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ACCA Strategic Professional · Strategic Business Leader · Identification, assessment and measurement of risk

Halcyon Energy's internal audit finds that the CEO overrides controls to approve large contracts with a company owned by his brother, which is not disclosed. Which analysis is most accurate?

This is management override combined with an undisclosed related-party transaction, a governance failure. Routine transaction controls cannot stop a CEO who bypasses them, so independent oversight by the audit committee and non-executive directors, plus disclosure and whistleblowing channels, are the main safeguards.

  1. AIt is management override and a related-party governance failure; ordinary transaction controls are weak against it, so the audit committee and non-executive oversight are the key safeguardsCorrect
  2. BIt is a low risk because the contracts have been approved by a senior officer who has authority
  3. CIt is solely an external risk beyond the board's influence
  4. DIt is a systematic risk that diversification by shareholders cannot remove

Explanation

Management override means senior people bypass controls, so transaction-level controls are ineffective and independent oversight by the audit committee and non-executives is needed. Undisclosed related-party dealings also breach good governance and disclosure expectations. Seniority increases the risk rather than reducing it.

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