Finance for Non-Finance Managers Risk Management and Internal Controls 2 — Questions and Answers
Question 1: Liquidity risk for a business primarily refers to the risk that the company:
- Will not be able to meet its short-term financial obligations when they come due (Correct answer)
- Will experience a decline in its stock price
- Will lose market share to a competitor
- Will fail to comply with tax regulations
Correct answer: Will not be able to meet its short-term financial obligations when they come due
Liquidity risk is the danger that a company cannot convert assets into cash quickly enough to meet its immediate financial obligations.
Question 2: The COSO framework is widely used in risk management and internal controls. What does COSO stand for?
- Committee of Sponsoring Organizations of the Treadway Commission (Correct answer)
- Corporate Oversight Standards Organization
- Compliance and Operations Standards Office
- Central Organization for Systematic Oversight
Correct answer: Committee of Sponsoring Organizations of the Treadway Commission
COSO stands for the Committee of Sponsoring Organizations of the Treadway Commission, which developed the widely adopted internal control and enterprise risk management frameworks.
Question 3: Which of the following best describes a 'key risk indicator' (KRI)?
- A measure of past financial losses recorded in the annual report
- A forward-looking metric that signals the potential for increased risk exposure (Correct answer)
- A legal document outlining the company's risk policies
- The total number of insurance claims filed in a year
Correct answer: A forward-looking metric that signals the potential for increased risk exposure
KRIs are forward-looking metrics that provide early warning signals of increasing risk exposure, allowing management to take proactive action.
Question 4: Operational risk in a business is best described as the risk arising from:
- Changes in interest rates affecting loan costs
- Failures in internal processes, people, systems, or external events (Correct answer)
- Declining product demand in the marketplace
- Currency exchange rate fluctuations
Correct answer: Failures in internal processes, people, systems, or external events
Operational risk stems from breakdowns in internal processes, human error, system failures, or external disruptions that impact business operations.
Question 5: What is the role of an internal audit function within a company?
- To prepare the company's external financial statements
- To independently assess the effectiveness of internal controls and risk management (Correct answer)
- To collect taxes on behalf of the government
- To manage the company's investment portfolio
Correct answer: To independently assess the effectiveness of internal controls and risk management
Internal audit provides an independent, objective assessment of whether the company's risk management and internal control systems are effective.
Question 6: Hedging is a risk management technique best described as:
- Avoiding all financial market transactions to prevent losses
- Taking an offsetting financial position to reduce the impact of adverse price movements (Correct answer)
- Diversifying a portfolio by investing in unrelated industries
- Setting aside cash reserves to cover unexpected expenses
Correct answer: Taking an offsetting financial position to reduce the impact of adverse price movements
Hedging involves taking an offsetting or opposite position in a related asset to reduce the financial impact of unfavorable price changes.
Question 7: Which fraud prevention control requires that two authorized individuals must both approve significant transactions before they are processed?
- Dual authorization (four-eyes principle) (Correct answer)
- Rotation of duties
- Reconciliation
- Background checks
Correct answer: Dual authorization (four-eyes principle)
Dual authorization, also called the four-eyes principle, requires two approvers for high-value or sensitive transactions to prevent unauthorized or fraudulent activity.
Finance for Non-Finance Managers Risk Management and Internal Controls 2
Liquidity risk for a business primarily refers to the risk that the company: