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FINAL SEC PHASE 1 > Module 5.1 > Flashcards

Module 5.1 Flashcards

1
Q

need to be able to appreciate the risks in buying and selling securities to understand their own or their respective clients’ risk profile.

A

Brokers/ dealers

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2
Q

in their exercise of their supervisory authority over brokers/ dealers, need to understand risks to get a big picture overview and perspective of the risk implications of business decisions taken.

A

associated persons

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3
Q

in their duty of providing independent oversight and check over the business activities of brokers/ dealers, should be familiar with the risk consequences of their respective business activities.

A

Compliance

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4
Q

in the course of the performance of their duty to buy and sell securities need to understand the risk of the securities they are selling and the suitability and appropriateness of these securities to be sold to their respective clients especially in their performance of the level of care they are expected to exercise for their clients.

A

salesman

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5
Q

simple working definition of risk provided by ISO 31000

A

Effect of uncertainty on objectives

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6
Q

the distance away from the predictable value or expected value.

A

risk

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7
Q

most popular measures of risk

A

standard deviation or volatility

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8
Q

statistical measure that measures the spread or deviation away from the average.

A

Standard deviation

The farther you are from the predictable variable (expected value or average), the higher the standard deviation or risk

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9
Q

T or F. Risk is associated with certainty

A

F. Risk is uncertainty

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10
Q

as the “state, even partial, of deficiency information related to, understanding or knowledge of an event, its consequence or likelihood”.

A

Uncertainty

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11
Q

This uncertainty exists in two dimensions:

A
  1. Likelihood that the adverse event will happen
  2. Consequence or impact of the adverse event
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12
Q

refers to the “chance of something happening”.

A

Likelihood

The higher the likelihood that the adverse event will happen, the higher the level of risk is

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13
Q

Likelihood:

  • Quality:
  • Quantity:
A
  • Quality: not possible to certainty
  • Quantity: probability
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14
Q

refers to the “outcome of a risk event”

A

Consequence

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15
Q

Consequence:

  • Quali:
  • Quanti:
A
  • Quali: minor to extreme
  • Quanti: losses
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16
Q

Risk = Consequence x Likelihood
Results framework

A

see page 9 module

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17
Q

compensation for the time value of money and for credit risk the investor is taking on the borrower or issuer of the fixed income security.

A

Interest

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18
Q

T or F. Investing in a short-term fixed income security is always riskier than investing in a long-term fixed income security.

A

F. not all the time. General rule is still the longer the tenor, the higher the risk

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19
Q

three levels of risk that organizations face

A

Level 1: Known Risk
Level 2: Developing Risk
Level 3: Black Swan Risk

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20
Q

are risks that an organization are aware of and can identify and plan for

A

Known risks

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21
Q

are risks that an organization are aware of but the full extent and implications are not completely clear.

A

Developing risks

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22
Q

are risks that are unforeseen and hard to predict or avoid. It is an popular term in risk management to describe low probability but significantly high impact risk events that could threaten the ability of the organization to continue or operate as a going concern.

A

Black swan risks

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23
Q

T or F. black swans are high-impact, hard to predict but rare events; difficult to quantify probability and psychological biases of people as the role of uncertainty

A

T

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24
Q

Black swan risks are risks that are:
A. High probability, low impact
B. Low probability, low impact
C. High probability, high impact
D. Low probability, high impact

A

D. Low probability, high impact

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25
Q

Risk can be broadly categorized into two different types:

A
  • financial risk
  • non-financial risk.
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26
Q

are risks that are associated with financing and investments. These risks are associated with transactions that have a direct financial impact.

A

Financial risks

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27
Q

Financial Risks

A
  1. Market risk
  2. Credit risk
  3. Liquidity risk
  4. Refinancing risk
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28
Q

To understand the nature and sources of financial risks, it will be helpful to look at the ___________ of a typical company.

A

balance sheet

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29
Q

Funds that come from sources with contractual obligations to repay

A

Liabilities

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30
Q

Funds that come from owners or sources with discretionary payments

A

Equity

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31
Q

is the risk that the investment will not be as profitable as the investor expected because of fluctuations in the market. It involves the risk that prices or rates will significantly change due to economic forces

A

Market risk

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32
Q

Market risk can be categorized into:

A

interest rate risk, foreign exchange risk, equity price risk and commodity price risk.

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33
Q

JG Summit, the investment holding firm of the family of tycoon John Gokongwei, incurred a net loss of PHP 694 million last year, a reversal of the PHP 8.61 billion net profit reported in 2007. The mark-to-market losses were brought about by the combined effects of the following factors: lower market value of its financial assets and fuel hedges volatility of global financial and commodity markets, and the lower value of the peso.

a. Market risk
b. Credit risk
c. Liquidity risk
d. Refinancing risk

A

a. Market risk

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34
Q

is the exposure of a company’s earnings and financial condition to fluctuation or adverse movements in interest rates.

A

Interest rate risk

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35
Q

As interest rates increase, their respective cost of borrowing also increases. This is also known as ______________.

A

cash flow interest rate risk

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36
Q

if bonds are purchased and market interest rates subsequently rise, the price of bonds that carry fixed interest rate will decline to entice future buyers of the bond as the fixed interest carried by the bond is now lower compared to market interest rates. This is also known as _____________________.

A

fair value interest rate risk

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37
Q

is the exposure of a company’s earnings and financial condition to movements in exchange rate.

A

Foreign exchange risk

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38
Q

A company with ownership of overseas subsidiaries also faces _____________ from changes in the reported domestic accounting results of foreign operations due to changes in foreign exchange rates.

A

revaluation risk

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39
Q

The Philippine Peso is among Asia’s worst performers in 2018. San Miguel Corp, SM Investments Corp and Ayala Corp are some of the leading groups with dollar-denominated obligations who need to refinance or repay in the next five years. The most at risk from the peso slump are construction and transportation companies, whose revenues are in Peso but they make large investments in dollars.

a. interest rate risk
b. foreign exchange risk
c. equity price risk
d. commodity price risk.

A

b. foreign exchange risk

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40
Q

is the exposure of a company’s earnings and financial conditions to adverse movements in equity prices. It is the risk that arises from security price volatility.

A

Equity price risk

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41
Q

is the exposure of a company’s earnings and financial condition to fluctuations in commodity prices.

A

Commodity price risk

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42
Q

Commodity price risk exposure usually arises from _____________________ or __________________.

A

commodity price-linked revenues; commodity price-linked expenses

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43
Q

is the risk that the borrower will fail to meet its obligations as they come due. This is largely dependent on the ability and willingness of the borrower to pay their obligations as they come due.

A

Credit risk

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44
Q

Credit risk can be understood in two main dimensions:

A

a. Probability of default
b. Loss given default

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45
Q

likelihood that the borrower will not be able to repay their obligations as it comes due. It is dependent on the characteristics of the borrower or counterparty. The higher the probability of default,
the higher the credit risk of the borrower.

A

Probability of default.

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46
Q

the amount of loss that will be incurred if the borrower defaults. It can be measured as 100% minus the recovery rate, which is the amount that a creditor can claim from the borrower or counterparty in the event of default.

A

Loss given default.

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47
Q

Credit ratings of five Philippine banks are in danger after they were exposed to the biggest default in Philippine corporate history as it could mean higher credit costs and reduction in profit according to Moody’s.

a. interest rate risk
b. foreign exchange risk
c. credit risk
d. commodity price risk.

A

c. credit risk

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48
Q

is the risk arising from the inability of the company to pay its obligation as they come due. describes the ability of the company to convert its assets to cash to meet short-term obligations

A

Liquidity risk

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49
Q

Liquidity risk arises from two factors:

A

a. Inability to sell or liquidate assets to meet obligations
b. Inability to obtain adequate funding through new borrowings

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50
Q

is the inability of the company to replace existing funding to repay existing maturing obligations.

A

Refinancing risk

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51
Q

Hanjin Philippines - the biggest investor in the Subic Bay Freeport Zone filed for bankruptcy on 8 Jan 2019. The company has become financially distressed due to its heavy debt. With revenues falling behind, it cannot support its operations anymore under the burden of heavy debt.

a. interest rate risk
b. liquidity risk
c. credit risk
d. commodity price risk

A

b. liquidity risk

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52
Q

are risks that do not have a direct financial impact

A

Non-financial risks

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53
Q

Examples of non-financial risks are:

A
  1. Operational risk
  2. Legal and Compliance risk
  3. Strategic risk
  4. Reputational risk
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54
Q

is the risk of loss resulting from inadequate or failed internal processes, people and systems or from external events.

A

Operational risk

55
Q

Causes of operational risk

A
  1. People risk
  2. Process risk
  3. Systems risk
  4. External events risk
56
Q

is the risk that people do not follow the organization’s procedures, practices and/or rules. It is the risk that people deviate from expected behaviors.

A

People risk

57
Q

There are two types of people risks:

A
  • Non-deliberate deviations:
  • Deliberate deviations:
58
Q

these are deviations from expected behaviors or set of rules that are not intended

A

Non-deliberate deviations:

59
Q

these are deviations from expected behaviors or set of rules intended to result in personal or financial gain

A

Deliberate deviations:

60
Q

The bank has been hit by internal fraud that a senior official perpetrated causing it to lose at least PHP 900 million. The senior official funnelled disbursed loans into fictitious accounts created in the name of a legitimate client. The funds in the fake account, controlled by the rogue officer, were then siphoned off electronically to other accounts in other financial institutions and into the pockets of the suspect.

a. Operational risk
b. Legal and Compliance risk
c. Strategic risk
d. Reputational risk

A

a. Operational risk

61
Q

is the risk arising from a faulty overall design and application of business processes.

A

Process risk

62
Q

There are three types of process risks:

A

a. Model risk
b. Transaction risk
c. Operational control risk

63
Q

This is the risk of incurring consequences, including financial losses, as a result of making decisions based on models that are incorrect or misused.

A

Model risk.

64
Q

This is the risk that occurs due to failure in execution of transactions.

A

Transaction risk.

65
Q

This risk arises from the failure of established controls to work as intended

A

Operational control risk

66
Q

is the risk of failure arising from deficiencies in a company’s infrastructure and information technology systems. Risks associated with information technology systems are identified with deficiency or inadequacy in software quality, IT security, interruption of day-to-day operations and outsourcing.

A

Systems risk

67
Q

is the risk associated with events outside the company’s control.

A

External events risk

68
Q

Operational Risk Events

A

a. Internal Fraud
b. External Fraud
c. Employment Practices and Worker Safety
d. Clients, Products and Business Practices
e. Damage to physical assets
f. Business disruption and system failures
g. Execution, delivery and process management

69
Q

is an operational risk event that arises due to acts intended to defraud, misappropriate property or circumvent regulations, the law or company policy, excluding diversity/ discrimination events, which involves at least one internal part

A

Internal fraud

70
Q

is an operational risk event that arises due to acts intended to defraud, misappropriate property or circumvent the law, which involves a third party

A

External fraud

71
Q

Operational risk events that arise from human resource related policies, such as employment practices and workplace safety

A

Employment Practices and Worker Safety

72
Q

These arise from intentional or negligent failure to meet a professional obligation to specific clients (including fiduciary and suitability requirements), or from the nature or design of a product

A

Clients, Products and BusinessPractices

73
Q

These arise from due to natural disasters or other events.

A

Damage to physical assuming

74
Q

These arise from the disruption of business or system failures

A

Business disruption and system failures

75
Q

These arise from failures in transactionprocessing, process management and relations with trade counterparties and vendors

A

Execution, delivery and process management

76
Q

is the possibility that lawsuits, adverse judgments or faulty contracts can disrupt or adversely affect the operations or conditions of the organization. It can also refer to the exposure to fines, penalties or punitive damages resulting from the supervisory actions as well as private settlements.

A

Legal risk

77
Q

is the risk of legal or regulatory sanctions, material financial loss, or loss to reputation that an organization may suffer as a result of its failure to comply with laws, regulations, rules, related self-regulatory organizational standards, code of conduct applicable to its activities and internet policies.

A

Compliance risk

78
Q

A Philippine Regulatory Agency penalized millions of pesos on two (2) ride-hailing companies for violating the Agency’s order to keep operations separate until the merger of both was approved.

a. Strategic Risk
b. Legal and Compliance Risk
c. Reputational Risk
d. People Risk

A

b. Legal and Compliance Risk

79
Q

is the risk of loss in earnings, capital or reputation arising from changes in the business environment, adverse strategic decisions, and improper implementation of decisions or lack of responsiveness to an industry, political, economic or technological changes.

A

Strategic risk

80
Q

T or F. Strategic risk arises from failure to properly formulate or implement strategies leading to significant damage to an organization’s financial position, reputation, competitiveness or business development prospects.

A

T

81
Q

is the risk that may arise from negative publicity regarding an institution’s business practices.

A

Reputational risk

82
Q

Risk management is defined by ISO 31000 as:

A

“Coordinated activities to direct and control an organization with regard to risk”

83
Q

Risk management is everyone’s responsibility. As one saying goes:

A

“everyone in an organization is a risk manager”.

84
Q

This model aims to remind everyone that each department or unit has a role to play in risk management

A

three lines of defense models

85
Q

three lines of defense model

A

First Line: Business Lines/ Operation
Second Line: Risk Management and Compliance
Third Line: Internal Audit

86
Q

It has the primary ownership, responsibility and accountability of risk. They originate risk for the organization and are therefore, in the best position to manage risk.

A

The first line of defense is the business unit.

87
Q

They are expected to exercise oversight and control on the first line of defense. They are also responsible for developing and implementing the risk management framework.

A

The second line of defense is risk management and compliance.

88
Q

which reviews the effectiveness of internal control and risk management practices of both the first and second line of defense.

A

The third line of defense is internal audit

89
Q

Risk management can be viewed as a set of activities that includes:

A
  1. Communication and consultation
  2. Establishing the context
  3. Identifying risk
  4. Analyzing risk
  5. Evaluating risk
  6. Treating risk
  7. Monitoring and reviewing risk
90
Q

the objective of risk management is not to avoid risk. Instead, the objective of risk management is to ___________________.

A

direct and control risk

91
Q

aims to make risks more manageable and acceptable in line with the capacity of the individual or the organization

A

Risk management

92
Q

What are the objectives of risk management?

A
  1. Increase the likelihood of achieving business objectives
  2. Encourage proactive management of risks
  3. Compliance with laws and regulations
  4. Efficient allocation of resources
  5. Enhance competitive advantage
93
Q

Risk management aims to increase the likelihood of the organization reaching its business objectives by designing and executing strategies that will manage risks.

A

Increase the likelihood of achieving business objectives

94
Q

The lack of formal process to manage risk makes the organization vulnerable to unwanted risk exposure and weakens the ability of the organization to respond to risks.

A

Encourage proactive management of risks

95
Q

Failure to comply with laws and regulations is an important risk exposure that would ordinarily be captured in the organization’s risk management practices. Thus, having a strong risk management framework and process reduces the likelihood or instances of violation of laws and regulations.

A

Compliance with laws and regulations

96
Q

A way to do this is to embed risk management considerations in performance measurements. How an organization rewards or allocates capital says a lot about the values of the organization more than the official value statement or organizational credo.

A

Efficient allocation of resources

97
Q

Risk management is increasingly being seen as a source of significant competitive advantage. History has shown that organizations that withstood unforeseen crises are organizations with strong and sound risk management.

A

Enhance competitive advantage

98
Q

is a structured process of identifying, analyzing, evaluating, mitigating and monitoring risk.

A

risk management process

99
Q

Risk Management Process

A
  1. Identification
  2. Analysis
  3. Evaluation
  4. Mitigation
  5. Monitoring and Review
100
Q

is the process of finding, recognizing and describing risks.

A

Risk identification

101
Q

Risk Identification

A
  1. Risk source
  2. Risk event and cause
  3. Consequences
102
Q

an element which alone or in combination has the intrinsic potential to give rise to risk

A

Risk source

103
Q

is an occurrence or change of a particular set of circumstances. The event can be one or more occurrences, and can have several causes.

A

Risk event

104
Q

is the outcome of an event affecting objectives. The event can lead to a range of consequences, which can be certain or uncertain and can have positive or negative impact on the objectives.

A

Risk consequence

105
Q

is the process of understanding the nature of risk and determining the level of the risk

A

Risk analysis

106
Q

Risk analysis involves the consideration of:

A
  1. Causes and sources of risk
  2. Positive and negative consequences of risk
  3. Likelihood that the risk event happens
  4. Factors that can affect the consequences and likelihood
107
Q

When quantifying risk, three factors are typically analyzed and quantified in detail:

A
  1. Likelihood
  2. Consequence
  3. Exposure
108
Q

This is the chance that the risk event happens.

A

Likelihood

109
Q

This is the potential gain or loss if the risk event happens.

A

Consequence

110
Q

This is the total amount of potential loss or gain at the time the risk event occurs disregarding potential recoveries from collateral or other securities.

A

Exposure

111
Q

is a Latin word for “after the fact”. Involves collection of data on historical losses

A

Ex-post Analysis

112
Q

is a Latin phrase that means “before the event”. involves the use of flexible methodologies to think about hypothetical events.

A

Ex-ante Analysis

113
Q

“a story that describes a possible future. It identifies some significant events, the main actors and their motivations and it conveys how the world functions”.

A

Scenario

114
Q

involves identification of key risks on the organization’s business and adopts a forward looking view on these risks.

A

scenario analysis

115
Q

Scenario analysis involves the following process:

A
  1. Generate Scenarios
  2. Impact Assessment
  3. Implementing
116
Q

In generating scenarios, there are generally three approaches:

A

In generating scenarios, there are generally three approaches:
● Bottom-up
● Top-down
● Consensus workshop

117
Q

is the process of comparing the results of risk analysis with predetermined risk criteria to determine whether risk and/or its magnitude are acceptable or tolerable.

A

Risk evaluation

118
Q

risk criteria are based on an organization’s ___________________.

A

risk appetite and tolerance

119
Q

is the aggregate level and types of risk an organization is willing to assume within its risk capacity to achieve its strategic objectives and business plan.

A

Risk appetite

120
Q

refers to the level of risk an organization can bear after the application of risk treatment mitigation strategies.

A

Risk tolerance,

121
Q

involves selecting one or more options for modifying risks and implementing those options.

A

Risk treatment

122
Q

Risk Treatment Options

A
  1. Avoid risk
  2. Take or increase risk
  3. Transfer Risk
  4. Change likelihood
  5. Change consequence
  6. Share the risk
123
Q

deciding not to pursue or continue with the activity that generates risk.

A

Avoid Risk

124
Q

This option is only taken if the company is confidence that it has the ability, expertise and willingness to tolerate and manage the residual risk arising from the business opportunity that generates the specific risk.

A

Take or Increase Risk

125
Q

is a strategy that involves the contractual shifting of risk from one party to another.

A

Risk transfer

126
Q

to reduce the chance or likelihood of a risk event from happening. This can be done through investments in preventive control to keep risk events from occurring.

A

Change likelihood

127
Q

The purpose of the adoption of the Risk Based Capital Adequacy (RBCA) Rules of the SEC is to ______________________.

A

protect the firms, investors, and its clients

128
Q

refers to the requirement to maintain sufficient liquid assets to cover the total risk exposure of the company.9 It is an approach to treat risk from the likelihood of happening as it ensures that companies have enough capital to cover its exposure to risks and that they are liquid enough to promptly settle obligations to clients.

A

RBCA

129
Q

refers to a risk treatment strategy where the consequence of risk is modified. Note that the difference between this and the other risk treatment is that this treatment applies only after the risk occurs

A

Change consequence

130
Q

There are many ways to change consequence such as:

A

● Changing the amount of loss if a risk event happen
● Changing the party who will bear the consequence of risk

131
Q

is a risk treatment option where the consequence of risk is distributed among several participants.

A

Risk sharing

132
Q

is the process of checking, supervising, critically observing or determining the status of the risk in order to enable change from the required or expected performance level.

A

Risk monitoring

133
Q

is the process of determining the suitability, adequacy and effectiveness of the risk management process.

A

Risk review

134
Q

is an important part of the risk monitoring and reviewing process. It involves documenting and communicating the results of the organization’s risk assessment and treatment measures to both internal and external stakeholders.

A

Risk reporting

FINAL SEC PHASE 1 (9 decks)

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