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Summary CMA USA PART 2 SECTION D RISK MANAGEMENT
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Summary - CMA USA PART 2 SECTION D RISK MANAGEMENT .CONTENT WISE TABLE MANNER FLASHCARD STYLE.EASY TO GRASP IDEAS WITH SIGNIFICANT IDEAL EXAMPLE
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SECTION D – Risk Management (Weightage 10%)S.No Questions Answers
1. How is risk defined by the A risk is any event or action that can keep an organization from
IMA’s Statement on Management achieving its objectives.
Accounting, SMA:ERMF?
2. What are the four common 1. Strategic risks include risks that are on a more global,
categories of risk? or macro, level for the business.
2. Operational risks are risks that result from inadequate
or failed internal processes, people or systems.
3. Financial risks are risks connected to the financial
health of the company.
4. Hazard risk is the type of risk that is can be insured
against.
3. What are the five steps in the 1) Risk identification
risk management process? 2) Risk assessment
3) Risk prioritization
4) Response planning
5) Risk monitoring
4. What two factors are used to assess 1) Loss frequency or probability
exposure to risk? 2) Loss severity
5. What are the four measures 1) Expected loss
of potential loss? 2) Unexpected loss
3) Maximum probable loss
4) Maximum possible loss (also called extreme or
catastrophic loss)
6. What is expected loss? The amount that management expects to lose to a given risk per
year on average over a period of several years. Because the loss
is expected, it should be included in the budget.
7. What is unexpected loss? The amount that could likely be lost to a risk event in a very bad
year, in excess of the amount budgeted for the expected loss,
up to the maximum probable loss. The business should reserve
the unexpected loss amount as capital.
8. What is the maximum The largest loss that can occur under foreseeable
probable loss? circumstances. Damage greater than the maximum probable
loss could occur, but in the judgment of management, is very
unlikely to occur.
9. What is the maximum The worst-case scenario. It represents the greatest possible loss
possible loss? from a specific risk or event.
10. What are loss frequency and loss Loss frequency or probability is the measurement of how often
severity? the loss occurs, on average.
Loss severity measures how serious a loss is in terms of cost
when it occurs.
From the Desk of Muhammad Zain – Founder of Zain Academy Page 46 of 66
, 11. What are the five responses for risk? 1. Avoiding the risk is eliminating the risky event or item.
Eliminating the risk might entail selling (or otherwise
disposing of) a business unit or product line.
2. Reducing (mitigating) the risk recognizes that the risk
will continue to exist but looks for ways to reduce the
risk.
3. Transferring (sharing) the risk is transferring the risk of
loss either partially or wholly to another organization.
The primary example of transferred risk is the purchase
of insurance.
4. Retained risk, or risk retention, is the portion of a risk
not covered by insurance, such as a deductible amount
that must be paid before any losses are reimbursed. A
retained risk may also be a risk the firm chooses to self-
insure against by not purchasing insurance to cover the
risk at all but instead budgeting and paying for it out of
its own funds
5. Exploiting (or accepting) a risk. Exploiting a risk is the
strategic process by which a firm deliberately exposes
itself to risk because its management believes they can
take advantage of a situation and generate value for
shareholders. Examples of exploiting or accepting risk
are investing in an emerging geographic market that
carries substantial political and economic risk or
introducing a new high-technology product when the
product’s success in the market is not certain.
12. What is risk appetite? Risk appetite reflects the level of risk a company can optimally
handle, given its capabilities and the expectation of its various
stakeholders such as vendors and creditors.
13. What is risk tolerance? The amount of risk a company is actually prepared to bear, given
a specific risk factor.
14. What is Enterprise Risk Management “Enterprise risk management is a process, effected by an
(ERM)? 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 achievement of entity objectives.”
(Definition by COSO)
15. What four categories 1) Strategic
of objectives does ERM 2) Operations
help a company achieve? 3) Reporting
4) Compliance
16. What are the main components of an 1. The internal environment is the atmosphere in the
ERM system? organization towards risk and risk management.
2. Objective setting. Before an effective ERM
environment can be established, the organization’s
strategic objectives and goals for its operations,
From the Desk of Muhammad Zain – Founder of Zain Academy Page 47 of 66
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