How Does an Accounting System Bring Out the Risks Order Instructions: The decision-makers are always looking forward to an accounting system that is likely to bring out the risks involved in all projects of an organization.
” So how does an accounting system bring out the risks? Please provide an example.
How Does an Accounting System Bring Out the Risks Sample Answer
The risk is inevitable due to unforeseen circumstances in the turbulent business environments. Be as it may, risk refers to the possibility of danger, injury or loss or other extreme outcomes of undertaking a particular activity (Kerzner, 2013). Decision makers in an organization use different techniques such as probability distributions, decision trees, hedging techniques, discounted cash flow, and capital asset pricing model to determine the risk involved in undertaking different projects in the organization. Accounting systems bring out the risks in a project through the project risk management process. This process encompasses of undertaking risk management through planning, detection of risk, risk analysis, response planning as well as controlling the risk that may occur in a project (Knight, 2012).
Risk identification is important so as to identify the potential risks of a project and develop strategies to mitigate those risks. This is important to ensure that projects are completed within the stipulated time and that they meet the set quality standards.
Once decision makers have a clear comprehension of the risks of their current project and business activities, they are required to research on the risks in their proposed project using Net Present Value (NPV) calculation, the probability distribution of discounted cash flow and risk premiums calculation (Edwards & Bowen, 2013). It is important to have a consistent approach when evaluating project risks and economics. For example, in an Oil company, the best approach for project evaluation involves three phases that is; project’s risk-return profile presented in a form of a probability distribution, standardized summary of measurements for return and risk, as well as a full description of all the sources of risk. In such a company, the whole process involves the project team strategic planning department and other key stakeholders. The project team identifies the basic economic drivers requisite for the project; the strategic department prescribes the consistent central assumptions that are paramount for accessing the risks involved while other stakeholders help in ensuring that the underlying method chosen in doing the risk assessment is robust.
How Does an Accounting System Bring Out the Risks References
Kerzner, H. R. (2013). Project management: a systems approach to planning, scheduling, and controlling. John Wiley & Sons.
Knight, F. H. (2012). Risk, uncertainty, and profit. Courier Corporation.
Edwards, P., & Bowen, P. (2013). Risk management in project organizations. Routledge.
