Internal Controls & Risk Assessment Flashcards

Which risk response strategy involves shifting the financial consequence of a risk to a third party?

Answer: Risk transfer

Risk transfer, such as purchasing insurance, moves the financial impact of a risk event to another party.

A monthly bank reconciliation prepared by an employee who does not handle cash receipts is an example of:

Answer: Independent reconciliation

Independent reconciliation ensures objectivity because the person performing the check has no involvement in the transactions being reviewed.

Inherent risk in internal control refers to:

Answer: The susceptibility of an assertion to a material misstatement assuming no controls

Inherent risk is the natural exposure to error or fraud in a process before any controls are considered.

Which of the following BEST describes a 'key risk indicator' (KRI)?

Answer: A metric that signals increasing exposure to a specific risk

KRIs are forward-looking metrics that alert management when risk levels are escalating beyond acceptable thresholds.

Physical controls over assets include all of the following EXCEPT:

Answer: Periodic reconciliation of physical inventory to records

Periodic reconciliation is a detective control that compares records to physical counts, not a physical safeguard of the asset itself.

The likelihood and potential impact of a risk event are used together to:

Answer: Prioritize risks on a risk register

Combining probability and impact allows organizations to rank risks so resources are focused on the most significant exposures.

Which internal control principle states that employees in key roles should periodically rotate to different positions?

Answer: Job rotation

Job rotation reduces the risk of long-term fraud by ensuring no single employee has exclusive control over a process for extended periods.