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65 Cards in this Set

  • Front
  • Back
The primary benefit of having a financial expert on a company's audit committee is:
a. The financial expert checks the auditor's work and verifies the appropriateness of the audit opinion.
b. The enhanced level of financial sophistication of the financial expert can serve as a resource for the audit committee.
c. The financial expert certifies compliance with SEC requirements and thereby reduces audit fees .
d . The expert designation conveys a higher level of due diligence on the expert and shields audit committee members and the corporation from most liabilities.
Choice "b" is correct. The benefits of a financial expert on the audit committee relate to the expertise that the board can bring to its oversight function.
Amold Astor, CPA, is a local tax practitioner who has been asked to sit on the Board of BigLarge Corporation, a multinational issuer. Astor has never had any involvement either as an employee or as an auditor with publically traded companies but does teach an accounting principles class at the community college. Under the provisions of Sarbanes-Oxley Act of 2002:
a. Astor qualifies as a financial expert based on achievement of a CPA certificate.
b. The Board of Directors would likely evaluate Astor's qualifications to serve on the audit committee and be designated as a financial expert based on mix of knowledge and experience.
c. Astor must petition the SEC for a waiver of prior experience requirements to be considered a financial expert.
d. The audit committee would immediately certify Astor's qualifications as a financial expert based on his CPA license and academic experience with GAAP and experience with internal control.
Choice "b" is correct. Qualification as a financial expert is a judgmental issue is typically made by the Board of
Directors. The Sarbanes-Oxley Act is silent as to what group has the authority to designate an individual a
financial expert but in practice, the board most often makes that decision. The Act provides some guidance but
does not prescribe specific qualifications.
The Sarbanes-Oxley Act of 2002 requires that the officers of a corporation be held accountable to a code of ethics. According to the Act, codifications of ethical standards should include provisions for all of the following, except:
a. Honest and ethical conduct.
b. Prompt internal reporting of code provisions and accountability for adherence to the code.
c. Compliance with laws, rules and regulations.
d. Full, fair, accurate, and timely disclosure in periodic FSs.
Choice "b" is correct. Although the SEC proposed standards for codes of ethics to include both internal reporting
of code provisions & accountability for adherence to the code, the Sarbanes-Oxley Act itself does not have this
requirement.
The Instafab Corporation regularly assesses whether the FSs of the company fairly state the
financial position, results of operations and cash flows associated with the underlying transactions. Leases, for
example are regularly evaluated for their status as a capital or operating lease and, if capital, the valuations of
both the asset and liability are evaluated for fairness, the depreciation methods used and interest rates used are assessed for proper computation or application, and inclusion or exclusion of lease-related cash activity from the statement of cash flows is carefully evaluated. The regular evaluation of transactions as part of the risk assessment component of the Committee on sponsoring Organization's Framework reflects the principle of:
a. Financial Reporting Objectives.
b. Fraud Risk.
c. Financial Reporting Risks.
d. Assessment Risk.
Choice "a" is correct. The assessment of whether the FSs reflect the underlying transactions & events in a manner that is fairly stated is a financial reporting objective.
The criteria for evaluating the effectiveness of enterprise risk management are:
a. The components of the internal control integrated framework.
b. The key elements supporting the components of the enterprise risk management framework .
c . The components of the enterprise risk management framework.
d. The principles supporting the components of the internal control integrated framework.
Choice "c" is correct. The components of the enterprise risk management framework are the criteria used to evaluate its effectiveness.
A manufacturing firm identified that it would have difficulty sourcing raw materials locally , so it decided to relocate
its production facilities. According to COSO, this decision represents which of the following responses to the risk?
a. Risk reduction.
b. Risk sharing.
c. Prospect theory.
d. Risk acceptance.
Choice "a" is correct. Relocation of production facilities to assure an uninterrupted supply chain (e.g. , sourcing raw materials) is an example of risk reduction. The Committee of Sponsoring Organization's (COSO) Enterprise Risk Management (ERM) framework identifies four methods of responding to risk , including avoidance, reduction, sharing & acceptance. The relocation of the plant reduces the risk of supply chain interruption. Risk avoidance
techniques might involve discontinuing the product that uses the raw material altogether or replacing the raw material with a locally available product. Risk acceptance is typically associated with doing nothing. Risk sharing is often associated with purchasing insurance, however, in this instance, the company might chose to share risk
by buying purchase options to ensure raw material availability from other sources or obtaining purchase commitments from local suppliers (with penalty clauses for nonperformance).
Corbin Corporation is evaluating the sample sizes associated with periodic tests of the existence of a fleet of taxis. Cash receipts associated with fares deposited daily are periodically reconciled to both the fares charged and the taxi's odometer readings. With respect to monitoring controls over cash VS. vehicles, Corbin will likely:
a. Review cash on an ongoing basis and fixed assets on a less frequent periodic basis.
b. Review cash and fixed assets on a periodic basis, neither one daily.
c. Review fixed assets on an ongoing basis and cash on a less frequent periodic basis.
d. Review cash and fixed assets on an ongoing basis.
Choice "a" is correct. The monitoring of internal control effectiveness is performed based on the significance of the risk being controlled. Cash has more risk than vehicles & thus needs to be monitored more frequently .
Generally, an organization will not operate beyond the limits of their risk appetite. Risk appetite has generally been exceeded when:
a. The likelihood and impact of negative events exceed residual risks.
b. The likelihood and impact of positive events is within the residual risk .
c . The likelihood and impact of negative events significantly exceeds residual risks.
d. The likelihood and impact of positive events is significantly below residual risk.
Choice "c" is correct. Generally, an organization's risk appetite has been exceeded when the combined likelihood & impact of negative events significantly exceed residual risk. Residual risk represents the risk that remains after management has taken actions to mitigate negative events. If the likelihood & impact of those negative
events significantly exceeds the residual risk, the operation is likely to exceed the organization's risk appetite.
Strategic objectives for the mission and vision of the organization are generally linked to related objectives. All of the following objectives are typically regarded as related objectives, except:
a. Operations objectives.
b. Compliance objectives.
c. Information technology objectives.
d. Reporting objectives.
Choice "c" is correct. Objectives related to strategy are typically operations & reporting & compliance objectives. Information technology objectives may be a subset of one of these objectives, but is typically not a separate category .
Consensus Corporation routinely seeks to identify the events that are most likely to pose a risk to the company.
The company generally hires an experienced facilitator to stimulate a discussion from a cross-functional group
representing different areas throughout the company. This method of event identification is most like referred to as
a(an):
a. Process flow analysis
b. Event workshop
c . Event inventory
d . Ongoing event identification
Choice "b" is correct. Meetings of cross-functional teams are generally referred to as event workshops.
Establishing objectives that will support the mission and vision of an organization generally involve supporting the
mission with:
a. Strategic objectives, supported by strategies and related objectives.
b. Strategy supported by strategic and related objectives.
c . Related objectives .
d . Strategy.
Choice "A" is correct. Strategic objectives support the mission & are implemented via various strategies & related objectives.
Which of the following is a true statement regarding nonfinancial measures of a process?
a. They are an effective substitute for financial measures.
b. All of the above are true.
c. They are best viewed as attention directors.
d. They are best viewed as problem solvers.
Choice "C" is correct. Nonfinancial measures are an effective way to observe problems as they occur & thereby direct attention to potential errors or inefficiencies before poor financial results are produced. While nonfinancial measures are highly effective at directing management to a problem, they are not viewed as a primary source of problem solving data. Nonfinancial measures are a good complement to financial measures but they are not a substitute.
Executive perks are often criticized since the compensation provided to the manager:
a. Can be excessive.
b. Occurs without Board of Di rector's approval.
c. Is not taxable.
d. Unfairly reduces traditional compensation.
Choice "A" is correct. Executive perks (e.g. , vacation homes, the use of company jets, etc . ) are often viewed as excessive.
Nonfinancial performance measures are often preferable to financial performance measures as a means of constructively motivating operational managers since:
a. Financial performance measures are not tied to operations.
b. Financial performance measures are punitive.
c. Nonfinancial performance measures are not controlled by financial records.
d. Nonfinancial measures are more easily associated with operational objectives.
Choice "D" is correct. Nonfinancial performance measures are often preferable to financial performance measures as a means of constructively motivating operational managers since Nonfinancial measures are more easily associated with operational objectives.
Fabro, Inc. produced 1 , 500 units of Product RX-6 last week. The inputs to the production process for Product RX-6 were as follows.
450 pounds of Material A at a cost of $1.50 per pound.
300 pounds of Material Z at a cost of $2.75 per pound.
300 labor hours at a cost of $15.00 per hour. What is the best productivity measure for the first-line supervisor in Fabro, Inc . 's production plant?
a. 5.00 units per labor hour.
b. 0.33 units per dollar input.
c. $15.00 per labor hour.
d. 2.00 units per pound.
Choice "A" is correct. First-line Supervisor is the production
supervisor
Kode Co. manufactures a major product that gives rise to a by-product called May. May's only separable cost is a $1 selling cost when a unit is sold for $4. Kode accounts for May's sales by deducting the $3 net amount from the cost of goods sold of the major product. There are no inventories. If Kode were to change its method of accounting for May from a by-product to a joint product, what would be the effect on Kode's overall gross
margin?
a. Gross margin increases by $4 for each unit of May sold.
b. Gross margin increases by $3 for each unit of May sold.
c. No effect.
d. Gross margin increases by $1 for each unit of May sold.
Choice "D" is correct. Under the Joint product method the selling price can not be netted from the sales value like what's happening under the by product method but otherwise accounted for as a selling expense
For purposes of allocating joint costs to joint products, the sales price at point of sale, reduced by cost to complete after split-off, is assumed to be equal to the:
a. Joint costs.
b. Relative sales value at split-off.
c. Total costs.
d. Sales price less a normal profit margin at point of sale.
Choice "B" is correct. Sales price less the cost to complete is defined as the relative sales value at split-off. In other words, this is the additional contribution to income generated by completing the product.
Which of the following is assigned to goods that were either purchased or manufactured for resale?
a. Product cost.
b. Relevant cost.
c. Opportunity cost.
d. Period cost.
Choice "A" is correct. Product cost is assigned to goods ( products) that were either purchased or manufactured for resale.
Note
Value-added costs increase the worth of the product or service to customers. Employees who develop these programs are adding value to the computer programs.
Note
Activity-based costing assigns costs to activities or transactions & allocates them to products according to their use of each activity. This method means multiple cause & effect relationships may exist.
In a traditional job order cost system, the issue of indirect materials to a production department increases:
a. Work in process control.
b. Factory overhead applied.
c. Stores control.
d. Factory overhead control.
Choice "d" is correct. Indirect materials are included in factory overhead costs as they are used in the production process. Therefore, the issue of indirect materials would decrease stores control & increase factory overhead control.
Which of the following nonvalue-added costs associated with manufactured work in process inventory is most significant?
a. The cost of labor that cannot be traced to any individual product.
b. The cost of additional resources consumed to produce any individual product.
c. The cost of moving, handling, and storing any individual product.
d. The cost of materials that cannot be traced to any individual product.
Choice "C" is correct. Value added costs are those resource uses that provide value to the consumer. The cost of inventorying products, generally moving, handling & storing them, does not add value to the product & is generally considered one of the most significant non-value activities/costs that a manufacturer should reduce because it can be controlled.
Which one of the following best describes direct labor?
a. Both a product cost and a prime cost.
b. Both a period cost and a prime cost.
c. A product cost.
d. A prime cost.
Choice "A" is correct. Direct labor is a prime cost, a conversion cost & a product cost
Note
Note that since inspection of units does not occur until the completion of manufacturing, none of the spoilage is allocated to the partially completed units.
A cost that bears an observable and known relationship to a quantifiable activity base is a( n ) :
a . Fixed cost.
b. Engineered cost.
c. Target cost.
d. Indirect cost.
Choice "b" is correct. An engineered cost bears an observable & known relationship to a quantifiable activity base. Engineered Costs - Engineered costs (including direct & indirect costs & variable & fixed costs) typically have a causal relationship between the incurrence of the cost & the output associated with the cost.
The distribution of overhead costs is known as:
a. Cost management.
b. Uncontrollable cost allocation.
c. Cost allocation.
d. Burden distribution.
Choice "c" is correct. Overhead costs are not " uncontrollable." Cost allocation is the distribution of overhead or support costs based on any one of a variety of methods.
Multiple or departmental overhead rates are considered preferable to a single or plantwide overhead rate when:
a. Cost drivers, such as direct labor, are the same over all processes.
b. Individual cost drivers cannot accurately be determined with respect to cause-and effect relationships.
c. Various products are manufactured that do not pass through the same departments or use the same manufacturing techniques.
d. The single or plant-wide rate is related to several identified cost drivers.
Choice "c" is correct. If a single or plant-wide rate is related to several identified cost drivers, then the single rate is accurate & appropriate. When various products are manufactured, multiple overhead rates are preferable to a single overhead rate.
Which of the following would cause overhead to be overapplied?
a. The number of units produced was the budgeted amount but a larger amount of overhead was actually incurred.
b. Actual overhead is greater than overhead applied.
c. Actual overhead is less than overhead applied.
d. Actual overhead was equal to the budgeted amount but fewer items were manufactured.
Choice "c" is correct. Over applied overhead occurs when the amount of overhead applied exceeds the actual amount of overhead incurred.
Generally, individual departmental rates rather than a plant-wide rate for applying overhead would be used if:
a. A company's manufacturing operations are basically labor based.
b. A company's manufacturing operations are all highly automated.
c. Manufacturing overhead is the largest cost component of its product cost.
d. The manufactured products differ in the resources consumed from the individual departments in the plant.
Choice "d" is correct. Generally, individual departmental rates ( rather than a plant-wide rate for applying overhead) would be used if the manufactured products differ in the resources consumed from the individual departments in the plant.
Activity based costing refines product cost information because the cost system:
a. Causes managers, who are aware of distortions in the traditional cost system, to make intuitive, imprecise adjustments to the traditional cost information without understanding the complete impact.
b. Uses a common departmental or factory wide measure of activity, such as direct labor hours or dollars to distribute manufacturing overhead to products.
c. Was designed to value inventory in the aggregate and not relate to product cost information.
d. Emphasizes long-term product analysis (when fixed costs become variable costs) .
Choice "d" is correct. Activity-based costing refines product cost information because the cost system emphasizes long-term product analysis (when fixed costs become variable costs).
Note
Activity-based costing uses cause & effect relationships to capitalize costs to inventory. This is not acceptable for external reporting & useful for internal reporting to management.
Under ABC, the allocation of costs to particular cost objectives allows a firm to analyze all of the following, except:
a. Why the sales of a particular product have increased.
b. Whether a particular department should be expanded.
c. Whether a product line should be discontinued.
d. Whether a particular manager earns a bonus.
Choice "a" is correct. Cost allocation & analysis will not explain a sales increase.
An accounting system that collects financial and operating data on the basis of the underlying nature and extent of the cost drivers is:
a. Variable costing.
b. Target costing.
c. Activity-based costing.
d. Direct costing.
Choice "c" is correct. Activity-based costing is an accounting system that collects financial & operating data on the basis of the underlying nature & extent of the cost drivers.
The use of activity-based costing normally results in :
a . Equalizing set-up costs for all product lines.
b. Substantially lower unit costs for low-volume products than is reported by traditional product costing.
c. Decreased set-up costs being charged to low-volume products.
d. Substantially greater unit costs for low-volume products than is reported by traditional product costing.
Choice "d" is correct. The use of activity-based costing normally results in substantially greater unit costs for low-volume products than is reported by traditional product costing.
Note
Job costing is used in the production of tailor-made or unique goods, including: • Construction of buildings or ships
• Aircraft assembly • Printing
• Special-purpose machinery ( microcomputer manufacturer)
• Public accounting firm • Management consulting firm
• Repair shops • Industrial research projects
Process costing is used where the product is composed of mass produced homogeneous units such as:
• Gasoline & oil • Chemicals
• Steel • Textiles (wallpaper) • Plastics • Paints
• Flour • Meatpacking • Canneries • Rubber
• Lumber • Food processing (beverage drink manufacturer)
• Glass • Mining
• Cement •Check clearing in banks
•Mail sorting in post offices
•Food preparation in fast-food outlets
•Premium handling in insurance companies
Note
Manufacturing overhead is applied on the basis of direct-labor dollars incurred during the period.
Note
Activity-based costing (ABC) tends to increase both the number of cost pools & the number of allocation bases. ABC breaks down a production process into many activities. It then accumulates costs by activity ( i.e. , cost pools) using an appropriate allocation base for each activity.
Note
Other factory expenses are considered applied OH
Note
Increased costs of ABC represent a limitation of the system.
Note
Historical cost is generally not relevant in a decision analysis situation.
Conversion cost pricing:
a. Could be used when the customer furnishes the material used in manufacturing a product.
b. Places heavy emphasis on indirect costs and disregards consideration of direct costs.
c. Places heavy emphasis on direct costs and disregards consideration of indirect costs.
d. Places minimal emphasis on the cost of materials used in manufacturing a product.
Choice "a" is correct. Conversion cost pricing could be used when the customer furnishes the material used in manufacturing a product.
Which of the following positions best describes the nature of the Board of Directors of XYZ Co.'s relationship to the company?
a. Agent.
b. Fiduciary .
c . Executive.
d. Representative.
Choice "b" is correct. The board of directors has a fiduciary responsibility to act on behalf of & in the best interest of the corporation.
According to COSO, the use of ongoing and separate evaluations to identify and address changes in internal control effectiveness can best be accomplished in which of the following stages of the monitoring-for-change continuum?
a. Control baseline.
b. Control revalidation/update.
c. Change management.
d. Change identification.
Choice "d" is correct. The COSO identifies four stages of the change continuum beginning with control baseline, followed by change identification & change management & concluding with control validation/ update. Change identification considers the risk assessment component of internal control & identifies changes in process or
risk & verifies that the design of underlying controls remains effective. Monitoring through the use of ongoing & separate evaluations should consider the ability to identify & address changes in the change identification stage of the monitoring for change continuum.
Note
Conversion cost pricing could be used when the customer furnishes the material used in manufacturing a product. Conversion cost pricing places no (not minimal) emphasis on the cost of materials used in manufacturing a product.
Note
Integrity & ethical values are addressed in the Internal Environment component of the Committee on Sponsoring Organizations Enterprise Risk Management Integrated Framework . Other elements of internal environment include risk management philosophy, risk appetite, organizational structure, assignment of authority & responsibility, & human resources standards.
Note
The setup hours are used because neither quantity produced nor direct manufacturing hours are activities.
Note
When management uses listings of potential events common to a specific industry as a means of identifying risks or opportunities, the method is known as event inventory .
Note
The internal environment component of the enterprise risk management (ERM) framework includes foundational elements such as organizational structure, assignment of authority & responsibility, integrity & ethical values, risk management philosophy , commitment to competence & human resource standards, & similar issues that influence the tone of the organization.
Note
Conducting focus groups would most likely be a related operating objective. Focus groups would identify the needs of various stakeholders & be used to improve operations.
Note
The independent Auditor can not be an Audit Committee member
Note
In 1992, the Committee on Sponsoring Organizations (COSO) issued Internal Control Integrated Framework (the Framework) to assist organizations in developing comprehensive assessments of internal control effectiveness. The Framework is widely regarded as an appropriate & comprehensive basis to document the assessment of internal controls over financial reporting.
Note
Restricted stock option programs may reward current performance but also emphasize future performance. The employee must typically stay through the option strike period & the option is only valuable if the stock price increases.
Note
The financial expert serving on the audit committee of an issuer must have experience with internal controls. The financial expert qualifies through education or past experience as an auditor or finance officer for an issuer of similar complexity .
Note
The business judgment rule is a rule that immunizes corporate Management (Not Shareholders) from liability for actions that result in corporate losses or damages if the actions are undertaken in good faith & are within both the power of the corporation & the authority of management to make
Note
Process costing is a method of allocating production costs to products & services by averaging the cost over the total units produced. Costs are usually accumulated by department rather than by job.
Note
Activity-based costing refines product cost information because the cost system emphasizes long-term product analysis (when fixed costs become variable costs).
Note
Establishment of a company-wide uniform chart of accounts would most likely be a related reporting objective. Uniform charts of accounts would promote more efficient reporting.
Note
Executive perks (e.g., vacation homes, the use of company jets, etc.) are often viewed as excessive.
Note
Qualification as a financial expert is a judgmental issue is typically made by the Board of Directors. The Sarbanes-Oxley Act is silent as to what group has the authority to designate an individual a financial expert but in practice, the board most often makes that decision. The Act provides some guidance but does not prescribe specific qualifications.
Note
Avoiding adverse publicity & damage to the entity's reputation is a public relations function, not a function of ERM
Note
An organization's risk appetite may go beyond the risk that they control. When the likelihood & impact of negative events exceeds residual risk, management will need to carefully evaluate their actions, but they may not have exceeded their risk appetite. Generally, an organization's risk appetite has been exceeded when the combined likelihood & impact of negative events SIGNIFICANTLY exceed residual risk. Residual risk represents the risk that remains after management has taken actions to mitigate negative events. If the likelihood & impact of those negative events significantly exceeds the residual risk, the operation is likely to exceed the organization's risk appetite.
Note
Residual risk is the risk that remains after management responds to the risk.
Note
An ethics program is a related compliance objective
Note
The components of the enterprise risk management framework are the criteria used to evaluate its effectiveness.
Note
An individual who knowingly executes or attempts to execute, securities fraud will be fined or imprisoned not more than 25 years or both.