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IIA CIA Exam
Certified Internal Auditor Exam (Page 61 )

Updated On: 12-Jan-2026
Page 61 of 342
PDF with 1702 Questions

A cash flow hedge mitigates risk exposure due to variability in cash flows associated with which of the following?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): B

Explanation:

A cash flow hedge is a hedge of exposure to variability in cash flows that1) is due to a given risk associated with a recognized asset or liability or a highly probable forecast transaction and2) could affect profit or loss. A fair value hedge is a hedge of the exposure to changes in fair value of are recognized asset or liability or an unrecognized firm
commitment. Thus, a cash flow hedge is associated with neither an unrecognized firm commitment nor a remotely possible forecast transaction. Illustrated below is a perpetual inventory card for the current year.


Additional Information
· The entity had no opening inventory.
· The Items sold on March 15 were purchased on January 12.
· The items sold on July 3 war purchased on May 5



To mitigate a possible loss and offset risk, an entity can use derivatives or other hedging instruments. Which of the following?

  1. Option A
  2. Option B
  3. Option C
  4. Option D

Answer(s): D

Explanation:

A fair value hedge is a hedge of the exposure to changes in fair value of a recognized asset or liability or unrecognized firm commitment The exposure must be due to a given risk and be, able to affect profit or loss. A cash flow hedge is a hedge of the exposure to variability in cash flows that1) is due to a given risk associated with a recognized asset or liability or a highly probable forecast transaction and2) could affect profit or loss.



Which of the following is not a criterion for hedge accounting?

  1. The hedge is expected to be highly effective and can be reliably measured.
  2. The hedge is assessed only at its inception.
  3. A forecast transaction subject to a cash flow hedge must be highly probable.
  4. The hedge is formally designated and documented at its inception.

Answer(s): B

Explanation:

An entity can mitigate a possible loss by using hedges to offset risk. Thus, an entity is said to hedge its financial positions. One of the criteria for hedge accounting is that the hedge be continually assessed and determined to have been effective. Thus. it is not assessed only at its inception.



Nonderivative financial instruments that have1) fixed or determinable payments, 2) a fixed maturity, and3) are held by the investing entity with a positive intent and ability to hold until maturity are what category of financial instruments?

  1. Held-to-maturity investments.
  2. Available-for-sale financial assets.
  3. Financial assets or liabilities held for trading.
  4. Fair value hedges.

Answer(s): A

Explanation:

Financial instruments are classified in three categories. Held-to-maturity investments are nonderivatives that have fixed or determinable payments and a fixed maturity. The entity must have a positive intent and ability to hold such investments to maturity. The other categories are financial assets or liabilities held for trading and available-for-sale financial assets.



Futures and option contracts are examples of what type of financial instruments?

  1. Nonderivatives.
  2. Underlyings.
  3. Derivatives.
  4. Equity instruments.

Answer(s): C

Explanation:

A derivative is a financial instrument whose value changes with the change in the underlying. It requires little or no investment and is settled in the future. Examples are futures. forward, swap, or option contracts. The underlying is a specified interest rate, security price. foreign currency exchange rate. price index, commodity price, etc.



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