Finc Mgmt E - Financial Trans. Processes and Controls

Question 1

SOX 404 requires that all publicly traded firms establish internal controls related to financial reporting and to be in compliance, a company needs to:

Answer 1

• develop documentation of existing internal controls and procedures associated with financial reporting
• test the effectiveness of those controls and procedures
• provide details on any deficiencies in the controls and/or documentation

Question 2

Risk will never be completely eliminated since there are limitations related to the control process. These limitations include:

Answer 2

• small staff size, cant segregate duties
• cost of implementing a control > benefit
• need for rapid responses by employees
• breakdowns in communication, training, and technology
• collusion of 2+ employees
• override of various controls by mgmt for illegitimate purposes

Question 3

With the Top-down risk assessment, the

Answer 3

• focus will deal with significant (material) accounts
• higher levels of risk are examined first in the assessment process
• then consider whether an internal control failure is low, medium, or high after internal controls have been assessed

Question 4

In the internal conrol process, Control sufficiency is

Answer 4

the group of controls with a variety of degrees of precision necessary to achieve a control objective

Question 5

In the internal conrol process, Control precision is

Answer 5

the alignment between a risk and the control activity designed to mitigate that risk

Question 6

Top-down risk assessment (TDRA) is used to identify and assess:

Answer 6

• financial reporting items
• the risks related to financial reporting
• the internal control procedures meant to limit the identified risks

Question 7

According to COSO, the 5 components of an internal control are:

Answer 7

CRIME - control activities, risk assessment, info/comm., monitoring, and control environment

Question 8

COSO framework was designed to provide reasonable assurance for a firm’s objectives related to:

Answer 8

• effectiveness and efficiency of operations
• reliability of financial report
• compliance with laws and regulations

Question 9

Control activities include

Answer 9

preventive and detective controls

Question 10

Detective activities include

Answer 10

audits, required vacations, background investigations, rotation of duties, variance analysis, reconciliations, and physical inventories

Question 11

Preventive activities include

Answer 11

separation of duties, use of passwords, required authorizations, required approvals, alarm systems, use of locks, security guards and cameras, and the education/training/monitoring of employees

Question 12

Internal control allows for the firm’s resources to be:

Answer 12

• used
• monitored
• measured

Question 13

Internal and external auditors are responsible for :

Answer 13

• the assessment of whether internal controls are correctly designed, properly implemented, and are effective
• making recommendations for improvements in the internal control procedures

Question 14

The best internal control procedure to provide a reasonable guarantee that all cash sales are being rung up properly and cash put in the cash drawer would be to

Answer 14

Post a sign in a visible spot near the checkout counter that states, “If you do not get a receipt, your purchase is free.”