PRACTICE QUESTIONS

CORPORATE GOVERNANCE AND RISK MANAGEMENT

Topic 1 - Corporate Governance

Question: 1 A director of a corporation is best characterized as a(n)

A. Agent.

B. Trustee.

C. Fiduciary.

D. Principal.

Question 2: How entities are systematically directed and controlled refers to which of the following?

A. Corporate governance
B. Sustainability
C. Agents
D. Internal controls

Question 3: The CEO of American Foods has made a variety of significant investments that have changed the
firm's focus and diminished share value. One of American Foods’ shareholders has aggressively been acquiring
shares and now owns 10% of the company. The shareholder has nominated Erik Sorenson to the board of
directors in an attempt to oversee manager actions. Although Sorenson could ask for the manager's resignation,
he prefers that the manager make choices that enhance firm value. This type of motivation is known as:

A. Performance shares.
B. Executive stock options.
C. Direct intervention.
D. The threat of firing.

Topic 2 - Audit Commitee

Question: 4 Audit committees have been identified as a major factor in promoting the independence of both
internal and external auditors. Which of the following is the most important limitation on the effectiveness of
audit committees?

A. Audit committees may be composed of independent directors. However, those directors may have close
personal and professional friendships with management.

B. Audit committee members are compensated by the organization and thus favor an owner’s view.

C. Audit committees devote most of their efforts to external audit concerns and do not pay much attention
to the internal audit activity and the overall control environment.

D. Audit committee members do not normally have degrees in the accounting or auditing fields.

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Question: 5 The audit committee may serve several important purposes, some of which directly benefit the
internal audit activity. The most significant benefit provided by the audit committee to the internal audit activity
is

A. Protecting the independence of the internal audit activity from undue management influence.

B. Reviewing annual engagement work schedules and monitoring engagement results.

C. Approving engagement work schedules, scheduling, staffing, and meeting with the internal auditors as
needed.

D. Reviewing copies of the procedures manuals for selected organizational operations and meeting with
organizational officials to discuss them.

Question: 6 Which of the following is an appropriate responsibility of an audit committee?

A. Performing a review of the procurement function of the organization.

B. Reviewing the internal audit activity’s (IAA’s) engagement work schedule submitted by the chief audit
executive (CAE).

C. Reviewing the engagement records of the public accounting firm to determine the firm’s competence.

D. Recommending the assignment of specific internal auditing staff members for specific engagements.

Question: 7 Which of the following actions is an appropriate response by organizations wishing to improve
the public’s perception of their financial reporting?

A. Increased adoption of audit committees composed of outside directors.

B. Viewing internal auditing as a transient profession -- a stepping stone to managerial positions.

C. Requiring internal auditors to report all significant observations of illegal activity to the chief executive
officer.

D. Keeping external and internal auditing work separated to maintain independence.

Question: 8 Which of the following is not an appropriate member of an audit committee?

A. The vice president of the local bank used by the organization.

B. An academic specializing in business administration.

C. A retired executive of a firm that had been associated with the organization.

D. The organization’s vice president of operations.

Question 9: Which of the following are responsibilities of the audit committee?

I. Aid in the choice of accounting methods and policies.

II. Document internal control procedures.
III. Sign quarterly and annual financial reports.
IV. Choose the auditor and approve auditor compensation.
V. Review the auditor's suggestions for improved internal control.
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 A. I, III, IV, and V only.
B. I, II, III, IV, and V.
C. I, II, and III only.
D. I, IV, and V only.

Question 10: Which board of directors committee is charged with overseeing the financial reporting process?

A. The audit committee

B. The compensation committee
C. The financial committee
D. The governance committee

Question 11: Which of the following is not an attribute required by the Sarbanes Oxley Act for the financial
expert who serves on the board of directors and the board's audit committee?

A. An understanding of internal controls

B. The individual must be a CPA or CFA
C. An understanding of audit committee functions
D. The ability to assess the accounting for accruals, estimates, and reserves

Topic 3 - Risk management

Question: 12 Risk assessment is a process

A. Designed to identify potential events that may affect the entity.

B. That establishes policies and procedures to accomplish internal control objectives.

C. Of identifying and capturing information in a timely fashion.

D. That assesses the quality of internal control throughout the year.

Question 13: Which of the following best describes when you would want to use insurance as a risk
management strategy?

A. Situations with Low Potential Loss and Low Likelihood

B. Situations with High Potential Loss and Low Likelihood
C. Situations with Low Potential Loss and High Likelihood
D. Situations with High Potential Loss and High Likelihood

Question 14: In a situation like employees stealing cash from a cash register, what would be the most
appropriate risk management strategy?

A. Accept risk.
B. Avoid risk.
C. Purchase insurance.
D. Implement controls.