Skip to content

ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Brightwave Energy rates a project risk as medium likelihood and very high impact. Its board has a low risk appetite and a stated risk tolerance that no single event may cost more than 10% of annual profit. Management's assessment shows the impact would be 60% of annual profit. Which conclusion is most consistent with sound risk management?

The risk breaches the board's tolerance because a potential loss of 60% of profit far exceeds the 10% limit, and a medium likelihood does not cancel that out. With a low appetite, the board should reduce, transfer or avoid the exposure rather than merely monitor or accept it.

  1. AThe residual risk exceeds tolerance, so the board should reduce, transfer or avoid the risk rather than simply monitor itCorrect
  2. BThe risk is within tolerance because its likelihood is only medium, so it should be accepted
  3. CThe risk should be ignored because tolerance applies only to financial reporting risks
  4. DThe risk should be accepted because low appetite means the board prefers retaining risks

Explanation

Impact of 60% of profit far exceeds the 10% tolerance threshold. Likelihood being medium does not offset this, and low appetite implies reluctance to retain exposure. Action to reduce, transfer or avoid is required.

Did you get it right without looking?

One question tells you little. A timed set on Identification, assessment and measurement of risk shows your real accuracy, how long you take and where you lose marks.

Practise Identification, assessment and measurement of riskFree diagnostic mock

More Identification, assessment and measurement of risk questions