Risk Management & Internal Control

Question 1

What is risk?

Answer 1

The chance that future events or results may not be as expected

Question 2

What is “downside” risk or “pure” risk?

Answer 2

Possibility of loss with no chance of gain

Question 3

What is speculative risk?

Answer 3

Two-way risk

Actual results can be better or worse than forecasted

Question 4

What is inherent risk?

Answer 4

A situation where an outcome is inevitable

Question 5

What is uncertainty?

Answer 5

arises from ignorance and a lack of information

Question 6

What is political risk?

Answer 6

risk due to political instability

Question 7

What is legal/litigation risk?

Answer 7

risk that litigation will be brought against the business

Question 8

What is regulatory risk?

Answer 8

Risk of changes in regulation affecting the business.

Question 9

What is compliance risk?

Answer 9

risk of non-compliance with the law resulting in fines /penalties, etc.

Question 10

What is business risk?

Answer 10

the risk businesses face due to the nature of their operations and products.

Question 11

What is strategic risk?

Answer 11

Risk that business strategies will fail

Question 12

What is product risk?

Answer 12

Risk of failure of new product launches/loss of interest in existing products

Question 13

What is commodity price risk

Answer 13

Risk of a raise in commodity prices i.e. oil

Question 14

What is product reputation risk?

Answer 14

Risk of change in product’s reputation or image.

Question 15

What is operational risk?

Answer 15

Risk that business operations may be inefficient or business processes may fail.

Question 16

What is contractual inadequacy risk?

Answer 16

Risk that terms of a contract do not fully cover a business against all potential outcomes

Question 17

What is economic risk?

Answer 17

Risk that changes in the economy might affect the business.

Question 18

What is financial risk?

Answer 18

Risk of a change in financial condition

Question 19

What are the main types of financial risk?

Answer 19

Credit Risk
Political Risk
Currency Risk
Interest rate risk
Gearing Risk

Question 20

What is technology risk?

Answer 20

The risk that technology changes will occur that either present new opportunities to businesses, or on the down-side, make their existing processes obsolete or inefficient.

Question 21

What is environmental risk?

Answer 21

Risk that arises from changes in the environment such as climate change or natural disasters

Question 22

What is fraud risk?

Answer 22

A type of operational risk; the vulnerability of an organization to fraud

Question 23

What is reputation risk?

Answer 23

A down-side risk because e better the reputation of the business, the more risk there is of losing that reputation

Question 24

What is malfeasance?

Answer 24

Doing wrong or committing an offence

Question 25

What are the risks in international operations?

Answer 25

``` Culture Litigation Credit Items in transit Financial ```

Question 26

Why take risks?

Answer 26

Gain competitive advantage Increase returns

Question 27

What is risk management?

Answer 27

The process of understanding and managing the risks that the organization is inevitably subject to in attempting to achieve its corporate objectives.

Question 28

What is enterprise risk management (ERM)?

Answer 28

The alignment of risk management with business strategy and the embedding of a risk management culture into business operations. A process, effected by an entity's board of directors, management and other personnel, applied in strategy setting and across the enterprise, designed to identify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives.

Question 29

What are the key principles of ERM?

Answer 29

* consideration of risk management in the context of business strategy * risk management is everyone's responsibility, with the tone set from the top * the creation of a risk aware culture * a comprehensive and holistic approach to risk management * consideration of a broad range of risks (strategic, financial, operational and compliance) * a focused risk management strategy, led by the board (embedding risk within an organization's culture).

Question 30

What are the eight components of ERM?

Answer 30

``` Internal environment Objective setting Event identification Risk assessment Risk response Control activities Information and communication Monitoring ```

Question 31

What is the internal environment under ERM?

Answer 31

The tone of the organization, including the risk management philosophy and risk appetite

Question 32

What is objective setting under ERM?

Answer 32

Objectives should be aligned with the organization's mission and need to be consistent with the organization's defined risk appetite.

Question 33

What is event identification under ERM?

Answer 33

These are internal and external events (both positive and negative) which impact upon the achievement of an entity's objectives and must be identified.

Question 34

What is risk assessment under ERM?

Answer 34

Risks are analyzed to consider their likelihood and impact as a basis for determining how they should be managed

Question 35

What is risk response under ERM?

Answer 35

Management selects risk response(s) to avoid, accept, reduce or share risk. The intention is to develop a set of actions to align risks with the entity's risk tolerances and risk appetite.

Question 36

What is control activities under ERM?

Answer 36

Policies and procedures help ensure the risk responses are effectively carried out.

Question 37

What is information and communication under ERM?

Answer 37

The relevant information is identified, captured and communicated in a form and timeframe that enables people to carry out their responsibilities.

Question 38

What is monitoring under ERM?

Answer 38

The entire ERM process is monitored and modifications made as necessary.

Question 39

What is shareholder value?

Answer 39

The sum of the value of what an organization does now and the value of what they could possibly do in the future.

Question 40

What is residual risk?

Answer 40

The risk a business faces after its controls have been considered.