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TOPCIMA - Risk and Control Strategy

Paper 3

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Syllabus summary

ManagementControl Systems

ManagementControl Systems

Financial RiskFinancial Risk

Notes ref: p2

Information Systems

Information Systems

Risk andInternal Control

Risk andInternal Control

Review and Auditof Control Systems

Review and Auditof Control Systems

3

Risk strategy process

Notes ref: p9

Identify RiskIdentify Risk Measure and Assess Risk

Measure and Assess Risk

Evaluate Risk StrategyEvaluate Risk Strategy

4 Notes ref: p10

Types of Risk

Notes ref: p10

Types of RiskTypes of Risk

Political,Legal andRegulatory

Political,Legal andRegulatory

EconomicRisk

EconomicRisk

EnvironmentalRisk

EnvironmentalRisk

FinancialRisk

FinancialRisk

TechnologyRisk

TechnologyRisk

BusinessRisk

BusinessRisk FraudFraudReputation

Risk

ReputationRisk

InternationalRisk

InternationalRisk

5

Measuring and Assessing Risks

IdentifyingIdentifying MeasuringMeasuring

Notes ref: p13-15

• PEST/SWOT

• External advisors

• Interviews/ Questionnaires

• Internal audit

• Brainstorming

• Expected values• Volatility

PrioritisingPrioritising

• Risk mapping

6

Risk Mapping

Notes ref:p15

Impact/Consequences

Probability/ Likelihood

Low

High

High

Low

7

Management of Risks

• Avoid risk• Transfer risk• Pool risks• Diversification• Risk reduction• Hedging risks• Risk sharing

Notes ref:p17-18

8

Systems and control

Notes ref: p21

Control Theory• Feedback• Feed forward

Control Theory• Feedback• Feed forward

Systems TheorySystems Theory

Management Control• Structure• Contracts• Policies and procedures• Rewards/discipline• Performance appraisal

Management Control• Structure• Contracts• Policies and procedures• Rewards/discipline• Performance appraisal

Management Accounting Control Systems• Responsibility and performance appraisal• Problems of systems

Management Accounting Control Systems• Responsibility and performance appraisal• Problems of systems

9

Systems Theory

Notes ref: p22 - 23

InputInput ProcessProcess OutputOutput

Sub Systems

Sub Systems InteractionInteraction ObjectiveObjective ControlControl TypesTypes

10

Feedback

Notes ref: p24

InputInput ProcessProcess OutputOutput

Control ActionControl Action ComparisonComparison MeasureMeasure

StandardStandard

11

Feedforward

Notes ref: p25

InputInput ProcessProcess OutputOutput

Implementationof Action

Implementationof Action

Predictive Model of Process

Predictive Model of Process

Measure ofOutput

Measure ofOutput

Determination of cause ofdeviation. Generation andevaluation of alternative

corrective actions.

Determination of cause ofdeviation. Generation andevaluation of alternative

corrective actions.ObjectiveObjective

12

Control Methods

• Organisation structure• Contracts of employment• Policies• Discipline and reward system• Performance appraisal and feedback

Notes ref: p26

13

Management Accounting Control Systems

Areas of Control

Areas of Control

Performance Targets

Performance Targets

Notes ref: 27-30

ResponsibilityResponsibility Financial and Non-Financial

Financial and Non-Financial

14

The Balanced Scorecard

FinancialFinancial

InternalInternalCustomerCustomer

Innovation and Learning

Innovation and Learning

Notes ref: 29

15

Management Accounting Control System

Areas of

Control

Areas of

ControlPerformance

Targets

Performance Targets ProblemsProblems

Notes ref: 27-30

ResponsibilityResponsibility Financial and Non-Financial

Financial and Non-Financial

Behavioural Factors

Behavioural Factors

16

Internal controls

Notes ref: p31

Internal Controls

Internal Controls

What are They?What are They?Features of

Internal Control Systems

Features of Internal Control

SystemsCosts vs BenefitsCosts vs Benefits

17

COSO Elements

• Control environment• Risk assessment• Control activities• Information and communication• Monitoring

Notes ref: p33-35

18

Fraud

Notes ref: p37

FraudFraud

What is it?What is it? Risk Indicators

Risk Indicators

Fraud Risk Management

Fraud Risk Management

19

Opportunity for Fraud

• Dishonesty• Opportunity• Motive

Notes ref: p38-39

20

Fraud Risk Management Strategy

FraudPrevention

FraudPrevention

Identifying a Fraud

Identifying a Fraud

Responding to a Fraud

Responding to a Fraud

• Anti fraud culture

• Risk awareness

• Whistle blowing

• Internal controls

• Regular checks

• Warning signals

• Whistleblowers

Notes ref: p40-42

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Corporate governance – Principles of the Combined Code

• Directors• Director’s remuneration• Relations with shareholder• Accountability and audit• Institutional investors

Notes ref: p48-49

22

Fundamental Principles of CIMA Ethics

• Integrity• Objectivity• Professional care and due competence• Confidentiality• Professional and technical standards

Notes ref: 54

23

Session Content

Notes ref: p57

Management Review of Controls

Management Review of Controls

Internal AuditInternal Audit

Types of AuditStructure

Scope

External Auditors

Standard of Work

24

Types of Audit Work

Notes ref: p61-63

Value for Money

Value for Money

Social and Environmental

Social and Environmental ManagementManagement

• Economy

• Efficiency

• Effectiveness

25

Session Content

Notes ref: p65

Testing• Sampling• Analytical Review

Testing• Sampling• Analytical Review

Planning• Systems

Investigation• Control

Assessment• Analytical Review

Planning• Systems

Investigation• Control

Assessment• Analytical Review

Reporting• Recommend

Actions

Reporting• Recommend

Actions

Risk-Based Approach

Audit Process

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Audit Process

Notes ref: p66

Agree the Objectives of the AuditAgree the Objectives of the Audit

Plan the AuditPlan the Audit

Find Out About Systems and ControlsFind Out About Systems and Controls

Confirm the Operation of the SystemConfirm the Operation of the System

Assess if Controls are AdequateAssess if Controls are Adequate

Test Compliance with ControlsTest Compliance with Controls

Test Application of ControlsTest Application of Controls

Review, Report and RecommendReview, Report and Recommend

Planning

Testing

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Audit Process Cont.

PlanningPlanning TestingTesting

Notes ref: p 67-74

• Risk based approach

• Systems investigation

• ICQs and ICEQs• Assessing controls

• Substantive vs compliance

• Sampling• Analytical review

Reporting and

Recommendations

Reporting and

Recommendations

• Audit report• Recommendations

28

Session Content

Notes ref: p83

Definition of Financial RiskDefinition of Financial Risk

Credit Risk

Credit Risk

Interest Risk

Interest Risk

Currency Risk

Currency Risk

Types of Financial RiskTypes of Financial Risk

Political Risk

Political Risk

29

Interest Risk

• Fixed rate• Floating rate• Refinancing

Notes ref: p86-7

30

Currency Risk Types

• Translation risk• Transaction risk• Economic risk

Notes ref: p88-89

31

Transaction risk

Notes ref: p91

Transaction Risk Management

Transaction Risk Management

Internal• Home Currency

• Leading/Lagging

• Matching/Netting

Internal• Home Currency

• Leading/Lagging

• Matching/Netting

External• Forward Contracts

• Money Market Hedges

• Currency Futures

• Currency Options

External• Forward Contracts

• Money Market Hedges

• Currency Futures

• Currency Options

Currency/Interest/Inflation

• Links Between

Currency/Interest/Inflation

• Links Between

32

External Hedging Techniques

ForwardForward

• Fixed date• Fixed rate• Tailor made• Contractual

obligation• Fix the rate

Money Market Hedge

Money Market Hedge

• Bring forward conversion of currency to today

• Create matching asset/ liability

FutureFuture

• Standardised contract

• Tradable• Range of

future dates• Effectively fix

the rate

Notes ref: p95-103

OptionsOptions

• Insurance• Downside risk

covered by option

• Standardised contract

• Tradable

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Predicting Future Spot Rates

PPPPPP IRPIRP

Predicting Long Term Future Spot Rates

Spot rate @ to x 1 + if1 + ih

Spot rate @ to x 1 + ints f 1+ ints h

34

Interest rate risk management

Notes ref: p111

Interest RateRisk Management

Interest RateRisk Management

Internal• Smoothing• Matching • Netting

Internal• Smoothing• Matching • Netting

External• FRAs• IRGs• Futures• Options• Swaps

External• FRAs• IRGs• Futures• Options• Swaps

35

Summary of Interest Rate Risk Instruments

Interest rate options

Interest rate guarantees (IRG’s), sometimes called caps/floors or

options

or swaptions for longer term hedge

‘Insurance’instruments

Interest ratefutures

Forward rate agreements (FRAs) or swaps for longer

term hedge

‘Fixing’ instruments

Exchange Traded

InstrumentsOTC Instruments

Notes ref: p112

36

Information systems

Notes ref: p125

TPS

MIS

DSS

EIS

Development of Information

Strategy

IMIT

IS

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Earls Three Levels of Strategy

IS Strategy

IM Strategy

IT Strategy

• Division/SBU/Function based• Demand Orientated• Business Focussed

• Activity Based• Supply Orientated• Technology Focused

• Organisation Based• Relationship Orientated• Management Focused

Applications

Delivery

Management

Notes ref: p126

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Strategic Planning Model

Notes ref: p127

Corporate StrategyCorporate Strategy

Information NeedsInformation Needs

Information Systems StrategyInformation Systems Strategy

IT ArchitectureIT Architecture

Information and

Data Architecture

Information and

Data ArchitectureApplications

Architecture

Applications

Architecture

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Critical Success Factors

Notes ref: p128

Mission StatementMission Statement

Business ObjectivesBusiness Objectives

Critical Success FactorsCritical Success Factors

Information toMeasure

Performance

Information toMeasure

Performance

Proposals for NewSystems or

Modifications

Proposals for NewSystems or

Modifications

40

Levels of Control

Notes ref: p130

OperationalLowerLevels

Activities

Tactical Middle Level Control

Strategic Board Level PlanningActivities

• Anthony’s Triangle

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Risks with IT systems

Notes ref: p148

Employees Hacker

Virus

Mistakes

Security:

• Hardware

• Data

Hardware

Faults

42

Controls

• General controls• Application controls• Software controls• Network controls

Notes ref: p148

43

General Controls

• Personnel controls• Access controls• Security:

–Physical–System–Software

• Business continuity

Notes ref: p149-150