2014ER BEC Homework B1.1

Becker Professio nal Education
Question CPA..oS130
A not-for-profit organization periodically conducts focus groups of employees, service beneficiaries and
go-.emance board members to reevaluate its mission \ision and values to determine the accuracy of the strategic
statements to refine them ......nere necessary. This acti\ity relates to ......n ich component of intemal control?
a. Information and communication.
b. Control acti\ities.
c. Risk assessment.
d. Monitoring.
Explanation
Choice "d" is correct. Periodically comparing and updating the mission \is ion and wlues of a not-for-profit could
best be classified as a monitoring activity.
Choice "b" is incorrect. Control activities are typically those procedures that implement rather than monitor
controls.
Choice "c" is incorrect. Risk assessment components of intemal control programs relate to periodic evaluations of
......nat could go wong and the effectjl.eness of procedures to pre-.ent or detect errors or irregularities.
Choice "a" is incorrect. Information and communication components of intemal control relate to the periodic
reporting on the effecti-.eness of controls.
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Question CPA..oS149
Generally, an organization 'A'ill not operate beyond the limits of their risk appetite. Risk appetite has generally
been exceeded wilen:
a. The likelihood and impact of positi..e e..ents is 'A'ithin the residual risk.
b. The likelihood and impact of positi..e e\ents is significantly below residual risk.
c. The likelihood and impact of negatiw e..ents exceed residual risks.
d. The likelihood and impact of negati\e e\ents significantly exceeds residual risks.
Explanation
Choice "d" is correct. Generally, an organization's risk appetite has been exceeded Wlen the combined likelihood
and impact of negati\e e\ents significantly exceed residual risk. Residual risk represents the risk that remains
after management has taken actions to mitigate negative e\ents. If the likelihood and impact of those negali\e
e\ents significantly exceeds the residual risk, the operation is likely to exceed the organization's risk appetite.
Choice "c" is incorrect. An organization's risk appetite may go beyond the risk that they control. When the
likelihood and impact of negati\e e..ents exceeds residual risk, management 'A'ill need to carefully evaluate their
actions, but they may not ha\e exceeded their risk appetite.
Choice "a" is incorrect. Positi\e e\ents represent opportunities. If those opportunities are 'A'ithin residual risk, then
the opportunity 'A'ill likely be pursued.
Choice "b" is incorrect. Positi..e e..ents represent opportunities. If those opportunities are significantly below
residual risk, then the opportunity wll likely be pursued.
Question CPA..oS150
Strategic objecti\es for the mission and 'vision of the organization are generally linked to related objecti-.es. All of
the follo""';ng objecti\es are typically regarded as related objecti\es, except:
a. Infonnation technology objecli-.es.
b. Reporting objectives.
c. Compliance objectives.
d. Operations objecti\es.
Explanation
Choice "a" is correct. Objecti\s related to strategy are typically operations and reporting and compliance
objecti\es. Infonnation technology objecti\es may be a subset of one of these objecti\es, but is typically not a
separate category.
Choice "d" is incorrect. Objecli-.es related to strategy are typically operations and reporting and compliance
objecli-.es. Operations are a related objectiw.
Choice "b" is incorrect. Objecti-.es related to strategy are typically operations and reporting and compliance
objecti\es. Reporting is a related objecti\e.
Choice "c" is incorrect. Objecti\es related to strategy are typically operations and reporting and compliance
objecli...es. Compliance is a related objecti\e.
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Question CPA..oS152
A significant component of risk assessment is the identification of e\ents that might impede the achie-..ement of
objecti\es. The technique characterized by the de\elopment of a listing of potential e\ents common to a specific
industry or functional area is knolMl as a(n):
a. Inter.;ew
b. Facilitated workshop
c. E'.Ent in-..entory
d. Questionnaire
Explanation
Choice "c" is correct. Lists of potential e\ents are knolMl as e\ent in\entories. Often they are generic lists related
to an industry.
Choice "b" is incorrect. A facilitated IM)rkshop is typically a gathering of kno'NIedgeable indi-..4duals brought
together to discuss possible e'.Ents.
Choice "a" is incorrect. Inter.;e'NS are typically one on one discussions vvith knovv1edgeable staff.
Choice "d" is incorrect. Questionnaires often take the foffil of sUMyS sent to staff.
Question CPA..o6156
The Glassman Company completed its annual retreat of board members and senior management and produced a
document that links the organization's mission and \1sion 'vVith strategic and related objecti\es. The document
includes a commitment to establish an ethics hotline and assign a corporate officer to conduct ethics training and
monitor reports through the hotline. That commitment 'M:luld most likely be a:
a. Related reporting objecti\e.
b. Related operations objecti\e.
c. Related compliance objecti\e.
d. Strategic objectiw.
Explanation
Choice "COO is correct. Establishment of an ethics hotline and related corporate training 'Mluld most likely be a
related compliance objecti\e. Ethics training is sometimes referred to as corporate compliance training.
Operational implementation of this character is generally a related objecti\e rather than a strategic objecti\e.
Choice "d" is incorrect. Strategic objecti\es are generally less operationally specific than the related objecti\e
contemplated by the ethics program.
Choice "b" is incorrect. An ethics program is a related compliance objecti\e, not an operations objecti\e.
Choice "a" is incorrect. An ethics program is a related compliance objecti\e, not a reporting objecti\e.
Becker Professiona l Education
Question CPA..oS157
The Hartman Conglomerate completed its annual retreat of board members and senior management and produced
a document that links the organization's mission and vision INith strategic and related objectives. The document
includes a commitment to de\elop a uniform chart of accounts for all di\isions of the conglomerate. That
commitment 'WOuld most likely be a:
a. Related reporting objective.
b. Strategic objective.
c. Related operations objecti\e.
d. Related compliance objective.
Explanation
Choice "a" is correct. Establishment of a company-lNide uniform chart of accounts v.Quld most likely be a related
reporting objecti\e. Uniform charts of accounts 'WOuld promote more efficient reporting.
Choice "b" is incorrect. Strategic objectives are generally less operationally specific than the related objective
contemplated by the uniform chart of accounts.
Choice "c" is incorrect. A uniform chart of accounts is a related reporting objecti\e, not an operations objecti\e.
Choice "d" is incorrect. A uniform chart of accounts is a related reporting objective, not a compliance objective.
Question CPA..oS158
The Justco Corporation completed its annual retreat of board members and senior management and produced a
document that links the organization's mission and \1sion 'vVith strategic and related objecti-..es. The document
includes a commitment to conduct focus groups 'vVith customers and suppliers to determine the responsi-..eness of
Justco to the needs of various parties. That commitment v.Quld most likely be a:
a. Related reporting objecti-..e.
b. Related compliance objecti>ve.
c. Strategic objecti-..e.
d. Related operations objecti>ve.
Explanation
Choice "d" is correct. Conducting focus groups v.Quld most likely be a related operating objecti-.e. Focus groups
v.Quld identify the needs of various stakeholders and be used to impro-.e operations.
Choice "c" is incorrect. Strategic objecti-..es are generally less operationally specific than the related objecti-..e
contemplated by conducting focus groups.
Choice "a" is incorrect. Conducting focus groups is a related operations objecthe, not a reporting objecthe.
Choice "b" is incorrect. Conducting focus groups is a related operations objecti-.e, not a compliance objecthe.
Question CPA..oS159
The Knight Corporation completed its annual retreat of board members and senior management and produced a
document that links the organization's mission and \ision 'vVith strategic and related objecti\es. The document
includes an objecti\e that the Knight Corporation 'vVi11 rank in the top quartile of quality for its industry. That
objecti\e W'Ould most likely be a:
a. Related reporting objecti\e.
b. Related operations objecti\e.
c. Related compliance objecti\e.
d. Strategic objecti\e.
Explanation
Choice "d" is correct. Broad, company-'vVide objecti\es, such as coordinating company-'vVide resources to produce
a ser-.1ce in the top quartile of quality, are strategic, not related.
Choices "b", "a", and "c" are incorrect. Related objecti"o.es tend to be more specific than the strategic objecti\
and are prepared in support of the broader strategic objecti\e.
Question CPA..oS160
Establishing objecti-.es that will support the mission and -.ision of an organization generally imol\e supporting the
mission with:
a. Strategy.
b. Strategic objecti\es, supported by strategies and related objectives.
c. Strategy supported by strategic and related objecti'.l9s.
d. Related objecli\es.
Explanation
Choice "b" is correct. Strategic objecti\es support the mission and are implemented -.ia \arious strategies and
related objectives.
Choice "c" is incorrect. Strategic objectives are implemented by strategy and supported by related objecti-.e s.
Choice "a" is incorrect. Strategy requires related objecti-.es to be fully implemented.
Choice "d" is incorrect. Related objecti-.es support various strategic plans that support the mission.
Becker Professiona l Educaton
Question CPA..oS166
Consensus Corporation routinely seeks to identify the e\nts that are most likely to pose a risk to the company.
The company generally hires an experienced facilitator to stimulate a discussion from a cross-functional group
representing different areas throughout the company. This method of e-..ent identification is most like referred to as
a(an):
a. E\nt'v'o'Orkshop
b. Ongoing e\nt identification
c. Process flow analysis
d. E\nt imentory
Explanation
Choice "a" is correct. Meetings of cross-functional teams are generally referred to as e-..ent 'v'o'Orkshops.
Choice "c" is incorrect. Process flow analysis in-,ol'oES analyzing flo'NCharts of processes as a basis for
determining risk exposures.
Choice "d" is incorrect. Lists of generic exposures compiled by management are referred to as e\Ent in\ntories.
Choice "b" is incorrect. Various inputs (e.g., reports, trade ne'NS and conferences, lobbyists, etc.) distributed by
types of extemal and intemal factors (e.g., economic, political, process, personnel, etc.) represent ongoing e-..ent
identification.
Question CPA..oS450
Which of the follo'A'ing is not a goal of an Enterprise Risk Management Frame\oVOrk (ERM)?
a. Achie\e financial and performance targets.
b. PrOl.4de reasonable assurance that company objecti\es and goals are achie-.ed and problems and surprises
are minimized.
c. A\-Oid ad-..erse publicity and damage to the entity's reputation.
d. Assess risks continuously and identify the steps to take and resources to allocate to o-.ercome or mitigate
risk.
Explanation
Choice "c" is correct. A\Oiding ad-.erse publicity and damage to the entity's reputation is a public relations
function, not a function of ERM.
Choice "b" is incorrect. ERM focuses on numerous goals including pro'viding reasonable assurances that
objecli-.es and goals are achie\d.
Choice "a" is incorrect. ERM focuses on numerous goals including achie-.ement of financial and peifonnance
targets.
Choice "d" is incorrect. ERM focuses on numerous goals including risk assessment and mitigation.
Question CPA..oS480
According to the Committee of Sponsoring Organizations (COSO) of the Treadway Commission, 'Nhich of the
foliolNing components of enterprise risk management addresses an entity's assignment of authority and
responsibility?
a. Infonnation and communication.
b. Monitoring.
c. Internal em-ironment.
d. Control acti'.1ties.
Explanation
Choice "c" is correct. The intemal en'.1ronment component of the enterprise risk management (ERM) frame'AQrk
includes foundational elements such as organizational structure, assignment of authority and responsibility,
integrity and ethical \Ellues, risk management philosophy, commitment to competence and human resource
standards, and similar issues that influence the tone of the organization.
Choice "d" is incorrect. The control acti'.1ties component of the ERM frame...-..ork includes key elements that relate
to the policies and procedures that ensure appropriate responses to identified risks, not to the assignment of
authority and responsibility.
Choice "a" is incorrect. The infonnation and communication component of the ERM frame...-..ork includes key
elements that relate to the identification, capture and communication of information, not to the assignment of
authority and responsibility.
Choice "b" is incorrect. The monitoring component of the enterprise risk management frame\r\'Ork includes key
elements that relate to the ongoing management acti",ties or separate e\eluations of the ERM approach adopted
by the entity, not to the assignment of authority and responsibility.
Question CPA..oS481
follolNing components of enterprise risk management addresses an entity's reporting deficiencies?
a. Control acti....ties.
b. E..ent identification.
c. Monitoring.
d. Internal em,ironment.
Explanation
Choice "c" is correct. The monitoring component of the enterprise risk management (ERM) frame'vVOrk includes
key elements that relate to the ongoing management acti....ties or separate evaluations of the ERM approach
adopted by the entity, including addressing reporting deficiencies.
Choice "d" is incorrect. The intemal em-ironment component of the ERM frame'vVOrk includes key elements such
as organizational structure, assignment of authority and responsibility, integrity and ethical values, risk
management philosophy, commitment to competence and human resource standards and similar issues that
influence the tone of the organization, not reporting deficiencies.
Choice "b" is incorrect. The e..ent identification component of the ERM frame'vVOrk include key elements such as
identifying the rele-.ant e..ents that may impact an organization and then determining 'Nhether the characteristics
of the e\ents are positi\e (opportunities) or negati\e (risks), not reporting deficiencies.
Choice "a" is incorrect. The control acti....ties component of the ERM framemrk includes key elements that relate
to the policies and procedures that ensure appropriate responses to identified risks including types of control
acti....ties and controls o..er information systems, not to reporting deficiencies.
Question CPA..oS482
foliolNing components of the intemal control integrated frame'NOrk addresses an entity's timely reporting of
identified intemal control deficiencies?
a. Control acti'.1ties.
b. Control en'.1ronment.
c. Monitoring.
d. Infonnation and communication.
Explanation
Choice "c" is correct. The monitoring component of the integrated framework includes the principle that
deficiencies should be in-.estigated in ongoing and separate evaluations and that deficiencies should be reported.
Choice "b" is incorrect. The control em';ronment component includes the tone at the top and the listing of reporting
deficiencies.
Choice "a" is incorrect. The control actil.-ities component relates to control policies and procedures but does not
include reporting deficiencies.
Choice "d" is incorrect. The infonnation and communication component includes gatheri ng and communicating
financial and intemal control information, but does not specifically address reporting deficiencies.
Question CPA..oS483
A company that retains a CPA v,.;th the appropriate kno\N1edge, skills and abilities to prepare timely and effecti-.e
financial reporting is applying the ideas from ......n ich principle of eifecti-.e intemal con1rol o-.er financial reporting?
a. Human resources.
b. Financial reporting competencies.
c. Integrity and ethical values.
d. Management philosophy and operating style.
Explanation
Choice "b" is correct. The financial reporting competencies principle of 1he control emlronmen1 component of
intemal control integrated frameoork. suggests stronger controls and encourages the company retains qualified
personnel to handle financial reporting.
Choice "c" is incorrect. The integrity and ethical \Glues principle of the control em';ronment component of intemal
control integrated frame\r\oOrk suggests stronger controls v,.;th high standards of ethical conduct for top
management, but does not address retention of qualified personnel to handle financial reporting.
Choice "d" is incorrect. The management philosophy and operating style principle of the control en\tronment
component of intemal control integrated frameoork suggests strong controls and encourages management's
attitudes to be congruent with strong financial controls, but does not address retention of qualified personnel to
handle financial reporting.
Choice "a" is incorrect. The human resources principle of the control enl.-tronment component of intemal control
integrated frameoork suggests strong controls and encourages human resources policies to be compatible 'Nith
effecti'.e financial reporting, but does not address retention of qualified personnel to handle financial reporting.
Question CPA..oS484
The Sarbanes-Oxley Act of 2002 requires that the members of the audit committee be independent VJith regard to
the issuer. Within the meaning of the law, v.t1ich of the foliOll.'ing corporate officers \'\Quid be considered
independent?
80amMember larlenP.adet1t
. AjJrlitiJr
a. No Yes
b. Yes No
c. No No
d. Yes Yes
Explanation
Rule: Audit committee members are to be members of the issuer's Board of Directors but also must be otherwise
independent. Independence criteria are as follO'NS:

Audit committee members may not accept compensation from the issuer for consulting or ad";sory
seNces.
Audit committee members may not be an affiliated person of the issuer (affiliation means a person has the
ability to influence financial decisions).
Choice "b" is correct. Board membership does not impair independence for purposes of audit committee
membership (in fact, being a board member is a requirement). The independent auditor is hired and paid by the
audit committee and thus is not independent, per the rule abo\e.
Choices "d", "a", and "c" are incorrect, based on the above explanation.
Becker Professi onal Educabon
Question CPA..oS485
The Barstan Corporation has adopted the internal control integrated framew::>r k and regularly sUl"\ys local
employers and uses national services to ensure that the accounting staff is appropriately compensated. The
principle of the control em..ironment most closely related to this practice is:
a. Authority and responsibility.
b. Financial reporting competencies.
c. Management philosophy and operating style.
d. Human resources.
Explanation
Choice "d" is correct. This is an example of human resources policies and procedures being fully compatible 'Nith
effecti>ve financial reporting and intemal control. The company might also design and re>.Aew compensation plans to
ensure market rates.
Choice "b" is incorrect. Financial and reporting competencies relate to technical training, not to compensation.
Choice "c" is incorrect. Management philosophy and operating style relates to objecti>.Aty and w::>rk ethic, not to
compensation.
Choice "a" is incorrect. Authority and responsibility relates to a clear designation of employee requirements.
Question CPA..oS486
Corbin Corporation is evaluating the sample sizes associated \o\'ith periodic tests of the existence of a fleet of
taxis. Cash receipts associated \o\'ith fares deposited daily are periodically reconciled to both the fares charged
and the taxi's odometer readings. With respect to monitoring controls o\er cash 113. \ehicles, Corbin 'Nili like/y:
a. Re\iew fixed assets on an ongoing basis and cash on a less frequent periodic basis.
b. Re\iew cash and fixed assets on an ongoing basis.
c. Re\iew cash and fixed assets on a periodic basis, neither one daily.
d. Re\iew cash on an ongoing basis and fixed assets on a less frequent periodic basis.
Explanation
Choice "d" is correct. The monitoring of intemal control effecti'-.eness is performed based on the significance of the
risk being controlled. Cash has more risk than -..ehicles and thus needs to be monitored more frequently.
Choice "b" is incorrect. Controls related to \ehicles (fixed assets) are not likely to need the same ongoing
attention that cash requires.
Choices "a" and "c" are incorrect, based on the abo\e explanation.
Question CPA..oS490
The Enterprise Risk Management Integrated Frame\oVOrk states that an organization must identify eo.,.ents, both
positi-.e and negati-.e, as part of its risk management program. Which of the follO'.ving is true ""';th regard to
e-.ents?
a. Eo.,.ents seM as the basis for establishing objecti..es and thus occur simultaneously 'Nith de..elopment of
objecti-.es.
b. E-.ent identification occurs prior to de...elopment of objecti...es .
c. Enterprise risk management is entirely focused on risks and ignores opportunities.
d. E..ent identification occurs after the deo.,.elopment of objecti..es.
Explanation
Choice "d" is correct. E-.ents can only be identified after the organizational objecli-.es are identified. E-.ents 'Nill
either favorably or unfao.,orably impact the achieo..ernent of objecti\E!s. Risks (negatiw e...ents) are only identifiable
""';thin the context of the objecti...es that they might impede.
Choice "c" is incorrect. Enterprise risk management considers both positio.,.e e-.ents (opportunities) and negati\
e-.ents (risks).
Choice "b" is incorrect. E-.ents can only be identified after the organizational objecli-.es are identified. E-.ents ""';11
either favorably or unfao.,orably impact the achie-.ement of objecti-.es.
Choice "a" is incorrect. E\nts are not the basis for establishing objecti\s. E...ents can only be identified after the
organizational objecti...es are identified.
Question CPA..oS491
Conflict of interest provisions of the Sarbanes-Oxley Act of 2002 generally prohibit the directors or executi\e
officers of an issuer from:
a. OlM1ing more than 10% of any form of equity.
b. OlM1ing more than 10% of common stock.
c. Receiving a personal loan from the issuer not in the ordinary course of business.
d. Receiving perquisite compensation.
Explanation
Choice "c" is correct. Issuers are generally prohibited from making personal loans to directors or executhe officers
under the Sarbanes-Oxley Act of 2002. Exceptions exist for loans made in the ordinary course of business.
Choice "b" is incorrect. Although there is no 10% cap on olM1ership, disclosures are required for persons .....no
generally directly or indirectly 01M1 more than 10 percent of any class of most any equity security.
Choice "a" is incorrect. Although there is no 10% cap on olM1ership, disclosures are required for persons .....no
generally directly or indirectly 01M1 more than 10 percent of any class of most any equity security.
Choice "d" is incorrect. There are no prohibitions on perquisite compensation but disclosures may be required.
Question CPA..oS492
A company that maintains a strong intemal audit function that reports directly to the Board of Directors is applying
the ideas from 'lllhich principle of effecti-..e intemal control o\r financial reporting?
a. Human resources.
b. Organizational structure.
c. Authority and responsibility.
d. Board of Directors.
Explanation
Choice "b" is correct. The organizational structure principle says that reporting relationships should not undermine
the commitment to effecti-..e financial reporting and intemal control. Maintaining reporting independence of the
intemal auditor is one way to apply this principle.
Choice "d" is incorrect. The Board of Directors' principle says that the board should be acti-..ely imol-..ed in
o-..erseeing the implementation of both financial reporting and intemal controls. The principle relates more to
leadership than to reporting relationships.
Choice "c" is incorrect. The authority and responsibility principle says that authority and responsibility should be
delegated to indi";duals within the organizational structure as appropriate to maintain effecti-..e intemal controls.
The authority and responsibility of indi";duals can be undermined by flalNS in the organizational structure.
Choice "a" is incorrect. The human resources principle says that human resources policies and procedures
should be fully compatible INith effecti-..e financial reporting and intemal control. Competence, not reporting
structures is emphasized by this principle.
Question CPA..oS493
A company that routinely performs background checks on its employees to ensure that there is no criminal
history is applying the ideas from 'Nflich principle of effecti-.e internal control o-.er financial reporting?
a. Integrity and ethical values.
b. Management's philosophy and operating style.
c. Human resources.
d. Financial reporting competencies.
Explanation
Choice "c" is correct. The human resources principle says that human resources policies and procedures should
be fully compatible with effecti-.e financial reporting and internal control. Background checks are e"';dence of the
organization's commitment to hire new employees only after they ha-.e been thoroughly -.elled and shoWl to be
compatible with organizational commitments to competence, ethics, etc.
Choice "b" is incorrect. The management philosophy and operating style principle says that management's
philosophy and operating style should be congruent INith effective financial reporting and intemal control.
Management's philosophy is demonstrated by intemal practices that emphasize work ethic and documentation
and are e"';denced by background checks.
Choice "a" is incorrect. The integrity and ethical values principle says that high standards of integrity and ethical
conduct should be adopted by top management and demonstrated throughout the entire organization. Background
checks on new employees do not support this principle.
Choice "d" is incorrect. The financial reporting competencies principle says that companies should retain qualified
personnel to handle financial reporting. Financial reporting competencies represent the establishment of standards
rather than the ...erification of standards (e.g., a background check).
Question CPA..o6663
According to the Sarbanes-Oxley Act of 2002, 'Which of the follo""';ng statements is correct regarding an issuers
audit committee financial expert?
a. The issuer must fill the role ""';th an indi\-idual 'Who has experience in the issuers industry.
b. The issuers current outside CPA firm's audit partner must be the audit committee financial expert.
c. If an issuer does not haw an audit committee financial expert, the issuer must disclose the reason 'Why the
role is not filled.
d. The audit committee financial expert must be the issuers audit committee chairperson to enhance internal
control.
Explanation
Choice "c" is correct. Sarbanes-Oxley Section 407 requires that an issuers audit committee haw at least one
financial expert, or disclose why that role is not filled. Section 407 requires that the financial expert haw an
understanding of GAAP and financial statements, be able to assess the application of accounting principles, ha-..e
comparable experience applying accounting principles to entities that present a similar lewl of complexity of the
issuer, and understand both internal controls and audit committee functions.
Choice "b" is incorrect. The audit committee is charged ""';th negotiating the engagement of the external auditor
and supel"o1sing their rk. The auditor is accountable to the audit committee. The partner in charge of the audit
firm engaged to do the audit should not be the financial expert on the audit committee.
Choice "a" is incorrect. Section 407 requires that the audit committee's financial expert understand the application
of accounting principles to the issues representatiw of the complexity of the issuer but does not require specific
experience in the industry. Section 407 defines four ways in 'Which the necessary attributes of a financial expert
can be achie...ed: education, experience super.4sing a financial officer, experience o...erseeing auditors, or other
rele\ent experience.
Choice "d" is incorrect. Section 407 does not require that the audit committee's chairman be its financial expert.
Question CPA-06664
According to COSO, which of the following components of enterprise risk management addresses an entity's
integrity and ethical \Ellues?
a. Risk assessment.
b. Infonnation and communication.
c. Intemal em-ironment.
d. Control acti\.1ties.
Explanation
Choice "c" is correct. Integrity and ethical values are addressed in the Intemal En\.1ronment component of the
Committee on Sponsoring Organizations Enterprise Risk Management Integrated Frame'vVOrk.. Other elements of
intemal environment include risk management philosophy, risk appetite, organizational structure, assignment of
authority and responsibility, and human resources standards.
Choice "b" is incorrect. The infonnation and communication component of the Committee on Sponsoring
Organizations Enterprise Risk Management Integrated Frame'vVOrk. includes infonnation and communications
standards, not ethical values.
Choice "a" is incorrect. The risk assessment component of the Committee on Sponsoring Organizations
Enterprise Risk Management Integrated Frame'vVOrk includes the identification of inherent and residual risk, the
e\Elluation of likelihood and impact of risk, and data sources. Ethical -.alues are not a primary component of this
area.
Choice "d" is incorrect. The control acti\.1ties component of the Committee on Sponsoring Organizations
Enterprise Risk Management Integrated Frame'vVOrk includes types of control acti\.1ties, policies and procedures,
and integration of control issues 'Nith risk responses. Ethical values are not a primary component of this area.
Question CPA..oS739
The Sarbanes-Oxley Act of 2002 was enacted in response to corporate scandals that largely centered on the
quality of corporate financial disclosure and highlighted the inadequate o\-ersight of management, auditors and the
Board of Directors. The Sarbanes-Oxley Act addresses the problems related to inadequate board o\-ersight by
requiring public companies to ha\-e an:
a. Audit committee.
b. Intemal auditor.
c. Annual audit for all issuers.
d. Independent Board of Directors.
Explanation
Choice "a" is correct. Public companies are required to establish an audit committee that is directly responsible
for the appointment, compensation and o\-ersight of the 'M:lrk of the public accounting firm employed by that public
company. The separation of audit supel\-ision from the Board of Directors addresses the problem of inadequate
board o-.ersight.
Choice "c" is incorrect. An annual audit prodes meaningful information about financial reporting but it does not
address the issue of board o-.ersight.
Choice "d" is incorrect. The independence of the Board of Directors may pro-.ide some assurance about the
objecti-.ity of the board but does not address the issue of board o-.ersight.
Choice "b" is incorrect. An intemal audit function impro\-es the control en-.ironment but it does not engage the
Board of Directors in o-.ersight.
Question CPA..oS740
The Sarbanes-Oxley Act of 2002 requires that one or more members of the audit committee be a financial expert
and that the financial reports disclose:
a. Confinnalion of the audit opinion by the financial expert.
b. The existence of financial expert(s) on the audit committee or the reasons why the audit committee does not
ha-..e a financial expert.
c. Certification of independence of the financial expert.
d. The name of the Board member(s) sei"\4ng as financial expert(s).
Explanation
Choice "b" is correct. In the financial reports, the issuer must disclose the existence of financial expert(s) on the
committee or the reasons why the committee does not ha-..e a financial expert.
Choice "d" is incorrect. Although the SEC proposed requirements that the name of the financial expert be
disclosed, the Sarbanes-Oxley Act only requires that the existence of a financial expert(s) (or lack thereof) be
disclosed.
Choice "a" is incorrect. The financial expert is not required to report on the audit opinion.
Choice "c" is incorrect. Although audil committee members are required to be independent and the SEC has
proposed disclosure of independence, certification of independence is not required in financial reports under the
Act.
Becker Professional Education
Question CPA..oS741
The primary benefit of ha\ing a financial expert on a company's audit committee is:
a. The expert designation conwys a higher lewl of due diligence on the expert and shields audit committee
members and the corporation from most liabilities.
b. The financial expert checks the auditor's INOrk and verifies the appropriateness of the audit opinion.
c. The enhanced lewl of financial sophistication of the financial expert can seM as a resource for the audit
committee.
d. The financial expert certifies compliance with SEC requirements and Ihereby reduces audit fees.
Explanation
Choice "c" is correct. The benefits of a financial expert on the audit committee relate to the expertise that the
board can bring to its owrsight function.
Choice "b" is incorrect. The audit committee pro\ides owrsight of the annual audit; howewr, the audit committee
and its financial expert do not wrify the auditor's INOrk.
Choice "a" is incorrect. The term "expert" within the context of the Sarbanes..Qxley Act does not conwy the same
requirements as SEC regulations and does not convey either a higher level of due diligence or pro\ide insulation to
other board members. The Act is silent as to the meaning of expert outside of the qualifications to be deemed an
expert.
Choice "d" is incorrect. The financial expert does not certify compliance with SEC regulations.
Question CPA..oS742
Amold Astor, CPA, is a local tax practitioner 'Nilo has been asked to sit on the Board of BigLarge Corporation, a
multinational issuer. Astor has ne\r had any in\Ol\ment either as an employee or as an auditor with publically
traded companies but does teach an accounting principles class at the community college. Under the pro\isions
of Sarbanes-Oxley Act of 2002:
a. The Board of Directors 'NOuld likely evaluate Astor's qualifications to ser.e on the audit committee and be
designated as a financial expert based on mix of knowledge and experience.
b. The audit committee 'M)uld immediately certify Astor's qualifications as a financial expert based on his CPA
license and academic experience with GAAP and experience with intemal control.
c. Astor qualifies as a financial expert based on achie\ment of a CPA certificate.
d. Astor must petition the SEC for a wai...e r of prior experience requirements to be considered a financial expert.
Explanation
Choice "a" is correct. Qualification as a financial expert is a judgmental issue is typically made by the Board of
Directors. The Sarbanes-Oxley Act is silent as to 'Nilat group has the authority to designate an indi\idual a
financial expert but in practice, the board most often makes that decision. The Act pro\ides some guidance but
does not prescribe specific qualifications.
Choice "c" is incorrect. The Act provides some guidance but does not prescribe specific qualifications. The
achie...ement of the CPA license generally does not qualify an indi\idual as a financial expert.
Choice "d" is incorrect. The Act pro\ides some guidance but does not prescribe specific qualifications. The idea of
a petition to the SEC is a distracter.
Choice "b" is incorrect. The Act pro\ides some guidance but does not prescribe specific qualifications. In addition,
the audit committee 'NOuld likely not regulate or evaluate the expertise of its 0'Ml membership. The Board of
Directors would likely make the decisions regarding the designation of financial experts.
Question CPA..oS743
The Sarbanes-Oxley Act of 2002 requires that the officers of a corporation be held accountable to a code of
ethics. According to the Act, codifications of ethical standards should include pro'.isions for all of the foliOlNing,
except:
a. Compliance with laws, rules and regulations.
b. Full, fair, accurate, and timely disclosure in periodic financial statements.
c. Prompt intemal reporting of code pro'.isions and accountability for adherence to the code.
d. Honest and ethical conduct.
Explanation
Choice "c" is correct. Although the SEC proposed standards for codes of ethics to include both intemal reporting
of code pro'.isions and accountability for adherence to the code, the Sarbanes-Oxley Act itself does not ha-.e this
requirement.
Choice "d" is incorrect. The Act specifically requires that the code of ethics include pro'.isions for honest and
ethical conduct.
Choice "b" is incorrect. The Act specifically requires that the code of ethics include pro'.isions for full, fair,
accurate, and timely disclosure i n periodic financial statements.
Choice "a" is incorrect. The Act specifically requires that the code of ethics include pro'.isions for compliance with
laws, rules, and regulations.
Question CPA..oS744
The Sarbanes-Oxley Act of 2002 requires that the management report on intemal control include all of the
foliolNing, except:
a. A statement that there are no disagreements betlNElen management and the auditor as to the effecti...eness of
intemal controls.
b. A statement of management's responsibilities for establishing and maintaining adequate intemal controls.
c. A conclusion about the effecti...eness of the company's intemal controls.
d. A statement that the auditor has attested and reported on management's evaluation of intemal controls.
Explanation
Choice "a" is correct. Financial statement disclosures include management's assumption of responsibility for
intemal control, management's assessment of intemal control effecti...eness and a statement that the auditor has
reported on management's evaluation. Management does not describe disagreements, if any, betlNElen
management and the auditor.
Choices "b", "c", and "d" are incorrect, based on the abo\e explanation.
Question CPA..oS745
The Sarbanes-Oxley Act of 2002 seeks to imprO'.e imestor confidence by providing greater transparency for all of
the follo""';ng issues, except:
a. Adequacy of intemal controls.
b. Means and methods for balancing risk and gfO'Nl.h.
c. Competency of audit committees.
d. Compliance of senior officers ""';th a code of ethics.
Explanation
Choice "b" is correct. The issues surrounding risk and gro'NI:h are significant to imestors and generally addressed
by enterprise risk management concepts; hO'v\'e-.er, the Sarbanes-Oxley Act focuses less on strategic operations
and more on the financial reporting issues impacted by the audit committee's competence, the ethical behavior of
senior officers and the adequacy of internal controls.
Choices "c", "d", and "a" are incorrect. The Sarbanes-Oxley Act focuses on the financial reporting issues
impacted by the audit committee's competence, the ethical behavior of the financial officers and the adequacy of
internal controls as a means of impro'.4ng imestor confidence. Competency of audit committees, compliance of
senior officers ""';th a code of ethics, and adequacy of internal controls are all issues addressed by Sarbanes
Oxley.
Question CPA..oS747
The Gotham Corporation regularly produces budget 11.>. actual data for its managers. The company is particularly
sensiti-..e to personnel costs, and division variances of greater than fhe percent for any period are promptly
in-..estigated to determine if budgeted postions ha-...e not been filled or if there has been extraordinary o-...ertime.
Timely exception resolution of this character illustrates the information and communication principles typically
associated Vllit h:
a. Intemal Communication.
b. Intemal Control Information.
c. Extemal Communication.
d. Financial Reporting Information.
Explanation
Choice "b" is correct. Intemal control information is needed to facilitate the function of control components and is
identified, captured, used and distributed in a timely manner that enables personnel to fulfill their responsibilities.
Reporting that triggers prompt exception resolution, root cause analysis, and control updates illustrates this
principle.
Choice "d" is incorrect. Financial reporting information principles anticipate that information is identified, captured,
used at all le...els of the company and distributed in a manner that supports the achie-..ement of financial reporting
objecti-...es. Variance analysis supports control more so than effecti-...e financial reporting.
Choice "a" is incorrect. Intemal communications anticipate that communications enable and support
understanding and execution of intemal control objecti'.s , processes, and individual responsibilities. Variance
analysis specifically supports intemal control, not simply intemal communications generally.
Choice "c" is incorrect. Extemal communications anticipate that matters affecting the achie'oment of financial
reporting are communicated vvith outside parties.
Question CPA..oS748
The extemal auditors for the Horace Company assess the achie-.ement of intemal control objecti-.es each year
and communicate the assessment to management and the Board. Communication by the extemal auditor
illustrates ...m ich principle of the information and communication component of the Committee on Sponsoring
Organization's Integrated Framev.Qrk?
a. Intemal Communication.
b. Financial Reporting Information.
c. Intemal Control Information.
d. Extemal Communication.
Explanation
Choice "d" is correct. The principle of extemal communications asserts that matters affecting the achie-.ement of
financial reporting should be communicated ""';th outside parties.
Choice "b" is incorrect. The principle of financial reporting information principles con-.eys the idea that information
should be identified, captured, used at all le-.els of the company, and distributed in a manner that supports
achie-.ement of financial reporting objecti-.es.
Choice "c" is incorrect. Intemal control information is needed to facilitate the function of control components and
is identified, captured, used and distributed in a timely manner that enables personnel to fulfill their
responsibilities.
Choice "a" is incorrect. The principle of intemal communications asserts that communications should enable and
support understanding and execution of intemal control objecti-.e s, processes and i ndividual responsibilities.
Question CPA..oS749
The Instafab Corporation regularly assesses .....nether the financial statements of the company fairly state the
financial position, results of operations and cash floINS associated v.tith the underlying transactions. Leases, for
example are regularly e\Elluated for their status as a capital or operating lease and, if capital, the valuations of
both the asset and liability are e-.aluated for faimess, the depreciation methods used and interest rates used are
assessed for proper computation or application, and inclusion or exclusion of lease-related cash acti-.1ty from the
statement of cash floINS is carefully e-.aluated. The regular e\Gluation of transactions as part of the risk
assessment component of the Committee on Sponsoring Organization's Framev.<>rk reflects the principle of:
a. Fraud Risk.
b. Assessment Risk.
c. Financial Reporting Objecti\s.
d. Financial Reporting Risks.
Explanation
Choice "c" is correct. The assessment of .....nether the financial statements reflect the underlying transactions and
e-.ents in a manner that is fairly stated is a financial reporting objecti-.e.
Choice "d" is incorrect. The detennination of .....nat might interrupt a company's ability to present their financial
statements in accordance with GAAP is a financial reporting risk. Instafab's analysis of capital lease recording
relates to financial reporting objecti\s, not risks.
Choice "a" is incorrect. The fraud risk principle considers incenti\s and pressures to commit fraud and the
responsibility and accountability for fraud policies. Instafab's analysis of capital lease recording relates to financial
reporting objecli-.es, not fraud risks.
Choice "b" is incorrect. The risk assessment component of the framev.<>rk does not contemplate an "assessment"
risk. This tenn has no definition.
Question CPA..oS750
Jasper Intemational considers cash receipting and cash disbursement processes as part of their risk
assessment. The consideration of processes relates to the:
a. Fraud Risk.
b. Financial Reporting Risks.
c. Assessment Risk.
d. Financial Reporting Objecti\es.
Explanation
Choice "b" is correct. The determination of what might interrupt a company's ability to present their financial
statements in accordance with GAAP is financial reporting risk.
Choice "d" is incorrect. The assessment of vmether the financial statements reflect the underlying transactions
and e\ents in a manner that is fairly stated is a financial reporting objecti\e. Financial reporting objecti\es relate
more to the substance of transactions and fair presentation than internal controls o\er processes and the resulting
financial reporting risks.
Choice "a" is incorrect. The fraud risk principle considers incenli\es and pressures to commit fraud and the
responsibility and accountability for fraud policies. Jasper's analysis of cash transaction processing relates to
financial reporting risks, not fraud risk.
Choice "c" is incorrect. The risk assessment component of the frame'NOrk does not contemplate an "assessment"
risk. This term has no definition.
Question CPA..oS751
The Treadway Commission was established to study factors that lead to fraudulent financial reporting. The
Treadway Commission was established by:
a. Private sponsoring organizations.
b. Sarbanes-Oxley Act of 2002.
c. Securities and Exchange Commission.
d. Treadway Foundation.
Explanation
Choice "a" is correct. The Committee on Sponsoring Organizations (COSO), an independent private sector
initiative, was initially established in the mid 1 980's to study the factors that can lead to fraudulent financial
reporting. The COSO is sometimes referred to as the Treadvvay Commission after its original Chairman, James
Treadvvay, Jr., an executive in the private sector. The pri-.ale "sponsoring organizations" included the five major
financial professional associations in the United States: the American Accounting Association (AAA), the
American Institute of Certified Public Accountants (AICPA), the Financial Executi...es Institute (FE I), the Institute
of Intemal Auditors (itA), and the Institute of Management Accountants (IMA).
Choices "b", "c", and "d" are incorrect, based on the abo\ explanation.
Question CPA..oS752
The Committee on Sponsoring Organizations prepared the Internal Control Integrated Framev,.ork:
a. As part of the Congressional task force knQlNr1 as the Treadway Commission.
b. To compliment the O\.erarching concepts of the enterprise risk management framev,.ork.
c. To help businesses assess internal control.
d. To respond to the internal control assessment requirements of the Sarbanes-Oxley Act of 2002.
Explanation
Choice "c" is correct. In 1 992, the Committee on Sponsoring Organizations (COSO) issued Internal Control
Integrated FramelloOrk he Framew;)(k) to assist organizations in dewloping comprehensi-..e assessments of
intemal control effectiwness. The FramelloOrk is v.tidely regarded as an appropriate and comprehensiw basis to
document the assessment of internal controls o'.r financial reporting.
Choice "d" is incorrect. The FramelloOri< was de'.loped in 1 992, ten years before the Sarbanes-Oxley Act of 2002.
Choice "a" is incorrect. The Treadway Commission was a pri\lte initiatiw and was not part of a congressional
task force.
Choice "b" is incorrect. Although the intemal control frameoork does complement the enterprise risk management
frame'NOrk, the internal control literature was prepared in 1992 wnile the enterprise risk management literature was
de'.loped in 2004. The internal control framev,.ork could not haw been del.loped to complement the enterprise
risk management frameoork.
Question CPA..oS753
Able Corporation o......"s numerous businesses along the coast of Florida. The company's management has
identified business interruption eloents as a potential risk resulting from storm damages caused by hurricanes.
Management is so fearful of the possibility of storm damage that they elect to diloest the company of '.4rtually all
properties on the Florida coast Able's response to potential risks is knO'Ml as:
a. Sharing.
b. Reduction.
c. Acceptance.
d. A-..oidance.
Explanation
Choice "d" is correct. A response to risk that imolloes the disposal of a business unit, product line, or
geographical segment is called risk a'vOidance. When Able sells all of its businesses in Florida, the company
eliminates its exposure to named storms that hit Florida.
Choice "b" is incorrect. A response to risk that imolloes the diloersification of product offerings rather than the
elimination of product offerings is called reduction. Lea'.4ng the state is a\,Oidance, not reduction.
Choice "a" is incorrect. Insuring against losses or entering into joint Ioentures to address risk is kno......" as risk
sharing. Lea'.4ng the state is a\Oidance, not sharing.
Choice "c" is incorrect. Self insuring or simply tolerating full exposure to risk is kno......" as acceptance. Lea'.4ng the
state is not acceptance of risk.
Becker Professio nal Educabon
Question CPA..oS754
identified business interruption eloents as a potential risk resulting from storm damages caused by hurricanes. The
company elects to not only insure its properties but to "buy do......,," standard deductibles with additional premium.
Able's response to potential risks is kno......" as:
a. Sharing.
b. A\Oidance.
c. Reduction.
d. Acceptance.
Explanation
Choice "a" is correct. Insuring against losses or entering into joint Ioentures to address risk is kno......" as risk
sharing.
Choice "b" is incorrect. A response to risk that imolloes the disposal of a business unit, product line or
geographical segment is called risk al,()idance. Obtaining appropriate insurance is not a\Oidance.
Choice "c" is incorrect. A response to risk that inl,()l\s the diloersification of product offerings rather than
elimination of product offerings is called reduction. Obtaining appropriate insurance is not reduction, it is sharing
(the risk has not changed; it has been shifted to another party).
Choice "d" is incorrect. Self insuring or simply tolerating the full exposure to risk is knov.n as acceptance.
Obtaining appropriate insurance is not acceptance of risk.
Question CPA..oS755
identified business interruption eloents as a potential risk resulting from storm damages caused by hurricanes. The
company elects to balance its portfolio of risk INith property inloestments on the coast of other states and in
Florida's interior. Able's response to potential risks is kno......" as:
a. Sharing.
b. Acceptance.
c. Al"Oidance.
d. Reduction.
Explanation
Choice "d" is correct. A response to risk that imQlloes the diloersification of product offerings rather than elimination
of product offerings is called reduction.
Choice "c" is incorrect. A response to risk that in\OI-.es the disposal of a business unit, product line or
geographical segment is called risk a\Oidance. Adjustments to the portfolio do not represent a\Oidance.
Choice "a" is incorrect. Insuring against losses or entering into joint Ioentures to address risk is kno......" as risk
sharing. Adjustments to the portfolio do not represent sharing.
Choice "b" is incorrect. Self insuring or simply tolerating the full exposure to risk is knQlMl as acceptance.
Adjustments to the portfolio do not represent acceptance.
Question CPA..oS756
Able Corporation O'MlS numerous businesses along the coast of Florida. The company's management has
identified business interruption e-.ents as a potential risk resulting from storm damages caused by hurricanes. The
company elects to treat the potential damages from hurricanes as part of their business model. Able's response
to potential risks is kno'Ml as:
a. Sharing.
b. Reduction.
c. Acceptance.
d. A-..oidance.
Explanation
Choice "c" is correct. Self insuring or simply tolerating the full exposure to risk is kno'Ml as acceptance.
Choice "d" is incorrect. A response to risk that imol-.es disposal of a business unit, product line or geographical
segment is called risk a-..oidance. Accepting risk as part of a business model does not represent a-..oidance.
Choice "b" is incorrect. A response to risk that imol-.es di'orsification of product offerings, rather than elimination
of product offerings, is called reduction. Accepting risk as part of a business model does not represent reduction.
Choice "a" is incorrect. Insuring against losses or entering into joint \ntures to address risk is kno'Ml as risk
sharing. Accepting risk as part of a business model does not represent sharing.
Question CPA..oS757
Barker Healthcare Corporation's management is de\eloping their risk assessment as they re-.1ew plans to expand
their nursing home chain into various states i n the southeast. The management team has consulted published
industry sources to e\Elluate both population trends and affluence in the region as a means of evaluating both
demand, the ability to pay and the risk that populations may either not seek healthcare or may not be able to
afford it. Barker's listing of risks from industry sources is a technique for risk assessment kno....." as a(n):
a. Questionnaire/Suf\ey.
b. Facilitated workshop.
c. Eo..ent Ino..entory.
d. Process Flow Analysis.
Explanation
Choice "c" is correct. When management uses listings of potential e\ents common to a specific industry as a
means of identifying risks or opportunities, the method is kno....." as e\nt ino,.entory.
Choice "b" is incorrect. Gathering management together to discuss or e\n brainstonn ideas in a structured
manner is a facilitated 'NOrkshop. Common industry lists or inventories are not techniques associated with
facilitated workshops.
Choice "a" is incorrect. Sending out questionnaires to affected parties requesting opinions on potential e..ents is
the questionnaire/sur.ey approach. Common industry lists or ino,.entories are not questionnaires or sUMyS.
Choice "d" is incorrect. A flow chart of acti-.1ties used to identify potential risks is a process flow analysis.
Common industry lists or inventories are not part of the process flow analysis.
Question CPA..oS758
Kamp Sporting Goods seeks to establish a code of conduct that INiIi communicate the "tone at the top" to all
employees. The contents of the code will likely include all of the following, except:
a. Descriptions of the organization's commitment to compliance and confidentiality.
b. Definitions of common sense approaches 10 software piracy to ensure Ihallhe company is competili"l.e.
c. Prohibitions against conflicts of interest and self dealing.
d. Prohibitions or limits on gifts and gratuities or establishes required reporting.
Explanation
Choice "b" is correct. Codes of conduct likely will not condone exceptions to ethical beha"';or or the law in the
name of competition.
Choice "c" is incorrect. Codes of conduct frequently include prohibitions against conflicts of interest.
Choice "d" is incorrect. Codes of conduct often include guidance on gifts and gratuities.
Choice "a" is incorrect. Codes of conduct INiIl generally stipulate that information is pri-...1 leged and should be kept
confidential.
Question CPA..oS759
Dollar Bus Company has set an objecti-.e to fully comply INith published bus schedules to ensure consistent on
time ser,.;ce. The company kno-..vs that shorter routes per bus minimize delays caused by unforeseen issues.
Shorter routes require a greater imestment in the fleet. The company currently achie-.es an 83% compliance rate
INith the schedule and does not expect a significant increase or decrease in ridership or re-.enue as compliance
impro..es to 100% but does see re..enues fall off significanlly ......nen buses are late more that 20% of time. The
company's objectiw setting oould logically de-.elop as follo-..vs :
a. Tolerable le-.els of \ariation from compliance INith stated bus schedules are established as a means of
establishing realistic compliance objecti..es.
b. Additional busses oould be acquired to achie-.e the objecti-.e and incenti-.es oould be pro"";ded to dri\oers ....o
..n
consistently meet requirements.
c. Compliance rates of 80% oould become the objectiw and additional in\oestments in buses 'M)uld be required
to reduce risk.
d. Compliance INith the bus schedule 'M)uld be re\ie'Wed in relation to the risk of lost ridership within tolerable
compliance percentages abo-.e 80%.
Explanation
Choice "d" is correct. Objecti...es are aligned INith risk appetite, ......nich dri-.es risk tolerance le...e ls.
Choice "b" is incorrect. Acquisition of additional busses is a response to risks and oould not be part of objecti...e
setting. Objecti..e setting precedes risk assessments 'NtIich precede risk responses.
Choice "a" is incorrect. Tolerable limits oould not be used to back into objecti...e s.
Choice "c" is incorrect. Risk responses (purchase of buses) 'M)uld not be deriwd from objectives.
Question CPA..o6760
Extra Edge Sporting Goods has set a strategic objecti-..e of being in the upper quartile of sporting goods retailers.
The company identified a related objecti-..e of increasing its sales force by 50 new staff members v.t1ile maintaining
staff cost at . 1 94 cents per sales dollar. E-..ents identified by the management of Extra Edge that might interfere
""";th achie-..ement of their related objecti...e 'NOuld include all of the follo""";ng, except:
a. Inadequate needs assessments may result in bad staffing decisions.
b. Product demand may fall if sporting goods become less popular.
c. Job markets may heat up and cause fewer offers to be accepted for the expanded sales force.
d. Job markets may slow doVv'll and result in more staff accepting positions than there are available positions.
Explanation
Choice "b" is correct. Although product demand is a legitimate concem, the related objecti...e is associated v.-;th
staffing le...el s. The drop in product demand 'M:luld not be an e...ent identified regarding the objecti...e of hiring staff
""";thin certain cost constraints.
Choice "c" is incorrect. An o...e rheated job market that creates a reduced pool of job applicants is an e-.ent that
'M:luld affect Extra Edge's objecti-.e of adding 50 new staff members.
Choice "a" is incorrect. Inadequate needs assessments is an e-.ent that could impact the quality of the new staff
added by Extra Edge and v.ould impact the objecti-.e of adding 50 new staff members.
Choice "d" is incorrect. A sluggish job market is an e\Ent that could not only result in an abundance of staff but
could also produce acceptance of more offers than there are available positions and 'M:luld impact Extra Edge's
objecti...e of adding 50 new staff members.
Question CPA..oS761
Management has carefully evaluated the likelihood and impact of e\ents on its foreign operations. In the e\ent of a
3% variation in exchange rate, the impact is estimated at $10 million INithout any action taken by management
and $4 million if the company purchases a hedge instrument. The impact of the inherent risk of changes in foreign
currency exchange on achie"";ng company's business objecti...es is:
a. $ 6 million.
b. $ 4 million.
c. $14 million.
d. $10 million.
Explanation
Choice "d" is correct. Inherent risk is the risk to an entity in the absence of any actions management might take
to alter either the risk's likelihood or impact. The $10 million exposure identified in the problem is the risk
exposure INithoul management's inler\enlion.
Choice "c" is incorrect. The inherent risk is not the sum of the inherent risk of$10 million and the residual risk of
$4 million.
Choice "a" is incorrect. The inherent risk is not the difference betv.<een the inherent risk of $10 million and the
residual risk of $4 million.
Choice "b" is incorrect. The $4 million risk exposure, after management purchases the hedge, is the residual risk.
Residual risk is the risk that remains after management responds 10 the risk.
Question CPA..oS762
Management has carefully evaluated the likelihood and impact of e\ents on its foreign operations. In the e\ent of a
3% variation in exchange rate, the impact is estimated at $10 million INithout any action taken by management
and $4 million if the company purchases a hedge instrument. The impact of the residual risk of changes in foreign
currency exchange on achie"";ng company's business objecti...es is:
a. $ 6 million.
b. $10 million.
c. $ 4 million.
d. $14 million.
Explanation
Choice "c" is correct. The $4 million risk exposure, after management purchases the hedge, is the residual risk.
Residual risk is the risk that remains after management responds to the risk.
Choice "d" is incorrect. The inherent risk is not the sum of the inherent risk of $10 million and the residual risk of
$4 million.
Choice "b" is incorrect. Inherent risk is the risk to an entity in the absence of any actions management might take
to alter either the risk's likelihood or impact. The $10 million exposure identified in the problem is the risk
exposure INithout management's inter.ention.
Choice "a" is incorrect. The inherent risk is not the difference betv.Jeen the inherent risk of $10 million and the
residual risk of $4 million.
Question CPA..o6763
Control actil.4ties are most closely related to:

a. Inherent risks.
b. Risk responses.
c. Risk assessments.
d. Residual risks.
Explanation
Choice "b" is correct. Control actil.4ties are the methods used to implement the response to risk. Sometimes the
control actil.4ty is also, effecthely, the risk response.
Choice "c" is incorrect. Risk assessments in'oOl-.e the detennination of the likelihood and impact of events on the
achie-.ement of objecli-.es.
Choice "a" is incorrect. Inherent risk is the risk to an entity in the absence of any actions management might take
to alter either the risk's likelihood or impact. Risk res ponses are de-.eloped to deal with inherent risk.
Choice "d" is incorrect. Residual risk is the risk that remains after management responds to the risk. The residual
risk still remains after the response to the risk and the control actil.4ties are in place.
Question CPA..oS764
For the components of Enterprise Risk Management to be functioning effecthely, there cannot be:
a. Reliance on unconsolidated subsidiaries.
b. Extraordinary losses.
c. Material weaknesses in internal control.
d. Operating losses in the last three fiscal periods.
Explanation
Choice "c" is correct. In order for the operating efficiencies contemplated by enterprise risk management to
operate effectively, there cannot be material weaknesses in internal control.
Choices "d", "a", and "b" are incorrect. Enterprise risk management is associated \Mth the identification and
e'l6luation of risk and the balancing of those risks with profitability and grOVv'lh objecti-.es. Recent operating losses,
reliance on unconsolidated subsidiaries, and extraordinary losses 'M:luld not preclude the effecti\oe operation of
enterprise risk management concepts.
Question CPA..oS765
The criteria for e\Elluating the effectil.eness of enterprise risk management are:
a. The components of the enterprise risk management frameoork..
b. The principles supporting the components of the intemal control integrated frameoori<..
c. The key elements supporting the components of the enterprise risk management frameoori<..
d. The components of the intemal control integrated frameoori<..
Explanation
Choice "a" is correct. The components of the enterprise risk management frameoork. are the criteria used to
e\Elluate its effecti-...en ess.
Choice "d" is incorrect. The enterprise risk management frameoork. embraces many of the concepts and
objecti-..es of the internal control framewori<., but they are not the criteria used to e\aluate its effecti-.eness.
Choice "b" is incorrect. The enterprise risk management frame'vVOrk embraces many of the concepts and
objecti-..es of the internal control framewori<., but they are not the criteria used to e..aluate its effecti-..eness.
Choice "c" is incorrect. The enterprise risk management frame'vVOri<. embraces all of the key elements supporting
enterprise risk management components, but they are not the criteria used to evaluate its effecti-...eness.
Question CPA..o6766
The Committee on Sponsoring Organizations (COSO) recommends that the number of organizational layers
between the Chief Financial Officer and those imolved in financial reporting should not exceed:
a. Three.
b. TIM).
c. Four.
d. One.
Explanation
Choice "a" is correct. According to the organization structure principle supporting the control environment
component of the COSO's Frameoork document, no more than three layers of organization should exist between
the CFO and the indi\iduals in\Ol-..ed in financial reporting.
Choice "d" is incorrect. According to the organization structure principle supporting the control environment
component of the COSO's FramelM)rk document, no more than three layers of organization should exist between
the CFO and the indi\iduals in\Ol-..ed i n financial reporting. One is too restricti..e.
Choice "b" is incorrect. According to the organization structure principle supporting the control environment
component of the COSO's FramelM)rk document, no more than three layers of organization should exist between
the CFO and the indi\iduals in\Ol-..ed in financial reporting. TIM) is too restricti..e.
Choice "c" is incorrect. According to the organization structure principle supporting the control en-..1 ronment
component of the COSO's Frameoork document, no more than three layers of organization should exist between
the CFO and the indi....duals in\Ol..ed in financial reporting. Four is too distant.
Question CPA..oS767
As a matter of policy, all correspondence to or from regulatory auditors receio..ed by the management of the
Barclay Corporation is prO\.tded to the Barclay Corporation audit committee and the corporation's full board as
needed. In assessing entity 'Wide controls, management might conclude:
a. The company's organization structure supports effectio..e internal control o...e r financial reporting.
b. The Board of Directors understands and exercises oo..ersight responsibility related to financial reporting and
related internal control.
c. Management's philosophy and operating style support achieljng effectio..e intemal control oo..er financial
reporting.
d. Management and employees are assigned appropriate leo..els of authority and responsibility to facilitate
effecti...e intemal control owr financial reporting.
Expla nation
Choice "b" is correct. Actiw engagement by an audit committee in representing the Board of Directors relatiw to
all matters of intemal and extemal audits is eljdence of the board's understanding of their oo..ersight responsibility
oo..er financial reporting.
Choice "c" is incorrect. Management's operating style typically relates to the manner in Yllhich employees regard
the importance of intemal controls. Qualified personnel acti-.ely engaged in ensuring effecti-.e financial reporting
relate to management's operating style.
Choice "a" is incorrect. The organizational structure principle typically im.olo..es the appropriate alignment of
reporting relationships to ensure that controls are not undermined (e.g., intemal auditors should not report to the
eFO).
Choice "d" is incorrect. The authority and responsibility principle is typicaUy related to defining staff
responsibilities in a manner that is compatible with their authority and consistent with effecti...e financial reporting.
Question CPA..oS768
Auburndale Corporation has a corporate compliance program that allo'N'S employees the option of anonymously
reporting ,",olations of la'N'S, rules, regulations, policies or other issues of abuse through a hotline. Reported issues
are re'.4elNed by the intemal auditor and either immediately forwarded to the CEO or summarized and reported to
the CEO each month. The program also pro'.4des opportunities to report through super..isory channels and
includes a biannual training class that all employees must complete. The corporate compliance program
demonstrates that:
a. Management's philosophy and operating style support achie'.4ng effecti-...e internal control o-...er financial
reporting.
b. Management and employees are assigned appropriate le\ls of authority and responsibility to facilitate
effectiw internal control owr financial reporting.
c. Sound integrity and ethical values are de\loped and understood and set the standard of conduct for financial
reporting.
d. The Board of Directors understands and exercises o\rsight responsibility related to financial reporting and
related internal control.
Explanation
Choice "c" is correct. The existence of a compliance program that includes both ethics training and a hotline for
anonymous reporting is e'.4dence of dewlopment of ethical ...alues and ensuring that those ...alues are understood
and taken seriously.
Choice "d" is incorrect. Board o-...ersight relates more to o\rall leadership than to the specifics of ethical beha'.4or.
Choice "a" is incorrect. Management's operating style relates more to 'NOm. ethic and commitment to effecti\
financial reporting rather than the specifics of ethical beha'.4or.
Choice "b" is incorrect. Appropriate delegation relates to the organization's assignment of duties rather than to the
specifics of ethical beha";or.
Question CPA..oS769
The Carlton Corporation publishes an Employee Handbook that contains employee responsibilities for moral
beha";or including a code of conduct. Each year, employees must acknowiedge their receipt of the handbook,
their understanding of the code, and if they ha\e any awareness of non-compliance within the company. The
policies VvQuld indicate:
a. Management's philosophy and operating style support achie";ng effecti\e internal control o\er financial
reporting.
b. Human resources practices are designed and implemented to facilitate effecti\e intemal control over financial
reporting.
c. Management and employees are assigned appropriate le\els of authority and responsibility to facilitate
effecti\ intemal control o\r financial reporting.
d. Sound integrity and ethical values are de\eloped and understood and set the standard of conduct for financial
reporting.
Explanation
Choice "d" is correct. The existence of a published code of ethics and a periodic acknowiedgment that ethical
values are understood is e";dence of de\elopmenl of ethical values and ensuring that those values are understood
and taken seriously.
Choice "b" is incorrect. Human resources standards generally relate 10 hiring practices and appropriate placement
of indi";duals 'Nithin the organization based on job descriptions, rather than the specifics of ethical beha";or.
Choice "a" is incorrect. Management's operating style relates more to 'NOr\( ethic and commitment to effecti\e
financial reporting than the specifics of ethical beha";or.
Choice "c" is incorrect. Appropriate delegation relates to the organization's assignment of duties rather than to the
specifics of ethical beha";or.
Question CPA..oS770
The Daphne Corporation evaluates employees 'With responsibilities for financial reporting for fulfillment of those
responsibilities for compensation and promotion purposes. The company's policies support the idea that:
a. The company's organizational structure supports effecti...e intemal control o...e r financial reporting.
b. Human resources practices should be designed to facilitate effectiw intemal control over financial reporting.
c. Management's philosophy and operating style support achie\tng effecti...e intemal control o-.er financial
reporting.
d. Management and employees are assigned appropriate le-.els of authority and responsibi lity to facilitate
effective intemal control over financial reporting.
Explanation
Choice "b" is correct. The regular evaluation of employees for their competence in financial reporting is an
important link bet'Neen human resources policies and the achie...e ment of financial reporting objecti...es.
Choice "c" is incorrect. Management's operating style relates more to work ethic and commitment to effective
financial reporting than the recruitment, retention, and evaluation of employees.
Choice "d" is incorrect. Appropriate delegation relates to the organization's assignment of duties rather than to the
recruitment, retention, and evaluation of employees.
Choice "a" is incorrect. The organizational structure principle typically in\Ol...es the appropriate alignment of
reporting relationships to ensure that controls are not undermined (e.g., intemal auditors should not report to the
CFO) rather than to the recruitment, retention and evaluation of employees.
Question CPA..oS772
All of the foliolNing management acti'.4ties of the Falco Insurance Group, Inc. are e'.4dence of the ongoing
monitoring of intemal controls built into the company's system, except:
a. The CFO re'.4e'NS changes in liability reserws in excess of a specified threshold.
b. The CEO and CFO re'.4ew monthly disaggregated gross margin and operating margin data by line of cO\-erage.
c. The CFO updates the audit committee on status of intemal control.
d. The CEO and CFO are required to formally \erify that all major disbursements such as for claims and
reinsurance premiums fully comply INith the planned program of insurance.
Explanation
Choice "c" is correct. Regular reporting to the audit committee represents reporting of deficiencies, not ongoing
monitoring.
Choice "d" is incorrect. Ongoing monitoring of intemal controls include such functions as verification that major
disbursements meet the criteria for planned risk retention as part of a program of ins urance. Formal authorization
of all major disbursements such as for claims and reinsurance premiums for this purpose represent an ongoing
monitoring.
Choice "a" is incorrect. Ongoing monitoring of intemal controls include such functions as authorization of major
disbursements, re'.4e'NS of large or unusual transactions and high le\el re'.4e'NS of disaggregated information.
Re'.4e'NS of changes in liability reserws in excess of a specified threshold represent ongoing monitoring.
Choice "b" is incorrect. Ongoing monitoring of intemal controls include such functions as authorization of major
disbursements, re'.4ews of large or unusual transactions and high le\el re'.4e'NS of disaggregated information.
Monthly re'.4e'NS of disaggregated gross margin and operating margin data by line of cO\-erage represents ongoing
monitoring.
Question CPA..oS977
In order to comply INith a director's duty of loyalty to a corporation, v.tIat action(s) should a director take v.tIen
presented INith a corporate opportunity?
a. Accept the opportunity and disclose the acceptance to the corporation.
b. Accept the opportunity and not offer it to the corporation.
c. Offer the opportunity to the corporation and accept it if the corporation rejects it.
d. Reject the opportunity and not offer it to the corporation.
Explanation
Choice "c" is correct. The business law concept of "duty of loyalty" is a common ethical standard. The director's
duty of loyalty requires that the director offer opportunities presented in the market place first to the corporation
and only accept them if the corporation rejects it. A land de..eloper might sit on the board of a land de...elopment
company. If presented with the opportunity to purchase a building or land at a significant discount, the de...eloper
oould be obligated to offer the opportunity to the corporation first but oould not be barred from taking advantage of
the opportunity if the corporation had no interest.
Choice "d" is incorrect. The duty of loyalty does not require that a director ignore an opportunity by personally
rejecting it and not offering it to the corporation.
Choice "b" is incorrect. A director's duty of loyalty requires both disclosure and offering the opportunity to the
director's corporation before accepting the opportunity.
Choice "a" is incorrect. A director's duty of loyalty requires both disclosure and offering the opportunity to the
director's corporation before accepting the opportunity.
Question CPA..oS992
Each of the following is a limitation of enterprise risk management (ERM), except:

a. ERM can pro";de absolute assurance with respect to objectiw categories.
b. ERM deals INith risk, ......n ich relates to the future and is inherently uncertain.
c. ERM operates at different lewis INith respect to different objectiws.
d. ERM is as effectiw as the people responsible for its functioning.
Explanation
Choice "a" is correct. ERM pro";des a framework in ....i..n ch to manage risk INithin an organization's risk appetite to
pro\ide reasonable assurance regarding the achiewment of entity objectiws. The assertion that ERM can pro\ide
absolute assurance INith respect to objectiw categories is not true but, if it ....r..e e, it would represent a strength and
not a ....a
..e kness.
Choice "b" is incorrect. ERM pro"";des a framework in which to manage risk INithin an organization's risk appetite
to pro"";de reasonable assurance regarding the achiewment of entity objectiws. The uncertainty of future ewnts or
risks addressed by ERM potentially limits the effectiwness of the framework.
Choice "c" is incorrect. ERM pro"";des a framework in ......n ich to manage risk within an organization's risk appetite
to pro"";de reasonable assurance regarding the achie..ement of entity objectiws. The complexity of ERM can limit
its effectiwness. ERM components are applied to each objecti...e from the entity through the subsidiary lewl.
Choice "d" is incorrect. ERM pro\ides a framework in which to manage risk INithin an organization's risk appetite
to pro\ide reasonable assurance regarding the achiewment of entity objectiws. Like any control mechanism, the
effectiwness of the framework is limited by the capabilities of the indi"";duals res ponsible for implementation.
Question CPA..oS993
A manufacturing firm identified that it 'NOuld ha\e difficulty sourcing raw materials locally, so it decided to relocate
its production facilities. According to COSO, this decision represents lNhich of the foll()\,o\ljng responses to the risk?
a. Risk sharing.
b. Risk acceptance.
c. Risk reduction.
d. Prospect theory.
Explanation
Choice "c" is correct. Relocation of production facilities to assure an uninterrupted supply chain (e.g., sourcing
raw materials) is an example of risk reduction. The Committee of Sponsoring Organization's (COSO) Enterprise
Risk Management (ERM) frame'vVOrk identifies four methods of responding to risk, including a\Oidance, reduction,
sharing and acceptance. The relocation of the plant reduces the risk of supply chain interruption. Risk a\Oidance
techniques might in\Ol-...e discontinuing the product that uses the raw material altogether or replacing the raw
material 'Nith a locally available product. Risk acceptance is typically associated 'Nith doing nothing. Risk sharing
is often associated with purchasing insurance, ho....\..-e er, in this instance, the company might chose to share risk
by buying purchase options to ensure raw material awilability from other sources or obtaining purchase
commitments from local suppliers (with penalty clauses for nonperforrnance).
Choice "d" is incorrect. The COSO ERM frame'vVOrk. identifies four methods of responding to risk including
a\Oidance, reduction, sharing and acceptance. Prospect theory, VYhich seeks to describe how people decide
between altemati...es that in\Olve risk, is not described by the COSO as a risk management technique.
Choice "a" is incorrect. The COSO ERM frame'vVOrk identifies four methods of responding to risk including
a\Oidance, reduction, sharing and acceptance. Risk sharing is often associated 'Nith purchasing insurance,
ho......-e\er, in this instance, the company might chose to share risk by buying purchase options to ensure raw
material availability from other sources or obtaining purchase commitments from local suppliers (with penalty
clauses for nonperforrnance).
Choice "b" is incorrect The COSO ERM frame'vVOrk identifies four melhods of res ponding to risk including
a\Oidance, reduction. sharing and acceptance Risk acceptance is typically associated with doing nothing.
Question CPA..o7013
According to COSO, the use of ongoing and separate ewluations to identify and address changes in intemal
control effectil.eness can best be accomplished in Vo'hich of the foll()ll,lj ng stages of the monitoring-for-change
continuum?
a. Change management.
b. Change identification.
c. Control rewlidationfupdate.
d. Control baseline.
Explanation
Choice "b" is correct. The COSO identifies four stages of the change continuum beginning 'lllith control baseline,
followed by change identification and change management and concluding """th control wlidationf update. Change
identification considers the risk assessment component of intemal control and identifies changes in process or
risk and -.erifies that the design of underlying controls remains effecti-.e. Monitoring through the use of ongoing and
separate ewluations should consider the ability to identify and address changes in the change identification stage
of the monitoring for change continuum.
Choice "d" is incorrect. Monitoring starts 'lllith a control baseline that supports the understanding of an intemal
control system's design and whether controls ha...e been implemented to accomplish intemal control objecti...es.
The base line is the starting point and does not address the methods of control monitoring.
Choice "a" is incorrect. Change management contemplates the establishment of a new control baseline in
response to changes that either occur or are implemented in response to resed needs. Change management
does not contemplate the selection of ongoing o r separate evaluations.
Choice "c" is incorrect. Control reI.Glidation and update contemplates confirmation of control effecti-.eness.
Ongoing procedures routinely rewlidate and create a continuous baseline Vo'hile separate ewluations proloide
periodic revalidation. The re\6lidation l.erifies or challenges of the baseline. The use of ongoing or separate
eI.Gluations is determined, howe...er, as part of change identification.
Question CPA..o7014
Which of the follo...ving is necessary to be an audit committee financial expert according to the criteria specified in
the Sarbanes-Oxley Act of 2002?
a. Experience ...vith intemal accounting controls.
b. A limited understanding of generally accepted auditing standards.
c. Education and experience as a certified financial planner.
d. Experience in the preparation of tax retums.
Explanation
Choice "a" is correct. The financial expert ser.ing on the audit committee of an issuer must ha-.e experience ...vith
intemal controls. The financial expert qualifies through education or past experience as an auditor or finance
officer for an issuer of similar complexity.
Choice "b" is incorrect. The financial expert qualifies through education or past experience as an auditor or finance
officer for an issuer of similar complexity. The expert should ha-.e an understanding of GAAP, application of
GAAP, an understanding of internal controls and an understanding of audit committee functions. There is no
requirement to ha-.e a limited understanding of GAAS.
Choice "c" is incorrect. The financial expert qualifies through education or past experience as an auditor or finance
requirement to ha-.e education and experience as a certified financial planner.
Choice "d" is incorrect. The financial expert qualifies through education or past experience as an auditor or finance
requirement to ha-.e experience in tax retum preparation.
Question CPA..o7015
Which of the follo...ving positions best describes the nature of the Board of Directors of XYZ Co.'s relationship to
the company?
a. Fiduciary.
b. Representati-.e.
c. Agent.
d. Executi-.e.
Explanation
Choice "a" is correct. The board of directors has a fiduciary responsibility to act on behalf of and in the best
interest of the corporation.
Choice "c" is incorrect. The board of directors is not primarily charged ...vith acting as an agent of the corporation.
Employees, for example, act as agents.
Choice "d" is incorrect. The board of directors is not primarily charged ...vith acting as an executi-.e in fulfilling their
fiduciary responsibility to the corporation. Officers, for example, act as executi-.es.
Choice "b" is incorrect. The board of directors is not primarily charged ...vith acting as representati-.es in fulfilling
their fiduciary responsibility to the corporation. Corporate attomeys or employees, for example, fulfill the role of
representali-.e.
Question CPA..o7020
Oa\ois, a director of Acti\ Corp., is entitled to:

a. Rely on information pro\oided by a corporate officer.
b. Unilaterally grant a corporate loan to one of Acti\'s shareholders.
c. Sel'\e on the board of a competing business.
d. Take sole advantage of a business opportunity that would benefit Acti\e.
Explanation
Choice "a" is correct. As a director of the corporation Oa\ois may rely on information pro\oided to him/her by a
corporate officer. A corporate director is under no obligation to \rify information gi\n to him by management
(corporate officers).
Choice "c" is incorrect. A director is not entitled to sel'\e on the board of a competing business. Doing so would
be a breach of fiduciary duty.
Choice "d" is incorrect. A director may not take sole ad'-'3ntage of a business opportunity that \Wuld benefit the
corporation. Doing so \Wuld be a breach of fiduciary duty.
Choice "b" is incorrect. A director may not unilaterally grant a corporate loan to one of the corporation's
shareholders. Directors generally must act through a majority I,()te at a directors' meeting.
Question CPA-07021
Knox, president of Quick Corp., contracted '-'\1th Tine Office Supplies, Inc. to supply Quick's stationery on
customary terms and at a cost less than that charged by any other supplier. Knox later informed Quick's board of
directors that Knox was a majority stockholder in Tine. Quick's contract 'Nith Tine is:
a. Valid because of Knox's full disclosure.
b. Void because the disclosure was made after execution of the contract.
c. Valid because the contract is fair to Quick.
d. Void because of Knox's self..<Jealing.
Explanation
Choice "c" is correct. If a corporation enters into a contract and a director has a conflict of interest in the
transaction, the contract is \Oidable unless the director makes full disclosure of all of the facts to the disinterested
directors or the shareholders, ......n o then approve the transaction, or the director can pro-.e that the transaction was
fair to the corporation. The stationery purchase was fair to Quick, since it was purchased at a below-mar1<et price.
Thus, the contract is valid.
Choice "d" is incorrect. A director's self-dealing does not automatically make a contract \Oid. The contract can be
upheld if it was fair.
Choice "b" is incorrect. A director's self-dealing does not automatically make a contract \Oid. The contract can be
upheld if it was fair.
Choice "a" is incorrect. If a corporation enters into a contract and a director has a conflict of interest in the
transaction, the contract is \Oidable unless the director makes full disclosure of all of the facts to the disinterested
directors or shareholders, who then appro\. the transaction, or the director can prow that the transaction was fair.
Mere disclosure after the contract was adopted does not automatically render the contract valid.
Question CPA..o7022
The principle that protects corporate directors from personal liability for acts perfoffiled in good faith on behalf of
the corporation is knoWl as:
a. The clean hands doctrine.
b. The full disclosure rule.
c. The responsible person doctrine.
d. The business judgment rule.
Explanation
Choice "d" is correct. If a director acts in good faith and in a manner the director belie-..es is in the best interest of
the corporation, and the director exercises the care that a reasonably prudent person \Wuld exercise in a similar
position, the director is protected against liability for decisions the director makes that tum out poorty for the
corporation. This is commonly known as the business judgment rule.
Choice "a" is incorrect. The clean hands doctrine (better knov.11 as the unclean hands doctrine) is a defense in
actions brought in cases seeking equitable relief (e.g., an action seeking specific performance of a contract). If a
person seeking equitable relief has acted improperly in the transaction before the court, he is said to haw unclean
hands and the court 'Nill not grant equitable relief. The doctrine has nothing to do vvith releasing directors from
liability for acting in good faith and is outside the scope of the CPA Exam topics.
Choices "b" and "c" are incorrect. There are no such rules. Full disclosure may be required in certain situations
under corporate law, but such disclosure requirement is not the described doctrine.
Question CPA..o7023
The business judgment rule is a rule that immunizes corporate:

a. Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken
in good faith but are not within the power of the corporation or the authority of shareholders to make.
b. Management from liability for actions that result in corporate losses or damages if the actions are undertaken
in good faith and are within both the power of the corporation and the authority of management to make.
c. Shareholders from liability for actions that result in corporate losses or damages if the actions are undertaken
in good faith and are within both the power of the corporation and the authority of shareholders to make.
d. Management from liability for actions that result in corporate losses or damages if the actions are undertaken
in good faith but are not within the power of the corporation or the authority of management to make.
Explanation
Choice "b" is correct. Under the business judgment rule, a director is protected from liability for decisions made
on behalf of the corporation if the director acts in good faith and in a manner that the director belie...es is in the
best interest of the corporation, exercising the care that a reasonably prudent person 'NOuld exercise in a similar
position. The action must also ostensibly be within the power of the corporation to undertake and ostensibly within
the authority of management to make.
Choice "d" is incorrect. A director """; l 1 not be protected under the business judgment rule if he kno""";ngly causes
the corporation to undertake action that is not """;thin the power of the corporation to take and not v.ithin the
authority of management.
Choices "c" and "a" are incorrect. The business judgment rule protects directors; it is not applicable to the
shareholders (except perf1aps in the case of a closelyheld corporation being run by the shareholders).
Question CPA..o7084
According to the Sarbanes-Oxley Act of 2002, a chief executi-.e officer or chief financial officer ....mo misrepresents
the company's finances may be penalized by being:
a. Fined and imprisoned.
b. Imprisoned, but not fined.
c. Fined, but not imprisoned.
d. Remo-..ed from the corporate office and fined.
Explanation
Choice "a" is correct. An indi\-idual ....mo knovvingly executes or attempts to execute, securities fraud will be fined
or imprisoned not more than 25 years or both.
Choice "c" is incorrect. The prol.-1sions of the Sarbanes-OxJey Act of 2002 pro\-ide for penalties for
misrepresentation of company finance that may include both fines and penalties.
Choice "b" is incorrect. The pro....sions of the Sarbanes-Oxley Act of 2002 prol.-1de for penalties for
misrepresentation of company finance that may include both penalties and fines.
Choice "d" is incorrect. The pro\-isions of the Sarbanes-Oxley Act of 2002 prol.-1de for penalties for
misrepresentation of company finance that may include both fines and penalties but do not carry pro'visions for
remo\El1 from corporate office.
Question CPA..o7085
Which of the follo'A'ing items is one of the eight components of COSO's enterprise risk management frame'NOrk?
a. Reporting.
b. Operations.
c. Monitoring.
d. Compliance.
Explanation
Choice "c" is correct. Monitoring is one of the eight components of COSO's enterprise risk management (ERM)
frame'NOrk. The eight components of the ERM framework are summarized as follows in the mnemonic I S EAR
AIM:
Intemal en"'ronment E-.ent identification Acti'.1ties (control)
Selling objecti-.es Assessment of risk Information and communication
Risk response Monitoring

Choice "b" is incorrect. Operations are not one of the eight components of the COSO's ERM frame'NOrk identified
by the mnemonic IS EAR AIM as sho",," abo\.
Choice "a" is incorrect. Reporting is not one of the eight components of the COSO's ERM frame'NOrk identified by
the mnemonic IS EAR AIM as sho",," abo\.
Choice "d" is incorrect. Compliance is not one of the eight components of the COSO's ERM frame'NOOI. identified
by the mnemonic IS EAR AIM as sho",," abo\o.
Question CPA..o7087
Management of a company has a lack of segregation of duties 'vVithin the application em-ironment, INith
programmers ha'.1ng access to deo,elopment and production. The programmers have the ability to implement
application code changes into production without monitoring or a quality assurance function. This is considered a
deficiency in 'lllhich of the follo'llling areas?
a. Computer operations.
b. Management oo,erride.
c. Data integrity.
d. Change control.
Explanation
Choice "d" is correct. Programmer access to deo,elopment and production represents fla'Ned segregation of duties
that creates deficiencies for change control. Change control considers the manner in ....nich management monitors
and authorizes changes to a variety of information technology mailers including software applications programs.
Only authorized indi'.1duals should be allo'Ned to mo...e changes into production and the function of making the
change should be segregated from the function of pulling the change into production. Programmers 'vVith access
to both programming instructions and Ii..e data undermine management's control of data and their ability to ...erify
that all changes ha-..e been performed in a manner consistent 'vVith their instructions.
Choice "b" is incorrect. Management o-.erride is a control 'Neakness in 'lllhich managers ignore or circum...ent
controls. Programmers are typically not management.
Choice "c" is incorrect. Data integrity requires that information be accurate and complete. The poor segregation of
duties associated 'lllith programmer access to production may not impact the completeness or e...en the accuracy
of data.
Choice "a" is incorrect. Computer operations would not necessarily be compromised as a result of programmer
access to li..e data. The computer operations would continue to efficiently generate results only INith potentially
fla'Ned instructions as a result of compromised change control.
Question CPA..o8291
According to COSO, which of the following is the most effecti-.e method to transmit a message of ethical behal.4or
throughout an organization?
a. Strengthening internal audit's ability to deter and report improper behal.4or.
b. Demonstrating appropriate behal.4or by example.
c. Specifying the competence levels for every job in an organization and translating those le\-els to requisite
knOlMedge and skills.
d. RemoYing pressures to meet unrealistic targets, particularly for short-term results.
Explanation
Choice "b" is correct. According to the COSO, demonstrating appropriate behal.4or by example is the most
effecti...e method to transmit a message of ethical behal.4or throughout an organization. The commitment to ethical
behal.4or begins with the tone at the top, and is best established by management's demonstrated commitment to
ethical behal.4or.
Choice "a" is incorrect. Although detection of unethical behal.4or with impro\-ed intemal audit resources is
important, it is not as effecti\-e in transmitting a message of ethical behal.4or as leadership by example.
Choice "d" is incorrect. Realistic goals are an important component of a corporate culture that encourages ethical
behal.4or; unrealistic goals may prol.4de reasons for unethical behaYior. But, according to COSO, they are no
substitute for a strong commitment by management and an ethical tone at the top.
Choice "c" is incorrect. A competent work force supports ethical behal.4or and proYides an en"';ronment where
ethical beha....or will thri\-e. HO'Ne...e r, a demonstrated commitment to ethical behal.4or by management is the most
effecti'.e method for transmitting a message of ethical behal.4or throughout the organization.
Question CPA..o8292
Within the COSO Intemal Controlntegrated Framev.ork, .....nich of the foliolNing components is designed to
ensure that intemal controls continue to operate eifecti-..ely?
a. Monitoring.
b. Risk assessment.
c. Control en-...1ronmenl.
d. Information and communication.
Explanation
Choice "a" is correct. The monitoring component or function of the intemal control framework is designed to
ensure that intemal controls continue to operate eifecti\ly. Monitoring of intemal control eifecti..eness is done 10
pro-...1de an assessment of the performance oflhe system of internal control o\r time. Monitoring is designed to
ensure that intemal controls operate effecti..ely.
Choice "c" is incorrect. The control en-...1 ronment is sometimes referred to as the "tone at the top." The control
en-...1 ronment is the frameoork upon .....nich all other principles are built. It is not as specifically designed to ensure
that intemal controls continue to operate effecti..ely as is monitoring.
Choice "b" is incorrect. The risk assessment component of the COSO rrameoork includes principles associated
with management's consideration of the risk of material misstatement, not the assurance that intemal controls
continue to operate effecti..ely.
Choice "d" is incorrect. The information and communication components of the COSO frameoork consider those
systems that identify, capture, process, and distribute information supporting the accomplishment of financial
reporting objecti..es, not the assurance that internal controls operate effecti\ely.
Question CPA..o8293
According to COSO, an effecti\e approach to monitoring intemal control im.ol\es each of the following steps,
except:
a. Increasing the reliability of financial reporting and compliance with applicable laws and regulations.
b. Establishing a foundation for monitoring.
c. Designing and executing monitoring procedures that are prioritized based on risks to achiew organizational
objecti\es.
d. Assessing and reporting the results, including following up o n correcti\e action vvtlere necessary.
Explanation
Choice "a" is correct. Increasing the reliability of financial reporting and compliance INith applicable laW'S and
regulations is an approach to promoting a management philosophy and style that is congruent INith effecti\e
financial reporting and control, not monitoring. Monitoring intemal control may in...ol\e establishing a foundation for
monitoring, prioritization of monitoring procedures based on risk to achie\e organizational objecti\es, and
assessing reporting results and following up as appropriate INith correcti\e actions.
Choice "b" is incorrect. Embracing the attributes of the monitoring principle including establishing a foundation for
monitoring is an effecti\e approach to monitoring.
Choice "c" is incorrect. Designing procedures that are prioritized based on risks to achie\ing organization
objecti-.es is an effecti-.e approach to monitoring. Management might consider, for example, de\eloping a list of
control \rVeaknesses that lNOuld seriously, rather than immaterially, threaten the reliability of financial reporting to
establish standards for immediate reporting.
Choice "d" is incorrect. Assessing and reporting results, including follolNing up on correcti\e actions, is an
effecti\e approach to monitoring. Management might consider, for example, establishing procedures that require
reporting all deficiencies to a responsible manager.
Question CPA..o8315
According to COSO, which of the following is a compliance objecti\e?

a. To maintain accounting principles that conform to GAAP.
b. To maintain a safe le\el of carbon dioxide emissions during production.
c. To maintain material price ..ariances within published guidelines.
d. To maintain adequate staffing to keep o\ertime expense within budget.
Explanation
Choice "b" is correct. Maintaining safe (mandated by regulation) carbon dioxide emissions during production is a
compliance objecti\e. Compliance objecti\es include adherence to the laws, rules, and regulations associated
with operations, including em4ronmental regulations and other laws.
Choice "d" is incorrect. Maintaining adequate staffing to keep o\ertime expense within budget is likely an
operations rather than compliance objecti\e.
Choice "c" is incorrect. Maintaining material price \Griances within published guidelines is likely an operations
objecti\e.
Choice "a" is incorrect. Maintaining accounting principles that conform to GAAP is likely a reporting objecti\e.

2014ER BEC Homework B1.1

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Becker Professio nal Education

Control actil.4ties are most closely related to:

Each of the following is a limitation of enterprise risk management (ERM), except:

Oa\ois, a director of Acti\ Corp., is entitled to:

The business judgment rule is a rule that immunizes corporate:

Intemal en"'ronment E-.ent identification Acti'.1ties (control)

Selling objecti-.es Assessment of risk Information and communication

Risk response Monitoring

According to COSO, which of the following is a compliance objecti\e?

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