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Final Revision

2016
Essay Questions & Answer
CMA - PART 1

Prepared By: Arab web soft


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1.Identify the basic disclosures related to each of the statements
footnotes, supplementary schedules?
A. The first footnote accompanying any set of complete financial statements is generally
one describing significant accounting policies, such as the use of estimates and rules for
revenue recognition.

B. Footnote disclosures and schedules specifically related to the balance sheet include

1) Investment securities

2) Property, plant, and equipment holdings

3) Maturity patterns of bond issues

4) Significant uncertainties, such as pending litigation

5) Details of capital stock issues

2. Distinguish between receivables sold (factoring) on a with recourse


basis and those sold on a without-recourse basis, and determine the
effect on the balance sheet?
 Factoring without recourse transfers the ownership of the receivable to the factor and
removes it from the balance sheet.

 factoring with recourse, rights of ownership remain with the original owner of the
receivable and are not transferred to the factor. The receivable then remains on the original
owner's balance sheet.

3. Determine the effect on the financial statements of using different


depreciation methods.
 depreciation is the systematic, rational allocation of a tangible assets cost less
estimated residual (net salvage) value over the estimated life of the asset. The periodic
depreciation is debited to depreciation expense shown on the income statement and
credited to the accumulated depreciation account (an offset or contra account to the asset
account).

 Straight-line depreciation produces a constant amount of depreciation per

period calculated as cost less estimated residual divided by the estimated asset life.

 Accelerated depreciation produces a declining amount of depreciation per

period calculated as the declining balance percentage divided by the estimated life times
the net book value of the asset at the beginning of the period. Estimated residual value is
ignored in the calculation. The net book value is cost less accumulated depreciation. Care
must be taken to depreciate the asset down to its estimated residual value but not below it.

 Units of production or activity depreciation produces a varying amount of


depreciation per period calculated as the cost less estimated residual value divided by the
estimated production or activity level expected over the life of the asset times the amount
of actual production or activity for the period.

4. How the owner can benefits from the information presented in cash
flow statement
The statement of cash flows should help the owner assess the entity’s ability to generate
positive future net cash flows (liquidity), its ability to meet obligations (solvency), and its
financial flexibility

5.Distinguish between an operating lease and a capital lease.


 Capital Lease A lease agreement transfers substantially all the benefits and risks of
ownership of the asset to the lessee if at least one of the following criteria is met:

1) The lease provides for the transfer of ownership of the leased property.

2) The lease contains a bargain purchase option (BPO).


a) A bargain purchase option gives the lessee the right to purchase the leased property for a
price lower than its expected fair value at the date the BPO becomes exercisable.

3) The lease term is 75% or more of the estimated economic life of the leased property.

4) The present value of the minimum lease payments is at least 90% of the fair value of the
leased property

 lessee has an operating lease

- if the long-term lease does not meet any of the above criteria .

- In an operating lease, the lessor retains substantially all of the benefits and risks of
ownership. Such a lease is a regular rental agreement

-The lessee reports periodic rental expense for the amount of rent paid, but no leased asset
or liability is recognized

6. First-In First-Out (FIFO)


In which we assume that the item sold to the customer is the earliest unit purchased by the
seller that has not yet been sold (in other words, the oldest item in inventory)

 Advantage:

• It generates an ending inventory valuation close to current cost

• It minimizes income taxes when prices are consistently falling

 Disadvantage:

• It matches older costs in cost of sales to revenue in income determination

• it results in higher income taxes when inventory costs are consistently rising

7. Last In First Out (LIFO) in which we assume that the item sold to the customer is
the latest unit purchased by the seller (in other words, the newest item in inventory)
 Advantage

• It matches the most current costs to revenue in income determination

• It minimizes income taxes when inventory costs are consistently rising

 Disadvantage

• The inventory valuation on the balance sheet could be many years out of date

• It is an extremely complex system when used for perpetual inventory valuation

8. Weighted Average,

in which we sum the costs paid for all the individual units of a given item in inventory and
divide by the number of units purchased to find the average cost for each unit.

 Advantages

is an easy-to-use and understand method. It is relatively easily programmed when used for
perpetual inventory valuation. It provides little tax advantage when costs are consistently
rising or falling.

9. Specific Identification, in which we actually keep track of each unit of inventory


individually. The specific identification method is used for low quantity, high value inventory
items, such as merchandise in a jewelry store or serialized electronic merchandise where
records are kept by serial number.

 effects :

Ending Inventory Cost of Goods Sold Gross Profit

Rising Prices ( inflation ) FIFO Higher LIFO Higher FIFO Higher

Falling Prices LIFO Higher FIFO Higher LIFO Higher


10. Equity Transactions – Issuance of Stock
- Cash is increased (debited), the appropriate stock account is increased (credited) for the
total par value of stock issued, and additional paid-in capital (paid-in capital in excess of
par) is increased (credited) for the difference.

- Direct costs of issuing stock (underwriting, legal, accounting, tax, registration, etc.) must
not be recognized as an expense. Instead, they reduce the net proceeds received and
additional paid-in capital.

11.Define off-balance sheet financing, and identify different forms of this


type of borrowing.
Off-balance sheet financing is a form of financing whereby liabilities are kept off the
organization's balance sheet. It is often used to keep the organization's debt/equity and
equity Multiplier (leverage) ratios low to avoid debt covenant violations. Examples of off-
balance sheet financing are joint borrowing ventures where each partner has 50% and
operating lease obligations.

12. GAAP & IFRS


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13. Explain Supply Chain Management


Supply chain management (SCM ) is the management of the flow of goods, which includes
the movement and storage of raw materials, work-in- process inventory, and finished goods
from the point of origin to the point of consumption .lt involves the planning and
management of all Activities involved in sourcing and procuring raw materials, converting
those materials to a finished product, and delivering that finished product to consumers. In
a broad sense, SCM strives to integrate procurement, operations management, logistics,
and information technology, while creating value through this chain of key processes and
activities.
14. Identify and describe the operational benefits of implementing lean
manufacturing.

• Quality performance, fewer defects and rework.

• Fewer machine and process breakdowns.

• Lower levels of inventory.

• Less space required for manufacturing and storage.

• Greater efficiency and increased output per person-hour.

• Improved delivery performance.

• Greater customer satisfaction.

• Improved employee morale and involvement.

• Improved supplier relations.

• Lower costs due to elimination of waste leading to higher profits.

• Increased business because of increased customer responsiveness.

15. Define materials requirements planning (MRP) & Benefits –


Limitations

It is an approach that uses computer software to help manage a manufacturing process.


MRP is a “Push- through” system that manufactures finished goods for inventory on the
basis of demand Forecasts

 Benefits

1.Less coordination required between functional areas; everyone follows the bill of
materials.

2.Scheduling improvements; levels load when demand is variable or relatively


unpredictable.
3. Predictable raw material needs; can take advantage of bulk purchasing and other price
breaks.

4. More efficient inventory control; schedules to use up raw materials or build finished
goods.

5. Additional inventory on hand to cover orders should product be damaged or lost in transit
to a customer.

6. Quick response to new customer demand; can supply new customers from existing
inventory rather than building product after the order is received.

7. Better manufacturing process control; minimizes retooling and machine setup time.

8. Reduced idle time.

9. Lower setup costs.

10. Lower inventory carrying costs.

11. Increased flexibility in responding to market change

 Limitations

The primary disadvantage of an MRP environment is potential inventory accumulation.


Workstations may receive parts that they are not ready to process.

16. Identify and describe the operational benefits and limitations of


implementing a just-in-time (JIT ) system.

 Definitions:

A comprehensive production and inventory system that purchases or produces materials


and parts only as needed and just in time to be used at each stage of the production
process

 Benefits :

1- Reduction in the cost of carrying the inventory and reduces nonvalue adding activities.
2- Greater emphasis on improving quality by eliminating the causes of rework, scrap and
waste.

3- Setup times are decreased.

4- Lower investments in space

5- Higher quality and lower inventory go together.

6- JIT increases inventory turnover (cost of sales ÷ average inventory) and decreases
inventory as a percentage of total assets.

7- Backflush costing is utilized with just-in-time production as a planning and control


system.

Backflush costing is less costly to operate than most traditional costing systems.

 Limitations

1. an increased risk of stockout costs

2. JIT implementation is not appropriate for high-mix manufacturing environments, which


often have thousands of products and dozens of work centers

17. Identify and describe the operational benefits of enterprise resource


planning (ERP).

1. Reduction in operational costs.

- Communication is improved across departments, leading to greater efficiencies


in production, planning, and decision-making that can lead to lower production costs, lower
marketing expenses, and other efficiencies.

2. Inventory management facilitated.

- Inventories can be managed more effectively to keep them at optimal levels.

3. Day-to-day operations are facilitated through real-time information.

- facilitates decision-making and control


4. Resource planning as a part of strategic planning is simplified.

18. Explain the concept of outsourcing, and identify the benefits and
limitations of choosing this option.

 Definition

Process of purchasing goods and services from outside vendors rather than producing the
same goods or providing the same services within the organization. For smaller business,
outsourcing may provide access to resources and expertise for capabilities they may not
have internally. For larger businesses, outsourcing can improve specific functions

 Benefits

1. By Outsourcing certain functions to a specialist, management can free up resources


within the company in order to focus on the primary operations of the company and
strategic revenue generating activities.

2. It may also be cheaper to outsource a function to a company that specializes in an area


than

It Is to run and support that function internally.

3. Benefits of outsourcing include reliable service, reduced costs, avoidance of the risk of

Obsolescence and access to technology.

4. Can improve efficiency and effectiveness by gaining outside expertise or scale

5. Can provide access to current technologies at reasonable cost without the risk of
obsolescence

6. Can reduce expenses by gaining capabilities without incurring overhead costs (for
example,

staffing, benefits, space)

7. May improve the quality and/or timeliness of products or services


 Limitation

1. Can result in a loss of in-house expertise and capabilities

2. Can reduce process control

3. May reduce control over quality

4. May lead to less flexibility (depending on the external supplier)

5. May result in less-personalized service

6. Creates privacy and confidentiality issues

7. Can result in “giving knowledge away” and lead to competitors obtaining expertise, scale,
customers, etc.

8. Potential for employee morale and loyalty issues

18. Identify the five steps involved in theory of constraints analysis

1. Identify the constraint.

2. Determine the most profitable product mix given the constraint.

3. Maximize the flow through the constraint.

4. Increase capacity at the constraint. .

5. Redesign the manufacturing process for greater flexibility and speed.

19. Define throughput-costing (super-variable costing)

Throughput costing, also called supervariable costing, is a costing method where the only
costs included in inventory are the costs of direct materials..

20. Define value chain analysis Value chain analysis - A continuous process of

gathering, evaluating, and communicating information. The basic intent of value chain
analysis is to help managers envision an organizations future and implement business
decisions to gain and sustain competitive advantage.
21. Identify the steps in value chain analysis

There are three steps in value chain analysis:

1) Identify the activities that add value to the finished product.

2) Identify the cost driver or cost drivers for each activity, and

3) Develop a competitive advantage by adding value to the customer or reducing the costs
of the activity.

22. Explain how value chain analysis is used to better understand a firm's
competitive advantage.

a. The purpose of a value chain analysis is to focus on the total value chain of each product
or service and to determine which selected part or parts support the firm's competitive
advantage and strategy. Theoretically, competitive advantage and competitive strategy
cannot be examined meaningfully at the organizational level as a whole or even at the
business unit level. Because a value chain separates the firm into distinct strategic
activities, organizations can use value chain analysis to determine where in the operations
from design to distribution and customer service customer value can be enhanced and
costs lowered

23. Identify the benefits of benchmarking in creating a competitive


advantage

Well-designed and properly applied benchmarking can be a powerful tool in helping an


organization to be competitive. Through benchmarking, a firm identifies best-in-class levels
and conducts a study to determine how those levels can be adopted and lead to improved
performance

24. Define and Identify benefits of equivalent unit (EUP)

 Define : An equivalent unit (EU ) is a measure of the amount of work done on partially
completed units expressed in terms of how many complete units could have been created
with the same amount of work
 Benefit : It help the company for better estimation of the unfinished units (work in
process) to more realistic counting of the ending inventory

25. Absorption "FULL" & Variable "Direct" Costing

Absorption " FULL " Costing Variable " Direct " Costing

Absorption costing capitalizes Under variable costing, only those


fixed factory overhead expenses manufacturing costs that vary with
as part of the cost of inventory output (Variable manufacturing costs)
(goods manufactured and not yet are treated as product costs (inventory
sold) in accordance with cost). This includes direct materials,
Define generally accepted accounting variable overhead and ordinarily direct
principles (GAAP). Therefore, labor. Fixed manufacturing overhead
absorption costing includes direct is treated as a period cost and it is
material, direct labor, and all expensed on the income statement as
overhead (variable and fixed) as incurred.
Inventoriable costs.

1) Absorption costing provides 1) The impact on profits of changes in


matching of costs and benefits. sales volume is more obvious with
variable costing.
2) Absorption costing is
consistent not only with GAAP 2) Under the variable costing method,
but also with Internal Revenue a production manager cannot
Service requirements for the manipulate income levels by
reporting of income on income overproducing.
Benefit
tax returns.
3) By not including fixed costs in the
calculation of cost to produce,
companies are able to make better
and more informed decisions about
profitability and product mix

4) Operating income is directly related


to sales levels and is not influenced by
changes in inventory levels due to
production or sales variances

5) It is easier to determine the


“contribution” to fixed costs made by a
division or product – and thereby helps
determine if the product or division
should be discontinued.

Limitation 1) The level of inventory affects 1) Variable costing does not provide
net income because fixed costs proper matching of costs and benefits.
are a component of product cost.
2) Since only variable manufacturing
2) The net income reported under costs are charged to the inventory in
the absorption method is less variable costing, this method requires
reliable (especially for use in separating all manufacturing costs into
performance their fixed and variable components.

evaluations) than under the 3) To prepare a complete income


variable method because the cost statement based on variable costing, it
of the product includes fixed is also necessary to separate the
costs and, therefore, the level of selling and administrative costs into
inventory affects net income. their fixed and variable components.

3) creates an opportunity for plant


managers to manipulate reported
net income by overproducing in
order to keep some of the fixed
costs on the balance sheet in
Inventory

26. Why inventory value is different under variable and absorption


costing Because absorption costing treat fixed factory overhead as part of inventory costs
(product cost) and variable costing treat it as period costs expensed on income statement
as incurred
27. Define and identify appropriate use (Job order, Process costing,
Activity based costing, Life cycle costing)

Job order costing Process costing ABC Life cycle costing

- Costs accumulated - Costs accumulated is a costing approach A life-cycle


by job. by process or that assigns costs to approach to
department Mass budgeting
- Production of wide products, services, or
production of estimates a
variety of customers based on
homogeneous product's revenues
Heterogeneous the consumption of
products or services. and expenses over
products or services. resources caused
its entire sales life
- Unit cost computed
- Unit cost computed by activities. cycle .
by dividing the total
by dividing total job Resources are
process costs of the Life-cycle costing is
costs by number of assigned to activities,
period by number of
units produced or and activities are Sometimes used on
units produced or
served at the end of assigned to cost a strategic basis for
served at end of the
the job. objects based on the cost planning and
period
activities' use. product pricing. It

is designed to allow
a firm to focus on
the overall costs for
a product or service

28. Identify and describe the benefits and limitations of each cost
accumulation system
Cost accumulation System Benefits Limitations
1. Job order costing is best 1. Employees are required
for businesses that do to keep track of all the direct
Job Order Costing custom work or service work labor hours used and all the
. materials used.

2. Job order costing enables 2. The focus is on direct


the calculation of profit on costs of products produced.
individual jobs, which can The focus on direct costs
help management determine can allow for inefficiencies
in the future which kinds of and increasing overhead
jobs are desirable. costs

3. The records kept result in 3. To produce meaningful


accurate costs for items results, job order costing
produced. requires a lot of accurate
data entry.
4. Management can see and
analyze each cost incurred 4. The use of job order
on a job in order to determine costing is limited to
how it can be better businesses that do
controlled in the future. customer or service work

5. Managers are able to keep


track of the performance of
individuals for cost control,
efficiency, and productivity.

1. Process costing is the 1. Process costing can


easiest, most practical introduce large variances
costing system to use to into the costing system if
allocate costs for standard costs allocated to
homogeneous items the units are not up to date.

2. It is a simple and direct 2. Process costing can be


Process Costing method that reduces the time-consuming for
volume of data that must be management accountants
collected.
3. Process costing is not
3. Process costing can aid in suitable for custom orders
establishing effective control or diverse products
over the production process
4. Since the work of an
4. Management accountants entire department is
can review the amounts of combined in the process
materials and labor used in costing system, process
each process to look for costing makes it difficult to
possible cost savings. evaluate the productivity of
an individual worker
5. Process costing enables
tracking of inventory

1. ABC provides more 1. Allocations. Even if


accurate and informative activity data are available,
product costs, which lead to some costs probably require
more accurate product allocations to departments
profitability measurements and products based on
and to better-informed arbitrary volume measures
strategic decisions about because finding a specific
pricing, product line, activity that causes the
customer market, and capital incurrence of the costs
expenditure. might not be practical.

2. ABC provides more 2. ABC reports do not


accurate measurements of conform to GAAP
ABC activity-driving costs, which
3. Expense and time. An
helps managers improve
ABC system is very
product and process value by
expensive to develop and is
making better product design
very time consuming.
decisions, controlling costs
better, and fostering various 4. ABC usually requires
more than a year for
Value-enhancement projects.
successful development
3. ABC provides managers and implementation.
easier access to relevant
5. ABC generates vast
costs for making business
amounts of information. Too
decisions, enabling them to
much information can
take a more competitive mislead managers into
position concentrating on the wrong
data.

1. Life-cycle costing provides 1. When life-cycle costing is


a long-term, more complete used to spread the cost of
perspective on the costs and fixed assets over the life of
profitability of a product or a product, the assumption
service may be made that the fixed
assets will be as productive
2. When long-term costs are
in later years as when they
recognized in advance, life-
were new. That may not be
cycle costing can be used to
an accurate assumption,
lower those long-term costs.
because a piece of
3. Life-cycle costing includes equipment may gradually
research and development slow down, resulting in
costs as well as future costs lower output and lower
such as warranty work, profitability toward the end

Life Cycle Costing enabling better pricing for of its life.


profitability over a product’s
2. Accurate estimation of
lifetime.
the operational and
4. Life-cycle costing can help maintenance costs for a
in determining when a product during its whole
product will reach the end of lifetime can be difficult.
its economic life.
3. Cost increases over the
5. Life-cycle costing can be life of the product need to
used to assess future be considered.
resource requirements such
4. Life-cycle costing can
as needed operational
require considerable time
support for the product during
and resources, and the
its life.
costs may outweigh the
benefits.
29. Discuss how life cycle cost if you increase upstream cost reduces
downstream cost ?

For example, a product that is designed quickly and carelessly, with little investment in
design costs, could have significantly higher marketing and service costs later in the life
cycle.

Managers are interested in the total cost, over the entire life cycle, not manufacturing costs
only.

In life-cycle budgeting, managers estimate the revenues and business function costs across
the entire value chain from a product’s initial R&D to its final customer service and support.
Life-cycle costing tracks and accumulates business function costs across the entire value
chain from a product’s initial R&D to its final customer service and support.

Life-cycle costing-Sometimes used on a strategic basis for cost planning and product
pricing. It is designed to allow a firm to focus on the overall costs for a product or service.
Poor early design could lead to much higher marketing costs, lower sales, and higher
service costs.

30. Three Example from downstream & Upstream

 Upstream costs-Costs

1) Research and development;

2) product design, including prototyping, target costing, and testing ;

3) Manufacturing, inspecting, packaging, and warehousing;

 Downstream costs

4) Marketing, promotion, and distribution; and

5) Sales and service.

31. Michael E. Porter’s “The Five Forces Model,” and Explain Two

(1) The risk of entry by potential competitors,


(2) The intensity of rivalry among established companies within an industry,

(3) The bargaining power of buyers,

(4) The bargaining power of suppliers,

(5) The closeness of substitutes to an industry’s products

 The risk of entry by potential competitors is a function of the height of barriers to


entry, that is, factors that make it costly for companies to enter an industry

The existence of close substitutes for an industry’s product is a threat because it


limits the prices that can be charged for the product, the less attractive the industry is to
potential entrants

32. Define key performance indicators (KPIs), and discuss the importance
of these indicators in evaluating a firm.

Key performance indicators (KPls) are measures of factors critical to the success of the
organization. Each KPI requires a defined business process, clear objectives for the
process, quantitative or qualitative measurements for the objectives, and a plan for
identifying and correcting variances from plan.

33. Define the concept of a balanced scorecard and identify its


components ?

Balanced scorecard-A process of compiling and organizing the key performance indicators
(KPIs) of an organization into four segments: a. financial, b. customer, c. internal business
process, and d. learning and growth. - Each KPI can be measured in a specific way so that
it can be managed appropriately

34. Identify and describe the perspectives of a balanced scorecard

Financial measures - Cover the traditional financial ratios, such as return on equity,
sales growth, return on assets, earnings per share, and the like.
Customer satisfaction measures - Focusing on the customer is critical to
accomplishing goals as the customer drives all of a company's revenue. The primary
customer outcome measures include market share, acquisition, satisfaction, retention, and
profitability.

 Internal business process measures - Go beyond simple financial variance measures


to include output measures, such as quality, cycle time, yield, order fulfilment, production
planning, throughput, and turnover.

 Innovation and learning measures - Focus on becoming efficient and effective at


producing new products. The measures include time to market, percentage of sales from
new products, and new products versus competitor's new products. Learning and growth
measures focus on education and training of personnel and can be measured by training
sessions provided, developing leadership skills, and reducing the number of defects.

35. Describe the characteristics of successful implementation and use of


a balanced scorecard.

 the entire organization is aware of it and supports it.

 senior management support the program, even as high as the board of directors.

 It is tied to the organization's strategy and goals, and the performance measures can be
quantified.

 It illustrating the sequence of cause-and-effect relationships.

 Each business unit and division should be involved in developing its own customized
scorecard.

 It is organized according to the four perspectives, with each selected scorecard measure
on a line and classified within its perspective.

 It identify tradeoffs that managers might make, for instance by reducing R&D spending to
achieve short-run financial goals, or making other tradeoffs that could hurt future financial
performance.

 It is marketed to both management and staff to garner support.


 Scorecard evaluation is more effective when it is used to judge the progress of an
individual business unit relative to the prior year or relative to its goals rather than when
used to compare a manager’s performance with that of other managers or a segment’s
performance with that of other segments.

 a firm have extensive enterprise resource planning6 systems to capture the required
information.

 used to create an environment in which everyone can learn and grow.

36. Strategic Management

 Define

- Is the development and implementation of a sustainable competitive position in which the


firm’s competitive advantage provides continued success.

- Sets overall objectives for an entity and guides the process of reaching those objectives. It
is the responsibility of upper management .

 Purposes / Benefit

- guide the company in its efforts to achieve superior performance, competitive advantage,
and maximized shareholder value.

- setting overall organizational objectives and goals and drafting strategic plans. It is a long-
term process aimed at charting the future course of the organization.

- is the design and implementation of the specific steps and processes necessary to reach
the overall objectives.

- It is the responsibility of upper management

 Limitation

- The effort, time, and expense involved in the process

- The fact that planning based on predictions is not an exact science; due to a variety of
factors, plans may prove to be incorrect and fail
- devoid of fresh ideas and strategic thinking

37. Steps in the Strategic Planning/Management Process (five-stage


process) – M.A.S.I.C

Step 1 Defining/selecting the company’s Mission and addressing the key corporate goals.

Step 2 Analyzing the organization’s external factors & the internal operating environment .

Step 3 Formulating and selecting strategies (SWOT analysis) that, Based on the results of
the situational analysis, upper management develops a group of strategies describing how
the mission will be achieved.

Step 4 Developing and Implementing the chosen strategies.

Step 5 Strategic Controls and feedback

38. Strategy, plans and budgets are interrelated and affect one another?

 Strategic analysis is the basis for both long-term and short-term planning.

In turn, these plans lead to the formulation of budgets.

 Budgets provide feedback to managers about the likely effects of their strategic plans.
Managers use this feedback to revise their strategic plans.

 Strategy is the organization's plan to match its strengths with the opportunities in the
marketplace to accomplish its desired goals over the short and long term.

Strategy is the starting point in preparing its plans and budgets.

39. Advantages of Budget ( PCCMA )

1- As planning tool budget forces the organization to examine the future.

Without a budget, the organization would be operating in a reactive manner, rather than in a
Proactive manner.
2- Budgets promote coordination and communication among organization units
and activities

budgets requires departmental managers to make plans in conjunction with the plans of
other interdependent departments, If the firm does not have an overall budget, each
department tends to pursue its own objectives without regard to what is good for the firm as
a whole..

3- As a control tool

1) A budget helps a firm control costs by setting cost guidelines.

2) Guidelines reveal the efficient or inefficient use of company resources.

3) A manager is less apt to spend money for things that are not needed if (s) he knows that
all costs will be compared with the budget.

4) Budgets can also reveal the progress of highly effective managers.

5) Managers can also use a budget as a personal self-evaluation tool.

6) Budgetary slack (overestimation of expenses), however, must be avoided if a Budget is


to have its desired effects

7) For the budgetary process to serve effectively as a control function, it must be integrated
with the accounting system and the organizational structure

4- Provide motivation for managers and employees to achieve the company's plans

1) A budget helps motivate employees and managers to do a good job.

a) Employees are particularly motivated if they help prepare the budget.

b) A manager who is asked to prepare a budget for his/her department will work hard to
stay within the budget.

2) A budget must be seen as realistic by employees before it can become a good


motivational tool.
3) the budget is not always viewed in a positive manner. Some managers view a budget as
a restriction.

4) Employees are more apt to have a positive feeling toward a budget if some degree of
flexibility is allowed

5- Promotes the efficient allocation of organizational resources

A budget helps management to allocate resources efficiently and to ensure that subunit
Goals are congruent with those of other subunits and of the organization

40. What are the benefits of pro forma financial statements

Identifying cash position, whether company need to borrow, as it shows the company
projected sales, costs and profits, used to decide whether the budget activities will result in
an acceptable level of income, also other strategic objective can be observed such as
target gross margin percentage

41. Explain the role of the sales budget in the development of an annual
profit plan

A sales budget is a cornerstone of budget preparation because a firm can complete the
plan for other activities only after it identifies the expected sales level, without an accurate
sales forecast, all other budget elements will be inaccurate since they are driven by
estimated demand

42. Explain the relationship between the sales budget and the
production budget

Once the desired level of sales is determined (from the sales budget), the production
budget is created to satisfy the expected demand, plus-or minus desired changes in
inventory levels

43. How can sales budget effect in operating income Budgeted income

statement based on the sales levels which incorporated in the sales budget and based on
the direct material, direct labour, manufacturing overhead budgets which also prepared
after the sales budget

44. Mention and explain four factors to consider while preparing a sales
budget

1) Economic and industry conditions and indicators

2) Competitors' actions

3) Rising costs

4) pricing policies

45.Identify the components of a sales budget and prepare a sales budget.

The sales budget has three components:

- forecasted sales volume,

- forecasted sales mix, and

- budgeted selling prices.

46. Factors affecting the selection of budget methodology:

- Types of business.
- Organizational structure.
- Complexity of operations
- Management philosophy

47. The BCG (Boston Consulting Group) Growth Share Matrix looks at the

company's products or services as one of the following: stars, cash cows, dogs, or question
marks. Stars are products or services with high growth rates and high cash generation
capabilities. Cash cows have high cash generation capabilities but low growth rates. Dogs
have low cash generation capabilities and low growth rates. Question marks have high
growth rates but low cash generation capabilities.
48. MASTER BUDGET / Annual Budget

 Define

Encompasses the organization’s operating and financial plans for a specified period
(Ordinarily a year or single operating cycle. Is made up of several deferent budgets, and
some budgets can't be developed until other budgets have already been completed.

 Purpose

to provide comprehensive and coordinated budget guidance for an organization.

 Appropriate Use

appropriate for most industries but are particularly useful in manufacturing settings that
require coordination of financial and operating budgets.

 Timeframe

Summarize activity for a one-year period

 Benefits

Master budgets are relatively easy to prepare and are the most commonly developed
budget system.

 Limitations

Master budget amounts are confined to one year at a single level of activity.

49. PROJECT BUDGET

 Define

used for creating a budget for specific projects or programs rather than for an entire
company, such as the design of a new airliner or the building of a single ship

 Appropriate use
Project budgets are appropriate for specific tasks (e.g., construction of building, infrequent
events , or groups of projects such as new product development, marketing, and
refinement.

 Timeframe

The time frame for a project budget is simply the duration of the project, but a multi-year

project could be broken down by year.

 Benefits

Project budgets allow for a focused look at a particular project's resource requirements and
timing & the ability to contain all of a project’s costs so that its individual impact can be
easily measured.

Limitations

If the budget process improperly done, project budgets may not afford a comprehensive
look at the manner in which the project impacts the organization.

50. Activity Based Budgeting

Define

Focuses on classifying costs based on activities rather than based on departments or


products; ABB applies activity-based costing principles to budgeting. It focuses on the
numerous activities necessary to produce and market goods and services and requires
analysis of cost drivers.

Purpose

focuses on costs of activities or cost drivers necessary for operations

 Appropriate use ABB is most appropriate in businesses that have complexity in their
number of products, number of departments, or other factors such as setups.

 Timeframe Activity based budgeting is generally applied to annual time periods or less.
51. Zero Based Budgeting

 Define

starts each new budgeting cycle from scratch as though the budgets are prepared for the
first time; ZBB is a budget and planning process in which each manager must justify his/her
department’s entire budget every budget cycle.

 Purpose

- budgeting process that requires justification of all expenditures every year.

- Many budget systems are referred to as incremental budgets because they assume that
previous budgets represent required levels of effort and need only be adjusted for

additional or incremental expenses. Zero-based budgets are designed to challenge that

assumption and require that manager begin the budget process from zero.

- Thus, managers must conduct in-depth reviews and analyses of all budget items and of

each area under their control to provide such justification.

- Such a budgeting process encourages managers to be aware of activities or functions

that have outlived their usefulness or have been a waste of resources. A tight, efficient

budget often results from zero-base budgeting.

 Benefits

- ZBB forces review of all elements of a business.

Limitations

1.it can require a nearly impossible amount of work to review all of a company's

activities every year. 2 time-consuming 3 expensive annual review process as a result.

52. Continuous ( Rolling ) Budgets


Define Allows the budget to be continually updated (revised) by removing information for
the period just ended (e.g., March of this year) and adding estimated data for the same
period next year (e.g., March of next year).

Purpose

Continuous (rolling or perpetual) budgets add a new budget month - rolls forward- (or
quarter) as each current month (or quarter) expires> According to this model, budgeting
becomes a perpetual process and long-range planning is performed continually rather than
annually.

Appropriate Use

Continuous (rolling) budgets are most effective in dynamic environments where constant re-
evaluation of products and activities are required by the market place or where results of
activities are critical to operations

Timeframe

Although a continuous (rolling) budget contemplates a year of activity, it usually does not

Coincide with the organization's fiscal period because it adds either a month or a quarter to
the budget as each month or quarter is completed.

 Benefits

- Longer strategic perspective

- have up-to-date budgets

 Limitations

Continuous budgets can be weakened by incomplete analysis.

53. Flexible Budgeting

 Define serves as a control mechanism that evaluates the performance of managers by


comparing actual revenue and expenses to the budget amount for the actual activities and (
not the budget activities )
 Purpose Flexible budgets represent adjustable to accommodate changes in actual
activity.

 Appropriate Use Flexible budgets are most appropriate for a firm facing a significant
level of uncertainty in unit sales volumes for next periods.

 Benefits

- can be displayed on any number of volume levels within the relevant range.

- allows management to focus on the variances that may be caused by production or


administrative problems that need attention.

- Flexible budgets offer managers a more realistic comparison of budget and actual
revenue and cost items under their control.

 Limitations

- Flexible budgets are highly dependent on the accurate identification of fixed and variable
costs and the determination of the relevant range.

- Errors in determination of the relevant range , or misestimates in anticipated output


expected from variable costs .

54. difference between a master budget and a flexible budget ?

a) Flexible budget considers only variable costs but a master budget considers all costs.

b) Flexible budget allows management latitude in meeting goals whereas a master budget
is based upon a fixed standard.

c) Master budget is for an entire production facility but a flexible budget is applicable to
single departments only.

d) Master budget is based on one specific level of production and a flexible budget can be
prepared for any production level within a relevant range.

55. Characteristics of Successful Budgeting

1) The budget must be aligned with the corporate strategy.


2) The budget must have the support of management at all levels.

3) People who are charged with carrying out the budget need to feel ownership of the
budget.

4) The time period for a budget should reflect the purpose of the budget

5) The budget should be a motivating device.

6) A budget should be flexible.

7) To be useful, the budget should be an accurate representation of what is expected to


Occur.

8) A budget should be coordinated.

9) Budgeting should not be rigid.

56. Identify the characteristics of a successful strategic plan.

1. Assists the organization in achieving its long-term goals and objectives.

2. It has well-defined goals consistent with the strategic plan and the mission from which
the plan we derived.

3. It also has SMART objectives, objectives that are:

• Specific

• Measurable

• Achievable

• Realistic

• Timely

57. Identify the external factors that should be analysed during the
strategic planning process

Three environments should be examined, and the three environments are interrelated and shaping
the organizational strategy:
1. The industry in which the company operates,

• Market forces, industry trends, and competition.

2. The country or the national environment in which the company operates as well as the
international environment,

3. And the wider environment, or microenvironments in which the company operates.

- Economic, demographic, political, legal and regulatory factors, social, cultural, and technical
changes.

- Stakeholder groups and their social concerns.

- Globalization trends, emerging markets, and nongovernment organizations (e.g., United Nations,
World Bank, etc.).

58. Identify the internal factors that should be analyzed during the
strategic planning process

Analyze the organization’s internal operating environment to identify the organization’s


strengths and weaknesses.

Internal factors (recognition of SWC)

- Are the organization's strengths and weaknesses.

• Strengths are those things that would enhance the organization's competitive position
and profitability;

• Weaknesses are those that detract from its competitive position and profitability.

Distinctive competencies are the firm-specific strengths of a company. Valuable


distinctive competencies enable a company to earn a profit rate that is above the industry
average.

- The distinctive competencies of an organization arise from its:

• resources (its financial, physical, human, technological, and organizational assets) and

• capabilities (its skills at coordinating resources and putting them to productive use).
Therefore, Internal analysis focuses on reviewing the:

- Resources, - Capabilities, and - Competencies of a company.

59. Define Standard costs

costs for direct materials; direct labour and manufacturing overhead that are
predetermined or estimated, as they would apply under specified conditions

60. Four reasons for using standard costs are:

(i) cost management,

(ii) Pricing decisions,

(iii) Budgetary planning and control, and

(iv) Financial statement preparation.

61. Advantages of standard cost system

- Assists in performance evaluation.

- Allows employees to better understand what is expected of them.

- Permits development of flexible budgeting.

62. Budgetary Slack and Its Impact on Goal Congruence

Goal congruence it refers to the aligning of goals of the Individual managers with the goals
of the organization as a whole.

Budgetary slack or padding the budget describes the practice of underestimating


budgeted revenues, or overestimating budgeted costs, to make budgeted targets more
easily achievable.

Avoiding problems of budgetary slack

1
The best way to avoid the problems of budgetary slack is to use the budget as a planning
and control tool, but not for managerial performance evaluation. Or, if the company does
use the budget to Evaluate managers, it could reward them based on the accuracy of the
2
forecasts A firm may decrease slack by emphasizing the consideration of all variables,
holding in-depth reviews During budget development, and allowing for flexibility in making
additional budget changes

63. Ideal (theoretical) vs. currently attainable (practical) Standard costs

Ideal (theoretical or perfection or maximum efficiency) standards costs

- are standard costs under optimal conditions. They are based on the work of the most
skilled workers with no allowance for waste, spoilage, machine breakdowns, or other
downtime.

Currently attainable (practical) standards costs

- are defined as the performance that is reasonably

expected to be achieved with an allowance for normal spoilage, waste, and

downtime.

64. SWOT analysis

- involves Identifying and understanding the organization's strengths and weaknesses


(internal factors) and the opportunities and threats external to the organization.

- helps the organization utilize and maximize its strengths, minimize and correct its
weaknesses, exploit opportunities, and avoid or minimize risks.

65. Benefits and Limitations of Regression Analysis

 Regression analysis is a quantitative method and as such, it is objective. A given data set
generates a specific result. That result can be used to draw conclusions and make
forecasts.

 is an important tool for use in budgeting and cost accounting. In budgeting, it is virtually
the only way to compute fixed and variable portions of costs that contain both fixed and
variable components (mixed costs).
The shortcomings or limitations of regression analysis are:

 To use regression analysis, historical data is required for the variable that we are
forecasting or for the variables that are causal to this variable. If historical data is not
available, regression analysis cannot be used.

 Even when historical data is available, if there has been a significant change in the
conditions surrounding that data, its use is questionable for predicting the future.

 Analysis are valid only for the range of data in the sample

 If the choice of independent variable (s) is inappropriate, the results can be misleading.

66. Benefits and Limitations of Learning Curve Analysis

 Benefits of Learning Curve Analysis

 Decisions such as the following can be aided by learning curve analysis:

 Life-Cycle costing – in calculating the cost of a contract, learning curve analysis can
ensure that the cost estimates are accurate over the life of the contract, leading to better
bidding.

 Development of production plans and labor requirements – production and labor Budgets
should be adjusted to accommodate learning curves

 Limitations of Learning Curve Analysis

 Learning curve analysis is appropriate only for labor-intensive operations involving


repetitive tasks where repeated trials improve performance. If the production process is
designed to have fast set-up times using robotics and computer controls, there is little
repetitive labor and thus little opportunity for learning to take place.

 The learning rate is assumed to be constant.

 Third, a carefully estimated learning curve might be unreliable because the observed

change in productivity in the data used to fit the model was actually associated with factors
other than learning.
67. Benefits and Limitations of expected value

 Benefits of Expected Value

Expected value analysis forces managers to think of all the possibilities that could happen
with each decision, and to evaluate decisions in a more organized manner.

 Limitations of Expected Value

It depends on repetitive trials, but in reality, most business decisions involve only one trial.

68. Identify and explain the different types of responsibility centers

 Revenue centers: responsible for sales in a department


 Cost centers: responsible for controlling costs in a department
 Profit centers: responsible for both costs and revenues in a department, a manager is
responsible for generating profits, managing revenue, and controlling costs
 Investment centers: responsible for investments, costs, and revenues in a department,
managers would be evaluated by relating the profit to its invested capital

69. Explain how budget variance reporting is utilized in a management by


exception environment.

The breakdown of variances into flexible budget variances and sales budget variances can
allow a firm to make business decisions based on these variances. Management by
exception is a method of focusing management attention on only significant variances from
the budget. Significant variances are the exceptions that require more attention than other
areas.

70. DM Variances Reasons

 Purchases Price
1) unfavourable materials price variance
- The purchasing function may be responsible under the assumption that it bought materials
that cost too much.
- The prices in the industry have risen, and standard costs should be updated.
2) favourable materials price variance
- that the purchasing function performed well by finding a lower-cost source for the
materials. But prices may have fallen, the purchasing function simply bought at the market
price, and standard costs should be updated.
- Another possibility is that the lower price may be attributable to lower-quality materials.

Direct Materials Quantity Variance


1) An unfavourable materials quantity variance
- theft of materials or other waste or shrinkage.
- using lower-quality materials that were purchased at a lower price.
- using unskilled (and lower cost) labor
2) favourable materials quantity variance
- that workers have been unusually efficient, for example, by reducing normal spoilage.
- they are producing lower-quality products with less than the standard quantity of materials.

71. DL Variance Reasons

Direct Labour Rate Variance

1) unfavourable labour rate variance

- is usually caused by assigning skilled workers to a production process.


- a new union contract resulted in a higher wage to workers.

2) favorable labor rate variance


- is usually caused by assigning workers with less skill to a job.

Direct Labor Efficiency Variance


1) unfavorable labor efficiency variance
- using workers with less skill than anticipated, in which case the labor rate variance may be
favorable.
- Another explanation is the use of low-quality materials that require extra time in the
production process
2) favorable labor efficiency variance
- is almost always desirable employees are working efficiently and have been able to
complete production in fewer hours than anticipated.

71. OVERHEAD VARIANCES Reasons


The variable overhead efficiency variance is related to the labor efficiency variance if
overhead is applied to production on the basis of direct labor hours. For example, if the
labor efficiency variance is unfavorable, the overhead efficiency variance also is
unfavorable because they are based on the same number of input hours.

72. Fixed Overhead VARIANCES Reasons


If sales are greater than expected, production increases, and the variance may be
favorable.
An unfavorable volume variance may be caused by low sales (the fault of the sales staff) or
by a production shutdown, perhaps due to a labor strike, power failure, or natural disaster.
In these cases, the variance is attributable to actions of the general administration of the
entity or to uncontrollable external factors

73. Return on investment (ROI)


ROI is an accounting measure of income (Profit) divided by an accounting measure of
investment in the business unit, is also called the accounting rate of return or the accrual
accounting rate of return
Advantage:
• Easily understood
• Comparable to interest rates and to rates of returns on alternative investments
• Widely used
• Comprehensive financial measure, includes all elements important to top management
revenues, costs, and investment
Disadvantage:
• Disincentive for high ROI units to invest in projects with ROI higher than the minimum rate
of return but lower than the unit's current ROI
• Can mislead strategic decision making, not as comprehensive as the balanced scorecard,
Which is linked directly to strategy
• Short-term focus, investments with long-term benefits might be neglected
74. Residual income (RI)
RI is an accounting measure of income minus a dollar amount for required return on an
accounting measure of investment, other words, RI is the income earned after the unit has
paid a charge for the funds it needs to invest in the unit
Advantage of residual income (RI)
• Supports incentive to accept all projects with ROI above the minimum rate of return
• Can use the minimum rate of return to adjust for differences in risk
• Can use a different minimum rate of return for different types of assets
• Congruent with top management goals

Disadvantage of residual income (RI)


• Favours large units when the minimum rate of return is low
• Not as intuitive as ROI
• Can be difficult to obtain a minimum rate of return
• Short-term focus, investments with long-term benefits might be neglected

75.Define transfer pricing and identify the objectives of transfer pricing


Determining profits for a responsibility center or segment involves assigning pricing for the
goods and services that pass between segments, transfer pricing sets prices for these
internally exchanged goods and services

76. Identify the methods for determining transfer prices and list and
explain the advantages and disadvantages of each method
Market price: A true arm's-length model because it sets the price for a good or service at
going market prices
• Keeps business units autonomous, forces the selling unit to be competitive with external
suppliers, and is preferred by tax authorities
Variable cost: Sets transfer prices at the unit's variable cost, or the actual cost to
produce the good or service less all fixed costs
• Is advantageous for selling units that have excess capacity because company wants to
encourage internal purchases
• Disadvantages of this method that it is not viewed favorably by tax authorities because it
lowers the profits
Full cost: Starts with the seller's variable cost for the item and then allocates fixed costs
to the price
This method may create less incentive for the buyer to purchase internally if the market
price is less and may create less incentive for the seller to reduce costs

Negotiated price: sets the transfer price through negotiation between the buyer and the
seller This method can make both buying and selling units less autonomous

77. If the company operates outside the country how this will affect its
performance measure
Companies in multinational may using low price in transfer price between company
branches to avoid high tax on profit in high tax on profit countries

78. Transfer pricing based on standard full cost or actual full cost which is
better for the company
Using standard full cost won’t transfer inefficiencies from selling to buying division but under
actual full cost inefficiencies are passed from selling to buying division
Advantage
• Standard full cost: No inefficiency passed to buying division and appropriate for longterm
decisions
• Actual full cost: Appropriate for Long term decisions
Disadvantage (both)
- Not appropriate for short term decisions
- demotivate selling division managers if they are at full capacity with competitive market
- demotivate selling division managers if they are evaluated at profit centers
- some managers would see it as a restrictions’ on their autonomy

79. Identify and describe the major internal control provisions of the
Foreign Corrupt Practices Act.
The FCPA mandated that public companies make and keep books, records, and accounts
that, in reasonable detail, accurately and fairly reflect the transactions and disposition of the
assets of the company. In addition, the company must devise and maintain a system of
internal accounting controls sufficient to provide reasonable

 The FCPA has two main provisions:


1) Anti-bribery provisions, and

2) Accounting provisions

80. What Things the internal auditor should informing to the


management and CEO ?
1) Fraud

2) Illegal acts

3) Material weaknesses and significant deficiencies in internal control

4) Significant penetrations of information security systems

Note; The internal auditor should evaluate fraud indicators and deciding whether any
additional action is necessary or whether investigation should be recommended.

81. Define and identify the objectives of a compliance audit and an


operational audit.
a. Compliance audit The auditor determines whether the firm has complied with applicable
laws and regulations as well as professional or industry standards or contractual
responsibilities.

b. Operational audit A nonfinancial audit that is intended to evaluate the effectiveness and
efficiency of the organization or one of its divisions, departments, or processes.

82.Identify and describe internal control objectives.


a. Internal controls are designed to provide reasonable assurance regarding

achievement of an entity’s objectives in five areas, which can be remem

bered by the acronym SCARE:

Safeguarding of assets

Compliance with applicable laws and regulations

Accomplishment of organizational goals and objectives


Reliability of financial reporting records

Efficiency of operations

83. Define the internal audit function and identify its functions AND
SCOPE
The primary purpose of an internal audit is to appraise the design of, effectiveness of, and
adherence to internal control policies and procedures and to assess the firm’s quality of
performance. The internal auditor ensures that any risk to the business is addressed and
verifies that the firm‟s goals and objectives are met efficiently and effectively.

The scope of internal auditing is broad and may include; the efficacy of operations; the
reliability of financial reporting; deterring, detecting, and investigating fraud; safeguarding
assets; and compliance with laws and regulations.

84.Define the objective of a disaster recovery plan and identify the


components of such a plan.
Disaster recovery policies and procedures—also referred to as business

continuance plans—are designed to enable the firm to carry on business in

the event that an emergency, such as a natural disaster,

A hot site is a backup facility that has a computer system similar to the one used regularly.
The hot site must be fully operational and immediately available, with all necessary
telecommunications hook-ups for online processing. A hot site also has current, live data
that is replicated to it from the live site, either by data communications or by on-site storage
of backup media.

A cold site is a facility where space, electric power, and heating and air conditioning are
available and processing equipment can be installed, though the equipment and the
necessary telecommunications are not immediately available. If an organization uses a cold
site, its disaster

85. BOD Responsibility


The primary responsibility of the board of directors is to ensure that the company operates
in the best interest of shareholders

1) Select and remove officers and Set the compensation of officers

2) Determine the capital structure 3) Add, amend, or repeal bylaws

4) Initiate fundamental changes, such as mergers and divestitures

5) Declare dividends.

86. Define and distinguish between preventive controls and detective


controls,
a. Preventive controls are those internal controls designed and implemented to prevent
errors or irregularities (fraud) from occurring. Detective controls are those designed and
implemented to discover errors or irregularities before they cause damage that requires
correction.

87. Describe the major internal control provisions of the Sarbanes-Oxley


Act
(Sections 201,203, 302, and 404).

Section 201—Prohibits external auditors from performing non audit services, such as
bookkeeping, internal audit functions, consulting, systems design, and so on.

Section 203—Requires audit partners to rotate at least every five years from an audit they
have been responsible for.

Section 302—Requires a public company’s principal officers (e.g. the CEO and CFO) to
certify as to the accuracy and completeness (include ing full disclosures) of the company’s
financial report(s) and, thus, the integrity of the report(s).

Section 404—Each annual report must contain an assessment of internal controls and
state management’s responsibility for establishing and maintaining an adequate internal
control structure.

88. Independence and Objectivity in Internal Auditing


The internal audit activity must be independent, which means it must be free from any
conditions that could threaten its ability to carry out its responsibilities in an unbiased
manner. “Unbiased” means impartial and without prejudice.

For example, if the internal audit activity were to report to a member of senior management,
the internal auditors might be reluctant to question anything potentially inappropriate that
they might discover relating to activities of the senior manager supervising their activity,
because doing so could threaten the auditors’ job security. For that reason, the internal
audit activity reports functionally to the board of directors and not to any officer of the
corporation.

Independence also means that the chief audit executive must have unrestricted access to
any member of senior management as well as to the members of the board of directors.
When an internal auditor wants to speak with the CEO, the CEO must be available.

Internal auditors individually must be objective. That means they must have an impartial,
unbiased attitude and must avoid any conflict of interest. A conflict of interest is a
competing interest that could make it difficult for the internal auditor to fulfill his or her duties
properly. For example, if an internal auditor has been responsible for a particular area of
operations within the past year, that auditor may not audit that area because of the potential
conflict of interest (the auditor could be auditing his or her own work). Furthermore, if an
internal auditor is assigned to audit a department where his or her best friend works, that
could also represent a conflict of interest.

In the event of a conflict of interest, the auditor should let the chief audit executive know
about the conflict of interest, and probably another auditor should be assigned to that audit
engagement.

The internal audit activity is to be independent.

The internal auditors individually are to be objective.

89. type of internal control


1. types of Internal Control (preventive - Directive l- detective – Corrective- Compensatory)
a. preventive control is one that prevents an error from entering the system. Preventive
controls are often highly visible and considered better than other forms of control because
they stop problems before they occur.

Ex. fences, locked doors, security guards, two people to open the mail, sound personal
practices, documentation of policies and procedures and a separation of duties policy.

b. Directive control (special type of corrective). The control that designed to encourage a
desirable event to occur ex. requiring all members of the internal audit department to be
CIAs.

Essentially, personnel policies and other directive controls are a special form of preventive
controls in that errors are prevented through the proper selection and training of employees.

c. Detective control is one that calls attention to an error that has already entered the
system before the error causes a negative outcome. An example is a petty cash count,
detective controls serves as a backup of the preventive controls.

d. Corrective control correct problems identified using the detective controls

e. Compensatory control

90. Components of Internal Control

(Control environment- Risk assessment- Control activities - Information and


communication- Monitoring)

1) Control environment sets the tone of an organization, influencing the control


consciousness of its people and provides discipline and structure

2) Risk assessment is the entity's identification and analysis of relevant risks as a basis for
their management.

a) Relevant risks include events and circumstances that may adversely affect an entity's
ability to initiate, authorize, record, process, and report financial data consistent with
financial statement assertions.

3) Control activities are the policies and procedures that help ensure that engagement
directives are carried out.
4) Information and communication systems support the identification, capture, and
exchange of information in a form and time frame that enable people to carry out their
responsibilities.

5) Monitoring is a process that assesses the quality of internal control performance over
time. It can be done by separate evaluation or on going activities. Ongoing monitoring are
procedures built into the normal recurring activities of the entity and include regular
management and supervisory

91. Component of control environment (IC HAMBO)???

1-Integrity and ethical value

2-Commitment to competence

3-Human resource policies and practices

4-Assignment of authority and responsibility

5-Management’s philosophy and operating style

5-Bored of directors or audit committee participation

6-Organizational structure

92.How the organizational structure effect control environment An

organization that is serious about internal control will design its lines of reporting and
authority such that incompatible duties are not combined in the same job function and
independent checks on performance are facilitated

93.External Audit independent

The independent auditor is nominated by the Audit Committee, and the independent
auditor’s appointment is ratified by shareholders at the annual meeting of shareholders

94.What are the segregations of duties examples?

1- Purchase payable cycle.

2- Sales receivable cycle.


3- Payroll cycle.

4-production cycle

95.The Authority and Responsibility of Internal Auditors ?

The CAE and staff of the internal audit

Activities are authorized to:

1· Have unrestricted access to all Functions, records, property, and Personnel.

2· Have full and free access to the audit committee.

3· Allocate resources, set frequencies, select subjects, determine scopes of work, and
apply the techniques required to accomplish audit objectives. · Obtain the necessary
assistance of personnel in units of the organization

Where they perform audits, as well as other specialized services from within or outside the
organization

‫نسألكم الدعاء بظهر الغيب‬


‫بأن يشفي هللا أمي شفاء ال يغادر سقما‬

‫و أن يوفقني هللا و يكتب لي و ألسرتي و أهلي الخير‬

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