Finance for Non-Finance Managers Risk Management and Internal Controls 1 — Questions and Answers
Question 1: Which of the following best defines financial risk in a business context?
- The possibility of a financial loss or adverse outcome due to uncertainty (Correct answer)
- The certainty that a company will lose money in the next quarter
- The total amount of debt a company has on its balance sheet
- The difference between projected and actual revenue
Correct answer: The possibility of a financial loss or adverse outcome due to uncertainty
Financial risk refers to the possibility of losing money or experiencing adverse financial outcomes due to uncertainty in business operations or markets.
Question 2: What is the primary purpose of internal controls in an organization?
- To maximize shareholder dividends
- To safeguard assets, ensure accurate reporting, and promote operational efficiency (Correct answer)
- To replace the need for external audits
- To reduce the number of employees in the finance department
Correct answer: To safeguard assets, ensure accurate reporting, and promote operational efficiency
Internal controls are designed to safeguard company assets, ensure the accuracy and reliability of financial reporting, and improve operational efficiency.
Question 3: A company identifies that a single employee both approves purchase orders and processes payments. This violates which internal control principle?
- Cost-benefit analysis
- Segregation of duties (Correct answer)
- Management override
- Dual authorization
Correct answer: Segregation of duties
Segregation of duties requires that no single individual controls all aspects of a financial transaction to prevent fraud and errors.
Question 4: Which type of risk refers to the danger that a customer or counterparty will fail to meet their financial obligations?
- Market risk
- Liquidity risk
- Credit risk (Correct answer)
- Operational risk
Correct answer: Credit risk
Credit risk is the risk that a borrower or counterparty will default on their contractual obligations, resulting in financial loss.
Question 5: What does a company's 'risk appetite' represent?
- The total amount of losses a company has experienced in the past year
- The level of risk a company is willing to accept in pursuit of its objectives (Correct answer)
- The number of risk events that occurred in a given period
- The cost of insurance premiums the company pays annually
Correct answer: The level of risk a company is willing to accept in pursuit of its objectives
Risk appetite defines how much uncertainty or potential loss an organization is willing to tolerate when pursuing its strategic objectives.
Question 6: Which of the following is an example of a risk TRANSFER strategy?
- Discontinuing a risky product line
- Purchasing insurance to cover potential losses (Correct answer)
- Investing in better safety equipment to reduce accidents
- Accepting that some losses will occur and budgeting for them
Correct answer: Purchasing insurance to cover potential losses
Risk transfer shifts the financial consequences of a risk to a third party, such as an insurer, rather than bearing it internally.
Question 7: A risk assessment matrix is most commonly used to evaluate risks based on which two dimensions?
- Revenue impact and market share
- Probability of occurrence and potential impact (Correct answer)
- Employee count and geographic location
- Duration of risk and industry sector
Correct answer: Probability of occurrence and potential impact
A risk matrix plots the likelihood (probability) of a risk occurring against its potential impact to help prioritize which risks need the most attention.
Finance for Non-Finance Managers Risk Management and Internal Controls 1
Which of the following best defines financial risk in a business context?