Risk Assessment & Management Flashcards
7 cards from real Certified Public Accountant practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Management flashcards as text
Which of the following is a leading indicator of liquidity risk for a company?
Answer: Declining current ratio over multiple quarters
A declining current ratio signals that the company may struggle to meet short-term obligations, making it a leading indicator of liquidity risk.
The concept of 'tone at the top' primarily relates to which COSO Internal Control component?
Answer: Control Environment
Tone at the top refers to the ethical culture and commitment to integrity set by senior management and the board, which is a fundamental element of the Control Environment.
Which risk response involves restructuring a business process to eliminate the source of a risk entirely?
Answer: Risk avoidance
Risk avoidance involves exiting or not engaging in activities that give rise to risk, effectively eliminating exposure by not participating in that activity.
An auditor identifies that a client's revenue recognition policy is complex and subject to significant management judgment. This primarily affects which audit risk component?
Answer: Inherent risk
Inherent risk is elevated when transactions require significant judgment or complex accounting, independent of any related internal controls.
A company purchases insurance to protect against potential property damage losses. This is an example of which risk response?
Answer: Risk transfer
Purchasing insurance transfers the financial consequence of a risk to the insurer, making it a classic example of risk transfer.
Which of the following best describes a 'material weakness' in internal control over financial reporting?
Answer: A deficiency or combination of deficiencies with a reasonable possibility of material misstatement not being prevented or detected
A material weakness is a deficiency (or combination) in ICFR where there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis.
Which of the following risk assessment approaches involves analyzing how multiple risks interact and compound each other?
Answer: Correlation and portfolio risk analysis
Correlation and portfolio risk analysis examines how risks are interrelated, recognizing that correlated risks can amplify aggregate exposure beyond individual risk estimates.