Chapter 3—Ethics, Fraud, and Internal Control TRUE/FALSE
1. The ethical principle of justice asserts asserts that the benefits of the decision decision should should be distributed distributed fairly fairly to those who share the risks. ANS: T 2. The ethical principle of informed consent consent suggests suggests that the the decision should be implemented so as to minimie all of the risks and to a!oid any unnecessary risks. ANS: " #. $mployees $mployees shoul should d be made made aware of of the firm% firm%s commitment commitment to to ethics. ethics. ANS: T &. 'usiness ethics ethics is the analysis analysis of the nature and social impact of computer technology( technology( and the corresponding formulation and justification of policies for the ethical use of such technology. technology. ANS: " ). *ara computer ethics is the e+posure e+posure to stories stories and reports reports found in the popular media regarding the good or bad ramifications of computer technology. technology. ANS: " ,. Source Source code is an e+amp e+ample le of intelle intellectual ctual property property.. ANS: T -. opyright laws and computer industry industry standards standards ha!e ha!e been de!eloped jointly and rarely conflict. ANS: " /. 'usiness 'usiness bankrup bankruptcy tcy cases cases always always in!ol!e in!ol!e fraudulen fraudulentt beha!ior beha!ior.. ANS: " 0. efalcatio efalcation n is another another word word for for financia financiall fraud. fraud. ANS: T 1. The trend toward distributed distributed data processing processing increases increases the e+posure to fraud from remote locations. ANS: T 11. The e+ternal auditor is responsible for establishing establishing and maintaining the internal control system. system. ANS: "
12. Segregation Segregation of of duties duties is an e+ample e+ample of an internal internal control control procedu procedure. re. ANS: T 1#. ontrols in in a computer3based information system are identical to controls controls in a manual system. ANS: " 1&. *re!enti!e *re!enti!e controls controls are are passi!e passi!e techni4ues techni4ues design designed ed to reduce reduce fraud. fraud. ANS: T 1). $thical $thical issues issues and legal issue issuess are essentia essentially lly the the same. ANS: " 1,. 5nternal control control systems systems are recommended but but not re4uired of of firms subject to the "oreign orrupt orrupt *ractices Act. ANS: " 1-. 6peration 6perationss fraud is the the misuse misuse or theft of the the firm%s firm%s computer computer resources resources.. ANS: T 1/. The "oreign "oreign orrupt orrupt *ractice *racticess Act Act re4uires re4uires only that that a firm keep keep good records records.. ANS: " 10. A key modifying assumption in internal control is that the internal internal control control system is the responsibility of management. ANS: T 2. atabase management management fraud includes altering( updating( and deleting deleting an organiation%s organiation%s data. ANS: " 21. 7hile the the Sarbanes36+ley Sarbanes36+ley Act prohibits prohibits auditors auditors from pro!iding non3accounting ser!ices to their audit clients( they are not prohibited from performing such ser!ices for non3audit clients or pri!ately held companies. ANS: T 22. The Sarbanes36 Sarbanes36+ley +ley Act re4uires re4uires the audit committee committee to hire and o!ersee o!ersee the e+ternal e+ternal auditors. auditors. ANS: T 2#. Section && re4uires that that corporate corporate management 8including the $69 $69 certify their organiation% organiation%ss internal controls on a 4uarterly and annual basis.
ANS: " 2&. Section #2 re4uires the management of public companies to assess and formally report on the effecti!eness of their organiation%s internal controls. ANS: " 2). The objecti!e of SAS 00 is to seamlessly blend the auditor%s consideration of fraud into all phases of the audit process. ANS: T MULTIPLE C!ICE
1. 7hich ethical principle states that the benefit from a decision must outweigh the risks( and that there is no alternati!e decision that pro!ides the same or greater benefit with less risk a minimie risk . b justice . c informed consent . d proportionality .
ANS: 2. 5ndi!iduals who ac4uire some le!el of skill and knowledge in the field of computer ethics are in!ol!ed in which le!el of computer ethics a para computer ethics . b pop computer ethics . c theoretical computer ethics . d practical computer ethics .
ANS: A #. All of the following are issues of computer security e+cept a releasing incorrect data to authoried indi!iduals . b permitting computer operators unlimited access to the computer room . c permitting access to data by unauthoried indi!iduals . d pro!iding correct data to unauthoried indi!iduals .
ANS: ' &. 7hich characteristic is not associated with software as intellectual property a uni4ueness of the product . b possibility of e+act replication . c automated monitoring to detect intruders . d ease of dissemination .
ANS: ). "or an action to be called fraudulent( all of the following conditions are re4uired e+cept a poor judgment . b false representation . c intent to decei!e . d injury or loss .
ANS: A ,. 6ne characteristic of employee fraud is that the fraud a is perpetrated at a le!el to which internal controls do not apply . b in!ol!es misstating financial statements . c in!ol!es the direct con!ersion of cash or other assets to the employee%s personal benefit . d in!ol!es misappropriating assets in a series of comple+ transactions in!ol!ing third . parties
ANS: -. "orces which may permit fraud to occur do not include a a gambling addiction . b lack of segregation of duties . c centralied decision making en!ironment . d 4uestionable integrity of employees .
ANS: /. 7hich of the following best describes lapping a applying cash receipts to a different customer%s account in an attempt to conceal pre!ious . thefts of funds b inflating bank balances by transferring money among different bank accounts . c e+pensing an asset that has been stolen . d creating a false transaction .
ANS: A 0. 6perations fraud includes a altering program logic to cause the application to process data incorrectly . b misusing the firm%s computer resources . c destroying or corrupting a program%s logic using a computer !irus . d creating illegal programs that can access data files to alter( delete( or insert !alues .
ANS: ' 1. 7ho is responsible for establishing and maintaining the internal control system a the internal auditor . b the accountant . c management . d the e+ternal auditor .
ANS: 11. The concept of reasonable assurance suggests that a the cost of an internal control should be less than the benefit it pro!ides . b a well3designed system of internal controls will detect all fraudulent acti!ity . c the objecti!es achie!ed by an internal control system !ary depending on the data . processing method d the effecti!eness of internal controls is a function of the industry en!ironment .
ANS: A 12. 7hich of the following is not a limitation of the internal control system a errors are made due to employee fatigue . b fraud occurs because of collusion between two employees . c the industry is inherently risky . d management instructs the bookkeeper to make fraudulent journal entries .
ANS: 1#. The most cost3effecti!e type of internal control is a pre!enti!e control . b accounting control . c detecti!e control . d correcti!e control .
ANS: A 1&. 7hich of the following is a pre!enti!e control a credit check before appro!ing a sale on account . b bank reconciliation . c physical in!entory count . d comparing the accounts recei!able subsidiary ledger to the control account .
ANS: A 1). A well3designed purchase order is an e+ample of a a pre!enti!e control . b detecti!e control . c correcti!e control . d none of the abo!e .
ANS: A 1,. A physical in!entory count is an e+ample of a a pre!enti!e control . b detecti!e control . c correcti!e control . d feedforward control .
ANS: ' 1-. The bank reconciliation unco!ered a transposition error in the books. This is an e+ample of a a pre!enti!e control . b detecti!e control . c correcti!e control . d none of the abo!e .
ANS: ' 1/. 5n balancing the risks and benefits that are part of e!ery ethical decision( managers recei!e guidance from each of the following e+cept a justice . b self interest . c risk minimiation . d proportionality .
ANS: ' 10. 7hich of the following is not an element of the internal control en!ironment a management philosophy and operating style . b organiational structure of the firm . c well3designed documents and records . d the functioning of the board of directors and the audit committee
.
ANS: 2. 7hich of the following suggests a weakness in the internal control en!ironment a the firm has an up3to3date organiational chart . b monthly reports comparing actual performance to budget are distributed to managers . c performance e!aluations are prepared e!ery three years . d the audit committee meets 4uarterly with the e+ternal auditors .
ANS: 21. 7hich of the following indicates a strong internal control en!ironment a the internal audit group reports to the audit committee of the board of directors . b there is no segregation of duties between organiation functions . c there are 4uestions about the integrity of management . d ad!erse business conditions e+ist in the industry .
ANS: A 22. According to SAS -/( an effecti!e accounting system performs all of the following e+cept a identifies and records all !alid financial transactions . b records financial transactions in the appropriate accounting period . c separates the duties of data entry and report generation . d records all financial transactions promptly .
ANS: 2#. 7hich of the following is the best reason to separate duties in a manual system a to a!oid collusion between the programmer and the computer operator . b to ensure that super!ision is not re4uired . c to pre!ent the record keeper from authoriing transactions . d to enable the firm to function more efficiently
.
ANS: 2&. Segregation of duties in the computer3based information system includes a separating the programmer from the computer operator . b pre!enting management o!erride . c separating the in!entory process from the billing process . d performing independent !erifications by the computer operator .
ANS: A 2). 7hich of the following is not an internal control procedure a authoriation . b management%s operating style . c independent !erification . d accounting records .
ANS: ' 2,. The decision to e+tend credit beyond the normal credit limit is an e+ample of a independent !erification . b authoriation . c segregation of functions . d super!ision .
ANS: ' 2-. 7hen duties cannot be segregated( the most important internal control procedure is a super!ision . b independent !erification . c access controls . d accounting records
.
ANS: A 2/. An accounting system that maintains an ade4uate audit trail is implementing which internal control procedure a access controls . b segregation of functions . c independent !erification . d accounting records .
ANS: 20. $mployee fraud in!ol!es three steps. 6f the following( which is not in!ol!ed a concealing the crime to a!oid detection . b stealing something of !alue . c misstating financial statements . d con!erting the asset to a usable form .
ANS: #. 7hich of the following is not an e+ample of independent !erification a comparing fi+ed assets on hand to the accounting records . b performing a bank reconciliation . c comparing the accounts payable subsidiary ledger to the control account . d permitting authoried users only to access the accounting system .
ANS: #1. The importance to the accounting profession of the "oreign orrupt *ractices Act of 10-- is that a bribery will be eliminated . b management will not o!erride the company%s internal controls . c firms are re4uired to ha!e an effecti!e internal control system .
d firms will not be e+posed to lawsuits .
ANS: #2. The board of directors consists entirely of personal friends of the chief e+ecuti!e officer. This indicates a weakness in a the accounting system . b the control en!ironment . c control procedures . d this is not a weakness .
ANS: ' ##. omputer fraud can take on many forms( including each of the following e+cept a theft or illegal use of computer3readable information . b theft( misuse( or misappropriation of computer e4uipment . c theft( misuse( or misappropriation of assets by altering computer3readable records and . files d theft( misuse( or misappropriation of printer supplies .
ANS: #&. 7hen certain customers made cash payments to reduce their accounts recei!able( the bookkeeper embeled the cash and wrote off the accounts as uncollectible. 7hich control procedure would most likely pre!ent this irregularity a segregation of duties . b accounting records . c accounting system . d access controls .
ANS: A #). The office manager forgot to record in the accounting records the daily bank deposit. 7hich control procedure would most likely pre!ent or detect this error a segregation of duties .
b independent !erification . c accounting records . d super!ision .
ANS: ' #,. 'usiness ethics in!ol!es a how managers decide on what is right in conducting business . b how managers achie!e what they decide is right for the business . c both a and b . d none of the abo!e .
ANS: #-. All of the following are conditions for fraud e+cept a false representation . b injury or loss . c intent . d material reliance .
ANS: #/. The four principal types of fraud include all of the following e+cept a bribery . b gratuities . c conflict of interest . d economic e+tortion .
ANS: ' #0. The characteristics of useful information include a summariation( rele!ance( timeliness( accuracy( and completeness .
b rele!ance( summariation( accuracy( timelessness( and completeness . c timeliness( rele!ance( summariation( accuracy( and conciseness . d disaggregation( rele!ance( timeliness( accuracy( and completeness .
ANS: A &. 5nternal control system ha!e limitations. These include a possibility of honest error . b circum!ention . c management o!erride . d stability of systems .
ANS: &1. ;anagement can e+pect !arious benefits to follow from implementing a system of strong internal control. 7hich of the following benefits is least likely to occur a reduced cost of an e+ternal audit. . b pre!ents employee collusion to commit fraud. . c a!ailability of reliable data for decision3making purposes. . d some assurance of compliance with the "oreign orrupt *ractices Act of 10--. . e some assurance that important documents and records are protected. .
ANS: ' &2. 7hich of the following situations is not a segregation of duties !iolation a The treasurer has the authority to sign checks but gi!es the signature block to the . assistant treasurer to run the check3signing machine. b The warehouse clerk( who has the custodial responsibility o!er in!entory in the . warehouse( selects the !endor and authories purchases when in!entories are low. c The sales manager has the responsibility to appro!e credit and the authority to write off . accounts. d The department time clerk is gi!en the undistributed payroll checks to mail to absent . employees. e The accounting clerk who shares the record keeping responsibility for the accounts . recei!able subsidiary ledger performs the monthly reconciliation of the subsidiary ledger and the control account.
ANS: ' &#. 7hich of the following is not an issue to be addressed in a business code of ethics re4uired by the S$ a onflicts of interest . b "ull and "air isclosures . c
iolations . e All of the abo!e are issues to be addressed .
ANS: $ S!RT A"S#ER
1. 7hat are the main issues to be addressed in a business code of ethics re4uired by the S$ ANS: onflicts of interest( "ull and "air isclosures( iolations( Accountability 2.
,. 5dentify to indicate whether each procedure is a pre!enti!e or detecti!e control. a .
authoriing a credit sale
*re!enti!e
etecti!e
b preparing a bank reconciliation .
*re!enti!e
etecti!e
c .
*re!enti!e
etecti!e
d preparing a trial balance .
*re!enti!e
etecti!e
e .
*re!enti!e
etecti!e
locking the warehouse
counting in!entory
ANS: A. pre!enti!e? '. detecti!e? . pre!enti!e? . detecti!e? $. detecti!e se the internal control procedures listed below to complete the statements. segregation of duties general authoriation access controls super!ision
specific authoriation accounting records independent !erification
-. A clerk reorders 2) items when the in!entory falls below 2) items. This is an e+ample of BBBBBBBBBBBBBBBBBBBBBBBBBB. ANS: general authoriation /. The internal audit department recalculates payroll for se!eral employees each pay period. This is an e+ample of BBBBBBBBBBBBBBBBBBBBBBBBBB. ANS: independent !erification 0.
ANS: super!ision 12. Not permitting the computer programmer to enter the computer room is an e+ample of BBBBBBBBBBBBBBBBBBBBBBBBBBBBBBB. ANS: segregation of duties 1#. Se4uentially numbering all sales in!oices is an e+ample of BBBBBBBBBBBBBBBBBBBBBBBBBB. ANS: accounting records 1&. 7hat are the fi!e conditions necessary for an act to be considered fraudulent ANS: false representation( material fact( intent( justifiable reliance( and injury or loss 1). 7hat is the objecti!e of SAS 00 ANS: The objecti!e of SAS 00 is to seamlessly blend the auditor%s consideration of fraud into all phases of the audit process. 1,. istinguish between e+posure and risk. ANS: $+posure is the absence or weakness of a control which increases the firm%s risk of financial loss or injury. =isk is the probability of incurring such a loss or injury. 1-. $+plain the characteristics of management fraud. ANS: ;anagement fraud typically occurs at le!els abo!e where the internal control system is effecti!e. "inancial statements are fre4uently modified to make the firm appear more healthy than it actually is. 5f any misappropriation of assets occurs( it is usually well hidden. 1/. The te+t discusses many 4uestions about personal traits of employees which might help unco!er fraudulent acti!ity. 7hat are three ANS: e+ecuti!es: with high personal debt( li!ing beyond their means( engaged in habitual gambling( appear to abuse alcohol or drugs( appear to lack personal codes of ethics( appear to be unstable 10. Ci!e two e+amples of employee fraud and e+plain how the theft might occur. ANS: harges to e+pense accounts: ash could be stolen and charged to a miscellaneous e+pense account. 6nce the account is closed( detection would be more difficult.
1. The te+t describes si+ internal control acti!ities.
E'a(ple general 8purchase of in!entory when le!el drops9 or specific 8credit appro!al beyond normal limit9
Segregation of functions
separate authoriation from processing separate custody of assets from record keeping
Super!ision
re4uired when separation of duties is not possible( such as opening the mail 8cash receipts9
Accounting records
maintain an ade4uate audit trail
Access controls
maintain physical security
5ndependent !erification
bank reconciliation( physical in!entory count
2. ontrast management fraud with employee fraud. ANS: $mployee fraud is usually designed to directly con!ert cash or other assets to the employee%s personal benefit. ;anagement fraud in!ol!es less of a direct benefit to the perpetrator. ;anagement fraud may in!ol!e an attempt to misstate financial performance in order to gain additional compensation or to earn a promotion. ;anagement fraud may also in!ol!e an attempt to misstate financial performance in order to increase the price of the company%s stock or to reduce the cost of debt. #. iscuss the importance of the "oreign orrupt *ractices Act of 10-- to the accounting profession. ANS: The "oreign orrupt *ractices Act of 10-- 8"*A9 is a law that re4uires all companies registered with the Securities and $+change ommission to: keep records that fairly and reasonably reflect the transactions of the firm and its financial position
maintain a system of internal control that pro!ides reasonable assurance that the organiation%s objecti!es are met As a result of the "oreign orrupt *ractices Act of 10--( management de!otes substantial time to de!eloping and maintaining the internal control structure because failure to do so !iolates the "*A and could lead to hea!y fines and imprisonment. Accountants are key participants in establishing and maintaining the internal control structure. Therefore( it is accountants who are instrumental in ensuring that the firm is in compliance with the "oreign orrupt *ractices Act of 10--. &. 7hy are the computer ethics issues of pri!acy( security( and property ownership of interest to accountants ANS: *ri!acy is a concern because the nature of computer data files makes it possible for unauthoried indi!iduals to obtain information without it being recognied as DmissingE from its original location. Security is a concern because its absence makes control from a pri!acy !iewpoint 4uestionable. 5n addition lack of security may permit unauthoried changes to data( therefore distorting information that is reported. *roperty ownership raises issues of legitimacy of organiational software( !aluation of assets( and 4uestions of lost re!enues. ). According to common law( there are fi!e conditions that must be present for an act to be deemed fraudulent. Name and e+plain each. ANS: 5n order for an act to be deemed fraudulent under common law( it must possess the following characteristics: )alse representation( meaning some misrepresentation or omission must ha!e occurred( (aterial )acts( meaning that the facts must influence someone%s actions( intent( meaning there must ha!e been the intention to decei!e others( *usti)ia+le reliance( meaning it did affect someone%s decision( and in*ur& or loss must ha!e occurred. ,. ;anagement fraud is regarded as more serious than employee fraud. Three special characteristics ha!e been discussed for management fraud. 7hat are they $+plain. ANS: 5t usually occurs at le!els abo!e the normal internal control system. There is typically an intent to present a better picture of the business than is !alid( often to decei!e creditors and@or shareholders. 5f assets are misappropriated( the route is 4uite de!ious in!ol!ing a mae of business transactions. -. "our principal types of corruption are discussed. Name all four and e+plain at least two. ANS: orruption in!ol!es an e+ecuti!e( manager( or employee of a business working in collusion with an outsider. The four principal types of corruption are: bribery( illegal gratuities( conflicts of interest( and economic e+tortion.
ri+er& in!ol!es gi!ing( offering( soliciting( or recei!ing things of !alue to influence an official in the performance of his or her lawful duties.
An ille-al -ratuit& in!ol!es gi!ing. recei!ing( offering( or soliciting something of !alue because of an official act that has been taken. A con)lict o) interest occurs when an employee acts on behalf of a third party during the discharge of his or her duties or has self3interest in the acti!ity being performed. Econo(ic e'tortion is the use 8or threat9 of force 8including economic sanctions9 by an indi!idual or organiation to obtain something of !alue.
/. ;isappropriation of assets can in!ol!e !arious schemes: charges to e+pense accounts( lapping( and transaction fraud. $+plain each and gi!e an e+ample. ANS: Char-es to e'pense accounts in!ol!e fictitious charges to such accounts as miscellaneous e+pense to offset theft of an asset. 'ecause the e+pense account is closed to re!enue at the end of the period( the period in which it could be detected is short. Lappin- is a techni4ue whereby an early theft is co!ered up by a later one( i.e.( with the mo!es DlappingE o!er each other. The simplest e+ample in!ol!es taking a customer%s payment. A later payment is then credited to the first customer%s account( not the second. And on it goes. This re4uires some control o!er billing to a!oid tipping off the last customer. Transaction )raud in!ol!es deleting( altering( or adding false transactions to di!ert assets to the perpetrator. "or e+ample( if an employee lea!es the business and the super!isor fails to notify payroll and continues to clock the employee in and out( a fraudulent paycheck would be produced. 5f( in addition( the super!isor distributes the paycheck( it can be kept( and cashed.
0. omputer fraud is easiest at the data collection stage. 7hy ANS: omputer fraud is easiest at the data collection stage because much of what occurs after the data collection or input stage is not !isible to human eyes. 6nce entered( the system will presume that the input is legitimate and will process it as all others. 1. $+plain why collusion between employees and management in the commission of a fraud is difficult to both pre!ent and detect. ANS: ollusion among employees in the commission of a fraud is difficult to both pre!ent and detect. This is particularly true when the collusion is between managers and their subordinate employees. ;anagement plays a key role in the internal control structure of an organiation. They are relied upon to pre!ent and detect fraud among their subordinates. 7hen they participate in fraud with the employees o!er whom they are supposed to pro!ide o!ersight( the organiation%s control structure is weakened( or completely circum!ented( and the company becomes more !ulnerable to losses. 11. Since all fraud in!ol!es some form of financial misstatement( how is Fraudulent Statement fraud different
ANS: "raudulent statements are associated with management fraud. 7hile all fraud in!ol!es some form of financial misstatement( to meet the definition under this class of fraud scheme( the statement itself must bring direct or indirect financial benefit to the perpetrator. 5n other words( the statement is not simply a !ehicle for obscuring or co!ering a fraudulent act. "or e+ample( misstating the cash account balance to co!er the theft of cash does not fall under this class of fraud scheme. 6n the other hand( understating liabilities to present a more fa!orable financial picture of the organiation to dri!e up stock prices does 4ualify. 12. $+plain the problems associated with lack of auditor independence. ANS: Auditing firms who are also engaged by their clients to perform non3accounting acti!ities such as actuarial ser!ices( internal audit outsourcing ser!ices( and consulting lack independence. They are essentially auditing their own work. This risk is that as auditors they will not bring to management%s attention detected problems that may ad!ersely affect their consulting fees. "or e+ample( $nron%s auditors F Arthur Andersen F were also their internal auditor%s and their management consultants. 1#. $+plain the problems associated with lack of director independence ANS: ;any boards of directors are comprised of indi!iduals who are not independent. $+amples of lack of independence are directors who: ha!e a personal relationship by ser!ing on the boards of other directors companies? ha!e a business trading relationship as key customers or suppliers of the company? ha!e a financial relationship as primary stockholders or ha!e recei!ed personal loans from the company? ha!e an operational relationship as employees of the company. 1&. $+plain the problems associated with Guestionable $+ecuti!e ompensation Schemes ANS: A sur!ey by Thompson "inancial re!ealed the strong belief that e+ecuti!es ha!e abused stock3based compensation. The consensus is that fewer stock options should be offered than currently is the practice. $+cessi!e use of short3term stock options to compensate directors and e+ecuti!es may result in short term thinking and strategies aimed at dri!ing up stock prices at the e+pense of the firm%s long3 term health. 5n e+treme cases( financial statement misrepresentation has been the !ehicle to achie!e the stock price needed to e+ercise the option. 1). $+plain the problems associated with inappropriate accounting practices. ANS: The use of inappropriate accounting techni4ues is a characteristic common to many financial statement fraud schemes. $nron made elaborate use of Special *urpose $ntities 8S*$9 to hide liabilities through off balance sheet accounting. 7orldom management transferred transmission line costs from current e+pense accounts to capital accounts. This allowed them to defer some operating e+penses and report higher earnings. Also( they reduced the book !alue of hard assets of ;5 by H#.& billion and increased goodwill by the same amount. Iad the assets been left at book !alue( they would ha!e been charged against earnings o!er four years. Coodwill( on the other hand( was amortied o!er much longer period. 1,. $+plain the purpose of the *A6'. ANS:
The Sarbanes36+ley Act creates a Pu+lic Co(pan& Accountin- !%ersi-ht oard .PCA!. The *A6' is empowered to set auditing( 4uality control( and ethics standards( to inspect registered accounting firms( to conduct in!estigations( and to take disciplinary actions. 1-. 7hy is an 5ndependent Audit ommittee important to a company ANS: The Sarbanes36+ley Act re4uires all audit committee members to be independent and re4uires the audit committee to hire and o!ersee the e+ternal auditors. This pro!ision is consistent with many in!estors who consider the board composition to be a critical in!estment factor. "or e+ample( Thompson "inancial sur!ey re!ealed that most institutional in!estors want corporate boards to be comprised of at least -)J of independent directors 1/. 7hat are the key points of the D5ssuer and ;anagement isclosureE of the Sarbanes36+ley Act ANS: 1. *ublic companies must report all off balance3sheet transactions. 2. Annual reports filed with the S$ must include a statement by management asserting that it is responsible for creating and maintaining ade4uate internal controls and asserting to the effecti!eness of those controls. #. 6fficers must certify that the company%s accounts Kfairly present% the firms financial condition and results of operations. Lnowingly filing a false certification is a criminal offence. 10. 5n this age of high technology and computer based information systems( why are accountants concerned about physical 8human9 controls ANS: This class of controls relates primarily to the human acti!ities employed in accounting systems. These acti!ities may be purely manual( such as the physical custody of assets( or they may in!ol!e the use of computers to record transactions or update accounts. *hysical controls do not relate to the computer logic that actually performs these accounting tasks. This is the subject matter of chapter 1,. =ather( they relate to the human acti!ities that initiate such computer logic. 5n other words( physical controls do not suggest an en!ironment in which clerks update paper accounts with pen and ink. >irtually all systems( regardless of their sophistication( employ human acti!ities that need to be controlled. 2. Iow has the Sarbanes36+ley Act had a significant impact on corporate go!ernance ANS: The Sarbanes36+ley Act re4uires all audit committee members to be independent and re4uires the audit committee to hire and o!ersee the e+ternal auditors. This pro!ision is consistent with many in!estors who consider the board composition to be a critical in!estment factor. "or e+ample( a Thomson "inancial sur!ey re!ealed that most institutional in!estors want corporate boards to be comprised of at least -) percent independent directors. 21. iscuss the non accounting ser!ices that e+ternal auditors are no longer permitted to render to audit clients under S6M legislation. ANS: The Act addresses auditor independence by creating more separation between a firm%s attestation and non3auditing acti!ities. This is intended to specify categories of ser!ices that a public accounting firm cannot perform for its client. These include the following nine functions: 'ookkeeping or other ser!ices related to the accounting records or financial statements? •
"inancial information systems design and implementation? Appraisal or !aluation ser!ices( fairness opinions( or contribution3in3kind reports? Actuarial ser!ices? 5nternal audit outsourcing ser!ices? ;anagement functions or human resources? 'roker or dealer( in!estment ad!iser( or in!estment banking ser!ices?
22. 7hat are the key points of the D5ssuer and ;anagement isclosureE of the Sarbanes36+ley Act ANS: The Sarbanes36+ley Act imposes new corporate disclosure re4uirements including: *ublic companies must report all off3balance3sheet transactions. Annual reports filed with the S$ must include a statement by management asserting that it is responsible for creating and maintaining ade4uate internal controls and asserting to the effecti!eness of those controls. 6fficers must certify that the company%s accounts Dfairly presentE the firm%s financial condition and results of operations. Lnowingly filing a false certification is a criminal offence.
