CSCP Internal Controls & Auditing 3

Question 1

In securities compliance auditing, a 'material weakness' differs from a 'significant deficiency' primarily because:

Accepted Answer

A material weakness creates a reasonable possibility of a material misstatement while a significant deficiency does not rise to that level

Answer

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.

Question 2

Which FINRA rule requires broker-dealers to establish and maintain a system to supervise the activities of associated persons?

Accepted Answer

FINRA Rule 3110

Answer

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.

Question 3

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:

Accepted Answer

Section 28(e) of the Securities Exchange Act of 1934

Answer

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.

Question 4

A risk-based audit approach in a securities firm prioritizes audit resources based on:

Accepted Answer

The relative risk and potential impact of each auditable unit or process

Answer

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.

Question 5

During a FINRA examination, which document would the regulator most likely request to assess the adequacy of a broker-dealer's supervisory system?

Accepted Answer

Written Supervisory Procedures (WSPs)

Answer

Written Supervisory Procedures (WSPs) document how the firm supervises its representatives and operations, and are a primary document reviewed during FINRA examinations.

(CSCP) Certified Securities Compliance Professional Practice Test

(CSCP) Certified Securities Compliance Professional Practice Test

CSCP Internal Controls & Auditing 3