B1 Corporate Governance

Question 1

What 3 objectives does Sarbanes-Oxley Act of 2002 addresses?

Answer 1

1. Corporate responsibility
2. Enhanced financial disclosures
3. Fraud

Question 2

Section 404 refers to?

Answer 2

The assessment of internal controls by management

Question 3

The Code of Ethics (“Tone at the top”) refers to what 3 things?

Answer 3

1. Ethical conduct
2. timely disclosures in periodic financial reports
3. Compliance with laws

Question 4

How many members of the audit committee must be financial experts?

Answer 4

One

Question 5

What is the role of the SEC?

Answer 5

to protect investors by regularly reviewing disclosures made by companies

Question 6

The SEC is more likely to review what type of companies?

Answer 6

Companies that:

1) issued material restatements,
2) stocks that rapidly move up and down (short periods)
3) Large companies (ex. google)
4) Emerging companies
5) Large banks & Insurance

Question 7

How long is the Statue of Limitations for Securities Fraud?

Answer 7

“2 & 5 rule”

• earlier of two years after discovery of facts constituting violation, or 5 years after the violation.

Question 8

Knowingly falsifying financial reports that are inaccurate and not reporting can have what penalty?

Answer 8

fines up to 1million or jail up to 10yrs.

Question 9

Penalties for Intentionally trying to deceive public regarding financial statements

Answer 9

5million dollar fine or up to 20yrs jail

Question 10

In order to enforce corporate accountability the SEC has the power to…? (4)

Answer 10

1. Fine/Jail for tampering/impeding official proceedings (2oyrs)
2. Freeze Assets for 45 days
3. prohibit serving as officers/directors
4. Any action taken against whistleblowers fine/jail (10yrs)

Question 11

COSO’s framework is designed to ….?

Answer 11

document the assessment of internal controls over financial reporting

Question 12

COSO is used by whom?

Answer 12

Management/board & Stockholders

Question 13

How does COSO help management & B.O.D?

Answer 13

helps show when internal controls are being utilize/design effectively

Question 14

How does COSO help stockholders?

Answer 14

determines if internal controls align with objectives

i.e accurate financial statements, compliance,

Question 15

Define Internal Controls

Answer 15

designed to provide reasonable assurance of operating ,reporting and compliance objectives,

Question 16

Define the 3 major categories of objectives under COSO ( orc)

Answer 16

1. op obj- effective & efficiency of operations
2. Report obj- reliability of F.S
3. Compliance- adhering to laws

Question 17

Name the 5 “integrated” components of internal control

CRIME

Answer 17

Control environment, risk assessment, information & communication, monitoring activities, existing control activities

Question 18

What is the purpose of the 5 components of internal control ( CRIME)?

Answer 18

To achieve the 3 objectives of internal control ( ORC)

Question 19

Define the control environment (Crime)

Answer 19

tone at the top- ethics
“ EBOCA”

ex: ethics, board independence, organizational structure, commitment to competence, accountability (“EBOCA”)

Question 20

Define risk assessment (Crime)

Answer 20

f/s misstated or fraud as it relates to COSO

“EAR”- Event ID, Assess risk, Respond to risk

Question 21

Define Information & communication (Crime)

Answer 21

checks if internal & external info is Fair, accurate, complete & timely (FACT)

ex: internal audit, audit committee, management ( all internal), cpa firm, investors, etc (external)

Question 22

Define Monitoring ( CRIME)

Answer 22

test the efficiencies of internal controls and report + correct deficiencies

frequency of testing is dictated by risk

Question 23

Define Existing control activities ( Crime)

Answer 23

• policies & procedures used to mitigate risk
• can be auto/manual or detective/preventative

ex: segregation of duties, IT, reconciliations

Question 24

COSO’s primary focus on what objective? (ORC)

Answer 24

reporting

Question 25

An effective system of internal controls require all 5 components to be ? ( 2 words)

Answer 25

1. Present- included in design

2. Functioning- operating as designed in internal system

Question 26

What does a major deficiency in internal control represent?

Answer 26

significantly reduces likelihood org. can achieve obj.

Question 27

What’s the focus of ERM?

Answer 27

strategy to balance risk & return

ex: forecasting & identifying all risk

Question 28

What’s the difference between ERM focus vs COSO (ORC)?

Answer 28

ERM focus on a broader scope of balancing risk & return (ex: keeping money in savings low risk vs expanding business high risk

COSO focuses on the reporting (ex making sure company’s F/S is accurately reported)

Question 29

COSO defines ERM as …?

Answer 29

ability to identify, manage and provide reasonable assurance levels of risk to achieve company’s objectives

Question 30

ERM is broken down to what 4 objectives? ( S+ ORC)

Answer 30

Strategic (goals designed to achieve mission), operations, reporting, compliance

Similar to COSO internal control but broader in scope

Question 31

The components of ERM “ IS EAR AIM” can be defined as ?

Answer 31

1. IS- “C” in Crime + SORC
2. EAR- “R” in Crime
3. AIM - “E, I, M” in CRIME

Question 32

Inherent vs Residual Risk (“A” in EAR under ERM)

Answer 32

Inherent-risk if mgmt. takes no action to event

Residual risk-risk to org after mgmt. decision

Question 33

Benchmarking vs Probabilistic models vs non-probabilistic

ways to assess risk under ERM

Answer 33

1. benchmarking - compares data vs other companies
2. Probabilistic- statistical data “historical”
3. Non-Probabilistic- opinion (ex outcome of lawsuit)

Question 34

According to COSO, which component of ERM addresses an entity’s integrity & ethical values?

Answer 34

Internal environment

Question 35

The external auditors for Horace Company assess the achievement of internal control obj. each yr. & communicates assessment to mgmt. & board. Which principle of info & communication does this represent?

Answer 35

External Communication

Question 36

A company that retains a CPA w/ knowledgeable skills to prepare effective Financial reporting is applying the ideas from which principle of effective internal control over Financial reporting?

Answer 36

Financial reporting competencies

Question 37

Company X evaluates employees w/ responsibilities for financial reporting for fulfillment of those responsibilities for compensation and promotion purposes. The company’s policies support the idea that:

Answer 37

HR practices should be designed to facilitate effective internal control over Financial reporting

Question 38

Company X is evaluating sample sizes associated w/ periodic test of the existence of a fleet of taxis. Cash receipts associated w/ fares deposited daily are periodically reconciled to both the fares charged and taxi’s odometer readings. Will fixed assets or cash be moniter more?

Answer 38

Cash will be monitored more vs fixed assets because cash is more likely to be stolen.