Testbank

to accompany

Contemporary Issues in Accounting

Michaela Rankin, Patricia Stanton, Susan

McGowan, Matthew Tilling, Kimberly
Ferlauto & Carol Tilt

Prepared by
Matt Tilling

John Wiley & Sons Australia, Ltd 2012

 Chapter 7 Corporate governance

Chapter 7 Corporate governance

Multiple Choice Questions

1. Which of the following problems has contributed to the growth in corporate governance
over the past decades?

a. Managers using the resources of the company to benefit themselves

b. Corporations taking actions shareholders consider undesirable
c. Corporations misleading shareholders to avoid consequences
*d. All of the above

Correct answer: d
Learning Objective 7.1 ~ Explain the interest in corporate governance.

2. Which of the following examples is NOT advantage of good corporate governance?

a. Expanding the companys shareholder base

b. Reducing perceived risks to investors
*c. Increasing the cost of capital
d. Increased market confidence

Correct answer: c
Learning Objective 7.1 ~ Explain the interest in corporate governance.

3. Corporate governance is:

a. A coherent system of concepts that underlie financial reporting

b. A term referring to managements choosing to voluntarily disclose
non-compulsory information in annual reports
*c. The system by which corporations are directed and controlled.
d. A set of broad principles that provide the basis for guiding actions or decisions

Correct answer: c
Learning Objective 7.2 ~ Explain what corporate governance is and why good corporate
governance systems are needed.

John Wiley & Sons Australia, Ltd 2012 7.2

Testbank to accompany Contemporary Issues in Accounting

4. According to the Anglo-Saxon model whose interest should be the focus of corporate
governance?

a. Employees
*b. Shareholders
c. Community
d. Environment

Correct answer: b
Learning Objective 7.2 ~ Explain what corporate governance is and why good corporate
governance systems are needed.

5. Which of these costs is NOT associated with an agency relationship between managers
and shareholders?

a. Monitoring Cost
*b. Taxation Loss
c. Bonding Cost
d. Residual Loss

Correct answer: b
Learning Objective 7.3 ~ Discuss the relationship between positive accounting theory and
corporate governance.

6. The OECD Principles of Corporate Governance link manages remuneration to

shareholder interest to address which agency problem?

a. Risk aversion
b. Dividend retention
c. Horizon problem
*d. All of the above

Correct answer: d
Learning Objective 7.3 ~ Discuss the relationship between positive accounting theory and
corporate governance.

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 Chapter 7 Corporate governance

7. Which of the following is NOT an example of corporate governance practice?

a. Codes of conduct for directors

b. Requirements that most board directors be independent
c. Formation of a nominating committee to identify potential new directors
*d. None of the above, i.e. they are all examples of corporate governance

Correct answer: d
Learning Objective 7.4 ~ Discuss the key areas involved in corporate governance.

8. Which of the following is NOT one of the ASXs Principles of Corporate Governance?

*a. The majority of directors should be executive

b. Promote ethical and responsible decision making
c. Establish an audit committee
d. Ensure level and composition of remuneration is sufficient and reasonable

Correct answer: a
Learning Objective 7.4 ~ Discuss the key areas involved in corporate governance.

9. Which of the following is NOT an example of good corporate governance in relation to

shareholders?

a. Treat all shareholders equally

b. Have rules that allow shareholders to call extraordinary meetings
*c. Provide shareholders with all information made available to directors
d. All of the above

Correct answer: c
Learning Objective 7.4 ~ Discuss the key areas involved in corporate governance.

10. To ensure shareholders are sufficiently informed good governance practices include:

a. Prepare regular reports

b. Have annual reports audited
c. Detail related party transactions
*d. All of the above

Correct answer: d
Learning Objective 7.4 ~ Discuss the key areas involved in corporate governance.

John Wiley & Sons Australia, Ltd 2012 7.4

Testbank to accompany Contemporary Issues in Accounting

11. Which of the following is NOT a requirement of the Sarbanes-Oxley Act:

a. No loans by company to directors

*b. The use of checklists
c. Audit partner rotation every 5 years
d. The disclosure of whether there is a code of ethics for senior financial officers

Correct answer: b
Learning Objective 7.5 ~ Explain and evaluate the alternative approaches to corporate
governance.

12. An advantage of a principles-based approach to corporate governance is that:

*a. It places a higher level of duty on directors to determine which corporate

governance practices are required
b. It requires a corporation to prepare an annual report and provide them to
shareholders
c. It bans loans to directors
d. All of the options are correct

Correct answer: a
Learning Objective 7.5 ~ Explain and evaluate the alternative approaches to corporate
governance.

13. Which of the following is NOT a significant influence on actual corporate governance
practice?

a. The nature of the requirements

b. The environment in which the entity operates
c. The commitment of management
*d. None of the above, they are all significant

Correct answer: d
Learning Objective 7.5 ~ Explain and evaluate the alternative approaches to corporate
governance.

John Wiley & Sons Australia, Ltd 2012 7.5

 Chapter 7 Corporate governance

14. Which of the following were examples of risk management deficiencies that lead to the
GFC:
i. risk being monitored at the individual level rather than the entity level.
ii. information about risks not reaching the board.
iii. the organisational culture of pursuing growth in profits
iv. remuneration packages for high risk activities
v. alerting shareholders to a potential investment with a high return

a. i, ii, iii, v
b. ii, iii, iv, v
*c. i, ii, iii, iv
d. i, ii., iii., iv., v.

Correct answer: c
Learning Objective 7.6 ~ Discuss recent developments and issues in corporate governance.

15. What element of executive remuneration has been argued to have contributed to the
global financial crisis?

a. Share options
*b. Bonuses on the basis of short-term profits
c. Bonuses on non-financial key performance indicators
d. High fixed salary components

Correct answer: b
Learning Objective 7.6 ~ Discuss recent developments and issues in corporate governance.

16. The Dodd-Frank Wall Street Reform and Consumer Protection act includes provisions
that require:

a. Executive compensation to be submitted for shareholder approval via a non-

binding vote
b. Increased disclosure about the nature of compensation packages and payments
related to financial performance
c. That compensation can be rescinded if it was paid based on inaccurate financial
statements
*d. All of the above

Correct answer: d
Learning Objective 7.6 ~ Discuss recent developments and issues in corporate governance.

John Wiley & Sons Australia, Ltd 2012 7.6

Testbank to accompany Contemporary Issues in Accounting

17. What is one of the ways that accounting is used to direct and control the manager of a
corporation?

*a. Linking of a mangers performance to a bonus that depends on accounting profit

b. Making decisions based on the accounting information regardless of managerial
input.
c. Threatening to tell shareholders a mangers income if a manager makes a poor
financial decision.
d. Using income smoothing to assure a manager that they can invest in a low risk
investment.

Correct answer: a
Learning Objective 7.7 ~ Explain the role and impact of accounting in and on corporate
governance.

18. In what ways can accounting cause financial reporting problems?

i. disclosure can lead to constraining of the behaviour of a manager
ii. accounting information may lead a manager to making a different approach to a
companys original financial approach
iii. there is a drive or desire to meet share market expectations based on these accounting
results
iv. the manipulation of earnings to meet market expectations

a. i, ii
*b. iii, iv
c. i, ii, iii
d. iv, iii, ii, i

Correct answer: b
Learning Objective 7.7 ~ Explain the role and impact of accounting in and on corporate
governance.

19. When it comes to corporate governance many commentators have argued the most
important factor is:

a. Strong accounting systems

b. Harsh legal penalties
*c. Personal ethics
d. Codes of practice

Correct answer: c
Learning Objective 7.8 ~ Discuss and analyse the role of ethics in corporate governance.

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 Chapter 7 Corporate governance

20. Which of the following statements is most correct?

a. Corporate governance is only relevant to listed entities

b. Corporate governance is only relevant to developed economies
c. Corporate governance not relevant to family entities
*d. Corporate governance is relevant to most companies globally.

Correct answer: d
Learning Objective 7.9 ~ Discuss international perspectives and developments in corporate
governance.

John Wiley & Sons Australia, Ltd 2012 7.8