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FRM Part II · FRM Exam Part II · Governance

During a review, internal audit finds that the second-line credit risk function has never challenged the credit limits proposed by the front office and merely records them. Which conclusion about the three lines model is most appropriate?

The second line is failing to provide effective challenge, and internal audit should escalate this to the board's audit or risk committee. Audit assesses and reports on the framework but should not take over setting limits, since that would compromise its independence.

  1. AThe second line is not providing effective challenge, and audit should report this to the board's audit or risk committeeCorrect
  2. BThe first line has fulfilled its role, so no governance weakness exists
  3. CInternal audit should take over setting credit limits to fix the gap
  4. DThe weakness is acceptable because the second line only needs to monitor, not challenge

Explanation

The second line must provide independent oversight and effective challenge to first-line risk-taking. Audit's role is to assess and report such deficiencies to the board level, not to take over management functions, which would impair its independence.

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