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Chapter 1 Flashcards

1
Q

Title III of the Sarbanes-Oxley Act, Corporate Responsibility, includes four topics pertaining to financial reporting. What are they?

A

Public company audit committees

Corporate responsibility for financial reports

Improper influence on conduct of audits

Forfeiture of certain bonuses and profits

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2
Q

The Sarbanes-Oxley Act defines the responsibilities of the audit committee of an issuer as including:

A
  1. Appointment of the auditor
  2. Compensation of the auditor
  3. Oversight of the auditor
    a. Resolve disagreements between management and the auditor
    b. The auditor reports directly to the audit committee
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3
Q

The Sarbanes-Oxley Act defines the criteria for the independence of audit committee members for issuers as including the following characteristics:

A
  1. Each member of the audit committee shall be a member of the board of directors of the issuer but shall be otherwise independent
  2. Audit committee members may not accept any consulting, advisory or other compensation or fees from the issuer other than pursuant to their roles on the board
  3. Audit committee members may not be an affiliated person (a person who can influence financial decisions) of the issuer or any subsidiary of the issuer
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4
Q

The Sarbanes-Oxley Act requires that an issuer’s audit committee establish a complaint procedure that includes:

A
  1. Receipt, retention, and treatment of complaints received by issuers regarding:
    a. Accounting
    b. Internal controls
    c. Auditing
  2. Confidential or anonymous submissions by employees of issuers regarding questionable accounting or auditing matters
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5
Q

The Sarbanes-Oxley Act assigns the following corporate responsibilities for financial reports for issuers:

A

The CEO and CFO must certify the following for annual and quarterly reports:

  1. The officers have reviewed the report
  2. The report does not include untrue statements or omit material information
  3. The financial statements are fairly stated
  4. The signing officers make assertions regarding their responsibilities for internal control
  5. The signing officers have disclosed internal control weakness and instances of fraud to the auditors and the audit committee
  6. The status of changes to internal control subsequent to the date of their evaluation
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6
Q

The Sarbanes-Oxley Act assigns the following corporate responsibilities regarding internal controls that must accompany financial reports:

A

The CEO and CFO must certify the following for annual and quarterly reports:

  1. The officers are responsible for establishing and maintaining internal controls
  2. Internal control is designed to ensure that material information is provided to internal and external users
  3. Internal controls have been evaluated within 90 days prior to the report
  4. The officers’ conclusions regarding internal control effectiveness as of the evaluation date
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7
Q

The Sarbanes-Oxley Act assigns the following corporate responsibilities regarding the required disclosures to the auditors and audit committee by officers:

A

The CEO and CFO must certify the following for annual and quarterly reports to the auditors and auditor committee:

  1. All significant deficiencies in the design or operation of internal controls
  2. Any fraud, whether or not material, that involves management
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8
Q

The Sarbanes-Oxley Act specifically prohibits improper influence on the conduct of audits defined as follows:

A

No officer or director may take any action to fraudulently influence, coerce, manipulate, or mislead an independent CPA engaged in an audit of the financial statements of an issuer for the purpose of rendering the financial statements materially misleading

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9
Q

The Sarbanes-Oxley Act imposes certain financial penalties on officers who are responsible for material misstatements resulting from their misconduct. Penalties include:

A
  1. Refund of the issuer of any bonus or other incentive-based or equity-based compensation during the 12-month period following the first public issuance of the financial document
  2. Refund any profits realized from the sale of securities of the issuer during the 12-month period following the first public issuance of the financial document
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10
Q

Title IV of the Sarbanes-Oxley Act, Enhanced Financial Disclosures, includes the following topics:

A
  1. Disclosures in periodic reports
  2. Enhanced conflict-of-interest provisions
  3. Disclosures of transactions involving management and principle stockholders
  4. Management assessment of internal controls
  5. Certain exemptions
  6. Code of ethics for senior financial officers
  7. Disclosure of audit committee financial expert
  8. Enhanced review of periodic disclosures by issuers
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11
Q

The Sarbanes-Oxley Act requires certain disclosures in periodic reports. Those disclosures include:

A
  1. All adjusting entries identified by the public accounting firm reporting of the financial statements
  2. The financial statements disclose all material off-balance sheet transactions including operational leases, contingent obligations, and relationships with unconsolidated subsidiaries
  3. Pro forma financial statements shall include all relevant informational and shall not include misleading or untrue information
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12
Q

The Sarbanes-Oxley Act includes certain enhanced conflict-of-interest provisions. Those provisions include:

A

Prohibitions on personal loans to executives with some exceptions

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13
Q

The Sarbanes-Oxley Act includes provisions for disclosure of transactions involving management and principal stockholders. Those provisions include:

A

Reporting by persons with ownership of 10% or more. Statements are filed at the time of registration, when a person achieves 10% ownership, and when there has been a change in ownership

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14
Q

The Sarbanes-Oxley Act includes provisions for management assessment of internal controls. Those provisions include a report showing:

A
  1. Management’s assertion that it is responsible for adequate internal control structure
  2. Management’s conclusions regarding its assessment of the effectiveness of the internal control structure and procedures for financial reporting
  3. The auditor’s attestation regarding management’s assessment of internal control
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15
Q

The Sarbanes-Oxley Act includes provisions for audit committee disclosures. The disclosures include:

A

The issuer must disclose the existence of a financial expert on the committee or the reasons why the committee does not have a member who is a financial expert

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16
Q

For purposes of service on the audit committee, what qualifies an individual for classification as a financial expert?

A

A financial expert qualifies through education, past experience as a public accountant, or past experience as a finance officer for an issuer.
Knowledge of the financial expert should include:

  1. Understanding of GAAP
  2. Experience in the preparation or auditing of financial statements for comparable issuers
  3. Application of GAAP
  4. Experience with internal controls
  5. Understanding of audit committee functions
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17
Q

Title VIII of the Sarbanes-Oxley Act considers what topics?

A
  1. Criminal penalties for altering documents
  2. Statute of limitations for securities fraud
  3. Whistle-blower protection
  4. Criminal penalties for securities fraud
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18
Q

Title IX of the Sarbanes-Oxley Act considers what topics?

A

Title IX, White Collar Crime Penalty Enhancements, includes the following:

  1. Attempt and conspiracy
  2. Amended sentencing guidelines for white-collar offenses
  3. Failure of corporate officers to certify financial reports
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19
Q

An issuer periodic report containing financial statements filed with the SEC must include the following written certifications:

A

Each certified financial report must include a written statement:

  1. That the periodic report complies with the Securities Exchange Act of 1934
  2. That information in the report fairly represents, in all material respects, the financial condition and operating results of the issuer
  3. Which must be signed by the CEO and CFO of the issuer, who bear responsibility for these statements
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20
Q

Title XI of the Sarbanes-Oxley Act considers what topics?

A

Title XI, Corporate Fraud Accountability, including the following:

  1. Tampering with a record or impeding an official proceeding
  2. Temporary freeze of authority for the SEC
  3. Authority of the SEC to prohibit persons from serving as officers or directors
  4. Retaliation against informants
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21
Q

Under Title XI, Corporate Fraud Accountability, what are the penalties for tampering with a document used in an official proceeding or retaliating against an informant providing information to the SEC?

A

Document tampering will result in fines and/or a prison term of not more than 20 years.

Retaliating against informants providing information to the SEC will result in fines and/or a prison term of not more than 10 years.

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22
Q

How does the principles-based approach support an effective system of internal control under the COSO framework?

A

An effective system of internal control requires the use of judgement in determining the sufficiency of controls, applying the proper controls, and assessing the effectiveness of the system of internal controls.

The principles-based approach of the COSO framework emphasizes the importance of management judgement

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23
Q

What are the components of the Committee on Sponsoring Organizations (COSO) Internal Control Integrated Framework?

CRIME

A
  1. Control Environment
  2. Risk Assessment
  3. Information and Communications
  4. Monitoring
  5. Existing Control Activities
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24
Q

What are the five PRINCIPLES associated with the CONTROL ENVIRONMENT COMPONENT of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

A
  1. Commitment to ethics and integrity
  2. Board independence and oversight
  3. Organizational structure
  4. Commitment to competence
  5. Accountability
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25
Q

What are the four PRINCIPLES associated with the RISK ASSESSMENT COMPONENT of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

A
  1. Specify objectives
  2. Identify and analyze risks
  3. Consider potential for fraud
  4. Identify and assess changes
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26
Q

What are the three PRINCIPLES associated with the (existing) CONTROL ACTIVITIES COMPONENT of the Committee on Sponsoring Organization’s (COSO) internal Control Integrated Framework?

A
  1. Select and develop control activities
  2. Select and develop technology controls
  3. Deploy through policies and procedures
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27
Q

What are the three PRINCIPLES associated with the INFORMATION AND COMMUNICATION COMPONENT of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

A
  1. Obtain and use information
  2. Internally communicate information
  3. Communicate with external parties
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28
Q

Name and describe the three objectives within the COSO framework?

A

The three framework objectives within COSO are:

  1. Operating objectives pertain to the effectiveness and efficiency of the entity’s operations
  2. Reporting objectives pertain to the reliability, timeliness, and transparency of an entity’s reporting
  3. Compliance objectives are necessary to ensure the entity is adhering to all laws and regulations
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29
Q

What is the purpose of the COSO cube?

A

The COSO cube shows a graphical three-dimensional depiction of the relationship between an entity’s three objectives, its five integrated control components, and the entity’s organizational structure

30
Q

What is necessary for the five components of the COSO framework to create an effective internal control environment for an entity?

A

In order to have an effective internal control environment for an entity, the five components and 17 related principles must be both present and functioning

Additionally, the five components must operate together as an integrated system, to reduce the risk to an acceptable level, that the entity will not achieve its objectives

31
Q

Differentiate the COSO framework from the Audit framework

A

The five components of the COSO framework are useful for identifying and evaluating the effectiveness of an entity’s internal control

In contrast, the Audit framework focuses on how a given control prevents or detects and corrects material misstatements in an entity’s financial reporting

32
Q

Identify some inherent limitations that may exist even with an effective internal control system

A

The following inherent limitations may still exist with an effective internal control system:

  1. Breakdowns in internal control due to error or human failure
  2. Issues pertaining to the suitability of the entity’s objectives
  3. External events beyond the control of the entity
  4. Faulty or biased judgement in decision making
  5. Management override of controls
  6. Circumvention of controls through collusion
33
Q

What constitutes ineffective internal control under the COSO framework?

A

If a major deficiency is identified related to the presence and functioning of a component or relative principle, or with respect to the components operating together in an integrated manner, the entity may not conclude that it has effective internal control system in place under the COSO framework

34
Q

What are the two PRINCIPLES associated with the MONITORING COMPONENT of the Committee on Sponsoring Organization’s (COSO) Internal Control Integrated Framework?

A
  1. Ongoing and Separate Evaluations

2. Communication and Deficiencies

35
Q

What themes does the ERM framework encompass?

A
  1. Aligning risk appetite and strategy
  2. Enhancing risk response decisions
  3. Reducing operating surprises and losses
  4. Identifying and managing multiple and cross-enterprise risks
  5. Seizing opportunities
  6. Improving deployment of capital
36
Q

Explain the difference between opportunities and risks under the ERM framework

A

Positive events that promote achievement of objectives are opportunities

Negative events that prevent the achievement of objectives are risks

37
Q

What are the COMPONENTS of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

IS EAR AIM

A
  1. Internal Environment
  2. Objective Setting
  3. Event identification
  4. Accountability
  5. Risk Response
  6. Control Activities
  7. Information and Communication
  8. Monitoring
38
Q

What are the KEY ELEMENTS of the INTERNAL ENVIRONMENT COMPONENT of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework ?

PHRASED C

A
  1. Philosophy of risk management
  2. Human resources standards
  3. Risk appetite
  4. Accountability
  5. Structure (organizational)
  6. Ethnic values (and integrity)
  7. Directors’ oversight
  8. Commitment to competence
39
Q

What are the KEY ELEMENTS of the OBJECTIVE SETTING COMPONENT of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Strategic Objectives
  2. Related Objectives
  3. Selected Objectives
  4. Risk Appetite
  5. Risk Tolerances
40
Q

What are the KEY ELEMENTS of the EVENT IDENTIFICATION COMPONENT of the Committee on Sponsoring (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Events
  2. Influencing Factors
  3. Event Identification Techniques
  4. Event Interdependencies
  5. Event Categories
  6. Distinguishing Risks and Opportunities
41
Q

What are the KEY ELEMENTS of the RISJ ASSESSMENT COMPONENT of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Inherent and Residual Risk
  2. Establishing Likelihood and Impact
  3. Data Sources
  4. Assessment Techniques
  5. Event Relationships
42
Q

What are the KEY ELEMENTS of the RISK RESPONSE COMPONENT of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Evaluating Possible Responses
  2. Selected Responses
  3. Portfolio View
43
Q

What are the KEY ELEMENTS of the CONTROL ACTIVITIES COMPONENT of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Integration With Risk Response
  2. Types of Control Activities
  3. Controls Over Information Systems
  4. Entity-Specific Controls
44
Q

What are the KEY ELEMENTS of the INFORMATION AND COMMUNICATION COMPONENT of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Informational

2. Communication

45
Q

What are the KEY ELEMENTS of the MONITORING COMPONENT of the Committee on Sponsoring Organization’s (COSO) Enterprise Risk Management (ERM) Integrated Framework?

A
  1. Ongoing Monitoring Activities
  2. Separate Evaluations
  3. Reporting Deficiencies
46
Q

What is a major limitation of enterprise risk management?

A

Enterprise risk management is subject to human error as ERM evaluations can contain errors and management can override controls

47
Q

Explain the purpose of a balanced scorecard

A

A balanced scorecard is a framework used for implementing strategy that converts an entity’s strategic objectives into a set of performance measures

48
Q

What are total factor productivity ratios (TFP) and partial productivity ratios (PPR)?

A

TFP and PPR are two types of productivity measures used as external benchmarks

Total factor productivity ratios (TFPs) reflect the quantity of ALL output produced relative to the costs of ALL inputs used

Partial productivity ratios (PPRs) reflect the quantity of output produced relative to the quantity of INDIVIDUAL inputs used

49
Q

What is a control chart and how is it used as a statistical quality-control tool?

A

A control chart is used to plot a comparison of actual results by batch or other suitable constant interval to an acceptable range

Control charts effectively indicate whether there is a trend toward improved quality conformance or deteriorating quality conformance

50
Q

How are Pareto diagrams and fishbone diagrams used to identify quality-control issues (defects)?

A

A Pareto diagram identifies the frequency (highest to lowest) of defects or problems that demand management attention

Once initially identified in the Pareto diagram, the individual defects/problems are further analyzed by cause and effect in a fishbone diagram

51
Q

What are the characteristics of effective performance measures?

A

Effective performance measures:

  1. Relate to the goals of the organization
  2. Balance long- and short-term issues
  3. Reflect management of key activities sometimes referred to as critical success factors in the balanced scorecard
  4. Are under the control or influence of the employee
  5. Are understood by the employee
  6. Are used to both evaluate and reward the employee or otherwise constructively influence behavior
  7. Are objective and are easily measured
  8. Are used consistently
52
Q

Define transaction marketing

A

Customers are attracted for the sake of a single sale

53
Q

Define interaction-based relationship marketing

A

When customers are attracted for the purpose of a sale that serves as the basis for an ongoing relationship

54
Q

Define database marketing

A

Information is gathered on customers and the information from that database is used to segment customers into target markets for a more effective selling effort

55
Q

Identify three types of compensation generally available

A
  1. Fixed salary
  2. Bonuses
  3. Perks
56
Q

List five issues related to incentive compensation

A
  1. Time Horizon– does the plan exclusively emphasize current reward for current performance or does it promote ongoing performance?
  2. Fixed vs. Variable bonuses–is the incentive pay formula driven or subjective?
  3. Stock vs. Accounting-based performance evaluation–is the measurement of performance based on accounting data or equity values
  4. Local vs. Company-wide performance–does the incentive reward for local (division) or company-wide performance?
  5. Cooperative vs Competitive plans–does the incentive reward group or individual accomplishment?
57
Q

Name the three components of product cost and identify which of these components are categorized as prime costs and conversion costs

A 
Direct Materials (DM)
Direct Labor (DL)
Manufacturing Overhead (MO)

Prime Cost = DM + DL
Conversion Costs = DL + MO

58
Q

Distinguish between product and period cost

A

Product costs–Inventoriable; they become cost of goods sold when sold

Period Costs–Expensed in the period incurred as they are not inventoriable

59
Q

Name the three most frequent objectives of an entity’s cost accounting system(s)

A
  1. Product costing (inventory and cost of goods manufactured and sold)
  2. Efficiency measurements (comparison to standards)
  3. Income determination (profitability)
60
Q

Determine the traditional overhead rate

A

Traditional overhead rate=

budgeted manufacturing overhead costs/estimated cost of driver

61
Q

Define relevant range

A

The relevant range is the range of volume for which the assumptions of the cost driver (i.e. linear relationship with the costs incurred) are valid and in which the actual value of the cost driver exists

62
Q

Compare and contrast the direct method and step-down method for allocating service costs in activity-based costing

A

Under the direct method, each service departments total costs are directly allocated to the production departments without recognizing that the service departments themselves may use the services from other service departments

Under the step-down method, a sequential approach is used to allocate service department costs to production departments as well as other service departments

63
Q

With joint products, what is the treatment of costs incurred before the split-off point?

A

Costs incurred before the split-off point are sunk costs, not relevant to further processing decisions

Joint costs are allocated by an arbitrary means such as by unit volume relationships or relative net realizable values at the split-off point

64
Q

What is the formula for cost of goods manufactured?

BASE
Beginning, Add, Subtract, Ending

A

WIP (beginning)

Add: Direct Materials (DM)
Direct labor (DL)
Manufacturing Overhead (MO)

Less: WIP (ending)

Costs of Goods Manufactured

65
Q

What is the formula for cost of goods sold?

A 
MANUFACTURING ENTITY
Finished Goods (beginning)
Add: Cost of goods manufactured 
Less: Finished Goods (ending)
Costs of Goods Sold (ending)
ALTERNATIVE FORMULA
Beginning Inventory 
Add: Purchases
Less: Ending Inventory
Cost of Goods Sold (ending)
66
Q

What is the difference between job and processing costing?

A

JOB COSTING–with job costing, each unit/batch is unique and easily identifiable costs are determined by each job…Example–We print your resume in our print shop

PROCESS COSTING– with processing costing, continuous mass-produced identical units are manufactured, and costs are determined by activity/process/department…Example: We process crude oil into gasoline

67
Q

What is an equivalent unit and how are the costs applied?

A

Used in process costing, equivalent units are fully completed and partially completed units during the period

In applying costs, determine the units, the costs, then apply the cost flow assumption for cost per unit and allocation of costs

68
Q

How are equivalent units and total cost calculated using the FIFO method?

A

Equivalent units = (Beginning WIP x % to be completed) + units started and completed + (Ending WIP x % completed)

Total costs = Cost incurred during the current period

69
Q

How are equivalent units and total cost calculated using the weighted average method?

A

Equivalent units = units completed and transferred out + (Ending WIP x % completed)

Total costs = costs in beginning WIP + costs incurred during the current period

70
Q

Name the types of spoilage and indicate the appropriate accounting treatment

A

Abnormal:
Charge to income of the current period

Normal:
Increase the cost of the product produced (i.e., inventory)

71
Q

Define activity-based costing (ABC)

A

ABC is a costing theory that assumes that resource consuming activities cause costs and that costs should be assigned to benefiting products based on the activities performed and the resources consumed

ABC systems often divide costs into multiple activity centers and identify the activities that drive the costs in each cost center. Costs are then assigned based on the volume of cost drivers at the determined rate per cost driver

Business Exam (6 decks)

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