B1 - Review Flashcards
What are 3 keys of SOX 2002 Act?
- Corporate responsibility
- Enhance Financial Disclosure
- Corp and Criminal Fraud Accountability
What are 3 assessments for internal control (IC) that CEO and CFO will have assumed responsibility?
1.Design: IC has been designed to ensure material info was made available
2. Evaluate: - IC has been evaluated for Effectiveness within 90 days prior to the report
3. Conclusion to the effectiveness of IC based on their evaluation – must be included in the report.
DEC- (report in December)
What are SOX relating Corp and Criminal Accountability, including: Alter or make false doc, working paper for auditor, securities fraud and whistle-blowers?
- Alter/ make false doc- criminal penalty:- fine, in jail up to 20 yrs
- Auditor needs to review and retain workpapers for 7 years, if fail, get fined and/or in jail up to 10 yrs
- Security fraud: from 2-5 yrs in jail after the discovery. If intentionally, fine and/or in jail up to 25 years
- Whitle-Blower Protection:- file with Secretary of Labor with compen damage
What is penalty for corp officers who dont sign off Financial reports that required by SEC?
- Up to USD1M fine, and/or 10 yrs in jail
- Willling to sign off for smt wrong, USD5M fine and/or 20 yrs in jail
Definition of Internal control?
a process which is designed, implemented by Mgnt/ Board/ employee to provide reasonable assurance that it will achieve its Operating, reporting and Compliance objectives. (OCR)
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What is COSO? <!--EndFragment-->
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COSO: Committee on Sponsoring Organization - independent Private sector Initiative
In 1992, COSO issed IC- Integrated Framework - to assist corp in developing comprehensive assessment of IC effectiveness.
IC concepts: – 17 principles in 5 major IC components <!--EndFragment-->
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What are 5 IC integrated components needed to achieve ORC? <!--EndFragment-->
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CRIME
- C - Control Environment - Tone at the top: Ethics & Integrity
- R - Risk Assessment - FS misstated/ Fraud - EAR: Event identify, Assess risk, Respond to risk
- I - Information and Communication - FACT: fair, accurate, complete, timely
- M - Monitoring - IC: efficient, must report deficiencies
- E - (Existing) Control Activities - Policy/ Procedure to mitigate risk to acceptable level, tech control <!--EndFragment-->
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What is Effective IC? <!--EndFragment-->
- All CRIME and 17 principles are relevant to both Present & Functioning - meant that they are included in current IC sys, operated as designed.
- CRIME operated as an integrated sys to reduce risk to acceptable level
- If major deficiency is identified, the entity may not conclude Effective IC under COSO
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What is Enterprise Risk Management - ERM? <!--EndFragment-->
In 2004, COSO issued ERM - Integrated Framework to assist org in developing a comprehensive response to risk management: Identify risk, determine how much uncertainty to accept and how to deal with, strategy to balance risk and returns.
- ERM’s Objectives: - 4 cate: S- ORC (Strategy for S)
- ERM’s components - Broader in scope of COSO IC framework
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What is ERM’s components? SI EAR AIM or S-CRIME <!--EndFragment-->
SI : Setting Objectives, Internal Environment: S -C of CRIME
EAR: Event Indentification, Assess risk, Risk response : R of CRIME
AIM: Activities control, Info and Communication and Monitoring - IME of CRIME
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What is Internal Environment of ERM’s components? <!--EndFragment-->
Same as C in CRIME, plus:
- HR : hire, train qualified people
- Risk Mgnt philosophy shared (Aggressive or Conservative)
- Risk level Appetite (accepted)
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What is the difference between Inherent risk and Residual Risk? <!--EndFragment-->
Inherent risk = risk if no action is taken to change
Residual risk = risk after action is taken
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What is assessment risk? <!--EndFragment-->
- Identify if inherent vs residual risk
- Establish likelihood (probability to occur) and Impact (consequence of an events occurrence, refered as severity or seriousness)
- Data sources: – from past experience with similar events
- Assessment technique: (i) Benchmarking (look at industry standards) (ii) Probability model (statistic data) and non-probablility model (assumpt: outcome of lawsuit)
- Event relationship
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What is effectiveness of ERM? <!--EndFragment-->
a. Each component must be present and functioning
b. No material weakness is considerred effective
c. Sig effective Erm - Mgnt/ BOD have reasonable assurance
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What is limitation fo ERM? <!--EndFragment-->
- Subject to human judgement
- Evaluate could be in error and managers could override controls
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What is Total Factor productivity Ratio (TFP)? <!--EndFragment-->
TFP - an external benchmark technique - Productivity mearures.- How many I can produce by putting in that much cost:
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TFP = QOP/ CIU
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QOP = Quantity of Output Produced
CIU = Cost of All Inputs Used
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What is Partial Productivity Ratio (PPRs)? <!--EndFragment-->
PPR = QOP/ QIU
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QOP = Quantity of Output Produced
QIU = Quantity of Input Used
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What is Prime costs? <!--EndFragment-->
DM + DL
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What is Conversion costs? <!--EndFragment-->
DL + OH applied
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What is Product costs (Manufacturing costs)? <!--EndFragment-->
Product cost = DM + DL + OH applied - will sit in Inventory and expense when sold
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What is Direct costs of (DM + DL)? <!--EndFragment-->
DM = Net Raw Material purchased + Freight In + Normal scrap created by the process DL = Labor directly related to production + reasonable downtime (break, setup, training..)
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What is indirect costs (OH: IM, IL, factory) <!--EndFragment-->
costs incurred in factory – product cost: Mfg OH
costs incurred in office – period cost - SG & A
What is traditional costing?
Traditional costing: –all indirect costs are allocated to a single cost pool as follow:
- OH rate = Budgeted OH cost/ Est cost driver
- Applied OH = Actual cost driver * OH rate
What is variable cost? fixed cost? Semi-variable costs?
How is the LT characteristic?
Variable cost vs Fixed Cost:
- Variable cost: – Constant per unit, change in total
- Fixed cost: – Change in unit, constant in total. (i.e rent per month)
- Semi-variable costs = mixed costs – contain both variable and fixed components (i.e Mfg OH)
- Long-run characteristic—For a long enough relevant range, any cost can be variable.
Relevant range – the range for which the assumptions of the cost driver in relationship with costs incurred are valid.
What is the process costing? its goal?
Present production report in Quantity and cost?
Process costing: – a method that average costs and applied them to a large number of homo items.
Goal: keep track of physical flow of mass production and costs associated with it.
How to compute Equivalent Unit (EU) using FIFO and Weighted Ave costing method?
- FIFO EU used in production
= ( Finished units in the period + End BL of WIP finished units) - Begin BL of WIP finished units
- WA EU in production
=(Finished units in the period + End BL of WIP finished units)
How to compute cost per Equiv. unit (EU) using FIFO and Weighted Average method?
- FIFO
= Current Cost only / EU
- Weighted Ave
= (Begin Cost + Current Cost) / EU
How is the Flow of Inventory?
How to compute COGM? and COGS?
Inventory: RM (or DM) to WIP to FG and go to COGS
(Begin RM + Purchase) - RM used in WIP = End RM
(Begin WIP + Total Mfg cost incurred) - COGM = End WIP
Total Mfg.cost incurred = DM used + DL + Mfg. OH applied
(Begin FG + COGM) - COGS = End FG
How is the T code for Mfg. OH?
Mfg OH
Dr balance = Actual cost incurred
Cr balance = OH applied =( rate * actual)
Credit balance is favorable since cost applied > actual
What is the difference between normal spoilage ( or shrinkage) abnormal spoilage?
Spoilage (or shrinkage)
Normal spoilage = occurred in regular operation, is included in Inventory cost
Abnormal spoilage = expense
Compute:
– Rule: Equivalent unit added for the period < actual units added
– key: (1) Compute Inventory costs = DM, DL, DOH + Normal spoilage è allocate cost per unit
(2) Compute period cost = SG&A +Abnormal spoilage àallocate per unit
What is Activity-based costing (ABC) system?
ACTIVITY-BASED COSTING (ABC) – a better way to allocate OH costs to products. Costs are assigned based on the consumption of resources. > Use multiple OH rate by dept ( compared to only 1 for Traditional)
Main characteristics of ABC
- More focused and detailed approach: – focus on multiple causes (activities) and effects (costs) and assign costs to them
- Can be part of a job-order system OR a process cost system
- Is also referred as Transaction-based costing
- Focus on mgnt of cost/benefit of activities: Value-added activities
What are 2 methods of service cost allocation using ABC?
2 methods: (1) Direct method – total costs of each Service dept are directly allocated to the production dept
i.e Service Dept A
rate= Total Dept A’s service cost / total cost driver units of all production divisions
Cost allocate to production Div 1= rate x Div 1’s cost driver#.
(2) Step down method – service dept’s costs are allocated to both other service dept and production dept as well.
Same way of calculation, except:
a. When computing rate, total service costs of the service dept = costs used by the productions division + costs being allocated from other service dept (since u used their service).
b. When computing rate, total cost driver units = of (all production divisions and service Dept) that have received the service.
What are Joint product costing and by-product costing?
(1) Joint Product: – more than 1 product and cannot be separately identified. (Main product)—resulted in Joint cost incurred up to the split-off point where separable costs are identified.
By-product: – minor products of relatively small value that incidentally result from the manufacture of main product (sp phu.)
(2) Methods to allocate Joint cost
a. Weighted average joint cost by Unit Volume.
b. Weighted average joint cost by NRV at Split-off point
NRV (Sales less cost of completion & disposal)
If sale value Not available at Split-off point, use final sale – further processing cost beyond the split off = NRV at the split off
(3) By-product cost
2 forms: (i) applied to main product as a deduction to common cost for joint-product at time of sale
Or (ii) credit as miscellaneous income
