Which of the following actions assures management that the organization's objectives are protected from the occurrence of risk events?
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A. B. C. D.A.
Internal controls are the actions taken by the organization to help to assure management that the organization's objectives are protected from the occurrence of risk events.
Internal control objectives are applicable to all manual or automated areas.
Internal control objectives include: -> Internal accounting controls- They control accounting operations, including safeguarding assets and financial records.
-> Operational controls- They focus on day-to-day operations, functions, and activities.
They ensure that all the organization's objectives are being accomplished.
-> Administrative controls- They focus on operational efficiency in a functional area and stick to management policies.
Incorrect Answers: B: Risk management is the identification, assessment, and prioritization of risks followed by coordinated and economical application of resources.
It is done to minimize, monitor, and control the probability and impact of unfortunate events or to maximize the realization of opportunities.
C: Hedging is the process of managing the risk of price changes in physical material by offsetting that risk in the futures market.
In other words, it is the avoidance of risk.
So, it only avoids risk but can not assure protection against risk.
D: Risk assessment is a process of analyzing the identified risk, both quantitatively and qualitatively.
Quantitative risk assessment requires calculations of two components of risk, the magnitude of the potential loss, and the probability that the loss will occur.
While qualitatively risk assessment checks the severity of risk.
The assessment attempts to determine the likelihood of the risk being realized and the impact of the risk on the operation.
This provides several conclusions: -> Probability-establishing the likelihood of occurrence and reoccurrence of specific risks, independently and combined.
-> Interdependencies-the relationship between different types of risk.
For instance, one risk may have greater potential of occurring if another risk has occurred.
Or probability or impact of a situation may increase with combined risk.
Answer:
A. Internal control
Explanation: Internal control is a process put in place by an organization to provide reasonable assurance that its objectives are achieved. The objectives may include financial reporting, compliance with laws and regulations, and effective and efficient operations. Internal control is a critical component of risk management, as it helps to protect the organization's objectives from the occurrence of risk events.
Internal control includes policies, procedures, and mechanisms designed to ensure that risks are identified, assessed, and managed effectively. Internal control also helps to ensure that the organization's resources are used efficiently, and that financial statements are accurate and reliable.
Internal control can be divided into five components: control environment, risk assessment, control activities, information and communication, and monitoring. Together, these components help to provide assurance that the organization's objectives are protected from the occurrence of risk events.
B. Risk management
Explanation: Risk management is the process of identifying, assessing, and managing risks that may affect the organization's objectives. The objective of risk management is to ensure that the organization's objectives are achieved by minimizing the impact of risk events.
Risk management involves identifying risks, assessing the likelihood and potential impact of those risks, and implementing controls to manage or mitigate the risks. Risk management is an ongoing process, as new risks may emerge, and existing risks may change.
Risk management is an important component of internal control, as it helps to ensure that risks are identified and managed effectively. However, risk management alone does not assure management that the organization's objectives are protected from the occurrence of risk events. Internal control is necessary to provide the assurance that the organization's objectives are protected.
C. Hedging
Explanation: Hedging is a risk management technique used to protect against the potential loss from an adverse event. Hedging involves taking an offsetting position in a related security or asset to reduce the impact of an adverse event.
Hedging is commonly used in financial markets to protect against market volatility. For example, a company may use hedging to protect against fluctuations in foreign currency exchange rates or commodity prices.
While hedging can be an effective way to manage risk, it does not provide assurance that the organization's objectives are protected from the occurrence of risk events. Internal control is necessary to provide the assurance that the organization's objectives are protected.
D. Risk assessment
Explanation: Risk assessment is the process of identifying, analyzing, and evaluating risks that may affect the organization's objectives. Risk assessment is a critical component of risk management, as it helps to identify potential risks and prioritize the implementation of controls to manage or mitigate those risks.
Risk assessment is an important component of internal control, as it helps to ensure that risks are identified and managed effectively. However, risk assessment alone does not assure management that the organization's objectives are protected from the occurrence of risk events. Internal control is necessary to provide the assurance that the organization's objectives are protected.