IFRS 7 requires disclosures of quantitative risk analysis that are rarely seen outside of the front office trading desks. These are fascinating topics. However, many audit firms in Dubai do not know where to begin.
Let’s commence at the beginning.
Quantity By Any Other Name
Do not be fooled; although the requirements may seem concise and straightforward from a risk analyst’s point of view, they are comprehensive. They would serve as a solid starting point to any company in Dubai that wants to use quantitative risk management in their internal decision-making processes.
IFRS 7 Identifies Four Areas Of Concern In Quantitative Terms.
Market Risk
A comprehensive overview of how future market and business environment changes will affect our assets.
Liquidity risk.
Illiquid assets are the other side to freely fluctuating assets. Dubai company audit specialists need to determine when cash flow payments are due from these assets.
Credit Risk
Drilling down in illiquid assets – There is a possibility that will never see the scheduled payment, which must quantify.
Concentration Risk.
Diversification is the only lunch that is free in quantitative finance. Concentration is lunch at the most expensive restaurant. It is necessary to demonstrate whether or not financial auditors are too exposed to specific companies, currencies, and geographies.
Risky Business
Let’s first look at what risk analysis is before auditor get into the details of each requirement. Risk cannot be touched, smelt, or seen. It is invisible, yet it is authentic. A potential danger is felt viscerally by people who try to avoid it if possible.
Like all other risks, financial risk is just like any other. It is difficult to quantify it accurately, but many people can recall times when they could not sleep because of the feeling of “potential” loss. Quantitative risk analysis can be described as a collection of numerical analogies to approximate different aspects. Everyone can rest better at night if they are aware of the risks.
Market Risk Analysis
First, auditor will be asked to give a sensitivity analysis of each market risk factor.
It is a difficult task to identify market risk factors. Still, auditors usually get them from information necessary for valuing security. A bond’s market risks are, for example, its issuer’s credit rating and the interest rate. The volatility and price of the underlying stock will determine employee stock options.
Each of these factors will be shocked by our sensitivity analysis. auditor will then use these shock values to calculate a loss figure in our quantitative valuation models. This is a difficult task, especially when we’re valuing complex products.
Not to be confused with other summary measures of market risks already being used by management, they can also be used. The goal is to have a broad view of corporate risk mitigation.
Liquidity risk
Although many of the most influential minds in history have discussed liquidity, no one agreed definition. Fortunately, IFRS 7 simplifies this process for internal auditors for Dubai entities by defining it to be a maturity analysis for current financial liabilities. This could be a simple bucketing according to time to maturity or a more complex duration analysis.
The duration calculation is used to calculate the average weighted time of repayment. This is a more precise measure. There are many ways audit services can calculate the duration. Still, it is essential to be careful when calculating it for complex securities because there are many pitfalls.
Credit Risk
Analytical credit risk measures are necessary for assets that have been in trouble or those can’t evaluate their credit quality. This is easy if an audit specialist already has the quantitative models to calculate market and liquidity risks.
auditor are generally looking for a credit spread for each fixed-income asset. This is done by taking the current fair value and valuing it as a government bond. The difference is called the Credit Value Adjustment, or CVA. Credit difficulties are more severe when there is a tremendous difference. However, experts can easily encapsulate the risk in a credit spread with a suitable quantitative model.
Concentration Risk
It is not always easy to summarize this information accurately. For example, the average weighted average (or weighted average) of the current net value of each security must be used to aggregate the duration most of the time.
experts can buckle our risk using qualitative methods once summarized the top-level. Is it more dangerous to be exposed to certain countries, industries, or currencies than we should? It is a sound management practice to identify these concentrations.
In Dubai and UAE trustworthy financial auditing is essential. auditors are responsible for providing accurate, transparent and informative financial information on our clients’ businesses.
This allows investors and other interested parties make informed decisions about whether to invest capital in that company. Audit services are necessary to preserve the integrity of our capital market. Auditor team works hard to deliver professional results.
