Module 40: Corporate Governance, Internal Control, and Enterprise Risk Management 57

Multiple-Choice Questions (1–51)

A. Corporate Governance 7. A corporate stockholder is entitled to which of the

following rights?
1. Which of the following is not generally a power of the
board of directors of a corporation? a. Elect officers.
b. Receive annual dividends.
a. Selecting officers. c. Approve dissolution.
b. Declaring dividends. d. Prevent corporate borrowing.
c. Determining management compensation.
d. Amending the Articles of Incorporation. 8. Which of the following best identifies the reason that
effective corporate governance is important?
2. Which of the following is not true concerning
corporations? a. The separation of ownership from management.
b. The goal of profit maximization.
a. Directors owe a fiduciary duty to the corporation. c. Excess management compensation.
b. All shareholders owe a fiduciary duty to the d. Lack of oversight by boards of directors.
corporation.
c. Officers owe a fiduciary duty to the corporation. 9. The articles of incorporation and bylaws of a corporation
d. Directors who act in good faith may use the business serve as a basis for the governance structure of a corporation.
judgment rule as a defense. Which of the following items are normally included in
the bylaws of the corporation as opposed to the articles of
3. Which of the following is not a right of the shareholder of incorporation?
a corporation?
a. Purpose of the corporation.
a. Right to inspect the books and records. b. Number of authorized shares of stock.
b. Right to share in dividends if declared. c. Procedure for electing directors.
c. Right to determine the mission of the corporation. d. Powers of the corporation.
d. Right to sue on behalf of the corporation if the officers
and directors fail to uphold corporate rights. 10. Which of the following forms of compensation would
most likely align management’s behavior with the interests of
4. Which of the following actions normally requires the shareholders?
shareholder approval?
a. A fixed salary.
a. Appointing the chief executive officer. b. A salary plus a bonus based on current period net
b. Issuing a dividend. income.
c. The corporate strategic plan. c. A salary plus stock options that cannot be exercised
d. Changing the nature of the corporation. for 10 years.
5. To which of the following rights is a stockholder of a d. A salary plus stock.
public corporation entitled? 11. Which of the following forms of compensation would
a. The right to have annual dividends declared and paid. encourage management to take on excessive risk?
b. The right to vote for the election of officers. a. A fixed salary.
c. The right to a reasonable inspection of corporate b. A salary and bonuses based on current period net
records. income.
d. The right to have the corporation issue a new class of c. A salary plus stock options that cannot be exercised
stock. for 10 years.
6. Which of the following is correct with respect to the rights d. A salary plus restricted stock.
of stockholders in a corporation? 12. Which of the following is not a duty that is typically
a. Stockholders have no right to manage their reserved for the board of directors of a corporation?
corporation unless they are also directors or officers. a. Selection and removal of the chief executive officer.
b. Stockholders have a right to receive dividends. b. Determining executive compensation.
c. Stockholders have no right to inspect the books and c. Amending the articles of incorporation.
records of their corporation. d. Decisions regarding declaration of dividends.
d. Stockholders have a right to get a list of their
corporation’s customers to use for a business
mailing list.
58 Module 40: Corporate Governance, Internal Control, and Enterprise Risk Management

13. Which of the following is a legal rule that prevents a. If it is decided that the CEO should also be appointed
directors from being held liable for making bad decisions if chairman of the board, the corporation must disclose
they act with good faith, loyalty, and due care? why this decision was made.
b. The members of the compensation committee of the
a. The good faith rule.
board must be independent.
b. The business judgment rule.
c. Shareholders must be allowed a nonbinding vote on
c. The due care rule.
officer compensation at least every three years.
d. The director liability rule.
d. All members of the audit committee of the board must
14. Which of the following is not a requirement of the New be financial experts.
York Stock Exchange regarding corporate governance of
20. Which of the following is most effective as an external
companies listed on the exchange?
monitoring device for a publicly held corporation than the
a. Have a majority of independent directors of the others?
corporate board.
a. Internal auditors.
b. Adopt and make publicly available a code of
b. External auditors.
conduct.
c. The SEC.
c. Prohibit the chief financial officer from serving on the
d. Attorneys.
board of directors.
d. Have an independent audit committee. 21. An important corporate governance mechanism is the
internal audit function. For good corporate governance,
15. Which of the following does not act as an external
the chief internal audit executive should have direct
corporate governance mechanism?
communication to the audit committee and report to
a. External auditors.
a. The chief financial officer.
b. The SEC.
b. The chief executive officer.
c. Credit analysts.
c. The controller.
d. Independent boards of directors.
d. The external auditors.
16. The Sarbanes-Oxley Act provides that at least one
22. In setting priorities for internal audit activities, the chief
member of the audit committee should be
audit executive should
a. Independent.
a. Use a risk-based approach.
b. The chief financial officer of the company.
b. Use management’s priorities.
c. A financial expert.
c. Use an approach that cycles audit areas each year.
d. A CPA.
d. Use a random approach to more likely detect fraud.
17. Which of the following is not a statutory requirement
23. The Institute of Internal Auditors’ International Standards
regarding the committees of the board of directors of publicly
for the Professional Practice of Internal Auditing cover what
held corporations registered with the SEC?
two major types of internal auditing services?
a. All members of the compensation committee must be
a. Assurance and consulting.
independent.
b. Financial and operational.
b. At least one member of the compensation committee
c. Compliance and taxation.
must be a “compensation expert.”
d. Audit and review.
c. All members of the audit committee must be
independent. 24. According to the International Standards for the
d. At least one member of the audit committee must be a Professional Practice of Internal Auditing
“financial expert.”
a. All internal audit seniors must be Certified Internal
18. Which of the following is necessary to be an audit Auditors.
committee financial expert according to the criteria specified in b. The internal auditors must establish and maintain a
the Sarbanes-Oxley Act of 2002? system to monitor the disposition of audit results.
c. Internal auditors must be assigned to assist the
a. An understanding of income tax law.
external auditors.
b. An understanding of generally accepted accounting
d. Internal auditors must not have a financial interest in
principles and financial statements.
the company.
c. An understanding of corporate law.
d. An understanding of corporate governance rules and 25. Which of the following is not a section of the Institute of
procedures. Internal Auditors’ International Standards for the Professional
Practice of Internal Auditing?
19. Which of the following is not a requirement of the
Wall Street Reform and Consumer Protection (Dodd- a. Performance Standards.
Frank) Act for publicly held corporations registered with b. Independence Standards.
the SEC? c. Implementation Standards.
d. Attribute Standards.
 Module 40: Corporate Governance, Internal Control, and Enterprise Risk Management 59

26. Securities analysts act as one form of monitoring device 32. Which of the following is not true regarding the
from a corporate governance standpoint. What is a limitation information and communication component of internal
that is often identified when considering the effectiveness of control?
securities analysts in this regard?
a. The information system captures both internal and
a. Conflicts of interest. external sources of data.
b. Lack of competence. b. The information and communication component
c. Use of only nonfinancial information for analyses. involves developing channels for communication from
d. They are employees of the company. external stakeholders.
c. A whistle-blower hotline is an important aspect of the
27. Which of the following divisions of the SEC reviews
information and communication component.
corporate filings?
d. An important aspect of the information and
a. The Office of the Chief Accountant. communication component is assessment of
b. The Division of Enforcement. information about fraud.
c. The Division of Corporate Disclosure.
33. According to the COSO framework, evaluators that
d. The Division of Corporate Finance.
monitor controls within an organization should have which of
28. According to the Sarbanes-Oxley Act of 2002, which of the following sets of characteristics?
the following statements is correct regarding an issuer’s audit
a. Competence and objectivity.
committee financial expert?
b. Respect and judgment.
a. The issuer’s current outside CPA firm’s audit partner c. Judgment and objectivity.
must be the audit committee financial expert. d. Authority and responsibility.
b. If an issuer does not have an audit committee financial
34. Which of the following is a general control rather than a
expert, the issuer must disclose the reason why the
transaction control activity?
role is not filled.
c. The issuer must fill the role with an individual who a. Technology development policies and procedures.
has experience in the issuer’s industry. b. Reconciliations.
d. The audit committee financial expert must be the c. Physical controls over assets.
issuer’s audit committee chairperson to enhance d. Controls over standing data.
internal control.
35. According to COSO, the use of ongoing and separate
evaluations to establish a new baseline after changes have been
made can best be accomplished in which of the following
B. Internal Controls stages of the monitoring-for-change continuum?
29. Which of the following components is considered
a. Control baseline.
the foundation of the internal controls established by an
b. Change identification.
organization?
c. Change management.
a. Control activities. d. Control revalidation/update.
b. Monitoring.
36. Which of the following is not a type of control under
c. The control environment.
the control activity component of the COSO framework for
d. The audit committee.
internal control?
30. Which of the following COSO categories of objectives
a. Supervisory controls.
includes safeguarding of assets?
b. Physical controls.
a. Operations. c. Monitoring controls.
b. Reporting. d. Verifications.
c. Compliance.
37. Which of the following is not a control environment
d. Financing.
factor?
31. Which of the following is not a principle related to the
a. Integrity and ethical values.
component of the control environment?
b. Board of directors or audit committee.
a. Demonstrate a commitment to integrity and ethical c. Human resources policies and procedures.
values. d. Control monitoring.
b. Demonstrate a commitment to attract, develop and
38. Which of the following components of internal control
retain competent individuals.
would encompass the routine controls over business processes
c. Identify and assess changes that could significantly
and transactions?
impact the system of internal control.
d. Hold individuals accountable for their internal control a. The control environment.
responsibilities. b. Information and communication.
c. Control activities.
d. Risk assessment.
60 Module 40: Corporate Governance, Internal Control, and Enterprise Risk Management

39. Which of the following is not a component in the COSO c. Risk assessment.
framework for internal control? d. Control activities.
a. Control environment. 45. Jarrett Corporation is considering establishing an
b. Segregation of duties. enterprise risk management system. Which of the following is
c. Risk assessment. not a benefit of enterprise risk management?
d. Monitoring.
a. Helps the organization seize opportunities.
40. Management of Johnson Company is considering b. Enhances risk response decisions.
implementing technology to improve the monitoring component c. Improves the deployment of capital.
of internal control. Which of the following best describes how d. Insures that the organization shares all major risks.
technology may be effective at improving monitoring?
46. In the COSO enterprise risk management framework, the
a. Technology can identify conditions and circumstances term risk tolerance refers to
that indicate that controls have failed or risks are
a. The level of risk an organization is willing to accept.
present.
b. The acceptable variation with respect to a particular
b. Technology can assure that items are processed
objective.
accurately.
c. The risk of an event after considering management’s
c. Technology can provide information more quickly.
response.
d. Technology can control access to terminals and data.
d. Events that require no risk response.
41. Which of the following is not a limitation of internal control?
47. Management of Warren Company has decided to respond
a. Human judgment in decision-making may be faulty. to a particular risk by hedging the risk with futures contracts.
b. External forces may attack the system. This is an example of risk
c. Management may override internal control.
a. Avoidance.
d. Controls may be circumvented by collusion.
b. Acceptance.
42. Which of the following is not required to be included c. Reduction.
in management’s report on internal control required under d. Sharing.
Section 404 of the Sarbanes-Oxley Act?
48. Which of the following is not a technique for identifying
a. A statement of management’s responsibility for events in an enterprise risk management program?
establishing and maintaining adequate internal control
a. Process flow analysis.
over financial reporting.
b. Facilitated workshops.
b. A statement indicating that the board of directors has
c. Probabilistic models.
approved the system of internal control over financial
d. Loss event data methodologies.
reporting.
c. A statement indentifying the framework used to assess 49. Devon Company is using an enterprise risk management
internal control over financial reporting. system. Management of the company has set the company’s
d. An assessment of the effectiveness of the objectives, identified events, and assessed risks. What is the
corporation’s internal control over financial reporting. next step in the enterprise risk management process?
43. Which of the following would generally be entitled to a a. Establish control activities to manage the risks.
reward for whistle-blowing under the Dodd-Frank Act? b. Monitor the risks.
c. Determine responses to the risks.
a. An external auditor who discovers a violation
d. Identify opportunities.
while performing an audit of a company’s
financial statement and internal control under SEC 50. Which of the following is not an advantage of establishing
requirements. an enterprise risk management system within an organization?
b. A customer of a company who discovers a violation in
the course of doing business with the company. a. Reduces operational surprises.
c. A director of a company who discovers a violation b. Provides integrated responses to multiple risks.
while performing her duties as a director. c. Eliminates all risks.
d. An internal auditor of a company who discovers a d. Identifies opportunities.
violation while performing an audit of compliance. 51. Kelly, Inc. is considering establishing an enterprise
risk management system. Which of the following is not a
limitation of such a system?
C. Enterprise Risk Management
a. Business objectives are not usually articulated.
44. According to COSO, which of the following components b. The system may break down.
of enterprise risk management addresses an entity’s integrity c. Collusion among two or more individuals can result in
and ethical values? system failure.
d. Enterprise risk management is subject to management
a. Information and communication.
override.
b. Internal environment.
 Module 40: Corporate Governance, Internal Control, and Enterprise Risk Management 61

Multiple-Choice Answers and Explanations

Answers
1. d __ __ 12. c __ __ 23. a __ __ 34. a __ __ 45. d __ __

2. b __ __ 13. b __ __ 24. b __ __ 35. c __ __ 46. b __ __

3. c __ __ 14. c __ __ 25. b __ __ 36. c __ __ 47. d __ __

4. d __ __ 15. d __ __ 26. a __ __ 37. d __ __ 48. c __ __

5. c __ __ 16. c __ __ 27. d __ __ 38. c __ __ 49. c __ __

6. a __ __ 17. b __ __ 28. b __ __ 39. b __ __ 50. c __ __

7. c __ __ 18. b __ __ 29. c __ __ 40. a __ __ 51. a __ __

8. a __ __ 19. d __ __ 30. a __ __ 41. b __ __

9. c __ __ 20. b __ __ 31. c __ __ 42. b __ __

10. c __ __ 21. b __ __ 32. d __ __ 43. b __ __ 1st: __/51 __%

11. b __ __ 22. a __ __ 33. a __ __ 44. b __ __ 2nd: __/51 __%

Explanations
1. (d) The requirement is to identify the item that is not rights to elect the board of directors, the officers may be
generally a power of the board of directors of a corporation. selected by the board of directors. Answer (d) is incorrect
Answer (d) is correct because generally only the shareholders because a shareholder cannot force an issuance of a new class
have the power to amend the Articles of Incorporation. of stock.
Answers (a), (b), and (c) are all incorrect because they are
6. (a) The requirement is to identify the correct statement
normally powers of the board of directors.
regarding the rights of stockholders. Stockholders do not have
2. (b) The requirement is to identify the item that is not the right to manage their corporation. However, stockholders
true concerning corporations. Answer (b) is true because who are also directors or officers do have the right to manage
shareholders do not owe a fiduciary duty to the corporation. as part of their rights as directors and officers. Answer (b)
However, majority shareholders owe a fiduciary duty to is incorrect because stockholders generally have no right
minority shareholders. Answers (a), (c) and (d) are all incorrect to receive dividends unless the board of directors declares
because all of these statements are true about corporations. such dividends. Answer (c) is incorrect because stockholders
are given the right to inspect the books and records of their
3. (c) The requirement is to identify the item that is not
corporation under certain circumstances. Answer (d) is
a right of a shareholder. Answer (c) is correct because the
incorrect because the stockholders may demand a list of
board of directors determines the mission of the corporation.
shareholders for a proper purpose such as to help wage a proxy
Answers (a), (b), and (d) are incorrect because they are all
fight; however, they may not require the corporation to give
rights of the shareholder.
them a list of its customers to use for a mailing list.
4. (d) The requirement is to identify the action that normally
7. (c) The requirement is to identify the right of a
requires shareholder approval. Answer (d) is correct because
shareholder. Shareholders have the right to vote on the
changing the nature of the corporation requires approval by the
dissolution of the corporation. Stockholders also have the right
shareholders. Answers (a), (b), and (c) are incorrect because
to elect the directors of the corporation, who in turn elect the
they are all actions that can be taken by the board of directors
officers. Answer (b) is incorrect, as shareholders do not have
without shareholder approval.
the right to receive dividends unless they are declared by the
5. (c) The requirement is to identify the right of the board of directors. Answer (d) is incorrect, as shareholders are
shareholder. Shareholders have the right to inspect the not necessarily involved in the management of the corporation
corporate records if done in good faith for a proper purpose. and cannot prevent corporate borrowing.
Answer (a) is incorrect because shareholders do not have a
8. (a) The requirement is to identify the reason that effective
right to dividends. It is the decision of the board of directors
corporate governance is important. Answer (a) is correct
whether or not to declare dividends. Answer (b) is incorrect
because the separation of ownership and management creates
because although at least one class of stock must have voting