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16/05/2018 CMA Test Bank

Custom Assessment Results 5/16/2018

Question 1
(2D1-LS28)

An organization is currently reviewing primary risk factors. This organization is at which step in the
Risk Management Process (RMP)?

 Determine the company's tolerance for risk.


Your Answer

 Evaluate the risk exposure.

 Monitor risk exposure.

 Implement an appropriate risk management strategy.

 You Answered Correctly!


During this step in the RMP, the specific nature of the exposure(s) must be identified and each
must then be quantified so that a decision can be made as to whether the level of risk is
acceptable to the organization.

Question 2
(2D1-LS29)

An organization is evaluating whether their risk management strategy is effective. This


organization is at which step in the Risk Management Process (RMP)?

 Determine the company's tolerance for risk.


Your Answer

 Monitor the risk exposure and the strategy.

 Implement an appropriate risk management strategy.

 Evaluate the risk exposure.

 You Answered Correctly!


Periodic monitoring assesses the status quo or any unexpected changes in the risk exposure
(as a result of market volatility, etc.). This step also considers whether the risk management
strategy selected is effective. Strategy adjustments may be necessary.
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Question 3
(2D1-LS31)

An organization can mitigate the risk of financial loss from natural disasters by purchasing:
Your Answer

 Hazard insurance.

 Health insurance.

 Liability insurance.

 Worker's compensation insurance.

 You Answered Correctly!


Hazard risks relate to natural disasters such as storms, floods, hurricanes, blizzards,
earthquakes, and volcanoes. Hazard insurance can be purchased in various forms to mitigate
(transfer) the risk of loss should a covered hazard occur.

Question 4
(2D1-LS23)

There are many strategies for risk response that an organization may choose from to reduce risk to
an acceptable level. Which action would not reduce risk for an organization?

 Purchasing property and casualty insurance.

 Requiring all employees to be bonded.


Your Answer

 Adjusting the organization's capital structure to maximize the cost of capital.

 Shifting costs from fixed to variable.

 You Answered Correctly!


This action would reduce risk by shifting risk to the bonding company.

Question 5
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(2D1-AT18)

Risk assessment is a process:

 that assesses the quality of internal controls throughout the year.

that establishes policies and procedures to accomplish internal control



objectives.

 of identifying and capturing information in a timely fashion.


Your Answer

 designed to identify potential events that may affect the entity.

 You Answered Correctly!


Risk assessment involves identifying all risks and vulnerabilities to which an organization is
exposed.

Question 6
(2D1-AT19)

Within a financial risk management context, the term Value at Risk (VAR) is defined as the:

 maximum value a company can lose.

 most likely negative outcome.


Your Answer

 maximum loss within a certain time period at a given level of confidence.

 worst possible outcome given the distribution of outcomes.

 You Answered Correctly!


VAR is defined as the maximum loss within a given period of time and given a specified
probability level (level of confidence).

Question 7
(2D1-LS30)

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Risk assessment is a function of management's attitude toward risk. A risk averse management
team typically:

 Does not prioritize mitigation of risks.


Your Answer

 Is more likely to spend money to mitigate risk.

 Is not willing to spend time to mitigate risk.

 Is not willing to spend money to mitigate risk.

 You Answered Correctly!


Risk assessment is a function of the management attitude toward risk as well as the estimate
of potential risk. For example, the more risk averse a management team is, the more they will
be willing to spend on mitigating the risk. Likewise, the greater the potential risk is perceived
to be, the more time and money management will be willing to spend to minimize or mitigate
the risk.

Question 8
(2D1-LS27)

Which of the following is not a key step in the Risk Management Process (RMP)?
Your Answer

 Evaluate capital reserves.

 Evaluate the risk exposure.

 Monitor the risk exposure.

 Determine the company's tolerance for risk.

 You Answered Correctly!


The four common steps in the RMP are: 1. Determine the company's tolerance for risk, 2.
Evaluate the risk exposure, 3. Implement an appropriate risk management strategy, and 4.
Monitor the risk exposure and the strategy.

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Question 9
(2D1-LS37)

The key components of enterprise risk management (ERM) include all of the following except:

 Assess risks.

 Monitor risk.
Your Answer

 Improved shareholder value.

 Set strategy and objectives.

 You Answered Correctly!


Improve shareholder value is not a key component of ERM although it is often a direct benefit
of effective ERM implementations. The basic components found in most ERM frameworks
include: set strategy and objectives, identify risks, assess risks, treat risks, control risks, and
communicate and monitor.

Question 10
(2D1-AT16)

Which of the following is not an example of a form of political risk associated with foreign direct
investment?
Your Answer

 Uncontrolled inflation.

 Civil war.

 Nationalization of factories.

 Change in government regime.

 You Answered Correctly!


Uncontrolled inflation is an economic risk, not a political risk.

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Question 11
(2D1-LS35)

To create, protect, and enhance shareholder value by managing uncertainties is the major goal of:

 Risk assessment.
Your Answer

 Enterprise risk management (ERM).

 Financial risk management.

 Operational risk management.

 You Answered Correctly!


IMA's Statement on Management Accounting ERM: Frameworks, Elements and Integration
states that the goal of ERM is: To create, protect, and enhance shareholder value by
managing the uncertainties that could either negatively or positively influence achievement
of the organization's objectives. Stronger internal controls, more effective corporate
governance, and implementation of ERM can lead to improved stability, reaction time, and
increased shareholder value.

Question 12
(2D1-LS25)

Risk that remains after all attempts management might take to mitigate them are commonly
called:

 Inherent risk.

 Financial risk.

 Operational risk.
Your Answer

 Residual risk.

 You Answered Correctly!


Risks are analyzed, considering likelihood and impact, as a basis for determining how they
should be managed. Responses to inherent risks are developed first. After completing that

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task, management develops a residual risk profile that identifies the risks that will remain
even after inherent risks have been dealt with.

Question 13
(2D1-LS39)

The COSO ERM framework includes eight interrelated components. Which component in the
framework implements policies and procedures to help ensure that risk responses are effectively
carried out?

 Risk assessment.
Your Answer

 Control activities.

 Objective setting.

 Event identification.

 You Answered Correctly!


Control activities include policies and procedures that are established and implemented to
help ensure that the risk responses are effectively carried out. The COSO model lists six
control activities: the assignment of authority and responsibility, a system of transaction
authorizations, adequate documentation and records, security of assets, independent
verifications, and adequate separation of duties.

Question 14
(2D1-LS34)

All of the following are investment options that an organization can use to reduce and mitigate
financial risk except:

 Arbitrage.

 Maturity matching.

 Hedging.
Your Answer

 Speculation.

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 You Answered Correctly!


Speculation would increase risk for the organization as it involves actively assuming
potentially high levels of risk to achieve significant possible gains. Speculation is employed
by risk takers, not those looking to mitigate risk.

Question 15
(2D1-LS24)

When a company purchases property and casualty insurance, they are attempting to mitigate risk
by practicing:

 Risk avoidance.
Your Answer

 Risk transfer.

 Operational risk.

 Exploiting risks.

 You Answered Correctly!


Purchasing insurance does not decrease the likelihood of a loss occurring, but in the event
that it does, a portion if not all of the loss is borne by (transferred to) the insurance company
that issued the policy.

Question 16
(2D1-LS38)

The COSO ERM framework includes eight interrelated components. Which component in the
framework identifies an organization's risk management philosophy, integrity, and ethical values?
Your Answer

 Internal environment.

 Risk assessment.

 Objective setting.

 Monitoring.

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 You Answered Correctly!


The internal environment refers to the organization's risk management philosophy and risk
appetite, integrity and ethical values, and the environment in which it operates.

Question 17
(2D1-AT21)

The Enterprise Risk Management (ERM)–Integrated Framework released by COSO expands upon
the 1992 COSO model and provides for a more robust and extensive focus on enterprise risk
management. Which of the following components are included in the ERM framework?

1. Internal control and monitoring


2. Internal environment, objective setting, and event identification
3. Risk assessment and risk response

 II only.

 III only.
Your Answer

 II and III.

 I only.

 You Answered Correctly!


The ERM framework includes eight interrelated components: internal environment, objective
setting, event identification, risk assessment, risk response, control activities, information
and communication, and monitoring. Internal control is not one of the eight components.

Question 18
(2D1-AT20)

Which of the following best explains why international business may increase risk?

 Selling internationally can greatly expand the company's market share.

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 Businesses can often obtain cheaper resources from international sources.


Your Answer

International businesses are generally bigger than domestic companies, thus



riskier.
Correct

The international business is faced with legal and financial risks not faced by

domestic companies.

 You Answered Incorrectly.


An international business is faced with legal and financial risks in foreign operations in
addition to the risk it faces in the domestic market.

Question 19
(2D1-LS17)

Organizations face many different types of risk. Risks that relate to natural disasters such as
storms, floods, hurricanes, blizzards, earthquakes, and volcanoes are commonly called:

 Operational risks.

 Financial risks.
Your Answer

 Hazard risks.

 Strategic risks.

 You Answered Correctly!


Hazard risks relate to natural disasters such as storms, floods, hurricanes, blizzards,
earthquakes, and volcanoes. Financial risks are caused by debt/equity decisions related to
financing the business. They include liquidity (short-term bill paying) and solvency (long-term
bill paying). Operational risk relates to the relationship of fixed and variable costs in the
organization's cost structure as well as the following: internal process failures, system
failures, personnel, and legal and compliance risks.

Question 20
(2D1-LS40)

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The COSO ERM framework includes eight interrelated components. The component called risk
response includes:
Correct

 Analyzing risks to determine how they should be managed.

 Classifying risks as either inherent or residual.

 Modifying internal controls as necessary.


Your Answer

 Establishing policies and procedures

 You Answered Incorrectly.


Under the risk response component of the COSO ERM framework, risks are analyzed,
considering their likelihood and impact, as a basis for determining how they should be
managed.

Question 21 
(2D1-CQ02)

A firm is constructing a risk analysis to quantify the exposure of its data center to various types of
threats. Which one of the following situations would represent the highest annual loss exposure
after adjustment for insurance proceeds?
Your Answer

Frequency of Occurrence: 1 year

 Loss Amount: $15,000

Insurance Coverage: 85%.

Frequency of Occurrence: 100 years

 Loss Amount: $400,000

Insurance Coverage: 50%.

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Frequency of Occurrence: 8 years

 Loss Amount: $75,000

Insurance Coverage: 80%.

Frequency of Occurrence: 20 years

 Loss Amount: $200,000

Insurance Coverage: 80%.

 You Answered Correctly!


This situation would represent the highest annual loss exposure after the adjustment for
insurance. The expected annual loss would be 12,750 [15,000(.85)]. The expected annual loss
for Frequency of Occurrence of 8 years = (75,000/8)(.8) = 9,375(.8) = 7,500. The expected
annual loss for Frequency of Occurrence of 20 years = (200,000/20)(.8) = 100,000(.8) = 8,000.
The expected annual loss for Frequency of Occurrence of 100 years = (400,000/100)(.5) =
4,000(.5) = 2,000.

Question 22
(2D1-LS33)

An organization can mitigate operational risk by:

 Modifying cost structures to make more costs differential costs.

 Modifying cost structures to make more costs step costs.


Your Answer

 Modifying cost structures to make more costs variable costs.

 Modifying cost structures to make more costs fixed costs.

 You Answered Correctly!


Operational risks may be lessened by shifting the organization's costs from fixed to variable.
For example, a company can outsource parts or activities rather than producing or
performing them internally.

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Question 23
(2D1-LS32)

An organization can mitigate the risk of financial loss from consumer product injuries by
purchasing:

 Health insurance.
Your Answer

 Liability insurance.

 Hazard insurance.

 Worker's compensation insurance.

 You Answered Correctly!


Liability insurance is a part of the general insurance system of risk financing to protect the
purchaser (the "insured") from the risks of liabilities imposed by lawsuits and similar claims.
It protects the insured in the event he or she is sued for claims that come within the coverage
of the insurance policy.

Question 24 
(2D1-LS36)

Direct benefits of enterprise risk management (ERM) include all of the following except:

 Improved reaction time to risk.


Correct

 Stronger internal controls.


Your Answer

 Improved firm stability.

 Increased shareholder value.

 You Answered Incorrectly.


Stronger internal controls, more effective corporate governance, and implementation of ERM
can lead to improved stability, reaction time, and increased shareholder value. Stronger
internal controls would not be a direct benefit of ERM.

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Question 25 
(2D1-LS26)

All of the following are potential benefits of risk management except:

 Reduced cost of capital.


Your Answer

 More effective resource allocations.

 Increased understanding of entity objectives.


Correct

 Decreased inherent risk.

 You Answered Incorrectly.


This is a benefit of risk management.

Question 26
(2D1-CQ01)

An organization would like to quantify the expected loss that may occur from two events. A
systems analyst estimates that the potential monetary loss from unauthorized alteration of
confidential information in their product development database could be $2,000,000 and has a 5%
likelihood of occurrence. In addition, there is a maximum potential loss of $5,000,000 with a 1%
likelihood of occurrence if the entire computer lab is destroyed by fire. The total expected loss of
these events is:

 $0.

 $50,000.

 $100,000.
Your Answer

 $150,000.

 You Answered Correctly!


An expected loss can be quantified by multiplying the potential monetary loss times the
likelihood of occurrence. The total expected loss of the two items in this organization are:
($2,000,000 × 0.05) + ($5,000,000 × 0.01) = $150,000.

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Question 27 
(2D1-LS22)

If a company determines that a particular risk could result in a loss of up to $50,000 and the
company is willing to spend up to $50,000 to mitigate the risk, this loss is commonly called all of
the following except:

 The maximum possible loss.

 The value at risk.


Correct

 The strategic loss.


Your Answer

 The catastrophic loss.

 You Answered Incorrectly.


In a business context, risk is defined as the level of exposure to a chance of loss.

Question 28
(2D1-AT17)

All of the following are valid reasons for expansion of international business by U.S. multinational
corporations, except to:

 secure new sources for raw materials.


Your Answer

 protect their domestic market from competition from foreign manufacturers.

 minimize their costs of production.

 find additional areas where their products can be successfully marketed.

 You Answered Correctly!


Protecting the domestic market from foreign competition is not a valid reason for expansion
overseas; all the other options are valid.

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