Internal Controls & Auditing Flashcards
7 cards from real CSCP practice questions. Tap to flip, then mark Knew It or Still Learning — missed cards come back until you master them.
Read the first 7 Internal Controls & Auditing flashcards as text
In securities compliance auditing, a 'material weakness' differs from a 'significant deficiency' primarily because:
Answer: A material weakness creates a reasonable possibility of a material misstatement while a significant deficiency does not rise to that level
A material weakness is a deficiency where there is a reasonable possibility that a material misstatement will not be prevented or detected on a timely basis, which is a higher threshold than a significant deficiency.
Which FINRA rule requires broker-dealers to establish and maintain a system to supervise the activities of associated persons?
Answer: FINRA Rule 3110
FINRA Rule 3110 requires broker-dealers to establish and maintain a supervisory system, including written supervisory procedures, reasonably designed to ensure compliance with applicable securities laws.
An investment adviser's internal audit finds that the firm's portfolio managers are receiving research from brokers in exchange for directing client trades to those brokers. This arrangement must be evaluated under:
Answer: Section 28(e) of the Securities Exchange Act of 1934
Section 28(e) provides a safe harbor for soft dollar arrangements where advisers use client commissions to pay for brokerage and research services that benefit their clients.
A risk-based audit approach in a securities firm prioritizes audit resources based on:
Answer: The relative risk and potential impact of each auditable unit or process
Risk-based auditing allocates audit resources to areas with the highest risk exposure and potential impact on the firm, ensuring coverage is proportionate to risk rather than uniform.
During a FINRA examination, which document would the regulator most likely request to assess the adequacy of a broker-dealer's supervisory system?
Answer: Written Supervisory Procedures (WSPs)
Written Supervisory Procedures (WSPs) document how the firm supervises its representatives and operations, and are a primary document reviewed during FINRA examinations.
Under the PCAOB Auditing Standard AS 2201, when testing the operating effectiveness of internal controls, auditors must:
Answer: Perform enough testing to provide a reasonable basis for assessing control effectiveness
AS 2201 requires auditors to perform sufficient testing to provide a reasonable basis for their opinion, which typically includes a mix of inquiry, observation, inspection, and re-performance.
A broker-dealer's compliance audit reveals that registered representatives are using personal email accounts to communicate with clients about securities transactions. This violates which core compliance requirement?
Answer: Books and records requirements under SEC Rule 17a-4
SEC Rule 17a-4 requires broker-dealers to preserve business-related electronic communications, and using personal email circumvents this record-keeping obligation.