BEC 1: Corporate Governance and Financial Risk Management

Question 1

when faulty strategy and inefficient and/or ineffective operations cause value to decline

Answer 1

value erosion

Question 2

when ongoing operations efficiently and effectively sustain created benefits; high customer satisfaction with profitable product line

Answer 2

value preservation

Question 3

when benefits created by the organization are received by stakeholders in either monetary or non monetary form

Answer 3

value realization

Question 4

when benefits of value exceeds the cost of resources used (people, financial capital, technology, process, and brand aka market presence)

Answer 4

value creation

Question 5

what are the four objectives of ERM?

Answer 5

reporting, operations, compliance, and strategy (ROCS)

Question 6

what are the limitations of enterprise risk management (ERM)

Answer 6

human judgment & human error, cost vs benefits limitations, errors made by management, collusion, management override

Question 7

what are the four responses to risk?

Answer 7

acceptance, reduction, sharing, and avoidance (ARSA)

Question 8

which risk response elects to assume all of the risk?

Answer 8

risk acceptance

Question 9

which risk response implements controls that mitigate the risk of a specific activity?

Answer 9

risk reduction

Question 10

which risk response shares the risk with another organization?

Answer 10

risk sharing

Question 11

which risk response elects not to engage in an activity at all?

Answer 11

risk avoidance

Question 12

what are the five major components of ERM?

Answer 12

governance & culture, review & revision, information & communication, strategy & objective-setting, performance (CRISP)

Question 13

how many principles support ERM?

Answer 13

20

Question 14

what principles support ERM’s governance & culture?

Answer 14

defines Desired culture, exercises board Oversight, commitment to core Values, attracts, develops & retains Employees, establishes operating Structure (DOVES)

Question 15

what principles support ERM’s strategy and objective-setting (FADE)?

Answer 15

Formulates business objectives
Analyzes business context
Defines risk appetite
Evaluates alternative strategies

Question 16

what principles support ERM’s performance (I PAID)?

Answer 16

Identifies risks
Prioritizes risks
Assess severity of risks
Implements risk responses
Develops portfolio views

Question 17

what principles support ERM’s review and revision (ART)?

Answer 17

Assesses substantial changes
Reviews risk and performance
The organization pursues improvement

Question 18

what principles support ERM’s information, communication, and reporting (ongoing) component (CLR)?

Answer 18

Communicates risk information
Leverages information systems
Reports on risk, culture, and performance

Question 19

the balance between an entity’s willingness to accept risk and the return/growth goals that the entity wishes to achieve

Answer 19

risk appetite

Question 20

the mission and vision of an organization most closely correlate with an entity’s:

Answer 20

strategy

Question 21

closely correlated with core values

Answer 21

culture

Question 22

what is the COSO cube used to illustrate?

Answer 22

the relationship between categories of objectives, internal control components, and entity organizational levels

Question 23

what are the objectives of COSO internal control (ROC)?

Answer 23

Reporting
Operating
Compliance
[note that strategic is an ERM objective]

Question 24

what would happen if an entity had a major deficiency in regard to internal control?

Answer 24

the entity cannot claim that they’re compliant and have internal controls

Question 25

If the CEO and CFO certifies the financial report to be correct when it actually isn’t, may be penalized by:

Answer 25

imprisonment and fined

Question 26

what type of diagram helps to show the logical flow of the data and the physical aspects of that flow?

Answer 26

flowchart

Question 27

a financial contract which derives its value from the performance of another asset or financial contract (interest rate, stock, asset, etc.)

Answer 27

derivative

Question 28

to fix a price in dollars to buy foreign currency, what type of option should be purchased?

Answer 28

a call option

Question 29

to sell the currency for a specified price at a specified time in the future is what type of option?

Answer 29

a put option

Question 30

what should be done if the option price is more than the exchange rate at the time of settlement?

Answer 30

exercise the option

Question 31

what should be done if the option price is less than the exchange rate at the time of settlement?

Answer 31

allow the option to expire

Question 32

what are the 2 principles of COSO’s monitoring?

Answer 32

ongoing and/or separate evaluations, communication of deficiencies

Question 33

which COSO is a process used to assess the quality of internal control performance over time?

Answer 33

monitoring

Question 34

what are the five principles of COSO’s control environment?

Answer 34

commitment to ethics & integrity, board independence & oversight, organizational structure, commitment to competence, accountability (EBOCA)

Question 35

what are the 3 principles of COSO’s information & communication?

Answer 35

obtain & use information, internally communicate information, communicate externally (OIE)

Question 36

What are the 3 principles of COSO’s control activities?

Answer 36

select & develop control activities, select & develop technology controls, disposition of policies & procedures (CATPP)

Question 37

Which COSO component describes a set of standards, processes, and structures that provide the basis for carrying out internal control across the organization and can be defined as the core or foundation of any system of internal control?

Answer 37

control environment

Question 38

what’s the primary reason why internal control should be monitored for addressing changes to risk?

Answer 38

because risks are fluid and constantly changes in terms of likelihood of severity; new risks can arise while old risks can disappear

Question 39

according to COSO, the presence of a written code of conduct provides for a control environment that can:

Answer 39

encourage teamwork in the pursuit of an entity’s objectives

Question 40

what are the 4 principles of COSO’s risk assessment?

Answer 40

identify & assess changes, consider potential for fraud, specify objectives, identify & analyze risk (SAFR)

Question 41

what are the internal auditors primary responsibility concerning the ERM of a company that was implemented by management?

Answer 41

evaluating the design and effectiveness of the ERM

Question 42

in an entity, who is responsible for setting the risk appetite of the organization?

Answer 42

management and board of directors

Question 43

According to COSO’s ERM, what is an example of an essential element of the internal environment?

Answer 43

demonstrating integrity and ethical values

Question 44

who provides oversight of an entity’s ERM?

Answer 44

board of directors

Question 45

according to COSO, the difference between inherent risk and residual risk arises because of management’s:

Answer 45

actions to reduce the inherent risk. the four ways an entity can respond to inherent risks are acceptance, reduction, sharing, and avoidance. residual risk is the piece of inherit risk that remains even after management have implemented control.

Question 46

a critical component of an ERM system is:

Answer 46

coordinating management risk taking the shareholder risk appetite