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Exam 3: Internal Controls

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Question 1

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A risk / control matrix has five columns, the last of which is labeled "comments." Which of the following statements is most true?

A) Because it is part of a risk / control matrix, the "comments" column is a control activity.
B) Because it is part of a risk / control matrix, the "comments" column is a tool for risk assessment.
C) If the comments are written by a department manager, they are part of establishing a strong control environment.
D) Although the "comments" column may not align directly with one of the five elements of the COSO framework, including it in the risk / control matrix is a good idea.

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Question 2

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PRL Corporation's internal control plan includes five items: (i) conducting ongoing evaluations of internal control during the normal course of operations, (ii) hiring accountants who understand the importance of strong internal control, (iii) including a segment in new employee orientation on the importance of strong internal control, (iv) periodic employee surveys that identify new issues that require internal controls, (v) a quarterly newsletter explaining elements of the internal control plan. Which of the following most appropriately groups two items from PRL's plan with a component of the COSO framework?

A) I and II, monitoring
B) II and III, control environment
C) IV and V, information and communication
D) I and V, risk assessment

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Question 3

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Violating the provisions of the Foreign Corrupt Practices Act most directly subjects an organization to what kind of risk from Brown's taxonomy?

Internal controls can prevent, detect or correct a problem. Which of the following groups includes controls that will fulfill all three with respect to the risk of an employee embezzling money by forging a manager's signature on a check?

Jared is a loan officer at a bank whose responsibilities include taking applications from prospective borrowers. Jared also makes an initial recommendation regarding each loan, although final approval requires the authorization of both a branch manager and a loan specialist at the bank's corporate headquarters. Within the context of a loan transaction, which of the following best pairs a risk with an internal control that will address the risk?

A Place to Rest is a retreat center located just outside Los Angeles; the center's management is interested in developing an internal control plan using the COSO framework. For each item listed below, indicate the framework element that most clearly applies; you must use each element of the COSO framework exactly one time. A. Conducting focus groups where employees talk about problems they observe at the center b. Designating a three-person committee to review and update the plan annually c. Filling out a risk / control matrix d. Inviting a guest speaker to talk to employees about the importance of internal control e. Sending out a monthly e-mail describing some aspect of the center's internal control plan

The risk / control matrix illustrated in the chapter contains five columns. Which of the following items is most likely to appear in the third column?

According to COSO, internal control is a:

Bumble Beasley was recently hired as a marketing manager at ATI Corporation. When approached by the accounting manager regarding the development of an internal control plan for the marketing department, Bumble said: "Internal control? I'm not even really sure I know what that is. And even if I did, I had the impression that it was all the responsibility of you accounting types." In the role of the accounting manager, explain to Bumble in your own words what internal control is. Also explain, in your own words, the basic purposes of internal control.

Consider the following examples of risk: i. A corporation is unable to issue bonds because its credit rating is too low.ii. A U.S. auto manufacturer tries to market a car in Mexico. The car does not sell because the Spanish translation of its name means "it doesn't go." Iii) An employee receives insufficient training in how to use specialized software.iv. Due to employee theft, a corporation spends more than anticipated buying new tools The risks listed above contain examples of all the categories in Brown's risk taxonomy except:

According to the COSO definition, internal control should promote ___ in financial reporting.

The risk / control matrix illustrated in the chapter contains five columns. Which of the following is not one of them?

Internal control has four major purposes in organizations. Ways to achieve at least one of the four include: (i) requiring supervisory review of how complex transactions are recorded in the journal, (ii) using general ledger software such as Peachtree.

Consider the list of risks and internal controls in the table below. For each row, indicate whether the internal control addresses the risk. If it does, indicate whether it is primarily preventive, detective or corrective in nature.

Internal control relates to an organization's achievement of objectives in three major categories. Which of the following best pairs one of the categories with a specific example?

Consider the following examples of risk: i. A corporation is unable to issue bonds because its credit rating is too low.ii. A U.S. auto manufacturer tries to market a car in Mexico. The car does not sell because the Spanish translation of its name means "it doesn't go." Iii) An employee receives insufficient training in how to use specialized software.iv. Due to employee theft, a corporation spends more money than anticipated buying new tools.Which pair of risks belongs to the same category in Brown's risk taxonomy?

Differences between legal & regulatory risk and directors' & officers' liability risk in Brown's taxonomy include:

After being laid off from his job, Dale applied for unemployment benefits. During his initial interview to establish eligibility, the interviewer explained his benefits would last no more than ten weeks; Dale later consulted the official web site and learned that, under the right circumstances, his unemployment benefits could last up to six months. Which of the following internal controls is least likely to address this situation?

Omar is a general manager at FRD Corporation. He recently attempted to reorganize FRD from three departments of ten people each to six departments of five people each. Which purpose of internal control is most likely to be impacted by the change?

A department manager at TRS Corporation attended a seminar on internal control; afterward, the manager formed a five-person departmental team to create an internal control plan for the department. After a one-day off-site meeting, the team produced a document titled "Departmental Internal Control Plan." It was formatted as a risk/control matrix. One member of the team commented that, although the work was interesting, the team was glad the task was complete and wouldn't have to be redone. Which of the following statements is most true?