10. Risk Management

Question 1

What are some examples of risk management policies for a large organisation?

Answer 1

1. Corporate codes of conduct
2. Environmental policies
3. Health and safety policies
4. Financial controls
5. Information systems controls and cyber security measures
6. Personnel controls
7. Internal audit processes

Question 2

What are the six components of the risk management model?

Answer 2

1. Risk appetite
2. Risk identification
3. Risk analysis
4. Risk evaluation and response
5. Risk monitoring and reporting
6. Review process and feedback

Question 3

What are four types of managerial culture according to Miles and Snow?

Answer 3

1. Defenders
2. Prospectors
3. Analysers
4. Reactors

Question 4

What are some influences on risk appetite?

Answer 4

1. Expectations of shareholders
2. Organisational attitudes
3. National origin of the organisation
4. Regulatory framework
5. Nature of ownership
6. Personal views

Question 5

Give examples of entity risks?

Answer 5

1. Business risk
2. Strategic risk
3. Operational risk
4. Hazard risk
5. Financial risk
6. Compliance risk
7. Cyber risk

Question 6

What are the main problems of break-even analysis?

Answer 6

1. Non-linear relationships
2. Stepped fixed costs
3. Multi-product businesses

Question 7

What items are typically excluded from relevant cash flows?

Answer 7

1. Sunk costs
2. Accounting entries that do not have a cash flow impact
3. Unavoidable costs
4. Finance costs - If a firm has applied a DCF, the discount rate will already reflect the cost of capital, including interest costs

Specifically include: ALL opportunity costs and revenues

Question 8

What are some limitations of expected values?

Answer 8

Evaluating decisions by using expected values has a number of limitations.

(a) The probabilities used when calculating expected values are likely to be estimates. They may therefore be unreliable or inaccurate.
(b) Expected values are long-term averages and may not be suitable for use in situations involving one-off decisions. They may therefore be useful as a guide to decision making.
(c) Expected values do not consider the attitudes to risk of the people involved in the decision-making
process. They do not, therefore, take into account all of the factors involved in the decision.
(d) The time value of money may not be taken into account: £100 now is worth more than £100 in 10 years’ time.