Question 1

Management is using the COSO Enterprise Risk Management (ERM) framework to address a newly identified risk: potential fluctuation in raw material prices. The company decides to enter into a forward contract to lock in prices for the next 12 months. Which risk response strategy does this represent?

Accepted Answer

Analyze the action taken. If the risk is moved to a third party (insurer, counterparty), it is Sharing/Transfer. If the activity is stopped, it is Avoidance. If controls are improved, it is Reduction.

Question 2

What mistakes do candidates make on this CPA question?

Accepted Answer

Confusing Reduction (internal steps) with Sharing (external transfer).

Management is using the COSO Enterprise Risk Management (ERM) framework to address a newly identified risk: potential fluctuation in raw material prices. The company decides to enter into a forward contract to lock in prices for the next 12 months. Which risk response strategy does this represent?

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