B1 Flashcards
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of enterprise risk management addresses an entity’s assignment of authority and responsibility?
a. Information and communication.
b. Monitoring.
c. Control activities.
d. Internal environment.
Internal Environment: The internal environment component of the enterprise risk management (ERM) framework includes foundational elements such as organizational structure, assignment of authority and responsibility, integrity and ethical values, risk management philosophy, commitment to competence and human resource standards, and similar issues that influence the tone of the organization.
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of enterprise risk management addresses an entity's reporting deficiencies? a. Internal environment. b. Event identification. c. Monitoring. d. Control activities.
Monitoring: The monitoring component of the enterprise risk management (ERM) framework includes key elements that relate to the ongoing management activities or separate evaluations of the ERM approach adopted by the entity, including addressing reporting deficiencies.
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, which of the following components of the internal control integrated framework addresses an entity's timely reporting of identified internal control deficiencies? a. Control activities. b. Control environment. c. Monitoring. d. Information and communication.
Monitoring: The monitoring component of the integrated framework includes the principle that deficiencies should be investigated in ongoing and separate evaluations and that deficiencies should be reported.
A company that retains a CPA with the appropriate knowledge, skills and abilities to prepare timely and effective financial reporting is applying the ideas from which principle of effective internal control over financial reporting?
a. Integrity and ethical values.
b. Accountability.
c. Financial reporting competencies.
d. Management philosophy and operating style.
Financial reporting competencies: The financial reporting competencies principle of the control environment component of internal control integrated framework suggests stronger controls and encourages the company to retain qualified personnel to handle financial reporting.
The Sarbanes-Oxley Act of 2002 requires that the members of the audit committee be independent with regard to the issuer. Within the meaning of the law, which of the following corporate officers would be considered independent?
Board Member
Independent Auditor
Board Member Yes, Independent Auditor No. Rule: Audit committee members are to be members of the issuer’s Board of Directors but also must be otherwise independent. Independence criteria are as follows:
Audit committee members may not accept compensation from the issuer for consulting or advisory services.
Audit committee members may not be an affiliated person of the issuer (affiliation means a person has the ability to influence financial decisions).
According to the Sarbanes-Oxley Act of 2002, which of the following statements is correct regarding an issuer’s audit committee financial expert?
a. The issuer must fill the role with an individual who has experience in the issuer’s industry.
b. If an issuer does not have an audit committee financial expert, the issuer must disclose the reason why the role is not filled.
c. The audit committee financial expert must be the issuer’s audit committee chairperson to enhance internal control.
d. The issuer’s current outside CPA firm’s audit partner must be the audit committee financial expert.
Choice “b” is correct. Sarbanes-Oxley Section 407 requires that an issuer’s audit committee have at least one financial expert, or disclose why that role is not filled. Section 407 requires that the financial expert have an understanding of GAAP and financial statements, be able to assess the application of accounting principles, have comparable experience applying accounting principles to entities that present a similar level of complexity of the issuer, and understand both internal controls and audit committee functions.
The Sarbanes-Oxley Act of 2002 was enacted in response to corporate scandals that largely centered on the quality of corporate financial disclosure and highlighted the inadequate oversight of management, auditors and the Board of Directors. The Sarbanes-Oxley Act addresses the problems related to inadequate board oversight by requiring public companies to have an:
a. Independent Board of Directors.
b. Audit committee.
c. Annual audit for all issuers.
d. Internal auditor.
Audit Committee: Public companies are required to establish an audit committee that is directly responsible for the appointment, compensation and oversight of the work of the public accounting firm employed by that public company. The separation of audit supervision from the Board of Directors addresses the problem of inadequate board oversight.
The Sarbanes-Oxley Act of 2002 requires that one or more members of the audit committee be a financial expert and that the financial reports disclose:
a. Certification of independence of the financial expert.
b. The existence of financial expert(s) on the audit committee or the reasons why the audit committee does not have a financial expert.
c. Confirmation of the audit opinion by the financial expert.
d. The name of the Board member(s) serving as financial expert(s).
Choice “b” is correct. In the financial reports, the issuer must disclose the existence of financial expert(s) on the committee or the reasons why the committee does not have a financial expert.
The primary benefit of having a financial expert on a company’s audit committee is:
a. The enhanced level of financial sophistication of the financial expert can serve as a resource for the audit committee.
b. The financial expert certifies compliance with SEC requirements and thereby reduces audit fees.
c. The financial expert checks the auditor’s work and verifies the appropriateness of the audit opinion.
d. The expert designation conveys a higher level of due diligence on the expert and shields audit committee members and the corporation from most liabilities.
Choice “a” is correct. The benefits of a financial expert on the audit committee relate to the expertise that the board can bring to its oversight function.
Choice “c” is incorrect. The audit committee provides oversight of the annual audit; however, the audit committee and its financial expert do not verify the auditor’s work.
Arnold Astor, CPA, is a local tax practitioner who has been asked to sit on the Board of BigLarge Corporation, a multinational issuer. Astor has never had any involvement either as an employee or as an auditor with publically traded companies but does teach an accounting principles class at the community college. Under the provisions of Sarbanes-Oxley Act of 2002:
a. The audit committee would immediately certify Astor's qualifications as a financial expert based on his CPA license and academic experience with GAAP and experience with internal control. b. The Board of Directors would likely evaluate Astor's qualifications to serve on the audit committee and be designated as a financial expert based on mix of knowledge and experience. c. Astor must petition the SEC for a waiver of prior experience requirements to be considered a financial expert. d. Astor qualifies as a financial expert based on achievement of a CPA certificate.
Choice “b” is correct. Qualification as a financial expert is a judgmental issue is typically made by the Board of Directors. The Sarbanes-Oxley Act is silent as to what group has the authority to designate an individual a financial expert but in practice, the board most often makes that decision. The Act provides some guidance but does not prescribe specific qualifications.
Choice “d” is incorrect. The Act provides some guidance but does not prescribe specific qualifications. The achievement of the CPA license generally does not qualify an individual as a financial expert.
The Sarbanes-Oxley Act of 2002 requires that the officers of a corporation be held accountable to a code of ethics. According to the Act, codifications of ethical standards should include provisions for all of the following, except:
a.
Full, fair, accurate, and timely disclosure in periodic financial statements.
b.
Honest and ethical conduct.
c.
Prompt internal reporting of code provisions and accountability for adherence to the code.
d.
Compliance with laws, rules and regulations.
Choice “c” is correct. Although the SEC proposed standards for codes of ethics to include both internal reporting of code provisions and accountability for adherence to the code, the Sarbanes-Oxley Act itself does not have this requirement.
Choice “b” is incorrect. The Act specifically requires that the code of ethics include provisions for honest and ethical conduct.
The Sarbanes-Oxley Act of 2002 requires that the management report on internal control include all of the following, except:
a.
A statement that the auditor has attested and reported on management’s evaluation of internal controls.
b.
A statement of management’s responsibilities for establishing and maintaining adequate internal controls.
c.
A conclusion about the effectiveness of the company’s internal controls.
d.
A statement that there are no disagreements between management and the auditor as to the effectiveness of internal controls.
Choice “d” is correct. Financial statement disclosures include management’s assumption of responsibility for internal control, management’s assessment of internal control effectiveness and a statement that the auditor has reported on management’s evaluation. Management does not describe disagreements, if any, between management and the auditor.
The Sarbanes-Oxley Act of 2002 seeks to improve investor confidence by providing greater transparency for all of the following issues, except:
a.
Compliance of senior officers with a code of ethics.
b.
Adequacy of internal controls.
c.
Means and methods for balancing risk and growth.
d.
Competency of audit committees.
Choice “c” is correct. The issues surrounding risk and growth are significant to investors and generally addressed by enterprise risk management concepts; however, the Sarbanes-Oxley Act focuses less on strategic operations and more on the financial reporting issues impacted by the audit committee’s competence, the ethical behavior of senior officers and the adequacy of internal controls.
The Gotham Corporation regularly produces budget vs. actual data for its managers. The company is particularly sensitive to personnel costs, and division variances of greater than five percent for any period are promptly investigated to determine if budgeted postions have not been filled or if there has been extraordinary overtime. Timely exception resolution of this character illustrates the information and communication principles typically associated with: a. Internal Communication. b. Financial Reporting Information. c. External Communication. d. Obtain and Use Information.
Obtain and Use Information. The principle of obtain and use information is applied when the organization obtains or generates and uses relevant, high-quality information to support the functioning of the control. In this case, management is using the exception report (information) to support the control of monitoring overtime costs.
The external auditors for the Horace Company assess the achievement of internal control objectives each year and communicate the assessment to management and the Board. Communication by the external auditor illustrates which principle of the information and communication component of the Committee on Sponsoring Organization's Integrated Framework? a. Financial Reporting Information. b. Internal Communication. c. Internal Control Information. d. External Communication.
External Communication: The principle of external communications asserts that matters affecting the achievement of financial reporting should be communicated with outside parties.
