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Exam I-Sp2007-solution

Exam I-Sp2007-solution - ACCOUNTANCY 321 Spring 2007 EXAM I...

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ACCOUNTANCY 321 Spring, 2007 EXAM I Solution I. 4 points for each one. Grade ONLY the first 4 INTERNAL ENVIRONMENT – This is the core of any business—its people. Their individual attributes, including integrity, ethical values, and competence (the environment in which they operate) sets the tone or culture of a company and helps determine how risk conscious employees are. It is the foundation for all other ERM components, providing discipline and structure. OBJECTIVE SETTING – The ERM ensures that company management puts into place a process to formulate strategic, operations, reporting, and compliance objectives which support the company’s mission and which are consistent with the company’s tolerance for risk. The strategic objectives are set first, as the foundation for the other three. The various objectives provide guidance to companies as they identify the events which give rise to the risks the company faces as they assess and respond to those risks. EVENT IDENTIFICATION – The ERM requires management to identify events which may affect the company’s ability to implement its strategy and achieve its objectives. Management must then determine whether these possible events represent risks (negative-impact events requiring assessment and response) or opportunities (positive- impact events which influence the strategy and objective-setting process). RISK ASSESSMENT – The organization must be aware of and deal with the risks it faces. It must establish mechanisms to identify, analyze, and manage risks. Identified risks are assessed to determine how to manage them and how they affect the company’s ability to achieve its objectives. Qualitative and quantitative methods are used to assess risks in several different ways. One must assess the risks’ likelihood, its positive and negative impact, both individually and by category, its effect on other organizational units, and its effect on both an inherent and a residual basis. RISK RESPONSE – To align identified risks with the company’s tolerance for risk, management can choose to avoid, reduce, share, or accept the risks. To select a response, management must take an entity-wide (or portfolio) view of risk and assess risk likelihood and impact as well as the costs and benefits of the alternative responses.
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CONTROL ACTIVITIES – Control policies and procedures must be established and implemented throughout the various levels and functions in the organization.
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