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Chapter 2–Corporate Governance and Ethics
Student: ___________________________________________________________________________
1. The main objective of corporate governance is to:
A. make sure employees are working as efficiently as possible.
B. make management more accountable to employees, stockholders, and others interested in the company.
C. make sure the a company’s stock price is not overvalued.
D. reduce the use of internal controls throughout the organization.
2. Individuals who serve on a company’s audit committee should be:
A. internal auditors of the company.
B. external auditors of the company.
C. either employees, managers, or stockholders of the company.
D. individuals who have no significant business relationship with the company.
3. Which of the following statements is true regarding internal control?
A. Some companies may eliminate internal control policies if their costs outweigh their benefits.
B. Effective internal control policies guarantee that a company’s goals and objectives will be achieved.
C. Internal control is comprised of two elements – risk assessment and monitoring.
D. All companies are required to following the same set of internal control procedures.
4. The most widely used internal control framework in the United States was developed in 1992 by:
A. the Securities and Exchange Commission (SEC).
B. the Internal Revenue Service (IRS).
C. the New York Stock Exchange (NYSE).
D. the Committee of Sponsoring Organizations (COSO).
5. Which of the following factors is least likely to contribute to the internal control environment within a
company?
A. Attitude and general philosophy of the board of directors towards internal control.
B. Attitude and general philosophy of stockholders towards internal control.
C. Attitude and general philosophy of management towards internal control.
D. Attitude and general philosophy of customers towards internal control.
6. What occurred in 2002 to significantly increase the oversight role of a company’s board of directors with
respect to internal controls?
A. The creation of the Securities and Exchange Commission (SEC).
B. The passage of the Sarbanes-Oxley Act.
C. The creation of an internal control framework by the Committee of Sponsoring Organizations (COSO).
D. The creation of the Financial Accounting Standards Board (FASB).
7. Which of the following items is not required by the Sarbanes-Oxley Act of 2002?
A. A company’s external financial statement auditor is responsible for determining the internal control
procedures the company must have in place.
B. Management must provide certifications about internal controls over financial reporting.
C. Management must make an assessment regarding the effectiveness of their internal controls.
D. Companies must allow employees to make complaints about accounting and auditing matters directly to
members of the audit committee.
8. Which of the following statements is true regarding the Sarbanes-Oxley Act of 2002?
A. Due to the lack of possible criminal penalties, companies have little incentive to follow the requirements of
the act.
B. Only employees classified as upper-level management may take complaints to the company’s audit
committee.
C. The external financial statement auditor bears all responsibility for creating the internal control policies the
company should follow.
D. It requires management to make an assessment regarding the effectiveness of their internal controls.
9. Which of the following statements is false regarding board of directors for public companies?
A. Board of directors should ascertain whether management is looking out for the best interests of the company
as a whole rather than their own best interests.
B. Board of directors serve as a liaison between a company’s management and its stockholders.
C. Board of director members should be employees of the company.
D. Board of directors have seen their role become more important since the passage of the Sarbanes-Oxley Act.
10. Which of the following statements is true regarding risk assessment?
A. Risk assessment is not normally part of internal control.
B. Management should focus primarily on assessing risks that might occur by lower-level employees.
C. Management is required to only assess risk every three years.
D. Management is required to evaluate the potential impact and likelihood of risks that affect the company.
11. Which of the following is not one of the general internal control activities that companies often use?
A. Safeguarding of assets
B. Transaction authorization
C. Segregation of duties
D. Gaining a competitive advantage over the competition
12. Ideally, segregation of duties requires which duties to be segregated?
A. Managerial and financial accounting duties
B. Manufacturing and selling and administrative duties
C. Computerized recordkeeping and manual recordkeeping duties
D. Recordkeeping, custody, and authorization duties
13. Which of the following is not an example of an internal control procedure?
A. Timely bank reconciliations
B. The use of sequentially numbered sales tickets
C. Manager bonuses associated with high levels of sales
D. Bar coding of inventory
14. Which of the following internal controls would not reduce the likelihood of unauthorized data access in a
technology-intensive environment?
A. Keeping computers on 24 hours per day.
B. Using passwords to gain access to sensitive data.
C. Using a firewall to limit access to computer network systems.
D. Moving critical data to a separate server that is not connected to the internet.
15. Which of the following statements is true regarding the impact that information technology has had on
internal controls?
A. It has introduced new risks.
B. It has reduced the likelihood of internal control failure.
C. Internal control procedures that were used before information technology became prevalent no longer need to
be followed.
D. It has not altered the way management approaches internal control.
16. Who sets the tone for ethical behavior in an organization?
A. Internal auditors
B. Audit committee
C. Upper management
D. Stockholders
17. Stakeholder analysis normally includes all of the following steps except:
A. Understanding the nature of each stakeholder’s interests.
B. Developing strategies to address the demands of stakeholders.
C. Assessing each stakeholder’s power and influence.
D. Assessing the ethical values of each stakeholder.
18. All of the following statements about stakeholder analysis are true except:
A. Stakeholder analysis can be used by a company to identify how a particular action or decision might affect
employees, customers, suppliers, and owners.
B. Stakeholder analysis is a framework for analyzing ethical dilemmas.
C. Stakeholder analysis is a type of financial statement analysis and can be used to analyze company
profitability.
D. Stakeholder analysis can be used by a company to determine its responsibility to employees and owners.
19. The portion of a company’s ethics program which lays out specific rules or standards of behavior for
various business situations is called:
A. the mission statement.
B. the corporate philosophy statement.
C. the code of conduct.
D. the articles of incorporation.
20. Where do most companies assert their commitment to key stakeholders?
A. In their mission statement.
B. In their code of conduct.
C. In their articles of incorporation.
D. In their financial statements.
21. Which of the following statements regarding fraud is false?
A. Fraud perpetrated by higher-level management is harder to detect than that of lower-level employees.
B. Fraud is often committed unknowingly by employees.
C. The most common type of fraudulent financial reporting involves the overstating of revenues and assets and
the understating of liabilities.
D. Adequate internal control systems can usually detect or prevent most types of employee fraud.
22. Which of the following statements is the best description of fraudulent financial reporting?
A. Fraudulent financial reporting involves the misappropriation of assets.
B. Fraudulent financial reporting only involves the intentional misstatement of amounts owed to the Internal
Revenue Service.
C. Fraudulent financial reporting is brought about by the misuse of a company’s assets.
D. Fraudulent financial reporting often involves the intentional misstatement of or omission of significant
information from a company’s financial statements.
23. The most common types of fraudulent financial reporting involve overstating:
A. liabilities and expenses.
B. direct materials and overhead.
C. revenues and assets.
D. liabilities and revenues.
24. If a company has decided to issue fraudulent financial statements, which type of account is most likely to be
understated?
A. Assets
B. Revenues
C. Expenses
D. Owner’s equity
25. Fraud involving upper-level management:
A. is less likely to harm the company than fraud by lower-level employees.
B. usually results in revenues and assets being understated on the financial statements.
C. is much more difficult to detect than fraud by lower-level employees.
D. is more likely to happen when a company has internal control procedures in place.
26. Fraudulent financial reporting involves the active involvement of a company’s:
A. creditors.
B. stockholders.
C. customers.
D. management.
27. Which of the following is not an example of fraudulent financial reporting?
A. Net income on the income statement is intentionally overstated.
B. The company’s annual report omits required disclosures required by generally accepted accounting
principles.
C. The company controller allowed herself to receive additional compensation that had not been approved by
the Board of Directors.
D. Liabilities on the balance sheet are intentionally understated.
28. Which of the following is more of an example of fraudulent financial reporting rather than misappropriation
of assets?
A. Kiting
B. Lapping
C. Overstatement of revenues
D. Embezzlement of funds
29. Which of the following situations is the best example of fraud being committed?
A. During the year, management over-applied manufacturing overhead to products.
B. The manager in charge of purchasing materials did not try to get the best price on those materials from
suppliers.
C. A cashier inadvertently gave too much change back to a customer from their purchase.
D. Without proper authorization, an employee uses a company vehicle for personal reasons.
30. Which of the following situations is not an example of fraud?
A. During the year, management estimated total overhead costs of $50,000 for purposes of the overhead
application rate, but at the end of the year, total overhead costs were actually computed to be $58,000.
B. Without permission, an employee with access to company materials took home less than $10 worth of
company materials.
C. A district manager intentionally reported $50 too much on his expense report for reimbursement of travel
expenditures.
D. Management intentionally recorded the sale of a product in 2005 instead of 2006 in order to overstate net
income.
31. ____ occurs when two or more people work together to commit fraud.
A. Embezzlement
B. Kiting
C. Lapping
D. Collusion
32. Which of the following controls would be best for reducing the incidence of lapping?
A. Securing of assets
B. Segregation of duties
C. Computer encryption of sensitive data
D. Setting up a firewall for network access
33. Which of the following would be best for reducing the incidence of employee theft of merchandise?
A. Transaction authorization
B. Timely bank reconciliations
C. Safeguarding of assets
D. Supervisor review of timecards
34. Which of the following is not one of the three general categories of forces that make up the fraud triangle?
A. Internal control procedures
B. Opportunities
C. Situational pressures
D. Personal characteristics
35. The most common financial motivation for fraud is:
A. opportunity.
B. greed.
C. a poor credit rating.
D. inflation.
36. Which of the following is least likely to be in place when a company has fraud committed by its
employees?
A. Collusion between employees and a third party.
B. Inadequate internal controls.
C. Management override of internal controls.
D. Aggressive antifraud programs and policies.
37. Which of the following strategies would be best for combating fraud?
A. Allowing the same employee who approves transactions to also record those transactions and maintain
custody of any assets involved.
B. Trusting only top-level employees.
C. Conducting background checks for employees.
D. Performing independent reviews of employees’ work as infrequently as possible.
38. Why is corporate governance important? List some of the internal and external forces that shape a
company’s corporate governance system.
39. Define corporate governance. Why would one set of corporate governance processes not be appropriate for
every company?
40. List three specific ways that assets can be safeguarded from misappropriation.
41. List two specific and unique risks that a business operating in a technology-intensive environment would be
more likely to be exposed to than a company that does not operate in that environment.
42. What are the five related elements of internal control?
43. How can risk assessment and control activities help to reduce fraud within a company?
44. Provide two examples of internal control procedures.
45. For segregation of duties to be most effective, what duties should be segregated?
46. List two internal control procedures unique to a company engaged in a technology-intensive environment.
47. Stakeholder analysis can be used to evaluate ethical dilemmas. List the 5 steps a company would follow
when performing a stakeholder analysis.
48. List two specific ethics programs that companies use to promote and maintain an ethical business
environment?
49. What are the three primary types of codes of ethics?
50. What are the three crucial ways a company should respond to ethics violations?
51. What are the two critical elements in the legal definition of fraud?
52. What precipitated the passage of the Sarbanes-Oxley Act of 2002 and what are some of its provisions?
53. How does employee fraud differ from management fraud?
54. List and describe the two general types of fraud that companies and their stakeholders should be concerned
about?
55. What is “lapping” and how can it be prevented?
56. What is a possible cause of fraudulent activity by management?
57. List and briefly describe the three forces (often depicted as the fraud triangle) that cause fraudulent activity
to occur?
58. Describe a situation where an employee might feel justified in committing fraud against a company.
59. How can a company reduce the risk of employee fraud?
60. How can the management of a company help to reduce fraud within the company?
61. J.R. works as a cashier for a large discount retail store. J.R.’s good friend, Eva, has approached J.R. with a
scheme whereby Eva will pretend to purchase and pay for an item in J.R.’s cashier lane, but will really take the
item home without paying for it. Later, J.R. and Eva can sell the item on an online auction site for cash. Eva has
assured J.R. that her scheme is “foolproof”.
Required:
What internal controls would you suggest to assist management in eliminating this opportunity for theft?
62. Pamela works as a cashier for a large discount retail store. Pamela has recently run up a lot of credit card
debt and is now desperate to obtain enough cash to pay off the debt. Pamela’s friend, Maurice, has suggested
that Pamela steal inventory from her store and then allow Maurice to return the stolen inventory back to the
store for a refund.
Required:
What internal controls would you suggest to assist management in eliminating this opportunity for theft?
63. Ed F. is a store manager for a local consumer electronics chain. At the end of each year, Ed is eligible to
receive a bonus contingent upon his store’s sales performance. In the current year, mainly due to the local
economy, Ed’s store has experienced a decrease in sales. Ed is fearful that his year-end bonus will not be large
enough and, as a result, he has decided to record fictitious credit sales at the end of the year in order to boost his
store’s profits.
Required:
What internal controls would you suggest to assist upper-level management in eliminating this opportunity for
fraudulent financial reporting?
Chapter 2–Corporate Governance and Ethics Key
1. The main objective of corporate governance is to:
A. make sure employees are working as efficiently as possible.
B. make management more accountable to employees, stockholders, and others interested in the company.
C. make sure the a company’s stock price is not overvalued.
D. reduce the use of internal controls throughout the organization.
2. Individuals who serve on a company’s audit committee should be:
A. internal auditors of the company.
B. external auditors of the company.
C. either employees, managers, or stockholders of the company.
D. individuals who have no significant business relationship with the company.
3. Which of the following statements is true regarding internal control?
A. Some companies may eliminate internal control policies if their costs outweigh their benefits.
B. Effective internal control policies guarantee that a company’s goals and objectives will be achieved.
C. Internal control is comprised of two elements – risk assessment and monitoring.
D. All companies are required to following the same set of internal control procedures.
4. The most widely used internal control framework in the United States was developed in 1992 by:
A. the Securities and Exchange Commission (SEC).
B. the Internal Revenue Service (IRS).
C. the New York Stock Exchange (NYSE).
D. the Committee of Sponsoring Organizations (COSO).
5. Which of the following factors is least likely to contribute to the internal control environment within a
company?
A. Attitude and general philosophy of the board of directors towards internal control.
B. Attitude and general philosophy of stockholders towards internal control.
C. Attitude and general philosophy of management towards internal control.
D. Attitude and general philosophy of customers towards internal control.
6. What occurred in 2002 to significantly increase the oversight role of a company’s board of directors with
respect to internal controls?
A. The creation of the Securities and Exchange Commission (SEC).
B. The passage of the Sarbanes-Oxley Act.
C. The creation of an internal control framework by the Committee of Sponsoring Organizations (COSO).
D. The creation of the Financial Accounting Standards Board (FASB).
7. Which of the following items is not required by the Sarbanes-Oxley Act of 2002?
A. A company’s external financial statement auditor is responsible for determining the internal control
procedures the company must have in place.
B. Management must provide certifications about internal controls over financial reporting.
C. Management must make an assessment regarding the effectiveness of their internal controls.
D. Companies must allow employees to make complaints about accounting and auditing matters directly to
members of the audit committee.
8. Which of the following statements is true regarding the Sarbanes-Oxley Act of 2002?
A. Due to the lack of possible criminal penalties, companies have little incentive to follow the requirements of
the act.
B. Only employees classified as upper-level management may take complaints to the company’s audit
committee.
C. The external financial statement auditor bears all responsibility for creating the internal control policies the
company should follow.
D. It requires management to make an assessment regarding the effectiveness of their internal controls.
9. Which of the following statements is false regarding board of directors for public companies?
A. Board of directors should ascertain whether management is looking out for the best interests of the company
as a whole rather than their own best interests.
B. Board of directors serve as a liaison between a company’s management and its stockholders.
C. Board of director members should be employees of the company.
D. Board of directors have seen their role become more important since the passage of the Sarbanes-Oxley Act.
10. Which of the following statements is true regarding risk assessment?
A. Risk assessment is not normally part of internal control.
B. Management should focus primarily on assessing risks that might occur by lower-level employees.
C. Management is required to only assess risk every three years.
D. Management is required to evaluate the potential impact and likelihood of risks that affect the company.
11. Which of the following is not one of the general internal control activities that companies often use?
A. Safeguarding of assets
B. Transaction authorization
C. Segregation of duties
D. Gaining a competitive advantage over the competition
12. Ideally, segregation of duties requires which duties to be segregated?
A. Managerial and financial accounting duties
B. Manufacturing and selling and administrative duties
C. Computerized recordkeeping and manual recordkeeping duties
D. Recordkeeping, custody, and authorization duties
13. Which of the following is not an example of an internal control procedure?
A. Timely bank reconciliations
B. The use of sequentially numbered sales tickets
C. Manager bonuses associated with high levels of sales
D. Bar coding of inventory
14. Which of the following internal controls would not reduce the likelihood of unauthorized data access in a
technology-intensive environment?
A. Keeping computers on 24 hours per day.
B. Using passwords to gain access to sensitive data.
C. Using a firewall to limit access to computer network systems.
D. Moving critical data to a separate server that is not connected to the internet.
15. Which of the following statements is true regarding the impact that information technology has had on
internal controls?
A. It has introduced new risks.
B. It has reduced the likelihood of internal control failure.
C. Internal control procedures that were used before information technology became prevalent no longer need to
be followed.
D. It has not altered the way management approaches internal control.
16. Who sets the tone for ethical behavior in an organization?
A. Internal auditors
B. Audit committee
C. Upper management
D. Stockholders
