Audit Procedures & Risk Mitigation Flashcards
7 cards from real ERAC practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Audit Procedures & Risk Mitigation flashcards as text
During an energy risk audit, which sampling technique is most appropriate when the auditor suspects fraud concentrated in high-value transactions?
Answer: Stratified sampling
Stratified sampling divides the population into subgroups and oversamples high-risk strata, making it ideal when risk is concentrated in specific segments like high-value transactions.
A natural gas distributor wants to hedge against price volatility. Which derivative instrument provides the right but not the obligation to purchase gas at a fixed price?
Answer: Call option
A call option grants the buyer the right, but not the obligation, to purchase the underlying commodity at a specified strike price before expiration.
An energy auditor finds that a utility's Value at Risk (VaR) model uses a 95% confidence interval over a 10-day holding period. What does a VaR of $5 million mean in this context?
Answer: There is a 5% chance losses will exceed $5M over 10 days
A 95% VaR of $5M means there is a 5% probability that losses will exceed $5 million over the specified 10-day holding period.
Which internal control is most effective at preventing unauthorized energy trades from being executed?
Answer: Dual-control authorization with segregation of duties
Dual-control authorization combined with segregation of duties ensures no single individual can initiate and approve a trade, preventing unauthorized transactions.
During a compliance audit, an auditor discovers that a power company's risk limits were breached for three consecutive days without escalation. This primarily indicates a failure in:
Answer: Limit monitoring and escalation procedures
Failure to escalate limit breaches within the required timeframe indicates a breakdown in the limit monitoring and escalation control procedures.
What is the primary purpose of a mark-to-market (MTM) process in energy trading risk management?
Answer: To value open positions at current market prices for accurate risk exposure reporting
Mark-to-market revalues open positions using current market prices, providing an accurate real-time picture of the portfolio's profit, loss, and risk exposure.
An energy company's audit reveals that stress testing is performed only under historical scenarios. What gap does this represent in the risk mitigation framework?
Answer: Absence of hypothetical or forward-looking stress scenarios
Relying solely on historical scenarios misses plausible but unprecedented events; a robust framework also includes hypothetical and forward-looking stress tests.