BEC Lecture 1

Question 1

Title III of the Sarbanes-Oxley Act, Corporate Responsibility, includes four topics pertaining to financial reporting. What are they?

Answer 1

• Public company audit committees
• Corporate responsibility for financial reports
• Improper influence on conduct of audits
• Forfeiture of certain bonuses and profits

Question 2

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

Answer 2

1. Appointment of the auditor.
2. Compensation of the auditor.
3. Oversight of the auditor.
   
   1. Resolve disagreements between management and the auditor.
   2. The auditor reports directly to the audit committee.

Question 3

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

Answer 3

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 for fees from the issuer other than pursuant to their role 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.

Question 4

The Sarbanes-Oxley Act requires that an issuer’s audit committee establish a complaint procedure that includes:

Answer 4

1. Receipt, retention, and treatment of complaints received by issuers regarding:
   
   1. Accounting
   2. Internal controls
   3. Auditing
2. Confidental or anonymous submissions by employees of issuers regarding questionable accounting or auditing matters.

Question 5

The Sarbanes-Oxley Act assigns the following corporate responsibilities for financial reports for issuers:

Answer 5

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

1. The officers have reviewed the report.
2. The report does not include untrue statements or omit material information.
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 weaknesses 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.

Question 6

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

Answer 6

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.

Question 7

The Sarbanes-Oxley Act assigned the following corporate responsibilities regarding the required disclosures to the auditors and the audit committee by officers:

Answer 7

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.

Question 8

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

Answer 8

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

Question 9

The Sarbanes-Oxley Act imposes certain financial penalties on officers who are responsible for material misstatements resulting from their misconduct. Penalties include:

Answer 9

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.

Question 10

Title IV of the Sarbanes-Oxley Act, Enhanced Financial Disclosures, includes the following topics:

Answer 10

Disclosures in periodic reports

Enhanced conflict-of-interest provisions

Disclosures of transactions involving management and principal stockholders

Management assessment of internal controls

Certain exemptions

Code of ethics for senior financial officers

Disclosure of audit committee financial expert

Enhanced review of periodic disclosures by issuers

Question 11

The Sarbanes-Oxley Act requires certain disclosures in periodic reports. Those disclosures include:

Answer 11

1. All adjusting entries identified by the public accounting firm reporting on the financial statements.
2. The financial statements disclose all material off-balance sheet transactions including operating leases, contingent obligations, and relationships with unconsolidated subsidiaries.
3. Pro forma financial statements shall include all relevant information and shall not include misleading or untrue information.

Question 12

The Sarbanes-Oxley Act includes certain enhanced conflict-of-interest provisions. Those provisions include:

Answer 12

Prohibitions on personal loans to executives with some exceptions.

Question 13

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

Answer 13

Reporting by persons with ownership of 10% or more.
Statements are filed at the time of registration, when a person achieves 10% ownership, and when there has been a change in ownership.

Question 14

The Sarbanes-Oxley Act includes provisions for management assessment of internal controls. Those provisions include a report showing:

Answer 14

1. Management’s assertion that it is 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.

Question 15

The Sarbanes-Oxley Act includes provisions for audit committee disclosure. Those disclosures include:

Answer 15

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

Question 16

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

Answer 16

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:

1. Understanding of GAAP.
2. Experience in the preparation or auditing of financial statements for comparable issuers.
3. Application of GAAP.
4. Experience with internal controls.
5. Understanding of audit committee functions.

Question 17

Title VIII of the Sarbanes-Oxley Act considers what topics?

Answer 17

Criminal penalties for altering documents

Statute of limitations for securities fraud

Whistle-blower protection

Criminal penalties for securities fraud

Question 18

Title IX of the Sarbanes-Oxley Act considers what topics?

Answer 18

Title IX, White Collar Crime Penalty Enhancements, includes the following:

• Attempt and conspiracy
• Amended sentencing guidelines for white-collar offenses
• Failure of corporate officers to certify financial reports

Question 19

An issuer periodic report containing financial statements filed with the SEC must include the following written certifications:

Answer 19

Each certified financial report must include a written statement:

1. That the periodic report complies with the Securities Exchange Act of 1934.
2. That information if the report fairly presents, in all material respects, the financial condition and operating results of the issuer.
3. Which must be signed by the CEO and CFO of the issuer, who bear responsibility for these statements.

Question 20

Title XI of the Sarbanes-Oxley Act considers what topics?

Answer 20

Title XI, Corporate Fraud Accountability, includes the following:

• Tampering with a record or impeding an official proceeding
• Temporary freeze on authority for the SEC
• Authority of the SEC to prohibit persons from serving as officers and directors
• Retalitation against informants

Question 21

Under Title XI, Corporate Fraud Accountability, what are the penalties for tampering with a document used in an official proceeding or retaliating against an informant providing information to the SEC?

Answer 21

Document tampering will result in fines and/or a prison term of not more than 20 years.

Retaliation against informants providing information to the SEC will result in fines and/or a prison term of not more than 10 years.

Question 22

How does the principles-based approach support an effective system of internal control under the COSO framework?

Answer 22

An effective system of internal control requires the use of judgment in determining the sufficiency of controls, applying the proper controls, and assessing the effectiveness of the system of internal controls.

The principles-based approach of the COSO framwork emphasizes the importance of managment judgment.

Question 23

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

[CRIME]

Answer 23

1. Control Environment
2. Risk Assessment
3. Information and Communications
4. Monitoring
5. (Existing) Control Activities

Question 24

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

Answer 24

1. Commitment to ethics and integrity
2. Board independence and oversight
3. Organizational structure
4. Commitment to competence
5. Accountability

Question 25

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

Answer 25

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

Question 26

What are the three **principles** associated with the (existing) **control activities component** of the Committee of Sponsoring Organization's (COSO) Internal Control Integrated Framework?

Answer 26

1. Select and develop control activities 2. Select and develop technology controls 3. Deploy through policies and procedures

Question 27

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

Answer 27

1. Obtain and use information 2. Internally communicate information 3. Communicate with external parties

Question 28

Name and describe the three objectives within the COSO framework?

Answer 28

The three framework objectives within COSO are: * *Operating objectives* pertain to the effectiveness and efficiency of the entity's operations. * *Reporting objectives* pertain to the reliability, timeliness, and transparency of an entity's reporting. * *Compliance objectives* are necessary to ensure the entity is adhering to all laws and regulations.

Question 29

What is the purpose of the COSO cube?

Answer 29

The COSO cube shows a graphical three-dimensional depiction of the relationship between an entity's three objectives, its five integrated control components, and the entity's organizational structure.

Question 30

What is necessary for the five components of the COSO framework to create an effective internal control environment for an entity?

Answer 30

In order to have an effective internal control environment for an entity, the five components and 17 related principles must be both *present* and *functioning*. Additionally, the five components must operate together as an intergrated system, to reduce the risk to an acceptable level, that the entity will not achieve its objectives.

Question 31

Differentiate the COSO framework from the Audit framework.

Answer 31

The five components of the COSO framework or useful for identifying and evaluating the effectiveness of an entity's internal control. In contrast, the Audit framework focuses on how a given control prevents or detects and corrects material misstatements in an entity's financial reporting.

Question 32

Identify some inherent limitations that may exist even with an effective internal control system.

Answer 32

The following inherent limitations may still exist with an effective internal control system: * Breakdowns in internal control due to error or human failure * Issues pertaining to the suitability of the entity's objectives * External events beyond the control of the entity * Faulty or biased judgment in decision making * Management override of controls * Circumvention of controls through collusion

Question 33

What constitutes ineffective internal control under the COSO framework?

Answer 33

If a *major deficiency* is identified related to the presence and functioning of a component or relevant principle, or with respect to the components operating together in an integrated manner, the entity may not conclude that it has effective internal control system in place under the COSO framework.

Question 34

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

Answer 34

1. Ongoing and Separate Evaluations 2. Communication of Deficiencies

Question 35

What themes does the ERM framework encompass?

Answer 35

1. Aligning risk appetite and strategy. 2. Enhancing risk response decisions. 3. Reducing operating surprises and losses. 4. Identifying and managing multiple and cross-enterprise risks. 5. Seizing opportunities. 6. Improving deployment of capital.

Question 36

Explain the difference between opportunities and risks under the ERM framework.

Answer 36

Positive events that promote achievement of objectives are opportunities. Negative events that prevent the achievement of objectives are risks.

Question 37

What are the **components** of the Committee of Sponsoring Organization's (COSO) Enterprise Risk Management (ERM) Integrated Framework? [**IS EAR AIM**]

Answer 37

1. **I**nternal Environment 2. **S**etting Objectives 3. **E**vent Identification 4. **A**ssessment of Risk 5. **R**isk Response 6. Control **A**ctivities 7. **I**nformation and Communication 8. **M**onitoring

Question 38

What are the **key elements** of the **internal environment component** of the Committee of Sponsoring Organization's (COSO) Enterprise Risk Management (ERM) Integrated Framework? ["EBOCA" HR]

Answer 38

1. Commitment to Ethical Values and Integrity 2. Board Oversight 3. Organizational Structure 4. Commitment to Compentence 5. Accountability 6. Risk Management Philosophy 7. Human Resources Standards 8. Risk Appetite

Question 39

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

Answer 39

1. Strategic Objectives 2. Related Objectives 1. Operations Objectives 2. Reporting Objectives 3. Compliance Objectives 3. Selected Objectives 4. Risk Appetitie 5. Risk Tolerances

Question 40

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

Answer 40

1. Events 2. Influencing Factors 3. Event Identification Techniques 4. Event Interdependencies 5. Event Categories 6. Distinguishing Risks and Opportunities

Question 41

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

Answer 41

1. Inherent and Residual Risk 2. Establishing Likelihood and Impact 3. Data Sources 4. Assessment of Techniques 5. Event Relationships

Question 42

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

Answer 42

1. Evaluating Possible Responses 2. Selected Responses 3. Portfolio View

Question 43

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

Answer 43

1. Integration With Risk Response 2. Types of Control Activities 3. Controls Over Information Systems 4. Entity-Specific Controls

Question 44

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

Answer 44

1. Information 1. Strategic and Integrated Systems 2. Intregration with Operations 3. Depth and Timeliness of Information 4. Information Quality 2. Communication 1. Internal 2. External 3. Means of Communication Everything other than Information and Communication is bonus.

Question 45

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

Answer 45

1. Ongoing Monitoring Activities 2. Separate Evaluations 3. Reporting Deficiencies

Question 46

What is a major limitation of enterprise risk managment?

Answer 46

Enterprise risk management is subject to *human error* as ERM evaluations can contain errors and management can override controls.

Question 47

Explain the purpose of a balanced scorecard.

Answer 47

A balanced scorecard is a framework used for implementing strategy that converts an entity's strategic objectives into a set of performance measures.

Question 48

What are total factor productivity ratios (TFP) and partial productivity ratios (PPR)?

Answer 48

TFP and PPR are two types of productivity measures used as external benchmarks. Total factor productivity ratios (TFPs) reflect the quantity of _all_ output produced relative to the costs of _all_ inputs used. Partial productivity ratios (PPRs) reflect the quantity of output produced relative to the quantity of _individual_ inputs used.

Question 49

What is a control chart and how is it used as a statistical quality-control tool?

Answer 49

A control chart is used to plot a comparison of actual results by batch or other suitable constant interval to an acceptable range. Control charts effectively indicate whether there is a trend toward improved quality conformance or deteriorating quality conformance.

Question 50

How are Parento diagrams and fishbone diagrams used to identify quality-control issues (defects)?

Answer 50

A Parento diagram identifies the frequency (highest to lowest) of defects or problems that demand management attention. Once initially identified in the Parento diagram, the individual defects/problems are further analyzed by cause and effect in a fishbone diagram.

Question 51

What are the characteristics of effective performance measures?

Answer 51

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 are easily measured. 8. Are used consistently.

Question 52

Define *transaction marketing*.

Answer 52

Customers are attracted for the sake of a single sale.

Question 53

Define *interaction-based relationship marketing*.

Answer 53

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

Question 54

Define *database marketing*.

Answer 54

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.

Question 55

Identify three types of *compensation* generally available.

Answer 55

1. Fixed salary 2. Bonuses 3. Perks

Question 56

List five issues related to *incentive compensation*.

Answer 56

1. Time horizon--Does the plan exclusively emphasize current reward or current performance or does it promote ongoing performance? 2. Fixed vs. variable bonuses--Is the incentive pay formula driven 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?

Question 57

Name the three components of *product cost* and identify which of these three components are categorized as *prime costs* and *conversion costs*.

Answer 57

``` Direct Materials (DM) Direct Labor (DL) Manufacturing Overhead (MO) ``` Prime Cost = DM + DL Conversion Costs = DL + MO

Question 58

Distinguish between *product* and *period* cost.

Answer 58

*_Product Costs_* Inventoriable; they become cost of goods sold when sold. *_Period Costs_* Expensed in the period incurred as they are not inventoriable.

Question 59

Name the three most frequent objectives of an entity's cost accounting system(s).

Answer 59

1. Product costing (inventory and cost of good manufactured and sold). 2. Income derermination (profitability). 3. Efficiency measurements (comparison to standards).

Question 60

Determine the *traditional overhead* rate.

Answer 60

Traditional overhead rate = _Budgeted manufacturing overhead costs_ Estimated cost driver

Question 61

Define *relevant range.*

Answer 61

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

Question 62

Compare and contrast the *direct method* and *step-down method* for allocating services costs in activity-based costing.

Answer 62

Under the *direct method*, each service department's total costs are directly allocated to the production departments without recognizing that the service departments themselves may use the services from other service departments. Under the *step-down method*, a sequential approach is used to allocate service department costs to production departments as well as other service departments.

Question 63

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

Answer 63

Costs incurred before the split-off point are sunk costs, not relevant to further processing decisions. Joint costs are allocated by an arbitary means such as by unit volume relationships or relative net realizable values at the split-off point.

Question 64

What is the formula for *costs of goods manufactured*?

Answer 64

WIP (beginning) ``` ADD: Direct Materials (DM) Direct Labor (DL) Manufacturing Overhead (MO) {Applied} ``` _LESS: WIP (ending)_ Cost of Goods Manufactured It's the BASE mnemonic.

Question 65

What is the formula for *costs of goods sold*?

Answer 65

_Manufacturing Entity_ Finished Goods (beginning) Add: Cost of Goods Manufactured _Less: Finished Goods (ending)_ Cost of Goods Sold _Alternative Formula_ Beginning Inventory Add: Purchases _Less: Ending Inventory_ Cost of Goods Sold Both are the BASE mnemonic.

Question 66

What is the difference between *job* and *process* costing?

Answer 66

*_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.*

Question 67

What is an *equivalent unit* and how are the *costs applied*?

Answer 67

Used in process costing, equivalent units are fully completed and partially 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.

Question 68

How are equivalent units and total cost calculated using the FIFO method?

Answer 68

Equivalent units = (Beginning WIP x % to be completed) + Units started and completed\* + (Ending WIP x % completed) \*Units started and completed = Units completed - Beginning WIP Total costs = Cost incurred during the current period

Question 69

How are equivalent units and total costs calculated using the weighted average method?

Answer 69

Equivalent units = Units completed and transferred out + (Ending WIP x % completed) Total costs = Costs in beginning WIP + Costs incurred during the current period

Question 70

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

Answer 70

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

Question 71

Define *activity-based costing (ABC)*.

Answer 71

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 on the volume of cost drivers at the determined rate per cost driver.