Module: | MODULE B: RISK MANAGEMENT
Q453: Consider the following statements regarding the role of Internal Audit in Liquidity Risk Management frameworks:
1. The internal audit function for liquidity risk management must be structurally independent from both the operational treasury and the risk management departments.
2. The primary operational duty of the internal audit team is to execute daily emergency funding strategies and define product pricing during a liquidity crisis.
3. A key responsibility of the independent internal audit is to regularly verify that the assumptions and data inputs used in the Contingency Funding Plan remain valid and up-to-date.
Which of the statements given above is/are correct?
2. The primary operational duty of the internal audit team is to execute daily emergency funding strategies and define product pricing during a liquidity crisis.
3. A key responsibility of the independent internal audit is to regularly verify that the assumptions and data inputs used in the Contingency Funding Plan remain valid and up-to-date.
Which of the statements given above is/are correct?
✅ Correct Answer: C
The correct answer is C. Statement 1 is correct: To maintain absolute objectivity and avoid conflicts of interest, regulatory guidelines dictate that the internal audit function must be structurally and functionally independent from the business units it audits.
This explicitly includes complete separation from the operational Treasury desk and the Mid-Office Risk Management function.
Statement 2 is incorrect: Internal Audit is purely an independent review and assurance function.
They do not hold any operational mandates.
Executing daily emergency funding strategies, deciding deposit pricing, or managing physical liquidity are strictly the executive duties of the Asset-Liability Management Committee (ALCO) and the Front Office.
Statement 3 is correct: A primary mandate of the internal audit team is comprehensive validation.
They must regularly review the Liquidity Risk Management framework, verifying that the behavioral assumptions, run-off rates, and data inputs underpinning the Contingency Funding Plan (CFP) and stress testing models remain logically valid and up-to-date.
This explicitly includes complete separation from the operational Treasury desk and the Mid-Office Risk Management function.
Statement 2 is incorrect: Internal Audit is purely an independent review and assurance function.
They do not hold any operational mandates.
Executing daily emergency funding strategies, deciding deposit pricing, or managing physical liquidity are strictly the executive duties of the Asset-Liability Management Committee (ALCO) and the Front Office.
Statement 3 is correct: A primary mandate of the internal audit team is comprehensive validation.
They must regularly review the Liquidity Risk Management framework, verifying that the behavioral assumptions, run-off rates, and data inputs underpinning the Contingency Funding Plan (CFP) and stress testing models remain logically valid and up-to-date.