ANG, ANGELIKA B.

Bachelor of Science in Accountancy

AE 18 - Governance, Business Ethics, Risk Management & Internal Control
BSA 3 - 3
Module 5 : Risk Management
June 18, 2021

Chapter Quiz
Assessment Quiz

1. What is “Risk Management”?

- Risk management is the process of measuring or assessing risk and developing strategies
to manage it. Risk Management is a systematic approach in identifying, analyzing and
controlling areas or events with a potential for causing unwanted change.
- In the financial world, risk management is the process of identification, analysis and
acceptance or mitigation of uncertainty in investment decisions. Essentially, risk
management occurs when an investor or fund manager analyzes and attempts to quantify
the potential for losses in an investment, such as a moral hazard and then takes the
appropriate action (or inaction) given the fund's investment objectives and risk tolerance.

2. What is the basic approach in managing risks?

● Risk Avoidance

○ is a risk strategy where the organization either chooses to not engage in an

operation, or chooses to shut down an operation because of the risk involved. For
example, a company might choose to shut down or not operate a branch in a high
risk location to avoid the risks involved.

● Risk Reduction

○ deals with mitigating potential losses. For example, suppose this investor already
owns oil stocks. There is political risk associated with the production of oil, and
the stocks have a high level of unsystematic risk. He can reduce risk by
diversifying his portfolio by buying stocks in other industries, especially those
that tend to move in the opposite direction to oil equities.

● Risk Sharing

○ can be defined as “sharing with another party the burden of loss or the benefit of
gain, from a risk, and the measures to reduce a risk. The term of risk transfer is
often used in place of risk sharing in the mistaken belief that you can transfer a
risk to a third party through insurance or outsourcing. Purchasing insurance is a
 common example of transferring risk from an individual or entity to an insurance
company.

● Risk Retention

○ planned acceptance of losses by deductibles, deliberate noninsurance and loss-

sensitive plans where some, but not all, risk is consciously retained rather than
transferred. This risk management approach is an extreme opposite on the Risk
Transfer approach in that it upholds the principle of taking responsibility for
one’s action. Risk Retention technique is the intentional decision of organizations
to handle opposing risk of a firm internally rather than transferring them to
insurance or any other third party. By so doing, the risk of the organization is
self-financed and managed. In accounting perspective, this is done by setting an
amount/ account aside called Provisioning. The provisioning account is used to
service bad debts (defaulting loans). The provision account is a loss financing
(reserve funds) account that pays for the potential losses arising from client’s
loan defaults.

3. How does ISO 31000 define “Risk Management”?

- As defined in the International Organization of Standardization (ISO 31000), Risk

Management is the identification, assessment and prioritization of risks followed by
coordinated and economical application of resources to minimize, monitor and control
the probability and/or impact of unfortunate events and to maximize the realization of
opportunities.

4. What are the basic principles of risk management?

- BASIC PRINCIPLES OF RISK MANAGEMENT

● Create value – resources spent to mitigate risk should be less than the
consequence of inaction, i.e., the benefits should exceed the costs.
● Address uncertainty and assumptions
● Be an integral part of organizational processes and decision-making
● Be dynamic, iterative, transparent, tailorable, and responsive to change
● Create capability of continual improvement and enhancement considering the
best available information and human factors
● Be systematic, structured and continually or periodically reassessed.

5. Enumerate the steps in the ISO 31000 risk management process.

1. Establishing the Context.

This will involve
a. Identification of risk in a selected domain of interest
b. Planning the remainder of the process.
 c. Mapping out the following
i. The social scope of risk management
ii. The identity and objectives of stakeholders
iii. The basis upon which risks will be evaluated, constraints.
d. Defining a framework for the activity and an agenda for identification
e. Developing an analysis of risks involved in the process
f. Mitigation or solution of risks using available technological, human
and organizational resources.

2. Identification of potential risks.

Risk identification can start with the analysis of the source of problem or with the
analysis of the problem itself. Common risk identification methods are:

a. Objective-based risk
b. Scenario-based risk
c. Taxonomy-based risk
d. Common-risk checking
e. Risk charting

3. Risk Assessment
Once risks have been identified, their potential severity of impact and the
probability of occurrence must be assessed. The assessment process is critical to make the
best educated decisions in prioritizing the implementation of the risk management plan.

6. What are the elements of the risk management process?

The the elements of the risk management process should consist of the following elements:
1. Identification, characterization and assessment of threats
2. Assessment of the vulnerability of critical assets to specific threats
3. Determination of the risk (i.e., the expected likelihood and consequences of specific
types of attacks on specific assets)
4. Identification of ways to reduce risks
5. Prioritization of risk reduction measures based on a strategy.

7. What are the key elements that the company-wide risk management system should possess?

● Goals and Objectives

● Risk language identification
● Organization Structure and;
● The risk management process documentation

8. What is the advantage of defining the categories into which risks fall?
 ● The advantage of having a knowledge to define categories into which risks fall, is
to be able to create a wall of defense to some unfavorable scenario that might
happen in the future. Furthermore, having a set of categories is to make a
minimum protection that will allow individuals to to have a perception to be
more precise when making a decision if there is an adequate protection, place as
well as when deciding on risk vs potential rewards.

9. What factors should be considered when setting and reviewing financial strategy?

● Probability
● Cash flow
● Long-term shareholder value
● Risk

10. What are some financial tools that can be applied in making strategic financial decision affecting
profitability?

● Financial Statements

○ The most common accounting tool used for business decisions are financial
statements made up of the income statement, balance sheet and statement of cash
flows. The workshop demonstrates how these financial statements can provide
business owners with specific information about revenues, expenses, assets,
liabilities and positive or negative cash-flow functions. The review of such
information can identify for management where resources are being applied, their
inventor carrying costs, the debt profile and the levels of profitability. The
course also provides insight into how financial statements can be used to help
business owners develop budgets for planning future expenditures.
● Financial Ratios

○ provide for a more in-depth analysis of the company’s financial statements. The
course shows how useful financial ratios extract information from the financial
statements and other complimentary sources to develop indicators that can
provide insights into the strengths and weaknesses of the company. For example
financial ratios measure the company’s ability to pay short-term liabilities, the
use of assets to generate revenues, long-term cash-flow sustainability and the
amount of leverage used to finance business resources. These indicators may also
be compared to a leading competitor or an industry standard to determine how
well the company operates compared with other businesses.

● Forecasting

○ simple effective forecasting tools are presented based upon internal and external
analysis methods used to determine the potential production output or sales of
 the company’s products or services. Internal forecasting determines the amount
of economic resources that small businesses need to produce the highest amount
of output at the lowest production cost. External forecasting uses basic economic
analysis to determine at what price point consumers will be most willing to
purchase the maximum amount of goods.

● Investment Analysis

○ the course provides an introduction to the use of accounting to conduct

investment analyses. Investment analysis may be applied to new business
opportunities that will maximize the company’s profitability, or selecting equity
securities to generate passive income streams, or securing debt financing for
business funding.

● Management Accounting

○ - the course explores how management accounting, an internal business function,

is used to allocate business costs to goods or services produced by a company.
Management accounts, properly interpreted, can be used to ensure that all
production costs are recouped on the sale of goods or services in the economic
marketplace. Other important topics covered include break-even analyses, cost-
volume-profit reports and other financial information to determine the minimum
amount of money a company must generate to pay for fixed and variable
expenses