cima p3 notes - chapters 1 and 2

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CIMA P3

Performance Strategy

Course Notes

By Nick Best





Chapter 1 ...............................................................................5 isk ......................................................................................5

1. Risk .............................................................................................. 6 2. Types of risk ................................................................................... 6 3. Strategic Business risks....................................................................... 6 4. Operationa !usiness risks ................................................................... " #. $inancia risk..................................................................................1% 6. Internationa risk.............................................................................11 &. 'ig( Re ia!i ity Organi)ations *'ROs+ ....................................................12 ,. Attitu-es to risk ..............................................................................12 ". 'u an -ecision aking an- risk ..........................................................13

Chapter ! ............................................................................. 15 isk Management ................................................................... 15

1. Risk Manage ent.............................................................................16 2. Risk Manage ent /rocess...................................................................1& 3. 0nterprise risk anage ent COSO 1 .....................................................23 4. /ro! e s of risk anage ent .............................................................2#

Chapter 3 ............................................................................. !" #o$ernance .......................................................................... !"

1. o ernance ...................................................................................2" 2. /rincip es of corporate go ernance.......................................................3% 3. T(e 5 Co-e of Corporate o ernance 1 .................................................31 4. Corporate go ernance Internationa y..................................................34

Chapter %............................................................................. 3" Interna& Contro& ..................................................................... 3"

1. Interna Contro ..............................................................................3" 2. # co ponents of interna contro syste s *COSO+ .....................................4% 3. o ernance an- contro s ...................................................................41 4. Contro o! ecti es ...........................................................................43 #. Contro acti ities or proce-ures...........................................................44 6. Contro precision .............................................................................44 &. Interna contro an- $rau- .................................................................4# ,. Interna contro s an- !usiness i pro e ent ............................................4# ". 7i itations of interna contro .............................................................4#

Chapter 5 ............................................................................. %" Management Contro& Systems .................................................... %"

1. Manage ent contro syste s ..............................................................4" 2. Too s of anage ent contro ..............................................................4" 3. Manage ent accounting contro syste s ................................................#3 4. Contro ing 0t(ics ............................................................................## #. Contro t(eory ................................................................................#,





Chapter ' ............................................................................. '1 isk an( contro& in information systems ....................................... '1

1. Infor ation....................................................................................62 2. 7e e s of anage ent8 infor ation an- contro .......................................63 3. Infor ation syste s an- contro ..........................................................6# 4. IS strategy .....................................................................................6"

Chapter ) ............................................................................. )% *he I* (epartment an( contro& of systems (e$e&opment ................... )%

1. Managing t(e IS -epart ent ...............................................................&# 2. Centra isation s -ecentra isation ........................................................&# 3. Outsourcing ...................................................................................&6 4. Accounting for t(e IS 9epart ent ........................................................&, #. Steering co ittee..........................................................................,1 6. Syste s -e e op ent ....................................................................... ,2

Chapter " ............................................................................. "'

Contro& an( security of I* ......................................................... "' 1. 5ey risks .......................................................................................,& 2. IT contro s ..................................................................................... ,&

Chapter + ............................................................................. +! Interna& Au(iting .................................................................... +!

1. Interna au-iting ............................................................................."3 2. 9e e oping t(e p an of au-it engage ents.............................................. "# 3. n-ertaking an interna au-it ............................................................."# 4. Measuring t(e interna au-it function.................................................... "& #. Ro e in corporate go ernance.............................................................. ", 6. Re ations(ip :it( t(e e;terna au-itor..................................................."" &. Au-itor et(ics................................................................................."" ,. Co puter<assiste- au-it tec(ni=ues.................................................... 1%%

Chapter 1, ......................................................................... 1,3 -inancia& isk ...................................................................... 1,3

1. >(at is financia risk? ..................................................................... 1%4 2. In est ents risks ........................................................................... 1%4 3. $inancia risks associate- :it( !usiness an- tra-ing o erseas..................... 1%# 4. @uantifying risk............................................................................. 1%& #. 9i ersification .............................................................................. 1%"

Chapter 11 ......................................................................... 11!

Currency isk ...................................................................... 11! 1. Currency risk ................................................................................ 113 2. Trans ation risk ............................................................................. 113 3. Transaction risk ............................................................................ 113 4. 0;c(ange rates ter ino ogy.............................................................. 114 #. /urc(asing po:er parity t(eory ......................................................... 11# 6. Interest rate parity t(eory ............................................................... 116





Chapter 1! ......................................................................... 11+ Currency he(ging techni ues .................................................. 11+

1. 'e-ging ...................................................................................... 12% 2. $or:ar-s ..................................................................................... 12% 3. Currency futures ........................................................................... 124 4. Currency options ........................................................................... 126

Chapter 13 ......................................................................... 13, Interest rate risk .................................................................. 13,

1. Interest rate risk ........................................................................... 131 2. 'e-ging interest rate risk ................................................................ 131 3. Interest rate S>A/S ....................................................................... 133 4. Caps8 $ oors an- Co ars .................................................................. 13# #. $inancia reporting an- risks of -eri ati es ........................................... 136





CIMA P3 Course Notesc

Chapter 1

isk





1. isk

/hat is risk0

isk is t(e potentia t(at a c(osen action :i ea- to an un-esira! eoutco e.

ti ate y co ercia risks resu t in a negati e outco e in ter s of so e!usiness goa an increase in costs8 fa in re enues8 oss of custo er8 egaia!i ity8 -rop in ora e of staff an- so on.

!. *ypes of risk

T(e ain categories of risk to consi-er are

Strategic re ating to t(e !usiness an- its strategic position8 for e;a p e ane: co petitor entering t(e arket8 c(a enging t(e co pany sco petiti e position an- affecting t(eir a!i ity to earn re enues an- profits.

Comp&iance :it( a: an- regu ation8 for e;a p e (ea t( an- safetyegis ation

-inancia& risks re ating to financing t(e !usiness *suc( as c(anging interestrates+ an- un-ertaking financia transactions *suc( as e;c(ange rate risk ornon<pay ent !y a custo er+

2perationa& risk in un-ertaking -ay to -ay !usiness < for e;a p e t(e!reak-o:n or t(eft of key e=uip ent

T(ese categories are not rigi- an- so e risks ay fa into ore t(an onecategory. T(e risks attac(e- to -ata protection cou - !e re ate- to !ot(operations an- co p iance.

3. Strategic Business risks

Strategic risk re ates re ating to t(e !usiness an- its strategic position.A goo- starting point is to consi-er risks arising un-er t(e /0ST07 factors 1

Po&itica& risk

/o itica factors are (o: an- to :(at -egree a go ern ent inter enes in t(e:orkings of organisations. /o itica factors inc u-e areas suc( as ta; po icy8





e p oy ent egis ation8 en iron enta a:s8 tra-e restrictions8 tariffs8 an-po itica sta!i ity.

o ern ent in est ent *or ack of+ can a so p ay a significant ro e in t(ea ai a!i ity of contracts an- :ork for organisations. o ern ents (a e great

inf uence on t(e (ea t(8 e-ucation8 an- infrastructure of a nation :(ic( cana so i pact t(e organisations :it(in t(at country e.g. t(e a ai a!i ity ofski e- a!our.

/o itica c(anges t(erefore create significant risks for organisations :it(int(at country.

conomic risk

0cono ic factors inc u-e econo ic gro:t(8 interest rates8 e;c(ange ratesan- t(e inf ation rate. T(ese factors (a e a or i pacts on (o: !usinessesoperate an- ake -ecisions. $or e;a p e8 interest rates affect a fir s costof capita an- t(erefore to :(at e;tent a !usiness gro:s an- e;pan-s.0;c(ange rates affect t(e costs of e;porting goo-s an- t(e supp y an- priceof i porte- goo-s in an econo y.

0cono ic c(ange t(erefore creates risk for organisations :it(in t(atecono y.

Socia& risk

Socia factors inc u-e t(e cu tura aspects an- inc u-e (ea t( consciousness8popu ation gro:t( rate8 age -istri!ution8 career attitu-es an- e p(asis onsafety. Tren-s in socia factors affect t(e -e an- for a co pany s pro-uctsan- (o: t(at co pany operates.

Socia c(ange can t(erefore create risk8 for e;a p e t(e re-uction in-e an- for un(ea t(y pro-ucts as (ea t( consciousness increases.

*echno&ogica& risk

Tec(no ogica factors inc u-e tec(no ogica aspects suc( as RD9 acti ity8auto ation8 tec(no ogy incenti es an- t(e rate of tec(no ogica c(ange.Organisations nee- to stay a:are of t(e key tec(no ogies in t(eir in-ustry inor-er to anage risks t(at t(ey -o not fu y a-apt to or app y ne:tec(no ogies.

n$ironmenta& risk





0n iron enta factors inc u-e eco ogica an- en iron enta aspects suc( as:eat(er8 c i ate8 an- c i ate c(ange8 :(ic( ay especia y affectin-ustries suc( as touris 8 far ing8 an- insurance.

$urt(er ore8 gro:ing a:areness of t(e potentia i pacts of c i ate c(ange

is affecting (o: co panies operate an- t(e pro-ucts t(ey offer8 !ot(creating ne: arkets an- -i inis(ing or -estroying e;isting ones.

0n iron enta risks can app y to onger ter c(anges t(at affect arkets*e.g. c i ate c(ange+ or s(ort ter acti ities suc( as a one<off po utione ent.

4ega& risk

C(anges in a: can inc u-e i pacts on pro-ucts8 custo ers8 staff8 pro-ct-e an- an- so on. Co panies ust continue to keep a:are of ega c(angeto a oi- t(e risk t(at t(ey -o not a!i-e !y t(e a: an- (a e to pay fines an--a age t(eir reputation.

Our ne;t set of risks to consi-er can !e re ate- to e e ents of /orter s #forces

Competiti$e risks

T(ese factors re ate to c(anges cause- !y co petitors in t(e arket. T(eyinc u-e ne: or c(anging pro-ucts8 price c(anges8 ne: entrants8 ne:-istri!ution c(anne s8 !ran-ing an- arket positioning.

Supp&ier risk

Supp ier factors inc u-e c(anging prices8 a ai a!i ity an- re ia!i ity ofsupp y8 -e ays in -e i ery8 =ua ity issues. As :e as increases in costs

i pose- !y c(anges in supp y8 supp y factors create risk of poor custo erser ice an- u ti ate y affect t(e co pany s reputation an- profita!i ity.

Customer risk

Custo ers ay o e to ot(er co petitors or e;ert po:er to re-uce prices.5ey custo ers ay a so cease to e;ist8 for instance :(en a !usiness goesinto i=ui-ation. O er-epen-ence on a s a nu !er of key custo ers is aa or risk of any !usinesses.





%. 2perationa& usiness risks

6ey operationa& risks

Operationa risks are interna risks8 re ating to t(e -ay to -ay functioning oft(e !usiness.

T(ese can inc u-e

• IT syste s !reak-o:n8 error or fai ure• 7oss or corruption of -ata• 7ega an- regu atory co p iance• 'ea t( an- safety issues• 7oss of key staff• Increasing :ages• S(ortages of ski e- staff• $rau-• 'u an error• 9a age8 oss or t(eft of assets

isk an( &arge pro7ects

9ue to t(e ery :i-e ariety of opportunities for pro! e s in arge pro ectssuc( as arge construction pro ects or IT -e e op ents t(ese are often(ig( y risky. Suc( entures typica y (a e (ig( cost o erruns8 !enefits(ortfa s8 an- sc(e-u e -e ays8 p us negati e an- unanticipate- socia an-en iron enta i pacts.

Researc( suggests t(at cost o erruns of #%E are co on on arge pro ects8:(i e actua -e an- for t(e en- ser ices t(ey are p anne- to pro i-e isco on y 2#E ess t(an anticipate-.

7arge pro ects t(erefore nee- ery c ear8 -etai e- feasi!i ity ana ysis at t(e

pro ect inception8 an- strong pro ect anage ent t(roug(out t(e pro ect.





5. -inancia& risk

8efinition

$inancia risks re ate to

• financing t(e !usiness *suc( as c(anging interest rates or non<a ai a!i ity of finance+

• un-ertaking financia transactions *suc( as e;c(ange rate risk or non<pay ent !y a custo er+

• t(e possi!i ity t(at an in est ent s actua return :i !e -ifferentt(an e;pecte-. T(is inc u-es t(e possi!i ity of osing so e or a oft(e origina in est ent.

$inancia risk ay !e arket<-epen-ent8 -eter ine- !y nu erous arketfactors8 or operationa 8 resu ting fro error or frau-u ent !e(a iour.

Measuring financia& risk of in$estments

$inancia risk often inc u-es not on y F-o:nsi-e riskF !ut a so Fupsi-e riskF*returns t(at e;cee- e;pectations+. Stan(ar( (e$iation is t(e ca cu ationof t(e aria!i ity of returns aroun- t(e ean8 an- pro i-es a easure offinancia risk. *Gou :i not !e re=uire- to un-ertake a stan-ar- -e iationca cu ation for t(e e;a :(ere =uestions ten- to focus on t(e -o:nsi-erat(er t(an t(e upsi-e risk.+

isk an( return

A fun-a enta i-ea in finance is t(e re ations(ip !et:een risk an- return.T(e greater t(e potentia return one ig(t seek8 t(e greater t(e risk t(atone genera y assu es.

$or e;a p e8 a go ern ent !on- is consi-ere- to !e one of t(e safestin est ents an-8 :(en co pare- to a corporate !on-8 pro i-es a o:er rateof return. T(e reason for t(is is t(at a corporation is uc( ore ike y to go!ankrupt t(an a go ern ent. Because t(e risk of in esting in a corporate!on- is (ig(er8 in estors are offere- a (ig(er rate of return.





'. Internationa& risk

Risks ten- to :i-en :(en organisations are operating internationa y.

Again t(e /0ST07 factors are a goo- starting point to assess risk.

Po&itica& Internationa po itics8 uncertainty an- :ar. T(e po itica situationin eac( arket operate- nee-s to !e consi-ere-.

conomic >or - econo y. an- econo ies of countries in :(ic( you areoperating e.g. e e s of :ea t(. 0;c(ange rates :i ary8 as :i oca ta;esan- tariffs. It ay !e a so (ar-er to c(ase cre-itors *cre-it risk+.

Socia& Cu tura an- -e ograp(ic -ifferences !et:een countries :(ic(

nee- to !e a-apte- to arket !y arket. 0-ucation an- ski e e s ay-iffer a so :(ic( ay affect staffing.

*echnica& Tec(no ogica -ifferences.

n$ironmenta& Countries :it( a -ifferent attitu-e an- a: in re ation toen iron enta issues.

4ega& 0ac( country (as its o:n a: an- regu ation :(ic( ust !e a!i-e-!y in eac( ne: arket entere-

He;t :e can consi-er t(e key strategic risks fro /orter s # forces

Customers >i (a e -ifferent nee-s in eac( ne: arket. T(ey ay (a eoya ty to e;isting pro-ucts or !ran-s.

Supp&iers He: re ations(ips :i nee- to !e !ui t :it( ne: supp iers.Supp y ay not !e a ai a! e in a ne: arkets

Competitors He: oca co petition ay !e in eac( ne: arket an- :inee- to ana yse- an- t(reats consi-ere-.





). 9igh e&ia i&ity 2rganisations :9 2s;

/hat is an 9 20

A 'ig( re ia!i ity organisation *'RO+ is an organi)ation t(at (as succee-e-in a oi-ing catastrop(es in an en iron ent :(ere nor a acci-ents can !ee;pecte- -ue to risk factors an- co p e;ity.

Organi)ations suc( as t(ese s(are in co on t(e a!i ity to consistent yoperate safe y in co p e;8 interconnecte- en iron ents :(ere a sing efai ure in one co ponent cou - ea- to catastrop(e. 0ssentia y8 t(ey areorgani)ations :(ic( appear to operate in spite of an enor ous range ofrisks.

9ow 9 2s manage risk

Many of t(ese in-ustries anage risk in a (ig( y =uantifie- an- enu erate-:ay. T(e risks are c ear y appe- out *often using tree -iagra s+. >(eret(e risks are foun- to !e (ig( t(ey are e a uate- against t(e costs ofre-ucing t(e risks an- easures i p e ente- :(ere it is cost !eneficia .

". Attitu(es to risk

isk appetite

T(e ter s attitu-e8 appetite an- to erance are often use- si i ar y to-escri!e an organi)ation s or in-i i-ua s attitu-e to:ar-s risk taking.

isk a$erse 8 risk neutra& an- risk seeking are e;a p es of t(e ter s t(atay !e use- to -escri!e a risk attitu-e.

Risk appetite ooks at (o: uc( risk one is :i ing to accept. Inorganisations t(e e e of risk appetite is often affecte- !y attitu-es ofs(are(o -ers8 -irectors an- staff often ingraine- in t(e corporate cu ture.

isk to&erance

Risk to erance is t(e e e of -e iation fro t(e nor t(at :i !e accepte-.T(e o:er t(e risk to erance8 t(e o:er t(e risks t(at can !e un-ertaken an-t(e greater t(e e e of contro t(at nee-s to !e e;erte- to stay :it(in t(ee;pecte- to erance e e s.





+. 9uman (ecision making an( risk

Psycho&ogy an( risk taking

Most -ecisions are a-e !e peop e an- t(erefore affecte- !y peop e s!e iefs8 a ues8 fears8 -esires an- so on.

4ink to go$ernance

One of t(e ai s of corporate go ernance is to pre ent !ias !y in-i i-ua-irectors or groupt(ink !y !oar-s !y i p e entation of easures suc( asscrutiny !y in-epen-ent non<e;ecuti e -irectors8 in o e ent in a-irectors in -ecision aking an- in-epen-ent risk ana ysis.





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Strategic an( -inancia& ana&ysis of the Pre>seen

Strategic ana&ysis < a key !usiness strategy o-e s in 03-inancia& ana&ysis !ase- aroun- t(e $3 sy a!usisk ana&ysis !ase- aroun- t(e /3 sy a!us

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CIMA P3 Course Notesc

Chapter !

isk Management





1. isk Management

8efinition

Risk anage ent is t(e i-entification8 assess ent8 an- prioriti)ation ofrisks fo o:e- !y coor-inate- an- econo ica app ication of resources toini i)e8 onitor8 an- contro t(e pro!a!i ity an-Kor i pact ofunfortunate e ents or to a;i i)e t(e rea i)ation of opportunities.

A process to anage risks

In i-ea risk anage ent8 a prioriti)ation process is fo o:e- :(ere!y t(erisks :it( t(e greatest oss *or i pact+ an- t(e greatest pro!a!i ity of

occurring are (an- e- first8 an- risks :it( o:er pro!a!i ity of occurrencean- o:er oss are (an- e- in -escen-ing or-er.

In practice t(e process of assessing o era risk can !e -ifficu t8 an-!a ancing resources use- to itigate !et:een risks :it( a (ig( pro!a!i ityof occurrence !ut o:er oss ersus a risk :it( (ig( oss !ut o:erpro!a!i ity of occurrence can often !e is(an- e-.

Ba&ancing spen(ing on risk management with enefits gaine(

Resources spent on risk anage ent cou - (a e !een spent on oreprofita! e acti ities. I-ea risk anage ent ini i)es spen-ing on t(eanage ent of risk :(i e a so ini ising t(e negati e effects of t(e riskst(e se es.

Princip&es of goo( risk management

T(e Internationa Organi)ation for Stan-ar-i)ation *ISO+ i-entifies t(efo o:ing princip es of risk anage ent

Risk anage ent s(ou -

• create a ue resources e;pen-e- to itigate risk s(ou - !e ess t(ant(e conse=uence of inaction8 or *as in a ue engineering+8 t(e gains(ou - e;cee- t(e pain

• !e an integra part of organisationa processes• !e part of -ecision aking• e;p icit y a--ress uncertainty an- assu ptions• !e syste atic an- structure-• !e !ase- on t(e !est a ai a! e infor ation• !e tai ora! e• take into account (u an factors





• !e transparent an- inc usi e• !e -yna ic8 iterati e an- responsi e to c(ange• !e capa! e of continua i pro e ent an- en(ance ent• !e continua y or perio-ica y re<assesse-

In t(e e;a you can co pare t(ese princip es to t(ose use- in t(e scenarioto e a uate an organisation s risk anage ent process.

!. isk Management Process

T(ere are a range of risk anage ent approac(es8 :(ic( for t(e ost part8consist of t(e fo o:ing e e ents8 perfor e-8 ore or ess8 in t(e fo o:ingor-er

1+ I-entify t(reats

2+ Assess t(e risk < t(e e;pecte- ike i(oo- an- conse=uences of specifictypes of t(reats on specific assets

3+ Risk treat ent < I-entify :ays to re-uce or anage t(ose risks

4+ I p e ent risk anage ent easures

#+ Re ie: an- contro

Step 1 I(entify threats

Risks are a!out e ents t(at8 :(en triggere-8 cause pro! e s. 'ence8 riski-entification can start :it( t(e source of pro! e s8 or :it( t(e pro! eitse f. 0;a p es of risk sources are stake(o -ers of a pro ect8 e p oyees ofa co pany or t(e :eat(er o er an airport.

Risks are re ate- to i-entifie- t(reats. $or e;a p e t(e t(reat of osingoney8 t(e t(reat of a!use of confi-entia infor ation or t(e t(reat of

acci-ents an- casua ties. T(e t(reats ay e;ist :it( arious entities8 osti portant :it( s(are(o -ers8 custo ers an- egis ati e !o-ies suc( as t(ego ern ent.

Once a t(reat is i-entifie-8 t(e e ents t(at ay !e triggere- can !ein estigate-. $or e;a p e stake(o -ers :it(-ra:ing -uring a pro ect ayen-anger fun-ing of t(e pro ectL confi-entia infor ation ay !e sto en !ye p oyees e en :it(in a c ose- net:orkL ig(tning striking an aircraft -uringtakeoff ay ake a peop e on !oar- i e-iate casua ties.

T(e c(osen et(o- of i-entifying risks ay -epen- on cu ture8 in-ustrypractice an- co p iance. T(e i-entification et(o-s are for e- !y





te p ates or t(e -e e op ent of te p ates for i-entifying source8 pro! eor e ent. Co on risk i-entification et(o-s are

2 7ecti$es> ase( risk i(entification

Organi)ations an- pro ect tea s (a e o! ecti es. Any e ent t(at ayen-anger ac(ie ing an o! ecti e part y or co p ete y is i-entifie- as risk.

Scenario> ase( risk i(entification

In scenario ana ysis -ifferent scenarios are create-. T(e scenarios ay !et(e a ternati e :ays to ac(ie e an o! ecti e8 or an ana ysis of t(einteraction of forces in8 for e;a p e8 a arket or !att e. Any e ent t(attriggers an un-esire- scenario a ternati e is i-entifie- as risk.

*a<onomy> ase( risk i(entification

Ta;ono y<!ase- risk i-entification is t(e use of a range of typica co onrisk categories to i-entify risks *e.g. /o itica risks8 0cono ic risks8 $inanciarisks < see c(apter 1+.

Common>risk checking

In se era in-ustries8 ists :it( typica kno:n risks are a ai a! e. 0ac( risk int(e ist can !e c(ecke- for app ication to t(e organisation

isk charting

Risks are co p ie- into a c(art isting out

• resources at risk• t(reats to t(ose resources• o-ifying factors :(ic( ay increase or -ecrease t(e risk• conse=uences it is :is(e- to a oi-.

Step ! Assess the risks

Once risks (a e !een i-entifie-8 t(ey ust t(en !e assesse- as to t(eir

• potentia se erity of i pact *genera y a negati e i pact8 suc( as-a age or oss+

• t(e pro!a!i ity of occurrence.





T(ese =uantities can !e eit(er si p e to easure8 in t(e case of t(e a ueof a ost !ui -ing8 or i possi! e to kno: for sure in t(e case of t(epro!a!i ity of an un ike y e ent occurring. T(erefore8 in t(e assess ent

process it is critica to ake t(e !est e-ucate- -ecisions in or-er toproper y prioriti)e t(e i p e entation of t(e risk anage ent p an.

T(ese can t(en !e p otte- on a risk ap.

?uantifying risk

T(us8 t(ere (a e !een se era t(eories an- atte pts to =uantify risks.Hu erous -ifferent risk for u ae e;ist8 !ut per(aps t(e ost :i-e yaccepte- for u a for risk =uantification is

Co posite Risk In-e; I pact of Risk e ent ; /ro!a!i ity of Occurrence

T(e i pact of t(e risk e ent is co on y assesse- on a sca e of 1 to #8:(ere 1 an- # represent t(e ini u an- a;i u possi! e i pact of anoccurrence of a risk *usua y in ter s of financia osses+. 'o:e er8 t(e 1 to# sca e can !e ar!itrary an- nee- not !e on a inear sca e.

T(e pro!a!i ity of occurrence is ike:ise co on y assesse- on a sca e fro1 to #8 :(ere 1 represents a ery o: pro!a!i ity of t(e risk e ent actua yoccurring :(i e # represents a ery (ig( pro!a!i ity of occurrence.





T(e Co posite In-e; t(us can take a ues ranging *typica y+ fro 1 t(roug(2#8 an- t(is range is usua y ar!itrari y -i i-e- into t(ree su!<ranges. T(eo era risk assess ent is t(en 7o:8 Me-iu or 'ig(8 -epen-ing on t(e su!<range containing t(e ca cu ate- a ue of t(e Co posite In-e;. $or instance8t(e t(ree su!<ranges cou - !e -efine- as 1 to ,8 " to 16 an- 1& to 2#.

8ifficu&ties in assessment

T(e fun-a enta -ifficu ty in risk assess ent is -eter ining t(e pro!a!i ity*or rate+ of occurrence since statistica infor ation is not a ai a! e on akin-s of past inci-ents.

$urt(er ore8 e a uating t(e se erity of t(e conse=uences *i pact+ is often=uite -ifficu t for intangi! e assets. Asset a uation is anot(er =uestion t(atnee-s to !e a--resse-. T(us8 !est e-ucate- opinions an- a ai a! e statisticsare t(e pri ary sources of infor ation.

He ert(e ess8 risk assess ent s(ou - pro-uce suc( infor ation for t(eanage ent of t(e organi)ation t(at t(e pri ary risks are easy toun-erstan- an- t(at t(e risk anage ent -ecisions ay !e prioriti)e-.

Step 3 isk *reatment@Management

Once risks (a e !een i-entifie- an- assesse-8 tec(ni=ues to anage t(e risk

fa into one or ore of t(e four a or *TARA+ categories

Transfer < S(aring :it( anot(er party e.g. Outsource or insure+A oi-ance < 0 i inate8 :it(-ra: fro or not !eco e in o e-Re-uction < Contro an- itigateAccept < Accept t(e risk an- !u-get for it s possi! e occurance

isk transfer

9efine- as Fs(aring :it( anot(er party t(e !ur-en of oss or t(e !enefit ofgain8 fro a risk8 an- t(e easures to re-uce a risk.F

T(is is usua y -one on one of t:o :ays1. Insuring t(e risk an- (ence passing t(e financia risk on to t(e

insurance co pany2. Outsourcing so t(at t(e risk is passe- to t(e outsourcer as part of

t(e contract.

Hote t(at so e e e ent of t(e risk is often retaine- !y t(e co pany. In t(ee ent of a fire8 t(e !usiness ay !e a! e to rec ai t(e financia osses8 !ut

t(ere ay !e reputationa risk or risk of oss of custo t(at t(e !usinessretains.





isk a$oi(ance

T(is inc u-es not perfor ing an acti ity t(at cou - carry risk. An e;a p e:ou - !e not !uying a property or !usiness in or-er to not take on t(e egaia!i ity t(at co es :it( it. Anot(er :ou - !e not f ying in or-er not to taket(e risk t(at t(e airp ane :ere to !e (i acke-. A oi-ance ay see t(eans:er to a risks8 !ut a oi-ing risks a so eans osing out on t(e potentiagain t(at accepting *retaining+ t(e risk ay (a e a o:e-. Hot entering a!usiness to a oi- t(e risk of oss a so a oi-s t(e possi!i ity of earningprofits.

isk re(uction

Risk re-uction in o es re-ucing t(e se erity of t(e oss or t(e ike i(oo- oft(e oss fro occurring. $or e;a p e8 sprink ers are -esigne- to put out afire to re-uce t(e risk of oss !y fire8 :(i e ocks on -oors re-uce t(e risk oft(eft8 as -o security guar-s.

Mo-ern soft:are -e e op ent et(o-o ogies re-uce risk !y -e e oping an--e i ering soft:are incre enta y. 0ar y et(o-o ogies suffere- fro t(efact t(at t(ey on y -e i ere- soft:are in t(e fina p(ase of -e e op entLany pro! e s encountere- in ear ier p(ases eant cost y re:ork an- ofteneopar-i)e- t(e :(o e pro ect. By -e e oping in iterations8 soft:are

pro ects can i it effort :aste- to a sing e iteration.

isk retention@acceptance

Retention in o es accepting t(e oss8 or !enefit of gain8 fro a risk :(en itoccurs. True se f insurance fa s in t(is category. Risk retention is a ia! estrategy for s a risks :(ere t(e cost of insuring against t(e risk :ou - !egreater o er ti e t(an t(e tota osses sustaine-. A risks t(at are nota oi-e- or transferre- are retaine- !y -efau t. T(is inc u-es risks t(at areso arge or catastrop(ic t(at t(ey eit(er cannot !e insure- against or t(epre iu s :ou - !e infeasi! e.

>ar is an e;a p e since ost property an- risks are not insure- against :ar8so t(e oss attri!ute- !y :ar is retaine- !y t(e insure-. A so any a ounts ofpotentia oss *risk+ o er t(e a ount insure- is retaine( risk . T(is ay a so!e accepta! e if t(e c(ance of a ery arge oss is s a or if t(e cost toinsure for greater co erage a ounts is so great it :ou - (in-er t(e goa s oft(e organisation too uc(.





Create a risk management@treatment p&an

$or eac( risk i-entifie-8 appropriate contro s or counter easures s(ou - !ese ecte- $or e;a p e8 an o!ser e- (ig( risk of co puter iruses cou - !eitigate- !y ac=uiring an- i p e enting anti irus soft:are. A goo- riskanage ent p an s(ou - contain a sc(e-u e for contro i p e entation an-responsi! e persons for t(ose actions.

0ac( approac( ust !e appro e- !y t(e appropriate e e of anage ent.$or instance8 a risk concerning t(e i age of t(e organi)ation s(ou - (a etop anage ent -ecision !e(in- it :(ereas IT anage ent :ou - (a e t(eaut(ority to -eci-e on co puter irus risks.

T(e risks an- agree- et(o-s of anaging t(ese risks are su arise- in aRisk Manage entKTreat ent / an8 :(ic( -ocu ents t(e -ecisions a!out(o: eac( of t(e i-entifie- risks s(ou - !e (an- e-.

T(e risk re-uction easures ay !e prioritise- !ase- on t(e i portance tot(e !usiness an- t(e cost.

Step % > Imp&ementation

I p e entation fo o:s a of t(e p anne- et(o-s for itigating t(e effectof t(e risks. /urc(ase insurance po icies for t(e risks t(at (a e !een -eci-e-

to !e transferre- to an insurer8 a oi- a risks t(at can !e a oi-e- :it(outsacrificing t(e entity s goa s8 re-uce ot(ers8 an- retain t(e rest.

Step 5 > e$iew an( contro&

Initia risk anage ent p ans :i ne er !e perfect. /ractice8 e;perience8an- actua oss resu ts :i necessitate c(anges in t(e p an an- contri!uteinfor ation to a o: -ifferent -ecisions to !e a-e in -ea ing :it( t(e risks!eing face-.

Risk ana ysis resu ts an- anage ent p ans s(ou - !e up-ate- perio-ica y.T(ere are t:o pri ary reasons for t(is

• to e a uate :(et(er t(e pre ious y se ecte- contro s are stiapp ica! e an- effecti e

• to e a uate t(e possi! e risk e e c(anges in t(e !usinessen iron ent. C(anges in proce-ures8 tec(no ogy8 sc(e-u es8 !u-gets8arket con-itions8 po itica en iron ent8 or ot(er factors typica yre=uire re<assess ent of risks.





3. nterprise risk management : M; C2S2

8efinition

Enterprise risk management (ERM) is a risk-based approach to managing anenterprise, and is one of the world’s most common methodologies used tomanage risk in an organisation. It aims to help organisations understand therisks facing organisations and develop control strategies to ensure they areeffectively managed. It was developed in 2004 by COSO (the Committee ofSponsoring Organisations of the Treadway Commission).

T(e 0RM cu!e represents (o: 0RM :orks t(roug(out t(e organisation. T(efour 0RM o! ecti es are s(o:n on t(e top of t(e cu!e. T(e eig(t processes:(ic( you (a e to go t(roug( to un-etake 0RM are s(o:n on t(e front face8:(i e t(e e e ents on t(e rig(t face ai to s(o: t(at t(ese s(ou - !efo o:e- in e ery part of t(e organisation i.e. in eac( su!si-iary8 !usinessunit8 -i ision an- in-ee- t(e organisation as a :(o e.

2 7ecti$es of enterprise risk management

This enterprise risk management framework is geared to achieving thefollowing four key objectives:





• Strategic: high-level strategic goals, aligned with and supporting itsmission

• Operations: effective and efficient use of its resources at an operationallevel in the business

• Reporting: reliability of reporting (e.g. financial reports)• Compliance: compliance with applicable laws and regulations

ight framework components

The eight components of enterprise risk management are:

Interna& en$ironment The internal environment encompasses the tone of anorganisation, and sets the basis for how risk is viewed and addressed by anentity’s people, including risk management philosophy and risk appetite,

integrity and ethical values, and the environment in which they operate.2 7ecti$e setting Objectives must exist before management can identifypotential events affecting their achievement. Enterprise risk managementensures that management has in place a process to set objectives and thatthe chosen objectives support and align with the entity’s mission and areconsistent with its risk appetite.

$ent i(entification Internal and external events affecting achievement ofan entity’s objectives must be identified, distinguishing between risks andopportunities. Opportunities are channelled back to management’s strategy or

objective-setting processes.

isk assessment Risks are analysed, considering likelihood and impact, as abasis for determining how they should be managed. Risks are assessed onan inherent and a residual basis.

isk response Management selects risk responses – avoiding, accepting,reducing, or sharing risk – developing a set of actions to align risks with theentity’s risk tolerances and risk appetite.

Contro& acti$ities Policies and procedures are established and implementedto help ensure the risk responses are effectively carried out.

Information an( communication Relevant information is identified,captured, and communicated in a form and time frame that enable people tocarry out their responsibilities. Effective communication also occurs in abroader sense, flowing down, across, and up the entity.

Monitoring The entirety of enterprise risk management is monitored andmodifications made as necessary. Monitoring is accomplished throughongoing management activities, separate evaluations, or both.





%. CIMA s isk Management Cyc&e

T(e CIMA risk anage ent cyc e is anot(er risk anage ent o-e 8 si i arin nature to t(e COSO o-e of risk anage ent. It out ines t(e fo o:ingsteps for risk anage ent

1. 0sta! is( a risk anage ent group an- set goa s.2. I-entif y risk areas.3. n-erstan- an- assess t(e sca e of risk.4. 9e e op a risk response strategy.#. I p e ent t(e strategy an- a ocate responsi!i ities.6. I p e ent an- onitor t(e suggeste- contro s.&. Re ie: an- refine t(e process an- -o it again.

While not as commonly used in practise as the COSO model, it has been

specifically examined in the P3 exam, and so must be learnt.

5. Pro &ems of risk management

Managing an- organisations risks effecti e y can !e a -ifficu t process. 'ereare so e of t(e key reasons

Su 7ecti$e

/ro!a!i ity an- i pact can often !e su! ecti e8 aking t(e -egree of risk(ar- to assess. T(e !est approac( to anaging t(e risk is a so oftensu! ecti e.

#i$ing too high a priority to risk management

/rioritising t(e risk anage ent processes too (ig( y can ake t(eorganistaion or pro ect o er y !ureaucratic :it( e ery processes re=uiring-etai e- contro s. It can a so ean t(at so e pro ects ne er get starte- orare -e aye- starte-8 as t(e risks are assesse- or are percei e- as unkno:nor e;cessi e y (ig(. T(is ay resu t in a ack of inno ation an- osingco petiti e e-ge to faster o ing co petitors.

Spen-ing too uc( ti e assessing an- anaging un ike y risks can a so-i ert resources t(at cou - !e use- ore profita! y.

9uman error

'u an fai ures suc( as si p e errors or istakes can ea- to ina-e=uateresponses to risk.

Contro&s can e circum$ente(





Contro s can !e circu ente- !y co usion of t:o or ore peop e or !y an ITiterate e p oyee8 an- anage ent (as t(e a!i ity to o erri-e riskanage ent -ecisions. /eop e are often oti ate- !y persona gain an- notanaging risk8 an- so ay circu ent contro s for t(ose reasons. 0.g.Nero e 5er ie at Societe enera e ost #!n t(roug( circu enting t(e

!anks contro s o er tra-ing.




Strategic Mock <ams 3= -3 an( P3

Base- aroun- t(e &atest Preseen 2 fu ocks are a ai a! e for eac( strategic su! ect

-u&& marking an( (etai&e( fee( ack

$u ock arking9etai e- an- persona ise- fee-!ack to focus on (e ping to pass t(e e;a s

Persona& coaching on your mock e<am

1(r persona coac(ing session :it( your arker/ersona ise- fee-!ack an- gui-ance

0;a tec(ni=ue an- tec(nica re ie:

Strategic an( -inancia& ana&ysis of the Pre>seen

Strategic ana&ysis < a key !usiness strategy o-e s in 03-inancia& ana&ysis !ase- aroun- t(e $3 sy a!usisk ana&ysis !ase- aroun- t(e /3 sy a!us

3% page strategic report$u i-eo ana ysis of (o: a key o-e s app y to t(e unseen

Ji-eo intro-uction to a t(e key o-e s

Persona& Coaching Courses

/ersona coac(ing to get you t(roug( t(e e;a

*uition Course /ersona ise- tuition to gi e you t(e re=uire- sy a!uskno: e-ge tai ore- to your nee-s

e$ision Course < /ractise past e;a =uestions :it( persona fee-!ack onyour tec(nica :eaknesses an- e;a approac( an- tec(ni=ue

esit Course I-entifying :eaknesses fro past atte pts an- pro i-ingpersona ise- gui-ance an- stu-y gui-es to get you t(roug( t(e e;a

cima p3 notes - chapters 1 and 2

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