BEC 2 - Corporate Governance, Internal Control & Enterprise Risk Management Flashcards

Question

Internal Environment | (ERM)

Answer 1

The internal environment ***sets the tone for the organization***. It *establishes* a ***basis for*** the ***analysis of risk***, incorporating ***management's philosophy***, the entity's ***risk appetite***, & the values that are important to the entity such as ***integrity & ethical values***.

Answer 2

The conversion of an entity's mission into specific objectives, the progress toward which can be measured incorporating operating objectives, compliance objectives, & reporing objectives. What are the four areas in which ERM can assist the entity in achieving its objectives? * **Strategic Objectives** - sets the direction for the entity. * **Operational Objectives** - What is the goal, operationally & the effective use of the resources available. * **Compliance Objective** - make certain that division operate within approperate regulation & laws. * **Reporting Objectives** - how is the strategic objectives going to be reported/communicated.

Answer 3

The process used for *identifiying those events, both external and internal, that have the potential of affecting the entity's ability to achieve its objectives* so that those representing opportunities can be taken advantage of and and those threats can be avoided or prepared for. ERM identifies 7 technique for identifying relevant events: 1. Event Inventories 2. Internal analysis 3. Escalation or threshold triggers 4. Facilitated workshops or interviews 5. Process flow analysis 6. Leading event indicators 7. Loss event data methologies

Answer 4

**Leading Event Indicators -** Identifying data that is indicative of a pending event, such as a decline in interest rates being indicative in the demand for housing **Loss Event Data Methologies -** collections of info regarding past losses used to prevent repeating actions that would likely result in further losses.

Answer 5

An assessment by management of how identified risk in ERM should be dealth with. Options are: * **Acceptance** - where the entity would take NO action & simply allow the event to occur. * **Sharing** - where the entity might use insurance or fidelity bonds, entering into arrangement w/ another entity to share the risk, or outsourcing an activity. * **Reduction** - where an entity be required to change of internal environment or change in control activities. * **Avoidance** - where an entity may change an internal process, elimanate the line of business/product, stop using a particular raw material or buying from a specific supplier, or discontinue selling to a particular customer.

Answer 6

1. **Benchmarking** - which compares expected outcomes to common measures. 2. **Probabilistic** Models - which develop expected values using probabilities of possible outcomes. 3. **Non-Probabilistic** Models - which uses subjective assumptions to measure possible outcomes.

Answer 7

**Inherent Risk** - is the risk to the entity if NO action is taken. **Residual Risk** - is the risk to the entity that would remain IF action is taken & contrals are taken into account. **Event Risk** - is the risk that an unforseen event will negatively impact the company, such as a fire.

Answer 8

1. **Balance Sheet Approach** - Entity should identify the resources within its control & determine which ones might be vulnerable (which assets). 2. **Process Approach** - Involves evaluating the processes that are used to acieve the entity's objectives. 3. **Event Identification Approach** - evaluating by viewing the entity from a competition standpoint.

Answer 9

* The **future**, by nature, **cannot be predicted with certainty** * Some **events are beyond management control** & due tot the need to allocate scare resources, the entity will not necessarily be able to pursue all objectives to the extent desired * No system processs, regardless of how well designed & managed will necessarily always accomplish what it is inteded to do **(no absolute assurance)**

Answer 10

The balanced scorecard *assesses an organization's performance* by analyzing: 1. **Financial Information** 2. **Customer Satisfaction** 3. **Internal Processes** 4. **Innovation** **_NOTE_**: Correct! **Innovation** (sometimes called "Learning and Growth") is one of the four perspectives on the balanced scorecard.

Answer 11

Correct! The Revised Model Business Corporation Act requires a recommendation from the board of directors and subsequent approval of a majority of voting shareholders to voluntarily dissolve a corporation.

Answer 12

The Committee of Sponsoring Organizations of the Treadway Commission (**COSO**) is a joint initiative of five private sector organizations, established in the United States, dedicated to providing thought leadership to executive management and governance entities on critical aspects of organizational governance, business ethics, internal control, enterprise risk management, fraud, and financial reporting. ## Footnote *Created the framework for Internal Control.*

Answer 13

You answered correctly Correct! Return on investment is typically computed as: (Revenues - Expenses) / (Average Assets). The average assets for Vested is $1,600,000 [($1,200,000 + $2,000,000) / 2]. Accordingly, the return on investment for year 3 is ($1,100,000 - 700,000) / ($1,600,000) = 25%.

Answer 14

You answered incorrectly Incorrect! A director must act in the best interest of the corporation. All opportunities should be first offered to the corporation. If the corporation doesn’t wish to pursue the opportunity, then the board member may consider pursuing the opportunity for their own benefit.

Answer 15

You answered correctly Correct! When applying Enterprise Risk Management (ERM) principles, risks are prioritized in terms of their likelihood of occurrence and their expected impact on the company. *The* ***expected value of the risk is considered important*** because it will be compared to the expected values of risks associated with alternative decisions in order to determine risk priority.

Answer 16

You answered correctly Correct! The Enterprise Risk Management-Integrated Framework is a risk-based approach designed to help management evaluate the interrelated impacts of decisions and deal with multiple risks. It is separate from and additional to the COSO internal control framework and is a ***process effected by an entity’s board of directors, management, and other personnel.***

Answer 17

You answered incorrectly Incorrect! According to COSO, a manager within the department is best suited, as part of the enterprise risk management (ERM) process, to devise and execute risk procedures for that department. At this procedural level, the CEO has limited or no involvement, and the independent audit committee of the board of directors has none. The internal audit department could possibly assist with devising departmental risk procedures for other departments, but would have little to no involvement with their execution.

Answer 18

You answered incorrectly Incorrect! To calculate expected annual loss from user error, find the midpoint of the evenly distributed losses and multiply by the likelihood of losses. The midpoint of 1,000 and 30,000 is 15,500, calculated as (1,000 + 30,000)/2. Multiplying 15,500 by the 90% likelihood equals an expected annual loss from user error of $13,950.

BEC 2 - Corporate Governance, Internal Control & Enterprise Risk Management Flashcards

(42 cards)