ExpertMedium1 markMultiple Choice
CPA · Question 03 · Area 1: Business Analysis
Management is using the COSO Enterprise Risk Management (ERM) framework to address a newly identified risk: potential fluctuation in raw material prices. The company decides to enter into a forward contract to lock in prices for the next 12 months. Which risk response strategy does this represent?
Management is using the COSO Enterprise Risk Management (ERM) framework to address a newly identified risk: potential fluctuation in raw material prices. The company decides to enter into a forward contract to lock in prices for the next 12 months. Which risk response strategy does this represent?
Answer options:
A.
Avoidance
B.
Acceptance
C.
Sharing (Transfer)
D.
Reduction (Mitigation)
How to approach this question
Analyze the action taken. If the risk is moved to a third party (insurer, counterparty), it is Sharing/Transfer. If the activity is stopped, it is Avoidance. If controls are improved, it is Reduction.
Full Answer
C.Sharing (Transfer)✓ Correct
Entering into a forward contract is a hedging activity. Hedging transfers the financial risk of price changes to the counterparty of the contract. In COSO ERM, this falls under 'Sharing' (often called Transfer in general risk management).
Common mistakes
Confusing Reduction (internal steps) with Sharing (external transfer).
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