Certified Internal Auditor Governance & Organizational Structure 2 — Questions and Answers
Question 1: An independent board director is best characterized as someone who:
- Holds a significant equity ownership stake in the company
- Has no material relationship with the company that could influence their judgment (Correct answer)
- Serves simultaneously on all standing board committees
- Is appointed directly by the chief executive officer
Correct answer: Has no material relationship with the company that could influence their judgment
Board independence requires that a director have no material relationship with the company—financial, personal, or professional—that could impair their objective judgment, as defined by stock exchange listing standards.
Question 2: Under Sarbanes-Oxley and stock exchange rules, an audit committee should be composed of:
- At least one internal auditor and two senior executives
- A majority of independent directors, with at least one member qualifying as a financial expert (Correct answer)
- Equal representation of management nominees and major shareholders
- Exclusively members of the external audit firm
Correct answer: A majority of independent directors, with at least one member qualifying as a financial expert
SOX Section 301 and NYSE/NASDAQ listing rules require audit committees to consist entirely of independent directors, with at least one member designated as a financial expert.
Question 3: According to IIA Standards, what is the recommended reporting relationship for the chief audit executive (CAE)?
- Functionally to the CFO and administratively to the CEO
- Functionally to the audit committee and administratively to senior management (Correct answer)
- Functionally to the external auditors and administratively to the board chair
- Exclusively to the CEO for all reporting purposes
Correct answer: Functionally to the audit committee and administratively to senior management
IIA Standards recommend the CAE report functionally to the audit committee to preserve independence and administratively to senior management for operational support.
Question 4: A 'staggered board' (also called a classified board) in corporate governance means:
- Board members receive compensation payments on staggered schedules throughout the year
- Directors are divided into classes elected in rotation, so only a portion of the board faces election each year (Correct answer)
- The board includes both executive and non-executive directors in defined ratios
- Committee assignments rotate among all board members on an annual basis
Correct answer: Directors are divided into classes elected in rotation, so only a portion of the board faces election each year
A staggered or classified board divides directors into classes with different multi-year terms, meaning shareholders can only replace a fraction of the board at any single election.
Question 5: A board-level risk committee is primarily responsible for:
- Conducting internal audits of the organization's highest-risk areas
- Overseeing the enterprise risk management framework and the organization's risk appetite (Correct answer)
- Approving all individual transactions above a defined materiality threshold
- Setting the internal audit function's annual risk-based audit priorities
Correct answer: Overseeing the enterprise risk management framework and the organization's risk appetite
The board risk committee oversees the enterprise risk management framework, approves the organization's risk appetite statement, and monitors major risk exposures.
Question 6: In the IIA's Three Lines Model (2020), what role does the governing body (board) play?
- The governing body represents the first line, owning and managing operational risks
- The governing body represents the second line, overseeing risk and compliance functions
- The governing body represents the third line, directing internal audit activities
- The governing body sits above the three lines, providing accountability and oversight to stakeholders (Correct answer)
Correct answer: The governing body sits above the three lines, providing accountability and oversight to stakeholders
In the IIA's 2020 Three Lines Model, the governing body sits above and outside the three lines, providing ultimate oversight and holding the organization accountable to stakeholders.
Question 7: A nominating/governance committee of the board is primarily responsible for:
- Designing and approving executive compensation and incentive packages
- Overseeing financial reporting quality and managing the relationship with external auditors
- Identifying and recommending director candidates and overseeing corporate governance practices (Correct answer)
- Monitoring and approving enterprise risk management policies and limits
Correct answer: Identifying and recommending director candidates and overseeing corporate governance practices
The nominating/governance committee oversees board composition, leads director nominee identification and vetting, and monitors corporate governance practices and policies.
Certified Internal Auditor Governance & Organizational Structure 2
An independent board director is best characterized as someone who: