RSK2601 MCQ EXAM PACK 2025

TEST BANK Enterprise Risk Management S - The Marketplace to Buy and Sell your Study Material 1 RSK2601 TEST BANK Question 1 Which one of the following is a benefit of effective risk and opportunity management? 1) Improved profit certainty 2) Increased shareholder value 3) Increased stakeholder confidence Correct option 3 4) Lower economic returns Explanation Improved cost certainty, sustainable shareholder value, increased stakeholder confidence and higher economic returns are all benefits of effective risk and opportunity management. Question 2 The board’s role should be to steer the corporation towards corporate governance policies that support … 1) long-term sustainable growth in shareholder value Correct option 1 2) short-term sustainable growth in shareholder value 3) short-term sustainable growth in stakeholder value 4) long-term sustainable growth in stakeholder value Explanation The board’s role should be to steer the corporation towards corporate governance policies that support long-term sustainable growth in shareholder value. Question 3 Which one of the following statements is not considered a benefit of Enterprise Risk Management (ERM)? 1) Minimise operational surprises and losses. 2) Enhance corporate governance. 3) Comply with relevant legal and regulatory requirements. 4) Align return appetite and strategy. Correct option 4 Explanation Benefits of Enterprise Risk Management (ERM) include minimisation of operational surprises and losses, enhancing corporate governance, complying with relevant legal and regulatory requirements and aligning risk appetite and strategy. The determination of the risk appetite of a business is vital in the ERM process because it shows how much risk the business is willing to take on. Question 4 The King II report moved away from the … bottom-line principle to a … bottom-line principle. 1) double - triple 2) single - triple Correct option 2 3) single - double 4) double – single 2 Explanation The King II report moved away from the single bottom-line principle to a triple bottom-line principle. Question 5 As of June 2010, companies listed on the JSE are expected to comply with … 1) King I 2) King II 3) King III Correct option 3 4) King IV Explanation As of June 2010, companies listed on the JSE are expected to comply with King III. Question 6 King III applies to … a) All listed companies on the JSE b) Banks c) Financial institutions d) Insurance institutions Choose the correct option. 1) a, b, c, d 2) a, b, c 3) a, b, d Correct option 3 4) a, b Explanation King III applies to all listed companies on the JSE, banks, financial and insurance institutions. Question 7 In financial ratio analysis, efficiency ratios … 1) measures the degree of success of the management in achieving their primary purpose of creating wealth for their owners 2) are also known as activity ratios correct option 2 3) examine the relationship between liquid resources held and creditors due for payment in the near future 4) assess the returns and performance of shares held in a particular business Explanation In financial ratio analysis, efficiency ratios are also known as activity ratios. Question 8 A GAP analysis … 1) is used to list all the risks that were identified on previous projects within the business 2) is a list that categorises each risk into a type of area 3) can be used to identify the main risks linked to a certain activity or project of the business Correct option 3 S - The Marketplace to Buy and Sell your Study Material 3 4) is a structured checklist to breakdown the risks and opportunities into manageable components Explanation A GAP analysis can be used to identify the main risks linked to a certain activity or project of the business. A risk checklist is used to list all the risks that were identified on previous projects within the business. A risk prompt list is a list that categorises each risk into a type or area. Risk taxonomy is a structured checklist to breakdown the risks and opportunities into manageable components. Question 9 Pareto analysis is used to … 1) identify those risks that will have a dramatic impact on business projects/activities and objectives Correct option 1 2) determine the expected return of an asset in relation to its risk or risk profile 3) structure decisions, uncertain events and values of outcomes 4) identify the causes of any risk Explanation Pareto analysis is used to identify those risks that will have a dramatic impact on business projects/activities and objectives. The CAPM model is used to determine the expected return of an asset in relation to its risk or risk profile. Decision analysis is used to structure decisions, uncertain events and values of outcomes. Casual analysis is used to identify the causes of any risk. Question 10 The attitude towards risk that requires an increase in the return for an increase in the risk is known as risk … 1) neutral 2) seeking 3) averse Correct option 3 4) impartial Explanation The attitude towards risk that requires an increase in the return for an increase in the risk is known as risk averse. Question 11 The … is a method used by a business to evaluate the effect of uncertainty on a planned activity in a range of situations and uses random numbers to sample from a probability distribution. 1) scenario analysis 2) simulation 3) Monte Carlo Simulation Correct option 3 4) latin hypercube sampling Explanation The Monte Carlo simulation is a method used by a business to evaluate the effect of uncertainty on a planned activity in a range of situations and uses random numbers to sample from a probability distribution. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 4 Question 12 The … is used to re-create the probability distributions specified by distribution functions accurately. 1) scenario analysis 2) simulation 3) Monte Carlo Simulation 4) latin hypercube sampling Correct option 4 Explanation The Latin Hypercube sampling is used to re-create the probability distributions specified by distribution functions accurately. Question 13 Which of the following are inputs for the risk treatment process? a) Risk register b) Industry betas c) Description of the business risk appetite d) Risk response actions Choose the correct option. 1) a, d 2) a, b, d 3) a, b, c Correct option 3 4) a, b, c, d Explanation Inputs for the risk treatment process include the risk register, industry betas and description of the business risk appetite. The outputs for the risk treatment process will be the risk response (i.e. remove, reduce or transfer) actions. Question 14 Which one of the following is a process output in the risk analysis process? 1) risk identification 2) risk recording 3) risk register Correct option 3 4) profit and loss account assessment Explanation Risk identification is done in the second stage of the risk management process. Risk is identified and recorded during this stage. Risk recording is a process input in the risk analysis process. The risk register is a process output of the risk identification and risk analysis process. One of the tools (process inputs) used to identify risk is the analysis/assessment of the profit and loss account. Question 15 Risk appetite can defined as ... 1) a reduction of risks by distribution 2) the amount of risk a business is prepared to tolerate at any point in time Correct option 2 3) the elimination of a risk when a negative outcome or high-risk exposure is anticipated 4) the strategy used to transfer a risk to another entity, business or organisation Explanation S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 5 Risk appetite can defined as the amount of risk a business is prepared to tolerate at any point in time. Use the following information to answers Questions 16 and 17. Afrika Company’s total current assets, total current liabilities, and inventory for each of the past 4 years are as follows: Item Total Current Assets R 16 950 R 21 900 R 22 500 R 27 000 Total Current Liabilities R9 000 R 12 600 R 12 600 R 17 400 Inventory R 6 000 R 6 900 R 6 900 R 7 200 Question 16 The firm’s current ratio for the year ended 2011 is ... 1) 1.24 2) 0.56 3) 1.79 Correct option 3 4) 3.26 Calculation The firm’s current ratio for the year ended 2011 is 1.79. Calculation of current ratio: Current Assets / Current Liabilities = R 22 500 / R 12 600 = 1.7857 ≈ 1.79 Question 17 The firm’s quick ratio for the year ended 2012 is... 1) 1.55 2) 1.14 correct option 2 3) 2.42 4) 1.79 Calculation The firm’s quick ratio for the year ended 2012 is 1.14. Calculation of quick ratio (acid test ratio): (Current Assets – Inventory) / Current Liabilities = (R 27 000 – R 7 200) / R17 400 = R 19 800 / R17 400 = 1.137 ≈ 1.14 Question 18 Effective corporate governance… 1) promotes the inefficient use of resources 2) attracts higher cost of capital 3) retards overall performance 4) ensures adherence to legislation Correct option 4 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 6 Explanation Effective corporate governance promotes the efficient use of resources, attracts lower cost of capital, enhances overall performance and ensures adherence to legislation (laws and regulations). Question 19 Key Risk Indicators must be … 1) linked to a loss 2) qualitative 3) quantitative Correct option 3 4) indicated by means of probability distributions Explanation Key Risk Indicators must be quantitative. Question 20 Mr. A Lucky has been appointed as the risk manager for A-Z clothing Ltd. Mr. A Lucky must implement a risk management process for the business. Which of the following risk management stages should Mr. A Lucky implement? a) establish the context, monitor and review b) risk identification, risk analysis and risk evaluation c) design and improve the process d) risk treatment, communication and consultation Choose the correct option. 1) a, d 2) a, b, d Correct option 2 3) a, b, c 4) a, b, c, d Explanation The stages in the risk management process include establishing the context, monitor and review, risk identification, risk analysis, risk evaluation, risk treatment, communication and consultation. The design and improve process is an ongoing process which takes place at commencement and throughout the risk management process. Question 1 The risk that a counterparty to a contract will not live up to its contractual obligations is known as: 1) Liquidity risk 2) Credit risk 3) Counterparty risk Correct option 3 4) Default risk Explanation Counterparty risk is the risk that a counterparty to a contract will not live up to its contractual obligations. Question 2 The uncertainty linked to the recovery of outstanding amounts due is known as: 1) Recovery risk Correct option 1 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 7 2) Exposure risk 3) Default risk 4) Credit risk Explanation Recovery risk is the uncertainty linked to the recovery of outstanding amounts due. Question 3 Which one of the following is not a benefit of operational risk management? 1) Improving ability to achieve business objectives. 2) Maximising day-to-day profits. Correct option 2 3) Providing management the opportunity to focus on revenue generating activities. 4) Minimising day-to-day losses. Explanation Benefits of operational risk management include improving ability to achieve business objectives, minimising day-to-day losses and providing management the opportunity to focus on revenue generating activities. Question 4 Information technology consists of the following: 1) E-commerce using the internet 2) Network Systems 3) Intranets Correct option 3 4) 4.Broadband Explanation Information technology consists of Intranets and communications technology consists of broadband, network systems and E-commerce using the internet. Question 5 The determination of the probability and impact of the identified risks and opportunities is referred to as risk … 1) identification 2) analysis 3) evaluation Correct option 3 4) review Explanation The determination of the probability and impact of the identified risks and opportunities is referred to as risk analysis. Question 6 The sources of risk embraced under economic risk include the following: a) Fall in demand b) Government policies c) Exchange Rates d) Fall in Supply Choose the correct option. 1) a, b, c, d S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 8 2) b, c, d 3) a, b, d 4) a, b, c Correct option 4 Explanation The sources of risk embraced under economic risk include fall in demand (a shift in the aggregate demand curve), government policies (including interest rates and trade protectionism) and exchange rates. Question 7 Macro-economic policy is influenced by government through the … a) Fiscal policy b) Econometric policy c) Monetary policy d) Competing theories Choose the correct option. 1) a, b, c, d 2) a, c, d correct option 2 3) a, b, d 4) None of the above. Explanation Macro-economic policy is influenced by government through the fiscal policy, monetary policy and competing theories. Question 8 Which one of the following factors influences the aggregate supply curve? 1) Consumer spending 2) Increased investment in education Correct option 2 3) Government spending 4) Exports and imports Explanation Increased investment in education is a factor that affects aggregate supply. Consumer spending, government spending, exports and imports are factors that affect aggregate demand. Question 9 Which of the following is an example of a political risk factor for the South African government? 1) Fiscal policy Correct option 1 2) Monetary policy 3) Monetary-economic policy 4) Inflation policy Explanation Political risk is defined as “the uncertainty that stems, in whole or in part, from the exercise of power by government actors and the actions of non-government groups”. The political environment of overseas countries will always have an impact on the threats and opportunities of a business wanting to expand business overseas for example the tax regime (fiscal policy) may change, contract S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 9 risk events, pressure groups, terrorism and blackmail. All of these factors can impact on the political risk a country or business can face. Question 10 “The exposure to a potential loss arising from diminishing sales or margins as a result of changes in market conditions, outside of the control of the business” is known as… 1) interest rate risk 2) environmental risk 3) market risk Correct option 3 4) social risk Explanation “The exposure to a potential loss arising from diminishing sales or margins as a result of market conditions, outside of the control of the business” is known as market risk. Question 11 Which one of the following methods is used to calculate Value-at-risk? 1) Monte Carlo Correct option 1 2) Pest Analysis 3) Economic value added 4) Economic simulations Explanation The Monte Carlo method is used to calculate Value-at-risk. Question 12 Graham Capital is in the process of obtaining a loan from XWX Bank. Which of the following factors must Graham Capital take into consideration? a) Interest rate at commencement of the loan b) Interest rate at the end term of the loan c) Duration of payment d) Nature of the interest rate Choose the correct option. 1) All of the above. 2) a, b, c 3) a, c, d Correct option 3 4) None of the above. Explanation When a company borrows money, it needs to know the interest rate at the commencement of the borrowing, the nature of the interest rate (fixed or variable), the duration of the payment and the basis of interest rate determination. Question 13 Expropriation of corporate assets without prompt and adequate compensation is an example of… 1) economic risk 2) political risk Correct option 2 3) legal risk 4) cultural risk S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 10 Explanation Expropriation of corporate assets without prompt and adequate compensation is an example of political risk. This example can also be seen as a macropolitical risk. Question 14 A country’s ability or intention to meet its financial obligations determines it’s… 1) economic risk Correct option 1 2) financial risk 3) political risk 4) country risk Explanation A country’s ability or intention to meet its financial obligations determines its economic risk. The fiscal and monetary policy of the government determines it financial obligations which can have an influence on economic risk. Question 15 Which one of the following statements is correct? 1) Current ratio is the relationship between non-current assets and non-current liabilities. 2) The current ratio is more conservative than the quick ratio. 3) The current ratio excludes inventory. 4) A higher quick ratio means a better liquid current position. Correct option 4 Explanation The correct statement is “A higher quick ratio means a better liquid current position”. Current ratio is the relationship between current assets and current liabilities. The quick ratio is more conservative than the current ratio. The quick ratio excludes inventory. Question 16 In implementing operational risk management in a business, external events which can occur outside of the business must be taken into consideration. These events may require a business to have response strategies in the form of: 1) change and knowledge management 2) project and knowledge management 3) change management and business contingency plans Correct option 3 4) project management and business contingency plans Explanation In implementing operation risk management in a business, external events which can occur outside of the business must be taken into consideration. These events may require a business to have response strategies in the form of change management and business contingency plans. Question 17 Control technology can be defined as… 1) the collection, storage and processing of information by electronic means 2) specific computer-based production control systems correct option 2 3) network systems in which computers are linked to one another over a network 4) IT governance to manage the risks and constraints of IT Explanation S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 11 Control technology can be defined as specific computer-based production control systems. Question 18 Which one of the following is seen as a common challenge for businesses in implementing project risk management? 1) Lack of a risk maturity model. Correct option 1 2) Clear definition of roles. 3) Lack of responsibility assignment matrix. 4) Lack of team structure. Explanation A common challenge for businesses in implementing project risk management is a lack of risk maturity model. Question 19 Which of the following risks are seen as internal micro influences to a business? 1) Project, market and legal risks 2) Economic, political and environmental risks 3) Social, ethical, health and safety risks 4) Ethical, project and technological risks Correct option 4 Explanation Ethical, project and technological risks is seen as internal micro influences to a business. Question 20 Credit insurance … 1) eliminates uncertainty over the likely recovery of outstanding amounts due 2) mitigates action for credit risk to protect a business against bad debt Correct option 2 3) prevents that a customer may default on its payment 4) relates to an uncertainty surrounding the payment of future amounts Explanation Credit insurance mitigates action for credit risk to protect a business against bad debt. Essay questions: The following represents an extract of the compliance statement of Vodacom. Read through the extract and answer question 1 below. Statement of compliance Vodacom is committed to the highest standards of business integrity, ethics and professionalism. The Board recognises the need to conduct the business in accordance with the principles of the King Code of Corporate Practices and Conduct (‘King III’). These principles include discipline, independence, responsibility, fairness, social responsibility, transparency and the accountability of directors to all stakeholders. A number of these principles are entrenched in the Group’s internal controls and policy procedures governing corporate conduct. The Board is satisfied that every effort has been made in the financial year to 31 March 2013 to S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 12 comply in all material aspects with King III. Where we do not comply, this is stated and explained. Question 1 1.1 In the extract, Vodacom’s statement of compliance is referring to the principles of the King Code of Corporate Practices and Conduct (King III). Discuss the principles listed in the compliance statement of Vodacom? (7) Answer Principle: Definition based on the King Code of Governance Principles for SA 2009 Discipline Each company should demonstrate its commitment to its code of ethics by constantly enforcing appropriate discipline. √ Independence Independence is the absence of undue influence and bias which can be affected by the intensity of the relationship between the director and the company. √ Responsibility The state or position of having control or authority and being accountable for ones actions and decisions. √ Fairness Free from discrimination or dishonesty and in conformity with rules and standards. √ Social responsibility Is an important and critical component of the broader notion of corporate citizenship. √ One is a good corporate citizen, inter alia, by being socially responsible. Corporate responsibility is the responsibility of the company for the impacts of its decisions and activities on society and the environment, through transparent and ethical behaviour that: contributes to sustainable development, including health and the welfare of society; takes into account the legitimate interests and expectations of stakeholders; is in compliance with applicable law and consistent with international norms of behaviour; and is integrated throughout the company and practiced in its relationships. Activities include products, services and processes. Relationships refer to a company’s activities within its sphere of influences. Transparency Easy to understand or recognise; obvious; candid; open; frank. √ Accountability of directors to all stakeholders Being responsible and able to justify and explain decisions and actions. √ 1.2 Identify any three (3) additional principles included in the King III report not specifically listed by Vodacom. (3) Answer Any three of the following additional principles included in the King III report can be discussed:  Management should be responsible for the risk management process. Management is accountable to the board for designing, implementing and monitoring the process of risk management and integrating it into the day-to-day activities of the company.  All staff should practise risk management.  The board should be responsible for the process of risk management. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 13  The board should approve the company’s chosen risk philosophy.  The board should adopt a documented risk management plan.  The board may delegate the responsibility of risk management to a dedicated risk committee.  Risk assessment should be performed on an on-going basis.  The board should approve key risk indicators for each risk, as well as tolerance levels.  Risk identification should be directed in the context of the company’s purpose.  The board should ensure that key risks are quantified and are responded to appropriately.  Internal audit should provide independent assurance on the risk management process.  The board should report on the effectiveness of risk management.  The board should ensure that the company’s reputational risk is protected.  The board should determine the extent to which risks relating to sustainability are addressed and reported on.  The board should ensure that information technology (IT) is aligned with business objectives and sustainability.  The board should consider the risk of the unknown as part of the qualitative and quantitative risk assessment process.  Compliance should form part of the risk management process. Question 2 With reference to the seven (7) stages in the enterprise risk management (ERM) process explain how a business might design and implement an ERM approach to risk. (15) Answer S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 14 The diagram is given for explanation purposes only. If the question had asked to illustrate the stages in the ERM process you would have been required to illustrate your answer by drawing this diagram. Stage 1 of the ERM process is establishing the context. It forms the foundation for all the other stages in the ERM process. √ Establishing the context deals with the business as a whole as well as the business activities, processes and projects. √ This stage is used to acquire accurate data and information about the whole business. √ Stage 2: Risk identification is a crucial step in the ERM process. It is important to be able to identify the risks in the business and understand how they fit into the overall business context. √ Through risk identification, the business will be able to identify the key risks and risk events associated with the business. √ The business will constantly change and grow as well as the risks associated with the business. The business will need to identify risks on a constant basis and identify the opportunities that may arise in order to enhance its objectives as well as risks that may reduce the likelihood of the business achieving its objectives. √ Stage 3: Risk Analysis. The risk analysis stage will provide information on the likelihood of risks and opportunities occurring √ and the impact of them to aid in the decision making process. √ The risk analysis process will assess all the risks identified in the risk register. √ Stage 4: Risk Evaluation. The risk evaluation stage will evaluate the results obtained in the risk analysis stage. Stage 4 will focus on both the risk exposure and opportunity that may arise from a business activity. All the information gathered in the risk analysis process is integrated into the risk evaluation process. √ The risk evaluation stage will evaluate the financial impact (loss or gain) of a risk in a business in numerical terms. The risk evaluation stage is essential as it assists the business to understand the combined effect of a group of risks and opportunities. This stage will assist the S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 15 business in its decision making process. √ Risk evaluation is the only option available to the business for assessing the organisation's exposure to risks and opportunities and it must be implemented properly. √ Stage 5: Risk Treatment. The risk treatment stage will assist the business to design a specific action plan √ and produce strategic responses to address the risks and opportunities identified in the business to secure business objectives. √ This stage is vital in the risk management process because the risk strategy responses and action plan must be prepared and implemented effectively into the business. √ Stage 6: Monitoring and Review. The risk monitoring and review stage is a key stage in the ERM process.√ It may become necessary for a business to review all the previous stages in the risk management process because new information became available or circumstances changed in the business. √ The monitoring and review stage must be carried out in order to increase the success of the implementation of the entire ERM process. √ Stage 7: Communication and consultation. The risk communication and consultation stage will be used across all the other ERM process stages. √ It is essential for a business to understand how effectively the process outputs of each stage is communicated and understood by decision makers. Risk communication and consultation form a link with all the other stages in the ERM process. The business risk management process must be effectively communicated to all levels of employees in the business. √ This step is vitally important because every employee may be involved in an activity that might have a direct impact on the ERM process and if the employee does not understand the risk management culture in which the business functions it can have disastrous consequences. √ All the stages are interrelated and must be implemented effectively and communicated in the business to manage its risks and opportunities. √ Question 3 3.1 Argue the value of good corporate governance to business enterprises. (Hint: refer to the four business areas corporate governance might impact on). (10) Answer Corporate governance adds value to an enterprise in the following manner: Employing assets efficiently Effective corporate governance promotes the efficient use of resources within a firm and the economy at large. √ When an efficient corporate governance system is in place, debt, equity and capital flow to enterprises that are capable of investing these resources efficiently in order to produce goods and services that are most in demand and have the highest rate of return. √ In this regard, effective governance helps to grow and protect scarce resources and to ensure that societal needs are met. Effective governance should make it possible to replace managers who do not put scarce resources to efficient use or who are incompetent in what they do. √ Attracting lower-cost capital Effective corporate governance helps enterprises to attract lower-cost capital by improving the confidence of domestic and international investors and by assuring them that the assets are used in the form agreed upon, whether the investment is in the form of debt or equity. √ This has a positive impact on both debt and equity. For enterprises to succeed in competitive markets, corporate managers must innovate relentlessly and efficiently, and constantly evolve new strategies to meet changing circumstances. √ S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 16 Meeting social obligations: complying with laws and regulations To succeed in the long term, enterprises must comply with the laws, regulations and expectations of the societies in which they operate. Most corporations take their corporate citizenship seriously. √ They contribute to civil societies' needs while some are opportunistic and have no regard for social or environmental issues. Good corporate governance is essential to ensure adherence to legislation as well as corporate social responsibility principles. √ Overall performance If corporate governance is effective, it gives managers a holistic view of the organisation and holds managers and the board accountable for the management of corporate assets. √ Such accountability contributes to the efficient use of resources, attraction of lower-cost capital and an increase in the responsiveness of the enterprise to society, and will therefore lead to the improvement of corporate performance. √ Effective corporate governance may not guarantee improved corporate performance at the individual firm level, but it should increase the likelihood of managers focusing on improving the performance of enterprises and of their being replaced when they fail to do so. √ 3.2 Define operational risk and briefly explain each of the main underlying risk factors comprising operational risk management. (10) Answer Operational risk is defined as “the potential for loss due to failures of people, processes, and technology and external dependencies”. √ The main underlying risk factors comprising operational risk include the following:  Business risk – includes adverse changes to a firm’s market, customers or products, changes to the economic and political environments in which the firm operates and strategic risk which a firm faces if business plans, supporting systems and the implementation of these plans adversely affect the firm. √  Crime risk including potential theft, fraud and computer hacking. √  Disaster risk such as fires, floods and other natural disasters. √  Information technology risk, including unauthorised access and disclosure, and data corruption.√  Legal risk including loss arising from legal action against it and from inadequate, incomplete or otherwise unsound legal documentation and practices. √  Regulatory risk relating to the lack of observance of rules set by a regulatory body. √  Reputational risk from negative publicity about its business practices or internal controls. √  Systems risk loss as a result of failure caused by the breakdown of business procedures, processes or systems and controls. √  Outsourcing. √ Question 1 Indicate the correct statement. 1) Risk is the deviation of the expected from the actual result. 2) Risk implies the presence of certainty. 3) The probability of an event refers to its long-term frequency of occurrence. Answer: 3 4) Uncertainty arises from a person’s perfect state of knowledge about future events. Explanation The probability of an event refers to its long-term frequency of occurrence. Question 2 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 17 Motorcar accidents are an example of subjective uncertainty. Which of the following characteristics best describes subjective uncertainty? 1) Outcomes can be predicted with precision. 2) Outcomes are identified and probabilities are known. 3) Outcomes are identified but probabilities are unknown. Answer: 3 4) Outcomes are not fully identified and probabilities are unknown. Explanation Subjective uncertainty applies where an outcome is identifiable but the probability of the outcome is not known outcomes are identified but probabilities are unknown. Question 3 For a given firm, 50 of the 90 employees are union members. Of those who are union members, 35 belong to union A and 15 belong to union B. The probability that any member selected at random belongs to a union is … 1) 0.56 Answer: 1 2) 0.66 3) 1.66 4) 2.56 Calculation Total number of members = 90 Members belonging to a union = 50 The probability that any member belongs to a union = 50/90 = 0.555 = 0.56 (to 2 decimal places) Question 4 The … is a measure of relative dispersion used in comparing the risk of assets with differing expected returns. 1) coefficient of variation Answer: 1 2) expected mean 3) standard deviation 4) average Explanation The coefficient of variation is a measure of relative dispersion used in comparing the risk of assets with differing expected returns. Question 5 The risk of not being able to repay its depositors on demand or, when the terms of the deposit require it, on expiry of the agreed period of notice or on due date is known as …. 1) investment risk 2) credit risk 3) liquidity risk Answer: 3 4) interest rate risk Explanation Liquidity risk: For a deposit-taking institution like a bank, the risk is not being able to repay its depositors on demand or, when the terms of the deposit require it, on expiry of the agreed period of notice or on due date. For other type of enterprises it is the risk of not being able to meet its cash commitments when required. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 18 Investment risk refers to the possibility of negative variation in the value of financial instruments owing to market changes. Credit risk refers to the possibility of counter-party to a financial transaction failing to meet the financial commitments stemming from a credit agreement on time. It is the risk that a debtor will fail to service the interest payments or to repay the capital when it falls due either because of bankruptcy or for any other reason, thereby causing the asset holder to suffer financial loss. Interest rate risk for a lender of money is the risk of loss of interest income that is caused by changes in market interest rates. For a borrower of money, it is the risk of having to pay more for debt as a result of changes in market interest rates. Question 6 Interest rate volatility is an example of a … risk to financial institutions. 1) systematic core business Answer: 1 2) incidental businesses 3) operational 4) downside Explanation Interest rate volatility is an example of a systematic core business risk to financial institutions. Question 7 Thabo was late for work. As he drove around a curve, he hit a patch of oil that had been spilled on the road. He slid across the road and hit a guard rail. Thabo was not hurt; however, his car was severely damaged. The presence of oil on the road is best described as a (n): 1) peril 2) objective risk 3) moral hazard 4) physical hazard Answer: 4 Explanation Thabo was late for work. As he drove around a curve, he hit a patch of oil that had been spilled on the road. He slid across the road and hit a guard rail. Thabo was not hurt; however, his car was severely damaged. The presence of oil on the road is best described as a physical hazard. Hazard relates to the environment surrounding the cause of loss (the presence of oil on the road). Question 8 In the preceding question, the collision between Thabo’s car and the guard rail is an example of a … 1) peril Answer: 1 2) physical hazard 3) fundamental risk 4) speculative risk Explanation The collision between Thabo’s car and the guard rail is an example of a peril. The peril is the source of risk but is not a risk in itself. Question 9 Corporate governance is defined in its narrowest sense as ….. 1) a formal system of accountability of the board of directors to shareholders Answer: 1 2) a formal system of accountability of the board of directors to stakeholders 3) an informal system of accountability of board of directors to its stakeholders S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 19 4) an informal and formal relationship between the corporate sector and its stakeholder Explanation Corporate governance is defined in its narrowest sense as a formal system of accountability of the board of directors to shareholders. Question 10 In terms of good corporate governance … a) risk identification should be directed in the context of the company’s purpose b) the CEO should approve the company’s chosen risk philosophy c) the Chief Risk Officer should be responsible for the process of risk management d) risk assessment should be done periodically Choose the correct combination. 1) a, b, c, d 2) a, d Answer: 2 3) b, c, d 4) a, b, d Explanation Options a and d are correct. In terms of good corporate governance, risk identification should be directed in the context of the company’s purpose and risk assessment should be done on an ongoing basis. Question 11 The business approach to risk management … 1) focuses on insurable and financial risks 2) adopts a holistic approach to managing risks 3) adopts a proactive approach to managing risks Answer: 3 4) is process driven Explanation The business approach to risk management adopts a more proactive approach to managing risks than the traditional approach. Although it looks further than insurable and financial risks, the focus however remained on managing individual risk and groups of risk thus function driven. Question 12 Alternative risk transfer techniques (ART) … 1) resulted from a need for a less sophisticated approach to risk financing Answer: 1 2) do not apply to large catastrophic risks 3) involve the transfer of risk from capital markets 4) exclude derivative instruments Explanation Alternative risk transfer techniques (ART) resulted from a need for a more sophisticated approach to risk financing, apply to large catastrophic risks, involve the transfer of risk to capital markets and include derivative instruments. S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 20 Question 13 The most important drivers towards an enterprise risk management approach include the following: a) increased value of tangible assets b) increased concentration of risk c) decline of insurance and development of ART d) new business practices Choose the correct combination. 1) a, b, c, d 2) b, c, d Answer: 2 3) a, b, c 4) c, d Explanation The most important drivers towards an enterprise risk management approach include increased value of intangible assets, increased concentration of risk, decline of insurance and development of ART; and new business practices. Question 14 The following factors contribute to the successful implementation of Enterprise risk management (ERM): a) Treating ERM as a stand-alone process. b) Strong and visible support from senior managers. c) Proceeding incrementally and leveraging early wins. d) Learning from experiences Choose the correct combination. 1) a, b, c, 2) b, c, d Answer: 2 3) a, c, d 4) a, b, c, d Explanation The factors that contribute to the successful implementation of enterprise risk management (ERM) include strong and visible support from senior managers, proceeding incrementally and leveraging early wins; and learning from experiences. Question 15 Which of the following evolving tools enable enterprises to ensure that returns are adequate for the risk undertaken and that capital is allocated optimally? 1) Risk-adjusted return on capital (RAROC) Answer: 1 2) Alternative risk transfer (ART) 3) Enterprise risk management (ERM) 4) Value added tax (VAT) Explanation S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 21 Risk-adjusted return on capital (RAROC) is an evolving tool that enables enterprises to ensure that returns are adequate for the risk undertaken and that capital is allocated optimally. Question 16 Enterprise risk management is characterized by a … 1) narrow focus on hazard risks 2) comprehensive, inclusive and proactive approach to risk management Answer: 2 3) functional approach to risk management responsibilities 4) lack of consistency in terms of level of detail and reporting formats Explanation Enterprise risk management is characterised by a comprehensive, inclusive and proactive approach to risk management. Question 17 Which of the following is not a category of risk management objectives? 1) Compliance 2) Operational 3) Reporting 4) Strategic Answer: 4 Explanation Incorrect: Strategic objectives serve as yardsticks for tracking the enterprise’s performance in the long term. Question 18 Internal factors that may influence the corporate and risk management objectives of an enterprise include the … a) technology used b) infrastructure c) economic environment d) employees Choose the correct combination. 1) a, b, c, d 2) a, b, d Answer: 2 3) b, c, d 4) a, b, d Explanation Options a, b and d are correct. Internal factors that may influence the corporate and risk management objectives of an enterprise include the technology used, the infrastructure of the enterprise and the personnel (employees) the enterprise has at its disposal. Question 19 Which of the following is an example of systems risk? 1) Fraud and theft 2) Security breaches Answer: 2 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 22 3) Negligent staff 4) Stock taking Explanation Systems risk refers to the risks resulting from systems failures and they are therefore primarily based on enterprises’ reliance on technology. Examples include systems failures, security breaches, implementation failure and poor data integrity. Fraud and theft, and negligent staff are examples of people risk. Question 20 The following share prices of Ayoba Holdings over the past five months were taken from the business section of a newspaper. March R23.50 April R24.00 May R24.20 June R24.50 July R25.10 The squared deviation for June is… 1) 0.2400 2) 0.0576 Answer: 2 3) 0.3450 4) 0.5700 Explanation When probability is not given, we assume that the probability of the given set of outcomes is the same. Therefore, the mean = the expected value. The mean for the given set of outcomes = Total share price/Number of outcomes = R121.30 / 5 = R24.26 Therefore the expected value = R24.26 Month Price Expected Value Deviation Squared deviation June R24,50 R24.26 0.24 0.0576 Therefore the squared deviation for June = 0.0576 Question 1 A (n)… is a graphic representation of any form of flow within and to the enterprise. 1) organisational chart 2) flow chart Answer: 2 3) fault tree analysis 4) SWOT analysis Explanation A flowchart is a graphic representation of any form of flow within and to the enterprise. Question 2 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 23 The term associated with the worst loss that could happen to a firm is … 1) Accumulation 2) “As if” analysis 3) Normal loss expectancy 4) Maximum possible loss Answer: 4 Explanation Maximum possible loss is associated with the worst loss that could happen to a firm. Question 3 Which of the following is an example of standing charges? 1) Bank charges 2) Leasing charges Answer: 2 3) Raw material prices 4) Distribution expenses Explanation Standing charges concern those costs which are incurred irrespective of whether or not the business operates. Typical examples include rent, certain salaries and expenses, leasing charges and a portion of services and facilities. Question 4 Type 3 losses include losses that occur regularly, but which are trivial. These losses are characterised by … 1) low frequency and low severity 2) low frequency and high severity 3) high frequency and high severity 4) high frequency and low severity Answer: 4 Explanation Type 3 losses include losses that occur regularly but which are trivial (e.g. loss of stationery). These losses are characterised by high frequency and low severity. Question 5 Lesedi Pharmacy would like to market a new hypertension drug. While the Department of Health was testing the drug, it discovered that the drug produced a harmful side effect. When Lesedi learnt of the Department’s test result, Lesedi abandoned its plan to produce and distribute the drug. Lesedi’s reaction illustrates risk … 1) avoidance Answer: 1 2) assumption 3) transfer 4) elimination Explanation Lesedi Pharmacy would like to market a new hypertension drug. While the Department of Health was testing the drug, it discovered that the drug produced a harmful side effect. When Lesedi learnt of the Department’s test result, Lesedi abandoned its plan to produce and distribute the drug. Lesedi’s reaction illustrates risk avoidance. Question 6 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 24 Which of the following is a procedural risk control measure? 1) Erecting a security wall around a property. 2) Having a back-up facility at a distant location. 3) Emergency procedures such as recovery plans following a fire. Answer: 3 4) A disclaimer delivered with the products marketed by a company. Explanation Emergency procedures such as recovery plans following a fire are a procedural risk control measure. Question 7 The process of establishing or offsetting long and short positions in order to diminish the portfolio’s risk that could result from an adverse price movement is known as … 1) speculation 2) hedging Answer: 2 3) interest rate swapping 4) insurance Explanation The process of establishing or offsetting long and short positions in order to diminish the portfolio’s risk that could result from an adverse price movement is known as hedging. Question 8 Indicate the correct statement. 1) Risk managers use insurance reviews to counter risk exposure. 2) The price of a stock is inversely related to the market rate. Answer: 2 3) The long buyer expects the price of the asset to fall. 4) A short position entails the buying and keeping of an asset. Explanation The price of a stock is inversely related to the market rate. Question 9 Indicate the correct statement. 1) Swaps may be used to increase the effective interest cost of borrowing. 2) Parties to interest rate swaps exchange the capital sums involved, adjusted for the differences in interest rates. 3) The result of a swap is the swapping of interest obligations as well as the risk of inherent interest rate changes. Answer: 3 4) Swaps may be used to decrease the realised yield on an investment. Explanation The result of a swap is the swapping of interest obligations as well as the risk of inherent interest rate changes. Question 10 Which of the following is responsible for articulating and communicating an enterprise’s risk appetite to different constituencies? 1) Methodologies S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 25 2) Limits and controls Answer: 2 3) Volume or notional limits 4) Risk-sensitivity limits Explanation Limits and controls are responsible for articulating and communicating an enterprise’s risk appetite to different constituencies. Question 11 Which of the following are key strategic considerations that need to be evaluated when determining the risk appetite for an enterprise? a) Capital at risk b) Internal constraints c) Process d) Strategy Choose the correct combination: 1) a, b, c 2) a, b, d Answer: 2 3) a, c, d 4) a, b, c, d The key strategic considerations that need to be evaluated when determining the risk appetite for an enterprise include capital at risk, internal constraints and strategy. Question 12 … is an attempt to provide a single number which summarises the total risk in a portfolio of financial assets 1) Cash flow at risk 2) Risk adjusted return 3) Earnings at risk 4) Value at risk Answer: 4 Explanation Value at risk is an attempt to provide a single number which summarises the total risk in a portfolio of financial assets. Question 13 The risk limit framework of an organisation is a combination of its … limits. a) notional b) risk-sensitivity c) stop-loss d) stress Choose the correct combination. 1) a, b, c 2) b, d 3) c, d 4) a, b, c, d Answer: 4 S - The Marketplace to Buy and Sell your Study Material Downloaded by: LIBRARY | Distribution of this document is illegal Want to earn $103 per month? S - The Marketplace to Buy and Sell your Study Material 26 Explanation The risk limit framework of an organisation is a combination of its notional, risk-sensitivity, stoploss/ advisory and stress/scenario limits. Question 14 Reporting on the risk profile, business performance and risk implications usually forms part of the … risk report. 1) daily 2) monthly Answer: 2 3) quarterly 4) annual Explanation Reporting on the risk profile, business performance and risk implications usually forms part of the monthly risk report. Question 15 Monitoring processes are generally applied to... 1) keep up to date with regulatory requirements 2) identify emerging risks Answer: 2 3) demonstrate management leadership 4) foster an environment that motivates people to learn Explanation Monitoring processes are generally applied to identify emerging risks Question 16 Which of the following is a method of monitoring a risk management process? 1) Internal audit Answer: 1 2) Insurance reviews 3) Statutory records 4) Fault tree analysis Explanation Internal audit is a method of monitoring the risk management process. Question 17 Hurdle rates are used to … 1) measure performance, taking into account the risks inherent in a portfolio 2) facilitate the allocation of capital based on risk 3) screen capital projects when using discounted cash flow techniques Answer: 3 4) strengthen the links between performance, accountability and established risk thresholds Explanation Hurdle rates are used to screen capital projects when using discounted cash flow techniques. Question 18 Bank regulators use … to determine the capital a bank is required to keep to reflect the market risk it is bearing. 1) earnings at risk 2) value at risk Answer: 2