Question

Explain how the risk analysis decision tree can be used in conjunction with the five-step process for ADA. Provide an example.

Answer 1

Risk analysis decision tree: In risk management process, a large part involves looking into the future, trying to analyze and understand what might happen in the future and if it matters. Decision tree is an important technique in this context. It is one of the technique of quantitative risk analysis.

Explanation:

Risk analysis decision tree: In risk management process, a large part involves looking into the future, trying to analyze and understand what might happen in the future and if it matters. Decision tree is an important technique in this context. It is one of the technique of quantitative risk analysis.

Decision tree is used for calculating expected monetary value which then evaluates the project based upon the expected values. It multiplies the expected values with the relevant probabilities and calculates expected monetary values.

Steps of using decision tree in a risk management project, are as follows:

a) The first step include documenting a decision in a decision tree.

b) The next step include assigning a probability of risk occurrence

c) Assigning monetary value to the occurrence of risk.

d) The last step include the calculation of expected monetary value for each decision path.

An important advantage of using decision tree is that it allows the consideration of all the probable outcomes of a decision and traces each path to a result or a conclusion. It helps in creating a comprehensive in depth analysis of the consequences along each branch and identifies decision nodes which demands further investigation.

The five step process for ADA can be used along with the risk analysis decision tree as follows:

1.Establishment of risk structure of an enterprises and in the context of audit data analytics (ADA), this risk is minimized through keeping a control by taking with the respective client.

2.After the establishment of risk structure of an enterprise, assigning ownership and responsibility should be straightforward. Each selected node will be having specified objective, which will be assign to different manager. Each node is having a set of risks, along with it's leader and owner, is a risk management cluster.This is more like standardization of data in ADA.

3.The third step involves the creation of an enterprise risk map. Common sense and risk budgeting helps in dictating the risks, supposed to reside at their local point of impact because this is the area where attention is naturally focused. It is linked with using mapping document in order to find opportunities for automation in ADA.

4.The most important aspect of this risk management is to carry out suitable or appropriate actions in order to mitigate the risks.

5.The last step include changing culture from local to enterprise. As at all the organizational levels, changing the focus from "risk management" to "managing risk" is a challenge.

An example includes the banking organization making an analysis of past loans in order to produce a decision tree which then can be converted to loan decision rules.This will help in analyzing and managing the risk associated with default.