BEC final review

Who should the director of internal audit report to

Audit committee

The AC must be composed on

BOD members who are independenent of management influence.

Who is required to make special certification statements regarding the establishment of internal control systems on Form 10-k

CFO and CEO

What would happen to COGS and ending inventory if the gross profit rate is overstated

COGS understated, ending inventory overstated

Inventory turnover ratio

COGS/Average Inventory

Cash conversion cycle formula

Days in inventory + Days in A/R - days of payables outstanding

Field check control

Designates the character types that are allowed in the field

Existence of a code of ethics and a periodic acknowledgement of it shows evidence that

Development of ethical values and ensures that those values are understood and taken seriously

Data flow diagram

Diagrams showing the logical flow (logical only)

Risk avoidance

Disposing of business unit

Risk reduction

Diversification of product offerings rather than elimination of the product

Sarbanes Oxley Act of 2002 prohibits directors and executive officers from

Receiving a personal loan from the issuer not in the ordinary course of business

T or F. US treasuring bonds are free of default risk premiums

True, they are fully backed up by the government and they do not charge for risk that the security issuer will fail to pay interest on a timely basis.

Reasonableness test control

Validates the logic of input values where fields are dependent or relevant to each other

Risk inventory

all risk that could impact an entity

Target risk

amount of risk an entity prefers to assume in pursuing its goals and objective

Freely fluntcuating exchange rates perform what?

automatically correct a lack of equilibrium in the balance of payments

Formula for working capital

current assets - current liabilities

Who is responsible for implementation of ERM

Management

Risk averse behavior

Management who demand more return for greater risk

A financial institution looking to assess its investment portfolios exposure to price changes most likely would use what technique

Market value at risk analysis

Required rate of return computation

Maturity risk premium + default risk premium + purchasing power risk premium (might be more?)

Example of a top level review as a control activity

Mngmnt reviewing actual performance of a wide scale marketing plan versus benchmark goals

Diversifiable risk

Non market, firm specific, unsystematic. All of these do not involve the market, you can diversify them,

What is associated with inventory carrying costs

Obsolescence and spoilage, insurance, opportunity cost on inventory investment

According to sarbanes oxley, an issuer must disclose whether or not it has adopted a code of ethisc for who?

for senior offiers

Risk sharing

insuring against losses or entering into joint ventures to address risk

An executives deliberate misrepresentation to a banker who is considering a loan with the company is an example of which type of internal control limitations?

management override

Who should review a company's incentive compensation plans to ensure alignment with corporate objectives?

on an annual basis- a compensation steering company that reports to the BOD

Domestic currency appreciates, then..

raises the prices of domestic goods relative to foreign goods

T or F. the AC must be independent from management influence

true

If a firm increases its cash balance by issuing additional shares of CS, working capital..

Increases and the current ratio increases

In evaluating the impact of relative inflation rates on the demand for a foreign currency, what is true?

Inflation in a foreign currency reduces the purchasing power of the foreign currency, which results in less demand for the FC and more demand for the domestic currency, due to higher purchasing power

Examples of nondiversifable risk (out of your control)

Inflation, recession, high interest rates

Code of conduct will include

1. prohibitions/limits on gifts 2. prohibitions against conflicts of interest 3. description of the orgs commitment to compliance

3 way may/voucher includes

1. purchase order 2. supplier invoice 3. receiving report

How many years for someone who alters//destroys/false entry to any record of documentation with the intent to obstruct the investigation within the jurisdictions of any department or agency

20 years

Swag agreement

A private agreement between two parties, generally assisted by an intermediary to exchange future cash payments

Effective interest rate calculation

1. calculate the actual finance charged (cost of loan times rate) 2. Subtract any interest earned on additional required balance [net cost is #1 - #2= x) 3. x over loan proceeds the company has use of (loan price minus additional balance) How must does it cost over the amount issued

In a large public corporate, evaluating internal control procedures should be the responsibility of

Internal audit staff who report to the BOD

A financial expert serving on the AC must have experience with...

Internal controls

Example of ongoing monitoring activity:

1. comparisons of info from various sources within company 2. follow up of customer and vendor complaints 3. periodic analysis of variances between expected versus actual results 4. CFO reviews changes in liability reservese in excess of threshold 5. CFO updated

The company's director of internal audit should report 1. functionally and 2. administratively to

1. functionally to the audit committee 2. admin- to CFO

Proper tone at the top helps:

1. navigate grey areas where no specific compliance exists 2. promote a willingness to seek help before its too late 3. create a culture that is committed to ERM

IC are likely to fail when

1. not designed and implemented properly at the outset 2. Environment in which they changes 3. Their operation changes in some way

According to COCO, purpose of monitoring IC is to verify that the IC system remains adequate to address changes in

Risks

A BOD participates in:

1. Ensuring suitable info technology resources are available to meet company's goals 2. Est. long term strategy to which tech system should be aligned 3. Maintain awareness of current tech used by org to assures it efficiency for fin reporting

In a small company that has few levels of management with wide spans on controls. each of the following mitigates management override of controls:

1. Having an effective internal audit function 2. Establishing an effective white blower program 3. Culture with high integrity

Responsibilities of AC of an issuer

1. appointment oversight of the work of registered firm 2. Preapproving all audit and non audit services provided by the company's auditor 3. establishing procedures for the retention and treatment of complains received by the company regarding internal control and auditing matters

Annual percentage rate of interest calculation

= amount of payments required under the contract divided by the net proceeds of the debt.

Risk profile

A composite view of the risk assumed at a particular level of the entity or aspect of the business that positions management to consider the types, severity, and interdependencies of risk and how they may affect performance relative to the strategy and business objectives

Derivative definition and example

A financial contract which derives its value from the performance of another asset or financial contract (interest rate, stock etc.)

Formula for quick ratio

Cash + ar + st marketable securities over CL CA - INV / CL

Highly leveraged client implies...

Client is heavily utilizing debt in the capital structure

Validity check control

Creates a framework so values in data entered into a foreign key field must first be entered in a corresponding table with the primary key

What would the sale of a vacant land at a loss do to the current ratio?

Increase cash thus increasing the current ratio

Business risk

Risks associated with unique circumstances to a particular company, as it might affect shareholder of that company For example: Only equity financing

Days sales in AR formula

Ending AR/ average daily sales

According to COSO, what is first ongoing monitoring step in evaluating the internal control system?

Establish control baseline

T or F. Cash collection of AR would increase WC

False

T or F. Cash collections of AR would increase the WC of a firm

False

T or F. Cash payments of accounts payable would increase the WC of a firm

False

T or F. The cost to reorder stock impacts the level of safety stock in inventory management

False

T or F. According to Sarbanes Oxley, Management must state if there were disagreements between management and the auditor as to the effectiveness of internal controls.

False. The do not need to describe or state if there were any.

BOD has a __ relationship w company

Fiduciary

A company that retains a CPA with appropriate skills and able to prepare timely and effective financial reporting is applying the ideas from which principal of effective internal control over fin reporting?

Financial reporting competencies (suggests stronger controls and encourages the company to retain qualified personnel to handle financial reporting)

System interface diagrams

Focus on the interfacing of clients and systems and do not depict the physical flow of information (no logical flow)

How can you lock the price of something now (foreign currency/AR)

Forward contract to sell AR in 30 days

COSO prepared the internal control integrated framework to..

Help businesses assess internal control

What can minimize risk from foreign currency fluncuations

Hold payables and receivables due in the same currency and amount. Loosely viewed as currency diversification

Determining the right level of working capital requires..

Offsetting the benefit of CA and CL against the probability of technical insolvency

A company w a strong internal audit function and reports directly to BOD is applying ideas from which principle of effective internal control over financial reporting?

Org structure

Ability to withstand the impact of large scale events refers to

Organizational sustainability

The working capital financing policy that subjects the firm to the greatest risk of not being able to meet maturing objectives is a policy that finances:

Permanent current assets with short term debt.

Which of the following is included in the assess and report phase of an effective approach to monitoring internal controls? 1. Prioritize risks 2. Tone at the top 3. Prioritize findings 4. Identify controls

Prioritize findings

Who created the Treadway Commission

Private Sponsoring Organizations (COSO?)

Fraud triangle includes-

Rationalization, opportunity, incentive

What does a high quick ratio indicate

That a company has more liquid short term assets on its balance sheets

Close loop verification

Retrieves and displays info related to the input to verify accuracy

Which component of IC framework addresses an entity's financial reporting objectives

Risk assessment

Residual Risk

Risk that an org incurs after management takes action to adverse impact of given event (inherent = no action)

Inherent risk

Risk that exists when management takes no action to alter the severity of the risk

Purchasing power risk

Risk that the price levels will change and affect asset values

Formula for net realizable value of inventory

Sales cost it could sell at - shipping costs

Accounts receivable turnover formula

Sales over avg AR

Programmer having access to development and production represents which two deficiencies

Segregation of controls and change control deficiency

Active engagement by an AC in representing the BOD relative to all matters of internal and external audits is evidence that...

The BOD understands their oversight responsibility over financial reporting

A put is an option that gives its owner the right to..

Sell a specific security at fixed conditions of price and time

Liquidity risk

The ability to sell the temporary investment in a short period of time without significant price concessions

If dollar price of the euro rises..

The dollar depreciates against the euro

Interest rate risk

The fluctuation in the value of a financial asset when interest rates change

What is the effect when a foreign competitors currency becomes weaker compared with the US dollar?

The foreign company will have an advantage in the US market (cheaper in fc which increases demand in US market

Risk capacity

The maximum amount of risk that an entity is able to absorb in the pursuit of strategy and business objectives

Uncertainty in ERM refers to

The state of not knowing how or if potential events may manifest

T or F. Any errors in the info provided by an automated system could lead to management making incorrect conclusions regarding controls

True

T or F. As a company becomes more conservative in its working capital policy, it would to have an increase in the ratio of current assets to units of output

True

T or F. Working capital policy is deemed to be more conservative as an increasing portion of an orgs long term assets, permanent current assets and temp current assets are funded by long term financing.

True

Flowchart

Visualize logical flow of data through a process and the physical aspects of that flow (logical and physical)

What is the relationship between the allowance for doubtful accounts and working capital?

When bad debt expense is recorded for the period, working capital decreases

Process narrative

Written description of process. No visual depictions