BEC NINJA V Flashcards Preview

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Flashcards in BEC NINJA V Deck (84):
1

Which of the following is not an integrating mechanism?

A. General personnel systems

B. General management systems

C. Increasing coordination potential

D. Reducing the need for coordination

A. General personnel systems

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.

2

Image processing systems have the potential to reduce the volume of paper circulated throughout an organization. To reduce the likelihood of users relying on the wrong images, management should ensure that appropriate controls exist to maintain the:

A. legibility of image data.

B. accuracy of image data.

C. integrity of index data.

D. initial sequence of index data.

C. integrity of index data.

If index data for image processing systems are corrupted, users will likely be relying on the wrong images.

Legibility and accuracy of image data are important to its use, but are independent of using the wrong image. Maintaining the initial sequence of index data may not be possible as the image data is modified and images are added/dropped.

3

If a burden rate is not employed, and the volume of production is increased over the planned level, the cost per unit for manufacturing overhead would be expected to:

A. decrease for fixed costs and remain unchanged for variable costs.

B. remain unchanged for fixed costs and increase for variable costs.

C. decrease for fixed costs and increase for variable costs.

D. increase for fixed costs and increase for variable costs.

A. decrease for fixed costs and remain unchanged for variable costs.


If a burden rate is not employed, and the volume of production is increased over the planned level, the cost per unit for manufacturing overhead would be expected to decrease for fixed costs and remain unchanged for variable costs. Note, however, that regardless of whether or not the company uses a burden rate, costs per unit typically change as production levels change. This is an essential point that drives the use of activity-based costing.

4

For which type of product is it appropriate for the seller to accept any price that exceeds the storage and delivery costs for the product?

A. Byproduct

B. Optional product

C. Captive product

D. Product bundle

A. Byproduct

Any amount received above the storage and delivery costs for a byproduct allows the seller to reduce the main product's cost and price to make it more competitive.

Optional products are those offered for sale along with the main product. They are unlikely to have a zero production cost so the seller must receive a price above the storage and delivery costs for such products.
Captive products are those that must be used along with the main product, such as film for use with a camera. Sellers often make their money on the captive products, rather than on the main product which is sold at a low price. The captive products therefore will be priced well above the storage and delivery costs.
Product bundles are combinations of products sold together at a reduced price, such as season tickets for a theater. Products are bundled in order to promote the sale of certain items that consumers might not otherwise purchase. The combined price of the bundle must be low enough to encourage consumers to buy the bundle, but must recover production costs and provide some profit for the seller, so the price must exceed storage and delivery costs.

5

Which of the following is an accurate comparison of fair value and fair market value?

A. Fair market value defines the buyer as hypothetical, whereas fair value defines a specific buyer.

B. Fair market value uses the principal market, whereas fair value uses the most advantageous market.

C. Fair market value uses the premise that the seller and not necessarily the buyer is willing to enter into the transaction, whereas fair value uses the premise that both the buyer and seller are willing parties.

D. Fair market value defines the seller as hypothetical, whereas fair value assumes a specific seller.

D. Fair market value defines the seller as hypothetical, whereas fair value assumes a specific seller.

Fair market value is probably the most common standard of value used in business valuation engagements. The International Glossary of Business Terms defines fair market value as “the price, expressed in terms of the cash equivalent, at which property would change hands between a hypothetical willing and able buyer and a hypothetical willing and able seller, acting at arm's length in an open and unrestricted market, when neither is under compulsion to buy or sell and when both have reasonable knowledge of the relevant facts.”

The International Glossary of Business Terms defines fair value as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.”

The differences between fair market value and fair value are quite substantial:

Fair market value implies a willing buyer and seller, whereas the buyer and seller under fair value are not necessarily willing.
Fair market value defines the seller as hypothetical, whereas there is a specific seller when using fair value.
Fair market value takes advantage of an unrestricted market, whereas fair value uses the principal or most advantageous market.

6

A company has cash of $100 million, accounts receivable of $600 million, current assets of $1.2 billion, accounts payable of $400 million, and current liabilities of $900 million. What is its acid-test (quick) ratio?

A. 0.11

B. 0.78

C. 1.75

D. 2.11

B. 0.78

The quick ratio is quick assets divided by current liabilities. Quick assets include cash and accounts receivable, but exclude inventory and prepaid expenses. Total current assets is not relevant. Quick assets total $700 million, while current liabilities are $900 million, for a quick ratio of 700/900, or 0.78.

7

During a meeting with the CEO of the Marble Company, Connie CPA learned that the son of the CEO had worked at the company during one summer doing odd jobs. The year in question was included in the past financial records being used as a basis for the business valuation for which Connie had been engaged. The payroll records revealed that the son had received $40,000 (including taxes and other benefits) for this summer work. Connie should make a normalization adjust for:

A. a nonoperating item for the full $40,000 received by the son.

B. a nonrecurring item for the full $40,000 received by the son since he only worked at the Mable Company for one summer.

C. a comparability item for $20,000 since it is not likely that guideline companies would have paid $40,000 for the work performed.

D. a discretionary item for $35,000 since the going market rate for the work performed by the son would have been $5,000.

D. a discretionary item for $35,000 since the going market rate for the work performed by the son would have been $5,000.

Business valuators often have to make adjustments during the normalization process. There 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.

8

Which of the following is an essential element of the audit trail in an electronic data interchange (EDI) system?

A. Disaster recovery plans that ensure proper backup of files

B. Encrypted hash totals that authenticate messages

C. Activity logs that indicate failed transactions

D. Hardware security modules that store sensitive data

C. Activity logs that indicate failed transactions

An audit trail allows the auditor to follow a single transaction from inception to recording in the books of account. An activity log indicating failed transactions in an EDI system would allow the auditor to identify why a transaction was not recorded and at what stage the transaction failed. This information would allow the auditor to test controls over such transactions. While a disaster recovery plan, encrypted hash totals, and hardware security modules are important to the internal controls of an electronic data interchange, they are not elements of the audit trail.

9

Most organizations are concerned about the potential compromise of passwords. Which of the following procedures would be the most effective in controlling against a perpetrator obtaining someone else's password?

A. Allow only the users to change their passwords and encourage them to change passwords frequently.

B. Implement a computer program that tests to see that the password is not easily guessed.

C. Implement the use of “see-through” authentication techniques whereby the user uses a card to generate a password and verifies both the key and the generated password to the system.

D. Limit password authorization to time of day and location.

C. Implement the use of “see-through” authentication techniques whereby the user uses a card to generate a password and verifies both the key and the generated password to the system.

D. Limit password authorization to time of day and location.

10

Currently, the U.S. tax code requires that transfer prices for multinational corporations are “arms length transactions.” Methods that are prescribed by the IRS for setting arm's length prices for tangible goods include all of the following except:

A. the comparable uncontrolled price. This method is based on the philosophy that what is a reasonable price for one customer is reasonable for another customer.

B. the resale price. This method assumes that the price at which the items can be resold by the distribution affiliate less an amount to cover overhead head costs and a reasonable profit is a realistic transfer price.

C. the cost-plus approach. This method entails adding an appropriate profit to the costs of the manufacturing affiliate in order to achieve a reasonable transfer price.

D. the target revenue approach. This method starts at a target selling price for the distribution affiliate that allows for a reasonable profit less the transfer price and any additional costs to cover overhead costs.

D. the target revenue approach. This method starts at a target selling price for the distribution affiliate that allows for a reasonable profit less the transfer price and any additional costs to cover overhead costs.

The comparable uncontrolled price, the resale price, and the cost-plus approach to set transfer prices are all methods allowed by the IRS in an attempt to control transfer pricing manipulation.

International Issues and Transfer Pricing

a. Many multinational corporations (MNCs) have international sales among the components of the organization. That means that transfer prices must be set between divisions and/or subsidiaries that reside in different countries. The MNCs have the same basic transfer pricing issues just discussed; however, there is an additional issue of taxes. Not all governments have identical tax rates; therefore, it is in the best interest of an MNC to use transfer pricing to shift the profit to subsidiaries in countries with lower tax rates when possible.
b. The flexibility to shift profit through the use of transfer pricing may be limited due to the fact that some host governments restrict such transfers when the intent is to avoid taxes. In other words, sales/purchases between subsidiaries of a firm are expected to use the principle of an arm's-length transaction when setting prices. There is still, however, a bit of flexibility in setting transfer prices without violating laws or regulations. Even though there is a limited range for setting transfer prices, subsidiaries often can shift costs for technology, research and development, etc. to subsidiaries in countries with high tax rates.
c. Currently, the U.S. tax code requires that transfer prices are “arm's-length transactions.” On March 12, 2003, the Pacific Association of Tax Administrators (PATA) reached an agreement for a final Transfer Pricing Documentation Package. The result is the PATA members have agreed to certain principles that allow taxpayers to prepare one set of documentation to meet the transfer pricing documentation provisions of each country. If a taxpayer complies with the provisions under the agreement, the taxpayer is shielded from transfer documentation penalties that might otherwise apply in each of the four jurisdictions (Australia, Canada, Japan, and the United States). The IRS extended the tax code to include transfer pricing of services as well as products in 2004.


Done

11

Edit checks in a computerized accounting system:

A. are preventive controls.

B. should be performed on transactions prior to updating a master file.

C. must be installed for the system to be operational.

D. should be performed immediately prior to output distribution.

B. should be performed on transactions prior to updating a master file.

Edit checks are a type of input (application or procedural) control. These checks are run by the computer (from programmed edit routines) to check the validity, accuracy, and reasonableness of the data which has been input from source documents.

Thus, edit checks should be performed on transactions prior to updating a master file (not prior to output distribution) to minimize the introduction of error in both the initial recording of data and in the conversion into machine-readable form.

Edit checks do not need to be installed for the system to be operational.

12

In the annual review of the data center of a nationwide mortgage servicing company, the internal audit manager was concerned about the data center not having an adequate contingency plan. The audit manager was especially concerned because the data center was located close to a river that occasionally flooded and in the vicinity of a major railroad and a major highway.

Management acted on the internal auditor's recommendation to prepare a contingency plan. The most critical aspect of the plan would be to provide for:

A. monitoring for fraud or abuse during recovery.

B. continuation of mortgage servicing.

C. security and control over information assets.

D. minimizing expenses during recovery periods.

B. continuation of mortgage servicing.


The most critical aspect of the planning would be to provide for continuation of mortgage servicing. Without mortgage servicing, the company would be out of business.

Deterring and detecting fraud or abuse while processing in recovery mode is important, but that is not the most critical aspect to consider.
There should be control over information assets at all times, but that is not the most critical aspect.
The company would want to minimize expenses during recovery periods but not at the expense of continuing to service mortgages.

13

Which of the following phrases defines the internal rate of return on a project?

A. The number of years it takes to recover the investment

B. The discount rate at which the net present value of the project equals zero

C. The discount rate at which the net present value of the project equals one

D. The weighted-average cost of capital used to finance the project

B. The discount rate at which the net present value of the project equals zero

The internal rate of return is the interest rate that will make the present value of the future net cash flows equal to the initial cash outlay. In other words, it is the interest rate that gives a net present value of zero.

The answer choice “the number of years it takes to recover the investment” is incorrect because it is the definition of the payback period, a number of years, not a rate of return. “The discount rate at which the net present value of the project equals one” is incorrect because the internal rate of return is the rate of return where the net present value is zero, not one. “The weighted-average cost of capital used to finance the project” is incorrect because weighted-average cost of capital is the interest rate that the company is paying on its other sources of financing. It is used to determine that project rate of return that would be acceptable to the company, but it is not used to calculate the internal rate of return.

14

A company can finance an equipment purchase through a loan. Alternatively, it often can obtain the same equipment through a lease arrangement. A factor that would not be considered when comparing the lease financing with the loan financing is:

A. whether the lessor has a higher cost of capital than the lessee.

B. whether the lessor and lessee have different tax reduction opportunities.

C. the residual value of the property.

D. the capacity of the equipment.

D. the capacity of the equipment.

15

An investor uses risk analysis to measure the probability of the variability of future returns from a proposed investment. What is the approach that is based upon utility theory and compels the decision maker to choose at what point he or she is indifferent to the choice between a certain amount of money and the expected value of a risky amount?

A. Capital Asset Pricing Model

B. Certainty equivalent adjustments

C. Risk-adjusted discount rates

D. Sensitivity analysis

B. Certainty equivalent adjustments



Certainty equivalent adjustments is a risk analysis technique that is based upon utility theory. The “utility” is how much a certain sum of money is worth to the investor. It makes the decision maker stipulate at what point he or she is indifferent to the choice between a certain amount of money and the expected value of a risky amount.

The amount of payoff (e.g., money or utility) that an investor would have to receive between that payoff and a given risk or gamble is called that gamble's “certainty equivalent.” For a risk-averse investor, the certainty equivalent is less than the expected value of the gamble because the investor prefers to reduce uncertainty.

A certainty equivalent represents the maximum amount one is willing to pay for some gamble. It is also the minimum premium one is willing to pay to insure against some risk.

16

DQZ Telecom is considering a project for the coming year which will cost $50 million. DQZ plans to use the following combination of debt and equity to finance the investment:

Issue $15 million of 20-year bonds at a price of 101, with a coupon rate of 8%, and flotation costs of 2% of par.
Use $35 million of funds generated from earnings.
The equity market is expected to earn 12%. U.S. Treasury bonds are currently yielding 5%. The beta coefficient for DQZ is estimated to be .60. DQZ is subject to an effective corporate income tax rate of 40%.

The before-tax cost of DQZ's planned debt financing, net of flotation costs, in the first year is:

A. 11.80%.

B. 8.08%.

C. 7.92%.

D. 8.00%.

B. 8.08%.

DQZ Telecom must pay interest at the coupon rate of 8% on $15 million. This amounts to $1,200,000. The money DQZ has received in this transaction comes from $15 million in bonds sold at a premium price of 101, which means DQZ received $15,150,000 ($15,000,000 × 1.01). Out of this amount, DQZ had to pay 2% of $15 million ($300,000) in flotation costs. That means DQZ had effective use of $14,850,000 ($15,150,000 - $300,000). $1,200,000 interest paid on $14,850,000 reflects an 8.08% effective interest rate ($1,200,000 ÷ $14,850,000).

he beta coefficient in the capital asset pricing model (CAPM) measures the market risk of a security relative to other securities. In the CAPM equation, ke = Rf + b(Km - Rf), the beta coefficient is the term “b”. The other terms in the equation are:

ke: the required return on the security on the part of investors,
Km: the average return in the market on all securities, and
Rf: the risk-free rate of return, usually measured as the present return on Treasury bills.
The beta coefficient is calculated by using a regression analysis of a firm's historical total return each year, regressed against the market's historical average return in the same years. A beta of 1.0 indicates that the security has the same (systematic or market) risk as the average security in the market. A beta greater than 1.0 indicates that the security fluctuates more than the average security over the business cycle, and is thus riskier. Investors will require a higher-than-average return on this security. A beta smaller than 1.0 indicates that the security fluctuates less than the average security over the business cycle, and thus investors will accept a lower rate of return on the security. Securities with high betas are typically those in firms producing luxury goods or services, where sales and profits expand and contract a great deal in response to the state of the economy over the business cycle. Securities with low betas are typically those from firms that sell necessities; thus, public utilities have betas less than 1.0. Some securities, such as stocks, usually fluctuate with changes in the business cycle. Other securities, like short-term government securities, do not fluctuate directly with the business cycle, and thus have a beta of “0.”

Large investment firms publish beta coefficient for commonly traded stocks. There are slightly different ways to calculate a beta, and some betas are adjusted for the additional risk posed by the firm's level of debt (leverage).



17

Kanban is:

A. a technique for managing a just-in-time (JIT) inventory system developed by the Japanese.

B. a method of evaluating alternative credit policies developed by the Japanese.

C. a method of determining the economic order quantity expressed in mathematical terms.

D. a method of developing a relationship between sales and inventory used in forecasting.

A. a technique for managing a just-in-time (JIT) inventory system developed by the Japanese.

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.

18

A job order cost system uses a predetermined factory overhead rate based on expected volume and expected fixed cost. At the end of the year, underapplied overhead might be explained by which of the following situations?

A. Actual volume, greater than expected; Actual fixed costs, greater than expected

B. Actual volume, greater than expected; Actual fixed costs, less than expected

C. Actual volume, less than expected; Actual fixed costs, greater than expected

D. Actual volume, less than expected; Actual fixed costs, less than expected

C. Actual volume, less than expected; Actual fixed costs, greater than expected


Underapplied overhead means the actual overhead cost was more than the overhead applied to work-in-process.

A lower production volume than planned could cause this, since the predetermined overhead application rate per unit would apply overhead for fewer units than planned, resulting in underapplied fixed overhead. This is actual production volume less than the expected production volume.

Underapplied overhead could also be caused by spending more for overhead than budgeted. This would be the situation where actual fixed costs are greater than the budgeted fixed costs.

19

What is the role of the systems analyst in an IT environment?

A. Developing long-range plans and directing application development and computer operations

B. Designing systems, preparing specifications for programmers, and serving as intermediary between users and programmers

C. Maintaining control over the completeness, accuracy, and distribution of input and output

D. Selecting, implementing, and maintaining system software, including operating systems, network software, and the database management system

B. Designing systems, preparing specifications for programmers, and serving as intermediary between users and programmers

Systems analysts analyze information needs and design systems that meet those needs.

Systems administrators develop long-range plans and direct application development and computer operations. The data control group controls the completeness, accuracy, and distribution of input and output. Database and network managers select and maintain system software, including operating systems, network software, and the database management system.

20

Advantages and disadvantages of the use of short-term credit and long-term credit are as follows:

Funds can be obtained quickly.
Retirement will probably contain a prepayment penalty.
Financing with this credit usually results in lower interest costs.
Interest rates tend to vary quickly.
Interest rates tend to be more stable.
There are some spontaneous sources of funds.
Some of this debt is “interest free.”
This type of debt is more risky.
The advantages and disadvantages of the use of short-term credit should be grouped as follows:

A. Advantages of short-term credit: I, VI, VII; Disadvantages of short-term credit: IV

B. Advantages of short-term credit: III, VI, VII; Disadvantages of short-term credit: II, IV

C. Advantages of short-term credit: I, III, VI, VII; Disadvantages of short-term credit: IV, VIII

D. Advantages of short-term credit: I, VI, VII; Disadvantages of short-term credit: IV, VIII



The items should be grouped as follows.

Advantages of short-term credit:

Funds can be obtained quickly.
Financing with this credit usually results in lower interest costs.
There are some spontaneous sources of funds such as trade credit.
Some of this debt is “interest free,” such as wages payable.
Disadvantages of short-term credit:

Interest rates tend to vary quickly.
This type of debt is more risky.
Advantages of long-term credit:

Interest rates tend to be more stable.
Disadvantages of long-term credit:

Retirement will probably contain a prepayment penalty.

21

An in-exchange premise as used when making a fair value calculation assumes that the maximum value of the item(s) being valued would come from:

A. the current use of that item.

B. using the item in its highest and best use.

C. using that item in conjunction with other assets as a group.

D. using the item alone.

D. using the item alone.

Per FASB ASC 820, a fair value determination can use either an in-exchange or an in-use premise. An in-exchange premise assumes that the maximum value of the subject item would come from the purchaser's perspective when the item is used alone. An in-use premise assumes that the maximum value of the subject item would come from the purchaser's perspective when the item is used in conjunction with other assets as a group.

22

A manufacturing company has several product lines. Traditionally, it has allocated manufacturing overhead costs between product lines based on total machine hours for each product line. Under a new activity-based costing system, which of the following overhead costs would be most likely to have a new cost driver assigned to it?

A. Electricity expense

B. Repair and maintenance expense

C. Employee benefits expense

D. Depreciation expense

C. Employee benefits expense

The allocation base is an activity measure used to allocate costs. The allocation base should have a cause-and-effect relationship to the variability of that cost.

The company has been assigning overhead costs in all four categories using machine hours as the cost driver. The more a machine is used, the more cost is allocated to that product line. Assuming that machines are powered by electricity, more machine hours result in increased electricity cost, so this seems an appropriate cost driver for electricity. The more a machine is used, the greater the repair and maintenance cost incurred, so machine hours would be the appropriate cost driver.

Similarly, it seems appropriate to use machine hours to allocate depreciation on machinery. However, it is likely some machines will use many more employee hours than other machines, so machine hours seem inappropriate as the cost driver for employee benefit expense. It is likely the cost driver for employee benefit expense will be changed to direct labor hours or direct labor dollars, both of which would be more directly related to changes in employee benefit cost incurred.

23

Which of the following statements is correct concerning the security of messages in an electronic data interchange (EDI) system?

A. Removable drives that can be locked up at night provide adequate security when the confidentiality of data is the primary risk.

B. Message authentication in EDI systems performs the same function as segregation of duties in other information systems.

C. Encryption performed by a physically secure hardware device is more secure than encryption performed by software.

D. Security at the transaction phase in EDI systems is not necessary because problems at that level will be identified by the service provider.

C. Encryption performed by a physically secure hardware device is more secure than encryption performed by software.

Electronic data interchange, or EDI, is the use of computerized communication to exchange business data electronically in order to process transactions. Encryption is transforming data into unreadable gibberish to be sent electronically. This data is then decrypted and read at its destination.

When data is transferred electronically, security is an issue. Software applications that encrypt data are more vulnerable to security risks than a hardware device performing the same function.

Removable drives will not prevent unauthorized access to electronic data, since the data could be intercepted en route. Message authentication, or being able to determine who sent a message, is a not a substitute for segregation of duties. Instead, authentication assists with allowing only authorized messages access to the information system. Most EDI systems now do not have a third-party provider transmitting electronic data, due to the advent of the Internet.

24

Variable rate loans reduce the potential interest rate risk of:

A. borrowers.

B. lenders.

C. both borrowers and lenders.

D. neither borrowers nor lenders.

C. both borrowers and lenders.

25

Which of the following factors is inherent in a firm's operations if it utilizes only equity financing?

A. Financial risk

B. Business risk

C. Interest rate risk

D. Marginal risk

B. Business risk

Both financial risk and interest rate risk deal with the concept of financial leverage and the cost of debt, and since the firm only utilizes equity financing, these risk types do not apply.

Marginal risk is the risk that is assumed by the issuer of a foreign exchange contract or debt (forward contract) in the event that the investor goes bankrupt. It is related to the risk of the last dollar of a transaction defaulting.

Business risk is the uncertainty associated with the ability to forecast EBIT (earnings before interest and taxes) due to such things as sales variability and operating leverage. This risk is inherent in equity financing.

26

Compatibility tests are sometimes employed to determine whether an acceptable user is allowed to proceed. In order to perform compatibility tests, the system must maintain an access control matrix. The one item that is not part of an access control matrix is a:

A. list of all authorized user code numbers and passwords.

B. list of all files maintained on the system.

C. record of the type of access to which each user is entitled.

D. limit on the number of transaction inquiries that can be made by each user in a specified time period.

D. limit on the number of transaction inquiries that can be made by each user in a specified time period.

A limit on transaction totals and frequency is not part of the access control matrix. 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.

27

Edwards Manufacturing Corporation uses the standard economic order quantity (EOQ) model. If the EOQ for Product A is 200 units and Edwards maintains a 50-unit safety stock for the item, what is the average inventory of Product A?

A. 250 units

B. 150 units

C. 100 units

D. 50 units

B. 150 units

The average inventory level when the standard economic order quantity model is used is one-half of the EOQ. The EOQ for Product A is 200 units. One-half of 200 is 100. Add the 50-unit safety stock to arrive at 150 units as the average inventory of Product A.

28

The capital structure of a firm includes bonds with a coupon rate of 12% and an effective interest rate of 14%. The corporate tax rate is 30%. What is the firm's net cost of debt?

A. 8.4%

B. 9.8%

C. 12.0%

D. 14.0%

B. 9.8%

The cost of debt is the expected interest cost on new debt minus the marginal tax rate due to the fact that interest payments are tax deductible.

The interest cost of the bonds is 14%. Use the effective rate rather than the standard rate; it is adjusted for compounding the interest more than annually.

The tax savings equals 30% of 14%, or 4.2% (.30 × .14).

Subtracting the tax savings from the interest cost yields the true cost of the debt:

14% - 4.2% = 9.8%

29

Typical product-costing systems synchronize the recording of accounting-system entries with the physical sequence of purchases and production. The alternative of delaying journal entries until after the physical sequences have occurred (which is normally used in high-speed automated environments) is referred to as:


A. backflush costing.

B. direct costing.

C. operation costing.

D. process costing.

A. backflush costing.

The alternative (which is normally used in high-speed automated environments) of delaying journal entries until after the physical sequences have occurred is referred to as backflush costing.

Direct costing is an inappropriate response because direct or variable costing is a method of inventory costing in which all variable product costs are treated as inventoriable costs and fixed manufacturing overhead is treated as a period cost.
Operation costing is an inappropriate response because operation costing refers to a hybrid costing system that blends characteristics of both job-order and process-costing systems. Operation costing is usually applied to batches of similar products where each batch of product is a variation of a single design and requires a sequence of selected operations/activities. An operation costing system would track work-in-process inventory.
Process costing is an inappropriate response because process costing is a sequential costing system in which the cost of a product/service is obtained by assigning costs to masses of similar units as they are produced and then computing unit costs on an average basis. There would be a tracking of work-in-process inventory with a process costing system.

30

At a remote computer center, management installed an automated scheduling system to load data files and execute programs at specific times during the day. The best approach for verifying that the scheduling system performs as intended is to:

A. analyze job activity with a queuing model to determine workload characteristics.

B. simulate the resource usage and compare the results with actual results of operations.

C. use library management software to track changes to successive versions of application programs.

D. audit job accounting data for file accesses and job initiation/termination messages.

D. audit job accounting data for file accesses and job initiation/termination messages.

Auditing job accounting data for file accesses and job initiation/termination messages will reveal whether the right data files were loaded/dismounted at the right times and the right programs were initiated/terminated at the right times, and thus verify whether the scheduling system performs as intended.

Analyzing job activity with a queuing model to determine workload characteristics gives information about resource usage but does not verify whether the right data files were loaded/dismounted at the right times and the right programs were initiated/terminated at the right times.
Simulating the resource usage and comparing the results with actual results of operating helps management characterize the workload but does not verify whether the right data files were loaded/dismounted at the right times and the right programs were initiated/terminated at the right times.
Using library management software to track changes to successive versions of application programs permits control of production and test versions but does not verify whether the scheduling system performs as intended.

31

Everything else being equal, a noncallable bond will be priced in comparison to a callable bond so that the noncallable bond will provide:

A. a higher yield.

B. a lower yield.

C. the same yield.

D. a yield 1% less.

B. a lower yield.

32

After reviewing the end-user computing (EUC) policy of an organization, an internal auditor audits the actuarial function and notices that some minimum control requirements are missing. Which of the following is a risk of using potentially incorrect end-user developed files?

A. Management places the same degree of reliance on the files as they do on files generated from mainframe systems.

B. Management receives limited information for decision making due to a lack of flexibility in EUC files.

C. Management is unable to respond to competitive pressures quickly.

D. Management continues to incur additional cost because it takes more hours to do the tasks using EUC.

A. Management places the same degree of reliance on the files as they do on files generated from mainframe systems.

End-user computing (EUC) allows users to develop their own information systems, but such systems often do not have the same level of general and application controls applied to the company's mainframe system. Thus, there is an increased risk that data produced by such systems will be inaccurate.

The answer choice “management receives limited information for decision making due to a lack of flexibility in EUC files” is incorrect because management may receive more information from EUC systems. The risk is that the information will be inaccurate. “Management is unable to respond to competitive pressures quickly” is incorrect because end-user computing does not affect the ability to respond to competitive pressures. “Management continues to incur additional cost because it takes more hours to do the tasks using EUC” is incorrect because it often costs less to use EUC. Controls are expensive and omitted controls save money at the risk of inaccurate data output.

33

The greatest financial threat to an organization that implemented the financial accounting module of an enterprise resource planning (ERP) system from a major vendor exists from errors detected during which of the following times?

A. Project initiation

B. Requirements determination

C. Table configuration

D. Implementation

D. Implementation

Enterprise resource planning (ERP) systems integrate all aspects of a company's operations with its information system. If the system is from a major vendor project, then initiation, requirements determination, and table configuration are part of the design phase and should be controlled by the vendor. Errors detected during the design phase do not contaminate the client information.

However, once the implementation is begun, the system is under the control of entity employees, and cost uncertainties due to potential implementation errors increase rapidly. Errors detected during implementation require the company to go back and redo the design steps.

34

A company's internal controls are established to provide protection for the company's assets as well as to detect fraud. An internal control allows for the firm's resources to be all of the following except:

A. monitored.

B. designed.

C. properly used.

D. measured.

B. designed.

A financial transaction control is a procedure that is developed to discover and/or prevent errors, misappropriations, or policy noncompliance in a financial transaction process. Such a control will aid an organization in achieving specific goals and objectives. It is an internal control that allows for a firm's resources to be properly:

used,
monitored, and
measured.
It is hoped that such controls will detect fraud and provide adequate protection for the company's assets.

35

An advantage of decentralizing data processing facilities is:

A. economies of scale obtainable through the use of microcomputers.

B. that all similar activities are better handled at a local level.

C. that system failure is of lesser significance.

D. the virtual elimination of the need for communication capability.

C. that system failure is of lesser significance.

Some advantages of decentralized data processing facilities are:

decentralization increases direct access by users,
standalone capabilities are distributed to points of need,
participation is increased in designs and use, and
the ability to share computing power, which decreases the significance of system failure.

36

In relation to the internal control process, control sufficiency is:

A. the group of controls with a variety of degrees of precision necessary to achieve a control objective.

B. the alignment between a risk and the control activity designed to mitigate that risk.

C. the measurement of the effectiveness of a specific control in alleviating the defined risk.

D. the testing of the effectiveness of a control procedure.

You answered C. The correct answer is A.

A. the group of controls with a variety of degrees of precision necessary to achieve a control objective.

Two important definitions related to the internal control process are control precision and control sufficiency:

Control precision is the alignment between a risk and the control activity designed to mitigate that risk. In other words, a control activity that has a direct influence on the achievement of a stated objective is considered to be more precise than one that only has an indirect influence.
Control sufficiency is a group of controls with a variety of degrees of precision necessary to achieve a control objective. For example, there would potentially be a number of control activities such as segregation of duties, reconciliation of bank statements, and daily deposits of receipts in order to protect all incoming receivable payments from theft or fraud.

37

Managing the information system function is likely to involve:

A. a system for charging user departments for computer services.

B. project development plans.

C. responsibility accounting principles.

D. All of the answer choices are correct.

D. All of the answer choices are correct.

A management information system (MIS) provides managers with the information they need for planning, organizing, decision making, and controlling the activities of the entity. The system may include the formal financial accounting records and can include many other information items needed by management.



38

All of the following are inventory carrying costs except:

A. storage.

B. insurance.

C. opportunity cost of inventory investment.

D. inspections.

D. inspections.

Inventory carrying costs are those costs incurred as a result of holding inventory for a period of time. All of the following are considered carrying costs:

Storage
Insurance
Opportunity cost of inventory investment (i.e., the lost return that could have been earned by investing the cash used to purchase the inventory in some other way)
The cost of inspections is not a function of the holding of inventory.

39

In the systems development cycle, coding is:

A. part of the detailed design phase.

B. part of the data flow diagram.

C. a form of program maintenance.

D. part of the feasibility study.

A. part of the detailed design phase.


The systems development cycle consists of analysis, conceptual design, detailed design, implementation, and operation.

In this cycle, coding (of data, accounts, etc.) is a part of the detailed design stage, the stage in which programs and data structures are developed and facilities are installed and employees are trained.

SDLC stands for systems development life cycle.

SDLC is an approach normally used in the development of large, highly structured computer application systems. The approach includes steps of problem definition, feasibility study, program development, programmer testing, user testing and acceptance, implementation, and continuing evaluation of the suitability of the software and surrounding manual systems to accomplish its designed objectives.

This approach requires the entity to monitor the application system and to identify when it is no longer adequate. When it is deemed inadequate, a new cycle starts. There are several phases involved in the system development, and internal auditor involvement is encouraged to help ensure that the process includes all needed parties and steps and that controls are built into the system before (not after) implementation.

40

There are two types of valuation engagements described by the Statement on Standards for Valuation Services (SSVS 1), issued by the AICPA, that went into effect in 2008. Valid comparisons of these two types of engagements include which of the following?

A. In a valuation engagement, the valuator is free to use any valuation approach of method deemed to be professional appropriate. In a calculation engagement, the valuator and the client agree upon the specific valuation methods or approaches to be used.

B. The results of a valuation engagement can be either a single number or expressed as a range. The result of a calculation engagement can only be expressed as a single number.

C. A valuation engagement is used when a full business is being valued. A calculation engagement is used when a minority interest is being valued.

D. In a valuation engagement, the valuator will use a going concern as the premise of value. In a calculation engagement, the valuator will use liquidation as the premise of value.

A. In a valuation engagement, the valuator is free to use any valuation approach of method deemed to be professional appropriate. In a calculation engagement, the valuator and the client agree upon the specific valuation methods or approaches to be used.

There are two types of business valuation engagements outlined in the SSVS 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset:

In a valuation engagement, the valuation analyst is free to employ the use of any valuation approach or method that is professionally deemed appropriate under the circumstances. The results are expressed in terms of a conclusion of value and can either be a single number or a range. The premise of value can be either a going concern or liquidation.
In a calculation engagement, the valuation analyst and the client agree upon the valuation methods and approaches to be used; therefore, the analyst is not free to use any approach or method available. The results are expressed in terms of a calculated valued and can be either a single number or a range. The premise of value can be either a going concern or liquidation.

Other Valuation Items

a. Valuations are often necessary for items such as a specific capital asset or investment, a business segment, or a complete business. Accountants have become increasingly involved in the valuation process, and the AICPA has developed the Statement on Standards for Valuation Services 1 (SSVS 1), Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, that became effective in 2008 to help provide guidance to practitioners and promote consistency within the valuation niche. Per the AICPA Professional Code of Conduct, a CPA should only undertake a valuation engagement providing the individual (or firm):
(1) possesses a good understanding of valuation principles and theory.
(2) has the skill necessary to apply the theoretical knowledge.
(3) has the professional judgment necessary to develop a conclusion or a calculation of value.
b. Beyond the identification of the subject of a valuation (asset, business segment, entire business, etc.), the date of the valuation, and the standard of value to be used, it is important to determine the premise of value before initiating any work on the engagement. The International Glossary of Business Valuation Terms defines the premise of value as an assumption regarding the most likely set of transactional circumstances that may be applicable to the subject of the valuation. For example, if an entire business is being valued, is the entity considered to be a going concern or in the process of liquidation?
c. There are two types of business valuation engagements outlined in SSVS 1:
(1) In a valuation engagement, the valuation analyst is free to employ the use of any valuations approach or method that is professionally deemed appropriate under the circumstances. The results are expressed in terms of a conclusion of value and can either be a single number or a range.
(2) In a calculation engagement, the valuation analyst and the client agree upon the valuation methods and approaches to be used; therefore, the analyst is not free to use any approach or method available. The results are expressed in terms of a calculated valued and can be either a single number or a range.

41

World Foods (WF) imports a wide variety of consumer food items for sale in the United States. Due to the sporadic nature of this type of market, WF often deals with its suppliers on an infrequent and sometimes one-time basis.

In order to facilitate and accelerate its purchase and receipt of these imported goods, WF most likely benefits from the use of:

A. cash.

B. factoring.

C. letters of credit.

D. open accounts receivable.

C. letters 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).

42

Lynn Manufacturing Co. prepares income statements using both standard absorption and standard vari­able costing methods. For Year 2, unit standard costs were unchanged from Year 1. In Year 2, the only beginning and ending inventories were finished goods of 5,000 units. How would Lynn’s ratios using absorption costing compare with those using variable costing?

A. Current ratio, same; Return on stockholder's equity, same

B. Current ratio, same; Return on stockholder's equity, smaller

C. Current ratio, greater; Return on stockholder's equity, same

D. Current ratio, greater; Return on stockholder's equity, smaller

D. Current ratio, greater; Return on stockholder's equity, smaller

Absorption costing is a method of costing in which fixed costs are treated as product costs and assigned to the units produced. Fixed costs follow the units through work-in-process and finished goods as inventoriable costs and are expensed through cost of goods sold when the units are sold.

Direct (variable) costing is a method of costing in which fixed costs are charged to expense as a period cost when incurred. It is more useful for management decision-making because it separates out fixed costs that do not change with the level of activity (volume).

The only differences on the balance sheets between absorption and variable costing would be inventory and retained earnings. Since fixed manufacturing costs are inventoried when using absorption costing and expensed when using variable costing, the inventory values would be higher using absorption costing. If all other current assets and current liabilities were unchanged, a larger value for current assets (which includes inventory) would result in a greater current ratio when using absorption costing.

If inventory is unchanged during the year, then cost of sales, gross margin, and net income would be the same for the current year using absorption costing as compared to variable costing. However, total assets will be greater under absorption costing than under variable costing.

Stockholders’ equity will be greater under absorption costing as well due to lower cost of sales under absorption costing in prior years, which resulted in a higher net income being closed to retained earnings. Dividing unchanged net income for the current year by a larger stockholders’ equity at the end of the current year will give a lower return on stockholders’ equity when using absorption costing as compared to variable costing.

43

A national retailer required more detailed data to help stock its stores with the right products and to increase its turnover. Such data amounted to several gigabytes per day from each store. A new high-speed company-wide network was needed to transmit and analyze the data. Management recognized the need to prepare the company for changes resulting from the enhanced external network services. For this purpose, what management action would be appropriate?

A. Optimize in-house networks to avoid bottlenecks that would limit the benefits offered by the telecommunications provider.

B. Plan for rapid implementation of new capabilities in anticipation of ready acceptance of the new technology.

C. Downsize the company's disaster recovery plan to recognize the increasing role of the telecommunications provider.

D. Enhance the in-house network management to minimize dependence on the telecommunications provider for network management.

A. Optimize in-house networks to avoid bottlenecks that would limit the benefits offered by the telecommunications provider.

A number of bottlenecks (e.g., in-house analog technology) may limit the benefits that can be derived from the external network.

Resistance to change, inflexible organization structures, and skepticisms of the technology should be expected and must be successfully managed if the company is to reap the benefits of the technology.
As individuals rely more on communications to perform their daily tasks, it becomes imperative for a network to be essentially 100% available. The company should enhance its disaster recovery plan to recognize this fact.
Whereas network management may now be primarily a function within

44

A top-down risk assessment (TDRA) is done in order for a company to be compliance with SOX 404. The purpose of a TDRA is to do all of the following except:

A. identify and assess financial reporting elements.

B. identify acts of fraud and embezzlement and assess the effect these items have had on company performance.

C. identify and assess the internal control procedures meant to limit the identified risks.

D. identify and assess the risks related to the financial reporting elements.

B. identify acts of fraud and embezzlement and assess the effect these items have had on company performance.

A top-down risk assessment (TDRA) is used to identify and assess:

financial reporting items.
the risks related to financial reporting.
the internal control procedures meant to limit the identified risks.
The internal control procedures are meant to prevent fraud and embezzlement—not to find evidence of such actions.

45

Which of the following events would decrease the internal rate of return of a proposed asset purchase?

A. Decrease tax credits on the asset

B. Decrease related working capital requirements

C. Shorten the payback period

D. Use accelerated instead of straight-line depreciation

A. Decrease tax credits on the asset

Two general rules can be developed related to the internal rate of return (IRR) of a proposed asset purchase:

Increases in cash inflows (decreases in cash outflows) will result in a higher internal rate of return.
The earlier the cash inflows (the later the cash outflows) the higher the internal rate of return, all else being equal.
Taxes in general will lower the IRR of a proposed asset purchase, as will decreases in the tax credits available when an asset is purchased.

46

During the annual audit, it was learned from an interview with the controller that the accounting system was programmed to use a batch processing method and a detailed posting type. This would mean that individual transactions were:

A. posted upon entry, and each transaction had its own line entry in the appropriate ledger.

B. assigned to groups before posting, and each transaction had its own line entry in the appropriate ledger.

C. posted upon entry, and each transaction group had a cumulative entry total in the appropriate ledger.

D. assigned to groups before posting, and each transaction group had a cumulative entry total in the appropriate ledger

B. assigned to groups before posting, and each transaction had its own line entry in the appropriate ledger.

Batch processing is updating master files periodically to reflect all transactions that occurred during a given time period. To do this, transactions are grouped in batches and processed as a batch.

The other answer choices are incorrect because:

each transaction can have its own line entry in either batch or continuous processing and
each transaction is posted to the ledger account as a part of the detailed posting of the batch, not just in a total.

47

In evaluating customer profitability, price discounts would fall into the category of customer:

A. output unit-level costs.

B. batch-level costs.

C. sustaining costs.

D. revenue level per unit.

D. revenue level per unit.

Discounts are price adjustments, not cost outlays. They can be a reduction in price given for prompt payment. A sales discount is subtracted from gross sales in arriving at net sales. It is a contra revenue account.

Sales discounts (also called cash discounts) are sometimes offered to trade debtors as an inducement for prompt payment. There are two methods of recording sales discounts.

Method 1 records both the receivable and sales at the net amount. The Sales Discounts Not Taken account is viewed as a type of financing income and is included on the income statement as other income. Method 2, the most commonly used method, records the receivable and sales at the gross amount. The Sales Discounts account preferably should be shown as a deduction from (contra to) sales on the income statement. A less desirable alternative is to include it in the other expenses classification.

48

Mainframe computer systems include several advanced processing procedures. Two of the most common processing procedures are multiprocessing and multiprogramming. Which of the following statements about these processing procedures is false?

A. Multiprocessing usually involves two or more computers functioning simultaneously.

B. Multiprogramming allows multiple programs to be executed at exactly the same time

C. Multiprogramming switches back and forth between programs during processing.

D. Multiprocessing allows the sharing of a central memory during processing.

B. Multiprogramming allows multiple programs to be executed at exactly the same time

Multiprocessing involves the simultaneous execution of two or more tasks, usually by using two or more processing units that are part of the same system (with a single central memory). Multiprogramming is the appearance of simultaneous execution of two programs as a single processing unit switches back and forth between the programs. Thus, the statement, “Multiprogramming allows multiple programs to be executed at exactly the same time,” is false.

Multiprogramming is a technique used to enable an operating system to handle two or more independent programs by overlapping their execution. There is the appearance of simultaneous execution of programs, but in reality the single processing unit is switching back and forth between the programs.

49

A firm with a higher degree of operating leverage when compared to the industry average implies that the:

A. firm has higher variable costs.

B. firm's profits are more sensitive to changes in sales volume.

C. firm is more profitable.

D. firm uses a significant amount of debt financing.

B. firm's profits are more sensitive to changes in sales volume.

Operating leverage is the impact on operating income resulting from a change in sales. The change in operating income is affected by the relative amounts of fixed and variable costs within total costs. The higher the fixed costs in relation to variable costs (due to such things as large investments in automation, etc.), the greater the impact on operating income from a change in sales. The degree of operating leverage is calculated from the ratio of the operating income change divided by the change in sales. A high degree of operating leverage indicates a firm's profits will be more sensitive to changes in sales.

The degree of operating leverage (DOL) is the percentage change in EBIT (earnings before interest and taxes) related to a given percentage change in revenue.


% change in net operating income Contribution margin
DOL = -------------------------------- = --------------------
% change in sales Contribution - Fixed
margin costs
A DOL of 2 means that the percentage change of EBIT will be twice the size of the percentage change in sales. If sales increase by 20%, then EBIT will increase by 40%; however, if sales decrease by 20%, then EBIT will decrease by 40%.

A firm can change the DOL by changing the proportion of fixed costs to variable costs. The larger the proportion of fixed costs, the higher the DOL and the higher the breakeven point. The higher the proportion of variable costs, the lower the DOL and the lower the breakeven point.

50

A manufacturer is considering using barcode identification for recording information on parts used by the manufacturer. A reason to use barcodes, rather than other means of identification, is to ensure that:

A. the movement of all parts is recorded.

B. the movement of parts is easily and quickly recorded.

C. vendors use the same part numbers.

D. vendors use the same identification methods.

B. the movement of parts is easily and quickly recorded.

A reason to use barcodes, rather than other means of identification, is to record the movement of parts with minimal labor costs.

The movement of parts can escape being recorded with any identification method.
Each vendor has its own part-numbering scheme, which is unlikely to correspond to the buyer's scheme.
Each vendor has its own identification method, although vendors in the same industry often cooperate to minimize the number of barcode systems they use.

51

Which of the following is a disadvantage of using a process costing system versus job order costing?

A. It is difficult to determine cost of goods sold when partial shipments are made before completion.

B. It is difficult to ensure that material and labor are accurately charged to each specific job.

C. It involves the calculation of stage of completion of goods-in-process and the use of equivalent units.

D. It is expensive to use, as a good deal of clerical work is required.

C. It involves the calculation of stage of completion of goods-in-process and the use of equivalent units.

Job order costing assigns costs to specific production batches or jobs and is used when a product or service consists of discreetly identifiable items. Job costing, not process costing, would be concerned with determining the cost for a partial shipment (before the job is complete) and charging material and labor costs to each job.

Process costing assigns costs to processes and calculates the average cost for all units produced. This calculation of equivalent units of production is a unique disadvantage to the process costing system. Process costing is used when similar goods or services are produced in mass quantities and discrete units are not readily identified.

These two methods are used for different types of manufacturing; therefore, one would not choose one over the other simply because of the cost to implement.

Process costing is a system of accounting for production in which costs are assigned to units of finished goods indistinguishable from each other and produced in a continuous process. Examples include the manufacture of product in which each unit is identical, such as boxes of cereal, blenders, or bags of cement. The objective is to determine the manufacturing cost per unit for inventory valuation and determination of cost of goods sold.



Note


Job order costing has the same objective; the two costing methods are merely different approaches to the same goal.




Costs are assigned to each unit by allocating the total costs divided by equivalent units of work performed to the units produced.


52

In one company, the application systems must be in service 24 hours a day. The company's senior management and information systems management have worked hard to ensure that the information systems recovery plan supports the business disaster recovery plan. A crucial aspect of recovery planning for the company is ensuring that:

A. organizational and operational changes are reflected in the recovery plans.

B. changes to systems are tested thoroughly before being placed into production.

C. management personnel can fill in for operations staff should the need arise.

D. capacity planning procedures accurately predict workload changes.


A. organizational and operational changes are reflected in the recovery plans.

A crucial aspect of recovery planning for the company is ensuring that organizational and operational changes are incorporated in the plans because such changes have the potential to make the recovery plans inapplicable.

It is vital that changes to systems be tested thoroughly before being placed into production, but that is not a part of recovery planning.
A good recovery plan would specify how operational staff might be replaced should the need arise, but their replacements might not be management personnel.
Being able to predict workload changes accurately permits a company to minimize its information systems facility costs, but that is not a part of recovery planning.

53

The “I” in “COBIT” stands for:

A. internal control.

B. international.

C. information.

D. integrated.

C. information.

Control Objectives for Information and Related Technology (COBIT) was developed by the Information Systems Audit and Control Association (ISACA). The standards are meant to be adopted internationally and to integrate internal control activities, IT processes, and business goals. While COSO is the generally accepted internal control framework for enterprises, COBIT is the generally accepted internal control framework for IT (COBIT 4.1).

54

Generally, the most appropriate basis on which to evaluate the performance of a division manager is the division's:

A. contribution margin.

B. net revenue less controllable division costs.

C. gross profit.

D. net income less the division's fixed costs.

B. net revenue less controllable division costs.

The most appropriate basis to evaluate the performance of a division manager is one that includes only measures over which the division manager has control.

Therefore, the division's net revenue less controllable division costs is the most appropriate basis for evaluating a division manager's performance.

55

A key component of database processing is a database management system (DBMS). A function that is not performed by the DBMS is to:

A. provide security measures.

B. control concurrent processing.

C. facilitate recovery from failure.

D. run application programs.

D. run application programs.

Historically, new files and programs were created each time an information need arose. This resulted in a proliferation of master files and the same data stored in two or more separate master files. When data was updated on one file and not on the other, data inconsistencies arose. This led to the creation of databases that are an organizational resource managed for the entire organization, not just a department or function.

A database is a set of interrelated, centrally coordinated files.

a. Their use minimizes or eliminates the proliferation of master files and data redundancies.
b. Data integration and data sharing is accomplished by combining master files into larger databases accessed by many application programs.
c. A database management system (DBMS) is a complex software package that permits users to access information from the database. In addition to basic data movement (utility) services, the DBMS provides for access and identification security, concurrent use of data, and backup and recovery. The DBMS is “application independent” and does not actually run application programs.
d. A database system consists of the database, the DBMS, and application programs that access the database through the DBMS.
e. The data dictionary contains a description of all data elements, stores, and flows in a system. Typically, a master copy of the data dictionary is maintained to ensure consistency and accuracy throughout the development process. The data dictionary is created using a data definition language (DDL).
f. The data query language (DQL) is used to interrogate the database.
g. The data manipulation language (DML) provides programmers with a facility to update the database.
h. Data control language (DCL) is used to specify privileges and security rules.

56

Which of the following metrics equates the present value of a project's expected cash inflows to the present value of the project's expected costs?

A. Net present value

B. Return on assets

C. Internal rate of return

D. Economic value-added

C. Internal rate of return

The internal rate of return is the interest rate that will make the present value of future net cash flows equal to the initial cash outlay. In other words, it is the interest rate that gives a net present value of zero.

The net present value metric is calculated using an assumed minimum desired interest rate that normally would not result in a present value equal to cost. Return on assets is the current net income divided by the total assets; it does not consider future cash flows. Economic value-added (EVA) is the earnings above the required cost of capital for shareholders, a dollar figure that does not consider future cash flows.

57

A CPA would recommend implementing an activity-based costing system under which of the following circumstances?

A. The client is a single-product manufacturer.

B. Most of the client’s costs currently are classified as direct costs.

C. The client produced products that heterogeneously consume resources.

D. The client produced many different products that homogeneously consume resources.

C. The client produced products that heterogeneously consume resources.

Activity-based costing (ABC) systems use a two-step process. First, a separate pool accumulates the overhead costs associated with each activity and some distinct measure is found for that activity. Overhead costs from each activity pool are allocated to product lines on the basis of the activity measure. In a second step, the overhead costs accumulated by product line are then allocated to the individual units in the product line.

The idea is that when various products consume significantly different levels of resources, costs can be more accurately assigned by identifying the level of resource use for each different product. Therefore, activity-based costing would be appropriate if the client’s products heterogeneously consume resources (each takes different levels of resources).

A single product manufacturer would not be able to benefit from closely analyzing the cost structure of different products. ABC systems are used to assign indirect costs, not direct costs clearly associated with specific products. If the different products homogeneously consume resources, they all have the same level of resource consumption, so the client would not benefit from analyzing the differences in resource consumption.

58

The discount rate used when preparing a business valuation when employing an income approach is critical. Which of the following statements about discount rates is true?

A. The higher the risk, the higher the discount rate, and the lower the present value of the subject company.

B. The discount rate or cost of capital is a predetermined amount as dictated in Revenue Ruling 68-609.

C. The capital asset pricing model (CAPM) is the best and most frequently used method to develop a discount rate for a business valuation.

D. Discount rates and capitalization rates often employed when using an income approach for a business valuation are interchangeable.

A. The higher the risk, the higher the discount rate, and the lower the present value of the subject company.

The higher the perceived risk involved in a particular investment, the greater the return that an investor would demand on that investment; therefore, the higher the discount rate used, the lower the present value.

IRS Revenue Ruling 68-609 states, “The 8 percent rate of return and the 15 percent rate of capitalization are applied to tangibles and intangibles, respectively, of businesses with a small risk factor and stable and regular earnings; the 10 percent rate of return and 20 percent rate of capitalization are applied to businesses in which the hazards of business are relatively high.”

However, even the IRS has denounced the use of the treasury method discussed in Revenue Ruling 68-609 as well as a blanket approach to determine discount and capitalization rates.

There are a number of ways to determine the discount rate: CAPM (capital asset pricing model), build-up methods, and the weighted average cost of capital. Although CAPM is a frequently used tool in finance, it is generally not used in business valuations.

Discount and capitalization rates are not the same. A company's capitalization rate is often derived by subtracting a company's expected long-term annual growth rate from its discount rate; therefore, a growing company's capitalization rate is usually lower than its discount rate.

The income approach is the method of measuring the market value of all output by adding up the factor payments and claims on the value of all final output, to yield gross national product. It is a method of national income accounting and is used to compute net national income. Income approach analogous to the Expenditure Approach. It is a macroeconomic concept.


GNP = Factor Payments + Other Claims on the Value of Output
= Wages + Rent + Interest + Profits + Capital Consumption
Allowance
+ Indirect Taxes, Net of Subsidies

59

ABC, Inc., assessed overall risks of MIS systems projects on two standard criteria: technology used and design structure. The following systems projects have been assessed on these risk criteria. Which of the following projects holds the highest risk to ABC?

A. Current technology and sketchy structure

B. New technology and sketchy structure

C. Current technology and well-defined structure

D. New technology and well-defined structure

B. New technology and sketchy structure

To function effectively as an interdependent feedback tool for management, a management information system (MIS) must be “usable.” Key elements of an MIS include timeliness, accuracy, consistency, and relevance. The usefulness of the MIS is reduced if one or more of these elements are compromised. A “sketchy” structure by itself would make a particular alternative more risky. Additionally, introducing new technology is riskier than continuing to use existing technology.

60

A 15,000-employee multinational company that produces and distributes retail products for home use has moved financial consolidation and reporting off its large mainframe computer system at headquarters to local area networks (LANs) with file servers. The mainframe system was doing the job of processing 200,000 transactions a month, but its batch processing was cumbersome and time consuming. It also did not have automatic interfaces to all the subsidiaries, especially those in other countries, due to software and hardware incompatibilities.

Aware of the threat of physical disasters to make the LANs unavailable, the implementation team wrote a disaster recovery plan that documented procedures for data and program backup and recovery, power backup, emergency equipment acquisition, and hot site services. The disaster recovery plan requires:

A. capacity planning.

B. normalizing.

C. frequent updating.

D. performance monitoring.

B. normalizing.

The disaster recovery plan described will require frequent updating because of the ever-changing nature of typical local area networks. Each change in the configuration of the LAN will require corresponding modification of the disaster recovery plan.

61

Which of the following items would be most critical to include in a systems specification document for a financial report?

A. Cost-benefit analysis

B. Data elements needed

C. Training requirements

D. Communication change management considerations

B. Data elements needed

Before considering the cost, training, or communications changes, you must specify the data elements in the report on which the report will be based. Data elements needed, training requirements, and communication change management considerations all follow once the elements are determined. They are important steps to consider in a system design, but are not part of the systems specification document that identifies the features of a proposed system.

Cost-benefit analysis is the pervasive constraint that the benefits of the information must exceed the cost of acquiring and presenting the information.

62

Greater reliance of management on information systems increases the exposure to:

A.
unauthorized third-party access to systems.

B. systematic programming errors.

C. inadequate knowledge bases.

D. business interruption.

D. business interruption.

Greater reliance of management on information systems increases the exposure to business interruption. As management relies more on information systems for crucial functions, system failures have the potential to interrupt business.

The exposure of unauthorized third-party access to systems is increased by the absence of adequate access controls to systems, not by greater reliance of management on information systems.
Systematic programming errors are the result of misspecification of requirements or lack of correspondence between specifications and programs, not of greater reliance of management on information systems.
Inadequate knowledge bases are a function of lack of care in building them; exposure does not result from greater reliance of management on information systems.

63

Which one of the following costs would be relevant in short-term decision making?

A. Incremental fixed costs

B. Total variable costs that will not change with either alternative

C. Costs of fixed assets to be used in the alternatives

D. Opportunity costs that are the same in the considered alternatives

A. Incremental fixed costs

Only incremental costs, whether fixed or variable, are relevant in decision making. Incremental costs represent the difference in the total cost between two alternatives. It is these future incremental costs that are important (“relevant”) to the decision-making process, the act of choosing between/among alternative courses of action.

Future costs, whether fixed or variable (or opportunity costs), that are the same for the considered alternatives (i.e., that will not change regardless of which alternative is chosen) are irrelevant to the decision.

Past costs, or sunk or historical costs, are costs that have already been incurred; these costs are irrelevant to the decision-making process because they will not change regardless of which decision is made.

64

Specialized programs that are made available to users of computer systems to perform routine and repetitive functions are referred to as:

A. object programs.

B. source programs.

C. compiler programs.

D. service programs.

D. service programs.

Service programs are applications programs that can be called in by the user's programs to perform some common, subordinate function. They are sometimes referred to as “canned” programs.

65

Tam Co. is negotiating for the purchase of equipment that would cost $100,000, with the expectation that $20,000 per year could be saved in after-tax cash costs if the equipment were acquired. The equipment's estimated useful life is 10 years, with no residual value, and would be depreciated by the straight-line method. Tam's predetermined minimum desired rate of return is 12%. Present value of an annuity of 1 at 12% for 10 periods is 5.65. Present value of 1 due in 10 periods at 12% is .322.

What is the accrual accounting rate of return based on initial investment?

A. 30%

B. 20%

C. 12%

D. 10%

D. 10%

Annual accrual accounting "income" = Annual saving - Depreciation
= $20,000 - ($100,000 / 10 years)
= $20,000 - $10,000
= $10,000
Accrual accounting rate of return = Accounting "income" / Investment
= $10,000 / $100,000
= 10%

Accounting rate of return is a nondiscounted method of computing the rate of return of an investment. It is based on accrual accounting and has the measurement of profitability as the goal. The limitation of this method, however, is that it ignores the time value of money.

Accounting rate of return = (Net cash inflow - Depreciation) ÷ Investment or net income ÷ investment.

There is some controversy about the denominator—the most commonly used amount is the initial cost of the investment, but some advocate the use of an average investment.

66

If the central bank of a country raises interest rates sharply, the country's currency will most likely:

A. increase in relative value.

B. remain unchanged in value.

C. decrease in relative value.

D. decrease sharply in value at first and then return to its initial value.

A. increase in relative value.

If the central bank of a country raises interest rates sharply, the country's currency will most likely increase in relative value. This is because as interest rates increase, the currency offers a higher return through the interests. The currency will become more desirable as an investment because the return is relatively higher. The currency “costs” more, so its value increases. (The demand for currency correspondingly decreases.)

67

The CPA reviewed the minutes of a board of directors meeting of LQR Corp., an audit client. An order for widget handles was outsourced to SDT Corp. because LQR could not fill the order. By having SDT produce the order, LQR was able to realize $100,000 in sales profits that otherwise would have been lost. The outsourcing added a cost of $10,000, but LQR was ahead by $90,000 when the order was completed. Which of the following statements is correct regarding LQR's action?

A. The use of resource markets outside of LQR involves opportunity cost.

B. Accounting profit is total revenue minus explicit costs and implicit costs.

C. Implicit costs are not opportunity costs because they are internal costs.

D. Explicit costs are opportunity costs from purchasing widget handles from the resource market.

A. The use of resource markets outside of LQR involves opportunity cost.

Each decision made by a company involves opportunity cost. Opportunity cost refers to the benefits given up by making one choice over another. Even though LQR Corp. seems to have made the right decision by outsourcing, intangible opportunity costs are always present when one plan of action is chosen over another.

Accounting profit equals revenue minus explicit costs (cash expenditures). Accounting profit does not take into account implicit costs (earnings that could have been received had the resources been used in an alternative use).

Opportunity costs are a form of implicit cost. Explicit costs are not opportunity costs.

68

As part of a benchmarking process, a company's costs of quality for the current month have been identified as follows:


Employee training $20,000
Product recalls 8,000
Scrap 4,500
Quality inspectors 48,000
Preventive maintenance 19,500
Supplier education expense 17,500
Materials inspection expense 60,000
Processing product returns 2,500
What amount is the company's prevention cost for the current month?

A. $39,500

B. $57,000

C. $165,000

D. $175,500

B. $57,000

Prevention costs are the costs of production process changes that reduce the rate at which product defects occur. This category includes employee training ($20,000), preventative maintenance ($19,500), and supplier education ($17,500).

The cost of quality inspectors is an inspection cost that identifies a defect but does not prevent it. Internal failure costs include reworking or scrapping defective products that are identified by the inspection process. External failure costs include warranty and repair expenses and product recalls.

69

To reduce security exposure when transmitting proprietary data over communication lines, a company should use:

A. asynchronous modems.

B. authentication techniques.

C. call-back procedures.

D. cryptographic devices.

D. cryptographic devices.

Cryptographic devices protect data in transmission over communication lines.

Asynchronous modems handle data streams from peripheral devices to a central processor. Authentication techniques confirm that valid users have access to the system. Call-back procedures are used to ensure incoming calls are from authorized locations.

Which of the following controls is least likely to be closely associated with assuring the accuracy and completeness of data in computer-processed master files?

A. Source data controls

B. File maintenance controls

C. Online data entry controls

D. Logical access controls

Access controls such as passwords and access logs serve to prevent improper access to and use of programs and files. They do not relate specifically to accuracy and completeness of data.

Access controls such as passwords and access logs serve to prevent improper access to and use of programs and files. They do not relate specifically to accuracy and completeness of data.

70

John Maynard Keynes talks about the reasons for holding cash and concludes that there are three major motives. The three major motives for holding cash are:

A. transactional, psychological, and social purposes.

B. speculative, fiduciary, and transactional purposes.

C. speculative, social, and precautionary purposes.

D. transactional, precautionary, and speculative purposes.

D. transactional, precautionary, and speculative purposes.

J.M. Keynes actually had four reasons for holding cash (money-demand):

The “Income-motive”
The “Business-motive”
The “Precautionary-motive”
The “Speculative-motive”
The first two however, refer to individuals and businesses having cash on hand to purchase goals and services in between the intervals of the receipt of income and its disbursement.

These are therefore generally referred to as the “Transactional-motive” for holding money.

The “Precautionary-motive” refers to having money on hand to provide for emergencies where a sudden expenditure is required.

The “Speculative-motive” for holding money refers to a situation where the alternative return on assets is so low that the yield on money (given changing prices and interest rates) is greater than the yields on other assets (stock, bonds, etc.).

71

After reviewing the end-user computing (EUC) policy of an organization, an internal auditor audits the actuarial function and notices that some minimum control requirements are missing. Which of the following is a risk of using potentially incorrect end-user developed files?

A. Management places the same degree of reliance on the files as they do on files generated from mainframe systems.

B. Management receives limited information for decision making due to a lack of flexibility in EUC files.

C. Management is unable to respond to competitive pressures quickly.

D. Management continues to incur additional cost because it takes more hours to do the tasks using EUC.

A. Management places the same degree of reliance on the files as they do on files generated from mainframe systems.


End-user computing (EUC) allows users to develop their own information systems, but such systems often do not have the same level of general and application controls applied to the company's mainframe system. Thus, there is an increased risk that data produced by such systems will be inaccurate.

The answer choice “management receives limited information for decision making due to a lack of flexibility in EUC files” is incorrect because management may receive more information from EUC systems. The risk is that the information will be inaccurate. “Management is unable to respond to competitive pressures quickly” is incorrect because end-user computing does not affect the ability to respond to competitive pressures. “Management continues to incur additional cost because it takes more hours to do the tasks using EUC” is incorrect because it often costs less to use EUC. Controls are expensive and omitted controls save money at the risk of inaccurate data output.

72

An in-exchange premise as used when making a fair value calculation assumes that the maximum value of the item(s) being valued would come from:

A. the current use of that item.

B. using the item in its highest and best use.

C. using that item in conjunction with other assets as a group.

D. using the item alone.

D. using the item alone.

Per FASB ASC 820, a fair value determination can use either an in-exchange or an in-use premise. An in-exchange premise assumes that the maximum value of the subject item would come from the purchaser's perspective when the item is used alone. An in-use premise assumes that the maximum value of the subject item would come from the purchaser's perspective when the item is used in conjunction with other assets as a group.

The in-exchange premise is the assumption that the maximum value to the market participants would come from using the asset in question as a standalone item.

The in-use premise is the assumption that maximum value to the market participants would come from using the asset in question in combination with other assets.

Fair Value Basics

a. As part of the FASB's Convergence Project working with the IASB (International Accounting Standards Board) as well as other standard-setting bodies to work towards compatible international reporting requirements, the FASB issued Fair Value Measurements and Disclosures (FASB ASC 820) to clarify the definition of fair value as well as to provide guidelines for measuring fair value. Per this statement, fair value is defined as “the price that would be received to sell an asset or paid to transfer a liability in an orderly transaction between market participants at the measurement date.” (FASB ASC 820-10-35-2)
b. Since the calculation of fair value assumes that the value determination is for a particular asset, liability, or equity ownership, the following items must be taken into consideration (FASB ASC 820-10-35):
(1) Age and condition of the valuation object
(2) Attributes for the valuation object
(3) Ability of the valuation object to stand alone or the need to function as part of a unit
(4) Location of the valuation object
(5) Restriction placed on the use or sale of the valuation object
c. In determining the price under a fair value assumption, the conditions under which the hypothetical sale are assumed to occur would be orderly and not under conditions of liquidation or distress. The seller would be able to take advantage of normal market activities and would have the ability to take enough time prior to the date of measurement to take advantage of normal exposure to the market given the item being valued. (FASB ASC 820-10-35-3)
d. Under fair value assumptions, the hypothetical transaction is considered to have occurred in either the principal market for the subject transaction or, in the absence of such a market, in the most advantageous market for that transaction. The principal market is considered to be where the holder of the transaction asset or liability could locate the greatest volume of similar transfers. The most advantageous market is considered to be where either the sales price for an asset can be maximized or the transfer costs for a liability can be minimized. Note that these hypothetical transfers are considered from the perspective of the holder of the asset or liability. Also, if there is a principal market for the subject item, then the fair value measurement is determined using that market even if the most advantageous market would yield a more beneficial transfer for the holder. (FASB ASC 820-10-35-5)
e. The market participants to be considered when determining fair market value are the actual holder of the asset or liability being valued and the hypothetical buyer in the principal (or most advantageous) market. Characteristics for both the buyer and seller would include (FASB ASC 820-10-35):
(1) Buyer and seller are not related parties (independence).
(2) Both parties are knowledgeable about the item being transferred and have access to usual and customary information.
(3) Both parties have the ability to complete the transaction.
(4) Both parties are willing to complete the transaction but are not being forced to do so.
f. A fair value measurement assumes that the item being valued will be put to the highest and best use resulting in the maximization of value that would be physically possible, legally permissible, and financially feasible. Note that the highest and best use is not determined from the perspective of the current holder but by the hypothetical market participants. (FASB ASC 820-10-35-10)
g. The fair value determination of an asset uses either an in-use or an in-exchange premise. An in-use premise assumes that the maximum value from the purchaser's perspective of the subject asset is when it is used in conjunction with other assets as a group. An in-exchange premise assumes that the maximum value from the purchaser's perspective of the subject asset is when it is used alone. (FASB ASC 820-10-35-10)
h. The fair value determination of a liability assumes that the liability will continue to exist after the transfer and maintain the same risk of nonperformance after the transfer as before. (FASB ASC 820-10-35 and 10-36)

73

The purpose of the TDRA (top-down risk assessment) is for the company to analyze the internal controls currently in place and to assess the effectiveness of those controls so as to avoid material misstatement in the company's financial reporting. As part of that assessment process, which of the following items would be done?

A. The TDRA will focus on the identification and analysis of pertinent risks related to the achievement of the company's objectives. The starting point for this assessment will be the lowest-level control, such as a process-level control (separation of duties and steps involved in a single task, such as issuing a credit for returned merchandise).

B. As a starting point of the TDRA, management must conclude whether the danger of an internal control failure is high, medium, or low. After that decision is made, the focus then shifts to the areas suspected of being vulnerable.

C. The focus of the TDRA assessment of internal controls is to ferret out all possible areas of error within the financial reporting process.

D. As part of the TDRA, management will develop a list related to a particular account that would have a reasonable likelihood of material misstatement, focusing on problems that have been encountered in the past and the solutions that were developed to avoid such errors in the future.

D. As part of the TDRA, management will develop a list related to a particular account that would have a reasonable likelihood of material misstatement, focusing on problems that have been encountered in the past and the solutions that were developed to avoid such errors in the future.

The purpose of the TDRA is for the company to analyze the internal controls currently in place and to assess the effectiveness of those controls to avoid material misstatement in the firm's financial reporting.

The focus of the assessment of internal controls will deal with significant (material) accounts.
The TDRA will focus on the identification and analysis of pertinent risks related to the achievement of the company's objectives. The higher levels are examined first in the assessment process.
Based upon the identification and analysis of risks and the associated internal control to mitigate those risks, management needs to conclude whether the danger of an internal control failure is low, medium, or high. This step is taken after the internal controls in place have been assessed.

74

To prevent interruptions in information systems operation, which of the following controls are typically included in an organization's disaster recovery plan?

A. Backup and data transmission controls

B. Data input and downtime controls

C. Backup and downtime controls

D. Disaster recovery and data processing controls

C. Backup and downtime controls

Backup and downtime controls are essential in a disaster recovery plan in order to allow for uninterrupted operation.

75

A department adds material at the beginning of a process and identifies defective units when the process is 40% complete. At the beginning of the period, there was no work-in-process. At the end of the period, the number of work-in-process units equaled the number of units transferred to finished goods. If all units in ending work-in-process were 66-2/3% complete, then ending work-in-process should be allocated as follows:

A. 50% of all normal defective unit costs

B. 40% of all normal defective unit costs

C. 50% of the material costs and 40% of the conversion costs of all normal defective unit costs

D. None of the normal defective unit costs

A. 50% of all normal defective unit costs

Units are identified as defective when production is 40% complete. Since the ending work-in-process inventory was 66-2/3% complete, all of the defective units had already been identified in work-in-process as well as finished goods.

The cost of normal spoilage is spread evenly over the remaining good units. At the end of the period, the number of work-in-process units equaled the number of units transferred to finished goods. Therefore, the same defective unit cost is allocated to finished goods as to work-in-process, meaning that 50% of the cost is allocated to each.

76

In order to prevent, detect, and correct errors and unauthorized tampering, a payroll system should have adequate controls. The best set of controls for a payroll system includes:

A. batch and hash total, record counts of each run, proper separation of duties, passwords and user codes, and backup copies of activity and master files.

B. employee supervision, batch totals, record counts of each run, and payments by check.

C. passwords and user codes, batch totals, employee supervision, and record counts of each run.

D. sign test, limit tests, passwords, and user codes, online edit checks, and payments by check.

A. batch and hash total, record counts of each run, proper separation of duties, passwords and user codes, and backup copies of activity and master files.

The quality of a set of controls is best gauged by their ability to prevent unwanted actions from occurring or to cause desired actions to occur. The question offers several collections of various controls but the best set of controls includes input controls (batch and hash totals, record counts of each run), preventive controls (proper separation of duties, passwords and user codes), and recovery methods (backup copies of activity and master files).

77

Key Co. changed from a traditional manufacturing operation with a job order costing system to a just-in-time operation with a back-flush costing system. What are the expected effects of these changes on Key's inspection costs and recording detail of costs tracked to jobs in process?

A. A decrease in both inspection costs and detail of costs tracked to jobs

B. A decrease in inspection costs and an increase in detail of costs tracked to jobs

C. An increase in inspection costs and a decrease in detail of costs tracked to jobs

D. An increase in both inspection costs and detail of costs tracked to jobs

A. A decrease in both inspection costs and detail of costs tracked to jobs

Key's inspection costs will decrease because in a just-in-time operation the number of vendors is reduced and remaining vendors are expected to deliver higher-quality materials on a timely basis.

A back-flush system is based on removal of the standard cost of finished products from the work-in-process inventory upon completion. The effect is to significantly decrease the detail of costs tracked to jobs.

78

An example of an internal check is:

A. making sure that output is distributed to the proper people.

B. monitoring the work of programmers.

C. collecting accurate statistics of historical transactions while gathering data.

D. recalculating an amount to assure its accuracy.

D.
recalculating an amount to assure its accuracy.

Examples of internal checks are as follows:

Limit check, which identifies if data have a value higher or lower than a predetermined amount
Identification, which determines if the data is valid
Sequence check, which checks sequencing
Error log, which is simply an up-to-date log of all identified errors
Transaction log, which provides the basic audit trail
Arithmetic proof, which computes the calculation in order to validate the result
Hence, an example of an internal check is recalculating an amount to assure its accuracy or arithmetic proof.

79

Cost allocation is the process of assigning indirect costs to a cost object. The indirect costs are grouped in cost pools and then allocated by a common allocation base to the cost object. The base that is employed to allocate a homogeneous cost pool should:

A. have a cause-and-effect relationship with the cost items in the cost pool.

B. assign the costs in the pool uniformly to cost objects even if the cost objects use resources in a nonuniform way.

C. be a nonfinancial measure (e.g., number of setups) because a nonfinancial measure is more objective.

D. have a high correlation with the cost items in the cost pool as the sole criterion for selection.

A. have a cause-and-effect relationship with the cost items in the cost pool.

All costs in a homogeneous cost pool should have a cause-and-effect relationship with the base that is employed for allocation.

An averaged or smoothed allocation may result in significant under or over allocation of costs.
Both financial and nonfinancial measures may be used as allocation bases.
Economic plausibility as well as high correlation are desirable for allocation bases.

80

Which of the following is usually a benefit of using electronic funds transfer for international cash transactions?

A. Improvement of the audit trail for cash receipts and disbursements

B. Creation of self-monitoring access controls

C. Reduction of the frequency of data-entry errors

D. Off-site storage of source documents for cash transactions

C. Reduction of the frequency of data-entry errors

Since electronic funds transfer (EFT) allows transactions to take place more directly and with fewer intervening steps, there is less chance of human error. This can result in a reduction in the frequency of data-entry errors. EFT actually reduces the paper audit trail, although there are methods of monitoring and auditing such transactions at the time they occur. EFT may actually require stronger access controls due to the fact that fewer controls and reviews take place during the electronic processing of the transaction.

81

In general, mainframe computer production programs and data are adequately protected against unauthorized access. Certain utility software may, however, have privileged access to software and data. To compensate for the risk of unauthorized use of privileged software, Information Systems (IS) management can:

A. prevent privileged software from being installed on the mainframe.

B. restrict privileged access to test versions of applications.

C. limit the use of privileged software.

D. keep sensitive programs and data on an isolated machine.

C. limit the use of privileged software.

Management can limit the use of privileged software as a means of reducing the risk of unauthorized use of that software. By limiting use, it will be easier to assume that the privileged software use was authorized and legitimate.

If the privileged software is not installed, it cannot be used by anyone.
Privileged software (the real versions, not test versions) is needed for some functions.
Placing sensitive programs and data on isolated machines has the practical effect of making those programs and data unusable for their intended purpose(s).

82

A rule of thumb used in the business valuation process is based upon such things as a multiple or a percentage of revenues, earning, book value, or other measured unit (beds, tables, etc.). Such calculations are easy to perform, and there are resources available providing rule-of-thumb information. By using a rule of thumb, a practitioner can:

A. develop a defendable valuation estimate that would be easy to defend in a litigated situation.

B. provide support for a valuation estimate arrived at using another method with similar results.

C. develop a valuation estimate that would be acceptable to use alone per the Statement on Standards for Valuation Services 1 (SSVS 1).

D. demonstrate consistency when performing business valuations in conformance with SSVS 1.

B. provide support for a valuation estimate arrived at using another method with similar results.


Rules of thumb have been used for many years for business valuation. In fact, there are numerous resources available providing rule-of-thumb information. Per SSVS 1, Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, a rule of thumb cannot be used as the method to determine value; however, it can be used as a reasonableness check on a value determined through the use of another method. Due to the fact that SSVS 1 provides a list of “best practices” to use in a business valuation, it would be difficult if not impossible to defend a valuation estimate determined solely through the use of a rule of thumb in a litigated environment, since it is no longer considered to be a “best practice.”

Assumptions Using Rules of Thumb

a. Rules of thumb have been used for many years in relation to business valuations. These are often based upon multiples or a percentage of revenues, earnings, book value, some type of measurement such as number of beds, number of rooms, number of tables, etc. These calculations are quick and easy; however, they do not take specifics related to a particular business into consideration since these rules of thumb are based upon the general averages for an industry.
b. Statement on Standards for Valuation Services 1 (SSVS 1), Valuation of a Business, Business Ownership Interest, Security, or Intangible Asset, specifically states that a rule of thumb not be used as the method to set value; however, it can be used as a reasonableness check for the results achieved using other methods. The use of a rule of thumb can:
(1) show that the valuator is knowledgeable about the subject company's industry.
(2) support a valuation arrived at using another method with similar results.
(3) support a valuation arrived at using another method with different results along with arguments as to why the subject company is not “average” within the industry.

83

In a traditional job order cost system, the issue of indirect materials to a production department increases:

A. stores control.

B. work-in-process control.

C. factory overhead control.

D. factory overhead applied.

C. factory overhead control.


Indirect materials used is a part of factory overhead cost. A factory overhead control account is used to accumulate actual factory overhead cost incurred.

So, the issuance of indirect materials to a production department increases the factory overhead control account for that department.

The issuance decreases stores control.
Use of direct materials (and labor) would increase work-in-progress control.
The factory overhead control account is closed to factory overhead applied.

84

In computing the current period's manufacturing cost per equivalent unit, the first-in, first-out (FIFO) method of process costing considers current period costs:

A. only.
B. plus cost of beginning work-in-process inventory
C. less cost of beginning work-in-process inventory.
D. plus cost of ending work-in-process inventory.

A. only.

The FIFO method of process costing uses an equivalent unit computation that includes only work done in the current period (i.e., Equivalent units work = Work done to complete beginning work-in-process + Work on units started and completed + Work done on units left in ending work-in-process).
In order to be consistent with 1., only current period costs are used in calculating cost(s) per equivalent unit.
Another method, the weighted-average method, averages some previous period costs with current period costs.