MOCK EXAM 1

Question 1

According to the Committee of Sponsoring Organization (COSO) of the Tread-way Commission, the following two components of enterprise risk management address and entity’s risk appetite

Answer 1

An entity identifies its Risk appetite as part of the internal environment component of the ERM as well with aligning objectives with risk tolerance as part of the Objective setting component

Question 2

The Sarbanes-Oxley act of 2002 requires that the officers of a corporation make any number of representations that will accompany their quarterly and annual financial statement including

Answer 2

internal control is the responsibility of the signing officers

Question 3

Effective Annual Interest Rate of 7.74% interest is payable semi-annually - what was the stated rate

Answer 3

the effective annual interest rate is equal to 1 plus the stated interest rated divided by the interest periods

Question 4

US company has A/R denominated in foreign currencies - to mitigate its exchange risk - forward contract to sell

Answer 4

forward contract to sell the foreign currency at a specific date

Question 5

forward contracts tend to be used for larger groups of transactions such as AR

Answer 5

while future contracts hedge a specific transaction

Question 6

A forward contract to buy foreign currency at specific rate would be used to mitigate the risk that a foreign currency used to settle a payable would not be greater than originally expected

Answer 6

Contracts to buy mitigate exchange risk of liabilities

Contracts to sell mitigate exchange risk of Assets

Question 7

Average Collections period to determine

Answer 7

Liquidity

Question 8

A company’s average collection period us used to evaluate liquidity through the calculation of the

Answer 8

cash conversion cycle - Liquidity measures focus on the ability of the company to meet obligations as they become due

Question 9

A letter of credit represent a third party guaranteed of obligations incurred by a company

Answer 9

a line of credit is short term borrowing

Question 10

debentures are unsecured debts and do not enhance trade credit capabilities

Answer 10

subordinated debentures are unsecured debts

Question 11

The payback period is computed as the net initial investment

Answer 11

divided by the increase in annual net after-tax cash flows

Question 12

A production report is normally formatted to prove units

Answer 12

at the beginning of the period plus units transferred in are equal to the units transferred out plus ending inventory

Question 13

for a firm earning a profit, increasing sales revenue and operating expenses by the same % will increase profits

Answer 13

this is because expenses will go up less in dollar than sales will. increased profit with no change in investment means a higher ROI

Question 14

for a firm earning a profit, increasing sales revenue and operating expenses by the same % will increase profits

Answer 14

this is because expenses will go up less in dollar than sales will. increased profit with no change in investment means a higher ROI

Question 15

cost push inflation is caused by a shift left

Answer 15

in aggregate supply - only a sharp rise in nominal wages would result in a shift left in aggregate supply

Question 16

which of the following situations illustrates a potential vertical merger between companies X and Y

Answer 16

a company merging with one of its suppliers represents a vertical merger

Question 17

Components of ERM
Control Activities - include elements that relate to the policies and procedures that ensure appropriate response to identified risks, including controls over information systems

Answer 17

the monitoring component of ERM - relate to the ongoing management activities or separate evaluations
Information & Communication -

Question 18

Components of ERM
Control Activities - include elements that relate to the policies and procedures that ensure appropriate response to identified risks, including controls over information systems

Answer 18

the monitoring component of ERM - relate to the ongoing management activities or separate evaluations
Information & Communication - identification, capture and communication of information
internal envoronment - organizational structure, assignment of authority and responsibility, integrity and ethical values, risk management phylosophy, commitment to competence and human resources, influence tone of organization.

Question 19

an investor with risk-averse behavior will seek to reduce risk by mixing investments in a portfolio with different or offsetting risks

Answer 19

this technique is most effective to reduce un-systematic risk.

Question 20

an investor with risk-averse behavior will seek to reduce risk by mixing investments in a portfolio with different or offsetting risks

Answer 20

this technique is most effective to reduce un-systematic risk.

Question 21

unsystematic risk is also referred to as firm-specific or non-market risk -

Answer 21

Unsystematic risk can be reduced by diversification in other companies

Question 22

The terms systematic, market, and non-diversifiable risk are all synonymous and refer to

Answer 22

the risk that can not be mitigated by investment in different securities

Question 23

operating leverage is the presence of fixed costs in operations

Answer 23

which allows a small change in sales to produce a larger lertative change in profits

Question 24

A firm with a higher degree of operating leverage when compared to the industry average

Answer 24

implies that the firms profits are more sensitive to changes in sales volume

Question 25

higher variable cost

Answer 25

imply lower degree of operating costs

Question 26

Prevention Costs

Answer 26

Employee Training
Inspection expenses - Pre-production
Process redesign
product redesign

Question 27

Appraisal Costs

Answer 27

Inspection Expenses - Post-production
Laboratory Maintenance
Product Testing

Question 28

Conformance Cost

Answer 28

Prevention cost plus Appraisal Costs

Question 29

Internal Failure Costs

Answer 29

Rework
Scrap
Tooling changes

Question 30

External Failure Costs

Answer 30

Cost of returning goods
liability Claims
warranty costs

Question 31

Non-conformance Costs

Answer 31

Internal Costs + External Failure Costs