CIMA P3 Actual Tests : Risk Management

Which TWO of the following might create a good control environment?

• A. The Board has just issued an ethical code
• B. Management did not have time to carry out all the staff appraisals this year but all staff have received a pay increase instead
• C. Management has just revisited the annual budget and made it much harder to achieve in order to try and boost profits
• D. The Finance Director has just been given a place on the audit committee to increase the committee's financial knowledge
• E. Managers have good job descriptions that define their roles in the organisation clearly

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?

• A. Reduce the company bank loans.
• B. Introduce credit checks for new customers.
• C. Pay suppliers' invoices quicker.
• D. Look for a loan with a lower interest rate.

K plc is a large listed company in the retail industry. It has recently appointed T as a non-executive director. T has never had any previous involvement with K plc but is well known to K's Chief Executive P because T is the Managing Director of K plc's largest supplier.
K has recently expanded into Asia. Doubts about the wisdom of the move have been expressed in the financial press with some journalists commenting that it has exposed K plc to higher degrees of risk than previously.
The move had been approved by the Risk Committee which consists of four Non-Executive Directors (NEDs) all of whom have significant experience in business.
K plc does not have a Nominations Committee. Nominations to the Board are usually proposed by P and generally agreed by the other directors.
In relation to the above scenario which of the following comments is valid?

• A. The absence of a Nominations Committee exposes K plc to the risk that the Chief Executive may have unfettered power.
• B. The Risk Committee should have rejected the proposal to enter the Asian market merely because it exposed K to greater risk than the other markets in which it operates.
• C. There is no possible conflict of interest in relation to T's position as a NED and as Managing Director of a supplier company since, in both roles, he would clearly want K plc to prosper.
• D. K plc is in line with best practice as it only has NEDs on its Risk Committee.

K is a large mining company. In its risk report it states that there is a risk of accidents and injury because of the nature of the industry. It states that it has staff training in place and complies with all Health and Safety regulations but in spite of this there will still be a residual risk that accidents and injuries may occur.
Which of the following statements are correct?

• A. The shareholders should not invest because there is still a residual risk.
• B. Most companies in this industry will say something similar in their risk report.
• C. Some risks cannot be eliminated.
• D. The directors are avoiding their responsibilities by saying there is a residual risk.
• E. Accepting a residual risk does not imply the company is reckless.

Multinational companies have a variety of methods by which to manage currency risk.
Select ALL internal hedging methods from the following list.

• A. Leading and lagging
• B. Money market hedge
• C. Pooling
• D. Forward contracts
• E. Invoice in home currency
• F. Matching