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AUDIT > BEC - 1 > Flashcards

BEC - 1 Flashcards

1
Q

COSO is the framework for assessment of

A

of internal controls over financial reporting.

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2
Q

COSO is used by management and the BOD for

A

understanding and obtaining confidence.

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3
Q

Definition of internal control is

A

the process designed and implemented by an entity to provide reasonable assurance that the company will accomplish its reporting objectives.

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4
Q

Five components within COSO - “CRIME” equal:

A

Control Environment, Risk Assessment, Information and Communication, Monitoring, and Existing Control Activities

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5
Q

Three major objectives within COSO - “ORC”:

A

Operating Objective, Reporting Objective, and Compliance Objective

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6
Q

Control environment is the tone

A

at the top.

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7
Q

Control Environment - EBOCA

A

Ethical value and integrity, Board Independence and oversight, Organizational Structure, Commitment to Competence, and Accountability

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8
Q

Risk Assessment - EAR

A

Event identification, assessment of risk and respond to risk.

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9
Q

Information and Communication - FACT

A

Fair, Accurate, Complete, and Timely information

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10
Q

Information and Communication occurs between

A

internal and external parties.

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11
Q

Monitoring is the effectiveness of

A

internal controls.

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12
Q

Monitoring’s frequency depends on

A

the assessment of risk.

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13
Q

Monitoring should report

A

deficiencies and correct them.

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14
Q

COSO cube - organizational structure includes:

A

Entity level - board, division, operating unit, and function.

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15
Q

Effective system should be both present and

A

functioning. Integrated system.

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16
Q

Present =

A

included in the design of internal control.

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17
Q

Functioning =

A

operating as designed.

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18
Q

Effective system will reduce

A

the risk of not accomplishing objectives.

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19
Q

Limitations on internal controls equal

A

no guarantees - reasonable assurance to meet objectives. There are human errors, collusion, and management override.

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20
Q

ERM stands for

A

enterprise risk management.

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21
Q

ERM is the company’s strategy to

A

balance the risk and return.

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22
Q

ERM has four category objectives (SORC)

A

Strategy, Operations, Reporting, and Compliance.

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23
Q

ERM components =

A

IS EAR AIM.

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24
Q

IS =

A

Internal Environment (EBOCA HR), and setting objectives (SORC).

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25
Q

EAR =

A

Event identification, assessment of risk, response to risk.

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26
Q

AIM =

A

Control Activities (existing controls), information and communication, and monitoring.

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27
Q

Internal environment (EBOCA HR) = (part of IS of ERM).

A

HR = Risk Management Philosophy (Aggressive or Conservative), Human Resource Standards (hire, train, evaluate, compensate, promote), Risk Appetite (balance).

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28
Q

Financial performance measures include:

A

1) profit, 2) return on investment, 3) variance analysis, 4) balanced scorecard.

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29
Q

Nonfinancial performance measures include:

A

External and internal benchmarks.

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30
Q

External benchmarks are productivity

A

measures.

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31
Q

Examples of external benchmarks include:

A

1) ratio of output relative to the input, 2) total factor productivity ratios, and 3) partial productivity ratio.

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32
Q

Total factor productivity ratio is all inputs, including

A

material AND labor costs. Output over total cost.

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33
Q

Partial productivity ratio is

A

materials OR labor costs - focusing on quantity. Output over specific quantity.

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34
Q

Internal benchmarks are

A

techniques to find and analyze problems.

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35
Q

Internal benchmarks include:

A

1) control chart, 2) Pareto Diagram, and 3) Cause and effect.

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36
Q

Control chart determines

A

zero defects.

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37
Q

Goalpost conformance, part of control chart, keeps

A

deviations within an acceptable range.

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38
Q

The Pareto diagram is a histogram that determines

A

quality control issues from most frequent to least frequent.

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39
Q

The Pareto diagram is also known as the

A

frequency diagram.

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40
Q

Cause and effect is the

A

fishbone diagram.

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41
Q

When using a cause and effect diagram, one

A

works backwards.

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42
Q

Managers use this diagram to identify sources of problems.

A

Cause and effect or fishbone diagram.

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43
Q

The characteristics of an effective performance measure include:

A

promoting the achievement of goals, which motivate employees, and also are objective and easy to measure.

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44
Q

Marketing practices must

A

consider the objectives of management.

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45
Q

Purpose of marketing is to:

A

establish value of a product or service.

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46
Q

Transaction marketing is for

A

the promote the lowest price, for a single sale.

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47
Q

Interactive-Based Relationship marketing is for

A

repeat business or a loyalty discount. It promotes customer satisfaction.

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48
Q

Database Marketing is for

A

focusing in on a segment of customers - which provides more effective selling to target groups.

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49
Q

E-marketing is performed via

A

the internet.

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50
Q

Network Marketing is from

A

relationships and referrals.

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51
Q

Incentive compensation is to

A

motivate, compensate and retain its employees.

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52
Q

Perks are

A

non-salaried benefits, but when they are not related to performance of manager’s business activities may also need to be included in the taxable income.

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53
Q

Cash bonus can be either

A

fixed, which is objective, or variable, which is subjective.

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54
Q

Stock options promote

A

current and future performance. Assist in the retention of employees.

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55
Q

Local vs. company-wide performance incentives

A

Division performance may erode company-wide performance.

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56
Q

Cooperative incentive plans promote

A

one goal and an example would be stock options.

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57
Q

Competitive incentive plans are promoted by

A

tiered sales commissions.

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58
Q

ERM stands for

A

enterprise risk management.

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59
Q

ERM has four objectives - SORC -

A

Strategic, Operations, Reporting, Compliance.

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60
Q

The Components of ERM as acronyms are:

A

IS EAR AIM

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61
Q

IS stands for:

A

internal environment and setting objectives.

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62
Q

EAR stands for

A

event identification, assessment of risk, and response to risk.

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63
Q

AIM stands for

A

control Activities (existing controls), information and communication, and monitoring.

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64
Q

Internal environment defines

A

the tone of the organization.

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65
Q

Internal environment is supported by eight key elements:

A

EBOCA HR.

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66
Q

EBOCA HR stands for:

A

Ethical Values and Integrity, Board Oversight, Organizational Structure, Commitment to Competence, Accountability. Risk Management Philosophy, Human Resources Standards, and Risk Appetite.

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67
Q

Setting Objectives is supporting by the following key elements:

A

Strategic Objectives, Operations Objectives, Reporting Objectives, and Compliance objectives. “SORC”

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68
Q

Risk appetite is set with the oversight

A

of the Board of Directors. It is the benchmark for strategy setting. Willingness to accept risk to achieve return.

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69
Q

Event identification – the E in EAR –

A

considers internal (technology choices, personnel, etc) and external risks (recessions, storms, changes in society), and both negative (risks) and positive (opportunities) should be identified.

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70
Q

Assessment of Risk – the A in EAR – is the

A

likelihood and severity - probability. There is inherent risk - if management does nothing - and residual risk - the risk after management takes action.

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71
Q

The assessment of risk has several techniques such as:

A

benchmarking, or modeling (probabilistic = statistical and non-probabilistic = opinion).

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72
Q

Response to risk – the R in EAR – should align

A

with the organizations overall risk appetite. Organizations should look at risk from a portfolio view or entity-wide view.

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73
Q

Management with response to risk in one of four ways. The four ways are:

A

avoidance, reduction, sharing, and acceptance.

74
Q

Control Activities - the A in AIM - are the

A

policies and procedures used to response to risk.

75
Q

Information and communication - the I in AIM - should use internal

A

and external information and communication to fully integrate with operations. The information quality should be FACT.

76
Q

Monitoring - the M in AIM - is ongoing

A

and dictated by risk. There are separate evaluations, with multiple checks and balances within internal audit. Should report deficiencies and correct them.

77
Q

There can be no material weaknesses for ERM to

A

be considered effective.

78
Q

Limitations of ERM are

A

made via error or management override of controls.

79
Q

Financial performance measures include:

A

profit, return on investment, variance analysis, and balanced scorecard.

80
Q

Nonfinancial performance measures includ external

A

benchmarks and internal benchmarks.

81
Q

External benchmarks is a productivity

A

measure of variance and efficiency.

82
Q

Examples of external benchmarks include:

A

ratio of output relative to the input, total factor productivity ratio, and partial productivity ratio.

83
Q

Total factor productivity ratios are for material

A

and labor costs. The ratio is the number of output over total cost.

84
Q

Partial productivity ratio are for material

A

or labor costs. Focuses in on quantity. The ratio is a number of units produced over a specific quantity (hours, pounds used, gallons used, etc.)

85
Q

Internal benchmarks are a technique

A

to find and analyze problems.

86
Q

Control chart is to determine

A

“zero” defects. Output is within an acceptable range. Standard = average, upper and lower range = goalpost conformance. Keep deviations within an acceptable range.

87
Q

Pareto Diagram is a

A

histogram and determines quality control issues from most frequent to least frequent. It is a frequency diagram.

88
Q

Cause and effect is also known as the

A

fishbone diagram.

89
Q

Cost object is defined as

A

a resource or activities that serve as a basis for management decisions.

90
Q

Cost control is the valuation

A

of product or inventory.

91
Q

A single cost object can have more than one way

A

to measure. Measure for tax purposes vs GAAP purposes or internal vs external.

92
Q

Prime costs include

A

direct material + direct labor.

93
Q

Conversion costs include

A

direct labor + overhead applied.

94
Q

Product costs would include

A

direct material + direct labor + manufacturing overhead applied. All costs related to manufacturing.

95
Q

Product costs are not expensed until

A

the product is sold - matching principle.

96
Q

Period costs are income

A

statement only. These should NOT be capitalized. Examples are selling, general, and admin costs, interest expenses.

97
Q

Product costs are

A

iventoriable (i.e. considered as assets before the product is sold).

98
Q

Period costs are expenses in the

A

period in which they are incurred.

99
Q

Manufacturing costs include all

A

costs associated with the manufacture of a product. Consist of both direct and indirect costs.

100
Q

Nonmanufacturing costs include

A

selling, general, and administrative expenses.

101
Q

Direct raw material are the costs

A

of materials purchased (including freight-in net of any applicable discounts) plus a reasonable amt of normal scrap.

102
Q

Direct labor is the cost of the labor

A

related to production including downtime.

103
Q

Indirect costs are known

A

as overhead.

104
Q

Indirect materials covers the cost

A

of materials not used specifically or could not be traced to completed product (i.e. cleaning supplies for couch making).

105
Q

Indirect labor in manufacturing includes

A

forklift drivers, maintenance workers, shift supervisors, etc).

106
Q

Other indirect costs in manufacturing would include

A

depreciation, rent, machine maintenance, property taxes, insurance, rent, utilities, etc.

107
Q

Calculated overhead rate =

A

Budgeted overhead costs / estimated cost driver

108
Q

Applied overhead =

A

actual cost driver x overhead rate (from prior step).

109
Q

Cost drivers can include

A

sales volume and production volume.

110
Q

Variable cost changes proportionally with the

A

cost driver.

111
Q

Variable costs change in total, but

A

they remain constant per unit.

112
Q

Fixed costs remain constant in total, but they

A

vary per unit.

113
Q

Long-run characteristics is given enough time,

A

any cost can be considered variable.

114
Q

The following transactions occur within the relevant range of an identified cost driver, the following are VARIABLE costs:

A 
Sales, 
Returns and allowances, 
Direct material,
Direct labor,
Fringe benefits (15% of labor),
Royalties (1% of product sales),
Factory production supplies,
Electricity - used in mfg. process,
Scrap and spoilage (normal),
Sales commissions,
Fringe benefits (relate to labor),
Delivery expenses.
115
Q

The following transactions occur within the relevant range of an identified cost driver, the following are FIXED costs:

A 
Depreciation - straight-line,
Electricity - used in the mfg. process,
Officers' salaries,
fringe benefits (relate to labor),
Advertising expenses (annual contract expenses).
116
Q

The following transactions occur within the relevant range of an identified cost driver, the following are SEMI-VARIABLE costs:

A 
Indirect labor, 
Fringe benefits (15% of labor),
Maintenance and repairs of building.
117
Q

Cost accumulation systems are used to

A

assign costs to products.

118
Q

Custom order cost object uses a

A

job costing system.

119
Q

Mass-produced homogeneous cost object uses a

A

process costing system.

120
Q

Cost of goods manufactured account for manufacturing costs

A

completed during the period. It includes direct material, direct labor, and manufacturing overhead.

121
Q

The manufacturing costs incurred during the period are increased or decreased by

A

the net change in work-in-process inventory (beginning WIP minus ending WIP).

122
Q

The formula for COGM is:

A

WIP, Beginning
Add: DM, DL, and manufacturing overhead
Less: WIP, Ending
= COGM

123
Q

The formula for COGS is:

A 
Finished Goods inventory, beginning
Add: COGM
= Cost of goods available for Sale
Less: Finished goods inventory, ending 
= COGS
124
Q

Flow of inventory = Raw materials >

A

Work in Process > Finished Goods.

125
Q

Details Flow of inventory = Raw materials used are added to WIP and

A

Inventory transferred to finished goods are added to finished goods.

126
Q

Under FIFO accounting, the ending inventory is priced at

A

cost of manufacturing during the period.

127
Q

Weighted-Average method averages

A

the cost of production during the period with the costs of the beginning WIP.

128
Q

FIFO has three elements:

A

1) Completion of units on hand at the beginning of the period (% to complete).
2) Units started and completed during the period (Units completed - beginning WIP)
3) Units partially complete at the end of the period.

129
Q

Weighted-Average has two elements:

A

1) Units completed during the month (beginning WIP + units started and completed during the month),
2) Units partially complete at the end of the period.

130
Q

FIFO represents only costs

A

incurred in the current period.

131
Q

Weighted-average approach includes both

A

current period units plus prior period units.

132
Q

Cost per equivalent unit for weighted average is calculated by:

A

(Beginning cost + current cost) / equivalent units.

133
Q

Cost per equivalent unit for FIFO is calculated by:

A

Current cost only / equivalent units

134
Q

Normal spoilage occurs under

A

regular operating conditions and included in standard cost of the manufactured product. Capitalized as part of inventory costs.

135
Q

Abnormal spoilage does not occur

A

under normal operating conditions. Expenses separately on the income statement as a period expense.

136
Q

Net realizable values equals

A

sales value less cost of completion and disposal.

137
Q

By-product sales reduces

A

common costs for joint product costing or increases miscellaneous income.

138
Q

Focus of Cost Objective is

A

with cost control. May focus on valuation of product or inventory or cost control (cost comparison to standards and budgets).

139
Q

Prime cost =

A

DM + DL

140
Q

Conversion costs =

A

DL + Overhead Applied.

141
Q

Product costs =

A

DM + DL + Overhead.

142
Q

Direct materials, WIP, and finished goods are all

A

balance sheet assets.

143
Q

COGS is an

A

income statement account - expense upon sale.

144
Q

Product costs are not expenses until

A

product is sold - matching principle.

145
Q

Period costs are

A

income statement only - they do NOT go on balance sheet.

146
Q

Manufacturing costs are

A

product costs.

147
Q

Manufacturing costs (product costs) are composed of both

A

direct (DM + DL = Prime) and indirect costs (overhead).

148
Q

Period costs are

A

SG&A, and interest

149
Q

Cost accounting assists with PIE. PIE stands for

A

product costing, income, and efficiency measurements.

150
Q

Freight in is included in direct

A

raw materials. Freight out is expensed.

151
Q

Indirect costs - in the factory are

A

product costs such as manufacturing overhead.

152
Q

Indirect costs - in the office are

A

period costs such as SG&A.

153
Q

Allocate overhead using a

A

cost driver, assign factory overhead to individual products. Examples are direct labor $’s or labor hours.

154
Q

Traditional costings is used with total

A

manufacturing overhead and we assign it in one way. A single cost pool.

155
Q

Traditional costings step one

A

budgeted total overhead cost and divide by cost driver (labor hours, machine hours, etc.)

156
Q

Traditional costing step two

A

uses actual hours multiplied by step 1 rate.

157
Q

Relevant range is when the total

A

cost would not vary with volume.

158
Q

Cost drivers are generally classified as a

A

volume of activity variable.

159
Q

Any cost is variable in

A

the long-run.

160
Q

All assumptions hold true within the

A

relevant range. Variable and total cost are constant.

161
Q

Unique products made use a

A

custom order job costing system.

162
Q

Process costing is used when there are

A

mass produced.

163
Q

You can use both job order

A

and process costing.

164
Q

Back flush costing - we will not price the

A

product until it is totally complete. It is not valuable until complete.

165
Q

COGM =

A 
BEG WIP
ADD: DM used (see card 166), DL, and Overhead applied
= Manufacturing costs available
LESS: Ending WIP
= COGM completed this period.
COGM is used in COGS.
166
Q

If direct materials used is not given, you

A 
would have BEG Raw material
ADD Purchases (incldue freight in
= Available
LESS: Ending Inve of Raw materials
= USED.
167
Q

Manufacturing Overhead t-chart and the debit side would include:

A 
Indirect labor
Indirect material
Utilities
Depreciation on building and equipment
Taxes (payroll, property)
Fire insurance
Other indirect Costs.
168
Q

Manufacturing Overhead t-chart and the credit side would include:

A

Overhead applied.

169
Q

Process costing is an

A

averaging of costs and applied them to a large number of items.

170
Q

The goal of a production report is to

A

keep track of the physical flow of units and costs.

171
Q

Equivalent units is defined when a percentage of units are

A

completed. Units multiplied by the percent completed. 10,000 units that are 75% completed would be an equivalent unit of 7,500.

172
Q

Step-down method is used in a

A

more sophisticated approach to allocate service. More complicated.

173
Q

Joint is also known as a

A

common cost.

174
Q

Joint product is a

A

main product.

175
Q

A by-product was not set

A

out to be made, but it just happened to occur during the production of the main product.

176
Q

Joint product costs are costs incurred in producing products

A

up to the split-off point.

177
Q

Separable costs are costs incurred on a product

A

after the split-off point.

178
Q

There are three methods to assign expenses to

A

joint costs. Method 1 = volume. Method 2 = Sales Value at split-off. Method 3 = No sales value at split-off (finish to sell). Work backwards - separable costs are subtracted from sales value.

179
Q

Net realizable value =

A

Sales value less cost to complete (separable costs). (Method 3).

180
Q

By-products have a immaterial

A

value.

181
Q

By-products can be subtracted

A

from the joint costs. Therefore less joint costs to allocate.

182
Q

By-products income can also be

A

miscellaneous income.

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