Chapter 25: Risk governance

Question 1

Risk management control cyccle - Similar to ACC

Answer 1

Risk identification - recognition of risks that threaten the income and assets of organisation
Risk classification - Company classifies them into categories
Risk measurement - estimation of the prob of the risk and its severity
Risk control - determining and implementing methods of risk mitigation
Risk financing - determine the likely cost of each risk and ensure the organisation has sufficient financial resources to continue its objective after a loss event occurs
Risk monitoring – regular review or re-assessment of all the risks previously identified with overall business review to identify new or previously omitted risks.

Question 2

Objectives of risk monitoring

Answer 2

determine if the exposure to risk and/or the risk appetite of the organisation has changed over time
identify new risks or changes in the nature of existing risks
report on risks that have actually occurred and how they were managed
assess whether the existing risk management process is effective.

Question 3

Benefits of a risk management process

Answer 3

avoid surprises
react more quickly to emerging risks
improve the stability (i.e. reduce earnings volatility) and quality of their business
improve their growth and returns by exploiting risk opportunities
improve their growth and returns through better management and allocation of capital
identify their aggregate risk exposure and assess interdependencies (i.e. concentration of risk, diversification benefits, natural synergies)
integrate risk into business processes (e.g. pricing) and strategic decision making (e.g. product development, mergers and acquisitions, etc)
Give stakeholders in their business confidence that the business is well managed.

Question 4

Systemic risk

Answer 4

Risk that affects an entire financial market or system and not just specific participants