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FRM Part II · FRM Exam Part II · Risk Governance

A bank's internal audit reviews the operational risk framework. Under the Basel principles, which finding would most clearly indicate a weakness in how audit performs its role?

The weakness is audit staff being involved in designing and running the operational risk assessment process they review. This compromises independence, which the third line of defence needs to give objective assurance to the board. Validating controls, risk-based planning and verifying consistent implementation are all proper audit activities.

  1. AAudit regularly validates the effectiveness of controls and reports findings to the board's audit committee
  2. BAudit staff were involved in designing and operating the day-to-day operational risk assessment process they are asked to reviewCorrect
  3. CAudit's coverage plan is risk-based and approved by the audit committee
  4. DAudit verifies that the framework has been implemented consistently across the bank

Explanation

Audit provides independent assurance, so it must not take part in designing or operating the processes it reviews, which compromises independence. The other three options describe appropriate audit work: validation, risk-based planning and verifying consistent implementation.

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