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The Usefulness of 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. The process of conducting an investigation of a business entity or of an individual before signing an agreement and carried out with prudence is known as due diligence. While it is voluntary, due diligence is considered a legal obligation. 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 type of investigation has technical and financial components, like evaluating on the design of a proposed project, studying all the contracts to ascertain that all correct provisions are there, which are provisions for risk management and risk allocation. Due diligence can also be applied in the evaluation of the 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. The following points are included in a profile risk – 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. Risk management sees to it that the element of uncertainty does not avert the business undertaking. 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.The Essential Laws of Plans Explained

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