Deck 18: The Sarbanes-Oxley Act, Internal Controls, and Management Accounting

Question 1

The Sarbanes-Oxley Act:

A) arose because of several accounting scandals that rocked the public's confidence in published financial statements.
B) was enacted, in part, to bring about reform in companies' financial reporting processes.
C) has distinct guidelines for reporting on an organization's internal control practices.
D) contains provisions whereby the chief executive officer (CEO) and chief financial officer (CFO) can be held criminally responsible if their firm's financial statements are found to be fraudulent in nature.
E) All of the answers are correct.

Answer 1

E

Question 2

The provisions of section 302 of the Sarbanes-Oxley Act (as originally enacted) require the signing officers of a company to do all of the following except:

A) Audit the internal controls over financial reporting.
B) Establish the internal controls over financial reporting.
C) Maintain the internal controls over financial reporting.
D) Evaluate the internal controls over financial reporting.
E) Disclose material weaknesses in the internal controls over financial reporting.

Answer 2

A

Question 3

To achieve the objectives of sections 302 and 404 of the Sarbanes-Oxley Act, management and independent auditors should:

A) Disclose the minutia of the internal control structure.
B) Conduct a cost-benefit analysis prior to deciding whether or not to adopt these sections.
C) Emphasize those areas where the greatest risk of fraud or material misstatement is likely to occur.
D) Analyze all financial transactions that are included in the reported financial statements.
E) Work together to design the most effective internal control system.

Answer 3

C

Question 4

Since many internal control procedures are automated, internal software controls are not needed.

Question 5

Which of the following is not a provision of (nor an outgrowth of) the Sarbanes-Oxley Act?

A) A public company's annual report must contain a separate disclosure that assesses the company's internal controls.
B) Management is essentially responsible for establishing and maintaining internal controls.
C) A company's Chief Executive Officer (CEO) and Chief Financial Officer (CFO) can be held criminally responsible if their firm's financial statements are fraudulent.
D) A company must prepare a balance sheet, an income statement, a statement of stockholders' equity, and a statement of cash flows.
E) A new body, the Public Company Accounting Oversight Board, oversees and investigates the audits and auditors of public companies.

Question 6

The Sarbanes-Oxley Act established the:

A) Securities and Exchange Commission (SEC).
B) Public Company Accounting Oversight Board (PCAOB).
C) Financial Accounting Standards Board (FASB).
D) Institute of Management Accountants (IMA).
E) American Accounting Association (AAA).

Question 7

Under section 404 of the Sarbanes-Oxley Act, auditors are required to:

A) Attest to and report on the effectiveness of the client's internal controls.
B) Establish and maintain internal controls for audited companies.
C) Advise management on its preparation of the Report on Internal Controls.
D) Evaluate the company's internal control system periodically throughout the year.
E) All of the answers are correct.

Question 8

Even in large companies, few internal controls exist in order to establish greater control of security among limited individuals.

Question 9

Which of the following is a typical internal control?

A) The use of password-protected computers and software.
B) The requirement that separate individuals authorize cash disbursements and sign checks.
C) The use of physical controls over inventories to prevent loss from theft.
D) A physical count of inventory at year-end to verify amounts shown on the company's accounting records.
E) All of the answers are correct.

Question 10

Which of the following bodies oversees audits and auditors, and sanctions firms and individuals for violations of laws and regulations?

A) American Institute of Certified Public Accountants (AICPA).
B) American Accounting Association (AAA).
C) Public Company Accounting Oversight Board (PCAOB).
D) Financial Accounting Standards Board (FASB).
E) Accounting Principles Board (APB).

Question 11

Internal controls focus on all of the following except:

A) effectiveness of operations.
B) reliability of financial reporting.
C) compliance with applicable laws and regulations.
D) maximization of profit and cash flows.
E) efficiency of operations.

Question 12

Smart Start Company is a hardware supplier to building contractors. At the end of each month, the employee who maintains all of the inventory records takes a physical inventory of the firm's stock. When discrepancies occur between the recorded inventory and the physical count, the employee changes the physical count to agree with the records.
Required:
A. What problems could arise as a result of Smart Start Company's inventory procedures?
B. How could the internal control system be strengthened to eliminate the potential problems?
C. What are the implications of SOX sections 302 and 404 for the company's internal control issues?

Question 13

The provisions of sections 302 and 404 of the Sarbanes-Oxley Act (as originally enacted) have proved especially troublesome for:

A) Small businesses.
B) Private universities.
C) Cities and municipalities.
D) Healthcare providers.
E) Individual taxpayers.

Question 14

Which of the following statements is false concerning computerized accounting systems?

A) Safeguards exist to make sure that controls are working properly.
B) There is no need for controls over human operators of computerized systems.
C) Computerized accounting systems are not 100% reliable.
D) Limits should be placed on who can access a computerized system.
E) Many internal control procedures are automated.

Question 15

Which of the following statements regarding the Sarbanes-Oxley Act is (are) true?

A) Management must establish and maintain a system of internal controls over financial reporting.
B) Management must periodically assess a company's system of internal controls over financial reporting.
C) Management must include in the company's annual report a separate report that assesses internal controls.
D) A company's auditors are required to report on management's assessment of internal controls.
E) All of the answers are correct.

Question 16

Section 404 of the Sarbanes-Oxley Act, Management Assessment of Internal Controls, includes all of the following except:

A) A statement of management's responsibility for establishing the internal control structure.
B) A waiver of auditor responsibility for assessing management's report on internal controls.
C) An assessment of the effectiveness of internal controls by management.
D) An assessment of the effectiveness of procedures for financial reporting by management.
E) A requirement that management include in its annual report an internal control report.

Question 17

What does it mean to say that the concept of risk exposure may be the key to making SOX sections 302 and 404 more effective?

Question 18

The Public Company Accounting Oversight Board (PCAOB) is a 7-member board operating under the auspices of the American Institute of Certified Public Accountants (AICPA).

Question 19

The first decade of the SOX legislation was characterized by controversy.

Question 20

Most of the Sarbanes-Oxley Act relates primarily to:

A) Corporate governance.
B) Financial accounting.
C) Auditing.
D) Court-invoked penalties for violating the law.
E) All of the answers are correct.