Top tutor Chris Cain explains what the examiner is looking for when it comes to assessing the severity and probability of risk events.
The ACCA publish a syllabus and study guide from SEPTEMBER 202X TO JUNE 202Y each year and gives all the potential examination Tasks including the changes and clarity made to the detailed study guide each year.
For example, in the September 2022 to June 2023 syllabus area D (Risk), detailed study guide 1g said that you must be able to ‘assess the severity and probability of risk events using suitable models’.
From September 2023 to June 2024 syllabus area D, detailed study guide 1g has removed the reference to models because this can be examined in a number of ways. The study guide now says ‘assess the severity and probability of risk events’.
The following notes (prepared by PASS-SBL) will help in passing this Task.
Assessing severity
Define criteria: Establish criteria for measuring the severity of a risk. This could include financial impact, impact on reputation, safety concerns, legal consequences, etc.
Scale or rating System: Develop a scale or rating system to quantify the severity. For example, use a numerical scale (e.g. 1 to 5) or qualitative categories (e.g. low, medium, high).
Impact analysis: Conduct impact analysis to understand the potential consequences of each risk event. Consider both direct and indirect impacts on various aspects of the organisation.
Scenario analysis: Use scenario analysis to explore different potential outcomes and their severity. Consider worst-case scenarios to ensure a comprehensive understanding of the risks.
Expert judgment: Seek input from subject matter experts within the organisation or industry. Their experience and knowledge can provide valuable insights into the potential severity of specific risks.
Historical data: Analyse historical data to identify patterns and trends related to similar risk events.
This can help in assessing the potential severity based on past experiences.
Assessing probability
Define criteria: Establish criteria for measuring the probability of a risk occurring. Consider factors such as frequency, likelihood and historical data.
Scale or rating system: Develop a scale or rating system to quantify the probability. This could be a percentage scale (e.g. 0% to 100%) or qualitative categories (e.g. rare, occasional, frequent).
Risk factors: Identify and analyse factors that contribute to the probability of each risk event.
This may include internal and external factors such as market conditions, technological changes, regulatory developments, etc.
Data analysis: Use available data to assess the likelihood of specific risk events. Historical data, industry benchmarks and statistical analysis can help in estimating probabilities.
Expert opinion: Consult with experts who have a deep understanding of the industry or specific risks. Expert opinions can provide valuable insights into the likelihood of certain events.
Next month, in part 2 of the series, we will look at the data points and analyses that are crucial for strategic marketing decisions
- Chris Cain is an approved trainer with PwC Academy
