Corporate Governance and Financial Risk Mgmt

Question 1

What was the initial purpose of the COSO framework?

Answer 1

It was established in the mid 1980s to study the factors that lead to fraudulent financial reporting

Question 2

Who are the 5 main sponsor of COSO?

Answer 2

AICPA
IMA 
IIA
AAA
FEI (Financial exec Institute)

Question 3

Who primarily uses the framework?

Answer 3

Mainly used by company management and its Board of directors.

Question 4

Name the 3 categories of objectives within the framework? (ORC)

Answer 4

1. Operations objective - related to effectiveness and efficiency of an entity’s operations
2. Reporting objective - pertain to reliability of entity’s reports
3. Compliance objective - adherence to all applicable laws and regulations

Question 5

What are the 5 components of internal control? (CRIME)

Answer 5

1. Control environment
2. Risk assessment
3. Information processing and communication
4. Monitoring
5. Existing control activities

Question 6

Name 5 principal related to the control environment? (EBOCA)

Answer 6

1. Commitment to ethics and integrity
2. Board independence and oversight
3. Organization structure
4. Commitment to competence
5. Accountability

Question 7

Name 4 principal related to the risk assessment? (SAFR)

Answer 7

1. Specify objectives - identify and assess risks
2. Identify and Assess changes
3. Fraud potential
4. Identify and analyze Risk

Question 8

Name 3 principal related to the information and communication? “OIE”

Answer 8

1. Obtain and use information
2. Internally communicate information
3. Communicate with External parties

Question 9

Name 2 principal related to the monitoring component? (SO D)

Answer 9

1. Separate and ongoing evaluations of IC (are they present and functioning)
2. Communication of deficiencies

Question 10

Name 3 principal related to the (existing) control activities component? CA T P)

Answer 10

1. Select and develop control activities
2. Select and develop tech controls
3. Deployment of policies and procedures

Question 11

What is considered a ‘major deficiency’ by the COSO framework?

Answer 11

A major deficiency represents a material internal control deficiency, or combination of deficiencies, that significantly reduces the likelihood that an organization can achieve its objectives

Question 12

What are the 3 risk preferences?

Answer 12

Risk-indifferent
Risk-averse
Risk-seeking

Question 13

What type of risk preference describes most managers and why?

Answer 13

Risk-averse. An increase in the level of risk results in an increase in managements required rate of return. Greater the risk = more return is needed.

Question 14

Describe interest rate risk (yield risk)?

Answer 14

Represents the exposure of the owner of an instrument to fluctuations in the value of the instrument in response to changes in interest rate.

Question 15

Describe Market/Systematic/Nondiversifiable risk

Answer 15

Market risk is the exposure of a security or firm to fluctuations in value as a result of operating within an economy. Nondiversifiable risks can be attributed to things like war, inflation. international affairs, and political events.

Question 16

Describe Unsystematic/Firm-Specific/Diversifiable Risk?

Answer 16

Diversifiable risk represents the portion of a firms or industry risk that is associated with random causes and can be eliminated through diversification. This type of risk can be attributed to firm-specific or industry-specific things like strikes, lawsuits, regulatory actions or a loss of a key account

Question 17

Classify risk into its two broad categories? DUNS

Answer 17

Diversifiable
-Unsystematic (nonmarket/firm or industry specific)
Nondiversifiable
-Systematic (market)

Question 18

Explain credit risk and who does it affect?

Answer 18

Credit risk affects borrowers. If a company is unable to secure financing or secure favorable credit terms as a result of poor credit rating then as credit ratings declines the interest rate demanded by lenders increases.

Question 19

Explain default risk and who does it affect?

Answer 19

Default risk affects the lenders. Creditors are exposed to default risk to the extent that is is possible that its debtors may not repay the principal or interest due on their indebtedness on a timely basis.

Question 20

Explain liquidity risk and who is affects?

Answer 20

Liquidity risk affects the lenders (investors). Exposed when they want to sell their security, but cannot do so in a timely manner or when material price concessions have to be made to do so

Question 21

Explain price risk?

Answer 21

Exposure that investors take when there is a decline in the value of their individual securities or portfolio. Price risk is a market risk/unsystematic/diversifiable

Question 22

What is the stated interest rate?

Answer 22

The state interest rate is the rate shown in the agreement of indebtedness. This is the rate of interest charged before any adjustment for compounding or market factors.

Question 23

What is effective interest rate?

Answer 23

The effective rate shows the actual finance charge associated with a borrowing after reducing loan proceeds for charges and fees related to a loan origination.

Question 24

How is effective interest rate calculated?

Answer 24

By dividing the amount of interest paid based on the loan agreement by the net proceeds received.

Question 25

What is annual percentage rate?

Answer 25

Represents a noncompounded version of the effective annual percentage rate described and computed below. (the rate required for disclosure by federal regulations)

Question 26

How is annual percentage rate calculated?

Answer 26

Computed as effective periodic interest rate times the # of periods in a year.
Step 1: calculate the effective rate
Step 2: multiply that by the number of periods (i.e. if semiannual payments = 2 periods)

Question 27

What is effective annual percentage rate?

Answer 27

Abbreviated APR, this represents the stated interest rate adjusted for the number of compounding periods per year.

Question 28

Describe hedging

Answer 28

Hedging is a financial risk management technique in which an organization, seeking to mitigate the risk of fluctuations in value, acquires a financial instrument that behaves in the opposite manner from the hedged items

Question 29

Whats are steps to using COSO framework document? COPS

Answer 29

1. Overall assessment
2. Component eval
3. Principal eval
4. Summary of any deficiencies

Question 30

CCPIS to manage risk and create value

Answer 30

Culture ‘core values’
Capabilities ‘competitive advantage’
Practices ‘continually applied’
Integration with Strategies

Question 31

What are three parts to risk assessment/

Answer 31

Actual residual risk, inherent risk and target residual risk

Question 32

Rsik appetite has generally been exceeded when..

Answer 32

the likelihood and impact of negative events significantly exceeds residual risk

Question 33

What are the two factor that influence exchange rates?

Answer 33

Trade and financial

Question 34

What are the 3 trade related factors?

Answer 34

relative inflation rates, relative income levels, government control

Question 35

What are 2 financial factors?

Answer 35

Relative interest rates

Capital flow

Question 36

what is translation exposure?

Answer 36

Risk that assets, liabs, quity or income of a consolidated org that includes foreign subs will change as a result of changes in exchange rate

Question 37

what is transaction exposure?

Answer 37

the potential that an org could suffer economic loss or experience economic gain upon settlement of individual transactions as a result of changes in the exchange rates. Will result in a gain or loss.

Question 38

What are different derivative investments?

Answer 38

forwards
futures
options
swaps