Risk Assessment & Underwriting Flashcards

In auditing, 'walkthrough procedures' are primarily used to:

Answer: Confirm the auditor's understanding of controls and their design and implementation

Walkthroughs involve tracing transactions from initiation through the financial reporting process to confirm the auditor's understanding of how controls are designed and implemented.

Under the COSO framework, 'risk tolerance' in enterprise risk management refers to:

Answer: The acceptable variation around objectives the entity is willing to accept

Risk tolerance is the acceptable variation relative to the achievement of an objective, operating within the risk appetite set by management and the board.

An underwriter applying 'experience rating' adjusts premiums based on:

Answer: The insured's own past loss experience compared to expected losses for similar risks

Experience rating modifies standard premiums by comparing the insured's actual historical losses to the expected losses for the risk class, rewarding favorable loss experience.

When a CPA performs analytical procedures as risk assessment procedures, unexpected relationships in financial data should:

Answer: Be investigated to determine if they indicate a risk of material misstatement

Unexpected results from analytical procedures performed as risk assessment procedures require investigation to understand the cause and to determine whether they indicate a risk of material misstatement.

Which of the following is an example of 'catastrophe modeling' in insurance underwriting?

Answer: Using probabilistic simulations to estimate potential losses from events like hurricanes

Catastrophe models use computer simulations based on historical data, engineering, and meteorological science to estimate potential losses from low-frequency, high-severity events.

Under AU-C Section 265, a 'significant deficiency' differs from a 'material weakness' in that a significant deficiency:

Answer: Is less severe than a material weakness but warrants the attention of those charged with governance

A significant deficiency is less severe than a material weakness but important enough to merit attention by those charged with governance, and must be communicated in writing.

In property and casualty insurance underwriting, 'moral hazard' refers to:

Answer: The increase in risk-taking behavior by the insured after obtaining insurance coverage

Moral hazard occurs when insurance coverage reduces the insured's incentive to prevent losses, because the financial consequences of a loss are shifted to the insurer.