Which of the following best demonstrates the board of directors' governance over internal control?

Question breakdown

Tests

Distinguish board governance oversight from management's control responsibilities

Difficulty

Medium

Key idea: The board exercises governance over internal control through oversight activities such as setting tone at the top and planning executive succession, not by designing or running controls.

How to reach the answer

1. The question asks what shows the board's governance role, meaning oversight rather than execution.
2. Designing and implementing internal control belongs to management, which rules out A.
3. Effective boards have independent, non-executive majorities, which rules out B.
4. Audit committees are chaired by independent directors, never by the CAE, which rules out C.
5. CEO and executive succession planning is a core board oversight duty that shapes the control environment, so D fits.

Each option

• AIncorrect. Developing and implementing the internal control system is management's job; the board oversees it.
• BIncorrect. A board dominated by executive management undermines its independence and its ability to provide objective oversight.
• CIncorrect. The CAE reports to the audit committee and does not chair it, because doing so would impair independence.
• DCorrect. Succession planning for the CEO and key executives is a board oversight responsibility that influences the control environment and tone at the top.

Common trap: Option A sounds like strong board involvement, but direct responsibility for building controls is management's role, not the board's governance role.

In practice: Board and nominating committee charters typically assign CEO selection, evaluation, and succession to the board. Management owns the design and operation of controls under frameworks like COSO.

Remember: The board oversees and sets direction, while management designs and operates internal controls.

Drafted with AI assistance and checked against the answer key.