Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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Appendix I
The Sarbanes-Oxley Act, Internal Controls, and Management Accounting
Answer Key
True / False Questions
1. Even in large companies, few internal controls exist in order to establish greater control of
security among limited individuals.
2. Since many internal control procedures are automated, internal software controls are not needed.
3. The Public Company Accounting Oversight Board (PCAOB) is a 7-member board
operating under the auspices of the American Institute of Certified Public Accountants
(AICPA).
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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4. The first decade of the SOX legislation was characterized by controversy.
Multiple Choice Questions
5. The Sarbanes-Oxley Act:
A. arose because of several accounting scandals that rocked the public’s confidence in
6. Internal controls focus on all of the following except:
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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7. Which of the following is a typical internal control?
A. The use of password-protected computers and software.
8. The Sarbanes-Oxley Act established the:
A. Securities and Exchange Commission (SEC).
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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9. Which of the following bodies oversees audits and auditors, and sanctions firms and
individuals for violations of laws and regulations?
10. Which of the following is not a provision of (nor an outgrowth of) the Sarbanes-Oxley
Act?
A. A public company’s annual report must contain a separate disclosure that assesses the
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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11. Which of the following statements regarding the Sarbanes-Oxley Act is (are) true?
A. Management must establish and maintain a system of internal controls over financial
reporting.
12. The provisions of sections 302 and 404 of the Sarbanes-Oxley Act (as originally enacted)
have proved especially troublesome for:
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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13. The provisions of section 302 of the Sarbanes-Oxley Act (as originally enacted) require
the signing officers of a company to do all of the following except:
14. Section 404 of the Sarbanes-Oxley Act, Management Assessment of Internal Controls,
includes all of the following except:
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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15. To achieve the objectives of sections 302 and 404 of the Sarbanes-Oxley Act,
management and independent auditors should:
A. Disclose the minutia of the internal control structure.
16. Most of the Sarbanes-Oxley Act relates primarily to:
A. Corporate governance.
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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17. Which of the following statements is false concerning computerized accounting systems?
A. Safeguards exist to make sure that controls are working properly.
18. Under section 404 of the Sarbanes-Oxley Act, auditors are required to:
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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Essay Questions
19. Smart Start Company is a hardware supplier to building contractors. At the end of each
month, the employee who maintains all of the inventory records takes a physical inventory of
the firm’s stock. When discrepancies occur between the recorded inventory and the physical
count, the employee changes the physical count to agree with the records.
Required:
A. What problems could arise as a result of Smart Start Company’s inventory procedures?
B. How could the internal control system be strengthened to eliminate the potential problems?
C. What are the implications of SOX sections 302 and 404 for the company’s internal control
issues?
Solution:
Appendix I – The Sarbanes-Oxley Act, Internal Controls, and Management
Accounting
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20. What does it mean to say that the concept of risk exposure may be the key to making SOX
sections 302 and 404 more effective?
Solution: