CIMA OFFICIAL REVISION CARDS

STRATEGIC LEVEL

SUBJECT P3

Risk Management

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RISK MANAGEMENT

Published by: Kaplan Publishing UK

Unit 2 The Business Centre, Molly Millars Lane, Wokingham, Berkshire RG41 2QZ

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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.

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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

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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.

• Being 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.........

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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 4 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.

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RISK MANAGEMENT

Contents

1. Risk (Chapters 1 and 2)

2. Responses to Strategic Risk (Chapters 4, 5, 6, 8 and 9)

3. Internal Controls to Manage Risk (Chapters 3, 7, and 10)

4. Risk Associated with Cash Flows (Chapters 11 – 13)

5. Risks Associated with Capital Investment Decisions (Chapters 14 and 15)

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Exam guidance

Your exam will be made up of 60 questions, covering every area of the syllabus.

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.

Core areas of the syllabus

The syllabus comprises of:

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

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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.

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overviewrisk management

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Control systems

Risk

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RISK MANAGEMENT

Risk associated with cash flows

Risk Management

Internal audit

Types and sources

Risk management

Responses to risk

Tools and processes GovernanceEthics

Forex risk Interest rate risk

Risks associated with investments

Evaluating projects

Evaluating outcomes

Evaluating conflicts

Internal control Fraud

riskrisk management

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RISK MANAGEMENT – Risk

Types and sources of risk

Enterprise governance

Definition

Why incur risk?

Risk

Risk management

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RISK MANAGEMENT – Risk

Enterprise governanceA useful way of looking at the entire Risk Management (P3) syllabus is through the concept of Enterprise Governance.

Enterprise Governance

Conformance i.e. CorporateGovernance

• Accountability• Assurance

Performancei.e. Business Governance

• Value creation• Resource utilisation

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RISK MANAGEMENT – Risk

Definition of riskRisk in business is the chance that future events or results may not be as expected.

Downside risk = bad

Upside risk = results may be better

than expected

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RISK MANAGEMENT – Risk

Why incur risk ?

Incur risk to

Gain competitive advantage

Increase financial return

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RISK MANAGEMENT – Risk

Types and sources of risk

Types and sources of risk

Political, legaland regulatory risk

Businessrisk

Economicrisk

Financial risk

Technologyrisk

Internationalrisk

Fraud risk

Reputation risk

Environmentalrisk

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RISK MANAGEMENT – Risk

Monitoring and reportingRisk appetite Features

Identifying and assessing Response strategy and treatment

Roles and responsibilities Definitions

Risk management strategy

Risk management Risk

management cycle

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RISK MANAGEMENT – Risk

DefinitionsRisk 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)

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RISK MANAGEMENT – Risk

Risk appetite

Business strategy

Risk appetiteHow much risk the business

will accept Risk strategy

Residual riskRisk that cannot be

managed

Risk attitudeOverall approach

to risk

Risk capacityMaximum risk business can

accept

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RISK MANAGEMENT – Risk

Risk management strategy features

Key features of a risk management strategy are:

• ResponSibilities

• AtTitude

• PerfoRmance criteria

• Appetite

• ObjecTives

• CulturE

• G

• SYstems

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RISK MANAGEMENT – Risk

Risk management cycle

Business strategyEstablish risk management group and set goals

Understand and assess scale of risk

Review and refine process and do it again

Development of risk response strategy

Implementation and monitoring of controls

Information for decision-making

Identify risk areas

Implement strategy and allocate responsibilities

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RISK MANAGEMENT – Risk

Risk management cycle: Identifying and assessing risks

Assessing riskIdentifying risk

QUANTIFYING

• Expected values• Volatility• Value at Risk (VaR)

• Performed and controlled by risk committee• Risks recorded in risk register• Variety of methods such as brainstorming,

internal audit inspections, external advisors, scenario planning

RISK MAPPING

• Impact/consequences

• Probability/likelihood

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RISK MANAGEMENT – Risk

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

Risk treatments (responses) include:

Reduce

HEdge

DiverSify

Pool

AvOid

TraNsfer

Share

E

Risk management cycle: Risk response strategy and treatment methods

CHOICES

CHOICES

CHOICES

Impact/Consequence

Low High

Reduce Avoid

Accept Transfer

Hig

hLo

w

Prob

abili

ty/L

ikel

ihoo

d

Risk map

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RISK MANAGEMENT – Risk

A risk reporting system would include:

• System review of risk forecast

• Review of risk strategy and responses to significant risks

• Monitoring / feedback loop on action taken

• ‘Early warning’ system

• Incorporation of audit work

Risk reports show:

• gross risk = before the controls, transfer or management responses

• net risk (residual risk) = taking into account the controls, transfer and management responses

Risk management cycle: Monitoring and reporting

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RISK MANAGEMENT – Risk

Who? Responsibilities in relation to risk management

Board of directorsUltimate 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

Roles and responsibilities

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