ACCA Risk Management and Internal Controls 2 — Questions and Answers
Question 1: Which of the following is a key purpose of a company's Audit Committee?
- To approve all major capital expenditure decisions
- To provide independent oversight of financial reporting, internal controls, and external audit (Correct answer)
- To manage day-to-day operational risks
- To set the company's remuneration policy
Correct answer: To provide independent oversight of financial reporting, internal controls, and external audit
The Audit Committee provides independent oversight of financial reporting integrity, internal control systems, risk management, and the relationship with internal and external auditors.
Question 2: What is 'residual risk'?
- The risk before any controls are applied
- The risk remaining after controls and mitigating actions have been implemented (Correct answer)
- The portion of risk transferred to an insurer
- Risk that is accepted without any action
Correct answer: The risk remaining after controls and mitigating actions have been implemented
Residual risk is the level of risk that remains after management has applied controls and other risk responses.
Question 3: Which of the following financial risks refers to the possibility that a counterparty will fail to fulfill its contractual obligations?
- Market risk
- Liquidity risk
- Credit risk (Correct answer)
- Operational risk
Correct answer: Credit risk
Credit risk (also called counterparty or default risk) is the risk that a borrower or counterparty will not meet its obligations in accordance with agreed terms.
Question 4: In the context of business risk, 'reputational risk' is best described as:
- The risk of loss from inadequate internal processes or systems
- The risk that negative publicity will damage an organization's standing with stakeholders (Correct answer)
- The risk of regulatory fines and penalties
- Strategic risk arising from poor management decisions
Correct answer: The risk that negative publicity will damage an organization's standing with stakeholders
Reputational risk is the potential for negative stakeholder perceptions — from customers, investors, or regulators — to adversely affect business relationships and financial performance.
Question 5: A company purchases an insurance policy to cover potential losses from a warehouse fire. This is an example of:
- Risk avoidance
- Risk reduction
- Risk transfer (Correct answer)
- Risk acceptance
Correct answer: Risk transfer
Insurance transfers the financial consequence of a specified risk to the insurer in exchange for a premium, making it a classic risk transfer mechanism.
Question 6: Which of the following is a limitation of internal controls?
- They can be overridden by management (Correct answer)
- They always eliminate risk completely
- They are not required by corporate governance codes
- They apply only to financial risks
Correct answer: They can be overridden by management
A fundamental limitation of internal controls is that they can be overridden or circumvented by management, particularly those in positions of authority.
ACCA Risk Management and Internal Controls 2
Which of the following is a key purpose of a company's Audit Committee?