Corporate Governance & Financial Management 5

Question 1

A company's board is considering a leveraged recapitalization that would significantly increase debt. Which stakeholder group bears the most immediate financial risk?

Accepted Answer

Existing bondholders and creditors

Answer

A leveraged recapitalization increases bankruptcy risk and reduces asset coverage for existing bondholders, who did not consent to the increased leverage when they lent money.

Question 2

What financial governance principle underlies the requirement for boards to approve annual operating and capital budgets?

Accepted Answer

Budget approval ensures the board authorizes the financial resources and risk management strategy for the coming year

Answer

Board approval of budgets is a key control mechanism ensuring management's planned activities align with board-approved strategic priorities and risk parameters.

Question 3

Which of the following is an example of a 'channel stuffing' scheme that audit committees should watch for?

Accepted Answer

Shipping excess inventory to distributors near quarter-end to inflate reported revenue

Answer

Channel stuffing involves pushing unsustainable inventory into the distribution channel to recognize revenue prematurely, inflating short-term results.

Question 4

Under the COSO framework, which component of internal control focuses on the attitudes and actions of the board and management toward financial reporting integrity?

Accepted Answer

Control environment

Answer

The control environment—often called the 'tone at the top'—encompasses the board and management's commitment to ethical values and sound financial governance.

Question 5

A board's finance committee is assessing counterparty risk in the company's derivatives portfolio. What is the primary concern?

Accepted Answer

Whether counterparties will be able to fulfill their obligations if market movements create large payables

Answer

Counterparty risk is the danger that the other party to a derivative contract will default on its obligation, creating unhedged exposure and potential losses.

Corporate Governance Practice Test

Corporate Governance Practice Test

Corporate Governance & Financial Management 5