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BTF > Chapter 5: Introduction to risk management > Flashcards

Chapter 5: Introduction to risk management Flashcards

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1
Q

What is risk?

A

Risk is ‘the possible variation in an outcome what is expected to happen’.

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2
Q

What is the COSO definition of risk?

A

Risk is ‘the possibility that an event will occur and adversely affect the achievement of objectives.

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3
Q

What is the COSO definition of opportunity?

A

Opportunity is ‘the possibility than an event will occur and positively affect the achievement of objectives.

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4
Q

What is uncertainty?

A

Uncertainty is the ‘inability to predict outcomes because of a lack of information’ (not the same as risk)!

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5
Q

What are the three attitudes to risk?

A

Risk averse attitude
Risk neutral attitude
Risk seeker attitude

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6
Q

What is a risk averse attitude?

A

An investment would be chosen if it has more certainty but possibly a lower return than an alternative less certain, potentially higher return investment.

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7
Q

What is a risk neutral attitude?

A

An investment would be chosen according to its expected return, irrespective of risk.

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8
Q

What is a risk seeker attitude?

A

An investment would be chosen on the basis of it offering higher levels of risk, even if its expected return is lower than an alternative no-risk investment with a higher expected return.

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9
Q

What are the three different classifications of risk?

A

Business risk
Financial risk
Operational risk

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10
Q

What are some examples of sustainability and climate related risks?

A

Damage to supply chain and property
Impact on reputation
Not meeting regulations regarding emissions and climate

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11
Q

What categories can event risk be broken down into?

A

Disaster - catastrophe occurs such as a fire, flood etc.
Regulatory - new laws or regs are introduced
Reputation - risk of damage to the business’s reputation
Systematic - failure by a participant in the business’s supply chain

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12
Q

What is risk measurement?

A

Risk measurement identifies the probability of the risk occurring and quantifies the resultant impact and calculating the amount of the potential loss using expected values for gross risk.

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13
Q

What are descriptive statistics?

A

Descriptive statistics are used to describe a set of data.

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14
Q

What is descriptive analysis?

A

Descriptive analysis gives you an idea of the distribution of the data, helps you detect anomalies and enables you to identify relationships between variables.

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15
Q

What is a measure of central tendency?

A

Measures of central tendency i.e. mean, mode, median and expected value; are used to attempt to describe the usual or average value in a population. If this is related to risk - the average tells what we should expect from a set of data.

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16
Q

What is the deviation?

A

The deviation is a measure of how far away from the mean a value is in a data set.

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17
Q

What is the variance?

A

The variance is the average of the squared deviations of all the values in a data set.

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18
Q

What is the standard deviation?

A

The standard deviation is the square root of the variance

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19
Q

What is the coefficient of variation?

A

The coefficient of variation is the standard deviation divided by the mean

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20
Q

What is a frequency distribution?

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A

A frequency distribution is where data is in groups e.g. no. of people that fall within the income brackets.

21
Q

What is a normal distribution?

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A

The data is symmetrical and peaks in the centre.
It is a bell curve
The mean is shown in the y-axis
50% of the values will be below the mean and 50% above
The total area under the curve equals 1
The standard deviation shows how far the value spread out from the mean

22
Q

What are the general percentage rules in a normal distribution?

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A

34% of values lie between mean and 1 standard deviation

47.5% of values lie between the mean and two standard deviations

49.9% of values lie between the mean and three standard deviations

23
Q

What is a negative skew?

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A

Left (negatively) skewed - values are concentrated on the right hand side so the graph would have a long left tail.

The mode is often the highest point, with the median and mean to the left of the mode.

24
Q

What is a positive skew?

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A

Right (positively) skewed - values are concentrated on the left hand side so the graph would have a long right tail.

The mode is often the highest point, with the median and mean to the right of the mode.

25
What is risk management?
Risk management is 'the identification, analysis and economic control of risks which threaten the assets or earning capacity of a business'.
26
What is the risk management process?
Risk awareness and identification Risk assessment and measurement Risk response and control Risk monitoring and reporting
27
What is risk identification?
Risk identification involves 'identifying the whole range of possible risks and the likelihood of losses occurring as a result of these risks.'
28
What are 5 techniques to identify risks?
PEST/SWOT analysis External advisors Interviews/questionnaires Internal audit Brainstorming
29
What are the five different categories of loss which can be considered?
Property loss - possible loss of assets Liability loss - loss occurring from legal liability to third parties Personnel loss - due to injury, sickness and death of employees Pecuniary loss - as a result of defaulting debtors Interruption loss - being unable to operate
30
What is a risk assessment?
Risk assessment considers the nature of each risk and the implications it might have for the business achieving its objectives.
31
What is gross risk?
Gross risk is the potential loss associated with the risk, calculated by combining the impact and the probability of the risk, before taking any control measures into account Gross risk = Probability x Impact
32
What is a risk assessment map?
High Impact/Low probability = Sharing Reduction High Impact/High probability = Avoidance Reduction Share Low impact/Low probability = Accepted Low impact/High probability = Reduction
33
What is the TARA model?
The TARA model provides an outline of general risk responses: Transfer (Sharing) - to a third party Avoidance - not undertaking risky activities Reduction - retain activity but take action to limit risk Acceptance (Retention) - tolerating losses
34
What is the risk response ALARP?
ALARP - as low as reasonably practicable is the basis of many regulations relating to health and safety at work in the UK. Employers are expected to take actions to reduce risk faced by employees to a level that is reasonably practicable, but have no duty to go beyond this.
35
What is 'reasonably practicable'?
The risk of an event occurring is reduced to a level that is proportional to cost required to reduce the risk any further. The cost of reducing the risk further would outweigh the benefit.
36
Why do we need risk monitoring?
To monitor the effectiveness of the current risk management process. To monitor whether the risk profile is changing.
37
What is required when reporting on risk management for listed companies?
Determine the nature and extent of any risks the company is willing to take in order to achieve its objectives. Report risk management issues.
38
What are the additional board disclosures when reporting on risk management?
That they are responsible for the company's system of internal control That systems have been designed to manage, not eliminate, risk. How the board have dealt with the internal control aspects of significant problems highlighted in the accounts. Any weaknesses in internal control that have resulted in material losses.
39
What is a crisis?
A crisis is an unexpected event that threatens the wellbeing of a business, or a significant disruption to the business and its normal operations which impacts on its customers, employees, investors and other stakeholders.
40
What are the 7 types of crisis?
Natural event - earthquake causing physical disruption Industrial accident - building collapse or fire Product or service failure - product recall or health scare Public relations disaster - unwelcome media attention or adverse publicity Business crisis - loss of key supplier or customer Management crisis - hostile takeover bid or loss key management Legal/regulatory crisis - new regulation increases costs
41
What is crisis management?
Crisis management involves identifying a crisis, planning a response to the crisis and confronting and resolving the crisis.
42
What is business resilience?
Business resilience considers an organisation's ability to manage and survive against planned or unplanned shocks and disruptions to operations.
43
What are the 2 axes ICSA has outlined for understanding an organisations resilience?
Axis 1: Processes and functions to protect the organisation Axis 2: General organisational characteristics driving resilience
44
Example of Axis 1: Processes and functions to protect the organisation
Risk management Business continuity planning Security IT disaster recovery Health and safety Crisis management Internal audit Governance
45
Examples of Axis 2: General organisational characteristics driving resilience
Employee trust in management Customers trust in the organisation Ability to innovate Clear values Values linked to behaviour Effective risk management Morale Leadership involvement
46
What is a disaster?
A disaster is when 'the business's operations, or a significant part of them, break down for some reason leasing to potential losses of equipment, data or funds'.
47
What are the two types of disaster?
A major crisis causing a breakdown in operations and resultant losses. An event which results in serious consequences.
48
What are the main components of a disaster recovery plan?
Define responsibilities Prioritise actions Establish backup and standby arrangements Communicate with staff Establish PR Risk assessment

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