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Corporate Governance and the Audit Committee

1. All of the following are parts of corporate governance except:
a. Oversight of management by the board of directors
b. Established processes to provide accountability back to stockholders
c. Whistle-blowing processes
d. Independent review of financial statements by the SEC

2. Which of the following would NOT be a correct statement about a partial cause of corporate governance failures?
a. Boards of directors approved stock option plans that did not align management and shareholder objectives
b. Audit committees met infrequently, only for an hour at a time
c. The AICPA became a trade association concerned with enhancing the wealth of its members
d. Accounting principles became more specific to address the complexities that existed in new transactions

3. Which of the following is NOT a Sarbanes-Oxley requirement for audit committees?
a. The audit committee must be chaired by the chair of the board of directors
b. Audit committee members must be financially literate
c. Audit committee members must be outside directors
d. The audit committee should view itself as the "client" of the external auditor

4. In what way did the public accounting profession bring about the problems that resulted in Congress passing the Sarbanes-Oxley Act of 2002?
a. Failed to detect material financial statement frauds
b. Emphasized generating revenues over audit quality
c. Viewed helping the clients find a solution to show increased earnings as value-added auditing
d. All of the above

5. An audit committee should do all of the following except:
a. Decide whether to retain or dismiss the outside auditors
b. Determine whether material fraud ought to be reported in the company's financial statements
c. Determine the budget for the internal audit department
e. Appoint, or concur with the appointment of, the chief audit executive for internal audit

6. Which of the following is NOT required to be communicated to the audit committee by the outside auditor?
a. Significant audit adjustments made during the course of the audit.
b. Significant disagreements with management regarding accounting principles
c. The auditor's knowledge of management's consultation with other public accounting firms regarding the proposed treatment of a controversial accounting item
d. The extent to which the internal auditors assisted in the conduct of the audit

Solution Preview

1. Corporate governance is a process by which owners and creditors exert control and require accountability for an organization. The SEC is not involved in this process; independence and regulation serve different purposes.

2. Accounting principles did not ...

Solution Summary

The problem consists of six multiple choice questions concerning duties and responsibilities of the audit committee under Sarbanes-Oxley. As a result of huge audit failure with large corporate bankruptcies, Sarbanes-Oxley set out new rules for audit committees. Those new rules are quite specific and the solution explains the significance of some of the new guidelines.