Question

Which of the following controls would an entity most likely use in safeguarding against the loss of marketable securities?

A. An independent trust company that has no direct contact with the employees who have record keeping responsibilities has possession of the securities
B. The internal auditor verifies the marketable securities in the entity's safe each year on the balance sheet date
C. The independent auditor traces all purchases and sales of marketable securities through the subsidiary ledgers to the general ledger
D. A designated member of the board of directors controls the securities in a bank safe-deposit box

Answer 1

Entities use stringent controls, such as a board member holding marketable securities in a bank safe-deposit box, as part of corporate governance to safeguard against loss. This physical security measure ensures direct accountability and governance oversight.

Step-by-step explanation:

To safeguard against the loss of marketable securities, an entity is likely to implement stringent controls. Often, these controls include the physical security of the securities, such as keeping them in a bank safe-deposit box. The responsibility for these securities could be assigned to a specific individual, such as a designated member of the board of directors, ensuring that there is direct accountability and an additional layer of oversight. This measure is part of corporate governance, which comprises multiple facets including the board of directors overseeing management, audits by independent firms, and the influence of outside investors.

Corporate governance practices are crucial, as seen in historical events like the collapse of Lehman Brothers, where weak governance led to a lack of transparent financial information for investors. Strong governance, including oversight of the custody of marketable securities, helps in preventing such risks and makes sure that an entity's assets are appropriately safeguarded.