Podcast
Questions and Answers
What is a primary responsibility of the board of directors regarding ethical standards?
What is a primary responsibility of the board of directors regarding ethical standards?
- To establish a code of ethical standards (correct)
- To engage suppliers
- To ensure stock prices are maximized
- To monitor employee attendance
Why should the roles of CEO and chairman be separate?
Why should the roles of CEO and chairman be separate?
- To simplify financial reporting
- To increase stock buyback potential
- To allow for better marketing strategies
- To facilitate independent discussions during executive sessions (correct)
What role does the audit committee play according to best practices?
What role does the audit committee play according to best practices?
- To select and engage an independent auditor (correct)
- To approve all management decisions
- To ensure the company complies with marketing regulations
- To oversee daily operational tasks
What is a potential consequence of excessive use of short-term stock options for executive compensation?
What is a potential consequence of excessive use of short-term stock options for executive compensation?
What is a crucial requirement for the nominating committee of the board of directors?
What is a crucial requirement for the nominating committee of the board of directors?
What should a code of ethics minimally address according to best practices?
What should a code of ethics minimally address according to best practices?
What is the main purpose of executive sessions in a board of directors' meetings?
What is the main purpose of executive sessions in a board of directors' meetings?
How should a compensation committee operate according to established best practices?
How should a compensation committee operate according to established best practices?
What is the primary purpose of detective controls?
What is the primary purpose of detective controls?
How do detective controls work?
How do detective controls work?
Which statement describes corrective controls?
Which statement describes corrective controls?
What would be an example of a detective control in a sales order process?
What would be an example of a detective control in a sales order process?
What differentiates detective controls from corrective controls?
What differentiates detective controls from corrective controls?
Which of the following is NOT a function of detective controls?
Which of the following is NOT a function of detective controls?
In what scenario would corrective controls be needed?
In what scenario would corrective controls be needed?
What would be a potential drawback of relying solely on preventive controls?
What would be a potential drawback of relying solely on preventive controls?
What is the purpose of embedded computer modules in an information system?
What is the purpose of embedded computer modules in an information system?
What do management reports primarily provide for managers?
What do management reports primarily provide for managers?
Control activities are designed to address which aspect of organizational risk?
Control activities are designed to address which aspect of organizational risk?
What is the distinction between general controls and application controls in IT?
What is the distinction between general controls and application controls in IT?
What are physical controls in accounting systems primarily concerned with?
What are physical controls in accounting systems primarily concerned with?
Which type of control ensures the integrity of systems like accounts payable and payroll?
Which type of control ensures the integrity of systems like accounts payable and payroll?
What is a key characteristic of effective management reports?
What is a key characteristic of effective management reports?
Which factor is NOT typically addressed by general IT controls?
Which factor is NOT typically addressed by general IT controls?
What is one primary purpose of access controls?
What is one primary purpose of access controls?
What type of access is gained through records that manage asset use?
What type of access is gained through records that manage asset use?
Which of the following best illustrates an example of indirect access control?
Which of the following best illustrates an example of indirect access control?
How does independent verification differ from supervision?
How does independent verification differ from supervision?
What can independent verification procedures help management assess?
What can independent verification procedures help management assess?
What is the primary goal of transaction authorization?
What is the primary goal of transaction authorization?
When can verification procedures happen in relation to transactions?
When can verification procedures happen in relation to transactions?
Which of the following is NOT an example of independent verification?
Which of the following is NOT an example of independent verification?
Which type of authorization allows operations personnel to perform daily tasks without additional approvals?
Which type of authorization allows operations personnel to perform daily tasks without additional approvals?
The timing of verification in an accounting system can vary based on what factor?
The timing of verification in an accounting system can vary based on what factor?
What characterizes programmed procedures in transaction authorization?
What characterizes programmed procedures in transaction authorization?
What is an example of specific authorization?
What is an example of specific authorization?
Which of the following is NOT a category of physical control activities mentioned?
Which of the following is NOT a category of physical control activities mentioned?
Why is segregation of duties important in control activities?
Why is segregation of duties important in control activities?
What role does independent verification play in physical control activities?
What role does independent verification play in physical control activities?
How does access control contribute to physical control activities?
How does access control contribute to physical control activities?
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Study Notes
Internal Control Framework
- Control mechanisms are categorized into three types: preventive, detective, and corrective controls.
- Preventive Controls aim to prevent undesirable events before they occur.
- Detective Controls identify errors or irregularities after they have occurred, functioning as the second line of defense.
- Detective controls involve techniques that compare actual occurrences against standards to detect deviations.
Detective Controls
- Designed to identify anomalies that elude preventive measures.
- Activate alarms or alerts when discrepancies arise.
- Example: Recalculating totals on sales orders to reveal data entry errors.
Corrective Controls
- Actions taken to rectify issues identified by detective controls.
- Important distinction: detective controls highlight issues, while corrective controls fix them.
Ethical Standards and Governance
- Boards should separate the roles of CEO and chairman to enhance independence.
- Establish a code of ethics covering conflicts of interest, falsification of data, and confidentiality issues.
- Independent audit committee is crucial for engaging auditors, reviewing reports, and addressing deficiencies.
Compensation Committees
- Must critically evaluate compensation structures to avoid conflicts of interest and ensure long-term health of the organization.
Ongoing Monitoring
- Continuous monitoring can incorporate special computer modules within information systems to facilitate real-time oversight.
- Management reports provide timely data for operational oversight and control.
Control Activities
- Policies and procedures aimed at mitigating identified organizational risks.
- Two main categories: Information Technology (IT) controls and physical controls.
IT Controls
- General Controls relate to entity-wide IT concerns (data security, systems maintenance).
- Application Controls focus on specific systems (e.g., sales order processing, payroll).
Physical Controls
- Involves human activities that trigger transactions or utilize task outcomes.
- Covers security measures surrounding assets, manual processes, and accounting frameworks.
Segregation of Duties
- Ensures that responsibilities are divided to minimize risk of error or fraud.
- Transaction authorization ensures legitimacy of processed transactions.
Authorization Types
- General Authorization allows routine operations without extra approvals (e.g., inventory reorder decisions).
- Specific Authorization requires management approval for nonroutine transactions (e.g., credit limit adjustments).
Access Controls
- Protects against unauthorized asset access, which can lead to theft or data manipulation.
- Physical security and document control help prevent unauthorized access.
Independent Verification
- Involves checks by individuals not directly involved in transactions to ensure accuracy and integrity.
- Helps assess individual performance and reliability of data through reconciliation and review processes.
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