Risk Management Questions and Answers
Division A of X plc produced the following results in the last financial year.
Net profit $200,000 Gross capital employed $1,000,000
For evaluation purposes all divisional assets are valued at original cost.
The division is considering a project that has a positive NPV, will increase annual net profit by $15,000, but will require average inventory levels to increase by $50,000 and non-current assets to increase by $50,000.
X plc imposes a 16% capital charge on its divisions. Given these circumstances, will the evaluation criteria of return on investment (ROI) and residual income (RI) motivate division A managers to accept the project?
Multinational companies have a variety of methods by which to manage currency risk.
Select ALL internal hedging methods from the following list.
J plc is a wholesale building supply business. It has a large warehouse where some of its materials are stored. Last month three accidents occurred where employees were slightly injured whilst moving items from the 5th shelf. The 5th shelf is located 15 metres up from the ground.
This is a health and safety risk and could also be a reputation risk in the longer term.
Which of the following risk mitigations should the company employ?
The internal audit department has just completed an investigation into the HR department's procedures relating to new staff appointments The head of HR is unhappy with the draft report prepared by the lead internal auditor The report lists several cases in which appointments were made despite the fact that one or more of the entity's formal procedures were not followed
The head of HR has complained that the internal auditor's comments do not allow for the fact that the HR department's staff members are often very busy and do not always have time to conduct every check.
The internal auditor's comments also reflect a failure to complete documents None of the omissions have led to the appointment of an unsuitable member of staff
Which TWO of the following statements reflect an appropriate response by the board of directors to this report?
VBN is a multinational company that has 60 subsidiary companies that operate in 11 countries. VBN evaluates the performance of each subsidiary as an investment centre, using residual income to measure performance.
Which THREE of the following threats of dysfunctional behaviour may arise from VBN's use of residual income to measure subsidiaries' performance?
Which method of quantifying risk exposure can be used to calculate the maximum loss on a portfolio occurring within a period of time with a given probability?
D is a large oil refinery.
The managers have identified four risks shown in the risk map below:
Which of the risk mitigations listed below would be the best for dealing with the two risks classified as medium likelihood and high impact?
H has a floating rate loan that it wishes to replace with a fixed rate. The cost of the existing loan is LIBOR + 4%. H would have to pay a fixed rate of 8% on a fixed rate loan. H's bank has found a potential counterparty for a swap arrangement.
The counterparty wishes to raise a variable rate loan. It would pay LIBOR + 1% on a variable rate loan and 9% on a fixed rate.
The bank will require 10% of the savings from the swap and H and the counterparty will share the remaining saving equally.
Calculate H's effective rate of interest from this swap arrangement.
ABC is a large supermarket chain which also has online shopping and home deliveries It has a 24/7 service which runs on a central server allowing all customers to enter new orders at any time This is a business critical service which, if not available, may lead to customers turning to alternative supermarket chains offering similar services, resulting in immediate turnover loss and possible long term customer loss.
ABC is contemplating the implementation of a hot standby facility, not only to cover for emergency disaster recovery, but also to allow for business continuity, allowing necessary maintenance and updates without service interruption.
Which of the following cybersecurity objectives is ABC concerned about in this scenario?
Y Company wishes to recruit an employee who will have responsibility for the receipt and handling of cash
From the point of view of the internal auditor which THREE of the following would be most likely to provide useful information about the candidate"?
Which of the following are objectives of the audit planning procedure?
Which THREE of the following form part of the role of Internal Audit?
W plc is a large international supermarket chain. It has many thousands of suppliers and many thousands of others competing for "shelf space" in its supermarkets.
Which of the following would be appropriate provisions for W plc to include in its Ethical Code in relation to its suppliers?
R is a company running gas-fired power stations in Western Europe. The Risk Committee has just received a report that a power station built to the same design and specification in a developing country has recently collapsed. The causes of the collapse are unclear, but if something similar were to happen in Europe the consequences for R could be catastrophic.
Which of the following actions being considered by the Risk Committee are ethical?
As part of risk assessment exercise for a low-cost airline you are requested to match the risks listed below with the most approriate method of minimising or dealing with each risk.
ERT is choosing between two maintenance policies for its vehicles. The outcomes of these policies are difficult to predict and so ERT has run a simu-lation of both.
Policy 1 has an expected annual cost of $400,000 per year, with a standard deviation of $80,000.
Policy 2 has an expected value of $350,000, with a standard deviation of $150,000.
Which of the following statements are correct?
Match the descriptions shown in the boxes below with the method of quantifying risk exposure it best describes.
Which of the following statements are true of economic risk?
M is a listed company. It is hoping to invest in a risky new venture. M has a substantial amount of cash to invest in the venture. M would have found it difficult to raise new finance as it has a high level of gearing. Which of the following statements about stakeholders' conflicting interests are true?
The management of U is reviewing internal controls throughout the company. It has noted the following:-
1. In the trade receivables section, journal adjustments are made by the clerks, without any reference to their supervisor. Journal adjustments may relate to sales returns, discounts allowed, or transfers between accounts.
2. In the purchasing department, the purchasing manager selects and approves all suppliers, as they are the only person with sufficient experience to do so. They use a very limited number of suppliers because they can rely on these suppliers to provide goods of the quality required at a competitive price. They do not keep any documents in relation to negotiations with other potential suppliers or other quotes obtained.
In relation to the above, which of the following statements are valid?
The Dean of Information Technology at Capital City University wishes to develop a degree in 'ethical hacking" Students will graduate from this course with the skills needed to develop malware, so that they have the ability to reverse engineer malicious software The Dean believes that there will be strong demand for such graduates from employers in IT security and related fields.
Which TWO of the following statements are correct?
K is a manufacturing company. It has sourced new equipment from the US to equip a new production facility.
It has to make a payment of USD1,000,000 in 3 months' time.
K's production manager needs to know whether it is cheaper to use a forward contract or a money market hedge.
Current spot and forward exchange rates are as follows:
Current mid-point money market rates (annual) are as follows:
Ignoring taxation, which of the following statements is correct?
YY is a company which generates electricity from alternative energy sources It has just begun constructing a wind farm near a well-known beauty spot The protect has been controversial as campaigners say it will be noisy and unsightly.
The campaigners took legal action but lost the case Some of them have started a campaign of direct action against YY and are physically blocking roads leading to the site and attempting to intimidate YY's staff
YY has hired a security company to help it to protect its staff
Which of the following statements are view in relation to the ethics of this scenario''
Select ALL that apply.
With regard to the internal audit department, which TWO of the following statements are correct?
AZX sells electrical components.
AZX's annual turnover is S24 million. Half of all sales are on 30 days' (1 month) credit
5% of credit sales have to be written off as unrecovered debt
25% of such write off is subsequently recovered through debt collection and legal action.
What is the expected loss each year due to credit risk?
Jo is a well known entrepreneur who founded JIS. a global producer or high technology equipment JIS has grown rapidly and was listed two years ago JIS's share price has grown steadily since its listing Jo serves as both CEO and Chair A recent newspaper article has suggested that JIS would benefit from having a separate CEO and Chair
Which TWO of the following arguments are valid?
You are a member of the Chartered Institute of Management Accountants (CIMA) and you have recently taken up the position of Sales Manager with a company that is facing financial difficulties. The company's terms include a commitment to maintain specified profitability, liquidity and solvency measures; failure to do so would render bank loans immediately repayable. The draft financial statements show that the company has not succeeded in complying with all of these requirements.
The financial results are very dependent on various estimates such as receivables impairments. The Chief Executive Officer (CEO) has suggested that these be recalculated so as to bring the financial results within the requirements of the bank. He has asked you to sign pre-dated internal documentation which would imply that, as Sales Manager, you initiated these changes in the belief that they would enhance the accuracy of the Financial Statements.
Which TWO of the following courses of action available to you would be ethically acceptable according to the CIMA Code of Ethics?
Which of the following are the Committee of Sponsoring Organisations (COSO) key principles of enterprise risk management?
Select ALL that apply.
G is an administrator who works for TRF TRF issues its staff with laptop computers that can be linked to the corporate network via Wi-Fi when they are working in the office Staff are permitted to work from home and can connect their company laptops to TRF's network via the internet in order to access files and send and receive emails
The software on G's laptop has not been updated for several months When G last updated the software it erased a draft report that he had been working on from his machine Ever since, whenever he logs in and is automatically offered the opportunity to install available updates he clicks the 'install later' option on his screen Some of the outstanding updates relate to the laptop's operating system and others to the software applications such as word processing and spreadsheet packages
Which TWO of the following are correct?
The shares of a company have a beta factor of 1.15. Therefore, which of the following must be true?
C Ltd is a private, family-owned company which is hoping to become listed on a recognised Stock Exchange within the next two years. At the moment, the Board of Directors comprises five directors; four of whom are from the founding family and all of whom are involved in the day-to-day running of the business. The remaining director obtained a seat on the Board three years ago as a condition of an investment by a venture capital fund.
The Board meets in half-day sessions once a fortnight and the Board meetings are reasonably well run. All decisions are taken by the Board as a whole. There are no sub-committees.
Which of the following steps would it be appropriate for C Ltd to take in the light of the proposed listing?
W is a construction company which undertakes large projects for governments and other clients worldwide. Following extensive tendering processes, contracts are issued for successful tenders, and projects typically take three to five years to complete. Contracts are normally fixed-price and many have considerable penalty clauses.
Which of the following would be appropriate policies and controls for W to implement?
An oil company has entered into a joint venture with a competing oil company to develop a new oil field. The joint venture arrangement is intended to mitigate the risks associated with developing the oil field.
The following disclosure appears in the oil company's risk report:
"Many of our large projects and operations are conducted through joint ventures. These arrangements involve complex risk allocation and indemnification arrangements and we have less control over these activities than we would have if we had full ownership and control. Our partners may have economic or business interests that are opposed to ours, and may exercise the right to block key decisions or actions. We believe the joint arrangement is in our best interest."
Which of the following statements are correct?
T has its computer facilities in a building adjacent to its headquarters Severe structural problems have been discovered with this building and T has been advised that the only option is demolition and rebuild This leaves T with strategic decisions to make about its IT provision and it has decided to investigate the outsourcing of its services.
Which TWO of the following factors should T consider as most important at this stage?
Company C wishes to recruit an employee who will have responsibility for, among other things, the receipt and handling of cash. Which THREE of the following would be most likely to provide useful information about the candidate from the point of view of the Internal Auditor?
P sells mobile phones and accessories The directors of P are concerned that there is a high risk of fraud being carried out by employees in the retail stores. There is a high turnover of employees in the shops as the sales targets are difficult to meet
Which TWO of the following controls would reduce this risk?
D's Board has been advised by the auditors that D's control environment is weak and should be improved. Which TWO of the following measures will help to improve the control environment?
A US company has to pay £500,000 for a new machine.
You have the following information on currencies.
EUR 1 = £1.2300
EUR 1 = USD 1.6200
What is the cost of the machine in USD?
Give your answer to the nearest $.
HIW manufactures motorcycles and has factories in several countries HIW produces several different types of motorcycle, with different models often being tailored to suit the needs of customers in specific countries HIW has identified a positive net present value project to build a new factory in Farland, which will make motorcycles for sale in Farland and for export to neighbouring countries HIW has not previously traded in Fartand or its neighbours Farland is regarded as politically and economically unstable and its currency is highly volatile against other leading currencies
HIWs Board wishes to consider the interests of different stakeholder groups who will be affected by the investment in Farland The Board recognises that there could be conflict between the goals of maximising profit and of maximising shareholder wealth
Which THREE of the following statements are correct?
M, a manufacturing company, has had some problems with defects in one of the main products it produces. This product has been made by the company for many years and is very profitable. Last month it had over 300 defects reported by customers which is more than 15% of products sold. This is a reputation risk for M and is also affecting profitability.
Which of the following controls could M introduce to reduce defects and also increase profitability?
TDC is a company which runs gas-fired power stations in western Europe. The Risk Committee has just received a report that a power station built to the same design and specification in a developing country has recently collapsed. The causes of the collapse are unclear but the consequences for TDC would be catastrophic if something similar were to happen in Europe
Which of the following actions being considered by the Risk Committee are ethical?
Select ALL that apply
FBK produces motorbikes for the high end sports market. The company has recently developed a bike that uses a powerful electric motor instead of a petrol engine.
Which of the following are product risks?
Select ALL that apply.
YHU manufactures flour from wheal (hat it purchases from wheat wholesalers who buy the gram in bulk from farmers around the world and import it to YHU's home country.
YHU sells its flour as "organic and free from genetically modified grain" It is difficult to test wheat to ensure that it is organic and impossible to prove that it has not been obtained from genetically modified crops YHU must trust its wholesalers to check the provenance of the wheat that they buy for resale to YHU.
Without YHU's knowledge, a consignment of wheat that it has used to make flour was purchased from a farmer who used genetically modified seed. The wholesaler made an error in tracking this consignment through its inventory system and sold it to YHU as organic and free from genetically modified gram
Which TWO of the following are correct?
Achieving the budget is often used as a good performance measure. However, there are problems with budgets which may mean they are not always good measures of performance.
Which TWO of the following statements about budgets suggest that they should not always be used to measure performance?
THG is a quoted company that manufactures expensive clothes that are sold to upmarket department stores THG's Board has commissioned a stress test to identify the impact of strategic risks The consultant who is conducting the test is currently investigating the impact that a 1 % increase in interest rates would have on THG.
Which TWO of the following are valid reasons for including an increase in interest rates in the stress test?
Some sensitive computer systems are particularly attractive to cyber criminals. Passwords may be used as one element of restricting access to legitimate users, but the password systems should be designed with great care.
Which of the following methods would enhance a password access system?
Why is it potentially useful for an organisation to maintain a risk register?
MNO is a hotel chain which consists of many small local hotels spread throughout Sealand and often used by business customers It has decided to undertake scenario planning to see how it might be affected by changes in the future.
Which TWO of the following scenarios would be helpful in strategic scenario planning for MNO?
C Ltd is a private, family-owned company which is hoping to become listed on a recognised Stock Exchange within the next two years. At the moment, the Board of Directors comprises five directors; four of whom are from the founding family and all of whom are involved in the day-to-day running of the business. The remaining director obtained a seat on the Board three years ago as a condition of an investment by a venture capital fund.
The Board meets in half-day sessions once a fortnight and the Board meetings are reasonably well run. All decisions are taken by the Board as a whole. There are no sub-committees.
Which of the following steps would it be appropriate for C Ltd to take in the light of the proposed listing?
The treasurer of IOK is considering entering into a money market hedge in order to hedge a payable.
Which of the following might be valid explanations for the use of a money market hedge for this purpose?
