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BEC > Corporate Governance > Flashcards

Corporate Governance Flashcards

1
Q

What is the primary duty of the board of directors?

A

To monitor management behavior.

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2
Q

What is the responsibility of the Nominating or Corporate Governance Committee of the board of directors?

A

Oversees the board

Responsible for hiring new CEO

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3
Q

What is the responsibility of the audit committee of the board of directors?

A

The audit committee appoints and oversees the external auditor.

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4
Q

What is the duty of the compensation committee of the board of directors?

A

The compensation committee handles the CEO’s compensation package.

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5
Q

What does the NYSE and NASDAQ require of the board of directors?

A

They require the board to be independent.

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6
Q

What is the main goal in an executive compensation package?

A

The package should ensure that the goals of management should match those of the shareholders.

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7
Q

How can an executive compensation package ensure that goals of management align with those of shareholders?

A

Executive compensation should create an 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.

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8
Q

Which influences help mold the direction that management takes?

A

They 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 or have financial ties to management such as compensation-related duties

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9
Q

What is shirking?

A

When management doesn’t act in the best interest of shareholders.

It can be alleviated by tying compensation to stock performance or company profit.

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10
Q

What requirements are imposed on a public company under Sarbanes-Oxley?

A

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 the financial statements comply with securities laws and fairly present the financial condition of the company.

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11
Q

What characteristics are promoted by the COSO framework on Internal Control?

A

Reliable financial reporting

Effective and efficient operations

Compliance

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12
Q

What are the elements of the control environment?

A 
Integrity & Ethics
Competence
The Board of Directors & Audit Committee
Management's Operating Style
Organizational Structure
Authority & Roles of Responsibilities
HR Policies
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13
Q

What are control activities?

A

A component of Internal Control that includes actions being taken to promote the control environment.

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14
Q

What are the basic elements of Internal Control?

A 
Control Environment
Risk Assessment
Control Activities
Information and Communication
Monitoring
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15
Q

What is the significance of the Information and Communication aspect of Internal Control?

A

Management must have access to relevant and timely information to make good decisions.

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16
Q

How does Monitoring affect Internal Control?

A

Internal Control activities must be constantly monitored and evaluated for effectiveness.

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17
Q

What activities does the COSO framework for enterprise risk management include?

A 
Identifies Risk Factors
Promotes Risk Response Decisions
Compares Management Risk vs. Shareholder Goals
Aids in evaluating opportunities
Promotes Quicker Capital movement

Does NOT eliminate all risk

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18
Q

What are possible responses to risk under the COSO framework for enterprise risk management?

A

Avoid or Reduce

Share or Accept

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19
Q

Define the “SOX Clawback provision”.

A

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.

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20
Q

What does the acronym SOX mean?

A

Sarbanes-Oxley Act.

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21
Q

List prohibitions observed by corporate insiders and outside auditors.

A 
They must observe the following prohibitions:
fraudulent influence;
coercion;
manipulation;
and misleading.
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22
Q

Pro forma financial statements must be reconciled with what?

A

They must also include comparable GAAP numbers.

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23
Q

Describe the three levels of the corporate pyramid.

A

Bottom: shareholders (vote for directors);
Middle: directors (select officers and set broad policies);
Top: officers (run firm day-to-day).

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24
Q

Under the Sarbanes-Oxley Act of 2002, what are the requirements and responsibilities of Audit Committees?

A

All directors must be independent;

New role: select, compensate, fire outside auditor; set up whistleblower procedures.

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25
Q

Define “internal control.”

A

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

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26
Q

Define “feed-forward controls.”

A

A process in which future results are projected based on current and past information and, if the future results are undesirable, the inputs to the system are changed to avoid the projected outcome. 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.

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27
Q

Define “corrective controls.”

A

Paired with detective controls, they attempt to reverse the effects of the error or irregularity which has been detected. Examples of corrective controls include maintenance of backup files, disaster recovery plans, and insurance.

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28
Q

Define “detective controls.”

A

“After the fact” controls designed to detect an error after it has occurred (though preferably before the erroneous information is used to update the database or appears in reports). Examples of detective controls include data entry edits (field checks, limit tests) and reconciliation of batch control totals.

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29
Q

Define “preventive controls.”

A

“Before the fact” controls designed to stop an error or irregularity from occurring. Examples of preventive controls include locks on building and doors, password protected access to files, and segregation of duties.

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30
Q

Define “application controls.”

A

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

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31
Q

Define “general controls.”

A

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

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32
Q

Define “feedback controls.”

A

A procedure in which the results of a process are evaluated and, if the results are undesirable, the process is adjusted to correct the results; most detective controls are also feedback controls.

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33
Q

Define “risk assessment” (according to the COSO internal control framework).

A

One of five components of internal control. The process of identifying, analyzing and managing the risks related to achieving the organization’s objectives.

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34
Q

Define “control activities” (according to the COSO internal control and ERM frameworks).

A

One of five components of internal control. Relates to the policies and procedures that ensure that organizational actions address key risks related to the achievement of management’s objectives.

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35
Q

Define “control environment” (according to the COSO internal control framework).

A

One of five components of internal control. Encompasses management’s philosophy towards controls, organizational structure, system of authority and responsibility, personnel practices, and policies and procedures. The core or foundation of any system of internal control.

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36
Q

Define “monitoring” (according to the COSO internal control framework).

A

One of five components of internal control. This component ensures the ongoing reliability of information and control processes by monitoring and testing the control system.

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37
Q

Define “information and communications” (according to the COSO internal control framework).

A

One of five components of internal control. Enable an organization’s personnel to identify, process, and exchange the information needed to manage and control operations.

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38
Q

Define competence in the context of designing internal control.

A

A commitment to attract, develop, and retain highly qualified individuals consistent with achieving organizational objectives. Includes establishing policies, assessing competencies, and planning for turnover and succession.

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39
Q

Define organizational policies.

A

The organization’s control activities that establish stakeholder expectations regarding conduct and operations.

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40
Q

Define inbound communications.

A

Communications with outsiders to the organization, including customers, suppliers, external auditors, regulators, financial analysts and others.

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41
Q

Define accountability in the context of designing internal control.

A

Holding individuals accountable for their internal control responsibilities.

42
Q

Define risk assessment precision.

A

Whether, and the extent to which, risk can be quantified.

43
Q

Define risk assessment materiality.

A

The determination of how large of a risk poses a threat to objectives.

44
Q

Define “objective setting” (according to the COSO ERM model).

A

A company must establish objectives at four levels (strategic, operational, reporting, and compliance).

45
Q

Define “risk response” (according ot the COSE ERM model).

A

Management’s response to risk. Depends on management’s risk appetite. May include risk avoidance, reduction, sharing, or acceptance.

46
Q

Define “reporting objectives” (according to the COSO ERM model).

A

One of four organizational objectives. Information system goals related to the accuracy, completeness, timeliness, and reliability of internal and external reporting.

47
Q

Define “event identification” (according to the COSO ERM model).

A

Identifying events that might affect—either positively or negatively—the organization’s ability to meet its objectives.

48
Q

Define “operations objectives” (according to the COSO ERM model).

A

One of four organizational objectives. Goals concerned with day-to-day operating activities (i.e. sales activities, warehousing, manufacturing, etc.).

49
Q

Define “strategic objectives” (according to the COSO ERM model).

A

One of four organizational objectives. High-level goals that support the organization’s overall mission.

50
Q

Define “compliance objectives” (according to the COSO ERM model).

A

One of four organizational objectives. These are designed to ensure that the organization meets legal and regulatory requirements.

51
Q

What is meant by “the tone at the top?”

A

The extent to which top management is ethical and pro-active in establishing an ethical and moral tone and culture. Consider a counter-example: Kenneth Lay urged Enron employees to buy more Enron stock at the same time that he was selling millions of dollars in Enron stock options (called a “pump and dump” scheme).

52
Q

Define “cross-enterprise risk.”

A

A risk that occurs in multiple units in an organization. For example, a security breach that allowed unauthorized access to a system could occur at multiple sites or units within an organization. Hence, it is a “cross-enterprise” risk.

53
Q

According to COSO, what four critical accounting activities should be segregated?

A
  1. Authorizing, 2. recording, 3. safeguarding, 4. reconciling, oversight and auditing.
54
Q

Define “risk appetite.”

A

According to COSO, the amount of risk exposure, or potential adverse impact from an event, that an organization chooses to accept or retain, as opposed to sharing, avoiding, reducing or eliminating the risk.

55
Q

Define “enterprise risk management.”

A

According to COSO, the methods and processes used by organizations to identify and manage the events and circumstances that influence the organization’s ability of achieve its objectives.

56
Q

Define “self-assessment.”

A

Either the person responsible for a control, or that person’s peer or supervisor, assesses control effectiveness.

57
Q

Define “competence” in relation to a control evaluator.

A

Competence refers to the evaluator’s knowledge of the controls and related processes, including how controls should operate and what constitutes a control deficiency.

58
Q

Define “compensating controls.”

A

Controls that accomplish the same objective as another control and will “compensate” for deficiencies in the first control.

59
Q

Define “timely information.”

A

Information is produced and used in a time frame that makes it possible to prevent or detect control deficiencies before they become material.

60
Q

Define “key controls.”

A

Controls that are most important to monitor in order to support a conclusion about the internal control system’s ability to manage or mitigate meaningful risks.

61
Q

Define “evaluator.”

A

An individual who monitors internal control. Must have skills, knowledge, and authority sufficient to understand risks and identify the controls needed to manage those risks. Two most important attributes are competence and objectivity.

62
Q

Define “self-review.”

A

Person responsible for a control (but not that person’s peer or supervisor) assesses control effectiveness. The least objective type of “self assessment.”

63
Q

Define “objective or objectivity.”

A

The measure of the extent of factors that might influence a person to report inaccurate or incomplete information about risks or controls.

64
Q

Define “accuracy.”

A

The degree to which information can reasonably be expected to be free from error and/or to communicate results that reflect reality.

65
Q

Define “suitable information.”

A

Must be relevant (i.e., fit for its intended purpose), reliable (i.e., accurate, verifiable and from an objective source), and timely (i.e., produced and used in an appropriate time frame).

66
Q

How does monitoring benefit corporate governance?

A

Monitoring is the core, underlying control component in the COSO ERM model. Controls degrade over time, technologies change, and people forget or get lazy. Because of this, monitoring is essential to maintaining strong internal control and effective risk management.

67
Q

Define “verifiable or verifiability.”

A

Can be established, confirmed or substantiated as true or accurate.

68
Q

Define “reliable information.”

A

Information must be accurate (see “Accuracy”), verifiable (see “Verifiable”) and from an objective source (see “Objective”).

69
Q

Define “control objectives.”

A

These provide specific targets for evaluating the effectiveness of internal control. Typically stated in terms that describe the nature of the risk to be managed or mitigated.

70
Q

Define “relevant information.”

A

Information is meaningful to assessing a risk, control, or control component.

71
Q

Define “persuasiveness of information or persuasive information.”

A

The degree to which the information provides support for conclusions. Derived from its suitability (i.e., its relevance, reliability, and timeliness) and its sufficiency.

72
Q

Define “key performance indicators.”

A

Metrics that reflect critical success factors. They help organizations measure progress towards critical goals and objectives.

73
Q

Define “key risk indicators.”

A

Forward-looking metrics that identify critical potential problems, thus enabling an organization to take timely action, if necessary.

74
Q

Name the three activities that comprise assessing and reporting on control monitoring.

A

Prioritize findings, report results as appropriate, follow up to implement corrective actions.

75
Q

Define “control baseline.”

A

A starting point for control monitoring. A control assessment that provides sufficient, persuasive information to support a conclusion about control effectiveness, either across the entire organization or in a given area.

76
Q

List the four activities that comprise the design and execution of control monitoring.

A

Prioritize risks, identify controls, identify persuasive information about controls, implement monitoring procedures.

77
Q

Define an internal control deficiency.

A

A condition requiring attention. May represent a perceived, potential or real shortcoming, or an opportunity to strengthen the system to increase the likelihood of achieving objectives.

78
Q

Define “ongoing monitoring.”

A

Activities to monitor the effectiveness of internal control in the ordinary course of operations.

79
Q

What are the three elements of establishing a foundation for control?

A

The tone at the top, organizational structure, baseline understanding of control effectiveness.

80
Q

List the three elements that constitute “Mandatory” Guidance in the Institute of Internal Auditors’ (IIA) International Professional Practices Framework.

A

Definition of Internal Auditing;
Code of Ethics;
International Standards.

81
Q

What are attribute standards?

A

These standards involve the characteristics (“attributes”) of organizations and of the individuals performing internal audit services.

82
Q

What is the purpose of “Interpretations” of the International Standards?

A

Interpretations clarify the terms/concepts within the Attribute and Performance Standards (Interpretations are an integral part of the International Standards).

83
Q

Define implementation standards.

A

These standards differentiate the requirements specifically applicable to “assurance” activities and “consulting” activities within the Attribute Standards and the Performance Standards.

84
Q

What is the distinction between “Assurance” and “Consulting” activities in internal auditing?

A

Assurance involves three parties (the process owner; the user; and the internal auditor), whereas consulting only involves two parties (the client and the internal auditor).

85
Q

List the four principles of the Institute of Internal Auditors’ (IIA) Code of Ethics (Framework for the 12 Rules of Conduct).

A

Integrity;
Objectivity;
Confidentiality;
Competency.

86
Q

What is the Institute of Internal Auditors’ (IIA) definition of internal auditing?

A

Internal auditing is an independent, objective assurance and consulting activity designed to add value and improve an organization’s operations. It helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluating and improving the effectiveness of risk management, control, and governance processes.

87
Q

List the three elements that constitute “Strongly Recommended” Guidance in the Institute of Internal Auditors’ (IIA) International Professional Practices Framework.

A

Position papers;
Practice advisories;
Practice guides.

88
Q

List the two basic categories of standards that comprise the International Standards for the Professional Practice of Internal Auditing.

A

Attribute Standards;

Performance Standards.

89
Q

Define “Quality Assurance and Improvement Program (Standard 1300)”.

A

“The chief audit executive must develop and maintain a quality assurance and improvement program that covers all aspects of the internal audit activity.”

90
Q

Define “Proficiency and Due Professional Care (Standard 1200)”.

A

“Engagements must be performed with proficiency and due professional care.”

91
Q

Define “Purpose, Authority, and Responsibility (Standard 1000)”.

A

“The purpose, authority, and responsibility of the internal audit activity must be formally defined in an internal audit charter, consistent with the Definition of Internal Auditing, the Code of Ethics and the Standards. The chief audit executive must periodically review the internal audit charter and present it to senior management and the board for approval.”

92
Q

Define “Independence and Objectivity (Standard 1100)”.

A

“The internal audit activity must be independent, and internal auditors must be objective in performing their work.”

93
Q

List the four primary themes of Attribute Standards.

A

Purpose, Authority, and Responsibility.
Independence and Objectivity.
Proficiency and Due Professional Care.
Quality Assurance and Improvement Program.

94
Q

Define the “Resolution of Senior Management’s Acceptance of Risks (Standard 2600)”.

A

“When the chief audit executive believes that senior management has accepted a level of residual risk that may be unacceptable to the organization, the chief audit executive must discuss the matter with senior management. If the decision regarding residual risk is not resolved, the chief audit executive must report the matter to the board for resolution.”

95
Q

Define “Communicating Results (Standard 2400)”.

A

“Internal auditors must communicate the results of engagements.”

96
Q

Define “Nature of Work (Standard 2100)”.

A

“The internal audit activity must evaluate and contribute to the improvement of governance, risk management, and control processes, using a systematic and disciplined approach.”

97
Q

Define “Managing the Internal Audit Activity (Standard 2000)”.

A

“The chief audit executive must effectively manage the internal audit activity to ensure that it adds value to the organization.”

98
Q

Define “Engagement Planning (Standard 2200)”.

A

“Internal auditors must develop and document a plan for each engagement, including the engagement’s objectives, scope, timing, and resource allocations.”

99
Q

Define the “Monitoring Progress (Standard 2500)”.

A

“The chief audit executive must establish and maintain a system to monitor the disposition of results communicated to management.”

100
Q

Define “Performing the Engagement (Standard 2300)”.

A

“Internal auditors must identify, analyze, evaluate, and document sufficient information to achieve the engagement’s objectives.”

101
Q

List the seven primary themes of Performance Standards.

A

(1) Managing the Internal Audit Activity; (2) Nature of Work; (3) Engagement Planning; (4) Performing the Engagement; (5) Communicating Results; (6) Monitoring Progress; and (7) Resolution of Senior Management’s Acceptance of Risks.

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