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1
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
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Risk strategy process
Notes ref: p9
Identify RiskIdentify Risk Measure and Assess Risk
Measure and Assess Risk
Evaluate Risk StrategyEvaluate Risk Strategy
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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
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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
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Risk Mapping
Notes ref:p15
Impact/Consequences
Probability/ Likelihood
Low
High
High
Low
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Management of Risks
• Avoid risk• Transfer risk• Pool risks• Diversification• Risk reduction• Hedging risks• Risk sharing
Notes ref:p17-18
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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
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Systems Theory
Notes ref: p22 - 23
InputInput ProcessProcess OutputOutput
Sub Systems
Sub Systems InteractionInteraction ObjectiveObjective ControlControl TypesTypes
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Feedback
Notes ref: p24
InputInput ProcessProcess OutputOutput
Control ActionControl Action ComparisonComparison MeasureMeasure
StandardStandard
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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
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Control Methods
• Organisation structure• Contracts of employment• Policies• Discipline and reward system• Performance appraisal and feedback
Notes ref: p26
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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
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The Balanced Scorecard
FinancialFinancial
InternalInternalCustomerCustomer
Innovation and Learning
Innovation and Learning
Notes ref: 29
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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
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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
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COSO Elements
• Control environment• Risk assessment• Control activities• Information and communication• Monitoring
Notes ref: p33-35
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Fraud
Notes ref: p37
FraudFraud
What is it?What is it? Risk Indicators
Risk Indicators
Fraud Risk Management
Fraud Risk Management
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Opportunity for Fraud
• Dishonesty• Opportunity• Motive
Notes ref: p38-39
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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
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Fundamental Principles of CIMA Ethics
• Integrity• Objectivity• Professional care and due competence• Confidentiality• Professional and technical standards
Notes ref: 54
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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
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Types of Audit Work
Notes ref: p61-63
Value for Money
Value for Money
Social and Environmental
Social and Environmental ManagementManagement
• Economy
• Efficiency
• Effectiveness
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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
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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
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Interest Risk
• Fixed rate• Floating rate• Refinancing
Notes ref: p86-7
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Currency Risk Types
• Translation risk• Transaction risk• Economic risk
Notes ref: p88-89
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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
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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
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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
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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
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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
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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
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Controls
• General controls• Application controls• Software controls• Network controls
Notes ref: p148
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General Controls
• Personnel controls• Access controls• Security:
–Physical–System–Software
• Business continuity
Notes ref: p149-150