Internal Audit : Governance

Ensuring effective organizational performance management and accountability is most directly the proper function of

• Control.

• Governance.

• Risk management.

• A quality assurance program.

Answer explanation

Organizational performance is measured by achieving objectives. The IIA Glossary defines governance as the combination of processes and structures implemented by the board to inform, direct, manage, and monitor the activities of the organization toward the achievement of its objectives. Thus, ensuring effective organizational performance management and accountability is most directly the proper function of governance.

Which of the following is not a goal of corporate governance?

• Complying with society’s legal and regulatory rules.

• Proving an overall benefit to society is a goal of corporate governance.

• Reporting fully and truthfully to stakeholders is a goal of corporate governance.

• Maximizing executive compensation.

Answer explanation

Governance practices may use various legal forms, structures, strategies, and procedures. They ensure that the organization (1) complies with society’s legal and regulatory rules; (2) satisfies the generally accepted business norms, ethical principles, and social expectations of society; (3) provides overall benefit to society and enhances the interests of the specific stakeholders in both the long- and short-term; and (4) reports fully and truthfully to its stakeholders, including the public, to ensure accountability for its decisions, actions, and performances. But maximizing executive compensation is not a goal of corporate governance.

Governance should help ensure that the objectives of an entity’s stakeholders are met. Stakeholders include

1. 1. Employees

2. 2. Regulators

   3. Suppliers

3. 4. Customers

• 1 and 4 only.

• 2 and 3 only.

• 2, 3, and 4 only.

• 1, 2, 3, and 4.

Answer explanation

Answer (D) is correct.
Stakeholders are persons or entities who are affected by the activities of the entity. Among others, these include (1) shareholders, (2) employees, (3) suppliers, (4) customers, (5) neighbors of the entity’s facilities, and (6) government regulators.

Which of the following statements about organizational governance is true?

• The internal auditor has more responsibility than the board for organizational governance.

• Governance functions are internal but not external.

• The compensation of management is a governance process.

• The dilution of shareholders wealth from stock options or bonuses is a governance issue.

Answer explanation

Management’s compensation is part of the control environment, specifically, the human resource element. Governance applies to all organizational activities, including risk management and control.

Which of the following is a function of the internal audit activity in organizational governance?

• Carrying out board directives to achieve organizational objectives.

• Ensuring the timely implementation of audit recommendations.

• Monitoring compliance with the code of conduct.

• Establishing the definition of governance.

Answer explanation

The internal audit activity periodically assesses the elements of the ethical climate of the organization and its effectiveness in achieving legal and ethical compliance. Internal auditors therefore evaluate the effectiveness of a formal code of conduct and related statements and policies (including procedures covering fraud and corruption).

In an assurance engagement, what is the internal auditor’s responsibility for evaluating ethics-related activities?

• Evaluate their design, implementation, and effectiveness.

• Evaluate only the design of ethics-related activities.

• Review employee activities for compliance with provisions of the code.

• Perform tests on various employee transactions.

Answer explanation

The internal audit activity must evaluate the design, implementation, and effectiveness of the organizations ethics-related objectives, programs, and activities.

What are the major components of governance?

• • Strategic direction

  • and Oversight

• • Strategic direction, ethics

  • and Oversight

• • Regulations

  • and Ethics

• • Oversight and Ethics

Answer explanation

The major components of governance are strategic direction and oversight. Strategic direction determines (1) the business model, (2) overall objectives, (3) the risk appetite, and (4) the limits of organizational conduct. The elements of oversight are (1) the risk management activities of senior management and the board and (2) internal and external assurance activities. Oversight is the component to which risk management and controls are most likely to be applied. It is therefore the component with which internal auditing is most concerned.

Which of the following is a situation in which an internal auditor’s role conflicts with the independence attribute of the internal audit activity?

• The internal audit activity recommends a new whistleblower program for the organization.

• The internal audit activity informs the board that it has implemented an organization-wide employee ethics program.

• The board requests that the internal auditors assess whether the organization is complying with the code of conduct.

• The CEO informs the board of recommendations made by the internal audit activity regarding the organization’s compliance with the code of conduct.

Answer explanation

The design and implementation of governance processes are the responsibility of the board and management.

Careful Corp. always has its internal auditors review transactions between Careful Corp. and its subsidiary, Risky Corp., to ensure that the transactions are carried out in a fair and transparent manner. This practice is most closely related to which of the following governance principles?

• Oversight of related party transactions and conflicts of interest.

• .Effective interaction among the board, management, and assurance providers.

• An organizational structure that supports accomplishing strategic objectives.

• An organizational structure used to measure organizational and individual performance.

Answer explanation

Careful Corp. and Risky Corp. are related (a parent and its subsidiary). Accordingly, having the internal auditors review transactions between Careful and Risky is most closely related to the governance principle of oversight of related party transactions and conflicts of interest.

Which of the following statements about organizational culture is false?

• The organizational culture sets the values, objectives, and strategies of the organization.

• Governance does not largely depend on organizational culture for effectiveness.

• Organizational culture defines roles and behaviors.

• The culture influences compliance with corporate social responsibilities.

Answer explanation

Governance practices reflect the organization’s unique culture and largely depend on it for effectiveness.