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FRM Part II · FRM Exam Part II · Risk Governance

A bank's internal audit function reports functionally to the audit committee of the board. Which activity is most consistent with internal audit's role as the third line of defense?

Internal audit, as the third line, independently assesses whether the risk management framework and the controls run by the first and second lines are effective, and reports this to the audit committee. Designing controls or setting limits would impair its independence.

  1. ASetting the bank's risk appetite limits for each business unit
  2. BIndependently assessing whether the risk management framework and first- and second-line controls are operating effectivelyCorrect
  3. CDesigning and operating daily control procedures for trading desks
  4. DApproving new products on behalf of the risk function

Explanation

The third line provides independent assurance to the board and senior management on the effectiveness of governance, risk management and internal control, including the work of the first and second lines. Designing controls, approving products or setting limits would compromise its independence and belongs to the first or second line.

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