B1: Corporate Governance

Question 1

Board of Directors

Answer 1

Primary Duty: Monitor Management behavior
Nominating/Corporate Gov Committee
    * Oversees the Board
    * Responsible for hiring new CEO
Audit Committee
    *Appoints and oversees external auditor
Compensation Committee
     *Handles CEO Compensation package
NYSE & NASDAQ
   * Require Board to be Independent

Question 2

Executive Compensation

Answer 2

Goals of management should match shareholders
* Executive compensation should create incentive for management to govern in a shareholder-friendly way that doesn’t sacrifice the long-term success of the enterprise for short-term gain.

Influences that help mold the direction that management takes range from internal (Board of Directors, Audit Committee, Internal Control) to external (Creditors, SEC, IRS)
* These influences should not be tainted by undue influence from management

“Shirking”
*When management doesn’t act in the best interest of the shareholders.

*Solution: Tie management compensation to stock performance or company profit.

Question 3

Sarbanes-Oxley

Answer 3

Management must submit a report on the effectiveness of Internal Control in the 10K

Management must disclose significant Internal Control deficiencies

CEO/CFO must certify that financial statements comply with securities laws and fairly present the financial condition of the company

Question 4

COSO Framework - Internal Control

Answer 4

Promotes

• Reliable Financial Reporting
• Effective and Efficient Operations
• Compliance

Question 5

COSO Framework - Internal Control

Answer 5

Control Environment

• Commitment to Integrity
• Exercise Oversight Responsibility
• Establish Structure and Authority
• Commitment to Competence
• Accountability

Question 6

COSO Framework - Internal Control

Answer 6

Risk Assessment

• Specify Suitable Objectives
• Identify /Analyze Risk
• Assess Fraud Risk
• Identify/Analyze Change

Question 7

COSO Framework - Internal Control

Answer 7

Control Activities

• Develop Control Activities
• Develop IT Controls
• Policies and Procedures

Question 8

COSO Framework - Internal Control

Answer 8

Information and Communication

• Relevant Information
• Internal Communications
• External Communications

Question 9

COSO Framework - Internal Control

Answer 9

Monitoring

• Ongoing Evaluations
• Communicates Deficiencies

Question 10

COSO Framework - Enterprise Risk Mgmt

Answer 10

Identifies Risk Factors
Promotes Risk Response Decisions
Compares Mgmt Risk vs Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement
Does NOT eliminate all risk
Possible response to risk:
   *Avoid or reduce
   *Share or accept

Question 11

International Internal Auditing Standards

Answer 11

Principles-focused (just like IFRS)

Question 12

International Internal Auditing Standards

Answer 12

Purpose of Standards

• Delineate basic principles
• Provide a framework for internal auditing
• Establish a basis for evaluating performance
• Improve organizational processes /operations

Question 13

International Internal Auditing Standards

Answer 13

Requirements of Standards
*State basic internal auditing requirements for
Professional practice
Evaluation of performance

Question 14

International Internal Auditing Standards

Answer 14

Interpretations of Standards

Clarify terms or concepts

Question 15

Attribute Standards

Answer 15

Purpose, Authority and Responsibility

• Must be defined in Internal Audit Charter
• Chief Audit Executive (CAE) must Review
• Board must Approve

Question 16

Attribute Standards

Answer 16

Independence and Objectivity
     Internal Auditors (IA) must be independent in the sense that their work will not be interfered with by management.

Internal Auditors must be:

• Objective
• Impartial
• Unbiased
• Avoid Conflicts of Interest

Chief Audit Executive must have unrestricted access to the Board
*If impaired, the IA must disclose it to the appropriate parties

Question 17

Attribute Standards

Answer 17

Proficiency and Due Professional Care
IA must have the knowledge and skills to carry out their duties:
* CPE

 If  IA are lacking in an area of proficiency, CAE must seek advice.

 IA must be able to evaluate fraud risk, but are not expected to be an expert at detecting and investigating fraud

 IA must have sufficient knowledge about IT to do their work

  IA must have skill expected of a reasonably prudent and competent IA