#9 Understanding an entity and its environment

Question 1

Effect of inflation on budgets

Answer 1

Budget items impacted by inflation:
>Wages
>Health care
>Materials

Budget items not impacted by inflations:
>Fixed-rate interest costs
>Contracted fixed costs
(eg, long-term fixed rent expense)
>Expenses based on historical cost
(eg, depreciation)

!!Budgets are usually within one-year period

Question 2

Board of directors fiduciary duties

Answer 2

Duty of loyalty: Act in entity’s best interest; avoid conflict of interest

Duty of care: Act objectively; exercise independent, informed judgment; promote success

Duty of due diligence: Act with reasonable care when entering into agreements on then corporation’s behalf

Question 3

Certification of reports filed with the SEC. Under Sarbanes-Oxley act of 2002

Answer 3

CEO and CFO of an issuer must certify that they:
*Reviewed annual and quarterly report (including F/S)
*Believe financial information is fairly presented
*Are responsible for internal control(I/C)
*Evaluate the effectiveness of I/C within the last 90 days.
*Disclosed significant changes in I/C after its evaluation
*Disclosed fraud or significant deficiencies in I/C to auditor and audit committee.

Question 4

Sarbanes -Oxley (SOX) penalties

Answer 4

Criminal Behavior:
1-Knowingly altering, destroying, or falsifying documents with intent to obstruct or influence federal investigation.

Penalty
*Up to $15 MM in fines and/or
*Up to 20 years imprisonment

2-Securities fraud

Penalty
*Fines and/or
*Up to 25 years imprisonment

3-Mail and wire fraud

Penalty
*Up to 20 years imprisonment

4-Willfully certifying financial statements that do not meet regulatory requirements

Penalty
*Up to $5MM in fines and/or
*Up to 20 years imprisonment