Midterm 1

Question 1

COSO Objectives

Answer 1

1. Operations - efficient and effective
2. Reporting - internal and external, reliable
3. Compliance - adhere to laws

Question 2

COSO Components

Answer 2

1. Environment - standards, “tone at top”
2. Risk assessment - identify and analyze risk
3. Control activities - actions to mitigate risk
4. Info & communication - enable understanding
5. Monitoring - ongoing evaluation of components

Question 3

Agency theory problems

Answer 3

1. Information asymmetry

2. Goal incongruence / conflicts of interest

Question 4

Principal wants…

Answer 4

Effort on tasks

Question 5

Agent wants…

Answer 5

Money and leisure

Question 6

Informal controls bind….

Answer 6

In the absence of formal controls

Question 7

Within COSO, which of the following components is designed to ensure that internal controls continue to operate effectively?

Answer 7

Monitoring

Question 8

According to COSO, an effective approach to monitoring internal control involves all except:

Answer 8

Increasing the reliability of the financial reporting and compliance with laws

Effective approach: monitoring, monitoring procedures and reporting results with follow up action

Question 9

According to COSO, which of the following is a compliance objective?

Answer 9

To maintain a safe level of carbon dioxide emissions during production (law)

Question 10

According to COSO, what is the most effective way to set ethical behavior standards?

Answer 10

DEMONSTRATE appropriate behaviors

Question 11

Control activities:

Answer 11

1. Authorization of transactions
2. Segregation of duties
3. Adequate records and documents
4. Security of assets and documents
5. Independent checks and authorizations

Question 12

What is risk?

Answer 12

The possibility of a crisis

Question 13

Audit risk =

Answer 13

Inherent risk x control risk x detection risk

Question 14

To describe risk you must know:

Answer 14

1. The possible outcomes
2. The value of each outcome
3. The probability of each outcome

Question 15

Risk =

Answer 15

P(loss) x I(loss)

Question 16

Overall risk =

Answer 16

Risk(loss1) + risk(loss2) ….

Question 17

Prospect theory

Answer 17

1. Reference point (relative to the potential for loss)
2. Loss = risk seeking , gain = risk averse
3. 1 unit of loss > 1 unit of gain

Question 18

Business process:

Answer 18

Sequence of work steps completed in order to produce a desired result

Question 19

KNOW THE FLOW CHART SHAPES

Answer 19

.

Question 20

Revenue cycle :

Answer 20

1. Take customer’s order
2. Check and approve customer credit
3. Check available inventory
4. Shipping
5. Billing
6. Cash collections

Question 21

Billing :

Answer 21

1. Invoice for customer

2. Updating AR

Question 22

Open invoice method :

Answer 22

Customers pay what is in each invoice

Question 23

Balance forward method :

Answer 23

Customers pay what is on monthly statement

Question 24

Automated clearing house network

Answer 24

A way to do electronic funds transfer from customer to business

Question 25

Purchasing process:

Answer 25

1. Prepare requisition and purchasing order 2. Notify vendor of needs 3. Receive goods 4. Record payable 5. Pay invoice 6. Update all records

Question 26

Purchasing risks:

Answer 26

Invalid transaction Wrong amount recorded Recorded late / to wrong account

Question 27

Ordering risks :

Answer 27

Kickbacks / rebates Purchase unneeded items Purchase at inflated prices Purchase goods with poor quality

Question 28

Hiring process:

Answer 28

1. Staffing requisition created 2. Advertise position & receive applications 3. Conduct interview and hire employee 5. New hire paperwork completed and entered into system

Question 29

Recording time:

Answer 29

1. Time sheets provided 2. Time sheets completed 3. Payroll department received sheets 4. Time entered into system

Question 30

Payroll processing :

Answer 30

1. Time information is put into HR system 2. HR calculates payroll 3. Payroll recorded to general ledger

Question 31

Payroll risks:

Answer 31

Fraud risk Ghost employees Not able to pay employees

Question 32

Theoretical capacity:

Answer 32

Amount of production possible under ideal conditions with no time for maintenance, breakdowns, or absenteeism

Question 33

Normal capacity :

Answer 33

The expected actual volume for the period

Question 34

Practical capacity :

Answer 34

The amount of production possible assuming only the expected time for scheduled maintenance and normal breaks and vacations

Question 35

Budgeted / expected capacity :

Answer 35

The long run expected volume produced

Question 36

Cost of quality =

Answer 36

Cost of good quality + cost of bad quality

Question 37

Cost of good quality =

Answer 37

Prevention costs + appraisal costs

Question 38

Cost of bad quality =

Answer 38

Cost of internal failure + cost of external failure

Question 39

Internal failure :

Answer 39

Scrap Rework Reinspection

Question 40

External failure :

Answer 40

Warranty repairs Product liability Marketing costs Lost sales

Question 41

Ways to reengineer :

Answer 41

``` Combining several jobs into one Letting workers make decisions Parallel activities Multiple versions of the same process Defer monitoring Minimize reconciliation Single point of contact Hybrid centralize / decentralization ```

Question 42

Classification of controls :

Answer 42

1. Preventive or detective 2. Key or secondary 3. Frequency of control

Question 43

Preventive controls :

Answer 43

Defer problems before they arise Hiring qualified personnel..

Question 44

Detective controls :

Answer 44

Discover problems as they arise Double check calculations...

Question 45

Key controls:

Answer 45

The controls that a process relies upon the most Matching up documents

Question 46

Secondary controls :

Answer 46

Controls that provide additional assurance that a process is achieving its objectives Using pre numbered documents

Question 47

Frequency of controls :

Answer 47

Determine how often the control should be done Bank reconciliation done monthly

Question 48

Which is the first document prepared in the purchasing process ?

Answer 48

The purchase requisition

Question 49

The same employee should not be allowed to...

Answer 49

Prepare voucher packets and sign checks

Question 50

If a company sold defective goods, the return would be accepted by....

Answer 50

The receiving clerk

Question 51

What is a benefit of EDI?

Answer 51

Shorter inventory cycle time

Question 52

What is COSO?

Answer 52

Guidelines on risk management and internal control