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What are the roles of business versus risk management in developing and implementing risk assessments?
The Principles for Risk Governance, as established by PRMIA (Professional Risk Managers' International Association), emphasize the Three Lines of Defense (3LoD) Model, which is widely used in risk management and governance frameworks.
Business Line Ownership of Risk (First Line of Defense)
The business units are responsible for identifying, assessing, managing, and monitoring risks within their operations.
Since they generate the risks through their activities, they must own the risk assessment process.
This aligns with PRMIA Governance Principles, which state that risk management should be embedded within business operations to ensure proactive risk identification and control.
Risk Management's Role (Second Line of Defense)
The risk management function is not directly responsible for conducting risk assessments but plays a key role in designing and maintaining the risk assessment framework.
This includes setting standards, methodologies, and tools for assessing risks across business functions.
Risk management provides supervision and oversight, ensuring that risk assessments align with organizational policies and regulatory expectations.
Oversight from Senior Management & the Board (Third Line of Defense)
Internal audit (third line of defense) independently reviews and provides assurance that the risk management framework is effective and that risk assessments are conducted properly.
PRMIA's Risk Governance Standards emphasize that internal audit should evaluate the effectiveness of the risk assessment framework without being involved in its direct execution.
Why Other Answers Are Incorrect
Option
Explanation
A . Risk management, in its role as second line of defense, performs the risk assessment process from beginning to end. There is no business line involvement.
Incorrect -- Risk management facilitates and oversees the risk assessment process, but the business must take ownership of the risks it generates.
C . Business owns the risk assessment process so risk management does not play a role in the process.
Incorrect -- While the business owns the process, risk management plays a crucial role in developing the framework, setting policies, and providing oversight.
D . Business management's role in the risk assessment process should be confined to oversight.
Incorrect -- Business management is actively responsible for executing risk assessments, not just overseeing them.
PRMIA Reference for Verification
PRMIA Standards for Risk Governance -- Establishes the Three Lines of Defense and the separation of responsibilities.
PRMIA Risk Management Framework (RMF) Guidelines -- Defines the roles of business and risk management in risk assessment.
PRMIA Enterprise Risk Management Best Practices -- Outlines how risk management facilitates risk assessments while the business retains ownership.
This answer is verified according to PRMIA's official risk governance documents and best practices. Would you like additional clarification or supporting documentation references?
Confidence Accounting can be defined as:
Definition of Confidence Accounting
Confidence Accounting challenges traditional accounting by introducing probability distributions and ranges rather than fixed numbers for financial reporting.
This approach improves transparency and risk awareness by acknowledging uncertainty in financial figures.
Why Answer B is Correct
Encourages using ranges (confidence intervals) instead of discrete values to better reflect uncertainty.
Used in risk-sensitive industries where financial estimates vary due to external factors (e.g., credit risk, market fluctuations).
Why Other Answers Are Incorrect
Option
Explanation
A . An approach that encourages companies and audit firms to have diverse boards.
Incorrect -- Board diversity is unrelated to Confidence Accounting.
C . An approach that encourages companies and audit firms to use regular statements in their AI software.
Incorrect -- AI may use probability models, but Confidence Accounting is an accounting methodology, not an AI approach.
D . An approach that encourages companies and audit firms to stop using figures and maths.
Incorrect -- Confidence Accounting still relies on mathematical models; it does not eliminate numerical analysis.
PRMIA Reference for Verification
PRMIA Financial Risk Reporting Standards
IFRS (International Financial Reporting Standards) Guidelines on Probability-Based Accounting
Ideally, which of the following should be completed as part of the risk assessments of service providers?
Third-Party Risk Management (TPRM)
PRMIA highlights the importance of conducting thorough due diligence on third-party vendors and service providers.
This includes evaluating compliance programs, risk management frameworks, financial stability, strategic objectives, and operational history.
Key Areas of Third-Party Risk Assessment
Compliance and Risk Infrastructure Ensures that the provider meets regulatory and security requirements.
Financial Health Determines whether the provider has the financial stability to support long-term service delivery.
Business Strategy Helps assess alignment with the organization's risk appetite and goals.
Operating History Evaluates experience and reliability in delivering services.
Why Other Answers Are Incorrect
Option
Explanation
B . An assessment of a third party should not include its compliance and risk infrastructure, financials, business strategy, and operating history.
Incorrect -- Ignoring these critical factors increases the risk of working with an unreliable vendor.
C . Onsite visits are not advantageous for understanding the third party's risks and control environment.
Incorrect -- Onsite visits are highly valuable as they provide first-hand insights into operational controls. PRMIA encourages risk managers to conduct site visits.
D . A review of the pay levels of the staff supporting the service.
Incorrect -- Employee salaries are not a primary risk factor in vendor assessments. The focus should be on the vendor's security, compliance, and operational risks.
PRMIA Reference for Verification
PRMIA Third-Party Risk Management (TPRM) Guidelines -- Details best practices for vendor risk assessments.
Basel Principles on Outsourcing and Third-Party Risk -- Provides regulatory guidance on evaluating third-party service providers.
In relation to the template for writing policy documents, which one of the following pairings of requirements is correct? A well designed policy will include:
Step 1: Key Elements of a Well-Designed Policy Document
A well-designed policy should include:
Scope -- Who the policy applies to.
Exception Handling -- How and where exceptions should be requested.
Accountability -- Who is responsible for enforcement.
Step 2: Why Option C is Correct
A policy must clearly define exceptions and the process for requesting them.
It should also define areas where the policy does not apply to avoid confusion.
Step 3: Why the Other Options Are Incorrect
Option A ('List of exceptions for board members' families') Incorrect because policies should apply consistently to all stakeholders.
Option B ('List of acceptable fonts and margin types') Incorrect because formatting is secondary to content clarity.
Option D ('To whom the policy applies and an additional management report') Incorrect because policy scope should not include unnecessary reports.
PRMIA Risk Reference Used:
PRMIA Policy Writing Guidelines -- Defines policy structure and exception handling.
ISO 19600 Compliance Management Standard -- Supports clear, well-documented policies.
Final Conclusion:
A well-designed policy clearly defines exceptions and their handling process, making Option C the correct answer.
In order for a KRI to be effective it must be:
Definition of an Effective Key Risk Indicator (KRI)
A KRI is a metric used to identify, measure, and monitor emerging risks.
To be effective, KRIs must be both quantitative and qualitative, allowing for a comprehensive risk view.
Key Characteristics of Effective KRIs
Quantitative -- Uses numerical data for trend analysis.
Qualitative -- Incorporates expert judgment and scenario-based insights.
Consistent -- Maintains uniform definitions across reporting periods.
Efficient & Repeatable -- Must be easily measured and consistently reported.
Why Other Answers Are Incorrect
Option
Explanation
B . Qualitative, Consistent, Efficient & Repeatable.
Incorrect -- Excludes quantitative aspects, which are essential for KRIs.
C . Quantitative, Consistent, Comparable, Efficient & Repeatable.
Incorrect -- While comparison is useful, qualitative factors are missing, making this answer incomplete.
D . Quantitative, Repeatable and Efficient.
Incorrect -- Lacks qualitative insights and consistency as key factors for KRIs.
PRMIA Reference for Verification
PRMIA Risk Indicator Guidelines
Basel Committee's Principles on Risk Data and KRI
