CPA CFE Strategy and Governance 1 — Questions and Answers
Question 1: In Porter's Five Forces framework, which force analyzes the ease with which new competitors can enter a market?
- Bargaining power of suppliers
- Threat of new entrants (Correct answer)
- Threat of substitute products
- Rivalry among existing competitors
Correct answer: Threat of new entrants
The threat of new entrants examines barriers to entry such as capital requirements, economies of scale, brand loyalty, access to distribution channels, and regulatory barriers. High barriers reduce the threat and protect existing firms' profitability.
Question 2: What is the primary role of the board of directors in corporate governance?
- Managing day-to-day operations of the company
- Overseeing management, setting strategic direction, and protecting shareholder interests (Correct answer)
- Preparing financial statements and tax returns
- Conducting internal audits and compliance reviews
Correct answer: Overseeing management, setting strategic direction, and protecting shareholder interests
The board of directors provides oversight of management, sets strategic direction, ensures accountability, and protects the interests of shareholders and other stakeholders. Day-to-day operations are delegated to management under the board's supervision.
Question 3: A company pursues a cost leadership strategy. Which of the following actions best supports this strategy?
- Investing heavily in product differentiation and premium branding
- Achieving economies of scale, tight cost controls, and operational efficiencies (Correct answer)
- Focusing on a narrow market niche with specialized products
- Charging premium prices to cover high production costs
Correct answer: Achieving economies of scale, tight cost controls, and operational efficiencies
Cost leadership requires a company to become the lowest-cost producer in its industry. This is achieved through economies of scale, process efficiencies, tight overhead control, access to low-cost inputs, and leveraging the experience curve to reduce costs below competitors.
Question 4: Under Canadian corporate governance guidelines, what is the recommended composition of the audit committee?
- A majority of management directors
- Entirely independent directors who are financially literate (Correct answer)
- An equal mix of independent and non-independent directors
- Any directors chosen by the CEO
Correct answer: Entirely independent directors who are financially literate
Canadian securities regulations (National Instrument 52-110) require audit committees to be composed entirely of independent directors, and each member must be financially literate. The committee oversees financial reporting, external audit, and internal controls.
Question 5: What does a SWOT analysis evaluate?
- Only the external competitive environment
- Internal strengths and weaknesses, and external opportunities and threats (Correct answer)
- Only the financial performance of a company
- The technical specifications of a company's products
Correct answer: Internal strengths and weaknesses, and external opportunities and threats
SWOT analysis is a strategic planning tool that evaluates an organization's internal factors (Strengths and Weaknesses) and external factors (Opportunities and Threats). It provides a framework for aligning capabilities with environmental conditions.
Question 6: In the context of enterprise risk management (ERM), what is risk appetite?
- The maximum loss a company has ever experienced
- The amount and type of risk an organization is willing to accept in pursuit of its objectives (Correct answer)
- The total insurance coverage held by the company
- The number of risks identified in the risk register
Correct answer: The amount and type of risk an organization is willing to accept in pursuit of its objectives
Risk appetite is the broad-based amount of risk an organization is willing to accept in pursuit of value creation and its strategic objectives. It is set by the board and guides risk-taking decisions throughout the organization.
CPA CFE Strategy and Governance 1
In Porter's Five Forces framework, which force analyzes the ease with which new competitors can enter a market?