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Who is the person ultimately responsible for enterprise risk management within a company?



What section SOX requires the CEO to review the financial statements?



What are the eight components of COSO's ERM framework?

The eight components of COSO's ERM framework are internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring. ERM processes must be monitored, deficiencies reported to management, and modifications performed when required.


What is included in GDP

GDP (gross domestic product) includes personal consumption, business investment, government expenditures, and the net difference between exports and imports.

Financial transactions are not included because they include such items as investments in securities and repayments of loans, which do not represent a real good or service produced by the economy. Second-hand sales are excluded from GDP because those items were originally produced at an earlier time and were included in GDP then.


What is the trough of a business cycle characterized by?

At a business cycle's trough, a large portion of the nation's productive capacity often goes unused due to the depressed level of demand in the economy. Moreover, firms and individuals are hesitant to make new investments because the expected return is far less than what it would be if the economy were in an expansion.


What does testing for basis risk involve?

Testing for basis risk would involve testing for the impact of the changes in relationships between key market interest rates.


What are the primary sources of funds for sovereign wealth funds?

The primary sources of funds for sovereign wealth funds are export earnings from commodity (energy)-based exports and the trade surplus generated by the export of manufactured goods. The trade surplus is often tied to the country having a weak currency that causes a country's goods and services to be priced lower in terms of a foreign currency.


What is structural unemployment?

Changes over time in consumer demand, and technology that alters the structure or composition of the demand for labor, both in terms of occupation and geographic opportunities.


What are sovereign wealth funds?

Sovereign wealth funds (SWFs) are entities established by governments to make investments with foreign exchange reserves that are managed separately for official foreign exchange reserves managed by the country's central bank within monetary policy goals. The underlying investments are made by SWFs with the goal of making a profit.


What is commercial paper?

Commercial paper is a short-term note payable which is unsecured and usually discounted.


What are the 3 basic valuation approaches?

The cost approach
The market approach
The income approach

The market approach to determining fair value uses market comparisons of identical or comparable items. A comparable item is one that has reasonable and justifiable similarity to the item being valued, be that a single asset or an entire business.

The cost approach to determining fair value is an example of the economic substitution principle. In other words, what would it cost to replace the item in question with an asset of like function and capacity?

The income approach to determining fair value focuses on the company's ability to create earnings or some other benefit stream, such as cash inflows, and the risk related to that investment. An investor will approach any investment from the perspective of the expected future benefit streams, and the requirement that those future benefit streams need to cover not only the cost of the initial investment but also a return commensurate with its risk.


What is an active policy strategy for dividends?

Treating dividends as an active policy strategy assumes that dividends provide information to the market. If a firm chooses to use dividend policy as an active policy strategy (rather than as a residual part of a financing decision), the firm is more concerned about the announcement effects of the dividend than the available investment opportunities (alternative uses of the retained earnings). This is particularly important when management wants to signal improved prospects to the outside investors.


Which capital budgeting model that is generally considered the best model for long-range decision making?

The discounted cash flow model because the time value of money (present and future values) is considered.


In the definition of fair value, what is considered the principal market?

The principal market is considered to be one where the holder of the asset or liability being valued could find the greatest volume of similar transfers.


What is one-for-one checking?

One-for-one checking involves retaining copies of all unnumbered documents submitted for processing and checking them off individually against a report of transactions processed.


What are the reasons to hold cash?

The “Income-motive”
The “Business-motive”
The “Precautionary-motive”
The “Speculative-motive”


Which of the following terms represents the residual income that remains after the cost of all capital, includ­ing equity capital, has been deducted?

Economic Value Added


What is a ring network?

Ring networks do not have a central computer. Each site connects directly to only two other sites but is still able to communicate to all other sites via going through its neighbors. This means all data is passed through each site until arriving at the correct location. This essentially creates a loop where each link passes communication through its neighbor to the appropriate recipient. It is this configuration that gives ring network its name.


What is a database schema?

A database schema is “a view of the entire structure of the database.” It is “the organizational chart showing how the database is structured.” The database schema shows all elements of the database and areas of responsibility of individuals.


What is a web crawler?

A web crawler is a robotic computer program that searches the web for web pages to add to a directory of web pages.


What is a zero-balance account?

A zero-balance account is one that maintains a zero-balance since funds only sufficient to cover the checks presented are transferred from another account.


What is the hurdle rate of return?

The hurdle rate of return (or discount rate) is the desired (or “internal”) rate of return; that rate which the investment must return for the investor to “break even.”

This rate must reward the investor for the risk that is being assumed in the investment—the higher the risk the higher the required rate of return.

Thus, for capital budgeting purposes, management would select a high hurdle rate of return for certain projects because management wants to factor risk of the project into its consideration.


What is a letter of credit?

A letter of credit is an arrangement whereby a bank agrees to stand behind the obligation of the importer. The transaction is significantly accelerated because the exporter has virtual assurance of collection for the goods shipped to the customer (importer).


What is a likely result as the economy reaches full employment?


As full employment approaches, demand for goods and services is rising. This increased demand usually causes an increase in price levels. The result is inflation, an increase in general levels of prices.


What is a poison put clause?

A poison put clause is a covenant that obliges the borrower to repay the bonds if a large quantity of common stock is held by a single investor and the bond rating is downgraded.

This type of bond covenant is used as a defensive strategy to prevent hostile takeovers.


What is a depository transfer check?

Depository transfer checks, or official bank checks, are used to move funds from one account to another as part of a firm's cash management process. These checks are not cashable at any bank.


When is using the cost (asset-based) valuation appropriate?

The use of a cost (asset-based) approach for valuation is appropriate when:

the company is in liquidation.

the company is worth more in liquidation than as a going concern.

the company's value is basically related to the assets held.

the company has had no income in recent years.
future benefit streams cannot be adequately predicted


What are four basic categories of normalization adjustments?

Nonoperating adjustments: the removal of nonoperating items included in the historical financial statements that are not part of normal operations. The performance of “odd jobs” around a business facility would be normal operating items.

Nonrecurring adjustments: the removal of unusual, unexpected, or items not likely to occur again from the financial statements. Although the son is not likely to perform these duties in the future, someone would need to do general maintenance on an ongoing basis.

Comparability adjustments: adjustments of the historical financial statements to match GAAP choices of potential guideline companies. The payment of wages is not a “GAAP” question, even though they may be excessive.

Discretionary adjustments: adjustments to the historical financial statement to include or to remove items not considered part of normal operations. Excessive wages paid to family members are considered to be discretionary items. The normalization adjustment would need to be made to bring the amount paid within going market rates.


What are the advantages of Net Present Value Modeling?

Advantages of using the net present value method for decision making include the following:

The time value of money is considered (compounding of returns).

Given a perfect market, correct decision advice will be obtained.

A correct ranking will be obtained for mutually exclusive projects given similar lives and investments.

An absolute value is obtained.


What are the disadvantages of Net Present Value Modeling?

Disadvantages of using the net present value method for decision making include the following:

The discount rate is difficult to determine.

Assumptions related to cash flows have to be made that may or may not be correct.


What is exponential smoothing?

Exponential smoothing is a statistical method that is useful as a sales forecasting technique.


What are the major integrating mechanisms?

Integrating mechanisms connect the information, tasks, and resources with the work groups in the organization. The major integrating mechanisms include:

general management systems,
increasing coordination potential, and
reducing the need for coordination.


What is strategic planning?

Strategic planning answers questions such as the following:

What product or service do we supply?
Who are our customers?
How can we perform well?

The answers to these questions provide a general direction for the organization.


When the cost of capital is 0, how do you calculate NPV?

When the cost of capital is zero, the NPV is simply the sum of a project's undiscounted cash flows minus the initial cash outlay.


How do you calculate net working capital using the percentage of sales method for a sales forecast?

Add/subtract all the percentages and multiply them by the sales amount.

EX: Net working capital is Cash + Accounts Receivable (A/R) + Inventory – Accounts Payable (A/P), so net working capital is 15% + 10% + 20% – 30%, or 15% of sales.

Sales is forecast to be $55,000 in year 2, so net working capital would be $8,250 ($55,000 × 0.15)


Which forecasting technique is most relevant for analyzing data prior to creation of a flexible budget?

Regression Analysis


What is the drum-buffer-rope theory?

The drum-buffer-rope theory:

assumes that within a manufacturing system there is at least one (or a limited number) of constraints created by scarce resources.

states that in order to best protect the throughput of a manufacturing operation, the limiting factor of the manufacturing process must be protected.

states that it is important to protect against inflationary inventory levels (inventory build ups) and the associated carrying costs which can occur at bottlenecks (constraints).

focuses on only the queuing area within a manufacturing firm that is in front of the constraint (bottleneck).


What is activity based costing?

Activity-based costing (ABC) collects financial and operating data based on the underlying nature and extent of the cost drivers. Activity-based costing:

identifies activities and cost of performing those activities.

identifies appropriate cost drivers for all activities.

develops activity costs per unit of cost driver.

assigns costs to products/services based on consumption of activity costs.


What is management by exception?

Management by exception involves concentrating on areas that deserve attention and paying less attention to areas operating as expected.

Management-by-objectives (MBO) involves having manager and subordinate jointly develop objectives and plans.


What is included in the planning stage of a project?

The planning stage of a project includes the following:

Creating the project plan
Creating a schedule
Creating a control plan
Creating a quality control plan
Creating a risk management plan
Creating a communications plan
Creating a completion plan


What are off-shore operations?

“Off-shore operations” describes an organization incorporating outside of the original jurisdiction of the primary operations. The organization will be considered off-shore if it:

incorporates under offshore company laws.
incorporates as a nonresident.
does not trade within the offshore jurisdiction.
meets nominal tax expenses


What are shared services?

Shared services is combining efforts of two departments that share the same resources.


What is the difference between variable and absorption costing?

The difference between variable and absorption costing is the way fixed overhead costs are handled.

Under variable costing, they are charged to expense as a period cost in the period incurred. No fixed overhead costs are allocated to the units produced.

Absorption costing treats fixed costs as a product cost and allocates them to the units produced. Fixed costs follow the units through work-in-process and finished goods inventory, and are expensed through cost of goods sold when the units are sold.


What does business process re-engineering do within an organization?

Business process re-engineering (BPR) identifies processes and workflows, analyzes processes and workflows, and designs processes and workflows


What is Kanban?

Kanban is a technique for managing a just-in-time inventory system. The kanban is a tag attached to the storage container where component parts are kept. As a component is used, a kanban is placed in a box. Managers determine the number of kanbans needed to be in the box of the component part before a reorder of that part is necessary.


What is Six Sigma?

Six Sigma is a systematic method for improving the operational performance of an organization by eliminating variability and waste in manufacturing and business processes.

Six Sigma is an improvement initiative specifically designed to address errors in defects.


What is process management?

Process management is the planning and monitoring of the operations of an actual business process. Knowledge of the process, process skills, techniques, tools, and systems must be applied to improve the business processes already in place.


What is part of the implementation stage in project management?

The implementation stage coincides with the planning stage. The implementation stage includes holding meetings, monitoring the progress of the project, updating the project plan, tracking costs, and communicating the progress of the project.


What are the 4 perspectives of a balanced scorecard?

Customer Satisfaction
Learning & Growth (innovation)
Internal Business Process Improvements
Financial Measures Related to Operations


What are controllable costs?

Costs that are definitely influenced by a given manager within a given time span are controllable costs.


What is the best way to identify and manage risk?

The best way to identify and manage risk is to have experts in the area of the project on the team. These experts will have had experience in the aspects of the project and can help identify possible risks as well as manage the risks without busting the bank.


What is another term for Just-In-Time processing?

Lean Manufacturing


What are some examples of business process modeling tools?

Use case diagrams present an overview of functionality provided by system drivers, their goals, and any dependencies.

Activity diagrams represent the step-by-step workflow of a process.

Business process modeling notation is a graphical representation that identifies the business processes in business process modeling.

Extended business modeling language (xBML) answers the questions Who, What, When, Where, and Which.

Unified Modeling Language is a general-purpose, standardized modeling language.


What are conversion costs?`

Conversion costs are manufacturing costs required to convert raw materials into a finished product:

Direct labor + Manufacturing overhead


What is step allocation?

Step allocation is the allocation of the costs of each service department in sequence to all departments that receive the service, whether other service departments or production departments.


What is lean manufacturing?

Lean manufacturing, which is often known simply as “lean,” is a production practice and methodology that focuses on reduction of the seven wastes (overproduction, waiting time, transportation, processing, inventory, motion, and scrap) in manufacturing products.


What is a business cycle?

A business cycle is the systematic pattern of changes in economic activity around the long-run trend (after adjusting for seasonal fluctuations).

Terms used to describe a business cycle:

Trough—bottom, low point, slump, depression (a severe trough); characterized by high unemployment and low consumer demand and surplus productive capacity

Recovery—expansion; upturn from a trough; characterized by replacing machinery and other productive facilities, increasing employment, income and consumer spending, production, sales, and profits

Peak—top, high point, boom; full utilization of existing productive capacity; may be accompanied by shortages of labor and other inputs/raw materials; capacity can be increased only by increased investment to expand production facilities (a long-run phenomenon)

Recession—contraction; downturn from a peak; formally defined as a decrease in real GNP for two consecutive calendar quarters (i.e., 6 months); decreasing demand results in decreasing employment and production, decreasing incomes and decreasing profits, and low levels of investment

Turning point—point at which a recovery or recession begins; change in slope from positive to negative (or from negative to positive)


What is a turnaround form?

A turnaround form is an output form that is later used for input. The turnaround form increases efficiency and eliminates input errors.


What is option risk?

Option risk occurs when a firm gives the customer the right (but not the obligation) to change the stream from assets, liabilities, or off-balance sheet items.


What does an access control matrix consist of?

An access control matrix consists of:

a list of all authorized user code numbers and passwords,
a list of all files and programs maintained on the system, and
a record of the type of access to which each user is entitled.


What are the four categories of entity objectives in the enterprise risk management framework (ERM)?

1) strategic (high-level goals, aligned with and supporting the entity’s mission),
2) operations (effective and efficient use of its resources),
3) reporting (reliability of reporting), and
4) compliance (compliance with applicable laws and regulations).


What are internally encrypted passwords?

Internally encrypted passwords are a form of access control designed to prevent unauthorized access by use of a utility program to identify passwords.


What is a password hierarchy?

Password hierarchy is a system of passwords designed in such a manner as to allow differing degrees of access to file manipulation activities.


What is usury?

Usury is exorbitant interest.


What causes deflation?

Deflation can occur as a result of a combination of four factors:
the supply of money goes down
the supply of other goods goes up
demand for money goes up
demand for other goods goes down

To prevent deflation, the opposite actions must take place.


What is game theory?

Game theory is mathematical models of conflict and cooperation between rational decision-makers.


What is the concentration ratio?

The concentration ratio measures the market share of several of the largest firms in the industry in an oligopolistic market.


What is the Herfindahl Index?

The Herfindahl index measures the size of firms in an industry and indicates the amount of competition in that industry.


What are the functions of a database administrator?

The database administrator may be a single individual or a staff of individuals depending on the size of the organization. The functional responsibilities generally include planning the database, defining schemas and subschemas, selecting the appropriate database management system (DBMS) software, creating the database structure, establishing policy and procedures for database usage, teaching users how to work with the DBMS, and controlling database activity, i.e., database design, operation and security.


How many levels of interdependence are included in integrated planning?

Interdependence is the level to which work groups are organized. There are three levels of interdependence to take into consideration:

a. Pooled interdependence: There is a common source of resource, but no interrelationship between the work groups.
b. Sequential Interdependence: The work groups coordinate the flow of information, tasks, or resources from one group to another.
c. Reciprocal Interdependence: Information, tasks, and resources are passed back and forth between the groups.


In a microcomputer system, where are the operating system program and language translator program are permanently stored?

The operating system and language translator programs are permanently stored in the read only memory (ROM). ROM may only be read from to prevent these important programs from being accidentally altered or deleted.