SU2: Fraud and Risk

Question 1

List the four primary controls

Answer 1

Prventivve, detective, corrective, directive

Question 2

List secondary controls

Answer 2

compensatory (mitigative), complementary

Question 3

Preventive Controls

Answer 3

Deter the occurrence of unwanted events

Question 4

Detective controls

Answer 4

Alert the proper people after an unwanted event

Question 5

Corrective

Answer 5

Correct the negative effects of unwanted events

Question 6

Directive

Answer 6

Cause or encourage the occurance of a desirable event

Question 7

ERM is defined as

Answer 7

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

Question 8

ERM Roles and Responsibilities

Answer 8

Audit committee, a risk committee, an executive compensation committee and a nomination or governance committee

Question 9

Three lines of management risk accountability

Answer 9

principal owners of risk, business enabling functions (risk officer), assurance (internal audit)

Question 10

Risk oversight is most effective when it is…

Answer 10

Independent of the organization

Question 11

Five interrelated components of the COSO framework

Answer 11

Governance and Culture, Strategy and Objective Setting, Performance, Review and Revision, Information/Communication and Reporting

Question 12

What are the two supporting aspect components of the COSO ERM Framework

Answer 12

Governance and Culture, Information Communication and Reporting

Question 13

What are the three common process components of the COSO ERM framework

Answer 13

Performance, Review and Revision, Strategy and Objective Setting

Question 14

Risk response categories

Answer 14

AARPS (acceptance, avoidance, avoidance, reduction, pursuite, sharing)

Question 15

Management considers risk appetite for all of the following reasons

Answer 15

Aligning with development of strategy.
Aligning with business objectives.
Prioritizing risks.
Implementing risk responses

Question 16

List the six categories of the external risk environment

Answer 16

PESTLE, Political, Environmental, Social, Technological, Legal, Economic

Question 17

What are the five limitations of ERM?

Answer 17

Faulty human judgement, cost-benefit considerations, simple errors or mistakes, collusion and management override

Question 18

A risk profile is a view of the relationship between

Answer 18

Risk and Performance

Question 19

List 5 red flags that might indicate fraudulent financial reporting

Answer 19

Performances too bad or too good to be true
Threat of imminent bankruptcy, foreclosure, or hostile takeover
High turnover of senior management, counsel, or board members
Nonfinancial management’s excessive participation in selecting accounting principles or determining estimates
Strained relationship with the auditor
Known history of securities laws violations
Industry or market declines
Poor cash flows
Significant related party transactions not in the ordinary course of business
Highly complex transactions
Transactions in tax-haven jurisdictions
Unrealistic sales or profitability incentives
Unusually rapid growth
Pressures to meet analysts’ earnings expectations

Question 20

List 5 Red flags that might indicate misappropriation of assets

Answer 20

Missing documentation for transactions
Large amounts of cash on hand
High-valued, small-sized inventories or other assets
Unexplained budget variances
Failure of certain employees to take vacations
Unusual write-offs of receivables
Failure to follow up on past-due receivables
Shortages in delivered or received goods
Poor supervision
Products or services purchased in excess of needs
Payroll checks with a second endorsement
Employees on the payroll who do not sign up for benefits
Undocumented petty cash expenditures
Common addresses on payables, refunds, or payments
Addresses or telephone numbers of employees that match with suppliers or others
Complaints by customers

Question 21

List the elements of the legal definition of fraud

Answer 21

A false representation of a material fact, made with the knowledge of its falsity or without sufficient knowledge on which to base this representation, a persons action on the represenation, the person acting incurs damages because of the reliance on false representation.

Question 22

If a companys assets are fully funded by equity (no debt), the company has no <> risk

Answer 22

Financial risk

Question 23

An entity defines its risk appetite in which component of the coso ERM framework

Answer 23

Strategy and Objective setting