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BEC > B1 - Corporate Governance and Financial Risk Management > Flashcards

B1 - Corporate Governance and Financial Risk Management Flashcards

1
Q

What are the five components of Internal Control?

A

CRIME!
C = Control Environment.
R = Risk Assessment.
I = Information and communication.
M = Monitoring.
E = Existing Control Activities.

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2
Q

What are the 5 principles related to the control environment component?

A

BOCCA!
1. Board Independence and Oversight. POF: Establishing oversight reponsibilities.
2. Organizational Structure. POF: Establishing reporting lines.
3. Commitment to Competence. POF: Hire, retain, develop and train competent employees.
4. Commitment to Ethics and Integrity. POF: Setting tone at top.
5. Accountability. POF: Establishing performance reviews, incentives and rewards.

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3
Q

What are the 4 principles related to the Risk Assessment component?

A

SICI!
1. Specify Objectives. POF: Identifying objectives that reflect mgmt’s choices, while being compliant.
2. Identify and Analyze Risks. POF: Analyzing internal and external factors.
3. Consider Potential for Fraud. POF: Assessing fraud triangle.
4. Identify and Assess Changes. POF: Assessing external changes and business changes.

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4
Q

What are the 3 principles related to the Information and Communication component?

A

OCI!
1. Obtain and Use Information. POF: Identifying and defining info requirements for internal control.
2. Communicate With External Parties. POF: Mgmt with open communication channels.
3. Internally Communicate Information. POF: Flow of info up and down,

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5
Q

What are the 2 principles related to the Monitoring Activities component?

A

OC
1. Ongoing and/or Separate Evaluations. POF: Establishing a baseline.
2. Communication of Deficiencies. POF: Monitoring corrective actions.

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6
Q

What are the 3 principles related to the Existing Control Activities component?

A

DSS!
1. Deployment of Policies and Procedures. POF: Establishing responsibilities and accountability.
2. Select and Develop Control Activities. POF: Integrating with risk assessment when selecting activities.
3. Select and Develop Technology Controls. POF: Include determining dependencies between the use of tech and establishing relevant tech for control activities.

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7
Q

What is the fraud triangle?

A

The fraud triangle represents the 3 primary factors that lead to fraud in the workplace:
1. Incentive/Pressure.
2. Rationalization.
3. Opportunity.

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8
Q

What is the nature of the relationship between the BOD and the company?

A

Fiduciary - It has a responsibility to safeguard the company.

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9
Q

What should be done when monitoring at top level management becomes difficult due to business growth?

A

Move the monitoring to lower levels.

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10
Q

What is ERM?

A

The culture, capabilities and practices, integrated with strategy-setting performance, that organizations rely on to manage risk in creating, preserving, and realizing value.

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11
Q

What are the two words in ERM that are linked together?

A

Core Values = Culture

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12
Q

What are the components of ERM?

A

GO PRO!
G = Governance and Culture.
O = Objective Setting and Strategy.
P = Performance.
R = Review and Revision.
O = Ongoing Information, Communication and Reporting.

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13
Q

What are the 5 principles related to the Governance and Culture component?

A

DOVES!
D = Defines Desired Culture.
O = Oversight (Excercises Board Oversight).
V = Values (Commitment to Core Values).
E = Employees (Capable).
S = Structure (operating) is Established.

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14
Q

What are the 4 principles related to the Objective Setting and Strategy component?

A

SOAR!
S = Strategies (Alt) are Evaluated.
O = Objectives (Bus) are Formulated.
A = Analyzes Bus Context.
R = Risk Appetite is Defined.

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15
Q

What are the 5 principles related to the Performance component?

A

VAPIR!
V = View; Develops Portfolio View.
A = Assesses Severity of Risk.
P = Prioritizes Risk.
I = Identifies Risk.
R = Risk; Implements Risk Responses.

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16
Q

What are the 3 principles related to the Review and Revision component?

A

SIR!
S = Assesses Substantial Changes.
I = Improvement in ERM.
R = Reviews Risk and Performance.

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17
Q

What are the 3 principles related to the Ongoing Information, Communication and Reporting component?

A

TIP!
T = Leverages Info Technology.
I = Communicates Risk Information.
P = Reports on Risk, Culture and Performance.

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18
Q

What is value preservation?

A

A company’s ability to maintain market share with high customer satisfaction and sustained profitability.

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19
Q

What are the 5 responses to risk under COSO ERM?

A

APRAS!
A = Acceptance: No action is taken to change the risk.
P = Pursue: Accepts the increased risk to improve performance.
R = Reduce: Action is taken to reduce risk.
A = Avoid: Action is taken to remove risk.
S = Share: Action is taken to reduce risk by outsourcing. i.e. Insurance.

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20
Q

What are the 3 risks that are considered part of risk assessment under COSO ERM?

A
  1. Inherent.
  2. Actual Residual.
  3. Target Residual.
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21
Q

When does event identification happen?

A

After the development of the objectives. Must know objectives first so we can assess which events willl impact the achievement of objectives.

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22
Q

When does a company exceeds its risk appetite?

A

When the likelihood and impact of negative events > residual risk.

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23
Q

What is inherent risk?

A

When management doe nothing to alter the likelihood or impact of a negative event.

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24
Q

What is residual risk?

A

The risk that is left to an organization after management takes actions to reduce the likelihood or impact of a negative event.

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25
Q

What is organizational sustainability?

A

The ability of an entity to withstand the impact of large-scale events.

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26
Q

How do you rank risk?

A

Likelihood % * Severity
Greater to lower.

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27
Q

What is the formula for Net Benefit?

A

Net Benefit = Potential loss * (Overall Threat % - Risk of loss).

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28
Q

What’s the big no-no for officers and directors when it comes to conflict of interest?

A

Accepting a personal loan.

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29
Q

What is the one thing that SOX does not provide?

A

Provide transparency on adequacy of internal controls.

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30
Q

What is a financial expert?

A

A person that has education/experience as an auditor or finance officer, and has an understading of:
1. GAAP.
2. Application of GAAP.
3. Internal Controls.
4. Understanding of Audit Committee Functions.

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31
Q

Per SOX, what provisions should the code of ethics include?

A
  1. Provisions for compliance w/ law, rules, and regs.
  2. Provisions for full, accurate, and timely disclosure in periodic FS.
  3. Provisions for honest and ethical conduct.
32
Q

What is the 3-way match?

A

A vital control in the expenditure process.
It includes:
1. Receiving Report.
2. PO.
3. Supplier Invoice.

33
Q

What is a picking ticket?

A

A list provided to the WH showing items and qty that needs to be picked and packaged for shipping.

34
Q

What are the key business processes?

A
  1. Revenue process.
  2. Expenditure process.
  3. HR & Payroll process.
  4. Manufacturing process.
  5. Finance and Reporting process.
35
Q

What is a Flowchart?

A

Flowcharts visualize not only the logical flow of data through a process but also the physical aspects of that flow.

36
Q

What’s the difference between a Flowchart and a Data Flow Diagram?

A

Flowcharts show the physical aspects of a flow, and a Data Flow Diagram does not.

37
Q

What is Cross-Footing?

A

A check on columns or rows!

38
Q

What is Input Validation?

A

Ensures batch processing is done in a complete and accurate manner utilizing record counts and batch totals.

39
Q

What is Data Matching?

A

Data matching works to mtch multiple items before processes are executed.

40
Q

What is Sequence Check?

A

The process of having prenumbered documents and verifying that no documents or transactions are missing.

41
Q

What are the Revenue process docs?

A
  1. Sales order.
  2. Pick ticket.
  3. Packing slip.
  4. B/L.
  5. Sales invoice.
  6. Receipt.
  7. Remittance advice.
42
Q

What are the Expenditure process docs?

A
  1. Purchase requisitions.
  2. PO.
  3. Receiving report.
  4. Supplier invoice.
  5. Voucher.
43
Q

What are the HR & Payroll process docs?

A
  1. Time card.
  2. Register.
  3. Paycheck.
  4. Earnings statement.
44
Q

What are the Manufacturing process docs?

A
  1. Bill of materials.
  2. Production instructions.
  3. Production schedule.
  4. Production order.
45
Q

What are the Finance and Reporting process docs?

A
  1. GL.
  2. TB.
  3. Bank statements.
  4. FS.
  5. Management reports.
46
Q

What are the financial risks available?

A

DIMPL!
1. Default Risk.
2. Interest Rate Risk.
3. Market Risk.
4. Purchasing Power Risk.
5. Liquidity Risk.

47
Q

What is Default Risk?

A

Risk that your debtors won’t pay you back.

48
Q

What is Interest Rate Risk?

A

Risk of a fluctuating Interest Rate.

49
Q

What is Market Risk?

A

Risk of fluctuating FMV.

50
Q

What is Purchasing Power Risk?

A

Risk of fluctuating prices in assets and real estate.

51
Q

What is Liquidity Risk?

A

Risk to sell inventments w/o significant price changes.

52
Q

What is Price Risk?

A

Risk of decline in value of securities.

53
Q

What is Back Testing Analysis?

A

A simulation model with past data to compare PREDICTED losses with ACTUAL results.

54
Q

What are the risk types?

A

DUNS!
D = Diversifiable Risk.
U = Unsystematic Risk. (Nonmarket)
N = Nondiversifiable Risk.
S = Systematic Risk. (Market).

55
Q

What’s the diff between put and call?

A

Remember from FAR:
Put = Sell.
Call = Buy.

56
Q

What is risk averse behavior?

A

The more risk the more ROI.

57
Q

What is risk seeking behavior?

A

Reduced return for higher risk.

58
Q

What is risk indifferent behavior?

A

IDGAF about risk.

59
Q

What is business risk?

A

All your eggs in one basket (equity financing).

60
Q

What is the effective rate formula?

A

Annual interest / Net cash available

61
Q

What is default risk premium?

A

The additional comp to withstand risk bc they can’t pay me back.

62
Q

What are nominal dollars?

A

(1 + Inflation rate) * real dollars

63
Q

How is effective percentage cost calculated?

A

(Original Issue Discount + Transaction costs) / Loan Amount

64
Q

What is Original Issue Discount?

A

Face value - Value Paid

65
Q

What do freely fluctuating exchage rates do?

A

They correct a lack of equilibrium in the balance of payments.

66
Q

What is the economic exposure to exchange rate risk rule?

A

FX down, Dom up = In: Loss Out: Gain.
FX up, Dom down = In: Gain Out: Gain.

67
Q

What are the risk exposure categories?

A
  1. Transaction Exposure = Potential econ loss from transactions.
  2. Economic Exposure = Potential fluctuation in PV.
  3. Translation Exposure = Potential BS Items change in value.
68
Q

When should I take a short position?

A

When I sell goods and I expect payment in a foreign currency.

69
Q

What is Risk Profile?

A

The collective view of different risks.

70
Q

What is Risk Capacity?

A

The amount of risk an entity can absorb to meet their strategies and objectives.

71
Q

What is Risk Appetite?

A

The amount of risk that you’re willing to accept to obtain value.

72
Q

What is Risk Inventory?

A

A list of all risks that could impact you. Just like a regular inventory, but with risk.

73
Q

When does identification of events occur?

A

Before risk assessment, and after objective setting.

74
Q

What is the Required Rate of Return formula?

A

RF + Inflation Premium + Financial Risks.

75
Q

What is Economic Exposure?

A

The potential that PV of Cash Flows would go up or down as a result of FX.

BEC (8 decks)

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