BEC Flashcards
Enterprise risk management helps an entity achieve four types of objectives. They are:
R.O.C.S
Reporting - objectives associated with the reliability of all forms of reporting, financial and otherwise
Operation - objectives related to the effective and efficient use of company resources
Compliance - objectives to ensure that the company complies with all relevant laws, rules, regulations, both internal and external
Strategic - high-level objectives that are aligned closely with and support a company’s mission
Risk assessment focuses on the following two risks:
I.R.
Inherent risks
Residual risk
The 2017 COSO ERM framework is a set of five components and twenty interrelated principles. The five components are:
P.R.I.G.S.
Performance
Review and Revision
Information, Communication, and Reporting
Governance and Culture
Strategy and Objective Setting
Residual risk is
the risk that remains after management’s response to mitigate risk.
Inherent risk is
the natural level of risk prior to any mitigation or reduction efforts.
Event risk is
the possibility of a negative impact resulting from an unexpected event.
Detection risk is the
risk that material misstatements will go undetected.
Internal control consist of five interrelated components:
C.C.R.I.M.
Control environment (FOUNDATION OFF ALL)
Control activities = (include all of the policies and procedures used within a system to help ensure that all management directives are performed as anticipated. )
Risk assessment,
Information and communication.
Monitoring = Monitoring is a company’s attempt to assess its internal control on an ongoing basis and make necessary changes whenever needed.
Risk responses fall into the following categories:
S.A.R.A.
Sharing – Reducing the risk likelihood or impact by transferring or sharing the risk such as purchasing insurance or forming a joint venture.
Acceptance – No action is taken to affect the likelihood or impact of the risk.
Reduction – Action is taken to reduce the likelihood or impact of the risk. The amount of the potential loss from each identified risk should be estimated to the extent possible. Some risks are indeterminate and can only be described as large, moderate or small.
Avoidance – Exiting the activity or activities that give rise to the risk, such as exiting a product line or selling a division.
A perfectly competitive market will exist if the following conditions are true:
Perfect competition
Customers are indifferent as to which supplier to buy from
Many independent firms are in the industry
Perfect information exists in the market
There are no barriers restricting firms from entering or exiting
The product is standardized
There is no non-price competition
The following is a list of assumptions that characterize monopolistic competition:
There are many non-collusive firms operating within the market, meaning that they operate independently of each other
The market for a product or products that can be differentiated, which means that each product is similar but not exactly alike
There is some non-price competition in which each firm tries to distinguish its product or service from competing products and services
The firms have limited control over price because of the presence of so many other firms selling similar products
There are minimal barriers from restricting firms from entering or exiting the market
Each firm has a highly elastic demand curve – when a company raises its price just a little bit the demand will go down and total revenue will decrease
The primary financial risks are
B.I.T.
borrowing risks,
investing risks, and
transaction risks
Black Scholes Option Pricing Model: Information Needed
P.E.R.E.S.
Price of the underlying asset
Exercise price of the option
Risk-free interest rate
Expiration date of the option
Standard deviation of the stock’s prices
Cash Conversion Period formula:
(Inventory Conversion Period + Receivables Conversion Period) - Payable Conversion Period
Quick Ratio (acid test) Formula:
(Cash + Marketable Securities + Net Accounts Receivables) ÷ Current Liabilities
Current Ratio Formula:
Current Assets ÷ Current Liabilities
Economic indicators are:
Leading indicator
Lagging Indicator
Coincident Indicator
Payroll Indicator
Economic indicator - Coincident indicator include:
Employees on nonagriculture income
Personal Income minus transfers payments
Index of industrial Production
Manufacturing and trade sales
What are the four screening methods, or ranking methods, used to determine if a project meets the necessary requirements to be a worthwhile investment?
P.I.N.A.
Payback Period/Discounted Payback Period
Internal Rate-of-Return
Net Present Value
Accounting Rate-of-Return
Payback Period/Discounted Payback Period –
DEFINITION
Used to determine the number of periods that must pass before the net-after cash inflows from the investment will equal the initial cost of the investment.
Net Present Value –
DEFINITION
Calculates the present value of the expected monetary gain or loss from a project by discounting all expected future cash inflows and outflows to the present point in time using the required rate of return.
Internal Rate-of-Return
DEFINITION
Calculates the interest rate at which the present value of expected cash inflows from a project equals the present value of expected cash outflows.
Accounting Rate-of-Return –
DEFINITION
The ratio of the amount of the expected increase in annual average accounting income as a result of the project relative to the required investment.
Depressions can be caused by:
E.S.O.
Excess of savings over new investment requirements
Speculation in the security markets
Overextension of credit during peak phases and excess inventories
Depressions can be caused by:
Overextension of credit during peak phases and excess inventories
Speculation in the security markets
Excess of savings over new investment requirements
All companies will experience different benefits from effective risk management but some of the common benefits include:
Fewer disruptions to operations
Higher utilization of resources
Fewer shocks and unwelcome surprises
More effective strategic planning
Better cost control
Minimizing losses and maximizing profits
Confidence in the organization from employees and shareholders
Better contingency planning
Improved ability to achieve objectives and take advantage of opportunities
Which is the Foundation of the five components of Internal Control?
Control Environment
Sarbanes-Oxley Act of 2002 Section 201:
Section 201: Services Outside the Scope of Practice of Auditors; Prohibited Activities
Sarbanes-Oxley Act of 2002 Section 204:
Section 204: Auditor Reports to Audit Committees
Sarbanes-Oxley Act of 2002 Section 302:
Section 302: Corporate Responsibility for Financial Reports
Sarbanes-Oxley Act of 2002 Section 404:
Section 404: requires management to document and test the company’s internal controls and to report on their effectiveness
A firm’s value chain is generally viewed as having the following components
inbound logistics,
operations,
outbound logistics,
marketing and sales, and
service to customers.
Big Data is characterized by the following four attributes known as the 4 V’s
Volume refers to the amount of data that exists.
Velocity refers to the speed at which data is generated and changed, also called its flow rate.
Variety refers to the diverse forms of data that organizations create and collect.
Veracity refers to the accuracy of data or the extent to which it can be trusted for decision-making.
ROA = Return on Assets
net income divided by total assets.
ROE = Return on Equity
net income divided by total equity
ROIC = Return on Invested capital
net income plus interest divided by average total invested capital. Invested capital is equal to interest bearing debt plus shareholders equity.
Manufacturers of capital goods are: C & HE
construction and heavy equipment
consumer durables are: A & A
automobiles and appliances
service businesses are: M
medical
producers of non-durable consumer goods are: F & C
food and clothing
There are 4 types of IT governance; S.S.P.D
strategic governance,
shared service governance,
project governance, and
data governance.
Big Data is characterized by the following four attributes known as the 4 V’s:
Volume - refers to the amount of data that exists.
Velocity - refers to the speed at which data is generated and changed, also called its flow rate.
Variety - refers to the diverse forms of data that organizations create and collect.
Veracity - refers to the accuracy of data or the extent to which it can be trusted for decision-making.
The capital asset pricing model formula is:
Investor’s required rate of return = Risk-free rate of return + Beta (Market rate of return – Risk-free rate of return).
AR turnover is calculated as
total sales divided by average receivables
Inventory turnover is calculated as
cost of sales divided by average inventory.
Strategic governance ensures
that IT objectives are aligned with the organization’s strategic objectives and provides a structure for the allocation of IT resources to meet business needs.
Factory overhead and manufacturing overhead are interchangeable terms. The costs included in factory overhead include:
Indirect Materials
Indirect Labor
General Manufacturing Overhead
Factory overhead -
Theoretical capacity assumes
output is produced 100% of the time.
Factory overhead -
Practical capacity adjusts
theoretical capacity for non-production time such as holidays
Factory overhead -
Normal volume adjusts
theoretical capacity for long run product demand over a multiple year period.
Factory overhead -
Expected annual capacity adjusts
theoretical capacity for the expected output for the current year only
The primary functions of an information system are:
P.I.C.O.S.
Processing
Input
Control
Output
Storage
Section 201 of the Sarbanes-Oxley Act of 2002
The prohibited services include
bookkeeping services, actuarial services, legal services, internal audit functions, in addition to many others.
Tax services, comfort letters, and statutory audits are all permitted services that usually require pre-approval by the audit committee.
The risk of fraud should be a concern to every management group as well as every audit team. You are beginning a new audit engagement. The client is the Hywong Corporation. Before the audit works begins, you want to make certain that the management and audit committee of the board of directors of this new client are aware of the importance of preventing fraud. Factors within an organization can often contribute to the risk of fraud. Write a memo to the president of Hywong and the audit committee to describe the importance of corporate governance oversight to reduce the risk of fraud. Please type your answer in the space provided below.
The management of a company has primary responsibility for the design and implementation of antifraud programs and controls to prevent, deter, and detect fraud. The audit committee has primary responsibility to oversee the organization’s financial reporting and internal control processes.
As a part of this work, the audit committee provides oversight of management’s fraud risk assessment process and antifraud programs and controls. Management and the board of directors are responsible for setting the “tone at the top” for ethical behavior within the company. Management must behave at all times with honesty and integrity because this attitude reinforces the importance of these values to employees throughout the organization. The corporate code of conduct establishes the “tone at the top” by stressing the importance of honesty and integrity. It can also provide specific guidance for all employees about permitted and prohibited behavior.
Typical items addressed in a code of conduct include expectations of general employee conduct, restrictions on conflicts of interest, and limitations on relationships with clients and suppliers. Additionally, the board of directors must be sufficiently objective so that the independence of its members cannot possibly be impaired. This independence is essential because the board has the ultimate responsibility for the implementation of antifraud programs and all other affairs of the organization.
cost accounting
price variance is calculated as:
(Actual Price − Standard Price) × Actual Quantity Used.
