P3 Risk Management (Online) CIMAPRA19-P03-1-ENG Exam Questions

1. M plc is an IT company that bids for large contracts to sell computer systems and also to service existing systems. M plc’s senior management has always set budgets which are hard to achieve and have made no allowances for the recession.

The economy has improved and M plc’s senior managers have made the budget even more optimistic. The budgeted sales target has been increased by 40%.

In the past, sales staff have not tried to achieve the budget sales because it was generally believed that the targets were impossible to reach.

M plc has recently appointed a new Sales Director who has decided that sales staff will be dismissed if they fail to meet sales targets for three successive months. He is also looking for higher sales margins than were achieved before.

What are the likely consequences of the new Sales Director’s policy?

2. DRAG DROP

The internal audit department should always give a report at the end of its audit. This report is intended to be useful and help the company going forward. The report should always include any recommendations for improvements.

Which of the following statements are true and which are false?

3. SDF is a quoted company.

Which of the following matters should normally be dealt with by SDF’s audit committee?

4. Risk management involves all parties in an organisation.

Which of the following describe the Board’s responsibilities for risk management?

5. You have just been appointed Financial Controller of Y, a marketing consultancy.

You are in a meeting with the Chief Executive Officer (CEO) of Y, and have been discussing the need for a major upgrade of all the information systems throughout Y, as they are all very old.

Knowing that major change should be managed effectively, you have suggested that Y should have a ‘systems steering committee’.

Advise the CEO which of the following should be included in the terms of reference of the steering committee.

6. YGH has recently completed a post completion audit on a five year contract that has only recently come to a conclusion. The main finding was that the project delivered most of the expected benefits, but that it cost significantly more to implement than had been anticipated at the project appraisal stage. YGH would not have proceeded if the true cost had been known at that stage.

The project was the responsibility of the production department, which is presently managed by G.

When the project was proposed, the production department was managed by H. H is now YGH’s Director of Operations.

How should the finding from this post completion audit be interpreted?

7. W plc is a large international supermarket chain. It has many thousands of suppliers and many thousands of others competing for "shelf space" in its supermarkets.

Which of the following would be appropriate provisions for W plc to include in its Ethical Code in relation to its suppliers?

8. Which TWO of the following are reasons for a company to comply with the Committee of Sponsoring Organisations of the Treadway Commission 2017 Enterprise Risk Management Framework (COSO Framework)?

9. A Firewall is an element of a company’s Information Technology infrastructure.

Which THREE of the following are characteristics of a Firewall?

10. In the purchasing department, the purchasing manager selects and approves all suppliers, as they are the only person with sufficient experience to do so. They use a very limited number of suppliers because they can rely on these suppliers to provide goods of the quality required at a competitive price. They do not keep any documents in relation to negotiations with other potential suppliers or other quotes obtained.

In relation to the above, which of the following statements are valid?

11. K has several subsidiary companies. The directors of K’s subsidiaries are paid an annual b onus based upon their particular subsidiary’s reported profits.

The directors of one of K’s subsidiaries are considering the choice between two models of a machine.

Which of the following is most likely to explain the decision to choose model X over model Y?

12. DRAG DROP

Z is a multinational pharmaceuticals company with operations across Europe, America and Asia.

It is currently investigating the possibility of setting up a chemical and specialist production facility in South America. This would be a multi $billion investment.

What steps should Z take to manage the following risks in this long term venture.

13. VBN’s home currency is the V$. On 1 January, VBN must make a payment of C$2 million on 31 March of that same year.

On 1 January the spot exchange rate was V$1 = C$0.4.

On 1 January VBN paid $180,000 for a call option to buy C$2 million for V$5.5 million on 31 March. VBN’s cost of borrowing was 8% per year.

On 31 March the spot rate was V$1 = C$0.45.

What was the total cost, including the cost of the option, of settling the payable?

14. DFG’s home currency is the D$.

DFG is heavily exposed to the exchange rate between the D$ and the L$, country L’s currency.

DFG’s treasurer has noted the following:

• Inflation has been running at 5% in DFG’s home country and 8% in country L

• Interest rates are 7% in DFG’s home country and 11% in country L

• The spot rate is D$1.0000 = L$2.1000 and the three month forward rate is D$1.0 = L$2.1196

Which of the following statements is consistent with these figures?

15. MNB is a multinational IT company with headquarters in Asia and with operations in all continents.

MNB is attempting to expand its operations in Europe. This is seen as a major challenge as the European market is very well developed and highly competitive.

MNB develops and manufactures its own products. Parts and assemblies are sourced across Asia, America and Europe. These are sometimes purchased locally as a condition of a contract, but MNB aims to include as much of its own equipment as possible. Transfer prices between MNB’s subsidiaries can be set in YEN, USD, EURO, GBP. Transfer prices are revised every month in line with production times as most goods are made on short order with sales cycles running at 3-4 months.

What types of risk are being presented here?

16. You have been assigned the role of lead internal auditor. Your task is to carry out the annual assessment of the production line maintenance department.

When planning for this audit, which of the following must be completed?

17. Which of the following summarises Purchasing Power Parity Theory (PPPT)?

18. A project has a net present value of $2 million.

Total cash outflows of this project have a present value of $14 million, which includes staff costs of $10 million.

What is the project’s sensitivity to staff costs?

19. GHY is a listed company. Tom is GHY’s CEO and Peter is its non-executive Chair of the Board. Tom and Peter both have substantial relevant business and industrial experience and both are believed to have considerable integrity. Tom and Peter quickly developed a good working relationship after Peter’s appointment. They have become close friends.

Tom briefs Peter on every aspect of the business. Tom and Peter jointly agree the agenda for every board meeting and both agree on the manner in which matters will be presented to the board.

Taking account of the principles of good corporate governance, which of the following statements is correct?

20. JC is a car manufacturing company in country C and manufactures diesel cars It is facing a number of serious risks .

Which TWO of the following nsk factors are external?

21. Company M has lost 25% of its revenue in the last three months due to bad debts. One of the receivables written off was from a long standing customer and the other three were from new customers. The management accountant has warned the sales team that the company cannot survive any more substantial bad debts.

Which of the following internal controls should be put in place to try and prevent further bad debts?

22. T is an accountant who has been accused of professional incompetence T agreed to advise a client on currency management and the client lost a great deal of money when a large foreign currency trade receivable declined in value without having been hedged.

Which of the following factors strengthens the case that T has been incompetent? Select ALL that apply

23. DFR is an online retailer that sells picture frames The software running on DFR’s website enables customers to log in and make purchases by inputting an email address as a user name and a password that must contain at least eight characters, including upper and lower case letters, numbers and punctuation marks (e.g. £, $ or!) Once logged in, customers can check previous orders that they have placed.

Customers can also use DFR’s website to change personal details, including credit card numbers and delivery addresses Whenever they wish to use those facilities, the software sends a text message containing a six-digit number to their mobile phones They must input that number before the system will accept changes to their personal details

Which TWO of the following statements are correct?

24. CORRECT TEXT

A project has an NPV of £1,200,000. The present value of material costs which are included in the NPV calculation are £8,000,000.

What is the sensitivity of the project to changes in material costs? Give your answer to the nearest whole percentage.

25. The treasurer of IOK is considering entering into a money market hedge in order to hedge a payable.

Which of the following might be valid explanations for the use of a money market hedge for this purpose?

26. DFG’s call centre budgets four minutes for its operators to deal with a customer’s enquiry and conclude the call. Team leaders are evaluated on the basis of the average call length.

Simone is a team leader. Her team’s average call length is five minutes and 30 seconds. Simone accepts full responsibility. She encourages her team members to check that the customer is satisfied before concluding the call.

On investigation, it was discovered that 2% of the customers who dealt with Simone’s team had to call DFG again within seven days. Other teams had an average of 25% of customers call back within seven days because their first call had not fully resolved their problem.

Which of the following statements are true?

27. DRAG DROP

Identify, from the list provided, which category of business risk most accurately describes the events detailed below.

28. A UK manufacturing company has simultaneously:

• purchased a put option to sell USD 1million at an exercise price of GBP1.00 = USD1.65

• sold a call option that grants the option holder the right to buy USD 1million at a price of GBP1.00 = USD1.61 (this option has the same maturity date as the put).

Which of the following is a valid explanation for entering into these option positions?

29. A project has been evaluated on the basis that it will cost $14 million and will have a net present value of $2.3 million.

The project has commenced and $3 million of the initial $14 million has been invested. A problem has been discovered that will cost an additional $2.5 million to rectify. The $2.5 million will be payable immediately.

What is the NPV of continuing with this project?

30. James owns a small company which sometimes suffers from credit risk.

Which of the following measures should he put in place to help reduce this risk?

31. Which risks should be given the highest priority?

32. Amber selects appropriate suppliers and places purchase orders.

Brian passes invoices for payment and submits payment instructions to the bank.

Chris checks incoming inventory and unpacks goods from their containers.

Dirwan posts purchase invoices and files invoices and supporting documents.

Which member of staff could most easily commit fraud?

33. The long-term prospects for interest rates in the UK and the USA are 2% and 6% per annum respectively.

The GBP/USD spot rate is currently GBP/USD1.71.

Using interest rate parity theory, what GBP/USD spot rate would you expect to see in six months’ time?

34. In the purchasing department, the purchasing manager selects and approves all suppliers, as they are the only person with sufficient experience to do so. They use a very limited number of suppliers because they can rely on these suppliers to provide goods of the quality required at a competitive price. They do not keep any documents in relation to negotiations with other potential suppliers or other quotes obtained.

In relation to the above, which of the following statements are valid?

35. JNH is a major corporation that stores its customer database in the Cloud JNH has suffered a data breach that has led to customer credit card details being made available for sale on the internet JNH’s Head of Security wishes to analyse network traffic at the cloud-based server in order to gain a better understanding of the manner in which the data was intercepted, but has been refused access.

Which of the following is the most likely explanation for the third-party owner’s refusal to assist JNH’s Head of Security?

36. Which of the following are threats to the control environment?

37. Which of the following risks should be given highest priority?

38. The managers of a company are agents for the shareholders tasked with increasing shareholders’ wealth.

Which of the following will usually increase shareholders’ wealth?

39. H Ltd is a logistics company which is likely to be seeking a Stock Exchange listing shortly.

The directors wish to strengthen the company’s internal controls.

Which of the following statements are valid?

40. The shares of a company have a beta factor of 1.15. Therefore, which of the following must be true?

41. P Ltd, a manufacturing company, is considering a new capital investment project to set up a new production line.

The initial appraisal shows a healthy net present value of $6,465 million at a discount rate of 10% as shown in the table below:

However, management is unsure about the demand for the product which will be produced and has insisted that the future revenues should be reduced to certainity equivalents by taking 70%, 65% and 60% of the years 1,2, and 3 cash inflows respectively.

What should P do?

42. DRAG DROP

G plc has decided to move its production plant to overseas Country

43. An electricity company owns and operates a nuclear power station located ten miles from a large city. A recent and very extensive engineering examination of the power station concludes with the estimate that the probability of a major nuclear disaster within the next 20 years is 0.2%.

Which of the following best explains the relevance of quantifying the risk in that way?

44. C Ltd is a private, family-owned company which is hoping to become listed on a recognised Stock Exchange within the next two years. At the moment, the Board of Directors comprises five directors; four of whom are from the founding family and all of whom are involved in the day-to-day running of the business. The remaining director obtained a seat on the Board three years ago as a condition of an investment by a venture capital fund.

The Board meets in half-day sessions once a fortnight and the Board meetings are reasonably well run. All decisions are taken by the Board as a whole. There are no sub-committees.

Which of the following steps would it be appropriate for C Ltd to take in the light of the proposed listing?

45. A project requires a capital investment of £2.7million. The project will save £450,000 each year after taxation. Assume the savings are in perpetuity. The business risk of the venture requires a 15% discount rate. The company has to borrow £1million to finance the project at a rate of 9% and the net tax shield is 30%, the project supports debt which generates an interest tax shield of 0.30 x 0.09 x £1million, which is £27,000 per year in perpetuity.

Calculate the project’s adjusted present value.

46. DRAG DROP

Select the most appropriate level of responsibility for managing each of the following risks.

47. An electricity company owns and operates a nuclear power station located ten miles from a large city. A recent and very extensive engineering examination of the power station concludes with the estimate that the probability of a major nuclear disaster within the next 20 years is 0.2%.

Which of the following best explains the relevance of quantifying the risk in that way?

48. N, a large company in the food production industry, has grown over the years by the acquisition of several smaller rivals. The company has ten branches located in its home country and has just opened a foreign branch for the first time. It has recently made some changes to the structure and implementation of its control system.

Which TWO of these would be most likely to improve the overall control system?

49. DRAG DROP

The list below has duties performed by risk managers and internal auditors. Show who would carry out the duties assuming the company has both risk managers and internal auditors.

50. M, a manufacturing company, has had some problems with defects in one of the main products it produces. This product has been made by the company for many years and is very profitable. Last month it had over 300 defects reported by customers which is more than 15% of products sold. This is a reputation risk for M and is also affecting profitability.

Which of the following controls could M introduce to reduce defects and also increase profitability?

51. When a new computer system is being implemented there are several possible methods for managing the changeover from the old system to the new system.

Which THREE of the following are true?

52. Division A of X plc produced the following results in the last financial year.

Net profit $200,000 Gross capital employed $1,000,000

For evaluation purposes all divisional assets are valued at original cost.

The division is considering a project that has a positive NPV, will increase annual net profit by $15,000, but will require average inventory levels to increase by $50,000 and non-current assets to increase by $50,000.

X plc imposes a 16% capital charge on its divisions.

Given these circumstances, will the evaluation criteria of return on investment (ROI) and residual income (RI) motivate division A managers to accept the project?

53. CW is a large company in the food production industry. It has grown over the years by the acquisition of several smaller rivals CW has ten branches located in its home country and has just opened a foreign branch for the first time It has recently made some changes to the structure and implementation of its control system.

Which TWO of the following changes would be most likely to improve the overall control system?

54. ZZ is a data security company that is responsible for cyber security m a large shopping mall 21 uses Network Configuration Management (NCM) to assist it in meeting the various needs of the mall’s user community.

Which THREE of the following are advantages provided by NCM?

55. Y Company wishes to recruit an employee who will have responsibility for the receipt and handling of cash.

From the point of view of the internal auditor which THREE of the following would be most likely to provide useful information about the candidate"?

56. Achieving the budget is often used as a good performance measure. However, there are problems with budgets which may mean they are not always good measures of performance.

Which TWO of the following statements about budgets suggest that they should not always be used to measure performance?

57. Which method of quantifying risk exposure can be used to calculate the maximum loss on a portfolio occurring within a period of time with a given probability?

58. Rio owns an architects business which employs 12 skilled architects and four administrative staff.

The Office Manager has just attended a workshop on internal controls and the way in which they can improve organisations. He intends to implement some internal controls as soon as possible.

What are the limitations of an internal control system in Rio’s business?

59. Which of the following is NOT a financial risk.

60. Which of the following represents the greatest risk associated with introducing a system of post-completion audit for investment projects?

61. UJK manufactures garden machinery. The company is dependent upon another manufacturer for the motors that power its products.

One of the factors that is being considered in a stress test requested by UJK’s Board is the possibility that the motor manufacturer increases its selling prices by 10% The motor accounts for a significant proportion of the overall manufacturing cost of UJK’s products

Which of the following are correct?

62. The board of OKN is considering an investment opportunity that will require the company to borrow a large amount in month 10 of the current financial year and to invest it immediately in property, plant and equipment. This investment has a positive net present value that justifies the risk, but the directors are reluctant to invest in the project.

Why might the directors be reluctant?

63. Which THREE of the following are principles of good corporate governance according to the UK Corporate Governance Code?

64. The internal audit department has just completed an investigation into the HR department’s procedures relating to new staff appointments The head of HR is unhappy with the draft report prepared by the lead internal auditor The report lists several cases in which appointments were made despite the fact that one or more of the entity’s formal procedures were not followed

The head of HR has complained that the internal auditor’s comments do not allow for the fact that the HR department’s staff members are often very busy and do not always have time to conduct every check.

The internal auditor’s comments also reflect a failure to complete documents None of the omissions have led to the appointment of an unsuitable member of staff

Which TWO of the following statements reflect an appropriate response by the board of directors to this report?

65. Which of the following are the Committee of Sponsoring Organisations (COSO) key principles of enterprise risk management? Select ALL that apply.

66. Kate is a management accountant. Her immediate superior plans to apply for a promotion and his strongest competitor is the sales manager. Kate’s superior has ordered her to set unattainable sales targets in a sales budget in order to reduce the sales manager’s promotion prospects. He told her not to tell anybody.

Kate asked the finance director for advice. He told her that he wanted her immediate superior to get the promotion and so she should set the unattainable budget as instructed.

Kate set the budget as instructed.

Which THREE fundamental ethical principles has Kate breached?

67. The shares of a company have a beta factor of 1.15. Therefore, which of the following must be true?

68. DFG is the largest bridge-building company in its home country, H. DFG works exclusively for the government of country H and the government awards DFG 80% of the contracts to build new bridges.

DFG’s directors are considering using the big data approach to identify opportunities to increase sales revenues and profit.

Which of the following statements are true?

69. The senior manager in the accounts department is going on annual leave for three weeks and Jo, a supervisor is being put in charge of the department for that time.

Which TWO of the following statements are correct?

70. C is a large international supermarket chain. It has many thousands of suppliers and many thousands of potential suppliers competing for shelf space m its supermarkets.

Which of the following provisions would be appropriate for C to include m its ethical code in relation to its suppliers? Select ALL that apply

71. Which of the following is an ethical dilemma?

72. A UK based company is considering an investment of GB£1,000,000 in a project in the USA. It is anticipated that the following cash flows will arise from this project.

The cash flows will be either US$400,000 with a probability of 40% or US$700,000 with a probability of 60% for each of the next three years; remitted to the UK at the end of each year.

Currently GB£1.00 is worth US$1.30.

The expected inflation rates in the two countries over the next four years are 2% in the UK and 4% in the US.

Applying the Purchasing Power Parity Theory, which of the following represents the expected net present value of the project in GP£ (to the nearest whole pound)?

73. You have just been employed as a management accountant in a small business with an annual turnover of $0.5 million.

You have a wide range of duties because the business is small.

Which of the following is an ethical risk?

74. The Committee of Sponsoring Organisations (COSO) outlined six key principles of Enterprise Risk Management (ERM).

Which of the following are COSO key principles?

75. Which of the following statements are correct?

76. GHJ makes large export sales to customers in Country A, whose currency fluctuates significantly against GHJ’s home currency. GHJ also makes large purchases from suppliers in Country A. All of these transactions are in Country A’s currency.

GHJ’s Treasurer does not actively hedge currency risks because there is a natural hedge in place due to the company making both sales and purchases in the same currency.

GHJ’s Board has instructed the Treasurer to put active hedging measures in place because the Risk Report would otherwise have to disclose the fact that GHJ has a currency risk which is not actively hedged.

Which of the following statements are correct?

77. You are the Management Accountant for a company which supplies baked food to a string of retail outlets; biscuits, cakes, savoury snacks etc.

You discover that a trainee employee, who is responsible for cleaning out the delivery vans has been taking damaged goods and packets which have reached their sales expiry date and has been selling them to friends. These products would otherwise have been discarded as waste.

The trainee in question is the nephew of one of the senior managers.

What is the correct course of action?

78. An oil company has entered into a joint venture with a competing oil company to develop a new oil field. The joint venture arrangement is intended to mitigate the risks associated with developing the oil field.

The following disclosure appears in the oil company’s risk report:

"Many of our large projects and operations are conducted through joint ventures. These arrangements involve complex risk allocation and indemnification arrangements and we have less control over these activities than we would have if we had full ownership and control. Our partners may have economic or business interests that are opposed to ours, and may exercise the right to block key decisions or actions. We believe the joint arrangement is in our best interest."

Which of the following statements are correct?

79. VBN is a multinational company that has 60 subsidiary companies that operate in 11 countries. VBN evaluates the performance of each subsidiary as an investment centre, using residual income to measure performance.

Which THREE of the following threats of dysfunctional behaviour may arise from VBN’s use of residual income to measure subsidiaries’ performance?

80. C is an accounts clerKwho is supposed to sign each invoice as evidence that she has conducted checks against supporting documents Sometimes C signs invoices without making these checks D is a member of the internal audit team He has been told to conduct compliance tests on whether C is checking the invoices property

Which of the following would grve D a false sense of assurance that C’s checks have been in operation?

Select ALL that appry