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CIA Part 1 Table of Contents
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Table of Contents
Exam Introduction ............................................................................................................. 1
Box Styles Used in This Book 1
Section I – Mandatory Guidance – Introduction ............................................................. 2
The Mission of Internal Audit ........................................................................................... 3
Mandatory Guidance ......................................................................................................... 3
The Core Principles 4
Introduction to the Standards 5
Types of Standards 6
Recommended Guidance.................................................................................................. 8
A. Definition of Internal Auditing ...................................................................................... 8
The Purpose, Authority, and Responsibility of the Internal Audit Activity 8
The Internal Audit Charter 9
Organizational Status of the Internal Audit Activity 11
Consulting Services 13
B. IIA Code of Ethics ....................................................................................................... 14
C. International Standards .............................................................................................. 16
C1. Comply with the IIA’s Attribute Standards ............................................................. 16
C2. Maintain Independence and Objectivity .................................................................. 16
Independence and Objectivity 16
Fostering Independence 17
Direct Interaction with the Board 19
Fostering Objectivity 19
C3-4. Proficiency and Necessary Skills ......................................................................... 24
Standard 1210: Proficiency 25
C5. Exercise Due Professional Care .............................................................................. 33
Standard 1220: Due Professional Care 33
C6. Promote Continuing Professional Development .................................................... 35
C7. Quality Assurance and Improvement Program ...................................................... 37
1. Internal Assessments (Standard 1311) 38
2. External Assessments (Standard 1312) 40
Standard 1320: Reporting on the Quality Assurance and Improvement Program 42
Standard 1321: Conforming to the Standards of Internal Auditing 44
Standard 1322: Disclosure of Noncompliance 45
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Section II – Internal Control & Risk – Introduction ....................................................... 47
A. Types of Controls (e.g. Preventive, Directive, Input, Output, etc.) ......................... 48
Defining Control 48
Classifying Controls 48
Timing of the Controls 52
Establishing the Control Process 54
Limitations of Internal Controls 59
B. Management Control Techniques ............................................................................. 59
Monitoring the Control System 62
Controls in the Accounting Cycles 63
Revenue-Receivable Cycle 63
Purchases-Payable Cycle 66
Payroll Cycle 68
Cash Receipts Cycle 69
Cash Disbursement Cycle 70
C. Internal Control Framework Characteristics & Use ................................................. 71
The COSO Model 71
D. Alternative Control Frameworks ................................................................................ 79
The CoCo Model 79
The Cadbury Model (Precursor to Turnbull) 80
The Turnbull Report 80
E. Risk Vocabulary and Concepts.................................................................................. 82
Benefits of Risk Management 83
Types of Risk 84
Internal and External Risk 85
The Risk Management Process 86
Risk Appetite and Risk Tolerance 93
Managing Operations Risk 94
Managing Finance Risk 94
Enterprise Risk Management (ERM) 95
Cost-Benefit Analysis in Risk Assessment and Decision Making 101
F. Fraud Risk Awareness .............................................................................................. 102
Types of Fraud 102
Conditions Necessary for Committing Fraud 103
Management Fraud 105
Responsibility for Fraud Detection 107
Responsibility of the Internal Auditor 107
Conducting a Fraud Investigation 108
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Section III – Conducting Internal Audit Engagements – Introduction ...................... 112
A. Data Gathering .......................................................................................................... 113
A1. The Preliminary Survey .......................................................................................... 113
Reporting Survey Results 115
A2. Checklists and Questionnaires .............................................................................. 116
Questionnaires 116
A3. Interviewing ............................................................................................................. 118
A4. Observation ............................................................................................................. 122
A5. Conduct Engagement to Identify Key Risks and Controls .................................. 123
Types of Risk Exposures 124
Assessing Risks for Likelihood and Impact 126
Risk Mapping Based on Likelihood and Impact 127
Responding to Risks 127
The Use of Matrices 128
A6. Sampling .................................................................................................................. 130
Statistical and Nonstatistical Sampling 131
Choosing the Correct Population 132
Areas in Which Sampling is Used 132
Sampling Risk 133
Confidence Level and Precision 134
Determining Sample Size 134
Methods of Attribute Sampling 136
Dealing with Errors in the Sample 137
Tolerable Error and Sample Error 138
Extrapolating Variables Sampling Results to the Population 138
Probability-Proportional-to-Size Sampling (PPS) 140
Using a Random Number Table 142
B. Data Analysis and Interpretation ............................................................................. 145
B1. Computerized Audit Tools and Techniques ......................................................... 145
Data Mining and Extraction 145
Testing the Computer System 146
Computer-Assisted Audit Techniques (CAAT) 147
Other CAAT Methods 148
B2. Spreadsheet Analysis ............................................................................................. 151
Spreadsheet Use 151
Spreadsheet Risk 152
B3. Analytical Review Techniques ............................................................................... 154
Identifying the Cause of the Problem 158
Techniques Listed in Implementation Guide 2320 161
1. Comparisons with Budgets (Variance Analysis) 161
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2. Trend 161
3. Regression Analysis 163
4. Ratio Analysis 166
B4. Benchmarking ......................................................................................................... 176
Benchmarking Process 176
Types of Benchmarking 177
Limitations of Benchmarking 177
B5. Draw Conclusions ................................................................................................... 178
Results of the Engagement 178
Criteria for Observations and Recommendations 180
C. Data Reporting .......................................................................................................... 181
C1. Reporting Test Results to Auditor-in-Charge ....................................................... 181
C2. Develop Preliminary Conclusions Regarding Control ......................................... 183
D. Documentation and Working Papers ...................................................................... 184
Function of Working Papers 184
Contents of the Working Papers 185
Computer or Electronic Working Papers 186
Types of Working Paper Files 186
Summaries in Working Papers 188
Control of the Working Papers 190
Retention of the Working Papers 192
Granting Access to the Working Papers 193
E. Process Mapping, Including Flowcharting ............................................................. 194
Flowcharts 194
Data Flow Diagram 195
Narratives 196
F. Evaluate Relevance, Sufficiency, and Competence of Evidence .......................... 196
Hierarchy of Reliability and Persuasiveness of Audit Evidence 199
Appendix A: Glossary ................................................................................................... 203
Appendix B: Sample Internal Audit Activity Charter .................................................. 206
Appendix C: Practice Advisories for Quality Assurance and Improvement Program208
Appendix D: 40 Common Forms of Fraud ................................................................... 216
Answers to Questions ................................................................................................... 218
CIA Part 2 Table of Contents
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Table of Contents
Part 2 Exam Introduction .................................................................................................. 1
Box Styles Used in This Book 1
Section I – Managing the Internal Audit Function – Introduction .................................. 2
Managing the Internal Audit Function 3
Topic I A. Strategic Role of Internal Auditing .................................................................. 3
A1. Initiating and Managing Change ................................................................................ 4
A2. Build and Maintain Networking with Others in the Organization ............................ 8
Other Organization Executives 8
The Audit Committee 8
A3. Organize and Lead a Team in Mapping and Business Improvement ..................... 9
Business Process Mapping 9
Improving the Process 10
A4. Assess and Foster Ethical Climate of Board and Management ............................ 11
Ethics Advocates 12
Resolving Complaints 14
Fostering an Ethical Climate in the Company 15
Code of Conduct Policy 16
A5. Educate Senior Management ................................................................................... 16
A6. Internal Audit Key Performance Indicators ............................................................ 17
Establishing the Performance Measurement Process 19
Examples of Internal Audit Effectiveness and Efficiency Metrics 21
Reporting and Monitoring KPIs 22
A7. Coordinating Activities with Other Bodies and Groups ........................................ 23
Coordination with External Auditor 24
Coordination with Regulatory Bodies 27
Coordination with Other Internal Assurance Functions 27
Assurance Maps 29
A8. Assess Adequacy of Performance Measurement System .................................... 31
Topic I B. Operational Role of Internal Audit ................................................................ 32
B1. Developing Policies and Procedures ...................................................................... 32
Planning 34
Setting the Goals of the Internal Audit Activity 34
B2. Review the Role of Internal Audit in the Risk Management Process ................... 36
B3. Direct Administrative Activities ............................................................................... 36
Developing the Engagement Work Schedules 36
Managing Resources 37
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The Internal Audit Budget 38
Recruiting and Promoting 38
Job Descriptions 39
Training, Staff Development, and Performance Evaluations 39
B4. Interviewing Candidates for Internal Audit Positions ............................................ 40
Asking Good Questions 41
Listening Effectively 41
B2. Review the Role of Internal Audit in the Risk Management Process ................... 41
Possible Roles for Internal Audit 43
Determination of Role of IAA in Risk Management 44
B5. Report on the Effectiveness of Risk Management ................................................. 45
Assessing the Adequacy of Risk Management Processes for Formal Consulting Services 48
B6. Report on Effectiveness of Internal Control Framework ....................................... 49
B7. Maintain an Effective Quality Assurance and Improvement Program ................. 52
1. Internal Assessments (Standard 1311) 53
2. External Assessments (Standard 1312) 55
Standard 1320: Reporting on the Quality Assurance and Improvement Program 57
Standard 1321: Conforming to the Standards of Internal Auditing 59
Standard 1322: Disclosure of Noncompliance 60
Topic I C: Establish Risk-Based Internal Audit Plan .................................................... 62
C1-4. Identify and Prioritize Engagements .................................................................... 62
C5. Determine Resource Requirements ........................................................................ 65
C6. Communicate Plans and Obtain Board Approval .................................................. 66
Types of Engagements ................................................................................................... 68
A. Conduct Assurance Engagements ............................................................................ 69
1. Risk and Control Self-assessments 69
a) Facilitated Approach (Facilitated Team Workshops) 70
b) Questionnaire Approach (Surveys) 72
c) Self-Certification Approach 72
2. Audits of Third Parties and Contract Auditing 73
3. Quality Audit Engagements 76
4. Due Diligence Audit Engagements 79
5. Security Audit Engagements 81
6. Privacy Audit Engagements 81
7. Performance Audit Engagements 83
8. Operational Audit Engagements 84
9. Financial Audit Engagements 85
B. Compliance Audit Engagements ............................................................................... 92
Environmental Audits 92
C. Consulting Services ................................................................................................... 96
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Considerations for Formal Consulting Engagements 96
Due Professional Care in Consulting Engagements 98
C1. Internal Control Training 100
C2 Business Process Mapping 101
C3. Benchmarking 101
C4 System Development Reviews 103
C5 Design of Performance Measurement Systems 104
Other Consulting Engagements 105
Section II – Managing Individual Engagements .......................................................... 106
Topic II A. Plan Engagements ...................................................................................... 106
The Engagement Planning Process 107
Planning Considerations 108
A1. Establish Engagement Objectives/Criteria and Finalize Scope .......................... 109
Engagement Objectives 109
Engagement Scope 110
A2. Plan Engagement to Assure Identification of Key Risks and Controls .............. 111
The Preliminary Survey 112
Documentation of the Preliminary Survey 114
A3. Complete a Detailed Risk Assessment of Each Audit Area ................................ 115
A4. Determine Engagement Procedures and Prepare Work Program ...................... 117
Engagement Work Program 117
Engagement Procedures 118
Sufficiency of Evidence 118
Reliability of Evidence 119
Relevant Evidence 119
Useful Evidence 119
Sources of Evidence 119
Types of Evidence 120
Selected Engagement Procedures 120
Tracing and Vouching 121
A5 – 6. Determine Level of Resources Needed and Construct Schedule ................. 124
Staff Schedule and Schedule Aids 125
Topic II B. Supervising the Engagement ..................................................................... 125
B1. Direct/Supervise Individual Engagements ............................................................ 125
B4. Review Working Papers ......................................................................................... 125
Supervision 125
Review Working Papers 126
B2. Nurture Instrumental Relations, Build Bonds and Work with Others................. 127
B3. Coordinate Work Assignments Among Team Members ..................................... 127
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B5. Conduct Exit Conference ....................................................................................... 128
Objectives of Exit Conference 128
B6. Complete Engagement Staff Performance Appraisals ........................................ 129
Topic II C. Communicating Engagement Results ....................................................... 130
C1. Initiate Preliminary Communication with Client ................................................... 130
C2. Communicate Interim Progress ............................................................................. 131
C3 – 4. Develop Recommendations When Appropriate and Prepare Report ........... 132
Criteria for Communicating 132
Guidelines for Quality Communications 137
C5 – 8. Approve and Distribute Report ........................................................................ 139
Management’s Response to the Report 139
Distribution of the Report 140
Communicating Sensitive Information 142
Topic II D. Monitor Engagement Outcomes ................................................................ 146
Monitor Engagement Outcomes and Conduct Appropriate Follow-Up 146
The Appropriate Method of Follow-Up 147
Methods Monitoring Progress 148
Management’s Acceptance of Risk 149
Section III – Fraud Risks and Controls ........................................................................ 151
Topic III A. What Fraud is and Types of Fraud ............................................................ 151
Committing Fraud 152
Topic III B, C, and E. Fraud Engagements ................................................................... 154
Responsibility for Fraud Prevention and Detection 154
Assessment of Fraud Risk for the Organization 155
Internal Audit Responsibilities During Engagement 157
Fraud Investigations 159
Topic III D. Complete a Process Review to Improve Controls ................................... 161
Topic III F. Support a Culture of Fraud Awareness .................................................... 162
IIIG. Interrogation and Investigation Techniques ....................................................... 165
Topic III H. Forensic Auditing ....................................................................................... 168
Appendix A: Sample Code of Conduct ........................................................................ 169
Appendix B: Practice Advisories for Quality Assurance and Improvement Program ............... 171
Answers to Questions ................................................................................................... 179
CIA Part 3 Table of Contents
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Table of Contents
Exam Introduction ............................................................................................................. 1
Section I – Governance and Business Ethics ................................................................. 2
IA. Corporate Governance Principles .............................................................................. 2
Corporate Governance and Risk Assessment, Internal Control, and Risk Management 3
Defining Governance 4
Principles of Good Governance 5
Cornerstones of Good Corporate Governance 6
The Governance Process Relationship with Risk and Control 7
Internal Audit’s Role in Corporate Governance (PA 2110-3) 8
IB. Environmental and Social Safeguards ....................................................................... 9
IC. Corporate Social Responsibility ............................................................................... 12
Section II – Risk Management ........................................................................................ 15
IIA. Risk Management Techniques ................................................................................. 15
Benefits of Risk Management 16
Risk Appetite 16
Risk Appetite, Capacity, and Tolerance 17
Types of Risk 21
Internal and External Risk 22
The Risk Management Process 23
ISO 31000 Principles, Framework and Process 30
IIB. Organizational Use of Risk Frameworks – ERM ..................................................... 34
Cost-Benefit Analysis in Risk Assessment and Decision Making 42
Section III – Organizational Structure/Business Processes and Risk ........................ 43
IIIA. Control Implications of Different Organizational Structures ................................ 43
Elements of the Organizational Structure 44
IIIB. Structure of the Organization ................................................................................. 46
Components of an Organization 48
Departmentation 51
Matrix Organizations 52
Span of Control 52
IIIC. Typical Schemes in Various Business Cycles ...................................................... 53
Supply Chain Management 53
Lean Manufacturing 54
IIID. Business Process Analysis .................................................................................... 56
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Tools for Analyzing Business Processes 56
IIIE. Inventory Management Techniques & Concepts .................................................. 65
Inventory Costs 65
Other Inventory Terms 66
Methods of Inventory Cost Management 67
Other Inventory Systems 69
IIIF. Electronic Commerce .............................................................................................. 70
Business-To-Business (B2B) 70
Electronic Data Interchange (EDI) 71
Business-To-Consumer (B2C) 72
Consumer-To-Consumer (C2C) 72
Electronic Payment Processing 73
IIIG. Business Development Life Cycles ....................................................................... 74
IIIH. The International Organization for Standards (ISO) ............................................. 77
III I. Outsourcing Business Processes .......................................................................... 78
Section IV – Communication .......................................................................................... 79
IVA. Communication ....................................................................................................... 79
The Communication Process 79
Interpersonal Communication 81
Channels of Communication in Organizations 81
Problems (Noise) in Communication 84
Methods to Improve Communication 85
Listening 85
Electronic Communications 87
IVB. Stakeholder Relationships...................................................................................... 89
Managing Stakeholders 90
Section V – Management and Leadership Principles ................................................... 91
VA. Strategic Management ............................................................................................. 91
VA 1. Global Analytical Techniques ............................................................................... 96
Industry Structures (And How Structure Impacts Pricing) 96
Porter’s Five Forces Model 99
Competitive Strategies 102
Competitive Analysis 107
Market Signals 110
Industry Evolution 111
VA 2. Industry Environment ......................................................................................... 115
Competitive Strategies for Different Types of Industries 115
Competition in Global Industries 119
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VA 3. Strategic Decisions ............................................................................................. 122
Analysis of Integration Strategies 122
Capacity Expansion 124
Entry into New Businesses 126
VA 4. Forecasting .......................................................................................................... 127
Forecasting Techniques ............................................................................................... 127
Using Regression Analysis in Forecasting 127
Using Probability Concepts in Forecasting 137
VA 5. Quality Management............................................................................................ 141
Quality Management and Productivity 141
Total Quality Management (TQM) 141
Cost of Quality 143
Measuring Quality 144
Six Sigma 144
VA 6. Decision Analysis ................................................................................................ 144
VB. Organizational Behavior ........................................................................................ 145
VB 1. Organizational Theory ......................................................................................... 145
VB 2. Organizational Behavior ..................................................................................... 145
Motivation Theories 145
Needs-based Theories of Motivation 145
Process-Based Motivational Theories 147
Impact of Job Design 150
VB 3. Group Dynamics .................................................................................................. 151
Traits of Group Dynamics 151
Stages of Group Development 155
Organizational Politics 156
VB 4. Human Resource Processes .............................................................................. 157
Human Resource Planning 157
Employee Recruitment 157
Employee Selection 158
Career Development 160
VB 5. Risk/Control Implications of Different Leadership Styles ................................ 160
VB 6. Performance ......................................................................................................... 160
Compensation and Benefits 166
VC Management Skills and Leadership Styles ........................................................... 167
VC 1. Lead, Inspire, Mentor and Guide People ........................................................... 167
VC 2. Create Group Synergy in Pursuing Collective Goals ....................................... 167
Studies on Leadership 167
Contingency Theories of Leadership 168
Transformational Leadership 170
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VC 3. Team Building and Assessing Team Performance .......................................... 171
Participative Management 171
Team Effectiveness 173
VD. Conflict Management ............................................................................................. 174
VD 1. Conflict Resolution .............................................................................................. 174
VD 3. Conflict Management .......................................................................................... 174
Winning and Losing 175
Conflict Triggers 175
Principles of Conflict Management 176
Conflict Management Strategies 177
VD 2. Negotiation Skills ................................................................................................ 181
VD 4. Added-Value Negotiating .................................................................................... 181
Approaches to Negotiations 181
Effective Negotiations 182
Overcoming Resistance 182
Added-Value Negotiating 183
Principled Negotiation 183
Third-Party Negotiations 184
VE. Project Management / Change Management ........................................................ 185
VE 1. Change Management ........................................................................................... 185
VE 2. Project Management Techniques ....................................................................... 187
Section VI – Information Technology and Business Continuity................................ 190
Information Technology (IT) ......................................................................................... 191
General Controls 192
Application Controls 197
IT Control Frameworks ................................................................................................. 201
COBIT Components 203
COBIT Maturity Model 204
Functional Areas of Information Operations 205
Systems Development .................................................................................................. 206
Program Development and Documentation Controls 213
Computer Programs and Software .............................................................................. 215
Systems Software.......................................................................................................... 215
Operating Systems 215
Evaluation and Selection of Vendor-Supplied software 216
Software Piracy 217
End-User Computing 217
Organizing the Information Systems Function 219
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Data Communications and Telecommunications Networks ...................................... 221
Voice over Internet Protocol (VoIP) 222
Types of Networks 223
Client/Server Networking 226
The Internet .................................................................................................................... 227
Telecommunications and Network Auditing 229
System Security ............................................................................................................. 230
Viruses, Trojan Horses, and Worms 231
Cybercrime and Defenses Against Cybercrime 232
Encryption 235
Privacy 236
Business Continuity / Contingency Planning ............................................................. 237
Disaster Recovery 238
Databases....................................................................................................................... 240
Accessing Files 240
History of Database Development 241
Entity-Relationship Modeling 241
Database Structure 242
Distributed Databases 243
Deadly Embrace 243
Database Management System (DBMS) 243
Database Development 244
Database Use and Maintenance 244
The Database Administrator 245
Enterprise Resource Planning ..................................................................................... 246
Appendix A – 34 IT Processes ...................................................................................... 248
Answers to Questions ................................................................................................... 250
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Table of Contents
Section VII – Financial Management ................................................................................ 1
A 1. Financial Accounting Concepts and Principles ...................................................... 1
Objectives of Accounting Information 1
Qualitative Characteristics of Accounting Information 2
Elements to the Financial Statements 3
Recognition of Financial Statement Elements 4
Accrual Accounting 4
External Financial Statements .......................................................................................... 5
1. The Balance Sheet (Statement of Financial Position) 5
2. Statement of Comprehensive Income 8
3. Statement of Changes in Equity 12
4. The Statement of Cash Flows (IAS 7) 12
5. Notes to the Financial Statements 16
A 2. Intermediate Concepts of Financial Accounting ................................................... 17
Bonds 17
Leases 18
Pensions 19
Types of Pension Plans 19
Intangible Assets (IAS 38) 21
Amortization and Impairment of Intangible Assets 22
Research & Development 23
A 3. Advanced Concepts of Financial Accounting ....................................................... 23
Accounting for Business Combinations (IFRS 3) 23
Consolidation of Financial Statements (IAS 27) 25
Partnerships 27
Accounting for Foreign Currency Denominated Transactions 28
A 4. Financial Statement Analysis (Ratio Analysis) ..................................................... 29
Comparative Financial Statement Analysis 29
Vertical Common-Size Financial Statements 29
Horizontal Index-Number Trend Series Analysis 31
Ratio Analysis 32
A 5. Capital Structure and Types of Debt and Equity ................................................... 42
Bonds 44
The Bond Instrument 47
Equity 55
Cost of Capital 62
A 6. Financial Instruments (Derivatives) ....................................................................... 73
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Forward Contracts 74
Futures Contracts 74
Stock Options 77
A 7. Cash Management ................................................................................................... 83
The Operating Cycle 84
Cash Flow Management 88
A 8. Valuation Models ..................................................................................................... 94
The Fair Value (Appropriate Price) of a Share of Stock 94
A 9. Business Valuation ................................................................................................ 100
A 10. Inventory Valuation .............................................................................................. 103
Valuing the Inventory When It Is Purchased 103
Determining Which Item Is Sold 103
The Frequency of Determining Inventory Balances 106
Lower of Cost or Net Realizable Value 109
Inventory Calculations 110
A 11. Capital Budgeting ................................................................................................ 113
The Stages in Capital Budgeting 114
Identifying and Calculating the Relevant Cash Flows 114
Irrelevant Cash Flows 117
Capital Budgeting Methods 118
1) Payback Period or Payback Method 118
2) Discounted Payback Period 119
3) Net Present Value (NPV) Method 120
4) Internal Rate of Return (IRR) 123
5) The Accounting (or Average) Rate of Return 123
A 12. Taxation Schemes ............................................................................................... 125
B. Managerial Accounting ............................................................................................ 130
B 1 and B 2. General Concepts and Costing Systems ............................................... 130
Classifications of Costs 130
The Difference Between Costs and Expenses 130
Direct Versus Indirect Costs 130
Costs Based on Level of Activity (Fixed, Variable and Mixed Costs) 131
Production vs. Period Costs 134
Cost of Goods Sold (COGS) and Cost of Goods Manufactured (COGM) 137
Costing Systems ........................................................................................................... 139
Introduction to Cost Measurement Systems 139
Overhead Allocation ...................................................................................................... 142
Manufacturing Overhead Allocation 143
Traditional (Standard) Allocation Method 144
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The Process of Accounting for Factory Overhead 148
Over-Applied and Under-Applied Manufacturing Overhead 149
B 3. Cost Concepts ........................................................................................................ 152
Process Costing ............................................................................................................ 152
Steps in Process Costing 154
Process Costing Summary 163
Job-Order Costing ......................................................................................................... 164
Operation Costing ......................................................................................................... 164
Life-cycle Costing .......................................................................................................... 165
Activity-Based Costing ................................................................................................. 167
Variable and Absorption Costing ................................................................................. 172
Fixed Factory Overheads Under Absorption Costing 173
Fixed Factory Overheads Under Variable Costing 173
Effects of Changing Inventory Levels 173
Income Statement Presentation 174
B 4. Relevant Costs – Decision Making ....................................................................... 177
Make-or-Buy Decisions 177
Special Order Decisions 180
Sell or Process Further Decisions 183
Disinvestment Decisions 185
B 5. Cost-Volume-Profit (CVP) Analysis ...................................................................... 186
Contribution Margin Income Statement 189
Breakeven Analysis 189
Profit Requirement 193
B 6. Transfer Pricing ..................................................................................................... 201
B 7. Responsibility Centers and Responsibility Accounting ..................................... 208
Evaluating the Manager vs. Evaluating the Business Unit 210
Allocation of Common Costs 210
The Contribution Income Statement Approach to Evaluation 212
B 8. Operations Budgeting ........................................................................................... 216
The Budgeting Cycle 216
Budget/Profit Planning Manual 216
The Annual/Master Budget or Profit Plan 217
The Master Budget 217
Development of the Master Budget 218
Section VIII – Global Business Environment .............................................................. 230
A. Economic / Financial Environments ....................................................................... 230
The Decision to Market Internationally 230
Evaluating Alternatives for International Operations 230
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Designing an International Marketing Program 231
Successful Global Marketing 233
Global Development and Expansion Strategies 233
Transnational Corporations 234
B. Cultural/Political Environments ............................................................................... 235
Attitudes toward Global Operations 235
Cultures and their Differences 236
National Culture Differences 237
Leadership in Global Organizations 238
Training and Working in a Foreign Country 239
C. Legal and Economics – General Concepts ............................................................ 240
Forms of Business Organization 240
Contracts 242
National Income Accounting 246
Economic Growth 249
Unemployment and the Economy 251
Costs of Unemployment 252
Full Employment and the Natural Rate of Unemployment 253
Inflation and the Economy 253
Costs of Inflation 254
D. Impact of Government Legislation and Regulation on Business ......................... 255
Monetary Policy in the United States 255
Federal Reserve System 255
Controlling the Nation’s Money Supply and Short-Term Interest Rates 255
Fiscal Policy 257
Strengths and Weaknesses of Monetary Policy and Fiscal Policy 260
Governmental Regulations 261
International Trade 263
Answers to Questions ................................................................................................... 265