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Components of COSO Framework

C- Control environment - tone at the top
R- Risk Assessment - F/S Misstated or fraud
I- Information and Communication -Fair, Accurate, Complete and Timely(FACT)
M- Monitoring - Effectiveness of internal controls, report deficiencies
E-(Existing) Control Activities- Policies/procedures to mitigate risk


Control Environment


E- Ethics - commitment to ethical values
B- Board Independence
O- Organizational structure that facilitates ethics
C- Commitment to Competence- Properly trained employees
A- Accountability


Risk Assessment

E- Event identification - identify possible risks
A - Assess the risk
R- Respond to the risk


Information and Communication

Between both internal(management and board/audit committee) and external parties(to investors, customers and external auditors)
- must be fair, accurate, complete and timely(FACT)



Test on a timely basis internal controls for effectiveness, monitor the controls regularly to assess internal control quality
- frequency of testing dictated by risk
- assets at greatest risk tested most frequently
- must report and correct any deficiencies in a timely manner


Existing Control Activities `

-Control activities set forth by the entity to mitigate risk
- Policies and procedures to prevent and detect
- segregation of duties
-make sure existing controls are being followed and no one is overriding them


Objectives of an organization(COSO)

O - Operations
R - Reporting
C - Compliance


Effective internal control

- effective internal control provides "reasonable" assurance that the entity's objectives will be achieved
- All components of CRIME must be PRESENT and FUNCTIONING
- PRESENT - components and relevant principles are included in the design of the internal control system
FUNCTIONING - components and relevant principles are currently operating as designed


How long to retain working papers and audit records for?

7 years


Statue of limitations for fraudulent reporting***

Earlier of 2 or 5
- 2 years since violation was found
- 5 years since violation occurred


Major deficiency identified in internal control

Organization cannot state or conclude that they have met the requirements for an effective internal control


Objectives of enterprise risk management(ERM)

S - Strategic(high level goals to achieve the mission)
O - Operational
R - Reporting
C- Compliance


Component of enterprise risk management(ERM)

Similar to components for internal control but BROADER in scope

I-Internal Environment(EBOCA "HR")
S-Setting objectives

E-Event identification
A-Assessment of risk
R-Risk response

I-Information and communication


Risk Assessment Techniques

1. Benchmarking - Use of common data from similiar organizations

2. Probabilistic models - Statistical data - more objective, historical data

3. Non-Probabilistic Models- mere opinion, subjective assumptions


Portfolio View

When use analyze risk you look at it from an ENTITY-WIDE perspective and not specifically to an isolated department


Balanced Scorecard

A framework used for implementing strategy that converts a company's strategic objectives into a set of performance measures(financial and non-financial measures)



Industry "gold" standard


Total factor productivity ratio(TFP)

reflect the quantity of all output produced relative to the costs of all inputs used.
-Material & labor costs
-used to compare actual cost cost per unit production levels to budgeted(or prior years) production levels.

Output / Total Costs


Partial Productivity Ratios

-Material OR Labor quantity

Output / Specific quantity


Internal Benchmarks

-Find and analyze problems
-Why we're not where we should be?

Control Charts
-Determine zero defects
-statistical analysis to determine output or usage of something is within an acceptable range


Goalpost conformance

Keep deviations within an acceptable range
-"zero" defects


Pareto Diagram

"Histogram", frequency diagram
-determine the quality control issues that are most frequent


Cause and effect diagram

"fish-bone diagram"
-analyze the REASONS that are contributing to frequent defects that come up in the Pareto diagram
-identify sources of the problem
-trace defect back to the source


Marketing practices

Establish value for organizations products

1.Transaction marketing- single sale, lowest price
2.Interaction based relationship -repeat business, loyalty discounts, establish relationships with customers
3. Database marketing - segment the customers, target groups
4. E-marketing - use of the internet
5. Network marketing - relationships and referrals


Bonus incentives

1. Cash bonus - reward current performance
2. Restricted stock options - may reward current performance, but the plan emphasizes future performance
- employee most likely must stay through option vesting period(retention)
-option only has value if stock price increases


Prime Costs

Direct materials + Direct Labor = Prime costs


Conversion Costs

Direct Labor + Overhead Applied = Conversion Costs


Product Costs

Not expensed until the product is sold - matching principle

-product costs are inventoriable
-Direct materials + direct labor + manufacturing overhead = product costs


Period Costs

Income State only(not capitalized or part of inventory or balance sheet)


"Manufacturing" costs

treated as product costs

composed of direct costs(DL + DM) and indirect costs(Overhead*)

*Indirect materials, Indirect Labor, Factory Overhead


Non Manufacturing Costs

treated as period costs

composed of Sales, General and Administrative and Interest costs


Cost Accounting

designed to meet the goal of measuring cost objects or objectives. The most frequent objectives include:

Product Costing(inventory and cost of goods manufactured and sold)
Income determination(profitability)
Efficiency measurements(comparisons to standards)


Direct Costs

Can be easily traced to the object
-Direct raw materials include freight-in(Not freight-out!) and a Normal amount for Scrap
-Direct raw materials include cost of labor directly related to the product plus a reasonable amount of expected "downtime"(e.g breaks, setup and training)


Indirect Costs

Cannot be easing traced to the completed product

If it has to do with the FACTORY than it is considered a product cost and Manufacturing Overhead

If the cost has to do with the OFFICE then it is considered a period cost(G &A)


Cost Drivers

Assign factory overhead for indirect costs to individual products

- In the "relevant range" assumptions of the cost driver hold true


Traditional costing

When using "traditional costing" we take total manufacturing overhead(all costs) and allocate it to one cost pool

Step 1: Calculate overhead rate= Budgeted overhead costs / Estimated cost driver(DL$, DH, DLH, MH)

Step 2:Applied overhead = Actual Cost driver x Overhead Rate(from step 1)


Cost Behavior

As products produced increases so does costs

Some costs are fixed and others are variable, while some can be both fixed and variable(semi variable costs)


Variable Cost

Total Cost changes proportionately with the cost driver
-per unit amount is constant


Fixed Cost

Total Fixed cost, does not change with the cost driver
-ex. rent per month
- as more units are produced the fixed cost per unit decreases

-in the long run any cost is considered variable(ex 30 year lease in year 30 becomes a variable cost)


Cost Accumulation systems

Job Costing
Used for specific unique items

Process Costing
Used for generic same item produced every time

Backflush Costing
Item has no value until it is complete, and therefore only accounts for costs at the end of the process


Calculating Cost of Goods Manufactured formula

Beginning Work in process
+Direct materials used
+Direct Labor
+Manufacturing overhead applied
=Total manufacturing costs incurred
-Ending work in process
=cost of goods manufactured, completed in this period


Calculating Direct Materials Used(if not given)

Beginning Raw Materials
=Materials available
-Ending Inventory Raw Materials
= Direct Materials Used


Calculating Cost of Goods Sold

Beginning Finished Goods
+Cost of Goods manufactured
=Cost of Goods available for sale
-Ending Finished Goods inventory
=Cost of Goods Sold


Equivalent Units of Production -Memorize!

Weighted Average
Take completed and transferred items + % complete of ending work in process items

1. Take work in process beginning x % NOT complete yet
2. Add units complete and transferred out
3. Subtract Total number of units in beginning work in process
4. Add % complete of ending work in process


Calculate per Equivalent Unite

Weighted Average
Beginning cost + Current Cost/ Equivalent Units

Current Costs only/ Equivalent Units



Normal Spoilage - part of Balance sheet, included in inventory costs

Abnormal Spoilage - period expense


Activity Based Costing -"Transaction-based costing"

Uses multiple overhead rates by department
-improves cost allocation compared to volume-based which uses only a single cost pool, provides greater detail by breaking O/H down by department to product costs

Cost Drivers and Cost pools
Traditional - only one
Activity Based Costing - multiple


Direct Method and Step-down method

Direct Method
-allocates service costs by taking service department's total costs and directly allocating them to production departments

Step-down method
-more sophisticated, service costs are allocated to service departments and production departments based on use(b/c service departments use service costs as well as production depts)


Joint Product Costs

-also known as a "common cost"
-joint products are "main products"

Split off point- point when joint product costs can be recognized as individual products(nike makes shoes, before product becomes running or basketball at that point is the split of point)
-after split off point costs are called separable costs



-relatively small value and not main product, so don't want to allocate joint product costs to them

-can subtract revenue received from sales of by-products against joint costs or book it as miscellaneous revenue


Allocating Joint Costs


1.By volume- as a percentage of units produced

2.Based upon sales value - whatever percentage of total sales value of items is allocated to joint costs

3.No sales value at split-off - must be finished to have value and sell it(b/c no sales value at split-off) work backwards and subtract out separable cots after split-off and then take percentage of sales value and allocate it to joint costs(like method 2)