Risk

This page will provide information about Risk.

Risk

Risk concerns the deviation of one or more results of one or more future events from their expected value. Technically, the value of those results may be positive or negative.

However, general usage tends focus only on potential harm that may arise from a future event, which may accrue either from incurring a cost ("downside risk") or by failing to attain some benefit.

 

Inherent risk

Inherent risk, in auditing, is the risk that the account or section being audited is materially misstated without considering internal controls due to error or fraud.

The assessment of inherent risk depends on the professional judgment of the auditor, and it is done after assessing the business environment of the entity being audited.

 

Residual risk

The residual risk is the risk or danger of an action or an event, a method or a (technical) process that, although being abreast with science, still conceives these dangers, even if all theoretically possible safety measures would be applied (scientifically conceivable measures).

The formula to calculate residual risk is (inherent risk) x (control risk) where inherent risk is (threats × vulnerability).

In the economic context, residual means “the quantity left over at the end of a process; a remainder” (dictionary.com).

In the property rights model it is the shareholder that holds the residual risk and therefore the residual profit.

 

Audit risk

Audit risk is a term that is commonly used in relation to the audit of the financial statements of an entity. (See financial audit). The primary objective of such an audit is to provide an action to the opinion as to whether or not the financial statements under audit present fairly the financial position, profit/loss and cash flows of the entity.

Audit risk is the risk of the auditor providing an inappropriate opinion on the financial statements, particularly when those financial statements contain a material misstatement.

AR = IR x CR x DR

 

Control risk

Control risk is the risk that the client’s internal control policies and procedures fail to detect or prevent a material misstatement from occurring. Like inherent risk, control risk is out of the hands of the auditor; however, its magnitude can be assessed.

 

Detection risk

Detection risk is defined as the likelihood that a material misstatement relating to an assertion will not be detected by the auditor's substantive testing.

It is important to note that the detection risk indicates the detection risk that the auditor is willing to "live with", given the acceptable audit risk and his assessment of inherent and control risk.

 

Risk assessment

Risk assessment is a step in a risk management process. Risk assessment is the determination of quantitative or qualitative value of risk related to a concrete situation and a recognized threat (also called hazard).

Quantitative risk assessment requires calculations of two components of risk: R, the magnitude of the potential loss L, and the probability p, that the loss will occur.

 

Risk management

Risk management is the identification, assessment, and prioritization of risks (defined in ISO 31000 as the effect of uncertainty on objectives, whether positive or negative) followed by coordinated and economical application of resources to minimize, monitor, and control the probability and/or impact of unfortunate events or to maximize the realization of opportunities.

 

Enterprise risk management

In enterprise risk management, a risk is defined as a possible event or circumstance that can have negative influences on the enterprise in question. Its impact can be on the very existence, the resources (human and capital), the products and services, or the customers of the enterprise, as well as external impacts on society, markets, or the environment.

In a financial institution, enterprise risk management is normally thought of as the combination of credit risk, interest rate risk or asset liability management, market risk, and operational risk.

 

Composite Risk Index

The above formula can also be re-written in terms of a Composite Risk Index, as follows:

Composite Risk Index = Impact of Risk event x Probability of Occurrence

 

Market Risk

Market risk is the risk that the value of a portfolio, either an investment portfolio or a trading portfolio, will decrease due to the change in value of the market risk factors. The four standard market risk factors are stock prices, interest rates, foreign exchange rates, and commodity prices.

The associated market risk are:

·         Equity risk, the risk that stock prices and/or the implied volatility will change.

·         Interest rate risk, the risk that interest rates and/or the implied volatility will change.

·         Currency risk, the risk that foreign exchange rates and/or the implied volatility will change.

·         Commodity risk, the risk that commodity prices (e.g. corn, copper, crude oil) and/or implied volatility will change.

 

Systematic risk

In finance, systematic risk, sometimes called market risk, aggregate risk, or undiversifiable risk, is the risk associated with aggregate market returns.