Internal Controls Provide an example of an item that pertains to either (a) the internal control environment (the umbrella) or (b) a monitoring activity or (c) a risk assessment activity that relates to Microsoft Corporation.

In 2002, the SEC settled with Microsoft on allegations of accounting violations that understated revenues. Microsoft did not admit to any wrongdoing. The settlement did call for the corporation to cease and desist from misstating income, without requiring any restatement of earnings reports. The SEC finding was based on Microsoft's noncompliance with Generally Accepted Accounting Principles (GAAP) in which material amounts of income were misstated in certain periodic filings with the SEC during the period from July 1, 1994 to June 30, 1998. Underscoring the audit finding by the Commission, was both an absence of documentation for the bases used for the accounting and evidence that Microsoft failed to maintain proper internal controls. A spokesman for SEC, Stephen Cutler, Director of the Commission's Division of Enforcement, stated,

"This case emphasizes that the Commission will act against a public company that issues financial statements with material inaccuracies, even in the absence of fraud charges. Public companies must ensure that their accounting is substantiated in the first instance by factual bases and well-reasoned analyses and conclusions. In order to do so, companies must properly document the bases for their reserves and other accounting entries, so that they and their auditors can verify that the accounting is proper; and they must maintain appropriate internal controls, so that this verification...

Treating stock-options as an expense on the corporation's income statement will depress year-over-year earnings, a situation that could make it easier for Microsoft to justify high stock valuation and demonstrate more impressive stock growth prospects in the years following the restatement (Weil, 2003). As an aside, current Financial Accounting Standards Board (FASB) regulations have adjusted to the new standard that was a catalyst for Microsoft's decision, as all companies must now treat options-based pay as an expense on their income statements (Weil, 2003).
Question 2. Provide a fairly detailed example of a control activity at Microsoft or JP Morgan Chase. You could use the revenue cycle or the expenditure cycle for your example of a control activity.

JP Morgan Chase twice changed the model that measures the level of risk taken by the CIO when trading (Henry & Horowitz, 2012). The bank changed its model for measuring the value-at-risk in the CIO, the department responsible for managing the derivatives portfolio (Henry & Horowitz, 2012). While other divisions of the bank were reported to have kept to more conservation modeling, the new model presented a dramatically different picture of risk than did the old model (Henry & Horowitz, 2012). Indeed, the disparity is…