CIMA
 
Paper P3
 

 
Performance Strategy
 
Study Notes

*SNP3M10*
SNP3M10
CIMA Study Notes P3 M10


 

 

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A catalogue record for this book is available from the British Library. 
Published by:  

Kaplan Publishing UK  
Unit 2 The Business Centre  
Molly Millars Lane  
Wokingham  
Berkshire  
RG41 2QZ   

 

ISBN  978­1­84710­927­9 
© Kaplan Financial Limited, 2009 
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Acknowledgements 
We are grateful to the Association of Chartered Certified Accountants and the Chartered Institute of 
Management Accountants for permisssion to reproduce past examination questions.  The answers 
have been prepared by Kaplan Publishing. 
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transmitted, in any form or by any means, electronic, mechanical, photocopying, recording or 
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ii

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Contents
Page
Chapter 1

CIMA verb hierarchy – Strategic level exams

1

Chapter 2

Enterprise governance and risk

9

Chapter 3

Risk management

23

Chapter 4

Management control systems

59


Chapter 5

Internal control

87

Chapter 6

Fraud

113

Chapter 7

Ethics

121

Chapter 8

Review and audit

135

Chapter 9

Audit process

157


Chapter 10

Corporate governance

179

Chapter 11

Financial risk

197

Chapter 12

Currency risk management

215

Chapter 13

Interest rate risk management

257

Chapter 14

Reporting on financial instruments

279


Chapter 15

Information strategy

289

Chapter 16

Information systems and information technology 305

Chapter 17

Information management

321

Chapter 18

Control of information systems

337

Chapter 19

Section A­style practice question

359

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iii


iv

KAPLAN PUBLISHING


chapter
Intro
 

 
  

v


 

 

 

How to Use the Materials

These Kaplan Publishing learning materials have been carefully designed to 
make your learning experience as easy as possible and to give you the best 
chances of success in your examinations.
The product range contains a number of features to help you in the study 

process. They include:
(1) Detailed study guide and syllabus objectives
(2) Description of the examination
(3) Study skills and revision guidance
(4) Complete text or essential text
(5) Question practice
The sections on the study guide, the syllabus objectives, the examination 
and study skills should all be read before you commence your studies. They 
are designed to familiarise you with the nature and content of the 
examination and give you tips on how to best to approach your learning.
The complete text or essential text comprises the main learning 
materials and gives guidance as to the importance of topics and where 
other related resources can be found. Each chapter includes:

vi

•

The learning objectives contained in each chapter are taken directly 
from CIMA's own syllabus learning objectives. You should use these to 
check you have a clear understanding of all the topics on which you 
might be assessed in the examination.

•

The chapter diagram provides a visual reference for the content in the 
chapter, giving an overview of the topics and how they link together.

•


The content for each topic area commences with a brief explanation or 
definition to put the topic into context before covering the topic in detail. 
You should follow your studying of the content with a review of the 
illustration/s. These are worked examples which will help you to 
understand better how to apply the content for the topic.

•

Test your understanding sections provide an opportunity to assess 
your understanding of the key topics by applying what you have learned 
to short questions. Answers can be found at the back of each chapter.

•

Summary diagrams complete each chapter to show the important 
links between topics and the overall content of the paper. These 
diagrams should be used to check that you have covered and 
understood the core topics before moving on.
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•
 

Question practice is provided in each chapter. In P3 you also have a 
chapter containing a Section A­style question for further practice.

Icon Explanations
Definition ­ these sections explain important areas of Knowledge which 
must be understood and reproduced in an exam environment.

Key Point ­ identifies topics which are key to success and are often 
examined.
New ­ identifies topics that are brand new in papers that build on, and 
therefore also contain, learning covered in earlier papers.
Expandable Text ­ within the online version of the work book and the 
complete text is additional material such as more detailed explanation of 
key terms, further examples, additional writers' views and other background 
reading. These sections will help to provide a deeper understanding of core 
areas. Reference to this text is vital when self studying.
Test Your Understanding ­ following key points and definitions are 
exercises which give the opportunity to assess the understanding of these 
core areas. Within the work book the answers to these sections are left 
blank, explanations to the questions can be found within the online version 
which can be hidden or shown on screen to enable repetition of activities.
Illustration ­ to help develop an understanding of topics and the test your 
understanding exercises the illustrative examples can be used.
Exclamation Mark ­ this symbol signifies a topic which can be more 
difficult to understand, when reviewing these areas care should be taken.

 

For more details about the syllabus and the format of your exam, please see 
your Complete Text or go online.

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vii


Paper background

Candidate requirements
The examiners
Aim of paper
Core areas of syllabus
The syllabus in detail
Format of paper
Assessment strategy
Paper­based examination tips
Study skills and revision guidance
Preparing to study
Effective studying
Revision
Further reading
You can find further reading and technical articles under the student section 
of CIMA's website.

viii

KAPLAN PUBLISHING


FORMULAE AND TABLES
Annuity
Present value of an annuity of £1 per annum, receivable or payable for n years, commencing in one year,
discounted at r% per annum:

PV =

1
1

1−
r
[1 + r ] n

Perpetuity

Present value of £1 per annum, payable or receivable in perpetuity, commencing in one year, discounted at
r% per annum:
PV =

1
r

Growing Perpetuity

Present value of £1 per annum, receivable or payable, commencing in one year, growing in perpetuity at a
constant rate of g% per annum, discounted at r% per annum:
PV =

KAPLAN PUBLISHING

1
r −g

ix


Area under the normal curve

This table gives the area under the normal curve between the mean and a point Z standard deviations above

the mean. The corresponding area for deviations below the mean can be found by symmetry.

0

Z=

x

(x − μ )

Z-

0.00

0.01

0.02

0.03

0.04

0.05

0.06

0.07

0.08


0.09

0.0
0.1
0.2
0.3
0.4

.0000
.0398
.0793
.1179
.1554

.0040
.0438
.0832
.1217
.1591

.0080
.0478
.0871
.1255
.1628

.0120
.0517
.0910
.1293

.1664

.0159
.0557
.0948
.1331
.1700

.0199
.0596
.0987
.1368
.1736

.0239
.0636
.1026
.1406
.1772

.0279
.0675
.1064
.1443
.1808

.0319
.0714
.1103
.1480

.1844

.0359
.0753
.1141
.1517
.1879

0.5
0.6
0.7
0.8
0.9

.1915
.2257
.2580
.2881
.3159

.1950
.2291
.2611
.2910
.3186

.1985
.2324
.2642
.2939

.3212

.2019
.2357
.2673
.2967
.3238

.2054
.2389
.2704
.2995
.3264

.2088
.2422
.2734
.3023
.3289

.2123
.2454
.2764
.3051
.3315

.2157
.2486
.2794
.3078

.3340

.2190
.2518
.2823
.3106
.3365

.2224
.2549
.2852
.3133
.3389

1.0
1.1
1.2
1.3
1.4

.3413
.3643
.3849
.4032
.4192

.3438
.3665
.3869
.4049

.4207

.3461
.3686
.3888
.4066
.4222

.3485
.3708
.3907
.4082
.4236

.3508
.3729
.3925
.4099
.4251

.3531
.3749
.3944
.4115
.4265

.3554
.3770
.3962
.4131

.4279

.3577
.3790
.3980
.4147
.4292

.3599
.3810
.3997
.4162
.4306

.3621
.3830
.4015
.4177
.4319

1.5
1.6
1.7
1.8
1.9

.4332
.4452
.4554
.4641

.4713

.4345
.4463
.4564
.4649
.4719

.4357
.4474
.4573
.4656
.4726

.4370
.4485
.4582
.4664
.4732

.4382
.4495
.4591
.4671
.4738

.4394
.4505
.4559
.4678

.4744

.4406
.4515
.4608
.4686
.4750

.4418
.4525
.4616
.4693
.4756

.4430
.4535
.4625
.4699
.4762

.4441
.4545
.4633
.4706
.4767

2.0
2.1
2.2
2.3

2.4

.4772
.4821
.4861
.4893
.4918

.4778
.4826
.4865
.4896
.4920

.4783
.4830
.4868
.4898
.4922

.4788
.4831
.4871
.4901
.4925

.4793
.4838
.4875
.4904

.4927

.4798
.4842
.4878
.4906
.4929

.4803
.4856
.4881
.4909
.4931

.4808
.4850
.4884
.4911
.4932

.4812
.4854
.4887
.4913
.4934

.4817
.4857
.4890
.4916

.4936

2.5
2.6
2.7
2.8
2.9

.4938
.4953
.4965
.4974
.4981

.4940
.4955
.4966
.4975
.4982

.4941
.4956
.4967
.4976
.4983

.4943
.4957
.4968
.4977

.4983

.4945
.4959
.4969
.4977
.4984

.4946
.4960
.4970
.4978
.4984

.4948
.4961
.4971
.4979
.4985

.4949
.4962
.4972
.4980
.4985

.4951
.4963
.4973
.4980

.4986

.4952
.4964
.4974
.4981
.4986

3.0
3.1
3.2
3.3
3.4
3.5

.49865
.49903
.49931
.49952
.49966
.49977

.4987
.4491
.4993
.4495
.4997

.4987
.4991

.4994
.4995
.4997

.4988
.4991
.4994
.4996
.4997

.4988
.4992
.4994
.4996
.4997

.4989
.4992
.4994
.4996
.4997

.4989
.4992
.4994
.4996
.4997

.4989
.4992

.4995
.4996
.4997

.4990
.4993
.4995
.4996
.4997

.4990
.4993
.4995
.4997
.4998

σ

KAPLAN PUBLISHING


Present value table

Present value of £1 i.e. (1 + r)−n where r = interest rate, n = number of periods until payment or receipt.
Interest rates (r)
Periods
(n)
1
2
3

4
5

1%
.990
.980
.971
.961
.951

2%
.980
.961
.942
.924
.906

3%
.971
.943
.915
.888
.863

4%
.962
.925
.889
.855
.822


5%
.962
.907
.864
.823
.784

6%
.943
.890
.840
.792
.747

7%
.935
.873
.816
.763
.713

8%
.926
.857
.794
.735
.681

9%

.917
.842
.772
.708
.650

10%
.909
.826
.751
.683
.621

6
7
8
9
10

.942
.933
.923
.914
.905

.888
.871
.853
.837
.820


.837
.813
.789
.766
.744

.790
.760
.731
.703
.676

.746
.711
.677
.645
.614

.705
.665
.627
.592
.558

.666
.623
.582
.544
.508


.630
.583
.540
.500
.463

.596
.547
.502
.460
.422

.564
.513
.467
.424
.386

11
12
13
14
15

.896
.887
.879
.870
.861


.804
.788
.773
.758
.743

.722
.701
.681
.661
.642

.650
.625
.601
.577
.555

.585
.557
.530
.505
.481

.527
.497
.469
.442
.417


.475
.444
.415
.388
.362

.429
.397
.368
.340
.315

.388
.356
.326
.299
.275

.350
.319
.290
.263
.239

16
17
18
19
20


.853
.844
.836
.828
.820

.728
.714
.700
.686
.673

.623
.605
.587
.570
.554

.534
.513
.494
.475
.456

.458
.436
.416
.396
.377


.394
.371
.350
.331
.312

.339
.317
.296
.277
.258

.292
.270
.250
.232
.215

.252
.231
.212
.194
.178

.218
.198
.180
.164
.149


Interest rates (r)
Periods
(n)
1
2
3
4
5

11%
.901
.812
.731
.659
.593

12%
.893
.797
.712
.636
.567

13%
.885
.783
.693
.613
.543


14%
.877
.769
.675
.592
.519

15%
.870
.756
.658
.572
.497

16%
.862
.743
.641
.552
.476

17%
.855
.731
.624
.534
.456

18%

.847
.718
.609
.516
.437

19%
.840
.706
.593
.499
.419

20%
.833
.694
.579
.482
.402

6
7
8
9
10

.535
.482
.434
.391

.352

.507
.452
.404
.361
.322

.480
.425
.376
.333
.295

.456
.400
.351
.308
.270

.432
.376
.327
.284
.247

.410
.354
.305
.263

.227

.390
.333
.285
.243
.208

.370
.314
.266
.225
.191

.352
.296
.249
.209
.176

.335
.279
.233
.194
.162

11
12
13
14

15

.317
.286
.258
.232
.209

.287
.257
.229
.205
.183

.261
.231
.204
.181
.160

.237
.208
.182
.160
.140

.215
.187
.163
.141

.123

.195
.168
.145
.125
.108

.178
.152
.130
.111
.095

.162
.137
.116
.099
.084

.148
.124
.104
.088
.074

.135
.112
.093
.078

.065

16
17
18
19
20

.188
.170
.153
.138
.124

.163
.146
.130
.116
.104

.141
.125
.111
.098
.087

.123
.108
.095
.083

.073

.107
.093
.081
.070
.061

.093
.080
.069
.060
.051

.081
.069
.059
.051
.043

.071
.060
.051
.043
.037

.062
.052
.044
.037

.031

.054
.045
.038
.031
.026

KAPLAN PUBLISHING

xi


Cumulative present value of 1.00 unit of currency per annum.

Receivable or payable at the end of each year for n years

1 − (1 + r) −n
r

.

Interest rates (r)
Periods
(n)
1
2
3
4
5


1%
0.990
1.970
2.941
3.902
4.853

2%
0.980
1.942
2.884
3.808
4.713

3%
0.971
1.913
2.829
3.717
4.580

4%
0.962
1.886
2.775
3.630
4.452

5%

0.952
1.859
2.723
3.546
4.329

6%
0.943
1.833
2.673
3.465
4.212

7%
0.935
1.808
2.624
3.387
4.100

8%
0.926
1.783
2.577
3.312
3.993

9%
0.917
1.759

2.531
3.240
3.890

10%
0.909
1.736
2.487
3.170
3.791

6
7
8
9
10

5.795
6.728
7.652
8.566
9.471

5.601
6.472
7.325
8.162
8.983

5.417

6.230
7.020
7.786
8.530

5.242
6.002
6.733
7.435
8.111

5.076
5.786
6.463
7.108
7.722

4.917
5.582
6.210
6.802
7.360

4.767
5.389
5.971
6.515
7.024

4.623

5.206
5.747
6.247
6.710

4.486
5.033
5.535
5.995
6.418

4.355
4.868
5.335
5.759
6.145

11
12
13
14
15

10.368
11.255
12.134
13.004
13.865

9.787

10.575
11.348
12.106
12.849

9.253
9.954
10.635
11.296
11.938

8.760
9.385
9.986
10.563
11.118

8.306
8.863
9.394
9.899
10.380

7.887
8.384
8.853
9.295
9.712

7.499

7.943
8.358
8.745
9.108

7.139
7.536
7.904
8.244
8.559

6.805
7.161
7.487
7.786
8.061

8.495
6.814
7.103
7.367
7.606

16
17
18
19
20

14.718

15.562
16.398
17.226
18.046

13.578
14.292
14.992
15.679
16.351

12.561
13.166
13.754
14.324
14.878

11.652
12.166
12.659
13.134
13.590

10.838
11.274
11.690
12.085
12.462

10.106

10.477
10.828
11.158
11.470

9.447
9.763
10.059
10.336
10.594

8.851
9.122
9.372
9.604
9.818

8.313
8.544
8.756
8.950
9.129

7.824
8.022
8.201
8.365
8.514

Interest rates (r)

Periods
(n)
1
2
3
4
5

11%
0.901
1.713
2.444
3.102
3.696

12%
0.893
1.690
2.402
3.037
3.605

13%
0.885
1.668
2.361
2.974
3.517

14%

0.877
1.647
2.322
2.914
3.433

15%
0.870
1.626
2.283
2.855
3.352

16%
0.862
1.605
2.246
2.798
3.274

17%
0.685
1.585
2.210
2.743
3.199

18%
0.847
1.566

2.174
2.690
3.127

19%
0.840
1.547
2.140
2.639
3.058

20%
0.833
1.528
2.106
2.589
2.991

6
7
8
9
10

4.231
4.712
5.146
5.537
5.889


4.111
4.564
4.968
5.328
5.650

3.998
4.423
4.799
5.132
5.426

3.889
4.288
4.639
4.946
5.216

3.784
4.160
4.487
4.772
5.019

3.685
4.039
4.344
4.607
4.833


3.589
3.922
4.207
4.451
4.659

3.498
3.812
4.078
4.303
4.494

3.410
3.706
3.954
4.163
4.339

3.326
3.605
3.837
4.031
4.192

11
12
13
14
15


6.207
6.492
6.750
6.982
7.191

5.938
6.194
6.424
6.628
6.811

5.687
5.918
6.122
6.302
6.462

5.453
5.660
5.842
6.002
6.142

5.234
5.421
5.583
5.724
5.847


5.029
5.197
5.342
5.468
5.575

4.836
4.968
5.118
5.229
5.324

4.656
4.793
4.910
5.008
5.092

4.486
4.611
4.715
4.802
4.876

4.327
4.439
4.533
4.611
4.675


16
17
18
19
20

7.379
7.549
7.702
7.839
7.963

6.974
7.120
7.250
7.366
7.469

6.604
6.729
6.840
6.938
7.025

6.265
6.373
6.467
6.550
6.623


5.954
6.047
6.128
6.198
6.259

5.668
5.749
5.818
5.877
5.929

5.405
5.475
5.534
5.584
5.628

5.162
5.222
5.273
5.316
5.353

4.938
4.990
5.033
5.070
5.101


4.730
4.775
4.812
4.843
4.870

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1

 

 

CIMA verb hierarchy – 
Strategic level exams
Chapter learning objectives
CIMA VERB HIERARCHY 
CIMA place great importance on the choice of verbs in exam 
question requirements. It is thus critical that you answer the question 
according to the definition of the verb used.
 

1



CIMA verb hierarchy – Strategic level exams

 

1 CIMA verb hierarchy ­ strategic level
In strategic level exams you will mainly meet verbs from levels 3, 4 and 5. 
Examiners have commented on many occasions that they ask a level 5 verb 
and get a level 2 response. It is vital that the higher level verbs are 
understood and responded to. Very occasionally you will also see level 1 
and 2 verbs but these should not account for more than 5­10% of the marks 
in total.
Level 3 ­ APPLICATION 
How you are expected to apply your knowledge
VERBS USED 

DEFINITION 

Apply

Put to practical use.

Calculate

Ascertain or reckon mathematically.

Demonstrate

Prove with certainty or exhibit by practical means.


 
Prepare

Make or get ready for use.
Make or prove consistent/compatible.

Reconcile
Find an answer to.
Solve
Arrange in a table.
Tabulate

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Level 4 ­ ANALYSIS 
How you are expected to analyse the detail of what you have learned.
VERBS USED 

DEFINITION 

Analyse

Examine in detail the structure of.

Categorise


Place into a defined class or division.

Compare and 
contrast

Show the similarities and/or differences between.
Build up or compile.

Construct
Examine in detail by argument.
Discuss
Translate into intelligible or familiar terms.
Interpret
Place in order of priority or sequence for action.
Prioritise
Create or bring into existence.
Produce
 

Level 5 ­ EVALUATION 
How you are expected to use your learning to evaluate, make decisions or 
recommendations.
VERBS USED 

DEFINITION 

Advise

Counsel, inform or notify.


Evaluate

Appraise or assess the value of.

Recommend 

Propose a course of action.

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CIMA verb hierarchy – Strategic level exams

 

2 Further guidance on strategic level verbs that cause confusion
Verbs that cause students most confusion at this level are as follows:
Level 3 verbs 

•

The verb "to apply"
Given that all level 3 verbs involve application,  the verb "apply" is rare 
in the real exam. Instead one of the the other more specific verbs is 
used instead. 

•


The verb "to reconcile"
This is a numerical requirement and usually involves starting with one of 
the figures, adjusting it and ending up with the other.
For example, in a bank reconciliation you start with the recorded cash 
at bank figure, adjust it for unpresented cheques, etc, and (hopefully!) 
end up with the stated balance in the cash "T account". 

•

The verb "to demonstrate"
The verb "to demonstrate" can be used in two main ways.
Firstly it could mean to prove that a given statement is true or consistent 
with circumstances given. For example, the Finance Director may have 
stated in the question that the company will not exceed its overdraft limit 
in the next six months. The requirement then asks you to demonstrate 
that the Director is wrong. You could do this by preparing a cash flow 
forecast for the next six months. 
Secondly you could be asked to demonstrate how a stated model, 
framework, technique or theory could be used in the particular 
scenario to achieve a specific result ­ for example, how a probability 
matrix could be used to make a production decision. Ensure in such 
questions that you do not merely describe the model but use it to 
generate the desired outcome.

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Level 4 verbs 

•

The verb "to analyse"
To analyse something is to examine it in detail in order to discover its 
meaning or essential features. This will usually involve breaking the 
scenario down and looking at the fine detail, possibly with additional 
calculations, and then stepping back to see the bigger picture to identify 
any themes to support conclusions.
For example, if asked to analyse a set of financial statements, then the 
end result will be a set of statements about the performance of the 
business with supporting evidence. This could involve the following:
(1) You could break down your analysis into areas of profitability, 
liquidity, gearing and so on.
(2) Under each heading look at key figures in the financial statements, 
identifying trends (e.g. sales growth) and calculating supporting 
ratios (e.g. margins).
(3) Try to explain what the figures mean and why they have occurred 
(e.g. why has the operating margin fallen?)
(4) Start considering the bigger picture ­ are the ratios presenting a 
consistent message or do they contradict each other? Can you 
identify common causes?
(5) Finally you would then seek to pull all this information together and 
interpret it to make some higher level comments about overall 
performance.
The main error students make is that they fail to draw out any themes 
and conclusions and simply present the marker with a collection of 

uninterpreted, unexplained facts and figures.

•

The verb "to discuss"
To discuss something is very similar to analysing it, except that 
discussion usually involves two or more different viewpoints or 
arguments as the context, rather than a set of figures, say. To discuss 
viewpoints will involve looking at their underlying arguments, examining 
them critically, trying to assess whether one argument is more 
persuasive than the other and then seeking to reach a conclusion.
For example, if asked to discuss whether a particular technique could 
be used by a company, you would examine the arguments for and 
against, making reference to the specific circumstances in the question, 
and seek to conclude.

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CIMA verb hierarchy – Strategic level exams

•

The verb "to prioritise"
To prioritise is to place objects in an order. The key issue here is to 
decide upon the criteria to use to perform the ordering. For example, 
prioritising the external threats facing a firm could be done by 
considering the scale of financial consequences, immediacy, 

implications for the underlying business model and so on.
The main mistake students make is that they fail to justify their 
prioritisation ­ why is this the most important issue? 

Level 5 verbs 

•

The verb "to evaluate"
To evaluate something is to assess it with a view to placing a value on 
it.  In many respects "evaluate" should be seen as a higher level version 
of "analyse" and "discuss" and could include qualitative and quantitative 
factors within your criteria. Your resulting arguments will need to be 
prioritised and weighed against each other to form a conclusion.  
For example, suppose you are asked to evaluate a proposed strategy 
in paper E3. At its simplest your answer could contain a series of 
arguments for and against the strategy. Each argument should be 
discussed to assess its importance. The arguments can then be 
weighed up against each other to form a conclusion. You are thus 
evaluating the factors within each argument and then evaluating the 
arguments against each other.
With such questions many students struggle to generate enough points 
or arguments. Part of the solution is to produce mental checklists when 
studying the paper concerned. These give criteria to use for valuing the 
matter at hand. With the above example on strategy evaluation, crietria 
could include any of the following:

6

–


Are there any useful calculations ­ e.g. NPV, impact on profit?

–

Does the strategy resolve any major threats faced by the firm?

–

Does the strategy capitalise on the firm's strengths or do 
weaknesses need resolving first?

–

Does the strategy enhance the firm's competitive strategy?

–

Does the strategy lead to a better "fit" with the environment?

–

What are the risks and are they acceptable?

–

What are the implications for different stakeholders and would it be 
acceptable to them?

–


What are the resource implications ­ how feasible if the strategy?

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Use of such a checklist will ensure you have enough points to pass.
In some questions you may have to do more preliminary work before 
you can evaluate. For example, if asked to evaluate a firm's approach 
to change management you would start by identifying what type of 
approach they are taking (referencing to different models of change 
management) before you can evaluate it.

•

The differences between the verbs "to evaluate", "to advise" and
"to recommend"
All three level 5 verbs involve a mixture of identifying relevant issues, 
analysing them, evaluating them and then finishing with some form of 
conclusion. Some writers see this as a three step approach:  
(1) What? Identify relevant issues.
(2) So what? Why are the issues relevant? How significant are they?
(3) What now? What response is required by the firm being 
considered?
The difference between the level 5 verbs lies in where the main 
emphasis is in these three steps. With "advise" and "recommend" the 
examiner will be looking for more detail in step 3. Recommendations in 
particular could involve formulating a plan of action that includes both 
short and longer term aspects.


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CIMA verb hierarchy – Strategic level exams

8

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chapter

2

 

 

Enterprise governance and 
risk
Chapter learning objectives
 
Lead 

Component 

B1. Evaluate types of risk facing  (b) Evaluate risks facing an 

an organisation.
organisation.
B2. Evaluate risk management 
strategies and internal controls.

(a) Discuss the purposes and 
importance of internal 
control and risk 
management for an 
organisation.

 

9


Enterprise governance and risk

 

 

 

 

 
 

1 Enterprise governance

A useful way of looking at the entire Performance Strategy (P3) syllabus is 
through the concept of Enterprise Governance. 

 

   Enterprise governance definition
 

 

In a report produced by CIMA and IFAC (International Federation of 
Accountants) enterprise governance was described as covering the entire 
accountability framework of an organisation in two dimensions: 
conformance, or ‘corporate governance’, and performance, or ‘business 
governance’. 
 

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Conformance covers issues such 
as:


Performance focuses on: 

Roles of chairman and chief 
executive officer (CEO)

Helping board to make strategic 
decisions

Board of directors (composition, 
non­executive directors (NEDs))

Understanding risk appetite and 
drivers of performance

Board committees (audit, 
remuneration and nominations)

Identifying critical points for strategic 
decision making

Internal controls

CIMA Strategic Scorecard ™

Risk management and internal audit  
 

   Further detail on conformance and performance
 


 

 

•

Enterprise governance considers the whole picture to ensure that 
strategic goals are aligned and good management is achieved.

•

These concepts will be further examined in chapter 3, Risk 
Management, and throughout the remainder of this text.

CIMA Strategic Scorecard ™
The CIMA / IFAC report identified a number of key priorities for attention as 
part of successful enterprise governance, with particular focus on the 
‘performance’ dimension. These have been captured in the CIMA Strategic 
Scorecard ™.

 

•

It is unlikely that the scorecard will be covered in detail within your exam, 
as the tool is under development. However, you will cover the related 
topics within this paper, and it is a useful overview of board processes.

•


The scorecard should provide the means for company directors from 
organisations of all sizes to obtain assurance that the strategic process 
is operating effectively. This is to ensure that long­term sustainable 
value is generated.

   Objectives of the scorecard
 

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Enterprise governance and risk
 

 

 

 

 
 

   CIMA Strategic Scorecard ™ dimensions
 

 


   Strategic Scorecard vs. Balanced Scorecard
 

 

2 What is risk ?
As already discussed, the management of risk should have a strategic 
dimension. Risks facing an organisation are those that affect the 
achievement of its overall objectives, which should be reflected in its 
strategic aims. Risk should be managed and there should be strategies for 
dealing with risk.
This chapter will look at the types and sources of risk for business 
organisations.  The next chapter will then move onto looking at the process 
of risk management.

 

 

•

Risk in business is the chance that future events or results may not be 
as expected.

•

Risk is often thought of as purely bad (pure or 'downside' risk), but it 
must be considered that risk can also be good – the results may be 
better than expected as well as worse (speculative or 'upside' risk).


•

Businesses must be able to identify the principal sources of risk if they 
are to be able to assess and measure the risks that the organisation 
faces.

   Risk and uncertainty
 

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chapter 2
 

Why incur risk ?
 

 

 

 

 

•


To generate higher returns a business may have to take more risk in 
order to be competitive.

•

Conversely, not accepting risk tends to make a business less dynamic, 
and implies a ‘follow the leader’ strategy.

•

Incurring risk also implies that the returns from different activities will be 
higher – ‘benefit’ being the return for accepting risk.

•

Benefits can be financial – decreased costs, or intangible – better 
quality information.

•

In both cases, these will lead to the business being able to gain 
competitive advantage.

   Benefits of taking risks
 

 

3 Types and sources of risk for business organisations
Categorising risks 


•

Many organisations categorise risks into different types of risk. The use 
of risk categories can help with the process of risk identification and 
assessment.

•

There is no single system of risk categories. The risk categories used 
by companies and other organisations differ according to 
circumstances. Some of the more commonly­used risk categories are 
described below.

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