Risk Assessment & Underwriting Flashcards
7 cards from real CPA practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Risk Assessment & Underwriting flashcards as text
In an actuarial context, 'credibility theory' is used in underwriting to:
Answer: Determine how much weight to give an individual risk's own loss experience versus industry data
Credibility theory provides a framework for blending an individual risk's own historical loss experience with broader industry or class data based on statistical reliability.
During an audit, a CPA discovers that management override of internal controls occurred related to revenue. This should be treated as:
Answer: A significant risk that requires immediate escalation and additional procedures
Management override of controls is always considered a significant risk under auditing standards and requires the auditor to perform specific additional procedures.
Which of the following would be classified as a 'pure risk' relevant to insurance underwriting?
Answer: The risk of fire destroying a building
Pure risk involves only the possibility of loss or no loss (e.g., fire damage), with no possibility of gain, making it insurable; speculative risks involve both gain and loss possibilities.
An auditor performing risk assessment at a bank should give special attention to the allowance for loan and lease losses (ALLL) because:
Answer: It involves significant management judgment and estimation uncertainty
The ALLL involves complex, subjective estimates of future credit losses, creating high inherent risk and requiring the auditor to evaluate the reasonableness of management's assumptions.
In insurance underwriting, a 'mono-line' insurer differs from a 'multi-line' insurer in that a mono-line insurer:
Answer: Writes only one type (line) of insurance coverage
A mono-line insurer specializes in one line of business (e.g., only workers' compensation), while a multi-line insurer writes multiple types of insurance coverage.
When evaluating the design effectiveness of a control, an auditor is assessing whether:
Answer: The control, if operating as designed, would prevent or detect material misstatements
Design effectiveness asks whether the control, if it operates as intended, is capable of preventing or detecting and correcting material misstatements in relevant assertions.
Which of the following underwriting actions represents a 'risk improvement' technique?
Answer: Requiring a sprinkler system installation before issuing property coverage
Risk improvement involves requiring the insured to take actions that reduce the actual risk exposure before or as a condition of coverage, such as installing fire suppression systems.