BEC Lecture 6

Question 1

List the five business process management activities.

Answer 1

1. Design
2. Modeling
3. Execution
4. Monitoring
5. Optimization

Question 2

List the elements of PDCA.

Answer 2

1. Plan
2. Do
3. Check
4. Act

Question 3

List the benefits of process management.

Answer 3

1. Efficiency
2. Effectiveness
3. Agility

Question 4

Define outsourcing.

Answer 4

Outsourcing is generally defined as the contracting of services to external providers. Examples include a payroll service of even a call center to provide support or back office services for a fee. A contractual relationship exists between the business and its outsource provider.

Question 5

Describe business process reengineering (BPR) and explain how it is different from business process management (BPM).

Answer 5

BPR represents techniques used by an organization to help rethink how work should be done to significantly improve customer satisfaction and service, reduce operating costs, and enhance competitiveness.

BPR seeks radical change, while BPM seeks incremental change.

Question 6

Define JIT and the underlying concept of JIT.

Answer 6

Just-in-time (JIT) management anticipates achievement of efficiency by scheduling the deployment of resources just in time to meet customer or production requirements.

The underlying concept of JIT is that inventory does not add value. The maintenance of inventory levels purely produces wasteful costs. Reducing inventory by ensuring that resources arrive only if they are needed (just in time for use) is the idea behind JIT.

Question 7

Differentiate between conformance costs and nonconformance costs as it pertains to achieving quality standards.

Answer 7

The costs associated with maintaining existing quality standards are termed conformance costs and include both prevention and appraisal costs.

The costs associated with correcting nonconformance with existing quality standards are called nonconformance costs, and include both internal failure and external failure costs.

Question 8

Define TQM.

Answer 8

Total quality management (TQM) represents an organization’s commitment to a customer-focused performance that emphasizes both quality and continuous improvement.

Question 9

Define Kaizen.

Answer 9

Kaizen is a term for continuous improvement efforts that improve the efficiency and effectiveness of organizations through greater operational control. Kaizen occurs during the manufacturing stage.

Question 10

Define demand flow.

Answer 10

Demand flow manages resources using customer demand as the basis for resource allocation. Demand flow contracts with resource allocations based on sales forecasts or master scheduling.

Question 11

Define theory of constraints.

Answer 11

Theory of constraints anticipates that organizations are impeded from achieving objectives by the existence of one or more constraints. The organization or project must be consistently operated in a matter that either works around or leverages the constraint.

Question 12

What are the five steps in the theory of constraints?

Answer 12

1. Identification of the constraint.
2. Exploitation of the constraint.
3. Subordinate everything else to the above decisions.
4. Elevate the constraint.
5. Return to the first step.

Question 13

What is Six Sigma?

Answer 13

Six Sigma anticipates the use of rigorous metrics in the evaluation of goal achievement. Six Sigma expands on the Plan-Do-Check-Act model of process management and logically anticipates methodologies to improve current processes and develop new processes.

Question 14

In Six Sigma, what is DMAIC?

Answer 14

Existing product and business process improvements (DMAIC):

1. Define the problem
2. Measure key aspects of current process
3. Analyze data
4. Improve or optimize current processes
5. Control

Question 15

In Six Sigma, what is DMADV?

Answer 15

New product or business process development (DMADV):

1. Define design goals
2. Measure CTQ (Critical to Quality issues)
3. Analyze design alternatives
4. Design optimization
5. Verify the design

Question 16

Define project management.

Answer 16

Project management consists of five major processes carried out by a project manager tasked with balancing the needs and expectations of various stakeholders against the organization’s constraints. The processes include initiating, planning, executing, monitoring and controlling, and closing.

Question 17

Define project charter.

Answer 17

A project charter is a document that contains a business justification to fulfill the needs and expectations of initial stakeholders by carrying out a statement of work that will achieve the project objectives.

Question 18

Define the roles of project members.

Answer 18

Project members perform the project tasks, and their roles generally include:

1. Carrying out the work and producing the deliverables that have been defined by the project manager.
2. Understanding the work that must be completed; planning out the assigned activities in more detail if needed; completing the work within the budget, time, and quality expectations; and proactively communicating the status of their work to the project manager.

Question 19

Identify the project sponsor and that role.

Answer 19

An individual or group, that is internal or external to the project’s organization, who is responsible for allocating funding as well as resources to the project.

Question 20

Identify the executive steering committee and its role.

Answer 20

A group of executive level people or external organizations charged with regular oversight of a project and taking responsibility for the business issues associated with a project. Although the steering committee provides direction, it does not manage the project on a daily basis.

Question 21

What is a scope baseline?

Answer 21

A scope baseline is the formal, written, approved statement of the project scope and work breakdown structure (WBS), outlining both the end product (product scope) and the project scope.

Question 22

Name the seven quality control (7QC) tools used to solve quality related problems pertaining to project quality management.

Answer 22

• Flowcharts
• Check sheets
• Cause-and-effect diagrams
• Histograms
• Pareto diagrams
• Scatter diagrams
• Control charts

Question 23

Describe the impact of globalization.

Answer 23

Globalization results in deeper integration of the world’s individual national economies and makes those economies more interdependent.

Question 24

What is a frequently used statistical measure of globalization?

Answer 24

World trade expressed as a percentage of GDP.

Question 25

List four primary factors that drive globalization.

Answer 25

* Improvements in transportation * Technological advancements * Deregulation of international financial markets * Organization/operational options for international business

Question 26

What is meant by shift in economic balance of power?

Answer 26

The ability of the world's emerging nations to contend with the economies of the industrialized world for power, resources, influence, etc., is a change or shift in the economic balance of power from previous decades where the U.S. dominated as the lone superpower. Although the United States' absolute strength is not likely to decline, its relative power is expected to decline.

Question 27

List the motivations for developing international business operations.

Answer 27

1. **Competitive Advantage** Creating economic advantage through specializations 2. **Imperfect Markets** Work around resource or legal barriers to trade 3. **Product Cycle** Establishment of foreign subsidiaries to more efficiently capitalize on foreign demand for domestic products

Question 28

What methods are used by multinational firms to conduct international business?

Answer 28

* International trade * Licensing * Franchising * Joint ventures * Direct foreign investment (purchasing a foreign company or starting up a foreign subsidiary) * Global sourcing (synchronizing all levels of production, R&D, and marketing on an international basis)

Question 29

Identify three inherent risks of international business operations.

Answer 29

1. Exchange rate fluctuation 2. Operating in foreign economies 3. Political risk

Question 30

Identify three categories of *exchange rate risks*.

Answer 30

1. Transaction risk (exposure) 2. Economic risk (exposure) 3. Translation risk (exposure)

Question 31

Name the factors influencing *exchange rates*.

Answer 31

Trade-Related Factors 1. Relative inflation rates 2. Relative income levels 3. Government controls Financial Factors 1. Relative interest rates 2. Capital flows

Question 32

Distinguish between diversifiable and nondiversifiable risk.

Answer 32

DUNS ``` **Diversifiable Risk** Unsystematic Risk (Nonmarket/firm specific) ``` ``` **Nondiversifiable Risk** Systematic Risk (Market) ```

Question 33

Describe the various types of investment risks.

Answer 33

* Interest rate risk:* Change in the value of a security due to changes in interest rates. * Market risk:* Fluctuations in the value of a security or firm due to market exposure; this risk is nondiversifiable. * Credit risk:* Represents the inability to secure financing on favorable terms due to the firm's poor credit history/ratings. * Default risk:* The risk that the debtor will not pay interest or principal on a timely basis. * Liquidity risk:* The risk that a security cannot be sold on a timely basis or that a sale will require the need to make material price concessions.

Question 34

Compare and contrast *transaction exposure*, *economic exposure*, and *transaction exposure*.

Answer 34

* Transaction exposure* is the potential that an entity could experience economic loss or gain upon settlement of individual transactions as a result of changes in exchange rates. * Economic exposure* is the potential that the present value of an entity's cash flows could increase or decrease due to changes in exchange rates. * Translation exposure* is the risk that an entity's assets, liabilities, equity, or income will change as a result of changes in exchange rates.

Question 35

How is a *futures hedge transaction* used to mitigate exchange rate risk on accounts payable or accounts receivables applications?

Answer 35

A future hedge contract is used to buy a foreign currency at a specific price and time (when the accounts payable is due) in order to mitigate the risk of a weakening domestic currency.

Question 36

How does a *money market hedge* work?

Answer 36

A money market hedge used international money markets to plan to meet future currency requirements by either investing internationally in a manner that matches investment maturities with settlement in foreign payables or borrows against foreign receivables in a manner that matches the maturity of borrowings with the collection of receivables.

Question 37

Name the currency option hedge used to mitigate transaction exposure to *exchange rate risk for payables*. Name the currency option hedge used to mitigate transaction exposure to *exchange rate risk for receivables*.

Answer 37

**Call option:** Option to buy foreign currency (for currency hedges) at a pre-negotiated price; mitigates payable exchange rate risk. **Put option:** Option to sell a foreign currency (for currency hedges) at a pre-negotiated price; mitigates receivable exchange rate risk.

Question 38

What is *selective hedging* and how does it differ from *cross-hedging*?

Answer 38

* Selective hedging* is a process of reducing the uncertainty of the value of a transaction or position by entering into an offsetting derivative transaction. * Cross-hedging* involves hedging one derivative instrument's risk with a different instrument by taking another position in a related derivatives contract.

Question 39

Name the primary objective of *transfer pricing* between foreign and domestic subsidiaries and their parent companies.

Answer 39

Minimization of taxation.

Question 40

What are the advantages and disadvantages of *short-term financing*?

Answer 40

Advantages * Increased liquidity * Increased profitability * Decreased financing costs Disadvantages * Increased interest rate risk * Decreased capital availability

Question 41

What are the advantages and disadvantages of *long-term financing*?

Answer 41

Advantages * Decreased interest rate risk * Increased capital availability Disadvantages * Decreased liquidity * Decreased profitability * Increased financing costs

Question 42

Differentiate between a *line of credit* and a *letter of credit*.

Answer 42

A *line of credit* is a revolving loan with a bank that is for a defined term and renewable prior to or upon expiration. A *letter of credit* is a third party guarantee (usually by a bank) of obligations incurred by a company. A letter of credit is a type of external credit enhancement (whereas a line of credit is not).

Question 43

Compare an *operating lease* to a *capital lease* (as it pertains to the leasee).

Answer 43

In an *operating lease*, the leasee makes rent (expense) payments to a lessor in exchange for the use of an asset for an insignificant portion of its useful life. An operating lease is a form of off-balance sheet financing. In a *capital lease*, the lessee essentially acquires the assets from the lessor either in substance or in legal form with the asset and liability recorded on the lessee's balance sheet.

Question 44

Define a *debenture* and a distinguishing characteristic of a *subordinated debenture*.

Answer 44

A *debenture* is an unsecured obligation of the issuing company. A *subordinated debenture* is a bond issue that is unsecured and ranks behind senior creditors in a bankruptcy or liquidation scenario.

Question 45

Why do creditors use *debt covenants* in lending agreements and how could this impact the issuer?

Answer 45

*Debt covenants* are stipulated in lending agreements to protect the creditors' interests by limiting or prohibiting certain actions of the debtors that may be harmful to the creditors' interests (i.e., issuing more debt). Debt convenants are disadvantageous to the issuer (the debtor) as they may restrict certain management activities (i.e., selling assets).

Question 46

What is the primary assumption of the Gordon growth dividend discount model and how it is calculated?

Answer 46

The primary assumption of the Gordon growth DDM is that a stock will pay future dividends that grow at a constant rate through perpetuity. P_t = D_(t+1) / (R - G) Where: * P_t = Current price (price at point "t") * D_(t+1) = Dividend one year after period "t" * R = Required return * G = (Sustainable) growth rate

Question 47

Explain how price multiples are used in valuation and list four price multiple used for stock valuation.

Answer 47

A price multiple represents a ratio of a stock's market price to another measure of fundamental value on a per share basis. Investors use price multiples to determine the intrinsic value of stock and ultimately to decide whether the stock is undervalued, fairly values, or undervalued. Commonly used price multiples include: * Price-to-earnings (P/E) ratio * Price-to-sales ratio * Price-to-cash flow ratio * Price-to-book ratio

Question 48

Explain how *discounted cash flow* *analysis* is used in valuation and list several DCF absolute models used.

Answer 48

Discounted cash flow analysis attempts to determine the intrinsic (true) value of a stock by determining the present value of its expected future cash flows. Once the DCF stock price is determined, it is compared to the stock's market value to determine if it is undervalued, fairly valued, or overvalued. Absolute DCF models used for valuation include: * Dividend discount model (DDM) * Free cash flow to the firm (FCFF) * Free cash flow to equity (FCFE) * Redisual Income (RI)

Question 49

List the behavioral issues that potentially distort decisions.

Answer 49

* Assuming stereotyped characterizations are accurate * Adjusting from presumed baselines * Using intuition rather than analysis * Excessive optimism * Confirmations bias or using only data that supports conclusions * Overconfidence * Illusion of control

Question 50

What decision context or environment is considered the most distracting?

Answer 50

Losses are considered the most distracting backdrop for decisions (far more distracting than gains).

Question 51

What is the implication of an "aversion to a sure loss"?

Answer 51

A manager's fear of accepting a known or guaranteed loss may actually increase as projects are continued and losses are sustained longer than appropriate in hopes that the project will become profitable.

Question 52

How does the International Professional Practices Framework define Internal Auditing?

Answer 52

1. Internal auditing is an *independent* and *objective assurance and consulting activity* designed to add value and improve an organization's operations. 2. Internal auditing adds value and helps an organization accomplish its objectives by bringing a systematic, disciplined approach to evaluate and improve the effectiveness of the following: 1. Risk management 2. Control 3. Governance processes

Question 53

Describe the *attributes standards* of the International Standards for the Practice of Internal Auditing.

Answer 53

*Attribute standards* are general standards regarding engagement definition, auditor independence and objectivity, auditor proficiency and professional care, and quality assurance.

Question 54

Describe the *performance standards* of the International Standards for the Practice of Internal Auditing.

Answer 54

*Performance standards* are field work standards that address planning and supervision of the engagement, defining engagement scope, and documenting work in a manner that supports conclusions.

Question 55

Describe the *implementation standards* of the International Standards for the Practice of Internal Auditing.

Answer 55

*Implementation standards* are embedded within the attribute and reporting standards to address the requirements of implementing both assurance and consulting activities.

Question 56

Identify and describe the four elements of the Code of Ethics adopted by the International Standards for the Practice of Internal Auditing

Answer 56

1. **Integrity** Internal auditors are to perform work with honesty, diligence, and responsibility, observing both law and organizational objectives. 2. **Objectivity** Internal auditors exhibit professional objectivity in gathering, evaluating, and communicating information and should not participate in relationships that represent conflicts of interest. 3. **Confidentiality** Internal auditors do not disclose information without appropriate authority or use information for personal gain. 4. **Competency** Internal auditors apply the knowledge, skills, and experience needed in the performance of internal auditing services.

Question 57

Attribute Standards are defined by what four major headings?

Answer 57

1. Purpose, Authority and Responsbility 2. Independence and Objectivity 3. Proficiency and Due Professional Care 4. Quality Assurance and Improvement Program

Question 58

Performance Standards are defined by what seven major headings?

Answer 58

* Managing the Internal Audit Activity * Nature of Work * Engagement Planning * Performing the Engagement * Communicating Results * Monitoring Progress * Management's Acceptance of Risk

Question 59

What are the two primary features of managing the internal audit activity?

Answer 59

1. **Effective Management** Effective management is characterized by ensuring that activities are contemplated by the internal audit charter and the activities conform to the definition of internal audit, the *Standards* and the *Code of Ethics*. 2. **Added Value** Added value is characterized by objective and relevant assurance and contributions to the effectiveness and efficiency of governance, risk management, and control processes.

Question 60

What major features of an internal audit engagement must be documented as part of planning?

Answer 60

* Engagement objectives * Engagement scope * Engagement resource allocation * Engagement work program

Question 61

Communication of the results of an internal audit engagement must generally include what elements?

Answer 61

Communications must include the following: 1. Engagement objectives 2. Engagement scope 3. Conclusions 4. Recommendations 5. Action plans

Question 62

List and define the *three* parties involved in *assurance* services provided by an internal audit engagement.

Answer 62

1. **Auditee** The person or group directly involved with the entity, operation, function, process, system or other subject matter. 2. **Internal Auditor** The person or group making the assessment. 3. **User (Sponsor)** The person or group using the assessment.

Question 63

List and define the *two* parties involved in *consulting* services provided by an internal audit engagement.

Answer 63

1. **Internal Auditor** The person or group offering the advice. 2. **User (Sponsor)** The person or group seeking the receiving the advice.