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Worth 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. 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. The components of risk profile includes the following: 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. The objective of risk management is to see to it that the element of uncertainty does not sidetrack the business undertaking and its goals. In an ideal risk management, a prioritization procedure is applied such 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. Risk management also includes allocating resources which is the prime basis in establishing opportunity cost, which is an alternative cost considered in undertaking a business investment.What Research About Resources Can Teach You