Mod 40

Question 1

Major controls over management:

Answer 1

1) compensation systems
2) BoD (and committees)
3) external auditors
4) internal auditors
5) attorneys
6) regulators
7) creditors
8) securities analysts
9) internal control systems

Question 2

Internal Control, as defined by COSO, should provide reasonable assurance regarding achievement of objectives in the categories of:

Answer 2

1) reliability of financial reporting
2) effectiveness and efficiency of operations, and
3) compliance with applicable laws and regulations.

Question 3

Components of Internal Control:

Answer 3

1) the control environment
2) the risk assessment process
3) control activities
4) information and communication, and
5) monitoring

Question 4

Limitations of Internal Control:

Answer 4

1) management override
2) collusion (circumventing SOD)
3) bad judgment / misunderstanding of assigned duties leading to control break down
4) control costs versus benefits

Question 5

What is Enterprise Risk Management (ERM)?

Answer 5

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

Question 6

ERM components:

Answer 6

1) internal environment
2) objective setting
3) event identification
4) risk assessment
5) risk response
6) control activities
7) information and communication
8) monitoring

Question 7

What is a “Black Swan Analysis”?

Answer 7

Evaluating the occurrence of events that had negative effects and were unanticipated or viewed as highly unlikely.

Question 8

What is the “Business Judgment Rule”?

Answer 8

A case law-derived concept that provides that a corporate director may not be held liable for errors in judgment providing the director acted in good faith with loyalty and due care.

Question 9

What do corporate bylaws set forth:

Answer 9

1) how directors and / or officers are selected
2) how meetings are conducted
3) types and duties of officers
4) required meetings
5) should also prescribe the process for bylaw amendment.

Question 10

What is an evaluator?

Answer 10

An individual that monitors internal control within an organization.

Question 11

What is inherent risk?

Answer 11

The risk to the organization if management does nothing to alter an event’s likelihood or impact.

Question 12

What is “residual risk”?

Answer 12

The risk to the organization resulting from an event after considering management’s response.

Question 13

What is risk tolerance?

Answer 13

The acceptable variation with respect to achieving a particular objective.

Question 14

Elements of the “Articles of Incorporation”:

Answer 14

1) Proposed name of the corporation and the initial address
2) Purpose of the corporation
3) Powers of the corporation
4) The Registered Agent of the corporation
5) Name and address of each incorporator
6) Number of authorized shares of stock and types of stock.

Question 15

Requires public corporations to disclose why or why not the chairman of the board is also the CEO.

Answer 15

Dodd-Frank Act (Wall Street Reform and Consumer Protection Act of 2010).

Question 16

Responsibilities of the Nominating / Corporate Governance Committee:

Answer 16

1) Oversees board organization, including committee assignments
2) Determines director qualifications and training
3) Develops corporate governance principles, and
4) Oversees CEO succession.

Question 17

The BOD Financial Expert as defined by SOX possesses all of the following attributes:

Answer 17

1) An understanding of GAAP and Financial Statements
2) Experience in preparing, auditing, analyzing, or evaluating financial statements of the breadth and complexity expected to be encountered with the company
3) An understanding of internal controls and procedures for financial reporting, and
4) An understanding of audit committee functions.

Question 18

Complaints from whistleblowers should be communicated to the __________?

Answer 18

Audit Committee of the BOD.

Question 19

Section 302 of SOX makes who responsible for maintaining effective I/C, and requires significant deficiencies in I/C to be communicated to who?

Answer 19

Officers are responsible for maintaining I/C, and the principal executive and financial officer(s) must disclose significant I/C deficiencies to the company’s auditors and audit committee.

Question 20

Responsibilities of the Compensation Committee:

Answer 20

1) Review and approve CEO compensation (based on meeting performance goals)
2) Make recommendations to the BOD with respect to incentive and equity-based compensation plans
3) Attempt to align incentives with shareholder objectives and risk appetite.

Question 21

Per _______, all members of the compensation committee must be _______, and shareholders must be allowed a nonbinding vote on executive compensation at least every ______ years, and a vote at least every _______ years as to whether the vote on compensation should be held more often. And finally, requires a nonbinding vote by shareholders on “golden parachutes” for exectutives.

Answer 21

The Dodd-Frank Act requires all members of the compensation committee of the BOD to be independent.

Question 22

Per the NYSE and NASDAQ rules, the following are required for public companies:

Answer 22

1) Majority of BOD must be independent
2) Make a determination of independence of director and provide to investors
3) Identify certain relationships that automatically precludes independence
4) Have non-management directors meet at regularly scheduled executive sessions
5) Adopt a code of conduct applicable to all directors, officers, and employees (must be made publicly available and must disclose any waivers of the code).
6) Have an independent Audit Committee (and other committee decisions must be made by independent committees)

Question 23

Specific NYSE and NASDAQ rules the preclude director independence include:

Answer 23

1) Was an employee of corporation or affiliate in the last 5 years (3 years)
2) A family member has been an officer of the corporation or affiliate in the last 5 years (3 years)
3) Was a former partner or employee of the corporation’s external auditor in the last 5 years (3 years)
4) Director or family member received more than $120K from corporation for other than director compensation during last 3 years
5) Is an executive of another entity that receives significant amounts of revenue from the corporation.

Question 24

What do the IA performance standards relate to?

Answer 24

The IA performance standards relate to the quality of IA activities.

Question 25

What do the IA attribute standards relate to?

Answer 25

The IA attribute standards relate to the characteristics of the IA activity.

Question 26

External auditors are required by SOX to communicate to the audit committee the following:

Answer 26

1) It is the auditor’s responsibility to form and express an opinion
2) Audit does not relieve management or the audit committee of their governance responsibility
3) The planned scope and timing of the audit
4) Significant audit findings
5) Material corrected misstatements
6) Significant issues discussed with management
7) The auditor’s views about significant matters on which management consulted with other accountants
8) Written representations the auditor is requesting
9) Significant deficiencies and material weaknesses in I/C.

Question 27

What are the divisions/offices of the SEC that are relevant to corporate governance?

Answer 27

1) The Division of Corporate Finance (reviews filings)
2) The Division of Enforcement (recommends investigations of securities laws violations, which cases to take to court, prosecuting the cases)
3) The Office of the Chief Accountant (advises SEC on accounting and auditing, oversees development of accounting principles, approves auditing rules put forward by the PCAOB)

Question 28

Section 906 of SOX requires:

Answer 28

The CEO and CFO to certify the accuracy and truthfulness of the financials filed with the SEC.

Question 29

If financials filed with the SEC are found to be inaccurate what are the potential penalties?

Answer 29

CFO and CEO can be found criminally liable and face imprisonment of 10 to 20 years. Civil penalties can include fines up to $5 million.

Question 30

What penalties doe SOX impose for someone knowingly perpetrating fraud in connection with the purchase or sale of securities?

Answer 30

Fines or prison up to 25 years, or both.

Question 31

What penalties for destruction, mutilation, alteration, concealment, or falsification of documentation with the intent to obstruct or influence investigation?

Answer 31

Fines or imprisonment for up to 20 years.

Question 32

What is the punishment for action taken against whistleblowers?

Answer 32

Fines or imprisonment up to 10 years.

Question 33

The three objectives of I/C:

Answer 33

1) Reliability of Financial Reporting
2) Efficiency and Effectiveness of operations, and
3) Compliance with applicable laws and regulations.

Question 34

The five components of I/C:

Answer 34

1) The Control Environment
2) The Risk Assessment Process
3) Control Activities
4) Information and Communication, and
5) Monitoring.

Question 35

Control Environment Factors:

Answer 35

Integrity and ethical values
Commitment to competence
Human resources policies and practices
Assignment of authority and responsibility
Management’s philosophy and operating style
Board of Directors or audit committee
Organizational structure.

Question 36

An effective information and communication system should accomplish the following goals for transactions:

Answer 36

1) Identify and record all valid transactions
2) Describe the transactions on a timely basis
3) Measure the value of the transactions properly
4) Record transactions in the proper time period
5) Properly present and disclose transactions
6) Communicate responsibilities to employees.

Question 37

The monitoring-for-change control continuum consists of the following sequence of activities:

Answer 37

1) Establish a control baseline
2) Change identification
3) Change management
4) Control revalidation/update.

Question 38

An effective change management process enables management to control:

Answer 38

1) Change requests
2) Change analyses
3) Change decisions
4) Change planning, implementation, and tracking.

Question 39

Internal Control may break down due to:

Answer 39

1) Faulty judgment
2) Human error
3) Collusion
4) Management override
5) Cost constraints