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Chapter 4 (Review Questions)

Basic Accounting (Notre Dame University)

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Chapter 4: Review Questions

1. Assume that management had determined that its organization’s audit committee is
not effective. How do the weaknesses in audit committee affect management’s
evaluation of internal control over financial reporting? Would an ineffective audit
committee constitute a material weakness in internal control over financial
reporting? State the rationale for your response.

The Audit committee is in charge in monitoring the choice of accounting policies and
principles which are practiced in the business organization, as well as performance, standards
in hiring, and ensuring absolute independence of the external auditors. They responsible in
overseeing the financial reporting and disclosure processes. Internal control and risk
management will not be properly addressed which means a huge loss in the resources of the
company. An ineffective audit committee will greatly affect the business organization’s
performance and financial condition as it will result to material weakness or material
misstatements in the company’s financial statements. If the audit committee is ineffective in
its line of work, this will affect the company’s performance in general, it will first affect the
performance of the board of directors as it has a direct relationship with the board, and in
turn will also affect the shareholders caused by the ineffectiveness of the audit committee.

2. Why is there a need for a corporation to maintain a comprehensive and cost-efficient

communication channels to shareholders and other investors?

There is a need for a corporation to maintain a comprehensive and cost-efficient

communication channels to shareholders and other investors to keep them informed in the
decision-making processes and to maintain investor motivation and relationship which are
held essential for the company. It is important that relevant information is disseminated to its
intended users in a well-organized channel for reporting. The medium must be well-organized
so it can provide timely and up-to-date information to the shareholders and other investors.

3. What is the objective of the company in having a strong and effective internal control
system?

A strong and effective internal control system ensures ethical and efficient functioning
of the company’s operations, financial reporting, and compliance. It aids business
organizations in loss prevention and the practice of the right business procedures, it also aids
in the accurate reporting of financial information, identification of problems and its solutions,
as well as preventions acting as measures for the future, and it also aids in ensuring that the
company is complying with all the applicable internal and external rules and regulations.

4. What is the purpose of having an independent internal audit function in a publicly-

listed corporation?
The purpose of having an independent internal audit function in a publicly-listed
corporation is to provide independent assurance in a business organization’s risk
management, corporate governance, and internal control processes. Internal auditors operate
independently rendering impartial and unbiased judgement, avoiding conflict of interest
situations to perform their duties in an unbiased attitude, all while maintaining their
neutrality.

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5. Give at least four (4) responsibilities of the chief audit executive.

The responsibilities of the chief audit exercise are as follows:

1) Periodically reviews the internal audit charter and presents it to senior management and
the board of audit committee for approval.
2) Establishes a risk-based internal audit plan, including policies and procedures, to
determine the priorities of the internal audit activity, consistent with the organization’s
goals.
3) Communicates the internal audit activity’s plans, resource requirements and impact of
resource limitations, as well as significant interim changes, to senior management and the
audit committee for review and approval.
4) Spearheads the performance of the internal audit activity to ensure it adds value to the
organization.

6. Enumerate the activities of the risk management department in publicly-listed

corporation.

The activities of the risk management department in publicly-listed corporation are the
following:
a) Defining a risk management strategy.
b) Identifying and analyzing key risks exposure relating to economic, environmental, social
and governance (EESG) factors and the achievement of the organization’s strategic
objectives.
c) Evaluating and categorizing each identified risk using the company’s predefined risk
categories and parameters.
d) Establishing a risk register with clearly refines, prioritized and residual risk.
e) Developing a risk mitigation plan for the most important risks to the company, as defined
by the risk management strategy.
f) Communicating and reporting significant risk exposures including business risks (i.e.,
strategic, compliance, operational, financial and reputational risks), control issues and
risk mitigation plan to the board risk oversight committee.
g) Monitoring and evaluating the effectiveness of the organization’s risk management
processes.

7. To what may the shareholders’ rights relate?

Shareholders’ rights relate to the following:

a) Pre-emptive rights.
b) Dividend policies.
c) Rights to propose the holding of meetings and to include agenda items ahead of the
scheduled annual and special shareholders’ meeting.
d) Right to nominate candidates to the board of directors.
e) Nomination process.
f) Voting procedures that would govern the annual and special shareholders’ meeting.

8. How may participation of employee in corporate governance be encouraged?

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Employee participation in corporate governance is encouraged to create a symbiotic

environment, realizing the company’s goals and participate in its corporate governance
processes. Establishing policies and programs such as; health, safety and welfare, training and
development, reward/compensation for employees which could encourage them to perform
better and motivate them to take a more dynamic role in the corporation.

9. TRUE or FALSE. Sustainability reporting includes voluntary corporate disclosure

about sustainability initiatives, plans, and associated outcomes.

This statement is TRUE.

10.TRUE or FALSE. The terms nonfinancial reporting, corporate social responsibility

reporting, and triple bottom-line reporting are each sustainability-related terms.

This statement is TRUE.

11.Define the terms nonfinancial reporting, corporate social responsibility reporting, and
triple bottom-line reporting. How do these terms relate to sustainability reporting?

 Nonfinancial reporting:
It is a form of transparency reporting where businesses formally disclose certain
information not related to their finances, including human rights information.
 Corporate social responsibility reporting:
It is a periodical/annual report published by companies to report their corporate
social responsibility actions and results.
 Triple bottom-line reporting:
It is a report on the financial, social, and environmental condition/performance of a
company a given period of time.

These reports emphasize the relationship between financial and non-financial

performance and influences long term management strategy, policies and business plans.
These terms relate to sustainability reporting as it includes the disclosure and communication
of sustainable, environmental, social and governance goals as well as the company’s progress
towards them.

12.What factors have driven the demand for sustainability reporting?

Sustainability reports help the company recognize its role and importance in the
interdependence of business and society, promoting mutually beneficial relationship that
allows the company to grow its business while contributing to the advancement of the society
it operates. Factors such as user’s interest on non-financial aspects of the company’s
performance, as well as the company’s roles in the government and civil society in
contributing solutions to complex global challenges like poverty, inequality, unemployment
and climate change.

13.Why is there a demand for independent assurance on sustainability reporting?

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There is a demand for independent assurance on sustainability reporting, in order for

business organizations to consider their impact on sustainability issues, enabling them to be
transparent about the risks and opportunities they face. Independent assurance gives the
business organization an overview of their sustainability conditions in an unbiased way
projecting their contributions to the government and the civil society.

14.Is it unethical for a company to provide a sustainability report, but provide no

assurance on the reliability of the information contain therein?

. The information given in the sustainability report may be inaccurate if there is no

sufficient provision of assurance in terms of reliability of such information. Thus, it is
important that sustainability reports must include assurance on the reliability of such
information included, providing facts/evidences regarding the contributions of the business
organization in the government and civil society. It is unethical for a company to provide a
sustainability report but provide no assurance on the reliability of the information contained
in such report, the basis of such report must be disclosed which serves as a reliable assurance
about the business organization’s sustainability condition

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