BEC 1: Corporate Governance and Operations Management

Question 1

What is the Board of Directors primary role and specific duties? Authority?

Answer 1

Primary: Safeguard company assets and maximize shareholder return.
Specific: (1) Election, removal, and supervision of officers (2) Adoption, amendment, and repeal of bylaws (3) Setting mngt. compensation (4) Initiating fundamental changes to the corp’s structure.
Authority: No individual; quorum - 8 out of 15 - duly constituted
*Sole discretion to declare dividends.

Question 2

Key provisions of SOX are described where?

Answer 2

Title III Corporate Responsibility: Audit committee; CEO/CFO representations &
Title IV Enhanced Financial Disclosures: Internal controls and audit committee.

Question 3

Describe the expanded role of the audit committee from SOX.

Answer 3

• Required
• Directly responsible for the appointment, compensation, and oversight of engagement auditor
• Auditor reports directly to
• Resolve disputes between auditor and mngt.
• Members of BOD but otherwise independent - cannot accept compensation or be affiliated persons
• Est. procedures to accept complaints (anonymous)
• At least one member be a financial expert or disclose why they don’t have to be one
• Tangible evidence those charged with governance are actively engaged in monitoring IC and audit of co’s F/Ss.

Question 4

Title VIII Corporate & Criminal Fraud Accountability

1) Individuals who alter….
2) Auditor work paper requirement…
3) Statute of limitations for securities fraud…
4) Criminal penalties for securities fraud…

Answer 4

1) Fined, imprisoned up to 20 yrs, or both
2) 7 yrs records - if not, fined, imprisoned up to 10 yrs, or both
3) “2 & 5” no later than earlier of 2 yrs after discovery or 5 yrs after violation
4) Fined, imprisoned up to 25 yrs, or both

Question 5

Title IX White collar criminal penalty enhancements

1) What are they and whom are they subject to?
2) A party that (a) certifies or (b) willfully certifies financial reports that don’t meet requirements…

Title XI Corporate Fraud Accountability

1) Tampering with record or impending an official proceeding
2) Retaliation against informants

Answer 5

1) Mail fraud, wire fraud, and violations of ERISA - US Sentencing Commission
2) a) Fined up to 1 mil. and/or imprisoned up to 10 yrs; b) Fined up to 5 mil. and/or imprisoned up to 20 yrs.

1) Fined and/or up to 20 yr prison term
2) Fined and/or imprisoned up to 10 yrs.

Question 6

What is COSO and when was it established and why?

What are the 5 major financial professional associations in the US that are the private “SOs” of COSO?

Answer 6

Committee on Sponsoring Organizations
Mid 1980s to study factors that lead to fraudulent financial reporting
1. Am. Acct. Association (AAA)
2. Am. Institute of Certified Public Accts (AICPA)
3. Fin. Executives Institute (FEI)
4. Institute of Internal Auditors (IIA)
5. Institute of Mngt. Accts. (IMA)

Question 7

What is Internal Control - Integrated Framework and when was it developed and updated?
How many principles within how many components?
Who is it used by?

Answer 7

Assist organizations in developing comprehensive assessments of internal control effectiveness - documents the assessment of IC over fin. reporting
1992 then 2006, 2009, and 2013

17 principles within 5 major IC components

Mngt. and BOD & External stakeholders

Question 8

What are the 3 objectives within the COSO Framework?

Which is the focus?

Answer 8

ORC:

1. Operations objective - relates to the effectiveness and efficiency of an entity’s operations
2. Reporting objective - pertains to the reliability, timeliness, and transparency of an entity’s ext. and int. fin. and non-fin. reporting as est. by regulators, acct. standard setters, or the firm’s int. policies - “Focus of COSO.”
3. Compliance objective - est. to ensure the entity is adhering to all applicable laws and regulations.

Question 9

What are the five components of internal control?

Answer 9

CRIME:

1. Control environment
2. Risk assessment
3. Info. and communication
4. Monitoring
5. (Existing) control activities

Question 10

What are the five principles of the Control environment?

Answer 10

EBOCA: “Tone at the Top”

1. commitment to Ethics and integrity
2. Board independence and oversight
3. Organizational structure
4. Commitment to Competence
5. Accountability

Question 11

What are the four principles related to Risk assessment? What is the mnemonic associated with it?

Answer 11

1. Specify objectives
2. Identify and analyze risks
3. Consider potential for fraud
4. Identify and assess change

EAR:
Event ID
Assess risk
Respond to risk

Deals with F/S misstatement or fraud

Question 12

What are the three principles related to Information and communication? Should be?

Answer 12

1. Obtain and use info.
2. Internally communicate info.
3. Communicate with ext. parties

“FACT” - Fair, Accurate, Complete, & Timely

Question 13

What are the two principles related to monitoring activities?

Answer 13

1. Ongoing and/or separate evaluations
2. Communication of deficiencies
   * Efficiencies of internal control and report deficiencies

Question 14

What are the three principles related to (Existing) control activities?

Answer 14

1. Select and develop control activities
2. Select and develop technology controls “IT”
3. Deployment of policies and procedures
   * Policies and procedures to mitigate risks

Question 15

All 5 components and 17 principles that are relevant to be both present and functioning. Define.

Answer 15

“Present” means that the components and relevant principles are included in the design and implementation of the IC system.
“Functioning” demonstrates that the components and relevant principles are currently operating as designed in the IC system.

Question 16

What is the framework issued by COSO dealing with risk and when was it issued?

Answer 16

Enterprise Risk Management (ERM) - Integrated Framework in 2004 to assist organizations in developing a comprehensive response to risk mngt.
*Strategy: balance risk and return.

Question 17

ERM defines enterprise objectives in what four categories?

Answer 17

SORC:

1. Strategic: high-level goals designed to achieve the mission
2. Operations: achievement of objectives through the effective and efficient use of resources
3. Reporting: achievement of reliable and consistent reporting
4. Compliance: ensuring compliance with laws and regulations.

Question 18

What are components or ERM?

Answer 18

IS EAR AIM

1. Internal environment: (C) “EBOCA” HR
2. Setting objectives: “SORC”
3. Event identification: (R)
4. Assessment of risk: (R)
5. Risk response: (R)
6. control Activities: (E) existing
7. Info and communication: (I)
8. Monitoring (M)

Question 19

Total Factor Productivity Ratio (TFP)?

Partial Productivity Ratios (PPRs)?

Answer 19

Output/Total Costs

Output/Specific Quantity

Question 20

Product Costs - prime and conversion costs?
Period Costs?
Manufacturing Costs?
Non-manufacturing Costs?

Answer 20

Not expensed until sold - related to manufacture of product.
Inv. and COGM & sold - Inventoriable
Components: DM, DL, and Manf. OH applied
Prime: DM & DL; Conversion: DL and OH applied

I/S only, expense when incurred, not Inventoriable
Exps - SG&A & Int. (Finc.) Exp.
Cost of selling product and administering and managing the operations of the firm.

All costs with manufacturing of product - Inv. and COGM & Sold - direct (DM, DL) & Indirect (IM, IL, OH) costs - product costs

Period costs - SG&A and Int.

Question 21

Cost Accounting systems are designed to meet the goal of measuring cost objects or objectives. The most frequent objectives include what?

Answer 21

PIE:

1. Product costing - Inv. & COGM & Sold
2. Income determination - Profitability
3. Efficiency measurements - comparisons to standards

Question 22

Direct Costs?

Indirect Costs?

Answer 22

Direct: DM and freight-in net of discounts and reasonable amount for normal scrap & DL and reasonable amount for expected downtime (breaks, setup, training)

Indirect: IM, IL, and other indirect costs in the factory - product - manf. OH in the office; period - SG&A

Question 23

What is the application of OH in traditional costing? Formula.

Answer 23

Calculate OH rate: budgeted OH costs/est. cost driver

Applied OH: Actual cost driver * OH rate (above)

Question 24

COGM?

Answer 24

WIP, beg.
\+ DM used *
\+ DL
\+ Manf. OH applied 
= total manf. cost available
less: WIP, end
= COGM (completed this period) (to COGS)

* DM used:
Beg raw materials
\+ purchases
= materials available
less: end. inv. raw materials
= used

Question 25

COGS?

Answer 25

FG inv. beg. 
\+ COGM
= COGAS
less: FG inv. end. 
= COGS (to I/S)

*Or net purchases for retailers

Question 26

Equivalent units:
WA?
FIFO?

Cost per EU:
WA?
FIFO?

Answer 26

1. WA:
   a. units completed (& transferred out) (100%)
   + b. End WIP * % completed

Beg. cost + current cost/EUs

2. FIFO
   a. Beg WIP * % to be completed
   + b. units completed - beg. WIP
   + c. end. WIP * % completed

Current costs only/EUs

Process Costing

Question 27

What are control charts?

Answer 27

A tool used in statistical quality control, plots results within an acceptable range, keeps deviations within an acceptable range, determines “zero” defects, shows goalpost conformance

Question 28

What are pareto diagrams?

Answer 28

“Histogram,” determines quality control issues that are most frequent, demonstrates a frequency of defects from highest to lowest.

Question 29

What is a fishbone diagram?

Answer 29

A cause-and-effect diagram, used to identify the source of problems in the production process by resource, production processes displayed along a line that looks like a fishbone, for managers to further analyze a defect.

Question 30

What types of cost bears an observable and known relationship to a quantifiable base?

Answer 30

Engineered cost

Question 31

For the 4 types of costing methods, (variable, activity-based, job, & process) which are used for external and/or internal reporting?

Answer 31

Activity-based and variable costing cannot be used for external reporting, but are useful for internal reporting; job and process costing are acceptable for both external and internal reporting.