ERAC Audit Procedures & Risk Mitigation 4

Question 1

An energy trading firm's audit shows that traders set their own position limits. This violates which fundamental risk control principle?

Accepted Answer

Segregation of duties

Answer

Segregation of duties requires that risk limit-setting be independent of trading functions; allowing traders to set their own limits eliminates a critical check on risk-taking behavior.

Question 2

Which method is used to validate that a VaR model accurately predicts losses over time?

Accepted Answer

Backtesting

Answer

Backtesting compares a model's predicted VaR against actual observed losses to assess whether the model's predictions are accurate and statistically sound.

Question 3

During an audit of an electricity retailer, the auditor finds the company has no liquidity reserve policy. Why is this a critical gap in risk mitigation?

Accepted Answer

Margin calls and collateral demands during price spikes can quickly create a cash crisis without reserves

Answer

Without a liquidity reserve, unexpected margin calls triggered by sharp price movements can force distressed asset sales or default, making liquidity risk management essential.

Question 4

A midstream company transports gas for multiple shippers. What type of risk does the auditor focus on when evaluating exposure to shipper non-payment?

Accepted Answer

Counterparty credit risk

Answer

Counterparty credit risk is the exposure to financial loss if a shipper fails to fulfill their payment obligations under the transportation agreement.

Question 5

Which control best mitigates the risk of erroneous trade data entry in an energy trading system?

Accepted Answer

Automated straight-through processing with pre-defined validation rules

Answer

Automated straight-through processing (STP) with validation rules catches data entry errors at the point of input before they propagate through downstream risk and accounting systems.

(ERAC) Energy Risk Auditor Certification Practice Test

(ERAC) Energy Risk Auditor Certification Practice Test

ERAC Audit Procedures & Risk Mitigation 4