Is initiative rolled only once at the start of the encounter or is it rolled every round? That is once every player and NPC has taken their turn and it has gone back round they roll initiative again. The manual doesn't seem to explicitly state this but hints that it should work like this.
It says that multiple actions are cumulative adding -20 -40 and so on. These penalties must happen within 1 round and once the round is over these penalties are reset to zero until the characters accumulate more actions within the round. Is my understanding of this correct?
Initiative is rolled at the beginning of each turn in combat.
Multiple Actions - Each action taken after the first (in the same turn) results in a cumulative -20 to skill and ability checks. At the start of a new turn, all Actions begin at 0.
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Just to make sure I'm understanding your definition of a turn, as it's not defined in the Glossary.
A turn is when each player and NPC has taken a go and it goes back to the first?
Correct. You could easily call this a round. A new round starts when everyone has taken their turn: PC's, NPC's and creatures.