wiley

Question 1

Define the “SOX Clawback provision”

Answer 1

This provision allows firms to reclaim incentive and bonus payments to officers that turn out to have been made based on wrongdoing by those officers.

Question 2

Under the Sarbanes-Oxley Act of 2002, what are the requirements and responsibilities of Audit Committees?

Answer 2

All directors must be independent;
New role: select, compensate, fire outside auditor;
set up whistleblower procedures.

Question 3

What does the acronym SOX mean?

Answer 3

Sarbanes-Oxley Act.

Question 4

Describe the three levels of the corporate pyramid.

Answer 4

Bottom: shareholders (vote for directors);
Middle: directors (select officers and set broad policies);
Top: officers (run firm day-to-day).

Question 5

List prohibitions observed by corporate insiders and outside auditors.

Answer 5

They must observe the following prohibitions:
fraudulent influence;
coercion;
manipulation;
and misleading

Question 6

Pro forma financial statements must be reconciled with what?

Answer 6

They must also include comparable GAAP numbers.

Question 7

Define “corrective controls.”

Answer 7

Paired with detective controls, they attempt to reverse the effects of the error or irregularity which has been detected. Examples of corrective controls include maintenance of backup files, disaster recovery plans, and insurance.

Question 8

Define “preventive controls.”

Answer 8

“Before the fact” controls designed to stop an error or irregularity from occurring. Examples of preventive controls include locks on building and doors, password protected access to files, and segregation of duties.

Question 9

Define “internal control.”

Answer 9

A process, effected by the entity’s Board of Directors, management, and other personnel, that is designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting, and compliance with applicable laws and regulations.

Question 10

Define “general controls.”

Answer 10

Controls over the environment as a whole. Apply to all functions, not just specific accounting applications. General controls help ensure that data integrity is maintained.

Question 11

Define “detective controls.”

Answer 11

“After the fact” controls designed to detect an error after it has occurred (though preferably before the erroneous information is used to update the database or appears in reports). Examples of detective controls include data entry edits (field checks, limit tests) and reconciliation of batch control totals.

Question 12

Define “application controls.”

Answer 12

Controls over specific data input, data processing, and data output activities. Designed to ensure the accuracy, completeness, and validity of transaction processing. As such, application controls have a relatively narrow focus on those accounting applications that are involved with data entry, update, and reporting.

Question 13

Define “feed-forward controls.”

Answer 13

A process in which future results are projected based on current and past information and, if the future results are undesirable, the inputs to the system are changed to avoid the projected outcome. Many inventory ordering systems are essentially feed-forward controls: the system projects product sales over the relevant time period, identifies the current inventory level, and orders inventory sufficient to fulfill the sales demand.

Question 14

Define “feedback controls.”

Answer 14

A procedure in which the results of a process are evaluated and, if the results are undesirable, the process is adjusted to correct the results; most detective controls are also feedback controls.

Question 15

Define “control activities” (according to the COSO internal control and ERM frameworks).

Answer 15

One of five components of internal control. Relates to the policies and procedures that ensure that organizational actions address key risks related to the achievement of management’s objectives.

Question 16

Define “information and communications” (according to the COSO internal control framework).

Answer 16

One of five components of internal control. Enable an organization’s personnel to identify, process, and exchange the information needed to manage and control operations.

Question 17

Define “control environment” (according to the COSO internal control framework).

Answer 17

One of five components of internal control. Encompasses management’s philosophy towards controls, organizational structure, system of authority and responsibility, personnel practices, and policies and procedures. The core or foundation of any system of internal control.

Question 18

Define “monitoring” (according to the COSO internal control framework).

Answer 18

One of five components of internal control. This component ensures the ongoing reliability of information and control processes by monitoring and testing the control system.

Question 19

Define “risk assessment” (according to the COSO internal control framework).

Answer 19

One of five components of internal control. The process of identifying, analyzing and managing the risks related to achieving the organization’s objectives.