CRA Regulatory Compliance & Corporate Governance 2 — Questions and Answers
Question 1: Under the Sarbanes-Oxley Act, which section specifically requires CEOs and CFOs to certify the accuracy of financial reports?
- Section 302 (Correct answer)
- Section 404
- Section 201
- Section 906
Correct answer: Section 302
Section 302 of SOX requires principal executives to personally certify quarterly and annual financial reports filed with the SEC.
Question 2: The 'three lines of defense' model assigns risk management functions to business units, risk/compliance functions, and which third line?
- External auditors
- Internal audit (Correct answer)
- Board of directors
- Regulators
Correct answer: Internal audit
Internal audit serves as the third line of defense, providing independent assurance that the first and second lines are functioning effectively.
Question 3: Which regulatory framework is primarily used by U.S. publicly traded companies to evaluate internal controls over financial reporting?
- Basel III
- COSO ERM 2017
- COSO Internal Control — Integrated Framework (Correct answer)
- ISO 31000
Correct answer: COSO Internal Control — Integrated Framework
The COSO Internal Control — Integrated Framework is the standard most widely used for evaluating ICFR under SOX Section 404 requirements.
Question 4: A company's audit committee is best described as a committee of the:
- Executive management team
- Board of directors (Correct answer)
- External auditors
- Compliance department
Correct answer: Board of directors
The audit committee is a subcommittee of the board of directors responsible for overseeing financial reporting and the external audit process.
Question 5: Which principle of corporate governance requires that boards consist of a sufficient number of independent directors to avoid conflicts of interest?
- Transparency
- Accountability
- Independence (Correct answer)
- Fairness
Correct answer: Independence
Independence is a core governance principle ensuring directors can exercise objective judgment free from conflicts of interest.
Question 6: Under Dodd-Frank, which newly created agency oversees systemic risk in the U.S. financial system and monitors threats to financial stability?
- Consumer Financial Protection Bureau (CFPB)
- Financial Stability Oversight Council (FSOC) (Correct answer)
- Office of Financial Research (OFR)
- Federal Insurance Office (FIO)
Correct answer: Financial Stability Oversight Council (FSOC)
FSOC was created by Dodd-Frank to identify and respond to systemic risks to U.S. financial stability posed by large, interconnected financial firms.
Question 7: A 'material weakness' in internal controls, as defined under SOX, indicates that there is:
- A minor procedural gap unlikely to affect financial statements
- A reasonable possibility that a material misstatement will not be prevented or detected on a timely basis (Correct answer)
- A guaranteed error in the financial statements
- A deficiency identified only in IT controls
Correct answer: A reasonable possibility that a material misstatement will not be prevented or detected on a timely basis
A material weakness is a deficiency where there is a reasonable possibility that a material misstatement of the financial statements will not be prevented or detected timely.
CRA Regulatory Compliance & Corporate Governance 2
Under the Sarbanes-Oxley Act, which section specifically requires CEOs and CFOs to certify the accuracy of financial reports?