Chapter 1

Question 1

Which component of internal control integrated framework addresses an entity’s timely reporting of identified internal control deficiencies?

Answer 1

Monitoring. The monitoring component framework includes the principle that deficiencies should be investigated in ongoing and separate evaluations and that deficiencies should be reported

Question 2

What is the financial reporting competencies principle?

Answer 2

It suggests stronger controls and encourages the company to retain qualified personnel to handle financial reporting

Question 3

The code of ethics under SOX 404 contemplates standards that promote:

Answer 3

1. Honest and ethical conduct
2. Full, fair, accurate, and timely disclosures in periodic financial reports
3. compliance with laws, rules, and regulations

Question 4

Who established the Treadway Commission?

Answer 4

Private sponsoring organizations (Treadway Commission is COSO, and was developed to study factors that can lead to fraudulent financial reporting)

Question 5

What is risk avoidance?

Answer 5

A response to risk that involves the disposal of a business unit, product line, or geographical segment

Question 6

What are the criteria for evaluating the effectiveness of enterprise risk management?

Answer 6

The components of the enterprise risk management framework

Question 7

What responsibility does the board of directors have over the corporation?

Answer 7

The board of directors has a fiduciary responsibility to act on behalf of and in the best interest of the corporation

Question 8

When does a company’s risk appetite become exceeded?

Answer 8

When the combined likelihood and impact of negative events SIGNIFICANTLY exceed residual risk

Question 9

When are events identified in the ERM framework?

Answer 9

Events can only be identified after the organizational objectives are identified. They will either favorably or unfavorably impact the achievement of objectives***

Question 10

When is the principle of obtain and use information applied?

Answer 10

It is applied when the organization obtains or generates and uses relevant, high-quality information to support the functioning of the control.

Question 11

What are nonfinancial measures?

Answer 11

They are an effective way to observe problems as they occur and thereby direct attention to potential errors or inefficiencies before poor financial results are produced

Question 12

What is the net sales value at at split-off?

Answer 12

Sales price less the cost to complete (it’s the additional contribution to income generated by completing the product).

Question 13

What do you need to do if net realizable value cannot be determined at split-off?

Answer 13

If net realizable value cannot be determined at split-off, then additional costs added after the split-off point (separable costs) must be subtracted from the final selling price to arrive at net realizable value

Question 14

What are prime costs?

Answer 14

Direct Labor and Direct Materials

Question 15

What is a product cost?

Answer 15

Product cost is assigned to goods (products) that were either purchased or manufactured for resale

Question 16

What are value added costs?

Answer 16

They increase the worth of the product or service to customers. Employees who develop these programs are adding value to the computer programs

Question 17

What is the focus of managerial accounting?

Answer 17

It focuses on the needs of internal users (managers) and on data relevant for decision making

Question 18

How do you calculate units started and completed for the equivalent units calculation under the FIFO method?

Answer 18

= Units completed and transferred out

- units in beginning inventory

Question 19

What is the most significant non-value added costs associated with manufactured work in process inventory?

Answer 19

The cost of moving, handling, and storing any individual product. It is the most significant cost and the manufacturer should reduce them because they are controllable

Question 20

Define a cost driver

Answer 20

A cost driver is a casual factor (the cause) that increases the cost (the effect) of a cost objective. They are also known as activities that cause costs to increase as the activity increases

Question 21

When could conversion cost pricing be used?

Answer 21

Conversion cost pricing could be used when the customer furnishes the material used in manufacturing a product

Question 22

What is an engineered cost?

Answer 22

An engineered cost bears an observable and known relationship to a quantifiable activity base

Question 23

Define process costing

Answer 23

Process costing is a method of allocating production costs to products and services by averaging the cost over the total units produced. Costs are usually accumulated per department rather than by job

Question 24

What is one purpose of cost allocation (allocating costs to cost objects)

Answer 24

Measuring income and assets for external reporting

Question 25

What are the characteristics of effective performance measures?

Answer 25

1. Relate to the goals of the organization
2. Be objective and easily measured
3. Under the control of the employee and understood by the employees

Question 26

Who provides oversight of an entity’s enterprise risk management?

Answer 26

The Board of Directors. Board oversight is very important with ERM and the BOD needs to set the organizational tone that not only establishes their authority but also promotes management accountability

Question 27

What is the difference between inherent risk and residual risk?

Answer 27

Inherent risk is the risk to an organization if management does nothing to alter the likelihood or impact of a negative event. Residual risk is the risk to an organization after management takes actions to reduce the likelihood or impact of a negative event. Residual Risk = Inherent Risk - Impact of management actions

Question 28

What is a Change Control System?

Answer 28

It is put in to place with the purpose of authorizing and monitoring changes related to information technology, including software implementation, development, application programs, database administration, etc.

Question 29

Why did COSO prepare the internal control integrated framework?

Answer 29

To help business assess internal control (it was developed in 1992, way before SOX)

Question 30

What is the total productivity ratio?

Answer 30

It considers all inputs simultaneously as well as the prices of the inputs. = output/total costs

Question 31

What is the partial productivity ratios?

Answer 31

Quantity of output produced relative to the quantity of individual inputs used. = output/specific QUANTITY
(NOT COST)

Question 32

Why are nonfinancial measures more often preferable over financial measures?

Answer 32

Nonfinancial measures are more easily associated with operational objectives. (delivery time, raw materials used, miles driven) managers intuitively understand and can more easily manage

Question 33

What topic focuses on managerial accounting?

Answer 33

The needs of organization’s internal parties (The needs of internal users (managers) and on data relevant for decision making)

Question 34

In a traditional job order cost system, the issue of indirect materials to a production department increases…?

Answer 34

Factory Overhead Control. Indirect materials are included in factory overhead costs as they are used in the production process. Therefore, the issue of indirect materials would decrease stores stores control and increase factory control