P3 notes 2 Flashcards
Strategic Risk
arise from overall strategic position e.g. financial risk. From financing and financial conditions
Operational risk
potential losses arising from normal business operations
Downside risk
negative
Upside risk
benefits
Pure risk
loss is only possible outcome
gross risk
inherent risk that exists if management take no action
net risk
residual risk which still exists given managements actions or current strategies
risks in IS / IT
physical threats; virus infection / hacking; technical failure; infrastructure failure; human error; theft of hardware / software; business interruption
Risks of international operations
currency; cultural; transit; credit
political risk
tax; expropriation; nationalisation; restriction on remittance; insistence on local ownership; riots etc.; reputation damage; discrim against overseas
Strategies for managing political risk
outsource country analysis; develop relationships; risk insurance; understand environment; profit sharing with gov; JV or local resources
Risk management cycle
1) establish a risk management group and set goals; 2) identify risk areas; 3) understand and assess the scale of risks; 4) develop risk response strategy; 5) implement the strategy and allocate responsibilities; 6) implement and monitor the suggested controls; 7) review and refine the process and do it again
risk response strategy
low prob high imp - transfer; high high - avoid; low low - accept; low imp high prob - reduce
COSO 2004 Components
internal env; obj setting; event identification; risk assessment; risk response; control activities; info and comms; monitoring
COSO 2004 objectives
Strategy; operations; financial reporting; compliance
COSO 2017
Gov and cult; strat and obj setting; performance; review and revision; info comms and reporting
obj of corp gov
ensure mgmt and reduction of risk and to create clear lines of accountability to all stakeholders
NEDs
no exec involvement; provide reassurance to shareholders
NED independence
employee in past 5; business relationship in 5; additional remuneration; close family ties with Eds; shares; board more than 10
NED befits
objective; external experience; challenge and develop proposals
Audit committee internal audit
monitor and review effectiveness of internal audit function; review internal audit plan; review company’s internal control and risk mgmt systems
Audit committee external audit
monitor integrity of financial statements; recommend external auditor and approve remuneration; monitor and review auditor; review auditors letter of weakness
UK corp gov code
leadership; effectiveness; accountability; directors remuneration; relations with shareholders
CIMA fundamental
confidentiality; integrity; prof comp; objectivity; prof behaviours
CIMA ethical conflicts
self interest; self-review; advocacy; familiarity; intimidation
Costing systems
ABC; standard; target; life-cycle
HRM
recruitment policy; contracts; policies and procedures; discipline and reward; performance appraisal and feedback
TP goals
goal congruence; divisional autonomy; appraise divisional performance; minimise overall tax liability
approaches to setting TP
market price; standard cost; full cost; marginal cost; dual pricing
ROI
div profit / TALCL
RI
div profit - (div investment x cost of cap)
EVA
TBC
Behavioural aspects of trad control mechanisms
participation and achievability
NFPIs
customer satisfaction; market share; quality; delivery
Performance in not for profit
Economy; efficiency; effectiveness
Balanced Scorecard
financial; customer; internal; innovation and learning
Modern mgmt. account
lean; JIT; TQM
Costs of quality
prevention; appraisal; internal failure; external failure
Objectives of internal control
reliability of financial reporting; efficiency and effectiveness of operations; compliance with laws and regulations
internal control system elements
control environment; control procedures
Control procedures
organisation; authorisation; personnel; supervision; physical; arithmetical and accounting; segregation of duties
Types of fraud
ghost employees inflated expense claims; misappropriation of assets; collusion with external parties; teeming and lading; pyramid fraud
IT strategies
IS - long term plan to exploit an entities IS to support bus strat; IT - defines specific systems that are required; IM - method of storage and collection
Management information systems
Executive information systems; expert systems; decision support systems; strategic enterprise management systs; ERP; transaction processing systems; extranet
Costs of information
direct data capture; costs of external sources
Systems development lifecycle
planning; systems analysis; systems design; systems development; implementation; maintenance (post-implementation review)
General systems controls
password; physical; personnel; environmental; contingency; backups; virus protection; firewalls; spyware
application controls
data verification; data validation; exception reports
Big data 4 vs
volume; velocity; variety; veracity
big data analytics
understand the info; extract knowledge (data mining); identify important data
forms of internal audit
compliance audit; fraud investigation; value for money audit; management audits; environmental audits; social audits
Audit process
audit planning and strategy; audit planning - individual assignments; ascertaining and documenting systems / policies / regulations; audit testing; documentation and review
audit testing
sampling; substantive tests; compliance testing; analytical review; benchmarking
Computer assisted audit techniques
audit software; test data
effective internal audit
independent; report findings to audit committee; qualified; appropriate knowledge and understanding; quality control processes; internal audit plan
financial risk
currency risk; interest rate risk; credit risk
currency risk
translation risk; economic risk; transaction risk
causes of fx rate fluctuations
balance of payments; purchasing power parity theory (PPP); interest rate parity theory (IRP)
Internal hedging techniques - currency
matching receipts; leading and lagging; foreign bank account; invoicing overseas customers in home currency; counter-trading; multilateral netting
External hedging techniques - currency
forward contracts; money market hedges; options; futures
forward contracts - currency
premium - deduct the adjustment; discount - add the adjustment
forward rate determination - currency
interest rates; inflation rates
options - currency
buy (call); sell (put); fixed amount of currency at a fixed rate on a fixed future date
options types - currency
over the counter; standard stock exchange options
strike price
price you end up paying / receiving for the commodity / currency
Black-Scholes options pricing model
1) intrinsic value of the option (diff between current price and exercise price) 2) time value of the option - depends on: standard deviation in daily value of asset; time period to the expiry of the option; risk free interest rate
Futures - currency
standardised contract to buy or sell a fixed amount of currency at a fixed rate on a fixed future date
IAS39
instruments have to be stated at their fair value at year end with movement in fair value going through the P&L account. Fair value is market value
Arbitrage
trader takes advantage of price differences between two markets
Value at risk
maximum loss that is acceptable to a company over a given period of time given normal market movements and a given level of prob
Value at risk formula
value at risk = confidence interval value x standard deviation
Interest rate risk
loans aren’t reviewed; gearing risk; fixed rate or floating; currency; length and closeness to redemption; key Ts&Cs
Internal hedging techniques - interest
matching; smoothing; netting
External hedging - interest
forward rate agreements; futures; interest rate guarantees; interest rate options
Forward rate agreements
tailored contract to lend or borrow a sum of money in the future at a rate that is fixed today
Futures - interest
standardised size and traded on organised exchanges
Interest rate guarantees
OTC and give holder right but not obligation to buy or sell an FRA
Exchange traded interest rate options
standard size and gives holder right but not obligation to buy or sell a future
interest rate swaps
exchange of payment obligation to reduce exposure to interest rates
Interest rate swaps benefits
TBC
Accounting rate of retune
average annual profits / average investing x 100
IRR
TBC
WACC
TBC
Dividend growth model
TBC
Beta factor
business risk ( unsystematic - company specific and systematic risk - market specific); financial risk
Criticisms of CAPM
single period model; assumes no transaction costs for trading securities; calculates beta factors on historic data; risk free rate may change considerably over time; assumes an efficient investment market where it is possible to diversify away risk
Adjusted present value
TBC
Techniques for dealing with risk
sensitivity analysis; expected values; certainty equivs; annual equiv cost; decision tree; simulation analysis; payback period; regression analysis; risk adjusted discount rate
Certainty equivalent
multiply cash flow by factor then get PV and NPV
Equivalent annual cost
EAC = NPV / annuity factor for the project life
Investment real options
follow on; delay; abandon
goals of public org
provide services deemed important by society
goals of profit making org
maximise wealth of shareholders
goals of non-profit making orgs
3 Es and value for money
Stakeholder types
internal; connected; external
project stages
conceptual; development; construction / manufacturing; control
post completion audit
TBC
