SPOM Set C Paper-1 : Risk Management

SPOM Set C Paper-1 : Risk Management MCQ is designed as an essential resource to help you solidify your grasp on the core concepts of Risk Management. Drawing directly from the ICAI’s curriculum, we’ve prepared a comprehensive set of 50 Multiple Choice Questions (MCQs). These questions are meticulously crafted to test your understanding of key topics, including:

The foundational distinction between ‘Risk’ and ‘Uncertainty’
Various classifications and types of risks (Strategic, Operational, Financial, etc.)
The overarching importance and objectives of effective risk management
An overview of mitigation and control strategies
The significant opportunities for CAs in the realm of risk management
Insights into Enterprise Risk Management (ERM) frameworks like COSO and ISO 31000.

Engage with these MCQs to assess your preparation, identify areas for improvement, and build the confidence needed to excel in your examination. Each question offers immediate feedback, helping you learn from your selections and deepen your knowledge.

Risk Management Quiz

Paper-1 : Risk Management

1. According to Professor Frank Knight, what is the primary distinction between “risk” and “uncertainty”?

a) Risk is unquantifiable, while uncertainty is measurable. b) Risks have calculable probabilities, while uncertainties do not follow a discernible pattern or are unique events. c) Uncertainty relates to financial outcomes, while risk relates to operational outcomes. d) Risk is a human mind state, while uncertainty is a state of nature.

2. Which of the following is considered an “internal risk” based on its source?

a) Employee churn or negligence. b) Changes in government regulations. c) Natural calamities like floods. d) Shifting consumer preferences in the market.

3. What does “Residual Risk” refer to in risk classification?

a) Risk that has been completely eliminated. b) Risk identified before any treatment or mitigation. c) Risk that is only present in a latent manner. d) The level of risk that remains untreated after mitigation efforts.

4. Which of the following is an example of a Strategic Risk?

a) Breakdown of critical production machinery. b) Poor service quality after sales. c) Emergence of an alternative product by a competitor making the company’s product obsolete. d) Inaccuracies in financial reporting with stock price sensitivities.

5. What is the primary objective of Risk Management?

a) To solely focus on avoiding all potential losses. b) To protect the property, earnings, and personnel of the organization against losses and legal liabilities. c) To ensure immediate business growth at any cost. d) To completely eliminate all accidental risks.

6. The concept of “Risk Control” primarily focuses on:

a) Reducing the frequency and severity of losses. b) Transferring all risks to another party. c) Accepting losses when they occur without alternatives. d) Avoiding any activity that is risk-prone.

7. Which of the following is NOT explicitly mentioned as a role a Chartered Accountant can play in Risk Management?

a) Manager. b) Auditor. c) Regulator. d) Consultant.

8. In the context of risk classification based on consequences, “Operational Risks” are generally:

a) Risks impacting the fundamental business and long-term objectives. b) Risks of tarnishing the company’s image due to poor perceptions. c) Risks dealing with financial matters of the company. d) Risks impacting how the organization prepares and delivers its product/service, often more internal in nature.

9. What is the main characteristic of “Uncontrollable Risks”?

a) Their outcome can be significantly influenced by management. b) They are easier to predict due to internal factors. c) They cannot be influenced to a reasonable extent by management and are generally harder to predict. d) Companies can take various preventative measures towards them.

10. The relationship between the source and nature of risk indicates that risk is highest for:

a) Internal controllable factors. b) External uncontrollable factors. c) Internal uncontrollable factors. d) External controllable factors.

11. What is “Enterprise Risk”?

a) An enterprise-wide approach to address the full spectrum of an organization’s various risks. b) Risk confined only to operational activities. c) A silo approach to managing specific risks. d) Risk associated primarily with financial investments.

12. Which of the following is a component of the latest COSO Enterprise Risk Management Framework?

a) Risk Avoidance and Retention. b) Financial Hedging Strategies. c) Risk Governance and Culture. d) Pure Risk Analysis.

13. The main difference between Scenario Analysis and Sensitivity Analysis is that:

a) Scenario analysis focuses on a single input variable, while sensitivity analysis considers multiple variables. b) Sensitivity analysis calculates the impact of a single input variable, while scenario analysis considers simultaneous changes in multiple variables based on a specific scenario. c) Scenario analysis is used for short-term projects, and sensitivity analysis for long-term projects. d) Sensitivity analysis predicts the impact, while scenario analysis quantifies the risk.

14. What does a “well-defined and developed risk appetite statement” primarily help achieve?

a) Better risk management and informed risk-based decisions. b) Complete elimination of all business risks. c) Exclusive focus on short-term profitability. d) Reduction of regulatory compliance requirements.

15. “Knowledge Risks” are primarily associated with:

a) Corruption to or loss/theft of vital/critical proprietary information. b) Physical factors like fire or leakage of toxic chemicals. c) Breakdowns of critical production machinery. d) Non-compliance with laws and regulations.

16. Which of the following is an example of a “Controllable Risk”?

a) Flooding in a certain part of the country. b) Terrorist strikes and bomb-blasts. c) Safety precautions taken on the factory floor to reduce the chance of an accident. d) An aggrieved employee choosing to sabotage production machinery.

17. “Audit Risk” is primarily defined as:

a) The risk of an organization suffering financial loss due to fraud. b) The risk of incorrect audit conclusions, partly due to inherent nature of audit work or flawed evidential matter. c) The risk of not meeting customer demands due to poor service quality. d) The risk of a company’s product becoming obsolete due to technological changes.

18. The “Transfer” strategy in risk management involves:

a) Causing another party to accept the risk, typically by contract. b) Deliberately not performing a risk-prone activity. c) Accepting the loss when it occurs without other alternatives. d) Reducing risk associated with an investment proposal.

19. Which of the following is considered an “External Risk” based on its source?

a) Quality of product and manner of production. b) Economic factors such as inflation. c) Outdated internal processes. d) Negligence or dishonesty of employees.

20. What is the definition of “Risk” as a measure of inability to achieve overall programme objectives?

a) The probability of failing to achieve a particular outcome and the consequences of that failure. b) The chance of financial loss in investments. c) Any unexpected event that impacts the business. d) The relative variation of the actual outcome from the anticipated outcome.

21. According to the document, which industry was mentioned as using full-time economists to monitor and track changing economic scenarios?

a) Pharmaceutical companies. b) Manufacturing firms. c) Enterprises with multiple businesses in diverse industries. d) Tech startups.

22. What is the core idea behind “Hedging” as a risk management technique?

a) Completely eliminating unavoidable risks. b) A systematic process of reducing risk associated with an investment or assignment where risk is inevitable. c) Transferring risk responsibility to others through contracts. d) Accepting potential losses as they occur.

23. Which risk classification categorizes risks based on whether or not any risk treatment or mitigatory actions have been applied?

a) Risk based on Source. b) Risk based on Nature. c) Risk based on Consequences. d) Risk based on Status.

24. “Brand/Reputation Risks” generally emanate from:

a) Some serious event which shakes the core foundation of what the company stands for. b) Poor customer service that does not impact the entire brand. c) Technical non-compliance resulting in rejection of applications. d) Breakdown of critical production machinery.

25. What role does the CEO primarily play in the Risk Management agenda?

a) Performing all administrative risk management activities directly. b) Assuming complete overall “ownership” of Risk management and setting the “tone at the top.” c) Solely identifying and assessing potential risks. d) Delegating all governance and supervision responsibilities to Internal Auditors.

26. Which of the following is NOT an example of a “People factor” internal risk?

a) Employee churn. b) Strikes or lock-outs by trade unions. c) Fire in the factory. d) Negligence or dishonesty of employees.

27. What is a key benefit of a well-defined Risk Appetite Statement regarding transparency?

a) It helps to improve transparency for various stakeholders, including investors and regulators. b) It limits the sharing of financial information to internal management only. c) It reduces the need for external audits. d) It simplifies complex risk models for public consumption.

28. The statement “risk is a state of nature, uncertainty is a state of human mind” implies:

a) Risk exists objectively regardless of human perception, while uncertainty is a cognitive state. b) Both terms are interchangeable and refer to the same concept. c) Uncertainty can be fully controlled, unlike risk. d) Risk is always quantifiable, but uncertainty is not.

29. What is the primary focus of “Risk Assessment” in the risk management process?

a) Implementing controls to reduce risk impact. b) Identifying potential risks and documenting their characteristics. c) Transferring risk to external parties. d) Developing crisis management plans.

30. The “Avoidance” strategy in risk management means:

a) Accepting losses when they occur. b) Shifting risk responsibility to others. c) A deliberate attempt not to perform an activity or accept a proposal that is risk-prone. d) Reducing the impact of an inevitable risk.

31. “Financial Risks” include:

a) Reporting inaccuracies in financial matters with stock price sensitivities. b) Theft of intellectual property. c) Poor service quality after sales. d) Breakdown of critical production machinery.

32. The process of “Risk Identification” can be successfully executed if:

a) The company has unlimited financial resources. b) Only external experts are involved in the process. c) The risk management team has a reasonable degree of business knowledge and related variables. d) The focus is solely on past events.

33. What is the role of “Key Success Factors (CSFs)” in strategic risk?

a) They measure the financial performance of the business. b) They articulate what the company must do, and do well, to achieve its strategic goals. c) They are solely related to internal operational efficiencies. d) They identify potential risks that could hinder business objectives.

34. “Business Risk” as a component of unsystematic risk emanates from:

a) Variability in the operating profits of a company. b) Presence of debt in the capital structure. c) General market movements. d) External economic factors.

35. What is the main characteristic of “Operational Risk” in the financial services industry?

a) It stems from credit allocation activities. b) It is similar to market risk. c) It is purely financial in nature. d) It is also referred to as non-financial risk, originating from flawed processes, human elements, or system failures.

36. The case of Kodak mentioned in the document is an example of failing to manage which type of risk?

a) Operational risk. b) Financial risk. c) Strategic risk. d) Reputation risk.

37. “Physical factors” leading to internal risks can include:

a) A fire in the factory or leakage of dangerous fumes. b) Employee strikes. c) Market preference changes. d) Outdated internal communication processes.

38. What is the distinction between “Risk” and “Uncertainty” as per the document?

a) Risk is a human mind state, while uncertainty is a state of nature. b) Risk is a state of nature, while uncertainty is a state of human mind. c) Risk is always calculable, while uncertainty is never calculable. d) The terms are completely interchangeable.

39. Which of the following defines “Risk Management” according to ISO 31000 Guide 73:2009?

a) A set of activities that support the risk management process. b) Coordinated activities to direct and control an organization. c) It is set of components that provide the foundations and organizational arrangements for designing, implementing, monitoring, reviewing and continually improving risk management throughout the organization. d) A systematic method of establishing context and avoiding losses.

40. “Customer Satisfaction Risks” are typically:

a) Severe enough to impact the whole brand or reputation of the company. b) Directly linked to financial reporting inaccuracies. c) Limited to external environmental factors. d) Aimed at the quality of product or service, but not severe enough to impact the whole brand, hence more limited in nature.

41. The objective of a Disaster Recovery Plan (DRP) is to:

a) Document a set of procedures to protect a business IT infrastructure if any disaster takes place. b) Completely eliminate all business disruptions. c) Focus solely on financial recovery after a crisis. d) Identify opportunities for business expansion.

42. “Technology Risks” include risks emanating from:

a) Employee dishonesty or negligence. b) Dependence on use, ownership, and operation of technology to deliver customer solutions, or not keeping pace with advancements. c) Changes in consumer preferences. d) Fluctuations in foreign currency exchange rates.

43. Which of the following is an example of “Laws and Regulations (Compliance) Risks”?

a) Breakdown of critical production machinery. b) Exposure of unethical dealings of company in the media. c) Imposition of fines/penalties by government for legal/regulatory violations. d) Poor/delayed customer problem resolution.

44. “Management and Employees (HR/People) Risks” include:

a) Sudden departure of key management personnel with critical information or skills. b) Flooding in a certain part of the country. c) Compromising on security procedures and allowing unauthorized systems access. d) Challenges by a competitor for violations of Intellectual Property Rights.

45. What does the concept of “sustainable growth” help managers consider?

a) Only short-term profit maximization. b) The financial consequences of sales increases and setting sales growth goals consistent with operating and financial policies. c) Avoiding all investments with potential risks. d) Diversifying resources to spread risk across multiple industries.

46. “Fraud Risk” as described by Standard on Internal Audit (SIA) 11, involves:

a) Unintentional acts leading to financial loss. b) Errors in financial reporting due to negligence. c) Natural calamities causing business disruptions. d) An intentional act by one or more individuals involving deception to obtain unjust or illegal advantage.

47. “Location/Geography Risks” are those specific to:

a) A particular geography or location and the organization’s dependence on that part. b) Internal operational inefficiencies within different departments. c) Global supply chain disruptions. d) Changes in general economic health.

48. What is the definition of “Systematic Risk” in the context of business portfolio risks?

a) Risk that can be completely diversified away. b) Risk particular to a specific company. c) Risk that cannot be avoided by diversification because it is general to the overall market. d) Risk arising due to the presence of debt in the capital structure.

49. The concept of “Enterprise Governance” is described as:

a) Solely concerned with the relationship between shareholders and management. b) The accountability framework for all management processes. c) Only applicable to financial institutions. d) An outdated concept replaced by Corporate Governance.

50. “Continuous Improvement” in risk management involves:

a) Regularly reviewing and improving risk management processes, learning from past experiences, and updating plans. b) Only focusing on new risk identification. c) Transferring all risks to external consultants. d) Relying solely on initial risk assessments without periodic reviews.