CPA Risk Assessment & Underwriting 4

Question 1

In an actuarial context, 'credibility theory' is used in underwriting to:

Accepted Answer

Determine how much weight to give an individual risk's own loss experience versus industry data

Answer

Credibility theory provides a framework for blending an individual risk's own historical loss experience with broader industry or class data based on statistical reliability.

Question 2

During an audit, a CPA discovers that management override of internal controls occurred related to revenue. This should be treated as:

Accepted Answer

A significant risk that requires immediate escalation and additional procedures

Answer

Management override of controls is always considered a significant risk under auditing standards and requires the auditor to perform specific additional procedures.

Question 3

Which of the following would be classified as a 'pure risk' relevant to insurance underwriting?

Accepted Answer

The risk of fire destroying a building

Answer

Pure risk involves only the possibility of loss or no loss (e.g., fire damage), with no possibility of gain, making it insurable; speculative risks involve both gain and loss possibilities.

Question 4

An auditor performing risk assessment at a bank should give special attention to the allowance for loan and lease losses (ALLL) because:

Accepted Answer

It involves significant management judgment and estimation uncertainty

Answer

The ALLL involves complex, subjective estimates of future credit losses, creating high inherent risk and requiring the auditor to evaluate the reasonableness of management's assumptions.

Question 5

In insurance underwriting, a 'mono-line' insurer differs from a 'multi-line' insurer in that a mono-line insurer:

Accepted Answer

Writes only one type (line) of insurance coverage

Answer

A mono-line insurer specializes in one line of business (e.g., only workers' compensation), while a multi-line insurer writes multiple types of insurance coverage.

(CPA) Certified Practicing Accountant Practice Test

(CPA) Certified Practicing Accountant Practice Test

CPA Risk Assessment & Underwriting 4