Question 1

According to OECD principles, what group is ultimately responsible for governing a multinational organization?

Accepted Answer

According to OECD principles, the board of directors is ultimately responsible for governing a multinational organization. This includes setting strategic direction, overseeing management, and ensuring compliance with legal and ethical standards. While regulatory agencies in both the host and home countries may have a role to play, they are not ultimately responsible for governing the organization. Common shareholders may have some influence over the direction of the company, but they are not responsible for governing it.

Question 2

Which of the following is a main function of internal auditing in multinational corporations?

Accepted Answer

Monitoring risks and assessing their effect on the company is a main function of internal auditing in multinational corporations. Internal auditors are responsible for identifying and evaluating risks and providing recommendations to management on how to mitigate those risks. This helps to ensure that the company is operating in compliance with laws and regulations, and that it is taking steps to minimize the impact of adverse events.

Question 3

Why is litigation against external auditors, which is very common in the United States, virtually unknown in Japan?

Accepted Answer

In Japan, interpersonal harmony is highly valued and considered essential for maintaining relationships. As a result, litigation against external auditors, who are often considered important associates of corporate clients, is rare because it can disrupt social harmony and damage trust.

Question 4

The OECD believes which group in a multinational corporation should oversee the financial reporting function to ensure that appropriate controls are in place to safeguard information integrity?

Accepted Answer

The OECD recommends that the board of directors oversee the financial reporting function to ensure appropriate controls are in place to safeguard information integrity.

Question 5

What are the two main theories of corporate governance?

Accepted Answer

The two main theories of corporate governance are agency theory and stakeholder theory. Agency theory focuses on the relationship between the principal (shareholders) and agent (management) and how to align their interests. Stakeholder theory argues that a company should consider the interests of not only shareholders but also other stakeholders such as employees, customers, suppliers, and the community. Option A is incorrect as audit reliance and board of directors' responsibility are not theories of corporate governance but responsibilities of the audit committee and the board of directors. Option C is incorrect as common law and code law refer to legal systems, not theories of corporate governance. Option D is incorrect as internal and external auditing are methods of monitoring and evaluating corporate governance, not theories.

Question 6

What is the first line of enforcement of legal and professional financial reporting standards?

Accepted Answer

The first line of enforcement of legal and professional financial reporting standards is external auditing. External auditors are responsible for evaluating whether an organization's financial statements are presented fairly and accurately in accordance with the applicable accounting standards. They also provide an independent opinion on the organization's internal controls over financial reporting. If an organization violates financial reporting standards, the external auditor may issue a qualified opinion or even withdraw their opinion altogether, which can have serious consequences for the organization's reputation and future financial reporting.

Question 7

Recently enacted listing requirements of the New York Stock Exchange focuses attention on independent directors. How does the NYSE define an independent director?

Accepted Answer

The NYSE defines an independent director as someone who has no material relationship with the listed corporation, ensuring that their decisions are not influenced by personal or financial ties to the company.

Question 8

Which of the following is NOT a concern identified in the 2008 IFAC report "Financial Reporting Supply Chain-Current Perspectives and Directions"?

Accepted Answer

The 2008 IFAC report "Financial Reporting Supply Chain-Current Perspectives and Directions" did not identify a trend towards less disclosure and transparency in business and financial reporting as a concern. Instead, it focused on issues like governance in name only, overregulation, and the development of a checklist mentality among others.

Question 9

In multinational corporations, to whom are the external auditors responsible according to OECD guidelines?

Accepted Answer

According to OECD guidelines, external auditors in multinational corporations are responsible to shareholders. They are expected to provide an independent and objective assessment of a company's financial statements and ensure they are accurate and reliable. This helps to protect the interests of shareholders and maintain public trust in the corporation. While auditors may also report to corporate management, creditors, and the government of the host country, their primary responsibility is to the shareholders.

Question 10

What explains the reason for the historically very low (1/3% to 1/2%) limit on allowance for doubtful accounts in China?

Accepted Answer

The primary reason for the historically low allowance for doubtful accounts in China is that the government was the primary customer, and it was presumed to have very good credit. This made businesses more confident in the government's ability to pay its debts, leading to a lower allowance for doubtful accounts.

Question 11

What impact did the Asian financial crisis in the late 1990s and the corporate scandals in the United States in this century have on the auditing profession?

Accepted Answer

The Asian financial crisis in the late 1990s and the corporate scandals in the United States in this century had a significant impact on the reputation of the auditing profession. Auditors were expected to be the watchdogs of financial reporting integrity, but the high-profile scandals and failures of companies such as Enron and Worldcom eroded public trust in the profession. Therefore, the reputation of being the watchdogs of financial reporting integrity was reduced. Regulations were actually increased in response to these scandals, making it more difficult for auditors to operate. External auditors were not required to sit on boards of directors, and in fact, this would create a conflict of interest.

Question 12

In Germany, who do external auditors consider as their clients?

Accepted Answer

External auditors in Germany consider their clients to be not just the entity's board of directors but also the government and society as a whole, due to their role in ensuring the accuracy and reliability of financial reporting for various stakeholders.

Question 13

What reason has been given to explain the lack of well-developed auditing professions in less developed economies?

Accepted Answer

The lack of well-developed auditing professions in less developed economies is primarily due to the fact that creditors and investors are not major players in these economies, hence there is little demand for audited financial statements.

Question 14

What is the primary role of external auditing in multinational corporations?

Accepted Answer

The primary role of external auditing in multinational corporations is to assure that financial statement information is high quality. This helps to provide assurance to shareholders, investors, and other stakeholders that the financial information provided by the company is reliable and accurate. While preparing the annual report, designing internal accounting controls, and selecting independent board members are all important functions in a multinational corporation, they are not the primary role of external auditing.

Question 15

What act of the U.S. Congress advocated creating the Public Company Accounting Oversight Board, required financial statement certification by the CEO and CFO, and requires external auditors to report directly to an audit committee?

Accepted Answer

The Sarbanes-Oxley Act of 2002 required the creation of the Public Company Accounting Oversight Board, made certification of financial statements by the CEO and CFO mandatory, and required external auditors to report directly to an audit committee.

Question 16

What term is used to describe the relationships between a company's management, its board, shareholders, and other stakeholders that create a structure through which the objectives of the company are set, attained, and monitored?

Accepted Answer

Corporate governance refers to the system of relationships and processes that influence the direction and performance of a company. It involves the interaction between management, the board of directors, shareholders, and other stakeholders, and is aimed at ensuring that the company is managed in an ethical and responsible way, with the goal of creating long-term value for all stakeholders. Options A, C, and D are not the most appropriate terms to describe the relationship between management, the board, shareholders, and other stakeholders.

Question 17

What caused the U.S. Congress, the OECD, the International Federation of Accountants, and other organizations to enact stricter rules on corporate governance in recent years?

Accepted Answer

The enactment of stricter rules on corporate governance in recent years was caused by high-profile corporate scandals like Enron, WorldCom, and Tyco that occurred in the early 2000s. These scandals highlighted the need for better oversight mechanisms to protect shareholders and prevent unethical practices in corporate management.

Question 18

Which of the following is NOT a key driver of audit quality based on the 2008 U.K. FRC publication "The Audit Quality Framework"?

Accepted Answer

The 2008 U.K. FRC publication "The Audit Quality Framework" identifies three key drivers of audit quality: the culture within an audit firm, the effectiveness of the audit process, and the skills and personal qualities of audit partners and staff. The composition of a company's audit committee is not identified as a key driver of audit quality in this publication.

Question 19

Who is considered to be the client for external auditors in the United Kingdom?

Accepted Answer

In the UK, external auditors are appointed by a company's shareholders and therefore their primary duty is to report to those shareholders on whether the company's financial statements show a true and fair view of its financial position. While the government and society as a whole have an interest in the integrity of financial reporting, they are not the primary clients of auditors.

Question 20

Why has corporate financial reporting in China not resembled reporting in Anglo-Saxon countries?

Accepted Answer

In China, there has traditionally been a greater emphasis on the social responsibilities of corporations, and this has been reflected in corporate financial reporting. The distinction between business functions and social service functions has been blurred in Chinese reporting entities, resulting in financial reports that do not resemble those in Anglo-Saxon countries.

Quiz 11: Auditing and Corporate Governance: An International Perspective