Internal Controls & Compliance Flashcards

Under the Volcker Rule, which activity is generally PROHIBITED for banks and their affiliates?

Answer: Proprietary trading in securities and certain derivatives for the bank's own account

The Volcker Rule, part of the Dodd-Frank Act, prohibits banking entities from engaging in short-term proprietary trading of securities for their own profit.

When evaluating the independence of a bank's internal audit function, the MOST critical factor is:

Answer: Whether the internal audit function reports directly to the board's audit committee

Reporting to the audit committee (rather than management) ensures internal audit can objectively evaluate and report on management's activities without interference.

A bank auditor is reviewing the institution's third-party risk management program. Which element is MOST important to verify is in place?

Answer: Due diligence, ongoing monitoring, and contractual protections covering key third-party relationships

Regulatory guidance on third-party risk requires rigorous due diligence before engagement and ongoing monitoring throughout the relationship, supported by strong contractual provisions.

Under Regulation Z (Truth in Lending Act), the Annual Percentage Rate (APR) disclosure is designed to:

Answer: Enable consumers to compare the true cost of credit across different lenders

APR standardizes the cost of credit by expressing the interest rate and fees as a single annual rate, allowing consumers to make meaningful comparisons between loan products.

An auditor identifies that a bank's fraud detection system generates a large number of false-positive alerts, consuming significant compliance staff time. The BEST course of action is to recommend:

Answer: Tuning the detection models using validated data to reduce false positives while maintaining detection efficacy

Tuning detection models to reduce false positives while preserving genuine threat detection optimizes both compliance effectiveness and operational efficiency.

Which of the following is a PRIMARY responsibility of a bank's Board of Directors with respect to internal controls?

Answer: Setting the control environment tone, approving risk appetite, and overseeing management's control activities

The board is responsible for governance—establishing the tone for a strong control culture, setting risk appetite, and holding management accountable for implementing effective controls.

A bank receives a Matters Requiring Attention (MRA) from its federal regulator citing deficiencies in its BSA/AML program. The MOST appropriate initial response by management is to:

Answer: Develop a written remediation plan with specific milestones and assign clear ownership for corrective actions

MRAs require prompt, documented remediation plans with timelines and responsible parties to demonstrate the bank's commitment to correcting supervisory concerns.