Corporate Governance, Internal Control, and Enterprise Risk Management

Question 1

A process, effected by the entity’s BOD, management, and other personnel designed to provide reasonable assurance regarding the achievement of objectives

Answer 1

Internal Controls

Question 2

A process designed to idnetify potential events that may affect the entity, and manage risk to be within its risk appetite, to provide reasonable assurance regarding hte achievement of entity objectives

Answer 2

Enterprise Risk Managemnt (ERM)

Question 3

The problem that occurs when managmenet does not act in the best interest of the shareholders–may engage in self-serving activities

Answer 3

Agency problem

Question 4

Taking too much/little risk

Answer 4

Shirking–an agency problem

Question 5

Filed with the secretary of state who issues a certificate of incorporation; Includes:

• name of corp
• purpose of corp
• powers of corp
• name of the registered agent
• name and address of each incorporator
• # of authorized shares of stock

Answer 5

Articles of Incorporation

–can be subsequently amended by appoval (majority vote) of shareholders

Question 6

Set forth how the directors and/or officers are elected/selected, how meetings are conducted, the types and duties of officers, and required meetings
–should prescribe the process for amendment of these rules

Answer 6

Bylaws

Question 7

Provide the basic capital of the corporation and elect the BOD

Answer 7

Common SH’s

Question 8

The right of common stockholders to subscribe to stock issues so that their ownership is not diluted

Answer 8

Preemptive right

Question 9

Have no voting rights, but have preference to dividends and receipt of capital upon liquidation of the company

Answer 9

Preferred SH’s

Question 10

Voting rights in the election of directors that allow common shareholders to cast 1 vote for each director of the of the corporation for each share of stock they own

Answer 10

Cumulative voting rights

Question 11

Charged with running the corporation on behalf of the SH’s and other stakeholders
-responsible for providing strategic direction and guidance about the stablishment of the key business objectives

Answer 11

BOD

–no individual power; power resides in the Board, collectively

Question 12

A case-law derived concept that provides that a corporate director may not be held liable for errors in judgment providing the director acted with good faith, loyalty, and due care; but are responsible for personal illegal actions and personal torts

Answer 12

Business judgment rule

Question 13

Duty of BOD that they must put hte interest of the corporation before their personal interest

Answer 13

Duty of loyalty

Question 14

An agent of the corporation that can bind with corporation with their actions within the scope of his/her autority–a corp is not bound by the actions of these people if they acted beyond the scope of their authority

• responsible for hte fair presentation of the corp’s financial reports
• fidcuiary duty to corp

Answer 14

Officers (CEO, CFO, etc.)

Question 15

A compensation system in which management is compensated based on performance (usually accounting profit)
–may result in mgmt putting too much focus on short-term profits

Answer 15

BAse Salary + Bonuses

Question 16

A form of compensation that provides managers with an incentive to increase stock price, but may result in mgmt taking risks/manipulating st F.S.’s to meet objectives

Answer 16

Stock Options

Question 17

Issuing shares of stock as part of management’s compensation in the form of REstricted Stock and Performance shares

Answer 17

Stock Grants

Question 18

Officers, employees or major stockholders that are on the BOD

Answer 18

Inside directors

Question 19

Requires public corporaitons to disclose why or why not hte chairman of the board is also the CEO

Answer 19

Wall Street Reform and Consumer Protection (Dodd-FRank) ACt of 2010

Question 20

The committe established by and amongst hte BOD f an issuer fro the purpose of verseeing the accounting and finacnial reporting processes of hte issuer; and audits of the financial statements of the issuer

• responsible for the appointment, compensation, and oversight of the corporations’ external auditor
• must be indpendent

Answer 20

Audit committee on BOD

Question 21

Rules that require executives to pay back incentive compensation when there is an accounting restatement

Answer 21

Clawback rules–required by Dodd-Frank

Question 22

A professional organization of internal auditors that issued International Standards for the Professional Practice of Internal Auditing and a Code of Ethics for internal auditors
–Administers the CIA

Answer 22

Institute of Internal Auditors (IIA)

Question 23

Services that provide an indpendent assesment of goverannce, ris management or control processes of an organization (ex. on financial presentation, compliance, performance, and system security)

Answer 23

Assurance services

Question 24

Services tha invovle advisory related services to improve an organization’s governance, risk management or control processes (ex. training, advising, and facilitating)

Answer 24

Consulting services

Question 25

Intenral auditing standards related to the characteristics of the internal audit activity

Answer 25

attribute standards

Question 26

Internal auditing standards related to the quality of internal audit activities

Answer 26

perofmance standards

Question 27

Internal auditing standards that expand upon the attribute and performance standards

Answer 27

Implementation standards

Question 28

The Chief Audit Executive should report directly to this person in order to prevent the internal auditors’ work from being influenced by management

Answer 28

CEO

Question 29

Requires that management acknowledge its responsibility for establishing adequate internal control over financial reporting and provide an assessment in the annual report of the effectiveness of internal control and requires that auditors attest to managment’s assertions

Answer 29

Section 404 of SOX

Question 30

Prohibits a person from knowingly destroying, mutilating, or concealing recoreds or documents to impede or influence the investigation of any department or agency of hte US

Answer 30

seCTION 802 OF SOX

Question 31

Responsible for protecting investors, maintining fair, orderly, and efficient market,s and facilitating capital formation
-consists of 5 appointed Commissioners by the president

Answer 31

SEC

Question 32

Reviews documents of publicly held companies that are filed with e SEC to see if companies are meeting disclosure requirements

Answer 32

Division of Corporate Fiance of hteSEC

Question 33

Assists the SEC in executing its law enforcement function by recommending the commencement of investigtions of securiteis law violations, and prosecuting on behalf of hte commission

Answer 33

Division of Enforcement of the SEC

Question 34

Advises the Commission on accounting and auditng, oversees the development o accounting principles, and approves the auditing rules put forward by the PCAOB

Answer 34

The Office of the Chief Accountant of the SEC

Question 35

REquires the CEO and CFO to certify the accuracy and truthfulness of periodic financial reports filed with the SEC

Answer 35

Section 906 of SOX

Question 36

Provides that hte SEC will pay awards to whistle-blowers for providing information about violations of securties laws that result in aggregate monetary sanctiosn in excess of $1 million

Answer 36

Dodd-Frank

Question 37

Exempts “emerging growht companies” for a maximum of 5 years from the date of their IPO from certain requirements that apply to larger public companies including:
Certain disclousres
REquirement of integrated audit
REquirements regarding SH votes on executive compensation

Answer 37

Jumpstart Our Business Startups (JOBS) Act

Question 38

Audits corporations’ tax returns and enforces penalties for filing false tax returns

Answer 38

IRS

Question 39

A defense against corporate takeovers that triggers an option for hte SH’s to purchase addtional shares at a discount if someone attempts to acquire a controlling interest in the corp

Answer 39

Poison pill defense

Question 40

Sets the tone of an organization by influencing the control consciousness of people–the foundation for the other components of internal control

Answer 40

Control environment

Question 41

Management’s process for identifying, analyzing, and responding to risks

Answer 41

Risk assessment

Question 42

Policies nad procedures that ehlp ensure that management directives are carried out

Answer 42

control activities

Question 43

Controls to check the accuracy and completeness of data, and the autorization of transactions (General, application, physical controls, seg of duties)

Answer 43

Information processing controls

Question 44

Control activities over data center operaions, system software acquisition and maintenance, acces security, and application system development and maitnence

Answer 44

General controls

Question 45

Control activities designed to ensure that particular applications are accurately and completely processing data and that transactiosn are properly authorized (segregated into input, processing, and ouput controls)

Answer 45

Application controls

Question 46

Controls to ensure that data are input accurately and completely, and transactiosn are authorizecd

Answer 46

input controls

Question 47

Controls to ensure that data is processesd accurately

Answer 47

Processing controls

Question 48

Controls over hte distribution of and accuracy of output

Answer 48

Output controls

Question 49

The process used to assess the quality of internal contorl perofrmnance over time

Answer 49

Monitoring

Question 50

Individuals that monitor controls within an organization

-must be competent and objective

Answer 50

Evaluators

Question 51

Evidence obtained form observing the control and reperforming it

Answer 51

Direct evidencfe

Question 52

Evidence that identifies anomalies that may signal control change or failure

Answer 52

Indirect Evidence

Question 53

The amount of risk an organization is willing to accept to achieve its goals

Answer 53

Risk appetite

Question 54

The acceptable variation with respect oa particular opbjective above/below a firm’s risk appetite

Answer 54

Risk tolerance

Question 55

Evaluating the occurrence of events that ahd negative effects and were unaticipated or viewed as highly unlikely

Answer 55

Black swan aanlysis

Question 56

Risk to the organization if managment does nothing to alter hte likelihood or impact

Answer 56

Inherent risk

Question 57

Risk of the event after considering management’s response

Answer 57

Risidual risk

Question 58

Associate a range of events and tesulting impact withelikelihood of those events based on certain assumptions

Answer 58

Probablistic models

Question 59

Use subjective assumptions in estimating the impact of events without quantifying an associated likelihood (ex. senstiivity measures, stress tests, scenario analyes)

Answer 59

Nonprobabilistic models

Question 60

A risk response that invovles exiting the activity that gives rise to the risk

Answer 60

Avoidance

Question 61

A risk response that involves taking action to reduce risk likelihood or impact, or both

Answer 61

Reduction

Question 62

Risk response that involves reduign risk likelihood or impact by transferring or sharing a portion of the risk (ex. insurance, hedging, outsourcing)

Answer 62

sharing

Question 63

A risk response in which no aciton is taken because the risk is consistent with the risk appetite of the organization

Answer 63

Acceptance (retention)