BEC 1 Flashcards
Techniques for risk assessment
1) Event inventory: when management uses listing of potential events common to a specific industry as a means of identifying risks or opportunities
2) Facilitated workshop: gathering management together to discuss or even brainstorm ideas in a structured manner is a facilitated workshop
3) Questionnaires/survey: sending out questionnaires to affected parties requesting opinions on potential events
4) Process flow analysis: a flow chart of activities used to identify potential risks
“CRIME” mnemonic-applies to all 3 categories of entity objectives “ORC” (COSO objectives)
COSO private sector initiative (best practices)-5 major internal control components
C-Control Environment: tone of the top-ethics “EBOCA”
R- Risk Assessment by Management -the risk that F/S misstated or fraud
I-Information and Communication Systems-any information internally/externally is FACT: Fair, Accurate, Complete, Timely
M-Monitoring: Efficiencies of internal controls, report deficiencies
E-(Existing) Control Activities: Policies/procedures to mitigate risk
Objectives of COSO
“ORC”
O-Operations Objectives: relate to the effectiveness and efficiency of an entity’s operations
R-Reporting Objective (Focus of COSO): pertain to the reliability, timeliness, and transparency of an entity’s external and internal financial and nonfinancial reporting as established by regulators, accounting standard setters, or the firm’s internal policies.
C-Compliance Objectives: established to ensure the entity is adhering to all applicable laws and regulations.
Control environment “Tone at the top”
EBOCA mnemonic
Control environment includes the processes, structures, and standards that provide the foundation for an entity to establish a system of internal control.
E-commitment to Ethics and Integrity B-Board independence and oversight O-Organizational structure C-Commitment to Competence: hire. develop and retain competent employees A-Accountability
Risk Assessment
“EAR” mnemonic
E-Event identification
A-Assess risk
R-Respond to risk
COSO framework- Effective internal control
General requirements
All 5 components “CRIME” and 17 principles that are relevant to be both present and functioning
a) Present-components and relevant principles are included in the design and implementation of the internal control system
b) Functioning-components and relevant principles are currently operating as designed in the internal control system.
Enterprise risk management (ERM)=4 category objectives
Strategy-balance risk & return (it’s more broader)
S-Strategic-high level goals designed to achieve the mission
O-Operations- Achievement of objectives through the effective and efficient use of resources
R-Reporting-Achievement of reliable and consistent reporting
C-Compliance-Ensuring compliance with laws and regulations
Eight components of COSO’s ERM (Enterprise risk management)
mnemonic: “IS EAR AIM”
I-Internal environment- C from CRIME - “EBOCA” plus “HR” (H is Human Resources and R is for Risk Management Philosophy, and Risk Appetite)
S-Setting objectives - 4 categories “SORC”
E-Event identification (“EAR” is all part of R from CRIME)
A-Assessment of risk
R- Risk response
A-Activities (control) - E from CRIME
I-Information and communication- I from CRIME
M- Monitoring -M from CRIME
ERM framework identifies four methods of responding to risk
Management’s response to risk must align with the organization’s overall risk appetite.
1) Avoidance:risk response that involves the disposal of a business unit, product line, or geographical segment
2) Reduction: diversification of product offerings rather than the elimination of product offerings
3) Sharing: insuring against losses or entering into joint ventures to address risk
4) Acceptance: self insuring or simply tolerating full exposure to risk
Internal Benchmarks- Techniques to find and analyze problems.
1) Control chart- determines zero defects-shows the performance of a particular process in relation to acceptable upper and lower limits of deviation (measures conformance of operations within a standard range known as a goalpost).
2) Pareto diagram- individual and cumulative graphical analysis of errors by type, displayed in order of most to least frequent with a line graph that displays the cumulative occurrence of the problems.
3) Fishbone diagram (cause and effect diagrams)-describes the process, the contributions to the process, and the potential problems that could occur at each phase of a process (occurrence of defects).
Main categories of potential causes of the defect (called “large bones”) are machinery, method used, materials, and use of manpower.
Costs
Prime cost: sum of direct labor and direct material
Conversion cost: direct labor + factory overhead
Product cost: direct material+direct labor +overhead applied
COGM (Cost of goods manufactured)
Beg WIP \+RM used \+DL \+O/H applied =Total mfg costs -EI WIP =COGM
Raw Materials used
Beg RM \+Purchases (including freight-in) =AFV (available for use) -End. RM =RM used
Cost of goods sold (COGS)
Beg FG \+COGM (costs of goods manufactured =COGAFS (Cost of goods available for sale) -EI =COGS
Process costing
Method of product costing that averages costs and applies them to a large number of homogeneous items.
