Magrath Chapter 1

An issuer's annual report contains the following statements: Management and the external auditors have taken responsibility for establishing and maintaining an adequate system of internal control over financial reporting. COSO was the internal control framework used to design and assess the effectiveness of the internal control system. Management has assessed that internal control over financial reporting is effective. An independent public accounting firm that is registered with the AICPA also assessed the system. Which of the above statements complies with the Sarbanes-Oxley Act of 2002?

2 and 3 only.

An internal auditor is considering a client's organizational structure as it affects the ethical climate established by company management. Each of the following considerations is valid in this regard except

A company that is highly centralized will have a more diverse ethical culture than a company that is decentralized.

Which of the following situations most clearly illustrates a breach of fiduciary duty by one or more members of the board of directors of a corporation?

A director who learned that the corporation is thinking of buying retail space in a city personally purchased a vacant building in the same city that would have been suitable for use by the corporation.

Which of the following is true regarding an issuer's compensation committee under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010?

All committee members must be independent.

Which of the following positions best describes the nature of the board of directors of XYZ Co.'s relationship to the company?

Fiduciary.

According to the Sarbanes-Oxley Act of 2002, a chief executive officer or chief financial officer who misrepresents the company's finances may be penalized by being

Fined and imprisoned.

Pursuant to the Sarbanes-Oxley Act of 2002, an accountant who destroys documents to impede an investigation by a U.S. agency can be

Fined and/or imprisoned not more than 20 years.

Seymore was recently invited to become a director of Buckley Industries, Inc. If Seymore accepts and becomes a director, Seymore, along with the other directors, will not be personally liable for

Honest errors of judgment.

An issuer's CEO unknowingly certifies filings that do not meet the requirements of the Sarbanes-Oxley Act of 2002. The CEO may be subject to Fines Imprisonment Neither fines nor imprisonment because (s)he acted unknowingly

I and II only.

An issuer's audit committee has established procedures on submissions by employees of questionable accounting and auditing matters. Those procedures require the following: Employees shall identify themselves. All submissions will be presented to senior management. The internal audit activity will periodically monitor compliance with the procedures. Which of the above procedures will likely result in a violation of the Sarbanes-Oxley Act of 2002?

I and II only.

The Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 established which of the following? Financial Stability Oversight Council Bureau of Consumer Financial Protection

I and II.

Which of the following person(s) may bring a whistleblower claim under the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010? An employee of the issuer An individual whose claim originates from information obtained while auditing the issuer An individual whose claim originates from information obtained while investigating the issuer

I only.

Which of the following penalties may an issuer's CEO and CFO incur for violating the Sarbanes-Oxley Act of 2002? Forfeiture of bonus or other incentive-based compensation Prohibited from serving as an officer or director Forfeiture of profits received from the sale of the issuer's stock

I, II and III.

A public accounting firm performs both audit and nonaudit services for an issuer. A violation of the Sarbanes-Oxley Act of 2002 occurs if The issuer's audit committee preapproves the nonaudit services. The issuer's audit committee preapproves the audit services. The issuer's board preapproves the nonaudit services. The issuer's board preapproves the audit services.

III and IV only.

Which of the following represents a violation of the Sarbanes-Oxley Act of 2002? An issuer's audit committee decides auditor compensation without board approval. An issuer's audit committee selects the independent auditor without board approval. An issuer's audit committee delegates to management the responsibility to oversee the work of the independent auditor.

III only.

According to the Sarbanes-Oxley Act of 2002, which of the following statements is correct regarding an issuer's audit committee financial expert?

If an issuer does not have an audit committee financial expert, the issuer must disclose the reason why the role is not filled.

Audit committee members of issuers are required, under the Sarbanes-Oxley Act of 2002, to maintain which of the following traits?

Independence.

The Financial Stability Oversight Council has a responsibility to do all of the following except

Inspect and investigate accounting firms.

Which of the following will most likely call into question the expertise of an audit committee's financial expert?

Lack of experience with internal accounting controls.

The business judgment rule is a rule that immunizes corporate

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.

Who is responsible for designing, implementing, and maintaining internal control over financial reporting?

Management.

The board of directors performs all of the following duties except

Managing day-to-day operations.

Which of the following is least likely to influence corporate governance?

Number of authorized shares of stock.

In general, which of the following must be contained in articles of incorporation?

Number of shares of stock authorized to be issued by the corporation.

In order to comply with a director's duty of loyalty to a corporation, what action(s) should a director take when presented with a corporate opportunity?

Offer the opportunity to the corporation and accept it if the corporation rejects it.

When Congress passed the Sarbanes-Oxley Act of 2002, it imposed greater regulation on public companies and their auditors and required increased accountability. Which of the following is not a provision of the act?

One of the company's officers may serve on the audit committee.

The Sarbanes-Oxley Act of 2002 established which of the following bodies to regulate the accounting profession?

PCAOB.

The Sarbanes-Oxley Act of 2002 imposes which of the following requirements?

The audit committee must be composed entirely of independent members of the board.

Under the Sarbanes-Oxley Act of 2002, who is responsible for establishing procedures for the receipt, retention, and treatment of complaints received by the issuer regarding accounting, internal accounting controls, and auditing matters?

The audit committee.

A purpose of corporate governance includes which of the following?

All of the answers are correct.

Absent a specific provision in its articles of incorporation, a corporation's board of directors has the power to do all of the following except

Amend the articles of incorporation.

Which of the following scenarios will most likely violate the Sarbanes-Oxley Act of 2002?

An issuer compensated a director on the audit committee for providing consulting services regarding the purchase of real estate.

Which of the following is most likely a violation of the rules of the Public Company Accounting Oversight Board (PCAOB)?

An issuer's independent auditor also performs consulting work for the issuer on the design and operation of its internal controls.

According to the Sarbanes-Oxley Act of 2002, when an issuer's board of directors selects members to be on the company's audit committee, the board of directors must select individuals who

Are members of the company's board of directors.

Under the Sarbanes-Oxley Act of 2002,

At least one member of the audit committee must be a financial expert.

The Sarbanes-Oxley Act of 2002 requires issuers to have an

Audit committee.

Which of the following provisions must a for-profit corporation include in its articles of incorporation to obtain a corporate charter? Provision for the issuance of voting stock Name of the corporation

Both I and II.

Who is required to make special certification statements regarding the establishment of internal control systems on Form 10-K?

Both the principal executive officer and the principal financial officer.

The principle that protects corporate directors from personal liability for acts performed in good faith on behalf of the corporation is known as the

Business judgment rule.

The president of a company has signed a $10 million contract with a construction company to build a new corporate office. Which of the following corporate documents sets forth the scope of authority under which this transaction is governed?

Bylaws.

Which of the following documents is a source of authority for directors and officers?

Bylaws.

Which of the following documents would most likely contain specific rules for the management of a business corporation?

Bylaws.

Julie is the director of the audit committee at C corporation. Julie receives compensation from C corporation for her service on the board. C corporation's audit committee is responsible for appointing and compensating the independent auditor, who reports directly to management. Which of the following is true regarding C corporation's compliance with the Sarbanes-Oxley Act of 2002?

C corporation is not in compliance because the independent auditor should not report directly to management.

Which provisions of the Dodd-Frank Wall Street Reform and Consumer Protection Act of 2010 require an issuer to have a policy defining how to recover performance-based executive compensation?

Clawback provisions.

An issuer is preparing to file its annual report prior to adopting a code of ethics for its senior financial officers. What action, if any, must the issuer take to comply with the Sarbanes-Oxley Act of 2002?

Disclose in the annual report the lack of the code of ethics and the reason(s).

A company officer who is not a director is authorized to perform which of the following duties?

Enter into a contract with a vendor of computers for the company.

Which of the following is necessary to be an audit committee financial expert according to the criteria specified in the Sarbanes-Oxley Act of 2002?

Experience with internal accounting controls.

The Sarbanes-Oxley Act of 2002 requires management of publicly-traded corporations to do all of the following except

Provide a statement that the board approves the choice of accounting methods and policies.

Which of the following organizations was established by the Sarbanes-Oxley Act of 2002 to control the auditing profession?

Public Company Accounting Oversight Board (PCAOB).

Generally, a corporation's articles of incorporation must include all of the following except the

Quorum requirements.

Davis, a director of Active Corp., is entitled to

Rely on information provided by a corporate officer.

Which of the following corporate actions is subject to shareholder approval?

Removal of directors.

The Sarbanes-Oxley Act of 2002 has strengthened auditor independence by requiring that management

Select auditors through audit committees.

Senior management can best promote an ethical culture within an organization by

Setting an example of ethical conduct.

The Sarbanes-Oxley Act of 2002 limits the nonaudit services that an audit firm can provide to public company audit clients. Which of the following is most likely to be a service that an auditor may provide to a public client?

Tax compliance services.

Section 302 of the Sarbanes-Oxley Act of 2002 requires the CEO and CFO, in every annual or quarterly filing with the SEC, to certify all of the following except

That they have taken every practical step to correct significant control deficiencies identified in the previous audit.

An issuer's audit committee consists of its CEO and three outside board members. The issuer compensates the outside board members for their service on the board. Under the Sarbanes-Oxley Act of 2002, which of the following is a deficiency in the issuer's audit committee?

The CEO is an audit committee member.

Which of the following statements is correct regarding the requirements of the Sarbanes-Oxley Act of 2002 for an issuer's board of directors?

The board of directors must have an audit committee entirely composed of members who are independent from management influence.

The CEO is selected by and reports to

The board of directors.

Each of the following statements is correct regarding the existence and implementation of codes of conduct except

The codes of conduct must be in writing and displayed in public areas, such as a break room.

A director of an automobile dealership is presented with an offer to purchase a competing dealership. The director presents the opportunity to the board of directors. The entire board rejects the opportunity, because the competitor's pending bankruptcy makes it an unattractive acquisition. Which of the following is true if the director accepts the competitor's offer?

The director acted properly.

A member of the board of directors of Central Communications Co. is offered a license by a third party to operate a cellular phone system. The director does not present this offer to the board of directors for approval but informally mentions it to a fellow board member, who does not think it will be a problem. The director buys the license. Which of the following statements is correct regarding the director's actions?

The director breached a duty of loyalty by usurping a corporate opportunity.

Which of the following actions is required to ensure the validity of a contract between a corporation and a director of the corporation?

The director must disclose the interest to the independent members of the board and refrain from voting.

A corporate director commits a breach of duty if

The director's action, prompted by confidential information, results in an abuse of corporate opportunity.

The audit committee of a publicly traded company (an issuer) is in the process of selecting the independent public accounting firm to conduct the annual financial statement audit. Which of the following is a requirement of the Sarbanes-Oxley Act of 2002 that the committee must consider when selecting an auditor?

The firm must be registered with the Public Company Accounting Oversight Board (PCAOB).

An issuer's board of directors has unanimously approved the CEO's request for a personal loan from the issuer. Subsequently, the CEO used the loan proceeds to purchase additional shares of the issuer's stock. Under the Sarbanes-Oxley Act of 2002 (SOX), what is the most likely effect of the loan on the issuer?

The issuer has violated SOX because it made a personal loan to an executive.

All of the directors on an issuer's audit committee are independent. However, none of the directors on the committee is a financial expert. The issuer disclosed this fact in its most recent annual filing. The issuer has complied with the Sarbanes-Oxley Act of 2002 if it also disclosed

The reason(s) why its audit committee lacks a financial expert.

An advantage of preferred shareholders over common shareholders is

The right to receive dividends and liquidation distributions first.

Under the reporting requirements of Section 404 of the Sarbanes-Oxley Act of 2002, the CEO and CFO must include a statement in the annual report to the effect that

The system of internal control has been assessed by an independent public accounting firm that is registered with the PCAOB.

According to the Sarbanes-Oxley Act of 2002, anyone who knowingly alters, destroys, covers up, or makes a false entry in any record or document with the intent to obstruct or influence the investigation of any matter within the jurisdiction of any department or agency of the United States may be fined and/or imprisoned for up to

Twenty years.

Knox, president of Quick Corp., contracted with 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 shareholder in Tine. Quick's contract with Tine is

Valid because the contract is fair to Quick.

An issuer's CEO and CFO certified the company's annual filing for Year 1 pursuant to the Sarbanes-Oxley Act of 2002. However, only the CEO certified the issuer's first quarterly filing for Year 2. The issuer has

Violated SOX because the CFO did not certify the quarterly filing.