BEC1

Question 1

Define Internal Control

Answer 1

Internal control is a process –affected by the entity’s Board of Directors, management, and other personnel –designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting, compliance with applicable laws and regulations

Question 2

What are the key sarbanes-oxley provisions that are aimed at improving the integrity of corporate financial reporting

Answer 2

Audit Committees, officer certification of financial statements, misleading auditors, financial statement deceit (off balance sheet transactions and pro forma financial statements), internal financial control, CFO code of ethics, and accounting expertise

Question 3

Expound upon audit Committees in regards to SOX

Answer 3

1. They choose, compensate, oversee, and terminate their companies auditors. 2.is be composed of entirely independent directors. 3. Must establish procedures for receiving retaining and treating complaints by whistleblowers about accounting procedures and internal controls and protecting the confidentiality of those complaints.

Question 4

3 tiered pyramid regarding basic corporate law.

Answer 4

Shareholders at the bottom, the directors in the middle, and the officers on top.

Question 5

Shareholder responsibilities

Answer 5

The shareholders right to elect directors and to vote on certain major structural changes such as a merger proposal constitute their primary input into corporate control

Question 6

Directors responsibilities

Answer 6

Directors are responsible for big picture corporate policy they also select compensate and remove corporate officers.

Question 7

Officers responsibilities

Answer 7

Officers are responsible for the day-to-day operations of the firm. Officers execute their responsibilities through employees who are acting within the scope of their authority.

Question 8

Accounting expertise

Answer 8

Requires that of the Audit Committee be a financial expert of education and experience has: 1. And understanding of GAAP and financial statements 2. Experience in preparing or auditing financial statements of comparable companies and the application of such principles in connection with accounting for estimates, accruals, and reserves 3. Experience with internal auditing controls 4. An understanding of audit committee functions.

Question 9

General objectives of internal control

Answer 9

1. Safeguard assets of the firm. 2. Promote efficiency of the firm’s operations. 3. Measure compliance with management’s prescribed policies and procedures. 4. Ensure accuracy and reliability of accounting records and information.

Question 10

Expound on ensure accuracy and reliability of accounting records and information.

Answer 10

1. Identify and record all valid transactions. 2. Provide timely information in appropriate detail to permit proper classification and financial reporting. 3. Accurately measure the financial value of transactions. 4. Accurately records transactions in the time period in which they occurred.

Question 11

Categories/ classifications of controls

Answer 11

1) preventive, detective, and corrective controls. 2. Feedback and feed-forward controls. 3. General and application controls.

Question 12

Define Preventive controls

Answer 12

“Before the fact” controls. Attempts to stop an error or irregularity before it occurs.

Question 13

Examples of preventive controls

Answer 13

1. Locks on buildings and doors. 2. User names and passwords. 3. Building segregation of duties into the organizational structure.

Question 14

Define Detective controls

Answer 14

“After the fact” controls. Attempts to detect an error after it has occurred.

Question 15

Examples of detective controls

Answer 15

1. Data entry edits 2. Reconciliation of accounting records to physical assets 3. Tests of transactions to determine whether they comply with management’s policies and procedures.

Question 16

Define corrective controls

Answer 16

Always paired with detective controls. They attempt to reverse the effects of the observed error or irregularity.

Question 17

Examples of corrective controls

Answer 17

1. Maintenance of backup files. 2. Disaster recovery plans. 3. Insurance.

Question 18

Define feedback controls

Answer 18

Evaluate the results of a process and, if the results are undesirable, adjust the process to correct the results; most detective controls are also feedback controls

Question 19

Define feed-forward controls

Answer 19

Project future results based on current and past information and, if the future results are undesirable, change the inputs to the system to prevent the outcome

Question 20

Example of feed- forward controls

Answer 20

Many inventory ordering systems are essentially feed forward controls: the system projects product sales over the relevant time period, identifies the current inventory level, and orders inventory sufficient to fulfill the sales demand.

Question 21

Define general controls

Answer 21

General controls are controls over the environment as a whole. They apply to all functions, not just specific accounting applications. General controls help ensure that data integrity is maintained

Question 22

Examples of general controls

Answer 22

Restricting physical access to computer resources, production and storage of backup files, and performing background checks of computer services personnel.

Question 23

Define application controls

Answer 23

Application controls are controls over specific data input, data processing, and data output activities. Application controls are designed to ensure the accuracy, completeness, and validity of transaction processing. As such, they have a relatively narrow focus on those accounting applications that are involved with data entry, updates, and reporting.

Question 24

Examples of application controls

Answer 24

Includes checks to ensure that input data is complete and properly formatted, that account numbers are valid, and that values are reasonable ( that we don’t sell quantities that are greater than the quantity currently in inventory)

Question 25

What is detection risk?

Answer 25

The risk that auditors fail to detect a material misstatement in financial statements

Question 26

Determining whether risk management processes are effective is a judgement resulting from the internal auditor’s assessment that…

Answer 26

1. Organizational objectives support and align with organizations mission. 2. Significant risks are identified and assessed. 3. Appropriate risk responses are selected that align risks with the organization’s risk appetite. 4. Relevant risk information is captured and communicated in a timely manner across the organization, enabling staff, management, and the board to carry out their responsibilities.

Question 27

Components of COSO’s ERM Framework

Answer 27

Internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring.

Question 28

What is Enterprise Risk Management?

Answer 28

The process used by organizations to manage risk and seize opportunities to achieve the goals of the organization. It provides a framework for risk management, determines response strategy, and monitors the progress.

Question 29

Define the SOX “claw back provision”

Answer 29

This provision allows firms to reclaim incentive and bonus payments to officers that turn out to have been made based on wrongdoing by those officers.