Chapter 2 - Risk and Risk Assessments - student (1)

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Ch 2 – Risk and Risk Assessments LO 1 Describe the nature of risk. How do we understand risk? 1. Technology provides new ways to manage risk while creating risks related to its use. a. Accounting professionals assess and address risk constantly, both informally and formally: Area of Accounting Role addressing and accessing risk Internal audit departments perform formal risk assessments when creating audit plans. External auditors assess audit risk when creating audit plans. Cost accountants examine risk from financial and operational perspectives. Financial accountants implement controls – that is, specific procedures – to address risk. Control: portion of a process that is intended to prevent or detect issues Tax accountants comply with regulations designed to protect their companies and clients from risk. 2. The importance of risk a. A risk is the likelihood of an unfavorable event occurring. Risks differ by business type, size, industry, and location. i. PJ’s Coffee on the strip has different risks than the Mercedes plant over in Vance. ii. If a company wants to be at the forefront of its industry, it must be willing to accept calculated risks. b. A risk-aware culture lets businesses proactively identify and manage risk. c. Formal risk assessments identify, categorize, and prioritize individual risks so companies can leverage their understanding of risk in strategic planning.

Ch 2 – Risk and Risk Assessments 3. Applying Risks to Businesses a. To address risks at an appropriate level of precision, companies must consider risk at a business function level. i. A business function level is a high-level business area or department that performs business processes to achieve company goals. More than one function may be required to complete a single business process. 4. Enterprise Risk Management (ERM) – the comprehensive process of identifying, categorizing, prioritizing, and responding to a company’s risks. a. When we examine risk across the entire organization, we can leverage our understanding of identified risks to: – Create the organization's strategic plan – Plan which audits the Internal Audit (IA) department will perform this year – Report risk to the audit committee and board of directors – Select which projects different departments should prioritize – Design information systems and data analytics solutions – Assess and design internal controls, – Meet regulatory requirements – Investigate potential areas of fraud – Create policies and procedures – Design physical security and infrastructure plans

Ch 2 – Risk and Risk Assessments 5. Identifying Risks: a. Conduct brainstorming exercises b. Use data to investigate historical events to predict future occurrences. c. Diagram business processes to look for weaknesses. d. Develop assumptions about operations and risks. Consider using Murphy’s Law. e. Risk statement containing two parts: the issue identified and the possible outcome. LO 2 Classify risks into different risk categories. What are the types of risks? 1. Internal Risks occur throughout a company’s operations and arise during normal operations. a. Operational Risk is the most important type of risk for AIS. i. This occurs during day-to-day business operations and causes breakdowns in business activities. ii. Result from inadequate or failed procedures within the company. iii. Technology Risk - exists when technology failures have the potential to disrupt business. 1. Cyber Risk - occurs when an external party accesses the company’s technology assets and performs malicious and unauthorized actions. b. Financial Risk - refers to money going into and out of a company and the potential loss of a substantial sum. (think investing, sales, purchases, and loans) c. Reputational Risk - occurs when a company's reputation – or good name – is damaged. 2. External Risks are risks unrelated to business operations and come from outside the company. a. Compliance Risk occurs when a company fails to follow regulations and legislation and is subjected to legal penalties, including fines. (EPA) b. Strategic Risk - is the inevitable risk that results when a strategy becomes less effective. c. Physical Risk - includes threats such as adverse weather, crimes, and physical damage. 3. Risk Inventory – Once risks are categorized, they are compiled into a listing of all the business’s known risks. Risk Internal or External Type of Risk Julia’s Cookies faces increased traffic on its mobile app during peak times of the day. More customers placing orders at once may cause the mobile app to crash. Internal Operational Technology Risk The company expands and buys cheap land. External Physical Risk Oct 16 – 19 th , 2023 A security breach at Comcast- Internal Operational Cyber Risk

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