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FRM Part II · FRM Exam Part II · Governance

Which statement best describes the role of internal audit as the third line of defense with respect to a bank's credit risk governance?

Internal audit, as the third line, gives the board independent assurance on whether the first and second lines are operating effectively. It evaluates governance, risk management and controls but does not set limits, originate exposures or build models, which preserves its independence.

  1. AIt provides independent assurance to the board on whether the first and second lines are operating effectivelyCorrect
  2. BIt sets credit limits and approves exceptions to the risk appetite
  3. CIt originates credit exposures and manages them within approved limits
  4. DIt develops the credit rating models used by the business units

Explanation

Internal audit independently assesses the design and operation of governance, risk management and controls and reports to the board or audit committee. Setting limits, originating exposures and model development are management functions in the first or second lines, and audit doing them would impair its independence.

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