CORPORATE GOVERNANCE 16.

The auditor must communicate significant audit

adjustments to the audit committee. TRUE
1. The objective of financial reporting is to provide useful 17. Any major disagreement the auditor has with
information to interested users. TRUE management should be discussed with the audit
committee. TRUE
2. Financial transparency relates to how well resources are
protected and managed by the company and its 18. Managers of organizations are hired by Boards of
management. FALSE Directors to perform responsibilities such as the
implementation of internal control. TRUE
3. Corporate governance is a process by which the
owners, but not the creditors, exert control over the 19. The Sarbanes-Oxley Act prohibits auditors from
resources of the enterprise. FALSE performing consulting services for their audit
clients. TRUE
4. Management can influence who sits on the board and the
audit committee as well as other governance controls that 20. The Public Company Accounting Oversight Board
might be put into place. TRUE (PCAOB) set standards for audits of private and public
companies. FALSE
5. A commission sponsored by the New York Stock
Exchange issued a report in 2010 indicating that 21. An auditor is required to communicate new accounting
successful governance depends heavily upon honest, principles adopted by the organization to the audit
competent, and industrious managers. TRUE committee. TRUE

6. The board’s fundamental objective should be to build 22. Audit committees are motivated to make sure the
a system of internal controls that will ensure the auditors do their job, because poor performance on the part
financial statements are free from all error. FALSE of the auditors will directly reflect on the performance of
the audit committee members. TRUE
7. An important aspect of governance is the independent
judgment of boards about what is in the best interests of 23. The Sarbanes-Oxley Act makes the audit committee the
the company and its shareholders. TRUE client of the external audit firm. TRUE

8. The external auditor has the primary 24. The Dodd-Frank Wall Street Reform and Consumer
responsibility for creating a culture of Protection Act of 2010 replaces the requirements of the
performance with integrity and ethical behavior Sarbanes-Oxley Act of 2002 for financial sector companies.
within the client’s organization. FALSE FALSE

9. Since the board is responsible to protect the 25. The Public Company Accounting Oversight Board has five
interest of the shareholders, independence is not a members, all of which must be CPAs. FALSE
necessary attribute for board members. FALSE
26. The Public Company Accounting Oversight Board has
10. Companies must strike the right balance in the the power of performing inspection of public accounting
appointment of independent and non-independent firms to determine their performance and check for
directors to ensure an appropriate range and mix of improvements if any. TRUE
expertise, diversity, and knowledge on the board.
TRUE 27. In order to safeguard independence of the firm,
partners and managers of public accounting firms must
11. It is effective for a board to take a “check the box” go through a cooling off period prior to taking a high-
mentality when implementing and complying with level position of employment with a public client
governance mandates and best practices. FALSE company. TRUE
12. The first decade of the twenty-first century has seen 28. The Sarbanes-Oxley Act includes provisions requiring
more changes in corporate governance than at any time the auditor and the management to certify the financial
since the Great Depression. TRUE statements and its disclosures and quality of internal
controls. TRUE
13. Governance failures over the past decade were primarily
limited to the United States. FALSE 29. The Sarbanes-Oxley Act requires that public companies
report on internal financial controls. TRUE
14. Board of directors that did not spend sufficient time or
have sufficient expertise to perform duties led to corporate 30. The Sarbanes-Oxley Act requires partners or
governance failures. TRUE managers significantly participating in audits to rotate off
the engagement every five years. TRUE
15. The audit committee is a subcommittee of the board
of directors comprised of independent outside directors. 31. The audit committee must be composed of
TRUE outsiders such as the organization's attorney and audit
partner. FALSE
32. The nominating committee is a standing committee of 46. The board should not consider limiting the number of
the board of directors whose purpose is to oversee the years an individual can serve on the audit committee
accounting and financial reporting processes of the since the more an audit committee member understands
company and the financial statement audits. FALSE the company the more effective that member will be able
to perform the required duties. FALSE
33. When operating effectively the audit committee may
replace the processes performed by the external auditors. 47. Recent academic research shows that companies with
FALSE good corporate governance have higher return on equity
than other companies. TRUE
34. The audit committee will receive feedback from both
the internal and external auditors on a number of issues 48. According to SAS 61, auditors are required to
including the quality of internal controls over financial inform the audit committee of any significant audit
reporting. TRUE adjustments discovered during the engagement. TRUE

35. For public companies, the audit committee must be 49. The audit committee must be assured that the
composed of outside directors who are also all financial auditor is free of any restrictions and has not been
experts. FALSE influenced by management during the course of the
audit. TRUE
36. The audit committee relies on the internal and
external auditors to develop and communicate objective 50. The Public Company Accounting Oversight Board
information needed by the audit committee to effectively obtains its authority to set audit standards for public
perform its oversight functions. TRUE companies from the U.S. Congress. TRUE

37. The audit committee typically would not review the 51.The American Institute of Certified Public
Management Discussion and Analysis section of the annual Accountants no longer retains the right to set audit
report filed with the SEC since that section of the report is standards for public companies as the Securities
the responsibility of management and includes forward Exchange Commission has relinquished such
looking statements. FALSE power. FALSE

38. A survey of audit committee members conducted 52. Corporate governance is a process by which the owners
by KPMG in 2010 indicated that, on average, and creditors of an organization
companies hold 12 audit committee meetings
annually. FALSE A. exert control.
B. require accountability.
39. Management of companies should have the ability to hire C. exert control and require accountability.
and fire the external auditor. FALSE
D. neither exert control nor require accountability.
40. The audit committee should have the authority to hire and
fire the external auditors. TRUE 53. Stockholders require accountability from management for:

A. financial performance
41. The purpose of the audit committee is to oversee all
aspects of the financial reporting process, including B. financial transparency
preparation and filing of financial statements, internal C. quality of internal controls
control over financial reporting, and related risks. TRUE D. all of the above
42. At least half of the members of an audit committee should 54. The responsibility for operating an enterprise is delegated
be composed of independent directors. FALSE to the:
43. The audit committee is responsible for ensuring A. auditor.
that management designs and implements sound B. audit committee.
internal control, which is essential for reliable financial
reporting for any organization. TRUE C. management.
D. board of directors.
44. The chief (internal) audit executive should have
direct reporting access to the audit committee, and the 55. Section 304 of the Sarbanes-Oxley Act requires
committee should oversee the activities and budget of the executives to forfeit any bonus or incentive-based pay or
internal audit function. TRUE profits (including stock options) from the sale of stock
received in the twelve months prior to an earnings
45. The audit committee should meet in separate restatement. This is often referred to as:
executive sessions with management, the external
auditor, the internal auditor, legal counsel, and other A. claw back provision
advisors. TRUE B. give back provision
C. restatement provision
D. fraud provision
56. Governance demands accountability back through the D. set audit standards
system to the:
63. Management of an organization has the responsibility for
A. shareholders all of the following except:
B. audit committee
C. management A. accounting principles used in financial reporting
D. all of the above B. engagement of a qualified auditor
C. internal control over financial reporting
57. The audit client of the CPA firm is: D. financial statements and disclosures
A. management. 64. A commission sponsored by the New York Stock
B. the SEC. Exchange issued a report in 2010 indicating that
C. the audit committee. successful governance depends heavily upon:
D. the stockholders.
A. honest managers
58. The Dodd-Frank Wall Street Reform and Consumer B. competent managers
Protection Act of 2010 was enacted in response to the C. industrious managers
financial crisis of 2008 and 2009 and included the D. all of the above
following corporate governance requirement(s):
65. The board’s fundamental objective should be to:
A. Mandates enhanced stock exchange listing
standards on compensation committee A. ensure the financial statements are free from all
independence error
B. Requires the external auditors report to the audit B. ensure management’s interests are properly
committee reflected in the strategy of the company
C. Mandates that at least one member of the audit C. build long-term sustainable growth in
committee be a financial expert shareholder value for the corporation
D. All of the above D. none of the above

59. The audit committee has oversight responsibilities for: 66. The corporate governance responsibilities of management
include:
A. outside reporting.
B. internal auditing. A. establishing risk management processes
C. external auditing. B. establishing proper internal controls
D. all of the above. C. requiring high ethical standards
D. all of the above
60. Which of the following should be communicated by the
auditor to the audit committee? 67. The Sarbanes-Oxley Act of 2002 requires management of
public companies to:
A. auditor's responsibilities under GAAP.
B. all significant audit adjustments. A. certify the accuracy of financial statements.
C. significant accounting policies. B. establish a corporate code of conduct.
D. all are required communications. C. take accountability for restated earnings.
D. all of the above
61. Which one of the following will provide auditing standards
of public companies? 68. All of the following groups have responsibility for
ensuring proper corporate governance except:
A. GAO
B. AICPA A. stockholders
C. GAAP B. board of directors
D. PCAOB C. regulatory agencies
62. The PCAOB has the authority to do all of the ff except: D. all of the above have responsibility

A. perform peer reviews on public accounting

firms
B. establish quality control standards for auditors
of public companies
C. take responsibility for an organization's
financial statements
69. Governance failures over the past decade related to 75. The Public Oversight Board issued a report citing
the stockholders included all of the following except: concerns with the audit process. These concerns
included all of the following except:
A. focus on short-term prices
B. failure to perform long-term growth analysis A. analytical procedures were being used
C. abdication of most responsibilities to inappropriately to replace direct tests of account
management and analysts as long as stock price balances
increased B. audit documentation, especially related to
the planning of the audit, was not in
D. all of the above are failures compliance with professional standards
70. Governance failures over the past decade related to the C. auditors were ignoring warning signals of fraud
external auditor included all of the following except: and other problems
D. all of the above were cited
A. failure of the external audio to implement
proper internal controls in the financial 76. An audit committee must be comprised of outside
systems of their clients directors and at least one outside financial expert. Which
B. promotion of personnel based on ability to sell of the following is considered an outside director?
non-audit products
C. replacement of direct tests of accounting A. A director who is not a member of
balances with inquiries, risk analysis, and management and has no other relationship to
analytics the organization.
D. all of the above are failures B. A consultant to the organization who works as
an honorary member of the board.
71. Which group is responsible for ensuring that the C. A director who is also a member of
organization is run according to the organization’s charter management and has no other relationship to
and that there is proper accountability?
the company.
A. regulatory agencies such as the SEC D. A director who is a CPA and CIO of an
B. external auditors affiliated organization.
C. board of directors
77. Which of the following members of the board of
D. internal auditors directors of McKeever Corporation is most qualified serve
on McKeever's audit committee?
72. Specific activities performed by regulatory agencies such
as the SEC include the following except:
A. Jon Adams, internal auditor of McKeever
A. reviewing of filings
Corporation
B. interacting with the FASB in setting accounting
B. Megan Wiley, attorney to McKeever
standards
Corporation
C. auditing the financial statements to express
C. Karen Jones, consultant to McKeever
an opinion
Corporation
D. all of the above are performed
D. None of the above should serve on the audit
73. Specific activities performed by external auditors committee of McKeever Corporation
include(s):
78. The audit committee’s primary responsibilities related to
A. preparation of client financial statements in the financial reporting process include:
conformity with GAAP
A. providing oversight of the accounting and
B. services such as audit, tax or consulting
financial reporting processes
C. creating and specifying independence standards
B. appointing, compensating, and overseeing the
D. all of the above are performed
external auditor
74. Specific activities performed by management include the C. ensuring that the board establishes a
following except: whistleblower program
D. all of the above
A. formulating strategy and risk management
B. implementing effective internal controls
C. hiring of the external auditors
D. all of the above are performed
79. It is expected that the external auditor reports the financial reporting and related
following to the audit committee except: processes?

A. critical accounting policies and practices used 84. The audit committee should perform the following
by management in relation to the management of the external auditor
except:
B. materiality methodology and thresholds used
by the auditor A. hiring
C. material alternative GAAP treatments that have B. firing (if appropriate)
been discussed with management C. determining the audit fee
D. material written communications between the D. all of the above should be performed
auditor and management
85. The audit committee should disclose the processes it uses
80. Which of the following board of directors of in discharging its responsibilities, including all of the
Robbins Corporation should not serve on the audit following except:
committee?
A. the number of meetings each year
A. John Williams, professor at the University of B. how the committee oversees the internal audit
Kalamazoo function
B. Tyrone Marks, treasurer of Robbins C. committee activities performed to assess the
Corporation risk of fraudulent financial reporting
C. Stacy Bobbitt, member of the board of directors D. the committee’s role in its direct
of the First National Bank and Trust implementation of internal controls
D. Jill Cemoss, chairman of the board of Big
Brothers and Sisters, a non-profit organization 86. The Sarbanes-Oxley Act of 2002 requires which of the
following?
81. The audit committee’s major areas of responsibility
include all of the following except: A. Only the largest four accounting firms may
A. oversight of the internal control system audit public companies.
B. Smaller public companies that cannot
B. oversight of the internal audit function and afford to become compliant with the act
external auditor must delist and become pink sheet
C. preparation of financial statements companies.
D. establishment and oversight of a whistleblower C. All publicly held companies will provide a
process report on internal control over financial
reporting.
82. The audit committee should have: D. Chief financial officers of public companies
A. at least one financial expert must be CPAs.
B. members with very similar backgrounds and 87. The PCAOB has broad powers affecting the audit
perspectives to avoid conflict profession, including:
C. at least one independent director A. Requiring all public accounting firms that audit
D. all of the above any U.S. company to register with the PCAOB
83. External auditors should expect the audit committees at B. Setting auditing standards for auditors of
their clients to ask them relevant and probing questions. public companies
Some of the relevant questions that audit committee C. Performing inspections of all
members should ask the external auditor include all of the public accounting firms in the
following except: AICPA to determine their
performance
A. What are the most significant risks to financial D. all of the above
reporting at this company?
B. What level of assurance do your 88. The Public Company Accounting Oversight Board was
procedures provide with respect established by:
to the annual financial
statements? A. an act of Congress.
C. How do you calculate materiality and what is B. the Securities and Exchange Commission.
your materiality threshold for the C. the Public Oversight Board.
engagement? D. the self-governing association of certified
D. How do you assess the competence of public accountants.
company personnel engaged in
89. Brooklyn Mercantile, Inc., a public company, receives 95. A proper system of corporate governance is one that
audit services from Gregory and Elder, LLC. Brooklyn demands
may engage Gregory and Elder to perform corporate tax
returns only if: A. decision making by auditors in place of
management.
A. Gregory and Elder is registered with the
B. accountability back through the system to
PCAOB.
the shareholders.
B. Gregory and Elder is independent of Brooklyn
C. internal audit representation on the board of
for tax purposes.
directors.
C. tax services by Gregory and Elder are
D. audit planning to obtain competent and
approved by Brooklyn's audit committee.
sufficient audit evidence.
D. the PCAOB approves such "non-audit" services
in writing. 96. The auditor may properly address the risk associated
with an organization that does not demonstrate a
90. Audit committees are required to have what person in its commitment to good governance in the all of the following
composition? ways except:

A. A CPA A. not accepting the client

B. A public regulator B. performing more audit work to better
C. A financial expert manage the financial risk to the auditor
D. An attorney-at-law C. charging a higher audit fee without
performing increased audit work to
91. According to the Sarbanes-Oxley Act of 2002, how compensate the auditor for the risk
often must audit managers and partners rotate off an D. all of the above are proper are proper
engagement of a public company?
97. Companies with good governance generally have the
A. Each busy season following characteristic(s):
B. When independence is in question
C. Every five years A. are less likely to engage in “financial
D. Managers and partners are not required to engineering”
rotate off of public client engagements B. take the requirements of good internal
control over financial reporting seriously
92. Which of the following are the CEO and CFO of a public C. make a commitment to financial
company prohibited from performing under the Sarbanes- competencies needed
Oxley Act of 2002?
D. all of the above
A. Certification of financial statements
B. Disclosure of off-balance sheet transactions 98. Describe the relationship between the external auditor
C. Reporting on internal control over financial and the audit committee of the company receiving audit
reporting services.
D. Selecting the external auditors
The audit committee hires the auditor to perform
93. The organization that will continue to set auditing audits of financial statements that are the representations and
standards for firms auditing private companies is the responsibilities of management. The audit committee is the
literal client of the auditor. The audit committee has the
A. FASB responsibility to assess the quality of audit services received,
B. GAO including the independence of the external audit firm. The
C. SEC audit committee has the ultimate ability to fire the audit firm.
D. AICPA
According to SAS 61 of the auditing standards, the
94. The AICPA is an organization that is auditors must communicate specific issues to the audit
committee. These items of communication include:
A. historically self-regulated.
- The firm's responsibility to audit in
B. regulated by the federal government.
accordance with Generally Accepted
C. regulated the state governments. Auditing Standards and its
D. a new organization established by an act of responsibility to review other
congress in 2002. information contained in annual reports
and public documents.
- The client company's adoption of significant
accounting policies and principles.
- The client company management's judgments
 and estimates of certain accounting balances.
- Significant audit adjustments proposed by the
auditors. 101. Discuss some of the more significant provisions of the
All major accounting disagreements with Sarbanes-Oxley Act of 2002.
management whether or not resolved.
Some of the more significant provisions of the Act
include:
99. Characteristics of an effective audit committee 1. Establishing the PCAOB with broad powers
including the power to set auditing standards for
List and discuss at least four attributes of an effective audits of public companies.
audit committee that provides important oversight functions. 2. Requiring that the CEO and CFO certify quarterly
Attributes of an effective audit committee includes: and annual reports.
3. Requiring management of public companies to
1. The audit committee members should be provide a comprehensive report on internal controls
comprised of outside directors. Outside over financial reporting.
directors are not members of management 4. Requiring management forfeiture of certain
and they do not have other relationships compensation in instances where there is a
with the company. restatements as a result of misconduct.
2. The audit committee members should be financially literate 5. Empowering audit committees to be the formal audit
and at least one member should have financial expertise. client of the external auditor with the responsibility to
hire and fire and pre-approve any non-audit services
3. The committee should be responsible for assessing the
independence of the auditor. 6. Requiring that the audit committee have at least one
person what is a financial expert and that other
4. The committee should have a discussion with the members be knowledgeable in financial accounting
auditor about the auditor's judgments about the as well as internal control
company's accounting principles. 7. Requiring partners in charge of audit engagements, as
well as all other partners with a significant role in the
5. The committee should be apprised of significant changes in
accounting information systems and the related controls. audit, to be rotated off public company engagements
every five years.
6. The committee should receive all regulatory reports 8. Increasing the disclosure of all off-balance sheet
and meet periodically with regulatory auditors to transactions that have a material effect.
discuss findings and concerns. 9. Establishment of an effective whistle-blowing
program.
7. The committee should have direct oversight over the
10. Requiring a cooling-off period before audit team
internal audit function. It should review the budget,
should review the audit plan and discuss internal audit members can take a high-level position with an audit
findings. client.
11. Limiting the non-audit services that audit firms can
8. The committee should meet regularly to discuss all matters provide to their audit clients.
of corporate governance. 12. Mandating analysis of audit firm competition and the
9. The committee may consider separation of the Chairman of potential need for audit firm rotation.
the Board and CEO positions.

100. Discuss what corporate governance is and

briefly describe an overview of the corporate
governance process.
Corporate governance is defined as “a process by
which the owners and creditors of an organization exert
control and require accountability for the resources entrusted
to the organization. The owners (stockholders) elect a board of
directors to provide oversight of the organization’s activities.”
Responsibility runs down the organization.
Governance starts with the stockholders/owners delegating
responsibilities through an elected board of directors to
management and, in turn, to operating units with oversight
and assistance from internal auditors. Accountability runs
upward in the organization. Operations personnel are held
responsible for their actions and decisions by management,
Management has to account for their decisions and actions
to the board of directors, and both the board and
management are held accountable by the stockholders.