Module 1 Unit 5: Risk assessment 2: Risk analysis and evaluation

Question 1

Define risk analysis

Answer 1

The process to comprehend the nature of risk and to determine the level of risk

Question 2

List four reasons why organisations do risk analysis

Answer 2

1. Prioritise risks for treatment
2. Achieve consistency about the perception of significance across the org
3. Inform decisions on how resources are allocated
4. Inform decisions about whether to proceed with a new strategy, project or investment

Question 3

Distinguish the meanings of the following terms:

Risk probability
Risk frequency

Answer 3

Probability:

Likelihood expressed numerically between 0 and 1 (or 0% and 100%) to measure probability

Frequency:

Frequency measurement calculated using available data from previous occurrences and a defined timeframe.

Question 4

Which is the best formula for calculating the severity of a risk?

A) inherent impact x residual likelihood
B) frequency x probability
C) outcome x probability
D) appetite - residual risk

Answer 4

C) outcome (impact) x probability

Question 5

Distinguish the meaning of the following terms:

A) consequence
B) magnitude
C) impact

Answer 5

A) Consequence: effect on the Strategic, Tactical, Operational and Compliance (STOC) core processes

B) Magnitude: size or severity of the event when it materialises, inherent risk

C) Impact: effect on the finances, infrastructure, reputation and marketplace (FIRM) when a risk materialises

Question 6

Outline the importance of risk appetite as a planning tool in the implementation of a RM initiative

Answer 6

Board agreed trigger point at which the org responds to a risk or risk exposure rather than tolerating it.

Question 7

Describe the relationship between risk appetite, exposure and capacity

Answer 7

Appetite: total value of the corporate resources that the board is willing to put at risk

Exposure: cumulative total of the individual values at risk associated with the risks faced by the org

Capacity: the capability of an org to take risk

Question 8

Provide the IRM’s definition of the ‘universe of risk’

Answer 8

The full range of risks which could impact, either positively or negatively on the ability of the organisation to achieve its long term objectives.