Chapter 1—Governance, Ethics, and Managerial Decision Making
Key
1. The main objective of corporate governance is to:
2. Individuals who serve on a company’s audit committee should be:
3. Which of the following statements is true regarding internal control?
4. The most widely used internal control framework in the United States was developed in 1992 by:
5. Which of the following factors is least likely to contribute to the internal control environment within a
company?
6. What occurred in 2002 to significantly increase the oversight role of a company’s board of directors with
respect to internal controls?
7. Which of the following statements is true regarding the Sarbanes-Oxley Act of 2002?
8. Which of the following statements is false regarding board of directors for public companies?
9. Which of the following statements is true regarding risk assessment?
10. Which of the following is not one of the general internal control activities that companies often use?
11. Ideally, segregation of duties requires which duties to be segregated?
A. Managerial and financial accounting duties
12. Which of the following is not an example of an internal control procedure?
13. Which of the following internal controls would not reduce the likelihood of unauthorized data access in a
technology-intensive environment?
14. Which of the following statements is true regarding the impact that information technology has had on
internal controls?
15. Who sets the tone for ethical behavior in an organization?
16. Stakeholder analysis normally includes all of the following steps except:
17. All of the following statements about stakeholder analysis are true except:
A. Stakeholder analysis can be used by a company to identify how a particular action or decision might affect
employees, customers, suppliers, and owners.
18. The portion of a company’s ethics program which lays out specific rules or standards of behavior for various
business situations is called:
19. Where do most companies assert their commitment to key stakeholders?
20. Which of the following items is not required by the Sarbanes-Oxley Act of 2002?
21. The proper company responses to ethics violations do not include:
22. Which of the following statements regarding fraud is false?
A. Fraud perpetrated by higher-level management is harder to detect than that of lower-level employees.
23. Which of the following statements is the best description of fraudulent financial reporting?
24. The most common types of fraudulent financial reporting involve overstating:
25. If a company has decided to issue fraudulent financial statements, which type of account is most likely to be
understated?
26. Fraud involving upper-level management:
27. Fraudulent financial reporting involves the active involvement of a company’s:
28. Which of the following is not an example of fraudulent financial reporting?
29. Which of the following is more of an example of fraudulent financial reporting rather than misappropriation
of assets?
30. Which of the following situations is the best example of fraud being committed?
31. Which of the following situations is not an example of fraud?
32. ____ occurs when two or more people work together to commit fraud.
33. Which of the following controls would be best for reducing the incidence of lapping?
34. Which of the following would be best for reducing the incidence of employee theft of merchandise?
35. Which of the following is not one of the three general categories of forces that make up the fraud triangle?
36. Which of the following is NOT one of the forces that make up the fraud triangle?
37. Which of the following is least likely to be in place when a company has fraud committed by its
employees?
38. Which of the following strategies would be best for combating fraud?
39. Why is corporate governance important? List some of the internal and external forces that shape a
company’s corporate governance system.
40. Define corporate governance. Why would one set of corporate governance processes not be appropriate for
every company?
41. List three specific ways that assets can be safeguarded from misappropriation.
42. List two specific and unique risks that a business operating in a technology-intensive environment would be
more likely to be exposed to than a company that does not operate in that environment.
43. What are the five related elements of internal control?
44. How can risk assessment and control activities help to reduce fraud within a company?
45. Provide two examples of internal control procedures.
Answers may include: (pick two)
46. For segregation of duties to be most effective, what duties should be segregated?
47. List two internal control procedures unique to a company engaged in a technology-intensive environment.
48. Stakeholder analysis can be used to evaluate ethical dilemmas. List the 6 steps a company would follow
when performing a stakeholder analysis.
49. List two specific ethics programs that companies use to promote and maintain an ethical business
environment.
50. What are the three primary types of codes of ethics?
51. What are the three crucial ways a company should respond to ethics violations?
52. What are the two critical elements in the legal definition of fraud?
53. What precipitated the passage of the Sarbanes-Oxley Act of 2002 and what are some of its provisions?
54. How does employee fraud differ from management fraud?
55. List and describe the two general types of fraud that companies and their stakeholders should be concerned
about.
56. What is “lapping” and how can it be prevented?
57. What is a possible cause of fraudulent financial reporting by management?
58. List and briefly describe the three forces (often depicted as the fraud triangle) that cause fraudulent activity
to occur.
59. Describe a situation where an employee might feel justified in committing fraud against a company.
60. How can a company reduce the risk of employee fraud?
61. How can the management of a company help to reduce fraud within the company?
62. J.R. works as a cashier for a large discount retail store. J.R.’s good friend, Eva, has approached J.R. with a
scheme whereby Eva will pretend to purchase and pay for an item in J.R.’s cashier lane, but will really take the
item home without paying for it. Later, J.R. and Eva can sell the item on an online auction site for cash. Eva has
assured J.R. that her scheme is “foolproof.”
Required:
What internal controls would you suggest to assist management in eliminating this opportunity for theft?
63. Pamela works as a cashier for a large discount retail store. Pamela has recently run up a lot of credit card
debt and is now desperate to obtain enough cash to pay off the debt. Pamela’s friend, Maurice, has suggested
that Pamela steal inventory from her store and then allow Maurice to return the stolen inventory back to the
store for a refund.
Required:
What internal controls would you suggest to assist management in eliminating this opportunity for theft?
64. Ed F. is a store manager for a local consumer electronics chain. At the end of each year, Ed is eligible to
receive a bonus contingent upon his store’s sales performance. In the current year, mainly due to the local
economy, Ed’s store has experienced a decrease in sales. Ed is fearful that his year-end bonus will not be large
enough and, as a result, he has decided to record fictitious credit sales at the end of the year in order to boost his
store’s profits.
Required:
What internal controls would you suggest to assist upper-level management in eliminating this opportunity for
fraudulent financial reporting?