Question 1

Which of the following did Brown identify as forms of operational risk: (i) systems risk, (ii) human error risk, (iii) directors' and officers' liability.

Accepted Answer

Brown identified systems risk and human error risk as forms of operational risk, but directors' and officers' liability is not typically classified under operational risk.

Question 2

Which of the following is included in all three definitions of internal control presented in the text?

Accepted Answer

Reasonable assurance is mentioned in all three definitions of internal control presented in the text. Elimination of error and focus on generally accepted accounting principles are not specifically mentioned, and while reliability of financial reporting is important, it is not mentioned in every definition.

Question 3

Market risk refers to changes in all of the following except:

Accepted Answer

Market risk refers to the risk of financial losses due to changes in factors such as stock prices, investment prices, and interest rates. Customer demand, on the other hand, is a factor that affects sales and revenue, but it is not considered a market risk as it is a part of the company's operational risk.

Question 4

According to the COSO definition, internal controls should provide:

Accepted Answer

Internal controls should provide reasonable assurance that the organization's objectives will be achieved. This means that although it cannot guarantee absolute assurance, it should provide a sufficient level of confidence that business operations are effective and reliable. The other options are not accurate descriptions of the purpose of internal controls.

Question 5

According to Brown, strategic risks include:

Accepted Answer

The answer of According to Brown, strategic risks include:
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Question 6

Which of the following is included in both COSO frameworks?

Accepted Answer

Monitoring is a component included in both the COSO Internal Control - Integrated Framework and the COSO Enterprise Risk Management Framework.

Question 7

The terms "preventive, detective and corrective" are most closely associated with which element of Internal Control? Integrated Framework?

Accepted Answer

The terms "preventive, detective and corrective" are commonly used to describe control activities, which are one of the five elements of Internal Control according to the Integrated Framework. Control activities are the policies, procedures, and other mechanisms that are put in place to ensure that the actions of an organization are consistent with its objectives and that its risks are effectively managed. Preventive controls are designed to stop problems from occurring, detective controls are designed to identify problems that have occurred or are occurring, and corrective controls are designed to address problems that have been identified.

Question 8

When a customer is unable or unwilling to pay amounts due, an organization experiences ___ risk.

Accepted Answer

When a customer is unable or unwilling to pay amounts due, it indicates credit risk. This type of risk is associated with the potential loss that an organization may face if a customer fails to pay the outstanding balance on time. Market risk refers to the loss that an organization may face due to unforeseen market fluctuations, systems risk pertains to the risk that arises due to the failure of technology or IT systems, and business strategy risk refers to the potential loss that an organization may face due to an incorrect or flawed business strategy.

Question 9

According to the COSO definition, internal controls should address which of the following areas: (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting, (iii) compliance with applicable laws and regulations.

Accepted Answer

The COSO definition states that internal controls should address all three areas: (i) effectiveness and efficiency of operations, (ii) reliability of financial reporting, and (iii) compliance with applicable laws and regulations. Therefore, Option D, i.e., "i, ii and iii," is the correct answer.

Question 10

In fulfilling the four purposes of internal control, managers should ensure that:

Accepted Answer

The four purposes of internal control are to safeguard assets, ensure accuracy and reliability of accounting records, promote efficiency and effectiveness of operations, and ensure compliance with laws and regulations. While eliminating the opportunity for theft is important, it is just one aspect of safeguarding assets. All employees need to be bonded is also not necessary in all cases. Ensuring that costs are less than benefits is a key consideration to ensure that the internal control system is efficient and effective, and that resources are not wasted on unnecessary control activities. Understanding the importance of SOX, while important, is not directly related to fulfilling the four purposes of internal control.

Question 11

Top management's general attitude about internal control and risk is called _______ in the COSO internal control framework and ______ in the enterprise risk management framework.

Accepted Answer

In the COSO internal control framework, the term "control environment" is used to describe top management's attitude towards internal control and risk. In the enterprise risk management framework, this is referred to as the "internal environment."

Question 12

According to the COSO definition, who is responsible for internal control: (i) board of directors, (ii) managers, (iii) auditors.

Accepted Answer

According to the COSO definition, the board of directors and managers are responsible for internal control. Auditors are not responsible for internal control but rather provide an independent assessment of its effectiveness.

Question 13

Internal Control: Integrated Framework includes all of the following except:

Accepted Answer

The Internal Control: Integrated Framework includes Control environment, Risk assessment, Monitoring, and Control activities but does not include Control assessment as a separate category. However, Control assessment is an integral part of the overall framework, as it involves evaluating the design and effectiveness of controls in place to mitigate identified risks.

Question 14

Making operations as efficient as possible is:

Accepted Answer

One of the primary goals of internal control is to ensure that operations are carried out efficiently and effectively. This helps to minimize waste, reduce costs, and improve overall performance. Therefore, option A is the correct answer. Option B is incorrect because the Foreign Corrupt Practices Act primarily focuses on preventing bribery and corruption in international business transactions. Option C is incorrect because the Sarbanes-Oxley Act primarily focuses on improving financial reporting and increasing transparency. Option D is incorrect because accountants play a crucial role in identifying opportunities for improving operational efficiency and implementing internal controls to achieve this goal.

Question 15

The general objectives of internal control include all of the following except:

Accepted Answer

The answer of The general objectives of internal control include...

Question 16

According to Enterprise Risk Management: Integrated Framework, risk can be:

Accepted Answer

Inherent risk is the risk that exists before any controls are implemented. Residual risk is the risk that remains after controls have been implemented.

Question 17

Among other things, internal controls should promote conformity with:

Accepted Answer

The answer of Among other things, internal controls should promote...

Question 18

According to the COSO definition, internal control is a(n):

Accepted Answer

According to the COSO definition, internal control is "a process, effected by an entity's board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives relating to operations, reporting and compliance." While internal control may involve a set of procedures or checklists and may help to mitigate risks, it is primarily a process that encompasses a variety of activities and functions within an organization.

Question 19

Which of the following best explains one of the four basic purposes of internal control?

Accepted Answer

One of the four basic purposes of internal control is to promote confidence in financial statements by ensuring that financial information is accurate, reliable, and complete. This promotes transparency and accountability within the organization and helps to ensure that stakeholders have trust in the integrity of the financial statements.

Question 20

Insufficient cash is an example of ______ risk in Brown's taxonomy.

Accepted Answer

Financial risk refers to the possibility of financial losses or difficulties arising from a company's financial structure or operations. Insufficient cash directly affects the financial stability of a business and thus falls under the category of financial risk.

Quiz 4: Internal Controls