Flashcards V1C5 - Sheet1
Question: V1C5-0001
Effective whistle-blower programs can help organizations meet the requirements of Section 301 of the Sarbanes-Oxley Act’s Audit Committees. Which of the following is not an element of the whistle-blower program?
Answers
A: Collecting employee concerns.
B: Improving internal communication.
C: Collecting information about emerging issues.
D: Improving external communication.
Answer Explanations
Answer (a) is incorrect. It does help the organization to meet the requirements of the act. It also helps to improve the implementation of whistle-blower program because it focuses on improving internal communication.
Answer (b) is incorrect. It does help the organization to meet the requirements of the act. It also helps to improve the implementation of whistle-blower program because it focuses on improving internal communication.
Answer (c) is incorrect. It does help the organization to meet the requirements of the act. It also helps to improve the implementation of whistle-blower program because it focuses on improving internal communication.
Answer (d) is the correct answer. The whistle-blower program can act as a means of collecting employee concerns, improving internal communication, collecting information regarding emerging issues before they become crises, and enhancing the organization’s overall system of internal controls. The program does not improve external communications because it focuses on internal communication.
Question: V1C5-0002 The most effective way of releasing the whistle-blower program throughout the organization is to have Answers A: Hard-copy memos. B: Electronic-mails. C: Face-to-face meetings. D: Computer-based training programs
Answer Explanations
Answer (a) is incorrect. It is not an effective way.
Answer (b) is incorrect. It is not an effective way.
Answer (c) is the correct answer. While a hard-copy memo, an e-mail, video conferencing, voice conferencing, or
even preparing a computer-based training program is a viable option to release the whistle-blower program throughout the organization, the most effective way is to have face-to-face meetings with employees. This shows management’s commitment to the program.
Answer (d) is incorrect. It is not an effective way.
Question: V1C5-0003 The “train-the-trainer” approach is implemented in which phase of the whistle-blower program? Answers A: Assessment. B: Building. C: Program release. D: Performance monitoring.
Answer Explanations
Answer (a) is incorrect. The assessment phase evaluates the needs.
Answer (b) is incorrect. The building phase trains operators.
Answer (c) is the correct answer. Program release phase introduces the whistle-blower program throughout the organization. An approach that is widely used in other settings and practical in the whistle-blower program is the “train-the-trainer” approach.
Answer (d) is incorrect. The performance-monitoring phase surveys employees.
Question: V1C5-0004 The selection of the facilitator is made in which phase of the whistle-blower program? Answers A: Assessment. B: Building. C: Program release. D: Performance monitoring.
Answer Explanations
Answer (a) is incorrect. The assessment phase identifies staff.
Answer (b) is incorrect. The building phase updates polices and procedures.
Answer (c) is the correct answer. The selection of the facilitator for the whistle-blower program release sessions is made in the program release phase. Choosing a sympathetic and knowledgeable facilitator will increase employee acceptance of the program and put employees at ease.
Answer (d) is incorrect. The performance-monitoring phase meets with oversight board.
Question: V1C5-0005 Employee surveys are conducted in which phase of the whistle-blower program? Answers A: Assessment. B: Building. C: Program release. D: Performance monitoring.
Answer Explanations
Answer (a) is incorrect. The assessment phase selects oversight board.
Answer (b) is incorrect. The building phase trains the oversight board.
Answer (c) is incorrect. The program release phase distributes notices.
Answer (d) is the correct answer. Performance monitoring requires verifying compliance with the program’s protocol
to ensure quality control. Surveys should be conducted to obtain feedback and to make sure that employees remain aware that the program is in place and working effectively
Question: V1C5-0006 A key element of the implementation of Section 302 of the Sarbanes-Oxley Act’s Quarterly CEO and CFO Certifications is Answers A: Disclosure controls. B: Disclosure procedures. C: Disclosure committee. D: Disclosure policies.
Answer Explanations
Answer (a) is incorrect. “Disclosure controls” is a part of the term introduced by the SEC and is not a key element.
Answer (b) is incorrect. “Disclosure procedures” is a part of the term introduced by the SEC, and is not a key element.
Answer (c) is the correct answer. Section 302 of the Sarbanes-Oxley Act requires CEOs and CFOs to personally certify in quarterly financial reports. To implement this section, the SEC introduced the term “disclosure controls and procedures,” which limits the evaluation to internal controls over financial reporting and over material nonfinancial disclosures. A key element of the disclosure process is a disclosure committee, in which knowledgeable, high-level people come together to rigorously examine financial information and other disclosures as they are being prepared.
Answer (d) is incorrect. The disclosure policies are neither a part of the term introduced by the SEC nor a key element.
Question: V1C5-0007 According to Section 404 of the Sarbanes-Oxley Act’s Management Assessment of Internal Controls, assessment and assertion of an organization’s control environment should focus on which of the following? Answers A: Integrated controls. B: Discrete controls. C: Soft controls. D: Hard controls.
Answer Explanations
Answer (a) is the correct answer. The control environment of an organization does not exist as series of discrete controls, like the steps in a transaction processing system. It is an integrated whole. The individual pieces contribute to the whole, but it is the interaction among the pieces that make up the control environment. Thus, the organization’s assessment and assertion of the control environment should be treated as a whole and in an integrated manner.
Answer (b) is incorrect. Discrete controls are used in transaction processing systems.
Answer (c) is incorrect. Soft controls are subjective aspects of control, like tone at the top.
Answer (d) is incorrect. Hard controls like testing are performed in traditional auditing work.
Question: V1C5-0008 According to the Committee of Sponsoring Organizations (COSO) report, which of the following is the most important component of internal control? Answers A: Risk assessment. B: Control environment. C: Control activities. D: Monitoring.
Answer Explanations
Answer (a) is incorrect because risk assessment identifies risks and suggests controls.
Answer (b) is the correct answer. According to the COSO’s report, five components of internal control include control environment, risk assessment, control activities, information and communication, and monitoring. Control environment is the foundation on which everything rests and is the basis for assessing integrity and ethical values, management’s philosophy, and operating style (soft controls).
Answer (c) is incorrect because control activities need control procedures.
Answer (d) is incorrect because monitoring includes management reviews and comparisons.
Question: V1C5-0009 When evaluating control self-assessment, most of the time should be spent on reviewing hard controls in which of the following areas? Answers A: Organizational level. B: Activity level. C: Process level. D: Department level.
Answer Explanations
Answer (a) is incorrect because soft controls should be evaluated at the organizational level.
Answer (b) is the correct answer. Most of the time, hard controls should be evaluated at the activity level; this is in addition to the soft controls. The focus of the hard controls should be on detailed documentation and testing of control activities. Activity level includes process level, functional level, and department level.
Answer (c) is incorrect because process level is a part of the activity level.
Answer (d) is incorrect because department level is a part of the activity level.
Question: V1C5-0010 Which of the COSO components include many soft controls? I. Control environment. II. Risk assessment. III. Control activities. IV. Information and communication. V. Monitoring. Answers A: I and II. B: I and III. C: II and V. D: I, III, and IV.
Answer Explanations
Answer (a) is the correct answer. The two of the five components of the COSO “control environment and risk assessment” includes many soft controls that are intangibles, such as evaluating tone at the top, management’s philosophy, operating style, integrity, and the organization’s ethical climate.
Answer (b) is incorrect because control activities focus on hard controls.
Answer (c) is incorrect because monitoring includes both soft and hard controls.
Answer (d) is incorrect because control activities, information, and communication include both soft and hard controls.
Question: V1C5-0011 COSO users adopt which of the following control evaluation processes? Answers A: Single-tiered. B: Two-tiered. C: Three-tiered. D: Four-tiered.
Answer Explanations
Answer (a) is incorrect because a single-tiered evaluation process is not as strong as the two-tiered one.
Answer (b) is the correct answer. COSO users often adopt a two-tiered control evaluation process. This includes entity-wide assessment (organizational level) followed by process or activity level (second-tier).
Answer (c) is incorrect because there is no such thing as the three-tiered evaluation.
Answer (d) is incorrect because there is no such thing as the four-tiered evaluation.
Question: V1C5-0012 The COSO-based audit approach should not override which of the following? Answers A: Risk-based approach. B: Transaction-based approach. C: Management-based approach. D: Audit committee-based approach.
Answer Explanations
Answer (a) is the correct answer. The COSO-based audit approach should not override the risk-based audit approach where the latter should receive high priority. Where there are gaps, the two approaches should be reconciled.
Answer (b) is incorrect because a transaction-based approach can be overridden.
Answer (c) is incorrect because a management-based approach can be overridden.
Answer (d) is incorrect because the audit committee would not be involved in the detailed audit approaches.
Question: V1C5-0013 According to the COSO report, audit plan changes as I. Risks change. II. Audit resources change. III. Board changes. IV. Policies change. Answers A: I only. B: I and II. C: III and IV. D: I, II, III, and IV.
Answer Explanations
Answer (a) is incorrect because audit resources do change frequently.
Answer (b) is the correct answer. The audit plan changes throughout the year as risks and audit resources change.
Answer (c) is incorrect because the changes occurring in the board’s composition and polices should not directly impact the audit plan.
Answer (d) is incorrect this choice mixes the correct and incorrect answers.
Question: V1C5-0014 According to the COSO report, the annual audit plan should be based on which of the following? I. Control model. II. Risk model. III. Resource model. IV. Management model. Answers A: I only. B: II only. C: I and II. D: III and IV.
Answer Explanations
Answer (a) is incorrect because risk should be considered.
Answer (b) is incorrect because control should be considered.
Answer (c) is the correct answer. The annual audit plan should be based on the control model. This should not replace a risk-based model.
Answer (d) is incorrect because resources and management model could be part of the control and risk model.
Question: V1C5-0015
According to the COSO report, the internal control framework consists of which of the following?
Answers
A: Processes, people, objectives.
B: Profits, products, processes.
C: Costs, revenues, margins.
D: Return on investment, earnings per share, market share.
Answer Explanations
Answer (a) is the correct answer. The core of any business is its people—their individual attributes, including integrity, ethical values, and competence and the environment in which they operate. They are the engine that drives the entity and the foundation on which everything else rests. The entity will have its objectives and the processes to achieve those objectives.
Answer (b) is incorrect because profits and products are not part of the internal control.
Answer (c) is incorrect because costs, revenues, and margins are not part of the internal control. Instead, they are part of financial control.
Answer (d) is incorrect because ROI, EPS, and market share are not part of the internal control. Instead, they are part of financial and marketing control.
Question: V1C5-0016 According to the COSO report, an entity’s internal control system is built into all of the following basic management processes except: Answers A: Planning. B: Execution. C: Monitoring. D: Risk.
Answer Explanations
Answer (a) is incorrect because planning is a part of the internal control system.
Answer (b) is incorrect because execution is a part of the internal control system.
Answer (c) is incorrect because monitoring is a part of the internal control system.
Answer (d) is the correct answer. According to the COSO report, there is a synergy and linkage among planning, execution, and monitoring, forming an integrated system that reacts dynamically to changing conditions. However, risk to an entity comes from internal and external sources, which must be identified, analyzed, measured, and managed. Risk varies with time, competition, and other factors.
Question: V1C5-0017 According to the COSO report, the correct sequence is Answers A: Risks, objectives, actions. B: Actions, objectives, risks. C: Objectives, risks, actions. D: Objectives, actions, risks.
Answer Explanations
Answer (a) is incorrect because objectives should be first since they drive everything else.
Answer (b) is incorrect because actions should come last.
Answer (c) is the correct answer. According to the COSO report, objectives provide the organization’s targets. To be in control, risks potentially affecting the achievement of an entity’s objectives must be identified and analyzed. Then actions must be put in place to mitigate the identified risks.
Answer (d) is incorrect because risks come before actions.
Question: V1C5-0018 According to the COSO report, the core of an organization is which of the following? Answers A: Products. B: Processes. C: People. D: Profits.
Answer Explanations
Answer (a) is incorrect because people make products.
Answer (b) is incorrect because people are involved in processes.
Answer (c) is the correct answer. According to the COSO report, the core of an organization is people. Profits result from products and processes, and it is the people who make things happen.
Answer (d) is incorrect because profits come from products.
Question: V1C5-0019 According to the COSO report, the effectiveness of an internal control system depends on which of the following? Answers A: Authorization of the process. B: Approval of the process. C: Condition of the process. D: Description of the process.
Answer Explanations
Answer (a) is incorrect because authorization of the process is a part of the internal control system.
Answer (b) is incorrect because approval of the process is a part of the internal control system.
Answer (c) is the correct answer. Deficiencies in an entity’s internal control system can surface from any of a number of sources. A “deficiency” may represent a perceived, potential, or real shortcoming, or an opportunity to strengthen the internal control system to provide a greater likelihood that the entity’s objectives will be achieved. The condition of the process is either deficient or not. Authorization, approval, and description of the process are steps in the internal control system, whereas the condition is the result of the process.
Answer (d) is incorrect because description of the process is a part of the internal control system.
Question: V1C5-0020 According to the COSO report, an entity’s objectives are based on all of the following except: Answers A: Preferences. B: Profits. C: Value judgments. D: Management style.
Answer Explanations
Answer (a) is incorrect because preferences should be considered in setting an entity’s objectives.
Answer (b) is the correct answer. Objective setting begins at the entity level, encompassing mission and value statements, preferences, and management style, which leads to overall strategy. Profits are the result of specific goals, where goals are derived from objectives.
Answer (c) is incorrect because value judgments should be considered in setting an entity’s objectives.
Answer (d) is incorrect because management style should be considered in setting an entity’s objectives.
Question: V1C5-0021 An effective relationship between risk level and internal control level is which of the following? Answers A: Low risk and strong controls. B: High risk and weak controls. C: Medium risk and weak controls. D: High risk and strong controls.
Answer Explanations
Answer (a) is incorrect because low risk requires weak controls.
Answer (b) is incorrect because high risk requires strong controls.
Answer (c) is incorrect because medium risk requires medium controls.
Answer (d) is the correct answer. According to the COSO report, there is a direct relationship between the risk level and the control level. That is, high-risk situations require stronger controls, low-risk situations require weaker controls, and medium-risk situations require medium controls.
Question: V1C5-0022 The concept of control should be viewed as Answers A: Accomplishing an objective. B: Limiting an operation. C: Blocking a process. D: Inhibiting a person.
Answer Explanations
Answer (a) is the correct answer. Controls should facilitate the achievement of an organization’s goals, and they should not limit operational practices, processes, and people’s actions. According to the COSO report, a control is defined as the policies, practices, and organizational structure designed to provide reasonable assurance that business objectives will be achieved and that undesired events could be prevented or detected and corrected.
Answer (b) is incorrect because controls should not limit an operation.
Answer (c) is incorrect because controls should not block a process.
Answer (d) is incorrect because controls should not inhibit a person.
Question: V1C5-0023
The purpose of control is to
Answers
A: Control employee behavior.
B: Determine who is in charge of a department.
C: Ensure that the goals of a firm are being achieved.
D: Determine whether an operation is a cost or profit center.
Answer Explanations
Answer (a) is incorrect because rewards and punishments control employee behavior.
Answer (b) is incorrect because management determines who is in charge of a department.
Answer (c) is the correct answer. The purpose of a control mechanism is to ensure that goals of a firm are being achieved.
Answer (d) is incorrect because responsibility accounting determines cost or profit center.
Question: V1C5-0024 Which of the following levers of control create positive and inspirational forces in an organization? I. Belief systems. II. Interactive control systems. III. Boundary systems. IV. Diagnostic control systems. Answers A: I and II. B: II and III. C: III and IV. D: II and IV.
Answer Explanations
Answer (a) is the correct answer. Belief systems and interactive control systems create positive and inspirational forces. Boundary systems and diagnostic control systems create negative forces such as rules and constraints.
Answer (b) is incorrect because boundary systems are part of negative forces.
Answer (c) is incorrect because boundary system and diagnostic control systems are part of negative forces.
Answer (d) is incorrect because diagnostic control systems are part of negative forces.
Question: V1C5-0025 Usually control decisions do not include Answers A: What measures to implement. B: How to evaluate performance. C: What type of punishments to impose. D: What type of incentives to use.
Answer Explanations
Answer (a) is incorrect because what measures to implement is a part of the control decision.
Answer (b) is incorrect because how to evaluate performance is a part of the control decision.
Answer (c) is the correct answer. Control involves the use of incentives and rewards and to motivate employees in order to help them accomplish organizational goals and objectives. Controls should be seen as positive actions, not so much of negative actions (punishments). People prefer positive things rather than negative things.
Answer (d) is incorrect because incentives are part of the control decision.
Question: V1C5-0026
Senior managers most often use which of the following to achieve their business objectives?
Answers
A: Hard controls, third-party reviews, and hard skills.
B: Soft controls, self-assessments, and soft skills.
C: Soft controls, third-party reviews, and soft skills.
D: Hard controls, self-assessments, and hard skills.
Answer Explanations
Answer (a) is incorrect because hard controls, third-party reviews, and hard skills are used by lower-level managers.
Answer (b) is the correct answer. Generally speaking, senior managers most often use soft skills and soft controls to achieve their business objectives. Self-assessment is a tool to implement soft control.
Answer (c) is incorrect because lower-level managers depend on third-party reviews such as contractors and consultants.
Answer (d) is incorrect because lower-level managers use hard controls and hard skills.
Question: V1C5-0027 According to the COSO report, for a policy to be implemented, it need not be Answers A: Written. B: Thoughtful. C: Clear. D: Consistent.
Answer Explanations
Answer (a) is the correct answer. Many policies and controls are informal and undocumented yet are regularly performed and highly effective. However, the unwritten policy must be thoughtful, clear, and consistent for others to understand and implement it.
Answer (b) is incorrect because policies must be thoughtful to be useful.
Answer (c) is incorrect because policies must be clear to be useful.
Answer (d) is incorrect because policies must be consistent to be useful.
Question: V1C5-0028 According to the COSO report, which of the following is not a precondition to internal control? Answers A: Objective setting. B: Strategic planning. C: Risk management. D: Monitoring.
Answer Explanations
Answer (a) is incorrect because it is essential to internal control systems and should be done prior to monitoring.
Answer (b) is incorrect because it is essential to internal control systems and should be done prior to monitoring.
Answer (c) is incorrect because it is essential to internal control systems and should be done prior to monitoring.
Answer (d) is the correct answer. Monitoring comes after developing strategic plans, setting objectives, and conducting risk assessment. Monitoring will assess the current performance of controls and their adequacy over time.
Question: V1C5-0029 According to the COSO report, an effective internal control system requires an ultimate Answers A: User. B: Sponsor. C: Owner. D: Customer.
Answer Explanations
Answer (a) is incorrect because a user does not have the power and authority to implement controls.
Answer (b) is incorrect because a sponsor is a person who funds a control system.
Answer (c) is the correct answer. An effective control system requires an ultimate owner. The only truly effective owner of the control system is the chief executive officer (CEO). The CEO is the only person who can establish the right tone at the top of the organization and who has the power to ensure that all parts of the enterprise effectively communicate and coexist. The ownership responsibility cannot be delegated to an accountant or an auditor.
Answer (d) is incorrect because customer could be internal or external to an internal control system.
Question: V1C5-0030
According to the COSO report, the threshold level for a “reportable condition” is
Answers
A: Higher than that of a material weakness.
B: A yardstick for determining whether the internal control system is effective.
C: Lower than that of a material weakness.
D: A yardstick for determining whether the internal control system is ineffective.
Answer Explanations
Answer (a) is incorrect. The threshold level for a reportable condition is lower than that of material weaknesses for reporting matters identified during an audit to the entity’s audit committee.
Answer (b) is incorrect. It does not serve as a yardstick for determining whether an internal control system is “effective.”
Answer (c) is the correct answer. Auditors are required to communicate only those findings meeting a specified threshold of seriousness or importance. Reportable conditions are defined as “significant deficiencies in the design or operation of the internal control structure, which could adversely affect the organization’s ability to record, process, summarize, and report financial data consistent with the assertions of management in the financial statements.”
Answer (d) is incorrect. The need to report a finding to an entity’s audit committee does not necessarily mean that the internal control system is ineffective.
Question: V1C5-0031
Auditors regularly evaluate controls and control procedures. Which of the following best describes the concept of control as recognized by internal auditors?
Answers
A: Management regularly discharges personnel who do not perform up to expectations.
B: Management takes action to enhance the likelihood that established goals and objectives will be achieved.
C: Control represents specific procedures that accountants and auditors design to ensure the correctness of processing.
D: Control procedures should be designed from the bottom up to ensure attention to detail.
Answer Explanations
Answer (a) is incorrect. This is an example of a show of power, but is not a comprehensive definition or example of the concept of control.
Answer (b) is the correct answer. This is the definition of control contained in the IIA Standards.
Answer (c) is incorrect. Control as a concept is broader than processing controls and is designed by management, not by auditors.
Answer (d) is incorrect. Some control procedures may be designed from the bottom up, but the concept of control flows from management down through the organization.
Question: V1C5-0032 Which group has the primary responsibility for the establishment, implementation, and monitoring of adequate controls in the posting of accounts receivable? Answers A: External auditors. B: Accounts receivable staff. C: Internal auditors. D: Accounting management.
Answer Explanations
Answer (a) is incorrect. External auditors are responsible for audit of financial statements.
Answer (b) is incorrect. Accounts receivable staff are responsible for daily transaction handling. This answer is incorrect. Refer to the correct answer explanation.
Answer (d) is the correct answer. Management is responsible for controls.
Question: V1C5-0033
Corporate directors, management, external auditors, and internal auditors all play important roles in creating a proper control environment. Top management is primarily responsible for
Answers
A: Establishing a proper environment and specifying an overall internal control structure.
B: Reviewing the reliability and integrity of financial information and the means used to collect and report such information.
C: Ensuring that external and internal auditors adequately monitor the control environment.
D: Implementing and monitoring controls designed by the board of directors.
Answer Explanations
Answer (a) is the correct answer. This is the best description of top management’s responsibility.
Answer (b) is incorrect. This is a function assigned to internal auditing.
Answer (c) is incorrect. Management cannot pass its responsibilities for control to auditors.
Answer (d) is incorrect. The board may establish criteria but it usually does not design controls as such.
Question: V1C5-0034
Corporate management has a role in the maintenance of internal control. In fact, management sometimes is a control.
Which of the following involves managerial functions as a control device?
Answers
A: Supervision of employees.
B: Use of a corporate policies manual.
C: Maintenance of a quality control department.
D: Internal auditing.
Answer Explanations
Answer (a) is the correct answer. The best form of control over the performance of individuals is supervision. This is a managerial function.
Answer (b) is incorrect. This does not control; it only advises.
Answer (c) is incorrect. A quality control department is a form of internal review. The manager of quality control should be independent of the operations reviewed.
Answer (d) is incorrect. Internal reviews (i.e., internal auditing) should be independent of the operations reviewed and are not a managerial function.
Question: V1C5-0035 Expressed as a percentage, what is the degree of objective risk if a company owns 1,000 cars, has averaged 30 collision losses per year, the collision losses will very likely range between 35 and 45, and last year’s loss experience was 25? Answers A: 25.0% B: 30.0% C: 33.3% D: 40.0%
Answer Explanations
Answer (a) is incorrect because it assumes the loss experience is same as the objective riskAnswer (b) is incorrect because it assumes collision losses are same as the objective risk.
Answer (c) is the correct answer. Objective risk is probable variation of actual from expected losses divided by expected losses. (45 – 35)/30 = 10/30 = 33.3%. The loss experience information is not relevant here.
Answer (d) is incorrect because it takes the average of collision losses of 35 and 45 and results in 40%.
Question: V1C5-0036
Which of the following are steps in the four-step risk management process?
Answers
A: Select risk-management techniques and purchase insurance on selected risks.
B: Select risk-management techniques and identify risks.
C: Select risk-management techniques, purchase insurance on selected risks, and identify risks.
D: Identify risks and analyze severity of expected losses.
Answer Explanations
Answer (a) is incorrect because companies can be self-insured and do not need to purchase insurance.
Answer (b) is the correct answer. The risk-management process involves identifying risks, evaluating risks, selecting risk-management techniques, and implementing and reviewing decisions.
Answer (c) is incorrect because companies can be self-insured and do not need to purchase insurance.
Answer (d) is incorrect because analyzing severity of expected losses is a part of identifying risks.
Question: V1C5-0037
Risk is defined as
Answers
A: Uncertainty concerning loss.
B: The probable variation of actual from expected experience.
C: The long-run chance of occurrence or relative frequency of loss.
D: A specific contingency that may cause loss.
Answer Explanations
Answer (a) is the correct answer. Risk means uncertainty. Risk regarding the possibility of loss can be especially problematic. It is when there is uncertainty about the occurrence of a loss that risk becomes an important problem.
Answer (b) is incorrect because it defines the objective risk.
Answer (c) is incorrect because it defines the probability.
Answer (d) is incorrect because it relates contingencies to risks.
Question: V1C5-0038
Risk can be categorized as
Answers
A: Objective-subjective and perils-hazards.
B: Objective-subjective, physical-moral-morale, and pure-speculative.
C: Static-dynamic, subjective-objective, and pure-speculative.
D: Objective-subjective, physical-moral-morale, pure-speculative, and perils-hazards.
Answer Explanations
Answer (a) is incorrect. It is a partial answer.
Answer (b) is incorrect. It is a partial answer.
Answer (c) is the correct answer. Risks can be classified into three types: static versus dynamic, subjective versus objective, and pure versus speculative.
Answer (d) is incorrect. It is a partial answer. Pure risk is a condition in which there is the possibility of loss or no loss only. Peril is the cause of possible loss. Hazard is a condition that creates or increases the probability of loss.
Question: V1C5-0039 Risk managers do not use which of the following approaches to identify risks? Answers A: Contract analysis. B: Statistical analysis. C: Financial engineering. D: On-site inspections.
Answer Explanations
Answer (a) is incorrect. Contract analysis is used to identify risks.
Answer (b) is incorrect. Statistical analysis is used to identify risks.
Answer (c) is the correct answer. Flowcharts, contract analysis, statistical analysis, on-site inspections, and others are used to identify risks. Financial engineering is used to reduce financial risk. This includes options, calls, and puts.
Answer (d) is incorrect. On-site inspections provide a direct observation of activities and are used to identify risks
Question: V1C5-0040 In the past, Tracie’s Ceramics has averaged 5 injuries among its 30 employees per year. What is the probability of an employee injury this year? Answers A: 0.1667. B: 16.67. C: 6.67. D: 1.67.
Answer Explanations
Answer (a) is the correct answer. This question is based on probability calculation, which ranges from 0 to 1. The probability of an employee being injured is defined as the chance of injury in terms of number of injuries divided by the number of employees. 5/30 equals 0.1667.
Answer (b) is incorrect. It multiplies the 0.1667 with 100, resulting in 16.67.
Answer (c) is incorrect. It misplaces the decimal point, resulting in 6.67.
Answer (d) is incorrect. It multiplies 0.1667 with 10 resulting in 1.67.
Question: V1C5-0041 Sharon, the risk manager of Tracie’s Ceramics, wants to know more about the 5 injuries among her 30 employees. One loss was a wrist sprain that has a probability of 0.06. Another was a back sprain with a probability of 0.07. Yet another was overinhalation of a hazardous substance with a probability of 0.02. The other two were slips and falls with a probability of 0.13. If the amounts of the losses were $700, $3,000, $2,500, $950, and $1,000, respectively, what is the expected value of an employee injury loss for that year? Answers A: $500.5 B: $432.0 C: $555.5 D: $513.5
Answer Explanations
Answer (a) is incorrect. It forgets to add $50, resulting in $500.5.
Answer (b) is incorrect. It forgets to add $123.5, resulting in 432.0.
Answer (c) is the correct answer. The expected value is defined as the probability of loss multiplied by the amount of loss. 0.06 × $700 + 0.07 × $3,000 + 0.02 × $2,500 + 0.13 × $950 + 0.13 × $1,000 = $42 + $210 + $50 + $123.5 + $130 = $555.5.
Answer (d) is incorrect. It forgets to add $42, resulting in $513.5.
Question: V1C5-0042
The three most commonly used methods of loss control are
Answers
A: Risk retention, risk avoidance, and risk transfer.
B: Self-insurance, diversification, and risk transfer.
C: Frequency reduction, severity reduction, and cost reduction.
D: Insurance transfers, frequency reduction, and severity reduction.
Answer Explanations
Answer (a) is incorrect because risk retention, risk avoidance, and risk transfer are risk-management techniques focusing on risk financing methods. Risk avoidance is different from loss control, because the firm or individual is sill engaging in operations that gave rise to particular risks.
Answer (b) is incorrect because self-insurance, diversification, and risk transfer are not loss control methods. Instead, they are risk financing methods.
Answer (c) is the correct answer. Common methods of loss control include reducing the probability of losses or decreasing the cost of losses that do occur. Probability of losses is related to frequency and severity. Cost reduction is also a method of controlling losses.
Answer (d) is incorrect because it mixes both correct and incorrect answers.
Question: V1C5-0043
Self-insurance differs from the establishment of a reserve fund in that
Answers
A: Establishing a reserve fund is a form of risk retention.
B: Self-insurance involves prefunding of expected losses through a fund specifically designed for that purpose.
C: Self-insurance requires the existence of a group of exposure units large enough to allow accurate loss prediction.
D: Self-insurance requires the formation of a subsidiary company.
Answer Explanations
Answer (a) is incorrect because a reserve fund may not be enough for large losses.
Answer (b) is incorrect because it is a necessary element of self-insurance.
Answer (c) is the correct answer. Self-insurance by a firm is possible and feasible when it has accurate records or has access to satisfactory statistics to enable it to make good estimate of expected losses. The general financial condition of the firm should be satisfactory and the firm’s management must be willing and able to deal with large and unusual losses.
Answer (d) is incorrect because self-insurance does not require the creation of a subsidiary company.
Question: V1C5-0044 The purchase of insurance is a common form of Answers A: Risk retention. B: Risk transfer. C: Risk avoidance. D: Loss control.
Answer Explanations
Answer (a) is incorrect because risk retention is a technique for managing risk and does not involve insurance.
Answer (b) is the correct answer. The most widely used form of risk transfer is insurance.
Answer (c) is incorrect because risk avoidance is best if it can be done and does not involve insurance.
Answer (d) is incorrect because loss control involves risk reduction or risk mitigation and does not involve insurance.
Question: V1C5-0045
Risk transfer is most likely ideal for a risk with a
Answers
A: High degree of diversification and a low potential severity.
B: High expected frequency and a low potential severity.
C: High expected frequency and a high potential severity.
D: Low expected frequency and a high potential severity.
Answer Explanations
Answer (a) is incorrect because the degree of diversification is not related to frequency or severity.
Answer (b) is incorrect because it is an example of risk retention.
Answer (c) is incorrect because it is an example of risk avoidance.
Answer (d) is the correct answer. As a rule, risk retention is optimal for losses that have a low expected severity, with the rule becoming especially appropriate when expected frequency is high. Another general guideline applies to risks that have a low expected frequency but a high potential severity. In this situation, risk transfer often is the optimal choice. Finally, when losses have both high expected severity and high expected frequency, it is likely that risk transfer, risk retention, and loss control all will need to be used in varying degrees.
Question: V1C5-0046 Which of the following is not an example of risk retention? Answers A: Use of credit. B: Use of reserve funds. C: Incorporation. D: Self-insurance.
Answer Explanations
Answer (a) is incorrect because the use of credit is an example of risk retention.
Answer (b) is incorrect because use of reserve fund is an example of risk retention.
Answer (c) is the correct answer. Incorporating an organization is an example of risk transfer. The other three choices are examples of risk retention.
Answer (d) is incorrect because self-insurance is an example of risk retention.
Question: V1C5-0047
Which of the following does not have to be present in order to start a self-insurance program?
Answers
A: A weak general financial condition so that the savings of insurance premiums will be material to the firm.
B: A sufficient number of exposure units to enable accurate loss prediction.
C: The establishment of a fund for the specific purpose of prefunding expected losses.
D: Accurate records of past losses.
Answer Explanations
Answer (a) is the correct answer. The following conditions are suggestive of the types of situations where selfinsurance by a business is both possible and feasible: (1) The firm should have a sufficient number of objects so situated that they are not subject to simultaneous destruction; (2) The firm must have accurate records or have access to satisfactory statistics to enable it to make good estimates of expected losses; (3) The firm must make arrangements for administering the plan and managing the self-insurance fund; and (4) The general financial condition of the firm should be satisfactory, and the firm’s management must be willing and able to deal with large and unusual losses.
Answer (b) is incorrect because it is one of the conditions for a self-insurance.
Answer (c) is incorrect because it is one of the conditions for a self-insurance.
Answer (d) is incorrect because it is one of the conditions for a self-insurance.
Question: V1C5-0048 Regarding risk management, captive insurers combine which of the following? I. Risk retention. II. Risk transfer. III. Risk mapping. IV. Risk profiling. Answers A: I and II. B: II and III. C: III and IV. D: I and IV.
Answer Explanations
Answer (a) is the correct answer. Captive insurers combine risk retention and risk transfer. Captive insurers is a form of funded risk retention.
Answer (b) is incorrect because risk mapping is not an example of captive insurer.
Answer (c) is incorrect because risk mapping and risk profiling are the same.
Answer (d) is incorrect because risk profiling is not part of captive insurer.
Question: V1C5-0049
Which of the following is not an example of risk retention?
Answers
A: Self-insurance.
B: Using a disclaimer of warranties clause on product packaging.
C: Unplanned retention.
D: Use of a reserve fund to prefund physical damage to company cars.
Answer Explanations
Answer (a) is incorrect because self-insurance is an example of risk retention.
Answer (b) is the correct answer. Using a disclaimer of warranties clause on product packaging is an example of risk avoidance.
Answer (c) is incorrect because unplanned retention is an example of risk retention.
Answer (d) is incorrect because use of a reserve fund is an example of risk retention. Risk retention can be planned or unplanned, funded or unfunded. Self-insurance and reserve funds are examples of risk retention.
Question: V1C5-0050
The first step in selecting available risk management techniques is to
Answers
A: Implement appropriate loss control measures.
B: Select the optimal mix of risk retention and risk transfer.
C: Avoid risks if possible.
D: Determine the availability of risk management tools.
Answer Explanations
Answer (a) is incorrect because it is the second step.
Answer (b) is incorrect because it is the third step.
Answer (c) is the correct answer. The steps for selecting among available risk-management techniques for a given situation may be summarized as: (1) avoid risks if possible, (2) implement appropriate loss control measures, and (3) select the optimal mix of risk retention and risk transfer.
Answer (d) is incorrect because it is a part of the third step.
Question: V1C5-0051 Which of the following is not an example of risk transfer? Answers A: Diversification. B: Hedging. C: Self-insurance. D: Hold-harmless agreements.
Answer Explanations
Answer (a) is incorrect because diversification is an example of risk transfer.
Answer (b) is incorrect because hedging is an example of risk transfer.
Answer (c) is the correct answer. Self-insurance is an example of risk retention. Risk transfer methods include diversification, hedging, and hold-harmless agreements.
Answer (d) is incorrect because hold-harmless agreement is an example of risk transfer.
Question: V1C5-0052
Which statement is true about risk management?
Answers
A: Capital budgeting and statistical analysis cannot be used to select the best mix of risk retention and transfer.
B: Deductibles and self-insurance cannot be used together.
C: Capital budgeting and statistical analysis can be used to select the best mix of risk retention and transfer.
D: Risk transfer is the same thing as insurance.
Answer Explanations
Answer (a) is incorrect because capital budgeting and statistical analysis can be used in risk management.
Answer (b) is incorrect because deductibles and self-insurance can be used together.
Answer (c) is the correct answer. Both capital budgeting and statistical procedures may be used in selecting an appropriate retention level (a mix consisting of risk retention and transfer), with insurance purchased for losses in excess of that level.
Answer (d) is incorrect because risk transfer is more than insurance.
Question: V1C5-0053
A tool that generally is not used to manage subjective risk is
Answers
A: Obtaining more information.
B: Group discussion.
C: Systematically identifying and analyzing appropriate methods for dealing with risks.
D: Severity reduction.
Answer Explanations
Answer (a) is incorrect because more information is obtained to manage subjective risk.
Answer (b) is incorrect because group discussion is used to manage subjective risk due to its consensus approach.
Answer (c) is incorrect. If risks have been systematically identified and analyzed, and if decisions have been made regarding the appropriate methods for dealing with those risks, then in most cases subjective risk can be expected to decrease.
Answer (d) is the correct answer. Severity reduction is used to manage objective risk due to its quantitative nature. Because objective and subjective risks are often both present in the same situation, some consideration must also be given to managing subjective risk. In one sense, the techniques applied to objective risk should also affect subjective risk.
Question: V1C5-0054
Regarding risk management, “high” and “low” loss frequency and severity are
Answers
A: Considered the same for all firms.
B: Defined differently for different firms.
C: Identifiable by industry standards.
D: Unimportant when considering risk avoidance.
Answer Explanations
Answer (a) is incorrect because the degree of loss frequency and severity are not the same for all firms.
Answer (b) is the correct answer. What constitutes “high” and “low” loss frequency and severity must be established on an individual basis. What is low loss severity for a multimillion-dollar company may be quite high for a small firm or an individual. In this regard, concepts such as total assets, net worth, and expected future income all are relevant.
Answer (c) is incorrect because they are not identifiable by industry standards.
Answer (d) is incorrect because they are important when considering risk avoidance.
Question: V1C5-0055 Regarding risk management, insurance should be purchased for losses in excess of the firm’s Answers A: Risk avoidance level. B: Short-term assets. C: Expected losses. D: Retention level.
Answer Explanations
Answer (a) is incorrect because insurance is not needed if risk can be avoided.
Answer (b) is incorrect because short-term assets are not relevant, but total assets are.
Answer (c) is incorrect because expected losses come into play in computing frequency and severity levels.
Answer (d) is the correct answer. Because in many situations both risk retention and risk transfer will be used in varying degrees, it is important to determine the appropriate mix of these two risk-management techniques. Both capital budgeting methods and statistical procedures may be used in selecting an appropriate retention level, with insurance purchased for losses in excess of that level.
Question: V1C5-0056
All of the following conditions are suggestive of the types of situations where self-insurance by a business is both possible and feasible except:
Answers
A: Objects at risk are not subject to simultaneous destruction.
B: The firm must administer the plan with existing, in-house personnel.
C: The firm has accurate records or has access to satisfactory statistics regarding the probability of loss.
D: The firm is in satisfactory financial condition.
Answer Explanations
Answer (a) is incorrect because it is one of the conditions for a self-insurance.
Answer (b) is the correct answer. Self-insurance can be contracted out to a third-party administrator so there is no need to have an in-house staff to administer it. The following conditions are suggestive of the types of situations where self-insurance by a business is both possible and feasible: (1) The firm should have a sufficient number of objects so situated that they are not subject to simultaneous destruction; (2) The firm must have accurate records or have access to satisfactory statistics to enable it to make good estimates of expected losses; (3) The firm must make arrangements for administering the plan and managing the self-insurance fund; and (4) The general financial condition of the firm should be satisfactory, and the firm’s management must be willing and able to deal with large and unusual losses.
Answer (c) is incorrect because it is one of the conditions for a self-insurance.
Answer (d) is incorrect because it is one of the conditions for a self-insurance.
Question: V1C5-0057 In organizations where new product groups are often created, a structure that combines functional and product departmentalization and creates dual lines of authority would be optimal. The best structure for this organization would be Answers A: Professional bureaucracy. B: Mechanistic. C: Matrix. D: Machine bureaucracy.
Answer Explanations
Answer (a) is incorrect. A professional bureaucracy is a structure with high complexity and low formalization in which professionals are required.
Answer (b) is incorrect. A mechanistic structure is one that is highly formalized and standardized and that has no dual authority structure. It is not the optimal structure.
Answer (c) is the correct answer. A matrix organizational structure combines functional and product departmentalization, creates a dual reporting structure, and is optimal where product groups are necessary.
Answer (d) is incorrect. In a machine bureaucratic structure, rules and regulations permeate the entire structure and tasks are highly routine.
Question: V1C5-0058
The following principles characterize certain organizational structures
I. A superior can delegate the authority to make decisions but cannot delegate the ultimate responsibility for the results of those decisions.
II. A supervisor’s span of control should not exceed seven subordinates.
III. Responsibility should be accompanied by adequate authority.
IV. Employees at all levels should be empowered to make decisions.
Which of these principles are shared by both hierarchical and open organizational structures?
Answers
A: I and III.
B: I and IV.
C: II and III.
D: III and IV.
Answer Explanations
Answer (a) is the correct answer. This principle applies to both types of organizational structure (items I and III).
Answer (b) is incorrect. Item IV is incorrect. This principle does not apply in a hierarchical organization.
Answer (c) is incorrect. Item II is incorrect. This principle does not apply in an open organization.
Choice (d) is incorrect. See choice (b).
Question: V1C5-0059
The relationship between organizational structure and technology suggests that in an organization using mass production technology (e.g., automobile manufacturing), the best structure would be
Answers
A: Organic, emphasizing loose controls and flexibility.
B: Matrix, in which individuals report to both product and functional area managers.
C: Mechanistic, that is, highly formalized, with tight controls.
D: Integrated, emphasizing cooperation among departments.
Answer Explanations
Answer (a) is incorrect. Mass production technology should not be matched with an organic structure.
Answer (b) is incorrect. Matrix is not a type of structure, but rather a type of departmentalization and should not be used with mass production.
Answer (c) is the correct answer. Mass production would be best matched with a mechanistic, highly formalized structure.
Answer (d) is incorrect. There is no such thing as integrated structure, and integration is not conducive to mass production.
Question: V1C5-0060
Routine tasks, which have few exceptions and problems that are easy to analyze, are conducive to
Answers
A: Formalized structure, where procedure manuals and job descriptions are common.
B: Decentralized decision making, where decisions are pushed downward in the organization.
C: Organic structures that emphasize adaptability and flexibility to changing circumstances.
D: High degrees of job satisfaction on the part of employees performing them.
Answer Explanations
Answer (a) is the correct answer. Routine tasks are conducive to formalized structure.
Answer (b) is incorrect. Routine tasks are conducive to centralization.
Answer (c) is incorrect. Routine tasks are conducive to mechanistic, not organic, structures.
Answer (d) is incorrect. Job satisfaction is often low in tasks that are routine and repetitive.
Question: V1C5-0061
Which of the following theories predicts that employee behavior depends on the belief that good performance will be rewarded by continued employment?
Answers
A: Equity theory: Employees compare their job inputs and outcomes with those of others and then react to eliminate inequities.
B: Expectation theory: The strength of a tendency to act in a certain way depends on the strength of an expectation that an act will be followed by a given outcome.
C: Goal-setting theory: Specific and difficult goals lead to higher performance.
D: Reinforcement theory: Behavior is a function of its consequences.
Answer Explanations
Answer (a) is incorrect. In equity theory, the employees compare their job inputs and outcomes with others and then respond to eliminate inequities.
Answer (b) is the correct answer. The strength of a tendency to act in a certain way depends on the strength of an expectation that an act will be followed by a given outcome.
Answer (c) is incorrect. Goal-setting theory postulates that specific and difficult goals lead to higher performance.
Answer (d) is incorrect. Reinforcement theory states that behavior is a function of its consequences.
Question: V1C5-0062
If a supervisor uses a supportive management approach, evidenced by positive feelings and concern for subordinates, a problem might result because
Answers
A: An approach based on pure power makes it difficult to motivate staff.
B: This approach depends on material rewards for the worker.
C: This approach depends on people who want to work, grow, and achieve.
D: The manager must believe in the teamwork approach.
Answer Explanations
Answer (a) is incorrect. The autocratic model is based on pure power.
Answer (b) is incorrect. The custodial model depends on material rewards for staff.
Answer (c) is the correct answer. If the people do not want to work, grow, and achieve, the manager will be unsuccessful when using this approach.
Answer (d) is incorrect. The manager’s beliefs alone will not be enough.
Question: V1C5-0063 Which particular type of organizational structure will likely have unity-of-command problems unless there is frequent and comprehensive communication between the various functional and project managers? Answers A: Line and staff. B: Strategic business unit. C: Centralized. D: Matrix.
Answer Explanations
Answer (a) is incorrect. This structure is designed to maximize unity of command by giving only line managers the authority to make decisions affecting those in their chain of command.
Answer (b) is incorrect. This is merely a method of dividing an organization into more homogeneous units to better serve specific markets.
Answer (c) is incorrect. A centralized structure need not have unity-of-command problems if management is organized in a line and staff fashion.
Answer (d) is the correct answer. This structure allows authority to flow both vertically and horizontally.
Question: V1C5-0064
Some management scholars have credited Douglas McGregor with founding the field of organizational behavior by arriving at a modern set of assumptions about people. Identify the basic assumption(s) underlying McGregor’s theory Y.
Answers
A: Employees are lazy and unambitious.
B: Employees are concerned only with higher wages.
C: Employees are component parts of the organizational system.
D: Employees are energetic and creative individuals.
Answer Explanations
Answer (a) is incorrect. It is a traditional theory.
Answer (b) is incorrect. It is a traditional theory.
Answer (c) is incorrect. This relates to Barnard and systems theory.
Answer (d) is the correct answer. This is the basis for Theory Y.
Question: V1C5-0065 A major aerospace company is organized so that vertical and horizontal lines of authority are combined. The company has found that this organizational structure is more conducive to the completion of major projects. Select the organizational form used by this company. Answers A: Line and staff. B: Matrix. C: Functional. D: Bureaucratic.
Answer Explanations
Answer (a) is incorrect. Lines of authority are vertical in this situation, with staff positions acting as advisors.
Answer (b) is the correct answer. Matrix structures are found in construction and aerospace firms that work on large projects.
Answer (c) is incorrect. Under this format, staff’s positions can temporarily assume line functions.
Answer (d) is incorrect. Authority is hierarchical in this structure.
Question: V1C5-0066
An organization chart depicts the official positions and formal lines of authority within a company. Such charts usually have two dimensions to describe: (1) the chain of command and (2) the division of labor. These two dimensions are called
Answers
A: Vertical hierarchy and horizontal specialization.
B: Staff and line functions.
C: Product and service departmentalization.
D: Functional departmentalization and specialized staff.
Answer Explanations
Answer (a) is the correct answer. The chain of command is called vertical hierarchy while the division of labor is called horizontal specialization.
Answer (b) is incorrect. Staff and line does not discuss the chain of command.
Answer (c) is incorrect. Departmentalization does not discuss chain of command.
This answer is incorrect. Refer to the correct answer explanation.
Question: V1C5-0067 A specific type of organization is characterized by division of labor, hierarchy of authority, a framework of rules, and impersonality. Identify the organization type. Answers A: Bottom-up. B: Synergistic. C: Bureaucratic. D: Equifinal.
Answer Explanations
Answer (a) is incorrect. A hierarchy of authority implies top-down authority.
Answer (b) is incorrect. Synergy is a characteristic of open systems. It results when components combine to form more than their sum.
Answer (c) is the correct answer. The characteristics listed are typical of a bureaucracy as defined by Weber.
Answer (d) is incorrect. Equifinality is a characteristic of open systems in which the same result is achieved through different means.
Question: V1C5-0068
While conducting a routine audit, an auditor found the following symptoms of a dysfunctional work environment: high levels of absenteeism and turnover; strict adherence to policies and procedures without an understanding of their purpose; and employees who felt they were treated like numbers, not like people. These problems are most likely to occur in an organization that practices
Answers
A: Scientific management.
B: Classical bureaucracy.
C: Theory Y management.
D: The contingency approach to management.
Answer Explanations
Answer (a) is incorrect. It is a symptom of a dysfunctional bureaucracy.
Answer (b) is the correct answer. These are all symptoms of a dysfunctional bureaucracy.
Answer (c) is incorrect. It is a symptom of a dysfunctional bureaucracy.
Answer (d) is incorrect. It is a symptom of a dysfunctional bureaucracy.
Question: V1C5-0069 For the past several years, many organizations have attempted to reduce administrative costs and respond more rapidly to customer and competitive demands. One method is to eliminate layers of middle management. The element of organizational structure affected by such reductions is Answers A: Spatial (geographic) differentiation. B: Formalization. C: Vertical differentiation. D: Formalization of jobs.
Answer Explanations
Answer (a) is incorrect. This refers to the degree of geographic separation between facilities and personnel.
Answer (b) is incorrect. This refers to the degree of job standardization through descriptions and rules.
Answer (c) is the correct answer. This refers to the vertical depth of the organizational hierarchy.
Answer (d) is incorrect. This term refers to the variety of jobs within an organization that require specialized knowledge or skills.
Question: V1C5-0070
The structure of an organization generally follows its overall strategy. At one end are loosely structured, organic organizations. At the other end are highly centralized, tightly controlled, mechanistic organizations. The following questions present the strategies for two different companies.
A company is a pioneer in the combination of laser and robotic technologies. The company’s scientists and engineers hold many patents. They are continually looking for ways to improve their products as well as to introduce new ones.
Identify the most appropriate structural option for this organization.
Answers
A: Mechanistic.
B: Imitative.
C: Organic.
D: Holistic.
Answer Explanations
Answer (a) is incorrect. A mechanistic structure is appropriate for organizations focusing on cost minimization through tight controls, extensive division of labor, and high formalization.
Answer (b) is incorrect. This is not a true structural option. Imitative strategies are best suited to a mechanistic and organic structure.
Answer (c) is the correct answer. Innovative strategy organizations operate best with a loose structure, low division of labor, and low formalization.
Answer (d) is a distracter.
Question: V1C5-0071
The structure of an organization generally follows its overall strategy. At one end are loosely structured, organic organizations. At the other end are highly centralized, tightly controlled, mechanistic organizations. The following questions present the strategies for two different companies.
A company maintains a chain of warehouse-style outlets. These outlets sell high volumes of food, office supplies, and other relatively inexpensive commodities. Marketing expenses are minimized, and each store is plainly furnished.
Select the structural option best suited to this organization.
Answers
A: Mechanistic.
B: Imitative.
C: Organic.
D: Holistic.
Answer Explanations
Answer (a) is the correct answer. A mechanistic structure is appropriate for organizations focusing on cost minimization through tight controls, extensive division of labor, and high formalization.
Answer (b) is incorrect. This is not a true structural option. Imitative strategies are best suited to a mechanistic and organic structure.
Answer (c) is incorrect. An organic structure exhibits an innovative strategy and operates best with a loose structure, low division of labor, and low formalization.
Answer (d) is incorrect. It is a distracter.
Question: V1C5-0072 In what form of organization does an employee report to multiple managers? Answers A: Bureaucracy. B: Matrix. C: Departmental. D: Mechanistic.
Answer Explanations
Answer (a) is incorrect. In a bureaucracy, each subordinate reports to only a single manager.
Answer (b) is the correct answer. In a matrix organization, project managers may “borrow specialists from line managers…”
Answer (c) is incorrect. Departmental organization structures represent the “typical organization” with unified and thus clear-cut single lines of authority.
Answer (d) is incorrect. Mechanistic organization structure is another term referring to bureaucracy.
Question: V1C5-0073 If an organization were to change from an inflexible organizational structure with many layers in its hierarchy to a more flexible streamlined structure as a result of change in its external environment, the company would be adhering to which view of management? Answers A: Contingency. B: Open systems. C: Universality. D: Classical.
Answer Explanations
Answer (a) is the correct answer. The key to the contingency approach is that different types of organization structures are appropriate in different situations or external environments.
Answer (b) is incorrect. Open systems involve a continual interaction between the organization and its external environment.
Answer (c) is incorrect. It is based on the belief that a single management process can be applied in all organizations.
Answer (d) is incorrect. The emphasis is on principles distilled from past organizational experience.
