Deck 5

Question 1

What is the Son-Father-Grandfather Concept?

Answer 1

It is a backup file system. The most recent file is called the son, the second most recent file is called the father, and the preceding file is called the grandfather. The process includes reading the previous file, recording transactions being processed, and then creating a new updated master file.

An example is if friday’s file is destroyed, a new file can be created using fridays transaction file and tursday’s file.

Question 2

Which of the following components of ERM addresses an entity’s operating structure?

Review and Revision
Performance
Governance and culture
Information, communication, and reporting

Answer 2

Governance and culture

The governance and culture component of the Enterprise Risk Management Integrated Framework includes such foundational principles as: defines desired culture; exercises board oversight; demonstrates commitment to core values; attracts, develops, and retains employees; and establishes operating structure.

Question 3

An increase in the demand and supply for a product will cause what to the price and quantity?

Answer 3

Price will increase, decrease, or remain unchanged

Quantity will increase

Make sure to be clear, the price with not only remain unchanged. It is unknown what price will do.

Question 4

If a problem asks you to calculate the flexible budget variance relative to operating income, how do you calculate this?

Answer 4

First you calculate the flexible budget amounts using actual units * budgeted prices and budgeted fixed costs to get to the flexible budgeted operating income.

Then you take each line (sales, expenses, etc) and you take actual - flexible budget to get to the total flexible budget variance related to operating income.

Question 5

An employee of a relatively small firm with a small number of application programmers, is a system programmer and an application programmer. Is this a problem?

Answer 5

Yes, Since the employee is a system programmer, the employee can more than likely override any system security and provide himself with unlimited access to application programs and data and would be able to hide such access. One employee acting as both a system programmer and an application programmer is a serious internal control weakness that is very difficult to overcome.

An employee in one function below should never be part of another function:

1. System analyst and application programmer
2. System administrator and System programmer
3. Data librarian, Data control, data entry clerk, and file librarian.

Question 6

How could a closed loop verification control help a company that had an employee incorrectly input a check received from a customer to the wrong account?

Answer 6

Closed-loop verification is a validation method that takes data entered into a system and uses it to retrieve and display other information to verify the accuracy of input data. In this scenario, the customer and the company can both receive system confirmation that the payment was made and applied to the correct place.

Question 7

What would be considered a security policy supporting document?

Procedures
Standard and baselines
Regulations
Corporate culture

Answer 7

Procedures
Standard and baselines
Regulations

Corporate culture is generally not a document but instead defines the mutually understood manner in which a company does business. While corporate culture is compatible with security policy, it is not a supporting “document.”

Question 8

in regards to internal control objectives of information systems, A secure system may have inherent risks due to managements analysis of trade-offs identified by cost-benefit studies.

Answer 8

One of the limitations of even a well-designed internal control system is management’s ability to override those controls. One reason management may override them is that the benefit of doing so exceeds the cost, which represents an inherent risk of even the strongest systems.

Question 9

What is the calculation for the real rate of interest?

Answer 9

Nominal interest rate - Inflation rate

Question 10

If the government sets a maximum ceiling price below equilibrium, what will happen in the short run and long run.

Answer 10

It will create shortages for that product in the short term and the long run.

Question 11

Under the IT governance institute there are 5 areas of focus. What are characteristics of each:

Strategic Alignment
Performance Measures
Value Creation
Risk Management
Resource Management

Answer 11

Strategic Alignment - The linkage between business and IT plans is referred to as strategic alignment and includes defining, maintaining, and validating the IT value proposition, with a focus on customer satisfaction.
EXs: Business managers and IT managers discussing reporting options or best practices to view inventory

Performance Measures - Features of performance measurement include tracking and monitoring strategy implementation, project completion, resource usage, process performance, and service delivery. It is important to define milestones and/or deliverables throughout the project so that progress toward completion can be measured.
EX: Creating an IT balanced scorecard

Value Creation - Value creation is the key governance objective of any enterprise. It includes the provision by IT of promised benefits to the organization, while satisfying its customers and optimizing costs and risks.
EX: IT department accelerating requests for certain departments when their value proposition is growing.

Risk Management - Risk management is defined as risk awareness by senior management, characterized by understanding risk appetite and risk management responsibilities (e.g., event identification, risk assessments, and responses). Risk management begins with identification of risks faced, followed by determining how the company will respond to the risk. The company can avoid the risk, mitigate the risk, share the risk, or ignore the risk.
EX: Updating the disaster recovery plan or creating a formal IT risk framework.

Resource Management - Resource management focuses on the optimization of knowledge and infrastructure.
Ex: reorganizing of personnel during a special company initiative based on skill level rather than department.

Question 12

How would you calculate gross margin?

Answer 12

(sales-Costs)/ sales = gross margin

Question 13

Which of the following terms is used to describe the unique attribute that identifies a specific record in a table?

A foreign key
A primary key
A secondary key
A schema

Answer 13

A primary key - it serves as a unique identifier to allow a user to identify a specific record in a database. A primary key is required so that a table record is always uniquely identifiable.

The schema of a database is the organization of data that represents the construction of the database management system.

Question 14

When the demand for a product is inelastic, a decrease in price has what effect on the number of units sold and total revenue?

Answer 14

The percentage change in price will be greater than the percentage change in quantity, and total revenue will fall.

Question 15

How would you calculate free cash flow?

Answer 15

NI + Noncash expenses (like depreciation) - Increase in working capital - Capital expenditures

Question 16

Which component of the internal control integrated framework addresses an entity’s financial reporting objectives?

Answer 16

Risk Assessment
The risk assessment component of the internal control integrated framework includes principles such as financial reporting objectives, risks and fraud risk.

Question 17

Does conversion cost pricing place heavy emphasis on indirect costs and disregard considerations of direct costs?

Answer 17

No, Conversion cost pricing places heavy emphasis on indirect (overhead) costs and direct labor, but disregards consideration of direct materials.

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

Question 18

Which of the following systems characterizes a decision support system (DSS)?

Transaction processing system (TPS)
Database Management system (DBMS)
Interactive system
Computer-integrated manufacturing system (CIM)

Answer 18

Interactive system

Decision support systems are interactive.

Question 19

What is the primary objective of data security controls?

Answer 19

To ensure that storage media are subject to authorization prior to access, change, or destruction.

Question 20

All of the following are techniques for mitigating exchange rate risk of long-term foreign transactions except for:

Parallel loans
Put options
Currency Swaps
Long-term forward contracts

Answer 20

Put Options

Put options are a receivables hedging technique but are not a technique for mitigating risk of long-term foreign transactions. The business has the option (not the obligation) to sell the collected amount of the foreign currency from the receivable at the option (strike) price. The business evaluates the relationship between the option price and the exchange rate at the settlement date. Generally, if the option price is more than the exchange rate at the time of settlement, the business will exercise its option. If the option price is less than the exchange rate at the time of settlement, the business will allow the option to expire.

Question 21

Which of the following statements would be true concerning operating leverage?

A company that increases debt to finance its operations is increasing its operating leverage
OR
A company with relatively high fixed costs has high operating leverage

Answer 21

A company with relatively high fixed costs has high operating leverage
Operating leverage is the degree to which a firm uses fixed, as opposed to variable operating costs. A firm that has high operating leverage has relatively high fixed costs and relatively low variable operating costs.

The use of debt to finance operations is measured by financial leverage and is not related to operating leverage.

Question 22

What are some facts about trade credit?

Answer 22

Trade credit is subject to risk of buyer default

It’s an important source of financing for small firms, it is not a source of long-term financing to the seller, it is usually an expensive source of financing of external financing

Question 23

A successful responsibility accounting reporting system is dependent on what?

Answer 23

The proper delegation of responsibility and authority

Responsibility for costs, and the authority to do something about them, are necessary for a successful responsibility accounting system.

Question 24

Generally, what do each of the sections of a balanced scorecard represent?

Customer
Learning and innovation
Financial
Internal business processes

Answer 24

Customer - Measurement of customer value, such as prices compared to competitor’s prices for a cost leader, would most likely be included in the customer section of the balanced scorecard.

Learning and innovation - would focus more on the effective use of personnel in improving business processes and linking rewards with recognition

Financial - Measures of financial performance would focus more on results of operations and utilization of assets.

Internal business processes - would focus more on internal efficiencies and cost structure

Question 25

A perfectly inelastic supply curve in a competitive market exists when?

Answer 25

Exists when firms cannot vary input usage

Perfectly inelastic supply curves are vertical representing that supply is insensitive to changes in price; i.e., the quantity supplied will not change as price changes.

Question 26

PKI (Public Key Infrastructure) refers to the system and processes used to issue and manage asymmetric keys and digital certificates.

Answer 26

b

Question 27

A company headquartered in the United States has operations in 27 countries. The company purchased a subsidiary to expand operations into another country last year. According to COSO, which of the following provides the strongest mechanism for monitoring control in this new foreign venture?

An internal audit is being performed
Management has oversight over litigation and foreign regulation

Answer 27

An internal audit is being performed

Question 28

For the following financial ratios below, how would each be categorized?

Asset utilization
Long-term solvency
Market Value
Liquidity
Profitability

Days sales in AR
Equity Multiplier
Inventory turnover
Price earnings ratio
Quick Ratio
Return on equity
Times interest earned

Answer 28

Asset utilization:
Days sales in AR and Inventory turnover
The days sales in accounts receivable ratio is a measure of how long it takes a company to collect its accounts receivable. and The inventory turnover ratio is a measure of how many times a company has sold and replaced inventory during a given period. These are a measure of asset utilization.

Long-term solvency:
Equity Multiplier and times interest earned
The equity multiplier ratio is a measure of a company’s financial leverage. The times interest earned ratio is a measure of a company’s ability to pay its debt. These are a measure of long-term solvency.

Market Value:
Price Earnings ratio
The price earnings ratio is a measure of the value of a company. That is a measure of market value.

Liquidity:
Quick Ratio
The quick ratio is a measure of a company’s ability to meet its short-term obligations with its most liquid assets. That is a measure of liquidity.

Profitability:
Return on Equity
The return on equity ratio is a measure of how much a company earns within a specific period in relation to the investments shareholders have made. That is a measure of profitability.

Question 29

when writing the written communication add things like:

The purpose of this memo… in intro paragraph

Explain what the item is (for example, what the operating leverage is if a company wants to keep OL low)

Consider starting the first paragraph with “in order to…” or “Our company is considering…”

Restate the information, if you are talking about key issues, say things like “There are a number of important considerations for companies adopting a policy of…”

Answer 29

b

Question 30

The committee on sponsoring organizations prepared the internal control integrated framework to what?

Answer 30

Help businesses asses internal control