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Applying Due Diligence in Risk Management Business investors or financial institutions normally carry out due diligence as an integral part of risk assessment of an upcoming, potential investment, acquisition or financial loaning. Due diligence is none other than a process of investigation of a business or individual prior to signing a contract or it could also mean an act carried out with prudence or a standard of care. Although the nature may be voluntary, the process of due diligence has a legal face. The establishment of due diligence is based on the theory that careful and prudent investigation carried about on a business entity or on an individual can help a lot in the decision-making of investors and lenders through the quality of information that was obtained from the investigation process. The nature of due diligence investigation comprises technical and financial components, such that it takes in assessment of all contracts so that all necessary provisions of risk management and allocation are stipulated or evaluating the technical design of a proposed project. Due diligence can also be applied in determining the type of risks facing a business or project venture at a particular point in time. With its extensive application, due diligence can be useful in both ways – investigating the financial capacity of a business entity or individual, as well as investigating the potential risks that can arise in a business investment or lending business. These are salient points that are included in the coverage of a risk profile – potential causes of risk, potential consequences resulting from the risk, adequacy of the control environment operating around the risk, and adequacy of the quality and quantity of information available to monitor the control environment operating around the risk. It is crucially important that in conducting a risk profile, it must be carried out with care and prudence so that all forms of risks (technological, sovereign, political, economic, etc) are given with much thought by the decision makers before any investment decision takes place.
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Risk management covers the process of identifying, assessing, and prioritizing all identified risks, followed by a coordinated and economical application of resources to minimize, monitor, and control the probability or impact of unforeseen events or to maximize the realization of opportunities. To make an almost safe assurance that the element of uncertainty does not sidetrack a business endeavor is the main goal of risk management. ideally, in applying risk management, it uses the prioritization process, such that risks that give the greatest loss and risks with a greater probability of occurring are prioritized first followed by risks with lower loss and probability and handled in descending order. Also included in the application of risk management is the process of allocating resources, which covers the setting up of what is called an opportunity cost or alternative cost, which is considered as a component in a business endeavor.6 Facts About Tips Everyone Thinks Are True