Corporate Governance Flashcards
According to COSO, each of the following is an example of an appropriate ongoing monitoring activity, except
A.Follow-up of customer and vendor complaints regarding amounts due and owed. [19%]
B.Periodic analysis of variances between expectations and actual results. [7%]
C.Comparisons of information from various sources within the company. [10%]
D.Approval of high-dollar transactions by supervisors. [62%
Choice D (Correct) and Choices A, B, C (Incorrect): Ongoing monitoring activities are designed to enable an entity to determine whether controls are being followed and whether they are effective. Means of monitoring may include following up on customer complaints regarding amounts due and owed to see if they indicate noncompliance with company policies as to the delivery of goods, performance of services, or billing practices; analyzing variances between expectations and actual results to determine if the causes are indicative of noncompliance with company policies; and comparing information from various sources within the company to identify inconsistencies. Requiring approval for high-dollar transactions is a control activity to prevent unauthorized acquisitions. Monitoring would be helpful in determining if this policy is being appropriately followed.
The Dodd-Frank Act
A.Provides no meaningful protections or incentives for accountants to report accounting violations. [12%]
B.Provides for whistleblowers to benefit financially from successful SEC prosecutions. [79%]
C.Grants whistleblowers 50% of the proceeds from successful SEC prosecutions. [4%]
D.Requires the SEC to hire accountants who get fired for reporting accounting violations by their employers.
Choice B (Correct) and Choice A (Incorrect): Dodd-Frank provides monetary incentives for whistleblowing.
Which organization is responsible for the most commonly-used framework to benchmark internal controls?
A.Committee of Sponsoring Organizations of the Treadway Commission [79%]
B.Financial Accounting Standards Board [4%]
C.Institute of Internal Auditors [12%]
D.Securities and Exchange Commission
Choice A (Correct): In response to heavily publicized incidents of undetected fraud, a group of accounting professional organizations formed the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which performed a study that resulted in the development of an internal control framework that has become very widely used. The Financial Accounting Standards Board is responsible for GAAP. The Institute of Internal Auditors, a member of COSO, establishes guidelines and standards to be followed by internal auditors. The Securities and Exchange Commission oversees the raising of capital in public marketplaces.
Which organization is responsible for the most commonly-used framework to benchmark internal controls?
A.Committee of Sponsoring Organizations of the Treadway Commission [79%]
B.Financial Accounting Standards Board [4%]
C.Institute of Internal Auditors [12%]
D.Securities and Exchange Commission
Choice A (Correct): In response to heavily publicized incidents of undetected fraud, a group of accounting professional organizations formed the Committee of Sponsoring Organizations of the Treadway Commission (COSO), which performed a study that resulted in the development of an internal control framework that has become very widely used. The Financial Accounting Standards Board is responsible for GAAP. The Institute of Internal Auditors, a member of COSO, establishes guidelines and standards to be followed by internal auditors. The Securities and Exchange Commission oversees the raising of capital in public marketplaces
According to COSO, which of the following provides oversight of an entity’s enterprise risk management?
A.Management. [33%]
B.A risk officer. [4%]
C.The board of directors. [60%]
D.Financial executives.
Choice C (Correct): Correct! The board of directors generally is assigned oversight roles, being the most impartial interested party. Management members and financial executives might allow other concerns to overshadow their judgment regarding enterprise risk management (ERM). A risk officer might not be sufficiently objective to engage in effective oversight with regard to upper management. Financial executives’ and management members’ actions typically are most in need of ERM oversight; one should not expect them to police their own actions effectively.
According to COSO, the proper tone at the top helps a company to do each of the following, except
A.Create a compliance-supporting culture that is committed to enterprise risk management. [6%]
B.Navigate gray areas where no specific compliance rules or guidelines exist. [20%]
C.Adhere to fiscal budgets and goals as outlined by the internal audit committee and board of directors. [70%]
D.Promote a willingness to seek assistance and report problems before it is too late for corrective action.
Choice C (Correct) and Choices A, B, D (Incorrect): COSO identifies the tone at the top as the most influential internal control component for establishing a commitment to integrity and ethical values. Tone at the top therefore promotes ethical behaviors or attitudes. Leading by example, management creates a compliance-supporting culture, demonstrating that the organization is aware of, and complies with, applicable rules and regulations; provides guidance for navigating gray areas where no specific compliance rules or guidelines exist, demonstrating a commitment to doing what is right in addition to what rules and regulations allow; and promotes a willingness to seek assistance and report problems in a timely manner by maintaining an “open door” policy and by allowing people to make honest mistakes without adverse repercussions. Adhering to fiscal budgets and goals, considered separately from any ethical issues that may arise therefrom, is a financial management function not directly related to the tone at the top.
Smith was an officer of CCC Corp. As an officer, the business judgment rule applied to Smith in which of the following ways?
A.Because Smith is not a director, the rule does not apply.
B.If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally not liable to CCC for damages caused.
C.If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, but CCC may elect to reimburse Smith for any damages Smith paid.
D.If Smith makes, in good faith, a serious but honest mistake in judgment, Smith is generally liable to CCC for damages caused, and CCC is prohibited from reimbursing Smith for any damages Smith paid.
Choice B (Correct): The business judgment rule establishes that managers or directors will not be held liable for business decisions made in good faith, with due care, and with loyalty. Since Smith’s mistake is honest and made in good faith, he will not be held liable for his business decisions.
A member of the board of directors of Central Communications Co. is offered a license by a third party to operate a cellular phone system. The director does not present this offer to the board of directors for approval but informally mentions it to a fellow board member, who does not think it will be a problem. The director buys the license. Which of the following statements is correct regarding the director’s actions?
A.The director breached a duty of care by failing to use prudent business judgment. [7%]
B.The director breached the duty of due diligence. [15%]
C.The director breached a duty of loyalty by usurping a corporate opportunity. [71%]
D.The director acted properly in purchasing the license.
Choice C (Correct): Board members have a fiduciary duty to act loyally and in the best interest of the corporation. Fiduciary duty dictates that the board member offered the license should have first formally relayed the offer to the entire Central Communications Co. board. Only if Central Communications passed on the offer would the board member be free to accept it for himself. In accepting the offer for himself without first communicating it formally to the board as a whole, the director breached his duty of loyalty by usurping a corporate opportunity. A duty of care is breached by an officer’s negligence. A duty of due diligence is breached when an officer does not put forth an appropriate effort in attending to responsibilities.
Which of the following is most useful when risk is being prioritized?
A.Low and high probability exposures. [44%]
B.Low and high-degree loss exposures. [21%]
C.Expected value. [26%]
D.Uncontrollable risks
Choice C (Correct): When applying Enterprise Risk Management (ERM) principles, risks are prioritized in terms of their likelihood of occurrence and their expected impact on the company. The expected value of the risk is considered important because it will be compared to the expected values of risks associated with alternative decisions in order to determine risk priority
An issuer’s board of directors would ordinarily participate in each of the following activities, except
A.Establishing long-term strategy and objectives to which their information technology system should be aligned. [4%]
B.Supervising and monitoring the quality control testing on the installation of a new information technology system. [77%]
C.Ensuring that suitable information technology resources and skills are available to meet the company’s strategic objectives. [8%]
D.Maintaining awareness of current technology used by the organization to ensure its efficiency and effectiveness for financial reporting
Information technology (IT) functions of the board of directors
. Governance (corporate objectives and strategy for IT system)
. Monitoring financial reporting IT requirements (technology, resources, and skilled personnel)
A board of directors (BOD) gets its responsibility and authority from an entity’s bylaws, as well as from statutes and legal precedent. The bylaws generally indicate the minimum and maximum number of directors, how they are to be selected, how often they meet, and the nature of their responsibilities.
Board members are charged with the broad responsibilities of representing shareholders’ concerns and overseeing senior management. The board generally does not get involved with the day-to-day management of the entity but rather performs an oversight and approval function. For example, the board would rely on management to supervise and monitor the quality control testing of a new information technology system.
Concerning the entity’s IT department, the BOD’s responsibilities include ensuring that suitable IT resources and skills are available to meet the entity’s strategic objectives (Choice C). The board also ensures that the IT department’s financial reporting system is efficient, effective, and aligns with the entity’s IT strategy and objectives (Choices A and D).
Things to remember:
A board of directors gets its responsibility and authority from an entity’s bylaws, statutes, and legal precedent. The board generally does not get involved with the day-to-day management of the entity but rather performs an oversight and approval function.
The internal auditor who works in enterprise risk management (ERM) performs each of the following activities, except
A.Giving assurance that the risks of the organization are correctly evaluated. [24%]
B.Evaluating the risk-management process. [1%]
C.Setting the risk appetite of the organization. [65%]
D.Coordinating ERM activities. [8%
Choice C (Correct): The board of directors is responsible for setting the broad limits within which management is to operate. This includes setting the organization’s risk appetite. An internal auditor typically gives assurance that risks are evaluated appropriately, evaluates the risk-management process, and coordinates ERM activities
Which of the following positions best describes the nature of the Board of Directors of ABC Co’s relationship to the company?
A.Agent. [4%]
B.Executive. [5%]
C.Fiduciary. [86%]
D.Representative.
Choice C (Correct): The Board of Directors of a corporation has a fiduciary duty to that entity, meaning that it must act in the best interests of the corporation in all business dealings and not in a director’s self-interest.
Under Title IX of The Wall Street Reform and Consumer Protection (Dodd-Frank) Act of 2010 – Investor Protections and Improvements to the Regulation of Securities, stockholders are entitled to vote:
I. Every 3 years to approve executive compensation
II. Every 6 years to re-elect members to the board of directors
III. On a non-binding basis to disapprove “golden parachute” arrangements
A.I only. [5%]
B.I and II only. [14%]
C.I and III only. [59%]
D.I, II, and III.
Choice C (Correct): Title IX of the Dodd-Frank Act gives authorizes stockholders to vote to approve executive compensation every 3 years and to vote every 6 years to determine if voting to approve compensation every 3 years is frequent enough. It also authorizes them to vote to disapprove a “golden parachute” arrangement, although the vote is not binding. It does not address elections to the board of directors.
A company’s new time clock process requires hourly employees to select an identification number and then choose the clock-in or clock-out button. A video camera captures an image of the employee using the system. Which of the following exposures can the new system be expected to change the least?
A.Fraudulent reporting of employees’ own hours. [12%]
B.Errors in employees’ overtime computation. [48%]
C.Inaccurate accounting of employee’s hours. [20%]
D.Recording of other employees’ hours
Choice B (Correct): A video camera is not likely to be helpful in exposing errors in employees’ overtime computation. An error in an employee’s overtime computation would be the result of a mathematical computation mistake and a video camera would not likely be helpful in exposing this kind of error
An internal auditor is considering a client’s organizational structure as it affects the ethical climate established by company management. Each of the following considerations is valid in this regard, except:
A.The appropriateness of an entity’s organizational structure depends in part on the nature of its activities. [4%]
B.A highly structured organization with formal reporting lines may be appropriate regardless of entity size. [14%]
C.A decentralized environment may increase the risk that unethical decisions could be made by unit managers. [10%]
D.A company that is highly centralized will have a more diverse ethical culture than a company that is decentralized
Choice D (Correct): A highly centralized company tends to have a more uniform culture (including ethical culture) than a decentralized company. The appropriateness of an entity’s organizational structure indeed depends in part on the nature of its activities. For instance, an organizational structure that works well for a common carrier probably would be a poor fit for an entity involved in real estate development. For some industries (for instance, those subject to strict government regulations), formal reporting lines are appropriate regardless of the entity size. A decentralized environment increases the chances that unit managers will make decisions; thus, it increases the risk that some of those decisions could be unethical.
