CBA Auditing Risk Management Questions and Answers 1 — Questions and Answers
Question 1: An auditor assesses a bank's inherent risk as high for its complex derivatives trading activities and its control risk as high due to a new, untested trading system. To maintain an acceptably low level of overall audit risk, what is the most appropriate action for the auditor regarding detection risk?
- Increase the acceptable level of detection risk by reducing substantive testing.
- Set the acceptable level of detection risk to a low level by performing more extensive audit procedures. (Correct answer)
- Conclude that overall audit risk cannot be managed and issue a disclaimer of opinion.
- Rely solely on management's representations as the primary source of audit evidence.
Correct answer: Set the acceptable level of detection risk to a low level by performing more extensive audit procedures.
The audit risk model states that Audit Risk = Inherent Risk x Control Risk x Detection Risk. Auditors aim to keep overall audit risk low. When inherent risk and control risk are assessed as high, the auditor must compensate by setting a low acceptable level for detection risk. This is achieved by increasing the nature, timing, and extent of substantive audit procedures to increase the likelihood of detecting material misstatements.
Question 2: During a review of a bank's risk management framework, an auditor notes that the board of directors has delegated oversight of risk management activities to an audit committee. Which of the following is a primary responsibility of the audit committee in this role?
- Executing the day-to-day risk mitigation and control activities.
- Designing and implementing the bank's internal control system.
- Ensuring the independence and effectiveness of the internal and external audit functions. (Correct answer)
- Setting the bank's overall risk appetite and strategic objectives.
Correct answer: Ensuring the independence and effectiveness of the internal and external audit functions.
The audit committee's primary role in risk management oversight is to ensure the independence and assess the performance of the internal and external auditors. This provides the board with independent assurance that risk management processes are effective. Day-to-day execution and system design are management's responsibilities, while setting the risk appetite is a core function of the full board of directors.
Question 3: A Certified Bank Auditor is evaluating the effectiveness of a bank's enterprise risk management (ERM) program based on the COSO framework. Which of the following activities best represents the 'Risk Assessment' component of the COSO framework?
- The board of directors establishes a code of conduct and demonstrates a commitment to integrity and ethical values.
- The internal audit function performs a follow-up review to ensure management has remediated a previously identified control weakness.
- Management uses a combination of qualitative and quantitative methods to analyze the potential likelihood and impact of identified risks. (Correct answer)
- Segregation of duties is enforced within the loan origination and approval process.
Correct answer: Management uses a combination of qualitative and quantitative methods to analyze the potential likelihood and impact of identified risks.
The 'Risk Assessment' component of the COSO framework involves identifying, analyzing, and managing the risks that threaten the achievement of an organization's objectives. Analyzing the likelihood and impact of risks is a core activity of this component. Establishing a code of conduct relates to the Control Environment, follow-up reviews are part of Monitoring Activities, and segregation of duties is an example of Control Activities.
Question 4: In the context of the 'Three Lines of Defense' model for risk management in a bank, which function serves as the third line?
- Business unit management and process owners.
- The independent risk management and compliance functions.
- The internal audit function. (Correct answer)
- The board of directors and its committees.
Correct answer: The internal audit function.
In the Three Lines of Defense model, the first line is business operations management, which owns and manages risk. The second line includes the risk management and compliance functions that provide oversight. The third line is the internal audit function, which provides independent and objective assurance on the effectiveness of governance, risk management, and internal controls to the board and senior management.
Question 5: A bank has recently launched a new mobile banking application with peer-to-peer payment capabilities. When auditing the risk management process for this new product, which of the following would be the auditor's primary concern regarding operational risk?
- The potential for losses due to fluctuations in interest rates.
- The possibility that the new service violates consumer lending regulations.
- The risk of loss resulting from inadequate or failed internal processes, people, and systems. (Correct answer)
- The likelihood that the bank's strategic goals for the new product will not be met.
Correct answer: The risk of loss resulting from inadequate or failed internal processes, people, and systems.
Operational risk is defined as the risk of loss resulting from inadequate or failed internal processes, people, and systems, or from external events. A new mobile application introduces risks related to system failures, cybersecurity breaches, transaction processing errors, and potential for fraud, all of which fall under the category of operational risk. Interest rate risk, compliance risk, and strategic risk are other distinct risk categories.
Question 6: Which of the following describes the relationship between risk appetite and an internal audit plan for a bank?
- The audit plan dictates the bank's risk appetite.
- Risk appetite is irrelevant to the development of the audit plan.
- The audit plan is designed to provide assurance that risks are managed within the bank's established risk appetite. (Correct answer)
- The audit plan and risk appetite are developed independently by the internal audit function.
Correct answer: The audit plan is designed to provide assurance that risks are managed within the bank's established risk appetite.
A bank's board of directors establishes the risk appetite, which is the amount and type of risk the bank is willing to accept in pursuit of its objectives. The internal audit plan is then developed to focus on areas of highest risk and provide independent assurance to the board that these risks are being identified and managed effectively and within the stated appetite.
CBA Auditing Risk Management Questions and Answers 1
An auditor assesses a bank's inherent risk as high for its complex derivatives trading activities and its control risk as high due to a new, untested trading system.
To maintain an acceptably low level of overall audit risk, what is the most appropriate action for the auditor regarding detection risk?