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Business CPA Review > BEC 1 > Flashcards

BEC 1 Flashcards

1
Q

Title III of the Sarbanes-Oxley Act, “Corporate Responsibility,” includes the following sections pertaining to financial reporting:

A

Section 301: Public Company Audit Committee
Section 302: Corporate Responsibility for Financial Reports
Section 303: Improper Influence on Conduct of Audits
Section 304: Forfeiture of Certain Bonuses and Profits

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2
Q

Section 301 of the Sarbanes-Oxley Act defines the responsibilities of the audit committee of an issuer as including:

A
  1. Appointment of the auditor.
  2. Compensation of the auditor.
  3. Oversight of the auditor.
    a. Resolve disagreements between management and the auditor.
    b. The accounting firm reports directly to the audit committee.
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3
Q

Section 301 of the Sarbanes-Oxley Act defines the criteria for the independence of audit committee members for issuers as including the following characteristics:

A
  1. Each member of the audit committee shall be a member of the board of directors of the issuer but shall be otherwise independent.
  2. Audit committee members may not accept any consulting, advisory, or other compensation or fees from the issuer other than pursuant to their roles on the Board.
  3. Audit committee members may not be an affiliated person (a person who can influence financial decisions) of the issuer or any subsidiary of the issuer.
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4
Q

Section 301 of the Sarbanes-Oxley Act requires that an issuer’s audit committee establish a complaint procedure that includes:

A
  1. Receipt, retention, and treatment of complaints received by issuers regarding:
    a. Accounting
    b. Internal controls
    c. Auditing
  2. Confidential or anonymous submissions by employees of issuers regarding questionable accounting or auditing matters.
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5
Q

Section 302 of the Sarbanes-Oxley Act assigns the following corporate responsibilities for financial reports for issuers:

A

The CEO and CFO must certify the following for annual and quarterly reports:

  1. The officers have read the report.
  2. The report does not include untrue statements.
  3. The financial statements are fairly stated.
  4. The signing officers make assertions regarding their responsibilities for internal control.
  5. The signing officers have disclosed internal control weakness and instances of fraud to the auditors and the audit committee.
  6. The status of changes to internal control subsequent to the date of their evaluation.
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6
Q

Section 302 of the Sarbanes-Oxley Act assigns the following corporate responsibilities regarding internal controls that must accompany financial reports:

A

The CEO and CFO must certify the following for annual and quarterly reports:

  1. The officers are responsible for establishing and maintaining internal controls.
  2. Internal control is designed to ensure that material information is provided to internal and external users.
  3. Internal controls have been evaluated within 90 days prior to the report.
  4. The officers’ conclusions regarding internal control effectiveness as of the evaluation date.
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7
Q

Section 302 of the Sarbanes-Oxley Act assigns the following corporate responsibilities regarding the required disclosures to the auditors and the audit committee by officers:

A

The CEO and CFO must certify the following for annual and quarterly reports to the auditors and the audit committee:

  1. All significant deficiencies in the design or operation of internal controls.
  2. Any fraud, whether or not material that involves management.
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8
Q

Section 303 of the Sarbanes-Oxley Act specifically prohibits improper influence on the conduct of audits defined as follows:

A

No officer or director may take any action to fraudulently influence, coerce, manipulate or mislead an independent CPA engaged in the financial statements of an issuer for the purpose of rendering the financial statements materially misleading.

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9
Q

Section 304 of the Sarbanes-Oxley Act imposes certain financial penalties on officers that are responsible for material misstatements resulting from their misconduct. Penalties include:

A
  1. Refund to the issuer of any bonus or other incentive based or equity based compensation during the 12-month period following the first public issuance of the financial document.
  2. Refund any profits realized from the sale of securities of the issuer during the 12-month period following the first public issuance of the financial document.
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10
Q

Title IV of the Sarbanes-Oxley Act, “Enhanced Financial Disclosures,” includes the following sections:

A

Section 401: Disclosure in periodic reports
Section 402: Enhanced conflict of interest provisions
Section 403: Disclosures of transaction involving management and principal stockholders
Section 404: Management assessment of internal controls
Section 405: Exemption
Section 406: Code of ethics for senior financial officers
Section 407: Disclosure of audit committee financial expert
Section 408: Enhanced review of periodic disclosures by issuers
Section 409: Real time issuer disclosures

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11
Q

Rule 401 of the Sarbanes-Oxley Act requires certain disclosures in periodic reports. Those disclosures include:

A
  1. All adjusting entries identified by the public accounting firm reporting on the financial statements.
  2. All off balance sheet transactions including contingent obligations and other relationships that may have a material current or future effect on the financial statements.
  3. Pro forma financial statements shall include all relevant information and shall not include misleading or untrue information.
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12
Q

Rule 402 of the Sarbanes-Oxley Act includes certain enhanced conflict of interest provisions. Those provisions include:

A

Prohibitions on personal loans to executives with some exemptions.

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13
Q

Rule 403 of the Sarbanes-Oxley Act includes provisions for disclosure of transactions involving management and principal stockholders. Those provisions include:

A

Reporting by individuals with ownership of 10% or more, statements that report the amount of all securities.

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14
Q

Rule 404 of the Sarbanes-Oxley Act includes provisions for management assessment of internal controls. These provisions include a report showing:

A
  1. Management’s assertion that they are responsible for adequate internal control structure.
  2. Management’s conclusions regarding its assessment of the effectiveness of the internal control structure and procedures for financial reporting.
  3. The auditor’s attestation regarding management’s assessment of internal control.
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15
Q

Rule 407 of the Sarbanes-Oxley Act includes provisions for audit committee disclosures. Those disclosures include:

A

The issuer must disclose the existence of financial expert on the committee or the reasons why the committee does not have a member who is a financial expert.

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16
Q

For purposes of service on the audit committee, what qualifies an individual for classification as a financial expert?

A

A financial expert qualifies through education, past experience as a public accountant, or past experience as a finance officer for an issuer. Knowledge of the financial expert should include:

i. Understanding of GAAP.
ii. Experience in the preparation or auditing of financial statements for comparable issuers.
iii. Application of GAAP.
iv. Experience with internal controls.
v. Understanding of audit committee functions.

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17
Q

What are the components of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

Hint: CRIME

A
  1. Control Environment
  2. Risk Assessment
  3. Information and Communications
  4. Monitoring
  5. Existing Control Activities
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18
Q

What are the principles associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

Hint: PHRASED

A
  1. Management’s Philosophy and Operation Style
  2. Human Resources
  3. Financial Reporting Competencies
  4. Authority and Responsibility
  5. Organizational Structure
  6. Integrity and Ethical Values
  7. Board of Directors
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19
Q

What are the principles associated with the risk assessment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

A
  1. Financial Reporting Objectives
  2. Financial Reporting Risks
  3. Fraud Risk
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20
Q

What are the principles associated with the control activities component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

A
  1. Risk Assessment Integration
  2. Selection and Development
  3. Policies and Procedures
  4. Information and Technology
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21
Q

What are the principles associated with the information and communication component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

A
  1. Financial Reporting Information
  2. Internal Control Information
  3. Internal Communication
  4. External Communication
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22
Q

What are the principles associated with the monitoring component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

A
  1. Ongoing and separate evaluations.

2. Reporting deficiencies.

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23
Q

What are the components of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

Hint: IS EAR AIM

A
  1. Internal environment
  2. Setting objectives
  3. Event identification
  4. Assessment of risk
  5. Risk response
  6. Activities (control)
  7. Information and communication
  8. Monitoring
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24
Q

What are the key elements of the internal environment component of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

Hint: PHRASED C

A
  1. Philosophy of risk management
  2. Human resources standards
  3. Risk appetite/response
  4. Authority and responsibility
  5. Structure (organizational)
  6. Ethical values (and integrity)
  7. Directores
  8. Commitment to Competence
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25
Q

What are the key elements of the objective setting component of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Strategic Objectives
  2. Related Objectives
    a. Operations Objectives
    b. Reporting Objectives
    c. Compliance Objectives
  3. Selected Objectives
  4. Risk Appetite
  5. Risk Tolerances
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26
Q

What are the key elements of the event identification component of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Events
  2. Influencing Factors
  3. Event Identification Techniques
  4. Event Interdependencies
  5. Event Categories
    a. External
    b. Internal
  6. Distinguishing Risks and Opportunities
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27
Q

What are the key elements of the risk assessment component of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Inherent and Residual Risk
  2. Establishing Likelihood and Impact
  3. Data Sources
  4. Assessment Techniques
    a. Benchmarking
    b. Probabilistic Models
    c. Non-probabilistic Models
  5. Event Relationships
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28
Q

What are the key elements of the risk response component of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Evaluating Possible Responses
    a. Avoidance
    b. Reduction
    c. Sharing
    d. Acceptance
  2. Selected Responses
  3. Portfolio View
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29
Q

What are the key elements of the control activities component of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Integration with Risk Response
  2. Types of Control Activities
  3. Policies and Procedures
  4. Controls over Information Systems
  5. Entity Specific Controls
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30
Q

What are the key elements of the information and communication component of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Information

2. Communication

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31
Q

What are the key elements of the monitoring component of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Ongoing Monitoring Activities
  2. Separate Evaluations
  3. Reporting Deficiencies
32
Q

Define the integrity and ethical values principle associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effective internal control over financial reporting?

A

Top management must set a standard of conduct for financial reporting that demonstrates a commitment to integrity and ethical values.

33
Q

Define the board of directors’ principle associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effective internal control over financial reporting?

A

The board of directors is charged with understanding and exercising oversight responsibility for financial reporting and related internal controls.

34
Q

Define the management philosophy and operating style principle associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effective internal control over financial reporting?

A

Management philosophy and operating style should support achieving effective internal control over financial reporting.

35
Q

Define the organizational structure principle associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effective internal control over financial reporting?

A

The organizational structure of the company should support effective internal control over financial reporting.

36
Q

Define the financial reporting competencies principle associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effective internal control over financial reporting?

A

The company retains only individuals who are competent in financial reporting roles.

37
Q

Define the authority and responsibilities competencies principle associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effective internal control over financial reporting?

A

Assignment of authority and responsibility promotes and effectively achieves internal control over financial reporting.

38
Q

Define the human resources competencies principle associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effective internal control over financial reporting?

A

Human resources principles and practices promote and achieve effectiveness with respect to internal control over financial reporting.

39
Q

The principles associated with the control environment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effective internal control over financial reporting integrates what seven elements?

Hint: PHRASED

A
  1. Philosophy and operating style of management
  2. Human Resources
  3. Reporting (financial) competencies
  4. Authority and responsibility
  5. Structure (organizational)
  6. Ethical values (and integrity)
  7. Directors
40
Q

Define the ongoing and separate evaluations principle associated with the monitoring component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effecting internal control over financial reporting?

A

The functioning of internal control over financial reporting must be verified on an ongoing basis or in separate evaluations.

41
Q

Define the reporting deficiencies principle associated with the monitoring component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effecting internal control over financial reporting?

A

Deficiencies in internal control over financial reporting should be identified and reported timely to parties responsible for taking corrective action, to management and, if necessary, the Board.

42
Q

The principles associated with the monitoring component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effecting internal control over financial reporting integrates what two elements?

A
  1. Ongoing and separate evaluations of the functioning of internal control.
  2. Timely reporting of internal control deficiencies to appropriate parties.
43
Q

The principles associated with the risk assessment component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effecting internal control over financial reporting integrates what three elements?

A
  1. Management specifies financial reporting objectives.
  2. Risks to achievement of financial reporting objectives should be identified and analyzed to formulate a stratefy to manage risks.
  3. Explicit consideration of material misstatement due to fraud.
44
Q

The principle associates with the control activities component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effecting internal control over financial reporting integrates what four elements?

A
  1. Integration of procedures with the risk assessment.
  2. Selection and development of control activities considering both efficiencies (cost benefit analysis) and effectiveness.
  3. Establishment and communication of appropriate policies and procedures to implement controls.
  4. Information technology controls should be established to support financial reporting objectives.
45
Q

The principles associated with the information and communication activities component of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework for achieving effecting internal control over financial reporting integrates what four elements?

A

Information should be identified, captured, and distributed in a form that will be relevant to achieving financial reporting objectives relative to:
1. Financial reporting
2. Internal control
Matters that enable and support the understanding and execution of internal controls should be communicated:
3. Internally to individuals responsible throughout the organization
4. Externally to appropriate outside parties

46
Q

What are the characteristics of effective performance measures?

A

Effective performance measures:

  1. Relate to the goals of the organization.
  2. Balance long and short term issues.
  3. Reflect management of key activities sometimes referred to as critical success factors in the balanced scorecard.
  4. Are under the control or influence of the employee.
  5. Are understood by the employee.
  6. Are used to both evaluate and reward the employee or otherwise constructively influence behavior.
  7. Are objective and easily measured.
  8. Are used consistently.
47
Q

Define: Transaction Marketing

A

Customers are attracted for the sake of a single sale.

48
Q

Define: Interaction-based Relationship Marketing

A

When customers are attracted for the purpose of a sale that serves as the basis for an ongoing relationship.

49
Q

Define: Database Marketing

A

Information is gathered on customers and the information from that database is used to segment customers into target markets for a more effective selling effort.

50
Q

Identify three types of compensation generally available.

A
  1. Fixed salary
  2. Bonuses
  3. Perks
51
Q

List five issues related to incentive compensation.

A
  1. Time horizon: Does the plan exclusively emphasize current reward for current performance or does it promote ongoing performance?
  2. Fixed vs. variable bonuses: Is the incentive pay formula drive or subjective?
  3. Stock vs. accounting based performance evaluation: Is the measurement of performance based on accounting data or equity values?
  4. Local vs. company-wide performance: Does the incentive reward for local (division) or company-wide performance?
  5. Cooperative vs. competitive plans: Does the incentive reward group or individual accomplishment?
52
Q

Name the three components of product cost.

A 
Direct Materials (DM)
Direct Labor (DL)
Manufacturing Overhead (OH)

Prime Cost = DM + DL
Conversion Cost = DL + OH

53
Q

Distinguish between product and period costs.

A

Product Costs: Inventoriable; they become cost of goods sold when sold.
Period Costs: Expensed in the period incurred.

54
Q

Determine the standard overhead rate.

A

Standard overhead rate = (Estimated total manufacturing overhead costs) / (Estimated total activity level of cost driver)

55
Q

Define: Executional Cost Driver

A

Executional cost drivers are factors that are helpful to the firm in managing the short-term costs of the firm (e.g., relationships with suppliers, enhancements to the production process, etc.)

56
Q

Define: Structural Cost Drivers

A

Structural cost drivers are strategic decisions or plans made by the firm that have a long-term effect on the cost (e.g., experience, available technology, etc.)

57
Q

Define: Relevant Range

A

The relevant range is the range of volume for which the assumptions of the cost driver (i.e., linear relationship with the costs incurred) are valid and in which the actual value of the cost driver exists.

58
Q

With joint products, what is the treatment of costs incurred before the split-off point?

A

Costs incurred before split-off point are sunk costs, not relevant to further processing decisions.
Joint costs are allocated using one of the following methods.

Use % of product to total based on a ratio of:

  • Relative sales value
  • Net realizable value
  • Physical units
59
Q

What type of costs does a standard cost measurement system use for determination of manufacturing costs?

A

Standard cost systems use standard costs for all manufacturing costs (i.e., raw materials, direct labor, and manufacturing overhead).

60
Q

What is the formula for Cost of Goods Manufactured?

A 
Work in Process, beginning
Add: Direct Materials
        Direct Labor
        Manufacturing Overhead
Less: Work in Process, ending
Equals: Cost of Goods Manufactured
61
Q

What is the formula for Cost of Goods Sold?

A 
Manufacturing Entity:
Finished Goods, beginning
Add: Cost of Goods Manufactured
Less: Finished Goods, ending
Equals: COGS
Other:
Beginning Inventory
Add: Purchases
Less: Ending Inventory
Equals: COGS
62
Q

What is the difference between job and process costing?

A

Job Costing: With job costing, each unit/batch is unique and easily identifiable costs are determined by each job.
Example: We print your resume in our print shop.

Process Costing: With process costing, continuous mass-produced identical units are manufactured, and costs are determined by activity/process/department.
Example: We process crude oil into gasoline.

63
Q

What is an equivalent unit?

A

Used in process costing, equivalent units are fully completed units during the period.
In applying costs, determine the units, then costs, then apply the cost flow assumption for cost per unit and allocation of costs.

64
Q

Name the types of spoilage and indicate the appropriate accounting treatment.

A

Normal: Increase the cost of the product produced (i.e., inventory)
Abnormal: Charge to income of the current period.

65
Q

Define: Activity-Based Costing (ABC)

A

ABC is a costing theory that assumes that resource consuming activities cause costs and that costs should be assigned to benefiting products based on the activities performed and the resources consumed.

ABC systems often divide costs into multiple activity centers and identify the activities that drive the costs in each cost center. Costs are then assigned based upon the volume of cost drivers at the determined rate per cost driver.

66
Q

List and define the types of economic costs.

A

Explicit Costs: Explicit costs are documented out-of-pocket expenses.
Implicit Costs: Implicit costs are opportunity costs of inputs supplied by the owners (equity contributions).

67
Q

Distinguish between accounting and economic costs.

A

Accounting Costs: Accounting costs are explicit costs.

Economic Costs:

  1. Economic costs combine accounting (explicit) costs and opportunity (implicit) costs.
  2. Economic cost is a broader concept than accounting cost.
68
Q

List and define the three main production concepts.

A

Total Product: Total product equals the total amount of output “Q”.
Marginal Product: Marginal product equals the change in total product resulting from a one-unit increase in quantity of an input employed.
Average Product: Average product equals the total product divided by the quantity of an input.

69
Q

Define: Diminishing Marginal Returns

A

Diminishing marginal returns is sometimes referred to as diminishing marginal product. The concept refers to the fact that the marginal product of an input typically falls as the quantity of the input increases.

70
Q

Define: Economies of Scale

A

Economies of scale are reductions in unit costs resulting from increased size of operations.

71
Q

Define: Diseconomies of Scale

A

Diseconomies of scale are increases in average costs of operations resulting from problems in managing large-scale enterprises.

72
Q

List the five steps in theory of constraints analysis.

Hint: IM FAR

A 
Identify the constraint
Determine the profitable product mix
Maximize the flow through the constraint
Add capacity to the constraint
Redesign the manufacturing process for flexibility and faster cycle time
73
Q

Define: Benchmarking.

A

Benchmarking is the process of identifying standards for critical success factors for:

  1. Comparison to actual performance
  2. Determination of gaps
  3. Implementation of improvements
74
Q

Define: Best Practices

A

Best practices represent externally determined benchmarks from world-class performers.

75
Q

Identify the costs of quality.

A
  • Appraisal costs
  • Prevention costs
  • Internal failure costs
  • External failure costs

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