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Risk, Return, Insurance, Internal Control Systems, Fraud Scheme, Security & Continuity

1. How would you weigh risk against return? Is there a point when return makes risk invalid? Explain your answer well.

2. When is insurance beneficial? Is insurance ever not beneficial? Explain your answer very well.

3. Where would you begin an evaluation of an internal control system? Please explain why?

4. What are some major components of an internal control system? Are these components always necessary? Explain your answer.

5. Explain the details of a fraud scheme that internal controls, due to inherent limitations, cannot impede

6. Describe some considerations for observing physical inventory. Explain a fraud scheme that could be used for inventory.

7. Explain how a company's growth can outpace current controls and provide an example

8. Explain some major risks inherent in the payroll cycle. How can these risks be mitigated?

9. Explain how controls and security are related for information assets

10. Explain the links between business continuity, system availability, and disaster recovery?

Solution Preview

1. How would you weigh risk against return? Is there a point when return makes risk invalid? Explain your answer well.
Invested money can render higher profits only if it is subject to the possibility of being lost.

You must be aware of your personal risk tolerance when choosing investments for your portfolio. Taking on some risk is the price of achieving returns; therefore, if you want to make money, you can't cut out all risk. The goal instead is to find an appropriate balance - one that generates some profit, but still allows you to sleep at night.

Before making investment you must bear in mind about the business, valuation and force of sale risk. You must evaluate your investment options properly - like stock, bond, mutual funds or any other investment instrument.

Investopedia has enlisted the following types of risks to be taken care of:-
Types of Risk
- Inflation risk is the chance the money you have invested will decline in value as rising prices shrink the value of the dollar.
- Principal risk is the degree of probability that your original investment will decline in value or be lost entirely.
- Credit risk is the chance a borrower will default on an obligation.
- Market risk (or volatility risk) is the likelihood that a broad investment market, such as the bond or stock market, will decline in value.
- Liquidity risk is the possibility you won't be able to sell or convert a security into cash when you need the money
When return on the investment becomes equal or less than the amount of investment risk becomes negative

2. When is insurance beneficial? Is insurance ever not beneficial? Explain your answer very well.
Insurance Benefits encompass the facilities associated with buying of insurances. Insurance is mainly an instrument used by consumers for hedging the future contingent risks related with life, health and non-life general issues. Insurance benefits help the policy holder or beneficiary in combating with the losses or hazards associated with him/her.

The policy holder buys the insurance to hedge against the future perceived losses by paying a regular amount to the insurance company known as the Premium. Insurance companies ensure financial reimbursement of the insured losses to the policy holders or his/her beneficiary. This is the most coveted Insurance Benefits.
(Text book of Insurance)

When not beneficial:
Disadvantages of course would be no protection from loss or lawsuit, and you paying for all.
If the value of the property has gone down or is less than the amount of insurance it will not be beneficial to take a policy.

3. Where would you begin an evaluation of an internal control system? Please explain why?
The evaluation of the Internal Control becomes unavoidable when the system fails to confirm to the following definition:
In accounting and auditing, internal control is defined as a process affected by an organization's structure, work and authority flows, people and management information systems, designed to help the organization accomplish specific goals or objectives. It is a means by which an organization's resources are directed, monitored, and measured. It plays an important role in preventing and detecting fraud and protecting the organization's resources, both physical (e.g., machinery and property) and intangible (e.g., reputation or intellectual property such as trademarks).
At the organizational level, internal control objectives relate to the reliability of financial reporting, timely feedback on the achievement of operational or strategic goals, and compliance with laws and regulations. At the specific transaction level, internal control refers to the actions taken to achieve a specific objective (e.g., how to ensure the organization's payments to third parties are for valid services rendered

4. What are some major components of an internal control system? Are these components always necessary? Explain your answer:
Components of Internal Control System:
Internal Control comprises the plan and all the co-ordinate methods and measures adopted within an organization with the express objectives of:-
- Safeguarding the assets of the organization,
- Verifying the accuracy and reliability of its accounting data,
- Promoting operational efficiency,
- Fostering and encouraging adherence to the prescribed managerial policies.
Evaluation of internal control systems can be done in a variety of ways. It would be reasonable to expect that the desired degree of documentation would be in proportion with the size and activities of the organization. The following are the general methods adopted:-
- Appraisal by workflow,
- Appraisal by duties,
Appraisal by questionnaire
- Appraisal by questionnaire,
Evaluation of internal control systems can be done in a variety of ways. It would be reasonable to expect that the desired degree of documentation would be in proportion with the size and activities of the organization. The following are the general methods adopted:-
- Appraisal by workflow,
- Appraisal by duties,
- Appraisal by questionnaire

5. Explain the details of a fraud scheme that internal controls, due to inherent limitations, cannot impede
We can take the example of Enron. All the internal controls were in place but the biggest fraud in US history did take ...

Solution Summary

The solution discusses how risk is weighed against return when making investments and the types of risk to be aware of. The benefits and disadvantages of insurance are highlighted, and topics such as fraud are included in the solution.

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