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business risks summary
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Auditing 288/388 Summary
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Identifying the business risk• Grab the easy marks first – risks apparent from the scenario
• Use following slides to scratch for other issues not covered above.
• Should be asking yourself ‘what could go wrong in this process’
eg. Customers sign long rental contracts, co pays for maintenance
What could go wrong co. may not be able to recover the costs as
customers will not accept price increases after signing a contract.
Escalation clause may still not eliminate the risk to acceptable level –
a 10% escalation is based on estimates that input costs will increase
by <10%. Risk – input costs may escalate by >10%.
Other common examples
Lack of balance of power in BoD; reliance on IT systems; fx exposure; no
protection over competitors (no TM, copyright, patents, exclusive contracts
etc); operating losses; high gearing; outsourcing of key functions; rented
premises; company not a price setter – check the “standard” response
,Identifying the business risk
Business risk
What can go wrong in the business?
• Profitability – increased costs / lost revenue / settlement of claims
• Efficiency – resource allocation (2 factories; 1 operating at say 50%
capacity and other at 30% ‐ why not combine if feasible)
• Economy – paying the right price but also quality
• Effectiveness – meeting objectives (deliver on time)
, Identifying the business risk
INDUSTRY
• Is it regulated – risk of non‐compliance; costs to comply (annual fees, reg fees etc.)
• Competition – is it easy for entities to enter this industry? Do I have protection in form of
TMs, copyright, patent, exclusive agreements etc?
• Health & safety – always consider, esp. for dangerous environment (eg construction,
mining industries)
• Environmental – always consider, esp. for dangerous environment (disposal of toxic
waste and chemicals)
• Do we require skilled staff – shortage of suitably qualified staff (pharmaceutical, aviation,
education, health etc)
• Reputation (especially service orientated businesses) – behaviour of staff
franchises / licensee – also consider behaviour of other service providers – remember the
Uber and private schools examples?
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