BEC III BLAKE CPA Flashcards
SOX act of 2002
1) Created PCAOB
2) Requires independent annual audit for all public companies
3) Requires that all public companies have an audit committee
Compliance with SOX 404
Compliance that a company designed & implemented their controls & that they are being appropriately evaluated & if there are deficiencies they are communicated.
- Develop documentation of existing internal controls and procedures associated with financial reporting
2) Test the effectiveness of those controls & procedures
3) Provide details on any deficiencies in the controls and/or documentation
Uncertainty in Enterprise Risk management refers to:
The state of not knowing how or if potential events may manifest
Responsibility of Board Member
Fiduciary responsibility
Duty of Care
Duty of loyalty
Duty of obedience
Data Processing Controls - Used to validate the OUTPUT OF DATA
1) Run to run totals (Sum Checks)
2) Data Matching - CONSISTENT ACCROSS VARIOUS SOURCES (
(Date of Invoice & Date of purchase order need to line up)
3) Data sequence checks - IF THERE IS A SEQUENCE NOTHING IS MISSING (EX INVOICES #1, #2, #3 ….)
Supervisory Contrpls
Preventive & Detective
Preventive supervisory controls
Hiring requirements
Proper hierarchy
Segregation of duties
Approval requirements
Detective supervisory controls
Audits or inspections
Reconciliation’s
Employee performance reviews
Budget vs actual analysis
Tracking of KPIs
Change Control - Monitoring of changes to applications
step 1) Work by programmers in test environment
Step 2) Changes reviewed before going live in the application
Flow of information through an Accounting system
Step 1) General ledger - Transactions recorded
Step 2) Trial Balance - Generate Trial Balance from G/L
Step 3) Financial Statements - Create F/S from TB detail
Data Entry input controls
Edit check is another name for data entry input controls
Field Check
Sign Check
Limit Check
Range Check
Size Check
Completeness Check
Validity Check
Closed loop verification
Business process reengineering
Fresh or blank slate
Focused on improving customer value by performing
1) Remove layers in organization
2) Streamline processes with IT
Derivative
A financial contract that derives its value from a performance of another asset. Never derived from its own value.
Has to derive its value from changes or movements in another asset or security
Expected Monetary Value of a Risk Event
Technique used by management to help quantify and compare risk of potential outcomes.
***Probability adjusted cost of a risk
Risk Event
Cost incurred by risk event
X Probability of risk occurring
= Expected Monetary Value
Call option
The right to BUY a specific security at a specific price and date
Hope that Stock increases
Put Option
SELL a security at a specific price at a specific point in time
Hope That stock decreases
Functional Currency
Currency used to do business
Cash inflows & Cash Outflows
My functional currency is the US $
Unsystematic Risks/ Firm-specific risk/ Non-market Risk
Losses created by labor problems
Weather conditions
Can be Resolved by diversification:
Tech Stock
US GOV’T Bonds
High dividend yielding stock
Systematic Risk
Foreign currency values
Changes to regulations
Cannot be resolved by diversification
Mitigating interest Rate Risk
Invest in floating rate debt securities - Think of a booey that goes up and down with interest rate - LIBOR fluctuates with the overall market
Enter into derivative contracts
Mitigating liquidity Risk
Trade only in active markets - easily convertible into cash
Financial Risk/Default Risk
relates to the exposure of lenders to the failure of borrowers to repay both principal and debt
entity that uses its own cumulative earnings in capitalizing its operations is not exposed to default risk
Goal of Transfer pricing
Transfer as much cost as possible to the subsidiary with the highest tax rate
Shift cost from a subsidiary with low tax rate to high tax rate after tax income will increase
Business Continuity Plan
1st step
1st step) Conduct a business-impact analysis -
- systematic process to determine and evaluate the potential effects of an interruption to critical business operations as a result of a disaster, accident or emergency
Forward Contract
If you want to reduce the risk of foreign currency fluctuations when $ is expected to come in the future
Lock in a foreign exchange rate in the future
Execute a forward contract at an exchange rate and bank takes on risk
Interest Rate Premiums MILD
Risk - Free rate
M Maturity Risk Premium
+
I Inflation Risk Premium
+
L Liquidity Risk Premium
+
D Default Risk Premium - Will the loan be repaid (US T Bonds Sero default risk & Corporate Bonds of equal maturity and marketability)
= Interest Rate Charged
Market rate of interest on a one-year U.S. treasury Bill
Risk-Free Rate of interest + Inflation Premium
Does Effective annual percentage Rate (EAPR) factor in compounding interest?
Factors in compounding interest while pr DOES NOT
EAPR Formula
Step 1) Divide rate by # of periods
Interest Rate / # of quarters = Quarterly Rate
Step 2) Add 1 to quarterly Rate
Quarterly Rate + 1 = Result
Step 3) Compounding periods
Result ^ compounding periods = compounded Rate
Step 4) Subtract 1
Compounded Rate - 1 = EAPR
Stated Interest Rate = Nominal Interest Rate
The stated rate will always be given
