risk management Flashcards
what is risk
possibility that actual results or events differ from what is expected
what are the 2 kinds of risk
negative (pure) risk and two-way (speculative) risk
what is 2-way risk
actual outcome may be either better or worse than expected
what is negative (pure) risk
where events may turn out either as expected or worse than expected e.g. credit risk
where do risks arise
external risk: risks in biz environment where co operates (outside manager’s control)
internal risk: risks within organisation (within manager’s control)
types of business risk
strategic, operational, financial
what is strategic risk
strategic risk arises in environment
- most are speculative
- outside direct control of mgmt
what is operational risk
operational risk is risk of loss from failure of internal business processes and internal controls
- most are negative
- internal risks: in control of mgmt
what is financial risk
financial risks are financial in nature, can affect firm’s financial performance, value, liquidity etc
- external: changes in financial environment (interest rate changes etc)
- internal: e.g. risks of errors published in FS
what is risk management
process by which a company evaluates and reduces risk exposure
important factors of risk management
assessment of significant risk, implementation of suitable responses/treatments, continuous process
what are the 8 components of enterprise risk mgmt framework
internal environment
objective setting
event identification
risk assessment
risk response
control activities
information and communication
monitoring
what is the responsibility of the board vs management
board: approve corporate strat that does not expose co to unacceptable level of risk, key risk mgmt policies
manager: implementation of risk mgmt policies, systems and procedures
