FRM Part II · FRM Exam Part II · Risk Governance
A firm designs its three lines of defense model for operational risk. Which allocation of responsibilities is most consistent with sound governance practice?
Business units own and manage risk as the first line, an independent risk function oversees and challenges as the second line, and internal audit provides independent assurance as the third line. This separation preserves independence and accountability, which the other allocations compromise.
- ABusiness units own and manage risk; an independent risk function oversees and challenges; internal audit independently assures the frameworkCorrect
- BInternal audit owns risk limits and approves new products; business units provide independent challenge
- CThe independent risk function runs day-to-day controls and also audits itself annually
- DBusiness units set the risk appetite and the risk function reports only to business unit heads
Explanation
In the three lines model, the first line owns and manages risk, the second line provides independent oversight and challenge, and the third line (internal audit) gives independent assurance. The other options either blur independence or have audit performing management roles.
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