FRM Part II · FRM Exam Part II · Risk Governance
A bank reviews a control for payment release that requires a second approver. Testing shows that approvers frequently sign off in batches without examining supporting documents, and 8% of sampled payments had errors that passed through. The control is documented and performed 100% of the time. How should the control be assessed?
The control is sound in design but ineffective in operation. Approvers sign off without reviewing documents, and 8% of sampled payments contained errors that passed through. Being performed every time does not make a control effective if the review is not meaningful.
- AEffective in design and operation because it is performed every time
- BEffective in design but ineffective in operation, since the approval is performed without meaningful review and lets errors throughCorrect
- CIneffective in design only, since a second approver is never adequate
- DNot a control, because only automated checks qualify as controls
Explanation
A second-approver design is reasonable, but operating effectiveness depends on the quality of execution. Rubber-stamp batch approvals that let 8% errors pass show the control does not work as intended. Performance frequency alone does not demonstrate effectiveness.
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