CIMA OFFICIAL REVISION CARDS STRATEGIC LEVEL SUBJECT P3 Risk Management RISK MANAGEMENT Published by: Kaplan Publishing UK Unit The Business Centre, Molly Millars Lane, Wokingham, Berkshire RG41 2QZ Copyright © 2017 Kaplan Financial Limited All rights reserved No part of this publication may be reproduced, stored in a retrieval system or transmitted in any form or by any means electronic, mechanical, photocopying, recording or otherwise without the prior written permission of the publisher Acknowledgements The CIMA Publishing trademark is reproduced with kind permission of CIMA Notice The text in this material and any others made available by any Kaplan Group company does not amount to advice on a particular matter and should not be taken as such No reliance should be placed on the content as the basis for any investment or other decision or in connection with any advice given to third parties Please consult your appropriate professional adviser as necessary Kaplan Publishing Limited and all other Kaplan group companies expressly disclaim all liability to any person in respect of any losses or other claims, whether direct, indirect, incidental, consequential or otherwise arising in relation to the use of such materials British Library Cataloguing in Publication Data A catalogue record for this book is available from the British Library ISBN 978-1-78415-946-7 Printed and bound in Great Britain RISK MANAGEMENT How to use Revision Cards The concept •• Revision Cards are a new and different way of learning, based upon research into learning styles and effective recall •• The cards are in full colour and have text supported by a range of images, making them far more effective for visual learners and easier to remember •• Unlike a bound text, Revision Cards can be rearranged and reorganised to appeal to kinaesthetic learners who prefer to learn by doing •• B eing small enough to carry around means that you can take them anywhere This gives the opportunity to keep going over what you need to learn and so helps with recall •• The content has been reduced down to the most important areas, making it far easier to digest and identify the relationships between key topics •• Revision Cards, however you learn, whoever you are, wherever you are RISK MANAGEMENT How to use them Revision Cards are a pack of approximately 52 cards, slightly bigger than traditional playing cards but still very easy to carry and so convenient to use when travelling or moving around They can be used during the tuition period or at revision They are broken up into sections •• An overview of the entire subject in a mind map form (orange) •• A mind map of each specific topic (blue) •• Content for each topic presented so that it is memorable (green) Each one is a different colour, allowing you to sort them in many ways •• Perhaps you want to get a more detailed feel for each topic, why not take all the green cards out of the pack and use those •• You could create your own mind maps using the blue cards to explore how different topics fit together •• If at the revision phase why not take all the purple cards and work through the past questions identified •• And if there are some topics that you understand, take those out of the pack, leaving yourself only the ones you need to concentrate on There are just so many ways you can use them RISK MANAGEMENT Contents Risk (Chapters and 2) Responses to Strategic Risk (Chapters 4, 5, 6, and 9) Internal Controls to Manage Risk (Chapters 3, 7, and 10) Risk Associated with Cash Flows (Chapters 11 – 13) Risks Associated with Capital Investment Decisions (Chapters 14 and 15) RISK MANAGEMENT Exam guidance Core areas of the syllabus Your exam will be made up of 60 questions, covering every area of the syllabus The syllabus comprises of: A range of question types will be used The main types will be: multiple choice, multiple response, number entry, drag and drop, drop down and hot spot All questions are equally weighted and independent of each other All elements of a question must be answered correctly for the question to be marked correct The pass mark is 70% Time allowed: 90 minutes No extra time is given for reviewing your answers A Identification, classification and evaluation of risk 20% B Responses to strategic risk 20% C Internal controls to manage risk 20% D Risk associated with cash flows 20% E Risks associated with capital investment decisions 20% RISK MANAGEMENT Quality and accuracy are of the utmost importance to us so if you spot an error in any of our products, please send an email to mykaplanreporting@kaplan.com with full details, or follow the link to the feedback form in MyKaplan Our Quality Co-ordinator will work with our technical team to verify the error and take action to ensure it is corrected in future editions RevisionCards overview risk management RevisionCards RISK MANAGEMENT Types and sources Risk management Tools and processes Ethics Responses to risk Risk Risk Management Control systems Internal control Risk associated with cash flows Forex risk Fraud Internal audit Interest rate risk Evaluating outcomes 10 Governance Risks associated with investments Evaluating conflicts Evaluating projects RISK MANAGEMENT – Risk Enterprise governance Risk management Definition Risk Types and sources of risk Why incur risk? 12 RISK MANAGEMENT – Risk Enterprise governance A useful way of looking at the entire Risk Management (P3) syllabus is through the concept of Enterprise Governance Enterprise Governance Conformance i.e Corporate Governance • Accountability • Assurance 13 Performance i.e Business Governance • Value creation • Resource utilisation RISK MANAGEMENT – Risk Definition of risk Risk in business is the chance that future events or results may not be as expected Downside risk = bad 14 Upside risk = results may be better than expected RISK MANAGEMENT – Risk Why incur risk ? Incur risk to Gain competitive advantage 15 Increase financial return RISK MANAGEMENT – Risk Types and sources of risk Types and sources of risk Political, legal and regulatory risk International risk Business risk Fraud risk Economic risk Reputation risk Financial risk Environmental risk Technology risk 16 RISK MANAGEMENT – Risk Roles and responsibilities Definitions Risk management strategy Risk appetite Risk management Features Monitoring and reporting Identifying and assessing 17 Risk management cycle Response strategy and treatment RISK MANAGEMENT – Risk Definitions Risk management is defined as: ‘the process of understanding and managing the risks that the organisation is inevitably subject to in attempting to achieve its corporate objectives’ CIMA Official Terminology Enterprise Risk Management (ERM) is defined as: ‘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.’ (COSO) (2003) 18 RISK MANAGEMENT – Risk Risk appetite Business strategy Risk appetite How much risk the business will accept Risk attitude Overall approach to risk 19 Risk capacity Maximum risk business can accept Risk strategy Residual risk Risk that cannot be managed RISK MANAGEMENT – Risk Risk management strategy features Key features of a risk management strategy are: •• ResponSibilities •• AtTitude •• PerfoRmance criteria •• Appetite •• ObjecTives •• CulturE •• G •• SYstems 20 RISK MANAGEMENT – Risk Risk management cycle Establish risk management group and set goals Review and refine process and it again Business strategy Identify risk areas Information for decision-making Implementation and monitoring of controls Development of risk response strategy Implement strategy and allocate responsibilities 21 Understand and assess scale of risk RISK MANAGEMENT – Risk Risk management cycle: Identifying and assessing risks Identifying risk • Performed and controlled by risk committee • Risks recorded in risk register • Variety of methods such as brainstorming, internal audit inspections, external advisors, scenario planning 22 Assessing risk QUANTIFYING • Expected values • Volatility • Value at Risk (VaR) RISK MAPPING • Impact/ consequences • Probability/ likelihood RISK MANAGEMENT – Risk Risk management cycle: Risk response strategy and treatment methods Any risk response strategy aims to ensure that: • Exposure to severe risks is minimised • Unnecessary risks are avoided • Appropriate measures of control are taken • The balance between risk and return is appropriate 23 Low High High Reduce Avoid Low Probability/Likelihood Risk map Impact/Consequence Accept Transfer Risk treatments (responses) include: Reduce HEdge DiverSify Pool AvOid TraNsfer Share E CHOICES CHOICE S CHOICES RISK MANAGEMENT – Risk Risk management cycle: Monitoring and reporting A risk reporting system would include: Risk reports show: • System review of risk forecast • g ross risk = before the controls, transfer or management responses • Review of risk strategy and responses to significant risks • Monitoring / feedback loop on action taken • ‘Early warning’ system • Incorporation of audit work 24 • net risk (residual risk) = taking into account the controls, transfer and management responses RISK MANAGEMENT – Risk Roles and responsibilities Who? Board of directors Responsibilities in relation to risk management Ultimate responsibility Define risk appetite Audit committee Review internal control system Risk committee Risk management for whole company Risk management group (led by Risk Manager) Operational responsibility for risk management process 25 RevisionCards ... legal and regulatory risk International risk Business risk Fraud risk Economic risk Reputation risk Financial risk Environmental risk Technology risk 16 RISK MANAGEMENT – Risk Roles and responsibilities... overview risk management RevisionCards RISK MANAGEMENT Types and sources Risk management Tools and processes Ethics Responses to risk Risk Risk Management Control systems Internal control Risk associated... expected RISK MANAGEMENT – Risk Why incur risk ? Incur risk to Gain competitive advantage 15 Increase financial return RISK MANAGEMENT – Risk Types and sources of risk Types and sources of risk Political,