Risk Management (P3)

Answer: B. The tolerance threshold in monetary terms is calculated by applying the stated percentage to the relevant base figure (net assets): $200m x 0.03 = $6 million. Any risk with a potential loss above this threshold breaches the board's stated tolerance and requires specific escalation or mitigation. $3 million simply restates the tolerance percentage as if it were a dollar figure. $60 million would result from using 30% instead of the correct 3%, a misplaced decimal point. $200 million is simply the net assets figure itself, with no percentage applied at all.

Answer: C. The sample error rate is 2 out of 40 tested, or 5%. Applying this rate to the full population of 2,000 transactions projects 5% x 2,000 = 100 transactions likely to contain an error, a figure the auditor would use to assess whether the projected error rate is material and whether further investigation or a larger sample is warranted. 2 simply restates the number of errors found in the sample itself, without extrapolating to the full population. 40 simply restates the sample size, not the projected population error count. 10 would result from using a 0.5% error rate instead of the correct 5%, a misplaced decimal point.

Answer: B. Expected value combines each possible outcome weighted by its probability: (0.60 x £5,000,000) + (0.40 x -£1,000,000) = £3,000,000 - £400,000 = £2,600,000. A positive expected value suggests the decision is worthwhile on average, though the board would also need to weigh the risk of the 40% downside scenario against its risk appetite, not rely on expected value alone. £3,000,000 only reflects the weighted upside scenario and omits the weighted downside loss entirely. £3,400,000 would result from adding rather than subtracting the weighted loss (£3,000,000 + £400,000). £4,000,000 simply adds the two raw outcome values together without weighting either by its probability.