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CIMA Strategic
P3
Risk Management Questions and Answers

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Viewing questions 71-80 out of questions

Questions # 71:

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?

Options:

The company expects to receive USD 1million from a customer and wishes to offset the cost of the put option by the premium on the call option.

The company expects to pay USD 1million to a supplier and wishes to offset the premium from the call option against the cost of the put option.

The company expects to receive USD 1million from a customer and wishes to obtain an additional benefit if the USD strengthens beyond GBP 1.00 = USD 1.61.

The company expects to pay USD 1million to a supplier and wishes to obtain additional protection against the USD strengthening beyond GBP 1.00 = USD 1.65.

Answer

Questions # 72:

HJK is a retailer, with more than 40 shops around the country. The directors suspect that a serious fraud has occurred at one of the branches and a team of internal auditors has been sent to investigate.

An analytical review investigation shows that sales revenue is in line with budget, but overtime payments to shop staff exceed budget by 20%.

How should the internal audit team proceed?

Options:

Conduct additional detailed testing on overtime payments.

Conduct additional detailed testing of all figures.

Increase the evaluation of inherent risk.

Increase the evaluation of control risk.

Answer

Questions # 73:

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?

Options:

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

The probability is so low as to be ignored.

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

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

Answer

Questions # 74:

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?

Options:

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

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.

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.

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.

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.

Answer

A, B, C

Questions # 75:

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

Options:

The shares have more unsystematic risk than the stock market average.

The shares have more systematic risk than the stock market average.

The shares have more total risk than the stock market average.

The shares have less unsystematic risk than the stock market average.

Answer

Questions # 76:

A's directors do not believe that they always get value for money from their investment in capital projects. Over the past decade the company has invested in 55 projects that have cost more than $1m. They are considering introducing a system of post completion audit to see if this will help them to understand any problems they have had with projects in the past. They hope to use the results of the post completion audits to significantly improve the results of their capital investments

State whether you agree or disagree with the points raised by A's directors.

Question # 76

Options:

Answer

Answer:

Questions # 77:

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?

Options:

Being asked to buy very small gifts for key clients.

Being asked to work weekends, playing golf with clients.

Being asked to work weekends, taking clients to night clubs making sure they have as much alcoholic drink as they want so that they will sign contracts.

Being asked to work weekends working out tenders for new contracts.

Answer

Questions # 78:

Which of the following statements best explains why a corporate treasury department should be established as a cost centre rather than a profit centre?

Options:

The Treasury Department should not be encouraged to speculate.

The Treasurer should not have a great deal of responsibility.

There is no way for the Treasury Department to generate revenue.

The Treasurer has the ability to manipulate the Department's reported profit.

Answer

Questions # 79:

SQH manufactures mobile phones SQH's Board is currently undertaking a long-term planning exercise as part of the process of strategy development The Board is considering expanding the number of countries it currently exports products to.

Which THREE of the following could cause difficulty in forecasting accurately'?

Options:

Currency changes in new and existing markets

Competitors will have a better understanding of potential new markets

Rapidly changing mobile phone technology.

Pressures on management to achieve short-term results

Long-term trends may be difficult to predict in this market

Answer

A, C, E

Questions # 80:

Which of the following are true of interest rate swaps?

Options:

Risk of default is high from the floating interest rate payer if interest rates rise.

An interest rate swap is an external hedging technique.

When interest rates are falling, the risk of default by the fixed interest rate payer is low.

Some companies use interest rate swaps to deliberately increase their risks because they believe that they are better at predicting future interest rates than the market.

An interest rate swap is an internal hedging technique.

Answer

A, B, D

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