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RISK MANAGEMENT PROCESS (2.Set risk appetite (Risk appetite: describes…
RISK MANAGEMENT PROCESS
1. Set responsibilities
Risk committee
Set risk policy
Assess risks
Review internal audit work
Review risk register
Advise board
Ensure system exists
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3. Identify risks
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Risk register
lists & priorities the main risks an org faces, & uses as the basis for decision making.
details who is responsible for dealing w risks & action taken.
4. Assess risks
Techniques
VAR, regression analysis,simulation
Sensitivity analysis, EV
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5. Respond to risks
TARA
Matching a suitable strategy to a given risk.
Risk Transfer
Risk Avoidance
Risk Reduction
Risk Acceptance
ALARP
Refers to 'as low as reasonably practicable' - a pragmatic to managing risks that seeks the most appropriate response to any risk by balancing cost & benefit.
Diversification of risks
Correlated risks: 2 risks that vary together. If positive correlation exists, the risks will increase/decrease together.
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6. Monitoring
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Information
Types
Financial information: important for internal purposes & to fulfill legal requirement for true & fair external reporting.
Non-financial information: quality report, customer complaints, HR data.
External information: competitors, suppliers, impact of social trends.
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Audit committee
Advantage:
(a) Improve quality of FR
(b) Create climate of discipline --> reduce opportunity for fraud
(c) Increase public confidence in credibility & objectivity of FSs.
(d) Help finance director by providing a forum to raise issues
Disadvantage:
(a) less effectively if it falls under influence of a dominant board member.
(b) approach may act as a drag on the drive & entrepreneurial flair of company's senior executives.
(c)
UK Corporate Governance Code
at least 3 members who should all be independent NED
at least 1 member of audit committee has recent & relevant financial experience.