How is risk defined by the

IMA’s Statement on Management

Accounting, SMA:ERMF?

A risk is any event or action that can keep an organization

from achieving its objectives.

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 What are the four broad
categories of risk?

1) Strategic risks
2) Operational risks
3) Financial risks
4) Hazard risks

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 What are the five steps in the
risk management process?

1) Risk identification
2) Risk assessment
3) Risk prioritization
4) Response planning
5) Risk monitoring

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 What two factors are used to
assess exposure to risk?

1) Loss frequency or probability

2) Loss severity

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 What are the four measures
of potential loss?

1) Expected loss
2) Unexpected loss
3) Maximum probable loss
4) Maximum possible loss (also called extreme or
catastrophic loss)

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 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.

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 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.

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 What is the maximum
probable loss?

The largest loss that can occur under foreseeable

circumstances. Damage greater than the maximum
probable loss could occur, but in the judgment of
management, is very unlikely to occur.

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 What is the maximum
possible loss?

The worst-case scenario. It represents the greatest

possible loss from a specific risk or event.

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 What are the five
responses to risk?

1) Avoiding or eliminating risk

2) Reducing or mitigating risk
3) Transferring or sharing risk
4) Retaining risk
5) Exploiting or accepting risk

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 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.

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 What is risk tolerance?

The amount of risk a company is actually prepared to bear,

given a specific risk factor.

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 What is Enterprise Risk
Management (ERM)?

“Enterprise risk management is 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
achievement of entity objectives.” (Definition by COSO)

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 What four categories
of objectives does ERM
help a company achieve?

1) Strategic
2) Operations
3) Reporting
4) Compliance

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 What are the eight components
of an ERM system?

1) The internal environment

2) Objective setting
3) Event identification
4) Risk assessment
5) Risk response
6) Control activities
7) Information and communication
8) Monitoring
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 What is residual risk?

SMA: ERMF defines residual risk as: “The level of risk that
remains after management has taken action to mitigate the
risk.”

Inherent risk
− Activities of management to mitigate/address the risk
= Residual risk

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What are some event identification
techniques for ERM?

1) Event inventories
2) Internal analysis
3) Escalation or threshold triggers
4) Facilitated workshops or interviews
5) Process flow analysis
6) Leading event indicators
7) Loss event data methodologies

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 What is capital adequacy?

A measurement used by bank regulators to assess whether

a bank has sufficient capital compared to its liabilities.

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How is the capital adequacy ratio
calculated?

Tier 1 Capital + Tier 2 Capital

Risk Weighted Assets (RWA)

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