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Applying Due Diligence in Risk Management In the investment business, as well as the lending business, due diligence is typically carried out as part of the financial risk assessment of an investment, acquisition, or before a lender loans out his/her money. Before a business contract is signed, a process of investigation of a business or of an individual with a certain standard of care is called due diligence. Although the nature may be voluntary, the process of due diligence has a legal face. The theory behind due diligence is on the premise that the type of investigation contributes the quality of information needed by the decision makers, who are the businessmen, financial lenders, in order to discuss the risks, costs, and benefits before agreeing to sign a contract. 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. Another task of due diligence is assessing the risk profile or indicating all types of risks facing a business or project at a particular point in time. Due diligence is useful in both ways – for the business entity or individual who is applying for a loan or for the financial investor or lender who needs a risk profile to allocate potential risks in the contract before agreeing to the loan contract. 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. The significance of risk profiling is that it provides awareness of the different forms of risks (technological, sovereign, political, economic, etc) which can affect the investment during the course of arriving in a business decision.
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The identification, assessment, and prioritization of risks and followed by a collaborated and financial application of resources to limit, monitor and control the probability or impact of unfortunate events is referred to as risk management. To make an almost safe assurance that the element of uncertainty does not sidetrack a business endeavor is the main goal of risk management. A prioritization process is usually employed in an ideal risk management set up, such that that the risks with greatest loss or impact and greatest probability of occurring are handled first and the risks with lower probability of occurrence and lower loss are 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.Practical and Helpful Tips: Resources