BEC Writing Section Flashcards
Describe the economic indicators (leading, lagging, coincident)?
Economic indicators help predict business cycles (where we are going, where we have been, and where we are now):
1) Leading - predicting economic activity (S&P500, new unemployment claims, new building permits)
2) Lagging (opposite of leading) - follow economic activity. Confirm/Validate what has already happened (duration of unemployment, prime rates, debt to income ratio)
3) Coincident - provide information about the current state. Understand what is currently happening in the market (GDP, manufacturing/trade sales, personal income)
How to reduce the risk of loss due to exchange rate flucutations?
Exchange rate fluctuations are a common risk with international business:
- Option contracts hedge against the impact of fluctuations
- AR does not decrease - buy an option to sell the foreign currency at the same rate of the sale. Collect AR and exchange the FC for $ at the agreed upon exchange rate
- AP does not increase - buy an option to purchase the FC at the incurred rate. Can purchase the FC at the agreed upon rate if the spot rate is not favorable at time of payment
- Transactions can be future (public) or forward (private) contracts
Discuss impact of internal controls of migrating to a manual vs automated bank reconciliation process?
Manual involves spreadsheets, which lead to input and calculation errors that are hard to detect:
- Timely to enter information
- Potential to lose data on the spreadsheet (not saving/corrupted file)
- Auditing and monitoring is harder to track work/steps being done
Automated - investment in new financial software:
- time saving, easier to maintain
- frequent backups to reduce lost data
- inputs feed in real time information automatically
- auditors can easily test the controls
Software can be costly, implementation and training, establish new internal controls. Parallel testing to ensure both are working properly.
Risk associated with high risk, high-return investment portfolios and procedures/controls that could reduce this risk?
Diversification - portfolio of investments that are uncorrelated and negatively correlated.
- Having both domestic and international equities, commodities, derivatives, real estate, fixed income and cash
- Ensure some investments are in CASH (advantage of potential opportunities) and HIGHLY RATED FIXED-INCOME to reduce risk (steady investment).
-Establish targeted percentage ranges for different asset classes (15%-20% domestic, 10%-15% international)
Explain how technology can help with internal control monitoring?
Monitoring - assess whether internal controls are present and functioning
Ongoing evals - assess controls (internally) on a regular basis and involve higher risk elements (cash)
Separate evals - assess controls (IA dept) on a periodic basis and involve lower risk elements (equipment tracking)
IT enhancements - increase speed and effectiveness of monitoring (hand held scanner); faster and more accurate reporting capacity
Advantages for moving from manual FA spreadsheet system to automated software?
- Cumbersome to TRACK steadily growing assets
- Increase SPEED of entry vs. manual
- Software can INTEGRATE with other SYSTEMS
- Easier RECON and provide cleaner AUDIT trail
- Spreadsheets can be LOST or corrupted or easily MANIPULATED
- Spreadsheets are more prone to input ERRORS - no automated checks and balance
List main market structures, barriers to entry and market strategy for each?
1) Monopolist Competition - Low barriers - maintain existing market share by enhancing product differentiation through R&D and advertising
2) Monopoly - insurmountable barriers - inelastic (no competition) - focus on maximizing profits with no regard to change in market
3) Oligopoly - high barriers - maintain/build market share through differentiation and adaption to price and product volume
4) Perfect Competition - no barriers - maintain market share by responsiveness to changes in price and market conditions
Pros and cons of using forward contracts?
- Forward contracts hedge against volatility by locking in a purchase price several months in advance of the actual purchase
- Allow parties to set notional amounts and settlement dates vs standard future contracts
- If price is not favorable to the contract, there is potential loss (falling prices)
- Credit risk - counterparty not fulfilling their end - unregulated market with forward contract
- Settled only at settlement date, no daily mark-to-market feature like future contracts to offset risk
Investment in using ROI and IRR models?
ROI - Annual NI / potential Investment
- Ease of interpretation, higher the return, the better the investment
- Not good when large investments increase the denominator, lowering the %
- Managers judged on ROI will hesitate on pursing a large investment
- ROI focus on short-term rather than long-term
IRR - can be compared with the required rate of return (hurdle rate)
- Higher is better
- Less reliable when cash inflows/outflows occur during the life of the project.
- Total net dollar impact is not accounted for in IRR (only a % return)
Pros and Cons to Flexible budgeting?
-Using actual volume totals provides cost and bottom line results with adjusted volume figures vs master budget
- Determine impact of variances outside of pure volume differences (vs actual revenue/costs)
- analyze different volume levels and variance analyses, forecast by selling more or less in units, isolate per unit revenue/costs/fixed assets
- Accuracy is crucial on a per unit relevant range
Why segregation of duties is important between a Security Admin vs Computer Programmer and Systems Analyst?
Security Admin - Restrict access to systems, applications or databases.
Computer Programmer - Write and/or maintain application programs.
Systems Analyst - Design IT system, in charge of hardware
Three cannot be combined b/c risk of stealing of hardware, embezzling of funds, steal information, granting unauthorized users access to system
5 Components of COSO Framework?
CRIME
Control Environment - TONE AT THE TOP, standards, processes, structure of IC. Ethics & integrity, Oversight of board, Org structure, Foundation
Risk Assessment - IDENTIFY & ANALYZE risk, assess potential fraud and changes that could affect IC
Information and Communication - OBTAIN & USE INFO to support IC. Shared internally and externally.
Monitoring - EVALUATE QUALITY of IC, Assess design and ops, ongoing/separate evaluations, communicate deficiencies.
Existing Control Activities - Initiatives of IC by management, POLICIES & PROCEDURES
Describe Fiscal vs Monetary policy and how they impact consumer demand?
Fiscal - federal gov uses taxation and spending to influence economy. Tax on income, property, sales, investments. Spending on subsidies, welfare, public programs, labor costs. Expansionary policy = increase spending, decrease tax vs Contractionary policy = opposite
Monetary - federal reserve bank manages interest rates and money supply. Discount rate = interest rate charged by reserve to member banks for ST loan (decrease leads to increase borrowing, money supply, consumer demand). Reserve ratio = required cash for banks (decrease increases money supply and consumer demand)
ST Vs LT Financing
ST - Lower interest rates but higher interest rate risk with fluctuations
LT - Decreased Credit Risk b/c company will seek refinancing less frequently
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