CB Risk Management & Mitigation 3 — Questions and Answers
Question 1: Which of the following best describes inherent risk in the context of internal controls?
- The risk remaining after controls are applied
- The risk that auditors will miss a material error
- The risk existing before any controls are in place (Correct answer)
- The risk of management override of controls
Correct answer: The risk existing before any controls are in place
Inherent risk is the susceptibility of a financial statement assertion to material misstatement assuming no related controls exist.
Question 2: A company sells goods on credit to customers without checking their creditworthiness. Which risk is the company most directly increasing?
- Liquidity risk
- Credit risk (Correct answer)
- Reputational risk
- Strategic risk
Correct answer: Credit risk
Credit risk is the possibility that a customer or counterparty will fail to meet their financial obligations, leading to a loss for the company.
Question 3: An accounts payable clerk notices that the same vendor invoice number appears twice in the payment queue. What is the best immediate action?
- Pay both invoices and investigate later
- Delete one invoice without documentation
- Flag the duplicate for supervisor review before processing (Correct answer)
- Contact the vendor for a credit memo
Correct answer: Flag the duplicate for supervisor review before processing
Flagging potential duplicates for review before payment is a preventive measure that avoids double-payment fraud while ensuring proper authorization.
Question 4: Which principle requires that financial record-keeping responsibilities be divided among multiple employees to reduce fraud risk?
- Materiality principle
- Segregation of duties (Correct answer)
- Matching principle
- Conservatism principle
Correct answer: Segregation of duties
Segregation of duties divides key financial tasks among different employees so that no single person controls all aspects of a transaction.
Question 5: A manufacturing company faces the risk that raw material prices could rise sharply. Which tool is commonly used to mitigate this commodity price risk?
- Accounts receivable aging report
- Futures contracts or hedging (Correct answer)
- Depreciation schedules
- Bank reconciliations
Correct answer: Futures contracts or hedging
Hedging with futures contracts locks in prices in advance, reducing exposure to adverse commodity price fluctuations.
Question 6: Which type of audit focuses specifically on evaluating the effectiveness of an organization's internal controls?
- External financial audit
- Tax audit
- Internal control audit (Correct answer)
- Forensic audit
Correct answer: Internal control audit
An internal control audit assesses whether a company's controls are designed and operating effectively to mitigate identified risks.
Question 7: A bookkeeper is responsible for issuing petty cash and also reconciling the petty cash fund. What risk does this create?
- Foreign exchange risk
- Opportunity for misappropriation of assets (Correct answer)
- Non-compliance with GAAP
- Increased depreciation errors
Correct answer: Opportunity for misappropriation of assets
Allowing one person to both disburse and reconcile petty cash removes an important check, enabling them to misappropriate funds and conceal the theft.
CB Risk Management & Mitigation 3
Which of the following best describes inherent risk in the context of internal controls?