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CIMA P3 - Risk Management

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Total 339 questions

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?

A.

There is no acceptable level of risk for a major nuclear accident and so the probability has little information value in itself.

B.

The probability is so low as to be ignored.

C.

The directors will be able to argue that they were not negligent in the event of a major disaster within the 20 year period.

D.

The calculation of a precise probability demonstrates that the engineers who conducted the inspection are experts in their field.

You are a junior accountant in a local accountancy firm with many clients in various businesses.

Your immediate manager has asked you to collect certain personal details about clients' staff from the firm's records. You suspect that his intentions are malicious.

You asked your manager to explain why he required these details and he told you it is none of your business.

What should you do? Select TWO responses.

A.

You should stop being impertinent and obtain the details as instructed.

B.

You should try to find out what the manager wishes to use the details for.

C.

You should keep a log of all the facts that the manager has requested, including the dates on which those requests were made.

D.

You should seek to have a confidential discussion with the manager's superior and express your concerns.

E.

You should raise the matter with the firm's external auditors.

A has an opportunity to invest $90,000 in a project that is expected to generate annual cash inflows of $60,000 for each of the next three years. The project's beta coefficient implies a discount rate of 12% for this project, based on a risk-free rate of return of 3%.

A is prepared to forego the expected cash flows from this project in return for a guaranteed payment of $50,000 at the end of year 1, $42,000 at the end of year 2 and $30,000 at the end of year 3.

What is the certainty equivalent value of this opportunity to A?

A.

$9,493

B.

$25,606

C.

$54,120

D.

$115,606

Which of the following statements are true of economic risk?

A.

Economic risk is easy to measure

B.

Economic risk may be caused by international trade

C.

Economic risk is something which cannot be avoided

D.

Economic risk is influenced by many factors

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?

A.

ROI Yes  RI Yes

B.

ROI Yes  RI No

C.

ROI No  RI Yes

D.

ROI No  RI No

COM is a well established company in the construction industry The company was founded by the Mac family 30 years ago and several family members still serve on the Board The company obtained a listing five years ago The Board has an appropriate balance between executive and non-executive members It also has audit remuneration and nomination committees The average age of board members is 68

COM is profitable but profit margins have been falling steadily and this year's revenues are lower than it was achieved last year The Board recognis thai it does not have a long term strategy in place and has been losing business to newer, more aggressive competitors

Which THREE of the following statements are correct?

A.

The remuneration committee should consider incentives such as share options to encourage the Board to focus on COM's long term strategy

B.

The nomination committee should have had a succession plan in place for directors.

C.

The nomination committee should be operating for the benefit of the directors.

D.

The audit committee should have alerted the Board to the impact of falling profit margins

E.

The non-executive directors should have challenged the lack of long term strategic planning

R is a company running gas-fired power stations in Western Europe. The Risk Committee has just received a report that a power station built to the same design and specification in a developing country has recently collapsed. The causes of the collapse are unclear, but if something similar were to happen in Europe the consequences for R could be catastrophic.

Which of the following actions being considered by the Risk Committee are ethical?

A.

Commission a reputable firm of structural engineers to carry out a review of all power stations owned by R.

B.

Decide that the information available to date is too uncertain to take any action for now.

C.

Send experts employed by R to the site of the collapse so that they can gather information first hand on what happened.

D.

Issue a press release confirming that all R's power stations are "entirely safe".

E.

Attempt to increase the level of insurance cover against this type of eventuality.

F.

Draw up contingency plans in case some of R's power stations need to be shut down.

Which of the following statements concerning the role of a non-executive director (NED) is correct?

A.

Individual NEDs should be on at least five boards if possible so as to give them wide experience.

B.

NEDs are not responsible for determining executive directors' remuneration.

C.

NEDs should satisfy themselves on the integrity of financial information and should develop the control systems to ensure that integrity is maintained.

D.

NEDs have a key role in removing executive directors.

 D is a large oil refinery.

The managers have identified four risks shown in the risk map below:

Which of the risk mitigations listed below would be the best for dealing with the two risks classified as medium likelihood and high impact?

A.

Accept

B.

Reduce

C.

Transfer

D.

Avoid

Laura is an accounts clerk. She is supposed to sign each invoice as evidence that she has conducted checks against supporting documents. Sometimes Laura signs invoices without making these checks.

Terry is a member of the internal audit team. Terry has been told to conduct compliance tests on whether Laura is checking the invoices properly.

Which of the following would give Terry a false sense of assurance that Laura's checks have been operating?

A.

Terry examined a sample of invoices to make sure that they had been signed by Laura. All had been signed.

B.

Terry worked at a spare desk in the accounts department and quietly watched Laura without telling her. She checked every invoice carefully while Terry was present.

C.

Terry selected a sample of purchase invoices and compared each to the supporting documents that Laura is supposed to review. Every one of Terry's invoices was supported by the related documents.

D.

Terry asked Laura a series of open-ended questions about the operation of the purchases system. She did not mention anything about detailed checks of invoices against documents.

E.

Terry reviewed a sample of invoices for purchases of plant and equipment and found that Laura had not signed them. Laura explained that she believed that those were authorised by someone else, although the accounts manual indicates that it was her responsibility.