Questions Flashcards
Components of Internal Control
1) control environment - control at the top - ethics; 2) risk assessment - F/S misstated or fraud; 3) Information and Communication - fair, accurate, complete, timely; 4) Monitoring - efficiencies of internal controls, report deficiencies; 5) Existing Control Activities - Policies/procedures to mitigate risk
Internal control framework
1) Operating - effectiveness and efficiency of an entity’s operations, ensuring that the assets of the organization are adequately safeguarded against potential lossess; 2) Reporting Objectives - Focus of COSO - reliability, timeliness and transparency; 3) Compliance Objectives - ensures the entity is dhering to all applicable laws and regulations
Corporate Fraud Accountability
Tampering with record or impeding an official proceeding - fined and not more than a 20-year prison term; whistle-blower protection - not more than 10 years and fined; altering documents - fined and no more than 10 years in prison; securities fraud - fined and imprisoned not more than 25 years
Corporate Fraud Accountability
Knowingly certifies a false financial report $1 mil and no more than 10 years; willfully certifies any statement fined $5 mil and not more than 20 years
Control environment components
Commitment to ethical value and integrity, board independence and oversight, organization structure, commitment to competence, accountability
Risk assessment
Specify objectives, identify and analyze risks, consider the potential for fraud, identify and assess changes
Information and communication
Obtain and use information, internally communicate information, communication with external parties
Monitoring activities
Ongoing and/or separate evaluations, communication of deficiencies
(Existing) Contorl Activities
Select and develop control activies, select and develop technology controls, deploy through policies and procedures
Components of Enterprise Risk Management
IS EAR AIM - internal environment, setting objectives, event identification, assessment of risk, risk response, control activities, information and communication, monitoring
Pareto Diagram (Histogram)
Used to determine the quality-control issues that are most frequent and often demand the greatest attention. A Pareto diagram demonstrates the frequency of defects from highest to lowest frequency.
Cause-and-Effect (Fishbone) Diagram
Once the most frequent recurring and costly defects/problems are identified by the Pareto diagram, a cause-and-effect diagram may be used to further analyze the defect. Managers use the diagram to identify the sources of problems in the production process by resource and take corrective action.
Prime costs
Direct material + direct labor
Conversion costs
Direct labor + overhead applied
Product costs
Not expensed until product sold-matching principle, inventoriable; components include direct materials, direct labor and manufacturing overhead applied
Period costs
I/S only; are expensed in the period in which they are incurred and are not inventoriable; period costs include selling, general, admin expenses, interest (financing) expense
Net Realizable Values at Split-off Point
joint cost x (sales value/total sales value); if sales value not available at spit-off then work backwards i.e. sales - further processing cost = net realizable value
Contribution Approach (direct costing)
Sales - COGS (DM +DL +manufacturing O/H variable; fixed manufacturing OHis a period cost; does not represent GAAP but useful for internal decision making; fixed O/H & Fixed & variable SG&A are period costs
Contribution margin ratio
contribution margin/revenue; contribution margin = revenue - variable costs; contribution margin ratio for contribution/variable/direct method only; absorption/full cost method is gross margin
Absorption costing
If production is greater than sales, inventory increases and report higher income under absorption costing than variable costing and vice versa, if sales is greater than production, inventory decrease and income is lower under absorption costing than under variable costing.
Breakeven
total fixed costs / contribution margin per unit; contribution margin per unit = (sales - VC)/total units; contribution margin ratio = contribution margin / sales price
Setting sales price per unit
(Fixed costs + variable costs + pretax profit) / number of units sold
Make vs. Buy
calculate the make cost vs. buy; purchase cost + direct material + direct labor + variable overhead and fixed factory overhead (avoidable cost vs. buy) and compare to the buy price
Linear regression
is a method for studying the relationship between two or more variables. One use of linear regression is to predict the value of a dependent variable corresponding to given values of the independent variables.
Coefficient of Correlation
measures the strength of the linear relationship between the independent variable (x) and the dependent variable (y). Range from -1.00 to 1.00
Coefficient of determination (r2)
is the proportion of the total variation in the dependent variable (y) explained by the independent variable (x). Value lies between zero and one. The higher R2, the greater the proportion of the total variation in y that is explained by the variation in x. The higher R2, teh better the fit of the regression line.
Learning curve calc
example 50 hours to produce unit assuming 70% learning curve; average time it takes to produce 2 units = 50 hours x .70 = 35 hours, total time 35 hours x 2 units = 70 hours; average time 4 units = 35 hours x .70 = 24.5 hours; total time for 4 units = 24.5 hours x 4 units = 98 hours
Balanced Scorecard
Gathers information on multiple dimensions of an organization’s performance defined by critical success factors necessary to accomplish the firm’s strategy. Critical success factors are classified as: Financial - respnsibility segment/SBU; Internal business processes - efficient/effective operations; Customer satisfaction - customers happy; Advancement of innovation and human resource development (learning and growth) - employees happy
Major advantage of NPV over IRR
Different rates may be used for different time periods using the NPV method. NPV is considered to be superiod to IRR because it is flexible enough to consistently handle either uneven cash flow or inconsistent rates of return for each year of the project.
Advantages & Limtations of the NPV Method
The NPV method is flexible and can be used when there is no constant rate of return required for each year of the project. NPV is limited by not providing the true rate of return on the investment. NPV purely indicates whether an investment will earn the “hurdle rate” used in the NPV calculation.
IRR
Focuses the decision maker on the discount rate at which the present value of the cash inflows equals the present value of the cash osutflows (usually the initial investment).
Limitations of IRR
Unreasonable reinvestment assumption; cash flow from the ivnestment are assumed in the IRR analysis to be reinvested at the internal rate of return. IRR method is less reliable than the NPV method when there are several alternating periods of net cash inflows and net cash outflows. IRR focuses on % vs. $.
Payback period method
Time required for the net after-tax cash inflows to recover the initla investment in a project. The payback period method focuses decision makers on both liquidity and risk. The payback period method measures the time it will take to recover the initla investment in the project, thereby emphasizign the project’s liquidity and the time during which return of principal is at risk. The greater the risk of the investment, teh shorter the payback period that is expected (tolerated) by the company.
Payback period forumula
Net initial investment (outflow) / increase in annual net after-tax cash flow
Non-uniform cash flow (use cumulative approach)
The standard payback formula shown above applies to uniform annual cash inflows. If cash flows are not uniform (i.e. they vary from period to period over the life of the project), a cumulative approach (rather than the standard payback formula) to determine the payback period is used.
Limitations of the payback method
Time value of money is ignore (see discounted payback), project cash flows occuring after the initla investment is recovered are not considered, reinvestment of cash flows is not considered, total project profitability is neglected
Discounted payback method (improvement)
This variation computes the payback period using expected cash flows that are discounted by the project’s cost of capital (the method considers the time value of money). Discounted payback is also referred to as the breaeven time method (BET).
Cost of Retained Earings
equal to the rate of return required by the firm’s common stockholders. A firm should earn at least as much on any earnings retained and reinvested in the business as stockholders could have earned on alternative investments of equivalent risk.
Three common methods of computing the cost of retained earnings
Capital asset pricing model (CAPM), discounted cash flow (DCF), bond yield plus risk premium (BYRP)
Capital Asset Pricing Model (CAPM)
The cost of retained earnings is equal to the risk-free rate plus a risk premium; the risk premium is equal to the systematic (nondiversifiable) risk associated with the overall stock market; The beta coefficient is a numberical representation of the volatility (risk) of the stock relative to the volatility of the overall market.
CAPM
risk free rate + beta (market - risk free rate)
Cost of retained earnings using discounted cash flow (DCF) method
(D1 / P0) + g
Cost of retained earnings using the bond yield plus risk premium method
pretax cost of long-term debt + market risk premium; pretax cost of long-term debt or firm’s own bond yield
ROI
income / investment capital; investment capital is D +E or ROI = profit margin x investment turnover; profit margin = income/sales; investment turnover = sales / invested capital
Factoring Accounts Receivable
turning over the collection of accounts receivablet o a third-party factor in exchange for a discounted short-term loan. Cash is collected from the factor immedicately rather than from the customer according to the credit terms.
Systems development life cycle (SDLC)
Systems Analysis,, Design (Conceptual and Physical), Implementation and Conversion, Training, Testing, Operations and maintenance
Information criteria (ICE RACE)
Integrity - accuracy, comepleteness, and validity; confidentiality - protection of sensitive information; efficiency - low cost without compromising effectiveness; reliability - information represents what it purports to represent; availability - providing curent and future information as required; compliance - comply with policies, laws, regulations and contractual arrangements; effectiveness - relevant or pertinent to a business process, and delivery in timely, correct, consistent, and useful manner
COBIT Framework
PO AIDS ME; Direct PO Plan and Organize, Solution AI Acquired and Implement; Service DS Delivery and Support, Ensure direction followed ME Monitor and Evaluate
System Analyst
Internally Developd System - determine system requirements, designs the overall application system, determines the type of network needed; Purchased systems - integrates with existing internal and purchased applications, provides training
Computer Programmer
Application programmer/software developer - writng and/or maintaining application programs; system programmer - installing, supporting, monitoring, and maintaining the operating system, perform capacity planning functions.
Computer Operator
Scheduling and running processing jobs, can be automated, and in large computing environments, must be automated
IT Supervisor
Manage IT department
File Librarian
Store and protect programs and tapes from damage and unauthorized use, large computing environment, much of this work is automated
Data Librarian
Custody of and maintains the entity’s data and ensures that production data is released only to authorized individuals when needed.
Security Administrator
Responsible for the assignment of initial passwords and often the maintenance of those passwords.
Database Administrator (DBA)
Responsible for maintaining and supporting the database software and performing certain security functions. Database administrators differ from data administrators; a database administrator is responsible for the actual database software, while a data administrator is responsible for the definition, planning, and control of the data within a database
Network Administrator
Support computer networks through performance monitoring and troubleshooting.
Web Administrator
Responsible for information on a website
Data input Clerk
Prepare, verify and input data to be processed however, that function is increasingly being distributed to end users.
Hardware Technician
Sets up and configures hardware and troubleshoots any resulting hardware problems
End User
Workers in an organization who enter data into a system or who use the information processed by the system
Segregation of duties within IT
System Analysts (system & hardware designers) vs. computer programers (software designers); computer operators vs. computer programers - person performing both functions could make unauthorized and undetected program changes; Security administrators vs. computer operators and computer programmers - if security administrators were also a programmer or an operator for that system, that person could give himself/herself or another person access to areas they are not authorized to enter.
Son-Father-Grandfather concept
Most recent file is called the son, the second most recent file is called the father, and the precedign file is called the grandfather. The backup process includes reading the previous file, recording transactions being processed, and then creating a new updated mater file. Always at least two backup files that can be used to re-create the destroyed file.
Uninterrupted Power Suppy (UPS)
A device that maintains a continuous supply of electtrical power to connected equipment. A UPS is also called battery backup.
