CMA Part 2 Section D- Risk Management

The CSB Company is assessing the potential loss from a production shutdown due to a strike at a supplier. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Short Strike $75,000 60% Medium Strike $240,000 30% Lengthy Strike $3,000,000 10% Based on this information, what is the expected loss from this production shutdown?

$417,000 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($75,000 × 60%) + ($240,000 × 30%) + ($3,000,000 × 10%) = $417,000. Therefore, this is the correct answer.

The Thomas Company is assessing the potential loss from a strike. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Short Strike $120,000 10% Medium Strike $480,000 30% Lengthy Strike $2,400,000 60% If Thomas actually experiences a loss of $2,400,000 from this strike, what is the unexpected loss from the strike?

$804,000 The unexpected loss from a situation is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For Thomas it is $1,596,000 calculated as: $120,000 × 10% + $480,000 × 30% + $2,400,000 × 60%. This means the unexpected loss is $804,000 ($2,400,000 − $1,596,000). Therefore, this is the correct answer.

The Thomas Company is assessing the potential loss from a strike. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $280,000 65% Moderate $700,000 30% Significant $1,390,000 5% If Thomas actually experiences a loss of $1,390,000 from this strike, what is the unexpected loss from the strike?

$928,500 The unexpected loss from a situation is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For Thomas it is $461,500 [($280,000 × 65%) + ($700,000 × 30%) + ($1,390,000 × 5%)]. This means the unexpected loss is $928,500 ($1,390,000 - $461,500). Therefore, this is the correct answer.

Which of the following is an example of the event inventories technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company considering expanding its business into a new country consults a list of events related to doing business in that country developed by a consulting firm.

Which of the following is not an example of legal risk?

A company decides to add a tremendous amount of debt to fund an expansion.

Which of the following actions is an example of risk mitigation?

A company reduces the check amount requiring two signatures from $10,000 to $5,000

Which of the following statements about debt is true concerning financial risk?

A company with no existing debt borrowing money will lower financial risk at first, but after a certain point issuing debt will increase financial risk.

Which of the following statements best describes inherent risk?

A company working to find a cure for cancer is riskier than a company selling clothing.

Which of the following is an example of compliance risk?

A company's advertisements include claims about its products that are not accurate.

Which of the following is an example of a financial risk?

A customer not paying for a purchase made on credit

Which of the following is an example of the loss event data technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A delivery company analyzes losses from accidents its vehicles were in to see if any patterns emerge.

Which of the following is an example of the loss event data technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A department store analyzes losses from shoplifting to see if any patterns emerge.

Which of the following is an example of a hazard risk?

A flood destroying an office building

Which of the following statements is correct?

A less risk averse management team is more likely to take on risk and a more risk averse management team is less likely to take on risk.

Which of the following statements about foreign currency is true concerning financial risk?

Accepting payments in foreign currency and making purchases in foreign currency increases financial risk.

Which of the following is not an action that will reduce operational risk?

Allowing sales managers to decide customer credit limits

Which of the following is not an action that will reduce operational risk?

Allowing sales managers to write off uncollectible accounts

Which of the following is not a common risk mitigation strategy?

Amplify the risk

Which of the following is an action that will increase financial risk?

Borrowing money and using the cash to pay a large dividend

Which of the following answers concerning quantitative risk assessment tools is correct?

Cash flow at risk, earning at risk, and earnings distributions are commonly used quantitative risk assessment tools.

Which of the following statements is correct?

Cash flow at risk, earnings at risk, and earnings distributions are commonly used quantitative risk assessment tools and risk identification, risk ranking, and risk mapping are commonly used qualitative risk assessment tools.

Which of the following actions would a more risk averse management team likely take?

Choosing a flood insurance policy that pays $500,000 in benefits rather than a policy that pays $250,000 in benefits.

Which of the following statements is true concerning cost-benefit analysis with respect to Enterprise Risk Management (ERM)?

Costs and benefits of possible actions within ERM can be stated quantitatively or qualitatively to be used in cost-benefit analysis.

Which of the following statements is true concerning Enterprise Risk Management (ERM)?

Costs and benefits should be taken into consideration when analyzing possible actions as part of ERM.

Which of the following statements is not correct?

Earnings distributions is a risk assessment tool that measures the maximum loss for a given period in terms of cash flow.

Which of the following is not an action that will reduce operational risk?

Eliminating dividends to conserve cash to pay off debt

What is an example of monitoring risk exposure and the risk management strategy?

Evaluating whether using multiple suppliers has resulted in an uninterrupted supply of raw materials at stable prices

Which of the following is not true concerning event identification techniques within an Enterprise Risk Management (ERM) approach to risk management?

Event identification techniques focus solely on identifying events that have negative impacts on the organization.

Which of the following situations best describes business risk?

Expenses being higher than budgeted due to unexpected shortages

Which of the following is an example of a hazard risk?

Fire destroying a warehouse

Elements of project risk identification include which one of the following?

Interviews and observations

The YGF Company is facing a shortage in its defined benefit pension fund. Which of the following actions taken by YGF is an example of risk exploitation?

Investing 100% of its pension fund in high-risk stocks

Which of the following actions is an example of risk retention?

Investing cash every quarter in a money market mutual fund to pay for possible flood damages to an office building

Which of the following actions is most likely to mitigate the risk of loss due to high financial leverage?

Issuing common equity and using the proceeds to retire (pay back early) debt

Which of the following actions is most likely to increase the risk of loss due to high financial leverage?

Issuing debt and using the proceeds to retire (buy back) common stock

Which of the following is a true statement about capital adequacy?

Liquidity involves the ability to pay for day-to-day operating expenses, solvency involves the ability to meet long-term obligations as they become due, and reserves involve the amount a bank must have on hand to pay depositors.

When purchasing temporary investments, which of the following best describes the risk associated with the ability to sell the investment in a short time without significant price concessions?

Liquidity risk

What is an example of implementing a risk management strategy?

Moving sensitive records to upper floors of buildings.

The LOH Company manufactures a product comprising 15% of its total sales in a country with a government having a history of seizing assets from foreign companies. Which of the following actions taken by LOH is an example of risk avoidance?

Moving the manufacturing of the product out of the country

Which of the following is an action that will increase financial risk?

Not establishing a sinking fund for bond repayments

Which of the following is a way a company can practice risk transfer?

Obtaining a life insurance policy on the CEO

Which of the following is not a way that firms can manage operational risk?

Obtaining insurance

Which of the following is most correct concerning portfolio management in an Enterprise Risk Management (ERM) program?

Portfolio management in an ERM context involves managing investments in current assets such as cash and inventory and managing investments in long-term assets such as property, plant, and equipment.

What is not a goal of risk management?

Reducing cash reserves.

The UIO Company currently pays its sales staff a combination of a fixed salary and sales commissions. Which of the following actions taken by UIO would be an example of risk exploitation?

Reducing commissions paid to its sales staff and increasing the salaries it pays them

The 2017 COSO (Committee of Sponsoring Organizations) Enterprise Risk Management (ERM) consists of five interrelated components. Which list below includes an item that is not one of the five components?

Risk Assessment & Response; Review & Revision

Which of the following actions would a more risk averse management team likely take?

Selling a division located in a country whose government has a reputation for seizing the assets of foreign companies

Which of the following is not a way a company can practice risk transfer?

Selling a warehouse that is located near a river

The OTF Company operates a line of business that is politically sensitive. Which of the following actions taken by OTF is an example of risk avoidance?

Selling off the politically sensitive line of business

Which of the following actions is most likely to decrease the risk of loss due to high financial leverage?

Selling unused equipment and using the proceeds to retire debt early

Which of the following is not an action that will reduce financial risk?

Sending employees to a training seminar where new accounting pronouncements will be discussed

Which of the following actions is an example of risk retention?

Setting cash aside on a regular basis in case a fire damages a manufacturing facility

Which of the following is most likely to occur when a company has a well-functioning risk management process in place?

The company will increase communication on the importance of regularly changing passwords.

Which of the following decreases the risk of a project?

The estimated time to obtain environmental approval for a construction project decreases from 12 months to 6 months.

Which of the following decreases the risk of a project?

The estimated time to obtain permits for a construction project decreases from 18 months to 9 months.

The 2017 COSO (Committee of Sponsoring Organizations) Enterprise Risk Management (ERM) Framework consists of five interrelated components. Which of the following statements about these components is true?

The five components apply throughout all of an organization's reporting units.

An organization has two options for dealing with a possible loss. Option A reduces the expected value of the loss from $350,000 to $150,000 at a cost of $220,000 and Option B reduces the expected value of the loss from $350,000 to $100,000 at a cost of $270,000. Which option is preferable?

The options are equally unattractive since they both result in the same reduction in income.

When evaluating financial risk, which ratios will be most beneficial to the analyst?

Total debt and interest coverage ratios

Which of the following actions is most likely to reduce a company's exposure to fluctuating prices for a material used in one of its products?

Training employees so that less material is wasted in the production process

Insurance is an example of which of the following risk mitigation strategies?

Transfer the risk

Which of the following actions is an example of risk exploitation?

Using variable-rate debt rather than fixed-rate debt

Which of the following statements about Value at Risk (VaR) is correct?

VaR is a quantitative risk assessment tool.

Which of the following statements is correct about Value at Risk (VaR)?

VaR measures prospective (future) risk rather than historical risk.

Which of the following measures indicates the potential loss a firm faces due to its trading activities?

Value at Risk

Which of the following statements about Value at Risk (VaR) is correct?

Value at Risk (VaR) is more useful than other risk assessment tools since it measures future or prospective risk rather than historical or retrospective risk.

Which of the following statements is not correct about Value at Risk (VaR)?

Value at Risk (VaR) measures the minimum loss that could occur from a risk within a given time period and with a given level of confidence.

Based on risk assessment techniques and the use of probabilities, firms should be prepared for which of the following outcomes?

Worst-case scenario

Joe Neil, CPA, has among his clientele a charitable organization that has a legal permit to conduct games of chance for fundraising purposes. Neil's client derives its profit from admission fees and the sale of refreshments, and therefore wants to "break even" on the games of chance. In one of these games, the player draws one card from a standard deck of 52 cards. A player drawing any one of four "queens" wins $5, and a player drawing any one of the other 12 "hearts", besides the "queen of hearts" (which wins $5), wins $2. Neil is asked to compute the price that should be charged per draw, so that the total amount paid out for winning draws can be expected to equal the total amount received from all draws. Which one of the following equations should Neil use to compute the price (P)?

[(4 ÷ 52) × $5] + [(12 ÷ 52) × $2] = P

Value at Risk (VaR) is most commonly used as a:

tracking measure to assess a firm's risk position.

The Andrew Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $50,000 50% Moderate $150,000 35% Significant $1,000,000 15% Based on this information, what is the maximum possible loss from this computer virus?

$1,000,000 The maximum possible loss is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $1,000,000 is the largest possible loss from this strike. Therefore, this is the correct answer.

The HNJ Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $100,000 30% Moderate $600,000 50% Significant $2,000,000 20% If HNJ actually experiences a loss of $2,000,000 from this virus, what is the unexpected loss from the virus?

$1,270,000 The unexpected loss from a situation is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For HNJ it is $730,000 calculated as: $100,000 × 30% + $600,000 × 50% + $2,000,000 × 20%. This means the unexpected loss is $1,270,000 ($2,000,000 − $730,000). Therefore, this is the correct answer.

The CSB Company is assessing the potential loss from a product recall. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $300,000 70% Moderate $900,000 25% Significant $1,800,000 5% If CSB actually experiences a loss of $1,800,000 from this recall, what is the unexpected loss from the defect?

$1,275,000 The unexpected loss from a situation is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For CSB it is $525,000 ($300,000 × 70%) + ($900,000 × 25%) + ($1,800,000 × 5%). This means the unexpected loss is $1,275,000 ($1,800,000 - $525,000). Therefore, this is the correct answer.

The Thomas Company is assessing the potential loss from a strike. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $280,000 65% Moderate $700,000 30% Significant $1,390,000 5% Based on this information, what is the maximum possible loss from this strike?

$1,390,000 The maximum possible loss from a situation is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $1,390,000 is the largest possible loss from this strike. Therefore, this is the correct answer.

The Thomas Company is assessing the potential loss from a strike. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Short Strike $120,000 10% Medium Strike $480,000 30% Lengthy Strike $2,400,000 60% Based on this information, what is the expected loss from this strike?

$1,596,000 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($120,000 × 10%) + ($480,000 × 30%) + ($2,400,000 × 60%) = $1,596,000. Therefore, this is the correct answer.

The XYZ Company is assessing the potential loss from a product defect. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $200,000 60% Moderate $600,000 35% Significant $1,600,000 5% Based on this information, what is the maximum possible loss from this product defect?

$1,600,000 The maximum possible loss from a situation is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $1,600,000 is the largest possible loss from this defect. Therefore, this is the correct answer.

The CSB Company is assessing the potential loss from a product recall. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $300,000 70% Moderate $900,000 25% Significant $1,800,000 5% Based on this information, what is the maximum possible loss from this product recall?

$1,800,000 The maximum possible loss from a situation is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $1,800,000 is the largest possible loss from this recall. Therefore, this is the correct answer.

The ABC Company is assessing the potential loss from a data breach. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $100,000 80% Moderate $400,000 15% Significant $1,900,000 5% Based on this information, what is the maximum possible loss from this data breach?

$1,900,000 The maximum possible loss from a situation is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $1,900,000 is the largest possible loss from this defect. Therefore, this is the correct answer.

The LTG Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $150,000 60% Moderate $450,000 30% Significant $2,100,000 10% If LTG actually experiences a loss of $450,000 from this virus, what is the unexpected loss from the virus?

$15,000 The unexpected loss from a situation is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For LTG it is $435,000 {($150,000 × 60%) + ($450,000 × 30%) + ($2,100,000 × 10%)}. This means the unexpected loss is $15,000 ($450,000 - $435,000). Therefore, this is the correct answer.

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 the 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

$150,000. 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 is: ($2,000,000 × 0.05) + ($5,000,000 × 0.01) = $150,000.

The ABC Company is assessing the potential loss from a data breach. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $100,000 80% Moderate $400,000 15% Significant $1,900,000 5% If ABC actually experiences a loss of $400,000 from this data breach, what is the unexpected loss from the breach?

$165,000 The unexpected loss from a situation is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For ABC it is $235,000 calculated as: $100,000 × 80% + $400,000 × 15% + $1,900,000 × 5%. This means the unexpected loss is $165,000 ($400,000 − $235,000). Therefore, this is the correct answer.

The XYZ Company is assessing the potential loss from a product defect. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $200,000 60% Moderate $600,000 35% Significant $1,600,000 5% If XYZ actually experiences a loss of $600,000 from this defect, what is the unexpected loss from the defect?

$190,000 The unexpected loss from a situation is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For XYZ it is $410,000 ($200,000 × 60%) + ($600,000 × 35%) + ($1,600,000 × 5%). This means the unexpected loss is $190,000 ($600,000 - $410,000). Therefore, this is the correct answer.

The HNJ Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $100,000 30% Moderate $600,000 50% Significant $2,000,000 20% Based on this information, what is the maximum possible loss from this computer virus?

$2,000,000 The maximum possible loss from a situation is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $2,000,000 is the largest possible loss from this computer virus. Therefore, this is the correct answer.

The LTG Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $150,000 60% Moderate $450,000 30% Significant $2,100,000 10% Based on this information, what is the maximum possible loss from this computer virus?

$2,100,000 The maximum possible loss from a situation is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $2,100,000 is the largest possible loss from this computer virus. Therefore, this is the correct answer.

The Thomas Company is assessing the potential loss from a strike. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Short Strike $120,000 10% Medium Strike $480,000 30% Lengthy Strike $2,400,000 60% Based on this information, what is the maximum possible loss from this strike?

$2,400,000 The maximum possible loss from a situation is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $2,400,000 is the largest possible loss from this strike. Therefore, this is the correct answer.

The CSB Company is assessing the potential loss from a production shutdown due to a strike at a supplier. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Short Strike $75,000 60% Medium Strike $240,000 30% Lengthy Strike $3,000,000 10% If CSB actually experiences a loss of $3,000,000 from this shutdown, what is the unexpected loss from the shutdown?

$2,583,000 The unexpected loss from a situation is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For CSB it is $417,000 calculated as: $75,000 × 60% + $240,000 × 30% + $3,000,000 × 10%. This means the unexpected loss is $2,583,000 ($3,000,000 − $417,000). Therefore, this is the correct answer.

The Andrew Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $50,000 50% Moderate $150,000 35% Significant $1,000,000 15% Based on this information, what is the expected loss from this computer virus?

$227,500 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($50,000 × 50%) + ($150,000 × 35%) + ($1,000,000 × 15%) = $227,500. Therefore, this is the correct answer.

The ABC Company is assessing the potential loss from a data breach. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $100,000 80% Moderate $400,000 15% Significant $1,900,000 5% Based on this information, what is the expected loss from this data breach?

$235,000 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($100,000 × 80%) + ($400,000 × 15%) + ($1,900,000 × 5%) = $235,000. Therefore, this is the correct answer.

The CSB Company is assessing the potential loss from a production shutdown due to a strike at a supplier. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Short Strike $75,000 60% Medium Strike $240,000 30% Lengthy Strike $3,000,000 10% Based on this information, what is the maximum possible loss from this production shutdown?

$3,000,000 The maximum possible loss from a situation is the largest possible loss from that scenario. It does not take the probability of losses or any loss other than the largest loss into consideration. $3,000,000 is the largest possible loss from this recall. Therefore, this is the correct answer.

The XYZ Company is assessing the potential loss from a product defect. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $200,000 60% Moderate $600,000 35% Significant $1,600,000 5% Based on this information, what is the expected loss from this product defect?

$410,000 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($200,000 × 60%) + ($600,000 × 35%) + ($1,600,000 × 5%) = $410,000. Therefore, this is the correct answer.

The LTG Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $150,000 60% Moderate $450,000 30% Significant $2,100,000 10% Based on this information, what is the expected loss from this computer virus?

$435,000 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($150,000 × 60%) + ($450,000 × 30%) + ($2,100,000 × 10%) = $435,000. Therefore, this is the correct answer.

The Thomas Company is assessing the potential loss from a strike. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $280,000 65% Moderate $700,000 30% Significant $1,390,000 5% Based on this information, what is the expected loss from this strike?

$461,500 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($280,000 × 65%) + ($700,000 × 30%) + ($1,390,000 × 5%) = $461,500. Therefore, this is the correct answer.

Dough Distributors has decided to increase its daily muffin purchases by 100 boxes. A box of muffins costs $2 and sells for $3 through regular stores. Any boxes not sold through regular stores are sold through Dough's thrift store for $1. Dough assigns the following probabilities to selling additional boxes: Additional Sales Probability 60 .6 100 .4 What is the expected value of Dough's decision to buy 100 additional boxes of muffins?

$52

The CSB Company is assessing the potential loss from a product recall. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $300,000 70% Moderate $900,000 25% Significant $1,800,000 5% Based on this information, what is the expected loss from this product recall?

$525,000 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($300,000 × 70%) + ($900,000 × 25%) + ($1,800,000 × 5%) = $525,000. Therefore, this is the correct answer.

XYZ Company performs a risk management assessment and has the following potential risk outcomes. What is its expected loss for this event? Loss Probability $250,000 20% $400,000 40% $750,000 30% $1,000,000 10%

$535,000 The correct answer is ($250,000 × 20%) + ($400,000 × 40%) + ($750,000 × 30%) + ($1,000,000 × 10%) = $535,000.

The HNJ Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $100,000 30% Moderate $600,000 50% Significant $2,000,000 20% Based on this information, what is the expected loss from this computer virus?

$730,000 To determine the expected loss from a scenario, the loss from each possibility is multiplied by the likelihood of each loss. Then, the products are added together. In this example, the expected loss is ($100,000 × 30%) + ($600,000 × 50%) + ($2,000,000 × 20%) = $730,000. Therefore, this is the correct answer.

The Andrew Company is assessing the potential loss from a computer virus. The following table lists three possible scenarios, the expected loss under each scenario, and the likelihood of each scenario. Scenario Expected Loss Likelihood Minor $50,000 50% Moderate $150,000 35% Significant $1,000,000 15% If Andrew actually experiences a loss of $1,000,000 from this strike, what is the unexpected loss from the strike?

$772,500 The unexpected loss is defined as the difference between the expected loss from the situation and the actual loss experienced. The expected loss from the situation is the weighted-average of the possible losses. For Andrew it is $227,500 calculated as: $50,000 × 50% + $150,000 × 35% + $1,000,000 × 15%. This means the unexpected loss is 772,500 ($1,000,000 − $227,500). Therefore, this is the correct answer.

Consider the steps in the risk management process below: 1. Implement a risk management strategy. 2. Monitor risk exposure and the risk management strategy. 3. Determine the company's tolerance for risk. 4. Evaluate the company's risk exposure. What is the proper order of steps in the risk management process?

3, 4, 1, 2

Which of the following is a true statement about capital adequacy?

A bank's ability to pay the mortgage on its building over the life of the mortgage is a solvency issue and its ability to pay employee wages and salaries is a liquidity issue.

Which of the following is an example of the event inventories technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company considering extending credit to customers consults a list of events related to selling on credit developed by an industry group.

Which of the following is an example of the internal analysis technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company considering purchasing a new computer application uses its own experience with the company as well as customer reviews to evaluate whether to purchase the application.

Which of the following is an example of the internal analysis technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company considering purchasing a new piece of equipment uses its own experience with the manufacturer of the equipment as well as customer reviews to evaluate whether to purchase the equipment from the manufacturer.

Which of the following is not an example of legal risk?

A company decides to use variable-rate debt to fund an expansion even though interest rates are expected to rise before the debt is due.

Which of the following is an example of political risk?

A company has a manufacturing plant in a foreign country that is seized by the government.

Which of the following is an example of the process flow analysis technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company maps out the process for determining the accrual for uncollectible accounts expense.

Which of the following is an example of the process flow analysis technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company maps out the process for the approval and payment of accounts payables.

Which of the following is an example of the leading event indicators technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company monitors absenteeism, lateness, and disruptive behavior on the job to determine employees who may be more likely to commit fraud against the company.

Which of the following is an example of the leading event indicators technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company monitors the number of customer complaints to determine which customers the company is in danger of losing due to poor service.

Which of the following is an example of the escalation or threshold triggers technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A company monitors the number of days since a payment due date has passed and suspends a customer's credit once it reaches 10 days late.

Which of the following is true regarding insurance?

A company purchases hazard insurance to protect against losses from earthquakes and purchases liability insurance to protect against lawsuits from employees for workplace harassment.

Which of the following is true regarding insurance?

A company purchases hazard insurance to protect against losses from fire damage and purchases liability insurance to protect against lawsuits arising from a customer falling down and getting injured in a store.

Which of the following is true regarding insurance?

A company purchases hazard insurance to protect against losses from flood damage and purchases liability insurance to protect against customer lawsuits for malfunctioning products.

Which of the following is true regarding insurance?

A company purchases hazard insurance to protect against losses from wildfires and tornadoes and purchases liability insurance to protect against employee lawsuits for wrongful termination.

Which of the following is an example of a financial risk?

A company violating a debt covenant and being in technical default

Which of the following is not a way to reduce operational risk?

A company with no debt issuing debt in order to retire higher-cost equity

Which of the following statements is correct concerning how management's attitude toward risk impacts the management of risk?

A more risk averse management team would be less willing to take on risk than a less risk averse management team would be.

Which of the following actions would a less risk averse management team likely take?

A pharmaceutical company changing its sales mix to include a greater percentage of products under patent and a lower percentage of generic products

Which of the following is an example of a strategic risk?

A product becoming obsolete when a competitor introduces a new product

Which of the following is an example of the escalation or threshold triggers technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

A retail store comparing weekly sales in the current year to sales in the same week for the previous year and enacting price-cuts once a decrease of 10% is reached

Which of the following is an example of an operational risk?

An employee accidentally emailing salary data throughout the company

Which of the following is an example of an operational risk?

An employee accidentally opening an e-mail attachment that results in a virus infecting the company's IT system

Which of the following statements is correct?

An increase in the estimated time to design a product increases the risk of a project and an increase in the range of possible input prices increases the risk of a project.

Which of the following statements is correct?

An increase in the estimated time to hire and train employees increases the risk of a project and an increase in the number of possible delivery options increases the risk of a project.

Which of the following statements is correct?

An increase in the time to receive environmental clearance for building a pipeline increases the risk of building the pipeline and having a guaranteed price for raw material purchases is less risky than paying prevailing market prices for raw materials.

Which of the following statements is correct?

An increase in the time to receive regulatory approval for a merger increases the risk of the merger and having a guaranteed wage rate for employees decreases the risk as compared to paying prevailing market wage rates for employees.

Which of the following is not correct concerning the role of corporate governance in Enterprise Risk Management (ERM)?

An organization's board of directors is typically not involved in its ERM program.

What is an example of implementing a risk management strategy?

Automatically updating virus definitions on all computers

What is an example of implementing a risk management strategy?

Automatically updating virus definitions on all computers.

An investor owns stock and is concerned that prices may fall in the future. Which strategy could help her hedge against adverse market conditions?

Buy a put option.

Which of the following actions would a less risk averse management team likely take?

Buying out a partner in a venture to produce and sell a high-risk product and continuing to produce and sell the product itself

Which of the following statements is correct?

Cash flow at risk is a quantitative risk assessment tool that measures the maximum loss for a given period in terms of cash flow.

Which of the following statements is not correct?

Cash flow at risk is a risk assessment tool where management uses intuition to estimate the maximum loss for a given period in terms of cash flow.

Which of the following actions would a less risk averse management team likely take?

Decreasing credit standards and offering larger credit limits

What is an example of determining a company's tolerance for risk?

Determining the acceptable defect rate in a manufacturing process.

What is an example of determining the company's tolerance for risk?

Determining the amount of revenue and assets that the company would be willing to risk in the event that a foreign government seized control of the company's property

What is an example of evaluating a company's risk exposure?

Determining the amount of revenue expected to be received in a foreign currency

Which of the following most accurately describes enterprise risk management (ERM)?

ERM is designed to identify potential events that may affect the entity.

Which of the following statements regarding enterprise risk management (ERM) is not correct?

ERM is intended to replace an entity's internal control framework.

Which of the following is not true concerning Enterprise Risk Management (ERM)?

ERM only involves upper management and the board of directors.

Which of the following statements is correct?

Earnings at risk is a quantitative risk assessment tool that measures the maximum loss for a given period in terms of accrual earnings.

Which of the following statements is not correct?

Earnings at risk is a risk assessment tool that utilizes graphs of potential returns and the probabilities of those returns to assess risk.

Which of the following measures the effect of risk management on reducing the volatility of earnings associated with an event?

Earnings distributions

Which of the following statements is correct?

Earnings distributions is a quantitative risk assessment tool that utilizes graphs of potential accrual earnings and the probabilities of those values to assess risk.

Which of the following statements is correct?

Earnings per share distributions is a quantitative risk assessment tool that utilizes graphs of potential EPS values and the probabilities of those values to assess risk.

Which of the following statements is not correct?

Earnings per share distributions is a risk assessment tool that measures the maximum loss for a given period in terms of accrual earnings.

Which of the following is not true concerning Enterprise Risk Management (ERM)?

Enterprise Risk Management (ERM) is a more effective approach to risk management because it manages risk in many individual silos instead of trying to manage them at the organization level.

Which of the following is an action that will decrease financial risk?

Establishing a sinking fund for bond repayment

Which of the following is not an action that will reduce operational risk?

Establishing a sinking fund to build up cash to pay off a debt offering

What is an example of evaluating a company's risk exposure?

Estimating how difficult it would be for company buildings to be broken into.

What is an example of monitoring risk exposure and the risk management strategy?

Evaluating the effectiveness of automatically updating virus definitions on all computers.

What is an example of monitoring risk exposure and the risk management strategy?

Evaluating the effectiveness of security enhancements at reducing the risk of facilities being broken into.

Which of the following sources of uncertainties would be affected by the firm's debt versus equity decision?

Financial risk

Which of the following is a way a company can practice risk transfer?

Forming a joint venture to manage the development and sale of a risky product

Which of the following is an example of political risk?

Having government contracts be responsible for a relatively high percentage of a company's revenue.

Which of the following is not a way to reduce operational risk?

Having multiple people use one cash register at a department store

Which of the following is true regarding insurance?

Hazard insurance protects against damage caused by accidents or natural disasters and liability insurance protects against lawsuits from employment practices or faulty products.

Which of the following is true regarding insurance?

Hazard insurance protects against damage caused by accidents or natural disasters but not against damage caused by faulty products or injuries suffered on a company's property.

A Bangladeshi wholesale export company publishes a price list in euros for the products sold by its European Union business unit. The management of the export company has determined that even if there are fluctuations in exchange rates between the Bangladeshi taka and the European euro, it is not practical for it to change its product prices every six months. Which one of the following is the most appropriate solution available to the export company to managing this risk?

Hedging the risk through financial instruments

Your client wants your advice on which of two alternatives he should choose. One alternative is to sell an investment now for $10,000. Another alternative is to hold the investment for three days, after which he can sell it for a certain selling price based on the following probabilities: Selling Price Probability 5,000 .4 8,000 .2 12,000 .3 30,000 .1 Using probability theory, which of the following is the most reasonable statement? (Note: This solution does not provide for an analysis or evaluation of the individual's aversion to risk.)

Hold the investment three days because the expected value of holding exceeds the current selling price.

Which of the following is the correct order of the risk management cycle?

Identify the risk, analyze the risk, evaluate the risk, manage the risk, monitor the risk.

Which of the following ways is not a method to effectively address liquidity and solvency issues?

Increase low-margin sales.

Which of the following is not an action that will reduce financial risk?

Increasing the percentage of raw materials purchased using foreign currencies

The Benjamin Company makes 20% of its sales in a foreign currency. Which of the following actions taken by Benjamin is an example of risk exploitation?

Increasing the percentage of sales in a foreign currency to 40%

Which of the following actions is most likely to increase the risk of loss due to high operating leverage?

Increasing the salary and reducing the commission rate paid to the sales staff

The 2017 COSO (Committee of Sponsoring Organizations) Enterprise Risk Management (ERM) consists of five components. Which list below includes an item that is not one of the five components?

Information, Communication, & Reporting; Risk Assessment & Response

Which of the following statements is incorrect?

Inherent risk is the risk remaining after risk avoidance, risk sharing, and risk mitigation strategies have been implemented.

Standard deviation and expected return information for the following four investments, selling for the same price, is presented here. Investment. SD Expected Return A 23% 18% B 15% 17% C 11% 7% D 10% 10% Which investment is the best choice in terms of the risk/return relationship?

Investment B

Which of the following is a way a company can practice risk transfer?

Issuing debt to raise funds needed for a new product launch

Which of the following is not a benefit of risk management?

It helps companies reduce risk to the lowest level possible.

Which of the following is not a benefit associated with the implementation of an enterprise risk management system?

It is easy and not very costly to implement.

Which of the following is correct concerning corporate governance in an Enterprise Risk Management (ERM) program?

It is recommended that organizations establish a Chief Risk Officer (CRO).

Which of the following actions isleast likelyto mitigate the risk of loss due to damage to a manufacturing facility located near a river?

Moving the production of one product out of the facility and moving the production of another product into the facility

Which of the following actions is an example of risk avoidance?

No longer selling on credit

Which of the following is the correct definition of risk transfer?

Offloading some portion of risk to another party

A company has developed a new, technologically advanced, paper-thin solar panel for residential home use. The company has decided to start selling this solar panel worldwide next month. As this is a technologically innovative product, one risk that the company faces in selling the solar panel is possible product failure. This risk of product failure is best representative of what type of risk to the company?

Operational risk

Which of the following is not true regarding operational risk?

Operational risk can be caused by a lack of appropriate insurance coverage.

Which of the following statements is true?

Operational risk can be caused by a lack of effective internal controls while financial risk can be caused by fluctuations in exchange rates.

Which of the following statements is true?

Operational risk can be caused by the lack of appropriate employee training while financial risk can be caused by fluctuations in interest rates.

Which of the following is not true regarding operational risk?

Operational risk can be caused by using too much debt to finance activities.

An organization has two options for dealing with a possible loss. Option A reduces the expected value of the loss from $100,000 to $10,000 at a cost of $30,000 and Option B reduces the expected value of the loss from $100,000 to $4,000 at a cost of $55,000. Which option is preferable?

Option A is preferable because it has a higher "net benefit" than Option B has.

An organization has two options for dealing with a possible loss. Option A reduces the expected value of the loss from $200,000 to $20,000 at a cost of $60,000 and Option B reduces the expected value of the loss from $200,000 to $10,000 at a cost of $90,000. Which option is preferable?

Option A is preferable because it has a higher "net benefit" than Option B has.

An organization has two options for dealing with a possible loss. Option A reduces the expected value of the loss from $250,000 to $80,000 at a cost of $70,000 and Option B reduces the expected value of the loss from $250,000 to $40,000 at a cost of $90,000. Which option is preferable?

Option B is preferable because it has a higher "net benefit" than Option A has.

An organization has two options for dealing with a possible loss. Option A reduces the expected value of the loss from $350,000 to $90,000 at a cost of $120,000 and Option B reduces the expected value of the loss from $350,000 to $40,000 at a cost of $150,000. Which option is preferable?

Option B is preferable because it has a higher "net benefit" than Option A has.

Which of the following is true concerning event identification techniques within an Enterprise Risk Management (ERM) approach to risk management?

Organizations tend to use multiple event identification techniques within an ERM approach to identify risk exposure.

Which of the following actions is least likely to reduce a company's exposure to fluctuating prices for a material used in one of its products?

Producing the product in two facilities rather than in just one facility

A company interested in mitigating the risk of foreign exchange losses on purchases in a foreign currency can take which of the following actions?

Purchase options to buy foreign currency for dollars at a predetermined rate.

A company interested in mitigating the risk of foreign exchange losses on sales in a foreign currency can take which of the following actions?

Purchase options to sell foreign currency for dollars at a predetermined rate

Which of the following is a way a company can practice risk transfer?

Purchasing an insurance policy to cover a warehouse and its contents in case of theft or damage

Which of the following is a way a company can practice risk transfer?

Purchasing an option to receive a fixed amount of dollars in exchange for a given amount of a foreign currency

Which of the following actions is an example of risk sharing?

Purchasing flood insurance

Which of the following actions would a more risk averse management team likely take?

Purchasing forward contracts to lock in a certain amount of dollars in exchange for foreign currency to be received from sales in a foreign country

Which of the following actions would a more risk averse management team likely take?

Purchasing options to lock in a price of a raw material that tends to fluctuate in price.

The REA Company produces and sells a product that uses a raw material that is subject to large price swings. Which of the following actions that REA could take is an example of risk sharing?

Purchasing options to pay a known amount for materials for a given period of time

The HEJ Company sells products and services in foreign currencies. Which of the following actions taken by HEJ is an example of risk sharing?

Purchasing options to receive a set amount of dollars for a given amount of a foreign currency regardless of spot (current) exchange rates

A company is interested in mitigating the risk of foreign exchange losses on purchases in a foreign currency. Which action below is least likely to mitigate this risk?

Purchasing options to sell foreign currency for dollars at a predetermined rate

When a firm does a risk assessment, it should use which of the following methods?

Quantitative and qualitative methods

Which of the following is not an action that will reduce operational risk?

Reducing sales commissions and increasing salaries paid to the sales staff

Which of the following actions is most likely to mitigate the risk of loss due to high operating leverage?

Reducing the salary and increasing the commission rate paid to the sales staff

Which of the following is an action that will decrease financial risk?

Refinancing debt with a 6% interest rate to debt with a 4% interest rate

Which of the following actions is most likely to decrease the risk of loss due to high operating leverage?

Renegotiating a contract to use intellectual property from one where the payment is a fixed amount every quarter to a payment based on the previous quarter's sales using the intellectual property

Which of the following actions is an example of risk mitigation?

Requiring employees to change computer passwords every 30 days

Which of the following statements concerning residual risk and inherent risk is correct?

Residual risk measures the amount of risk a company is bearing while inherent risk does not necessarily measure the risk a company is bearing.

Which of the following is not an action that will reduce operational risk?

Restructuring a contract with a delivery company from one where the company pays per delivery to one where the company pays a monthly fixed fee and receives unlimited deliveries for the month

When a firm develops internal activities to manage risk, it is using which of the following risk mitigation strategies?

Retain the risk

All of the following are components of the 2017 COSO ERM Framework except:

Risk Diversification

Which of the following is not correct concerning corporate governance in an Enterprise Risk Management (ERM) program?

Risk analysis is a component of an organization's corporate governance.

Which of the following is not a type of strategy a company can employ for responding to risk?

Risk aversion

Which of the following statements is correct?

Risk identification involves brainstorming to list the risks facing an organization

Which of the following statements is not correct?

Risk identification involves managers using their intuition to rank risks according to the probability of occurrence and magnitude of loss.

Which of the following concerning qualitative risk assessment tools is correct?

Risk identification, risk ranking, and risk mapping are qualitative risk assessment tools.

Which of the following statements is correct?

Risk identification, risk ranking, and risk mapping are qualitative risk assessment tools.

The risk management tactic where the organization classifies its risks into different levels, often with visual representation, is a(n):

Risk map.

Which of the following statements is not correct?

Risk mapping involves brainstorming to list the risks facing an organization.

Which of the following statements is correct?

Risk mapping is a qualitative risk assessment tool where risks are displayed visually with the probability of occurrence on one axis and the magnitude of loss on the other axis.

Which of the following is not a quantitative method used to assess risk?

Risk maps

Which of the following statements is correct?

Risk ranking involves managers using their intuition to rank risks according to the probability of occurrence and magnitude of loss.

Which of the following statements is not correct?

Risk ranking involves visually displaying the probability of a risk occurring on one axis and the magnitude of the loss on the other axis.

When a company purchases property and casualty insurance, it is attempting to mitigate risk by practicing

Risk transfer.

Which of the following concerning risk assessment is not correct?

Risks cannot be assessed qualitatively since using empirical analysis is the only way to assess risks.

Which of the following situations best describes business risk?

Sales revenue not meeting expectations due to demand being lower than expected

A management accountant is leading the effort to completely identify all of the risks that face her company. Which one of the following best identifies a technique that she should consider using?

Self-assessment workshops

Which of the following actions is an example of risk retention?

Setting cash aside on a regular basis to cover uncollectible accounts

Which of the following actions is an example of risk retention?

Setting cash aside on a regular basis to provide funds in case the company is sued for a hostile work environment

Which of the following is not a way a company can practice risk transfer?

Stopping the granting of credit to customers and only making cash sales

A toothbrush manufacturer has noticed a shift of customer preferences in its growing Asian sales market toward electronic battery-operated toothbrushes from manual toothbrushes. This shifting of customer tastes best represents what type of risk to the toothbrush manufacturer?

Strategic risk

Which of the following is most likely to occur when a company has a well-functioning risk management process in place?

The company will increase resources dedicated to ensuring all company activities are conducted safely and in accordance with laws, regulations, and safety standards.

Which of the following increases the risk of a project?

The company's contract for electricity at a guaranteed rate expires during the project completion. Absent the contract, the company pays market rates for electricity.

The 2017 COSO (Committee of Sponsoring Organizations) Enterprise Risk Management (ERM) Framework consists of five components. Which of the following statements about these components is not true?

The five components are independent of each other.

To assist in an investment decision, Gift Co., selected the most likely sales volume from several possible outcomes. Which of the following attributes would that selected sales volume reflect?

The greatest probability

Which of the following is an example of the facilitated workshops and interviews technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

The head of financial reporting holds a meeting with all employees in the area to get their ideas on possible risk areas within financial statements for the upcoming year.

Which of the following is an example of the facilitated workshops and interviews technique of identifying events within an Enterprise Risk Management (ERM) approach to risk management?

The head of the internal audit function holds a meeting with all employees to get their ideas on possible risk areas that should be investigated in an upcoming period.

An organization has two options for dealing with a possible loss. Option A reduces the expected value of the loss from $300,000 to $140,000 at a cost of $200,000 and Option B reduces the expected value of the loss from $300,000 to $90,000 at a cost of $250,000. Which option is preferable?

The options are equally unattractive since they both result in the same reduction in income.

Hughes Continental is assessing its business risk. Which of the following factors would not be considered in the analysis?

Use of preferred stock instead of common stock to finance acquisitions

The KMN Company sells products and services on credit and for cash. Which of the following actions taken by KMN is an example of risk sharing?

Using a third-party financial institution who will accept a portion of the risk of uncollectible accounts in exchange for a percentage of each credit sale

The uncertainty in return on assets due to the nature of a firm's operations is known as:

business risk.

Management philosophy and operating style would most likely have a significant negative influence on the entity's control environment when:

management is dominated by one individual.

Within a financial risk management context, the term "value at risk" (VAR) is defined as the

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

A large multinational company currently has its information technology (IT) department located in Germany. In order to reduce the risk of system failure, the company has decided to split up the IT department into two geographically separate locations and set up a new location in Singapore. The company still can face a catastrophic system failure, but the risk will be greatly reduced. The risk that remains after the company sets up the second IT department in Singapore is best described as

residual risk

When an organization decides it will develop or maintain internal activities to manage a risk, it is electing to __________ that risk.

retain

Two primary factors that contribute to business risk are:

sales volatility and the degree of operating leverage.