Midterm 1 Flashcards
COSO Objectives
- Operations - efficient and effective
- Reporting - internal and external, reliable
- Compliance - adhere to laws
COSO Components
- Environment - standards, “tone at top”
- Risk assessment - identify and analyze risk
- Control activities - actions to mitigate risk
- Info & communication - enable understanding
- Monitoring - ongoing evaluation of components
Agency theory problems
- Information asymmetry
2. Goal incongruence / conflicts of interest
Principal wants…
Effort on tasks
Agent wants…
Money and leisure
Informal controls bind….
In the absence of formal controls
Within COSO, which of the following components is designed to ensure that internal controls continue to operate effectively?
Monitoring
According to COSO, an effective approach to monitoring internal control involves all except:
Increasing the reliability of the financial reporting and compliance with laws
Effective approach: monitoring, monitoring procedures and reporting results with follow up action
According to COSO, which of the following is a compliance objective?
To maintain a safe level of carbon dioxide emissions during production (law)
According to COSO, what is the most effective way to set ethical behavior standards?
DEMONSTRATE appropriate behaviors
Control activities:
- Authorization of transactions
- Segregation of duties
- Adequate records and documents
- Security of assets and documents
- Independent checks and authorizations
What is risk?
The possibility of a crisis
Audit risk =
Inherent risk x control risk x detection risk
To describe risk you must know:
- The possible outcomes
- The value of each outcome
- The probability of each outcome
Risk =
P(loss) x I(loss)
Overall risk =
Risk(loss1) + risk(loss2) ….
Prospect theory
- Reference point (relative to the potential for loss)
- Loss = risk seeking , gain = risk averse
- 1 unit of loss > 1 unit of gain
Business process:
Sequence of work steps completed in order to produce a desired result
KNOW THE FLOW CHART SHAPES
.
Revenue cycle :
- Take customer’s order
- Check and approve customer credit
- Check available inventory
- Shipping
- Billing
- Cash collections
Billing :
- Invoice for customer
2. Updating AR
Open invoice method :
Customers pay what is in each invoice
Balance forward method :
Customers pay what is on monthly statement
Automated clearing house network
A way to do electronic funds transfer from customer to business
Purchasing process:
- Prepare requisition and purchasing order
- Notify vendor of needs
- Receive goods
- Record payable
- Pay invoice
- Update all records
Purchasing risks:
Invalid transaction
Wrong amount recorded
Recorded late / to wrong account
Ordering risks :
Kickbacks / rebates
Purchase unneeded items
Purchase at inflated prices
Purchase goods with poor quality
Hiring process:
- Staffing requisition created
- Advertise position & receive applications
- Conduct interview and hire employee
- New hire paperwork completed and entered into system
Recording time:
- Time sheets provided
- Time sheets completed
- Payroll department received sheets
- Time entered into system
Payroll processing :
- Time information is put into HR system
- HR calculates payroll
- Payroll recorded to general ledger
Payroll risks:
Fraud risk
Ghost employees
Not able to pay employees
Theoretical capacity:
Amount of production possible under ideal conditions with no time for maintenance, breakdowns, or absenteeism
Normal capacity :
The expected actual volume for the period
Practical capacity :
The amount of production possible assuming only the expected time for scheduled maintenance and normal breaks and vacations
Budgeted / expected capacity :
The long run expected volume produced
Cost of quality =
Cost of good quality + cost of bad quality
Cost of good quality =
Prevention costs + appraisal costs
Cost of bad quality =
Cost of internal failure + cost of external failure
Internal failure :
Scrap
Rework
Reinspection
External failure :
Warranty repairs
Product liability
Marketing costs
Lost sales
Ways to reengineer :
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
Classification of controls :
- Preventive or detective
- Key or secondary
- Frequency of control
Preventive controls :
Defer problems before they arise
Hiring qualified personnel..
Detective controls :
Discover problems as they arise
Double check calculations…
Key controls:
The controls that a process relies upon the most
Matching up documents
Secondary controls :
Controls that provide additional assurance that a process is achieving its objectives
Using pre numbered documents
Frequency of controls :
Determine how often the control should be done
Bank reconciliation done monthly
Which is the first document prepared in the purchasing process ?
The purchase requisition
The same employee should not be allowed to…
Prepare voucher packets and sign checks
If a company sold defective goods, the return would be accepted by….
The receiving clerk
What is a benefit of EDI?
Shorter inventory cycle time
What is COSO?
Guidelines on risk management and internal control
