Part 2 – SU1 rev. 2015

Report
CMA Part 1
Financial Decision Making
Introduction to the CMA Exam and Essays on the Exam
Ronald Schmidt, CMA, CFM
Ethics for Management
Jim Clemons, CMA
Introduction to the CMA Prep-course
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Schedule of classes and topics
Instructional mode/format
Instructors
Resources outside of the lectures
– Instructor/mentor
– Study material
The ICMA Requirements for the CMA
Designation
• Become a member, pref. choosing your local chapter
• Request to take the exam, and register for an exam 12 months after being
admitted to the Certification Program
• Pass both parts in 3 years
• Satisfy the education requirements
• Satisfy the experience requirement
• Comply with the IMA’s Statement of Ethical Professional Practice
• Once you are a CMA
– Beginning the calendar year after successful completion of the CMA exam, 30
hours of CPE must be completed
– This course can help you achieve that
CMA Exam Prep
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Read the Study Units to be lectured on next
Take the two multiple-choice quizzes
Identify if missed questions were do to concept or strategy
Re-read the concepts missed
Share with us what you are having trouble with by no later than the Wednesday prior to
the lecture
Attend lecture and ask questions
Prepare a 20 question quiz on the lectured material using Gleim’s test bank
Identify any concepts still not clear and contact Instructor/Mentor to review
Practice Essays as much as possible throughout the course, completing ideally one per
week until the end of the course
Keep track of concepts which still seem difficulty or unclear and convey those to us
prior to the Cram Session
Exam
• It is recommended that you register for the exam as
early as possible.
– Exams are given at Prometrics Testing Centers
• Class (cram session) will conclude on Feb. 14th, which
will give you 2 weeks to take the exam
• DO NOT(!) plan a strategy that you will plan any “catchup” studying after our cram session
– You should progress through the course in an “even” a
manner possible – plan for a consistent study plan
Exam format
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3 hrs - 100 multiple choice questions = approx. 1.8 (we recommend 1.5) minutes
per question (on average).
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Find ways to “bank” time
Look for short-cuts
You will find that you most question do not seem “easy”, don’t get discouraged
You “earn” points for each question answered correctly
Some questions are “test” questions that carry no point value. You will not know which ones
they are
– Extra time can be carried forward to the Essay portion
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1 hr - 2 Essay scenarios with up to 10 sub-parts
– You can’t go back to multiple-choice part once you enter this portion of the exam
– Whatever you have typed on the screen will be saved as your answer, irrespective if the timer
runs out on you
Exam format
Part 2 – Financial Decision Making
4 hours, 100 multiple-choice questions and two 30-minute essay scenarios
• Exam Content Specific Outline (CSO) includes:
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Financial Statement Analysis (25%)
Corporate Finance (25%)
Decision Analysis (25%)
Investment Decisions (20%)
Professional ethics (5%)
If you find you have weaknesses in any topic ref. Appendix C for ref. the
appropriate sub –units
Exam Structure & Feedback
• Exam structure
– 3 hours of multiple choice questions ~ 75% of score
– 1 hour of essay questions ~ 25% of score
• Must earn at least 50% on multiple choice section in order
to advance to essay section
• Cannot return to the multiple choice section once you’ve
advanced to the essay section of the exam
Exam Strategy
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To pass the exam, you need:
Knowledge
Confidence
Effective Time Management
Commitment!
Day of the Exam
Relax - “NO ONE HAS DIED FROM FAILING THE CMA EXAM”,
there is life beyond and we will help you pass it!!!!
Test Stategy
• Multiple Choice questions
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Answer in consecutive order
Try to ignore the answer choices (don’t get tricked)
Read the question carefully (sometimes before the scenario/data)
Determine the correct answer
Read the answer choices carefully and completely (most common
wrong answers are the alternative choices)
– Chose the best answer (there are correct and “more” answers)
– Guess if you have to (either educated, what you think the ICMA is
testing, or if you have not idea the same letter)
Most common reasons for missing
questions
1. Misreading the requirement (stem) – Read the question first
2. Not understanding what is required
3. Making a math error – Try to not do calculations of paper first,
with the idea of “transferring” to the exam later. If you know how
to use your memory button(s) well on your calculator, use it (i.e.
save sub-calculations in your calculator).
4. Applying the wrong rule or concept
5. Being distracted by one or more of the answers – the most
common wrong answers are the incorrect alternatives
Most common reasons for missing
questions
6.
Incorrectly eliminating answers from considerations – read all
answers first, some are more correct or complete then others
7. Not having any knowledge of the topic tested – don’t agonize
over it. If possible try to make an educated guess by eliminating
obvious wrong answers. If you guess, use the same letter each
time.
8. Employing bad intuition when guessing
The essays
• Remember, 2 essay questions with 3 to 6 parts each!
• This section provides a great opportunity to earn
partial credit
– Be sure to show your work and assumptions
– You can scroll between questions and scenarios within the
essay section of the exam
• Helps to determine how much time you will need for responses
Essay Questions
• Pay close attention to verbs
– E.g., if it says compare or contrast, don’t define something
• Read the entire question to understand all requirements
– You may have more than one requirement, for example:
“Define abc and interpret its applicability to xyz.”
• Grammar and writing skills
– Focus is on use of standard English, organization and clarity
– Graders are looking for effective writing skills
Essay Questions
• Be brief and to the point
– It’s ok to use bullet points!!!
• Do not leave a questions blank
– If short on time, at least write an outline of your main points
• Graders are looking to give you points, not take them away
– Make it as easy as possible for graders to give you points!
Essay Questions
• Type your responses into a text box
– Similar to MS Word, but with more simple
functionality
– Effective January 2013, the spreadsheet tool is no
longer being used on the CMA exam
• Be sure to use all of the time available to you
Essay
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There is a sample grading rubric for essay portion enclosed in slide presentation. This is
interesting because this shows that the graders only give points for correct answers. They
don't deduct for wrong answers. Notice on rubric for the second sample essay, there are
multiple points that could be earned for each question, but the total points for each question
is less than the sum for all the possible answers. This means that there is more than one
correct answer. Once you get the maximum points for this part, the grader moves on. You
don't get more points for embellishing.
Don't embellish. Be direct. Be simple. Use bullet points. Show your work, including
calculations. Use proper grammar and English. Then move on to the next question.
Practice answering essays online. This will get you used to how to type calculations and make
bullet points.
Use ALL the time you have on your essay questions, even if you pull time from your multiple
choice section.
The more you study, the better you will do. It is as simple as that.
Sample Essay Question #1
A City owns and operates a community swimming pool. The pool is open each year for 90 days during
the summer months of June, July, and August. A daily admission is charged to patrons of the pool. By
law, 10% of all recreational and sporting fees must be remitted to a state tourism promotion fund. The
City Manager has set a goal that pool admission revenue, after subtracting the state fee and variable
costs, must be sufficient to cover the fixed costs. Variable costs are assumed to be 15% of gross
revenue. Fixed costs for the three-month period total $33,000. The following budget for the pool has
been prepared for the current year.
Adult admissions: 30 per day x 90 days x $5.00
$ 13,500
Student admissions: 120 per day x 90 days x $2.50
27,000
Total revenue
40,500
State tourism fee
4,050
Net revenue
36,450
Variable costs
6,075
Fixed costs
33,000
Expected deficit $
(2,625)
The City Manager is trying to determine what admission mix is necessary to break even and what
actions could be taken to eliminate the expected deficit.
Essay Requirements (partial)
1. Given the anticipated mix of adult and student
admissions, how many total admissions must
the pool have in order to break even for the
season?
2. Regardless of the admissions mix, what is the
highest number of admissions that would be
necessary to break even for the season?
Sample Essay Response
Question 1:
Given the anticipated mix of adult and student admissions, how many total
admissions must the pool have in order to break even for the season?
Sample Response:
The contribution margin is 75% or $3.75 per adult admission, and $1.875 per student
admission. The mix is 20% adult (30 ÷ 150) and 80% student (120 ÷ 150).
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Calculate the weighted average contribution margin (WACM)
WACM = 0.20 ($3.75) + 0.80 ($1.875) = $2.25
The breakeven point in units is calculated as follows:
Fixed costs ÷ WACM
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Fixed costs = $33,000
WACM = $2.25
$33,000 ÷ $2.25 = 14,667 admissions per season
Sample Essay Response
Question 2:
Regardless of the admissions mix, what is the highest number of
admissions that would be necessary to break even for the season?
Sample Response:
To calculate the highest number of admissions to break even, you
would assume that all admissions are students. That’s because the
student admission price is the lowest of all admission prices.
– The breakeven point in units is calculated as follows:
• Fixed costs ÷ Contribution margin for students
– Fixed costs = $33,000
– Contribution margin for students = $1.875
– $33,000 ÷ $1.875 = 17,600 admissions per season
Ethics - Overview
CMA candidates need to be prepared to answer ethics questions
that will be integrated with any of the other topics, which can be
tested at all three levels of difficulty, requiring you:
• Recall aspects of the Foreign Corrupt Practices Act and
the IMA Statement of Management Accounting
• Evaluate and apply the different aspects as they relate
to typical business situations
• Memorize IMA’s Statement of Ethical Professional
Practice
Ethics - Overview cont.
• Questions can come in either multiple choice questions
or in essay format
• And require you not only to identify the nature of the
ethical dilemma but how to resolve it
• Tested from the perspective of both the individual and
organization in Part 2.
SU 1.1 - IMA’s Statement of Ethical
Professional Practice
• HFOR – The four overarching principles
– Honesty
– Fairness
– Objectivity
– Responsibility
SU 1.1 - IMA’s Statement of Ethical
Professional Practice
• CCIC – The statement contains four specific
standards
– Competence
– Confidentiality
– Integrity
– Credibility
SU 1.1 - IMA’s Statement of Ethical
Professional Practice
• Conflict of Interest
– Mitigate actual, and to avoid apparent, conflict of interest
– Examples – financial interest in suppliers, privileged info.
– Methods to control conflict of interest include:
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Code of Conduct
Full Financial disclosure
Prohibit financial ties to distributors
Adherence to strong ethical behavior
Etc…
SU 1.1 - IMA’s Statement of Ethical
Professional Practice
• Ethics on the exam
– You should essentially memorize the entire
content of the IMA Statement of Ethical
Professional Practice as shown on page 13 of the
book, including the section on Resolution of
Ethical Conflict on page 14
SU 1.5 – Practice Question 1
In accordance with IMA’s Statement of Ethical Professional Practice, a member who
fails to perform professional duties in accordance with relevant standards is acting
contrary to which one of the following standards?
A
Competence.
B
Confidentiality.
C
Integrity.
D
Credibility.
SU 1.5 – Practice Question 2 Answer
Correct Answer: A
One of the responsibilities of an IMA member under the competence standard is to “maintain an appropriate level
of professional expertise by continually developing knowledge and skills.” (S)he must also “perform professional
duties in accordance with relevant laws, regulations, and technical standards.” The third requirement under this
standard is to “provide decision support information and recommendations that are accurate, clear, concise, and
timely.”
Incorrect Answers:
B
The confidentiality standard concerns an IMA member’s responsibility not to disclose or use the firm’s
confidential information.
C
The integrity standard pertains to conflicts of interest, avoidance of acts discreditable to the profession, and
refraining from activities that prejudice the ability to carry out duties ethically.
D
Credibility is the fourth standard of IMA’s Statement of Ethical Professional Practice. It requires that
information be communicated “fairly and objectively,” and that all information that could reasonably
influence users be disclosed.
SU 1.5 – Practice Question 2
If an IMA member discovers unethical conduct in his or her organization and fails to act, (s)he will
be in violation of which of IMA’s ethical standard(s)?
A
“Refrain from engaging in any conduct that would prejudice carrying out duties correctly.”
B
“Communicate information fairly and objectively.”
C
“Disclose all relevant information that could reasonably be expected to influence an
intended user’s understanding of reporting analyses or recommendations.”
D
All of the answers are correct.
SU 1.5 – Practice Question 2 Answer
Correct Answer: D
An IMA member displays his or her competence and credibility and maintains integrity by taking
the appropriate action within the organization to resolve an ethical problem. All of these activities
should be a part of an IMA member’s normal job processes.
Incorrect Answers:
A
Each standard is violated by an IMA member who
fails to act upon discovering unethical conduct.
B
Each standard is violated by an IMA member who
fails to act upon discovering unethical conduct.
C
Each standard is violated by an IMA member who
fails to act upon discovering unethical conduct.
SU 1.5 – Practice Question 3
In which situation is an IMA member permitted to communicate confidential
information to individuals or authorities outside the firm?
A
There is an ethical conflict and the board has refused to take action.
B
Such communication is legally prescribed.
C
The IMA member knowingly communicates the information indirectly through a
subordinate.
D
An officer at the IMA member’s bank has requested information on a transaction
that could influence the firm’s stock price.
SU 1.5 – Practice Question 3 Answer
Correct Answer: B
According to IMA’s Statement of Ethical Professional Practice, members are responsible for observing
the standard of confidentiality. Thus, the IMA member should “refrain from disclosing confidential
information acquired in the course of his or her work except when authorized, unless legally
obligated to do so.”
Incorrect Answers:
A
IMA’s Statement of Ethical Professional Practice states that “each member has a responsibility to
keep information confidential except when disclosure is authorized or legally required.”
C
The IMA member should “inform all relevant parties regarding appropriate use of confidential
information. Monitor subordinates’ activities to ensure compliance.”
D
The IMA member is required to “refrain from using confidential information for unethical or
illegal advantage.”
Study Tip
• Try to explain out loud a concept you are
trying to learn as though you are trying to
teach it to someone. A good place to do this
is in your car or in front of a mirror.
SU 1.2 - Corporate Ethics and Legislation
• The Foreign Corrupt Practices Act of 1977
(FCPA) contains two sets of provisions:
– Accounting
• Books and Records
• Internal Control
– Anti-Bribery
SU 1.2 - Corporate Ethics and Legislation
• Foreign Corrupt Practices Act of 1977 (FCPA)
– All public companies must comply
• Payments to foreign officials / politicians –Prohibited
• Payment to foreign business owners / corporate officers – Not addressed
• Corrupt payments – For the purpose of inducing someone to act or refrain to
obtain or retain business.
– Prohibits a mere offer or promise –even if not consummated. Only minims gifts are
acceptable.
– Known / should have known – influence of official.
• Violations subject to fines and imprisonment.
– Fines have to be paid by the person involved, Not 3rd party
– Grease payments are allowed but not to Politicians.
Sarbanes-Oxley Act of 2002
• See “Backgrount to Sarbanes-Oxley Act” on page 16
(Enron, Arthur Andersen…)
• Extensive responsibilities on issuers / auditors of
publicly traded securities.
– Sec 406(a) Senior financial officers Code of Ethics
• Reasonably necessary to promote
– Honest and ethical conduct
– Full, fair, accurate, timely, and understandable disclosure
– Compliance with governmental rules and regulations
• SOX does not define ethics.
1.2 - Corporate Ethics and Legislation –
Question 1
The Foreign Corrupt Practices Act prohibits
A.
B.
Bribes to all foreigners.
Small bribes to foreign officials that serve as facilitating
or grease payments.
C.
Bribery only by corporations and their representatives.
D.
Bribes to foreign officials to influence official acts.
1.2 - Corporate Ethics and Legislation –
Question 1 Answer
Correct Answer: D
The Foreign Corrupt Practices Act (FCPA) prohibits any U.S. firm from making bribes to foreign officials
to influence official acts. The businesses subject to the FCPA include corporations, partnerships, limited
partnerships, business trusts, and unincorporated organizations. Violations of the FCPA are federal
felonies. The penalties are up to 5 years in prison or up to a $100,000 fine or both for an officer,
director, or shareholder who helps make the bribe.
Incorrect Answers:
A: Bribes to all foreigners is not covered by the provisions in the FCPA.
B: Small bribes to foreign officials that serve as facilitating or grease payments is not covered by the
provisions in the FCPA.
C: All U.S. firms are subject to the anti-bribery provisions.
1.2 - Corporate Ethics and Legislation –
Question 2
Firms subject to the reporting requirements of the Securities Exchange
Act of 1934 are required by the Foreign Corrupt Practices Act of 1977 to maintain
satisfactory internal control. The role of the independent auditor relative
to this Act is to
A.
Report clients with unsatisfactory internal control to the
SEC.
B.
Provide assurances to users as part of the traditional
audit attest function that the client is in compliance with
the present legislation.
C.
Express an opinion on the sufficiency of the client’s
internal control to meet the requirements of the Act.
D.
Attest to the financial statements.
1.2 - Corporate Ethics and Legislation –
Question 2 Answer
Correct Answer: D
Whether a client is in conformity with the Foreign Corrupt Practices Act is a legal question. Auditors
cannot be expected to provide clients or users of the financial statements with legal advice. The role of
the auditor is to assess control risk in the course of an engagement to attest to the fair presentation of
the financial statements.
Incorrect Answers:
A: The auditor is not required to report violations of the Act to the SEC, although a duty to disclose
outside the client may exist in some circumstances; e.g., the client’s failure to take remedial action
regarding an illegal act may constitute a disagreement that it must report on Form 8-K (AU 317).
B: The traditional attest function does not involve compliance auditing.
C: The FCPA contains no requirement that an auditor express an opinion on internal control.
Study Tip
• Try to find a little time every day to study,
whether it is reading or practicing quiz questions.
1 hour per day M – F and the 4 hour lecture = 10
hrs. per week
• Passing the exam is a marathon not a sprint!
1.3 - Corporate Responsibility for Ethical
Behavior
• The organization has a responsibility to foster a
sense of ethics
• A pervasive sense of ethical values can benefit
and organization
• A sense of ethics requires an ability to distinguish
between ethical and merely legal behavior
• “Leadership by example”, or tone at the top plays
an important role
1.3 - Corporate Responsibility for Ethical
Behavior
• “Human capital” concept is an important component
to creating the right climate of “doing the right thing”
• Organizations culture
• Employee training
• Monitoring ethical compliance
– Human performance feedback loop
– Survey tools
– Reviews, 360’s, KPI’s
1.3 - Corporate Responsibility for Ethical
Behavior
• Whistleblowing framework
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Confidential and independent
• Special challenges with international companies or trade
• Ethical behavior as a prerequisite to internal control
• Three tools to identify process controls related to ethical
and behavioral issues:
– Business Process Reengineering (BPR)
– Quality Management
– Continual Process Improvement (CPI)
1.3 - Corporate Responsibility for Ethical
Behavior
• “Values and Ethics: From Inception to Practice”
• Have a comprehensive framework
– CEO & CFO “Get out of Jail card”
• Responsible to : Foster a sense of ethics
– Written code of Conduct and ethical behavior
• Pervasive sense of ethical values has benefits.
– White space vs. Gray area.
• Ethical and merely legal behavior
1.3 - Corporate Responsibility for Ethical
Behavior – Question 1
Which one of the following is a true statement regarding organizational ethics?
A. As long as officer and employee behavior meet the requirements of the law, the organization can
be considered to have a functioning system of ethical behavior.
B.
A strong sense of ethics on the part of employees who are in the best position to appropriate cash
and other assets is the most vital part of a functioning system of ethical behavior.
C.
If an organization has a strong code of ethical conduct in place, the role of employee training can be
downplayed.
D. Paying attention to “whistleblowers” plays a significant role in maintaining an effective ethical
atmosphere.
1.3 - Corporate Responsibility for Ethical
Behavior – Question 1 Answer
Correct Answer: D
“Values and Ethics: From Inception to Practice” states, in part, “A
whistleblowing framework (e.g., an ethics helpline) is an important
component in maintaining an ethical organizational culture. An effective
feedback system includes having a confidential framework for employees to
report possible violations of the organization’s code of ethics and to receive
advice on the ethical aspects of challenging decisions. Statistics show that a
large number of occupational fraud cases are detected through an employee
“hotline” or other reporting method ... ” (IX. Measuring and Improving Ethical
Compliance.)
Continued
1.3 - Corporate Responsibility for Ethical
Behavior – Question 1 Answer (continued)
Incorrect Answers:
A: A sense of ethics requires an ability to distinguish between ethical and merely legal behavior. “Values and Ethics: From
Inception to Practice” states, in part, “Many individuals at the center of corporate scandals [of the late 20th and early 21st
Century] have professed the belief that they were innocent of any wrongdoing, including Kenneth Lay of Enron or Conrad Black of
Hollinger. The problem is that these individuals did not define their behavior by what most of society would see as ‘reasonable,’
but rather they followed their own particular code – in some cases, limiting the definition of ethical behavior to require
compliance with the law and nothing more.” (II. Introduction.)
B: “Values and Ethics: From Inception to Practice” states, in part, “Ethical behavior is not something that applies to someone
else – every single individual is responsible for behaving ethically. Nowhere is this more important than the demonstration of
ethical behavior that managers and supervisors exhibit in the way they execute their day-to-day work...” This phenomenon is
referred to as the “tone at the top.” (VI. Leadership by Example.)
C: Employee training is important to maintaining an ethical organizational culture. “Values and Ethics: From Inception to
Practice” states, in part, “Every existing member of staff should receive ongoing training, starting at the board level and cascading
down throughout the organization ... Ethics training for employees should focus on covering ethical concepts, the organization’s
code, and compliance. To achieve this, training should include: ethical concepts and thinking: What is ‘behind’ the issue of ethical
action?; [and] the organization’s code of ethics and any supporting ‘rules.’” (VIII. Practical Application: Converting Intent into
Operational Reality.)
1.3 - Corporate Responsibility for Ethical
Behavior – Question 2
IMA’s Statement on Management Accounting, “Values and Ethics: From Inception to
Practice,” recommends a defined code of conduct and ethical behavior for all
organizations. One advantage of having such a code is that it
A. Provides employees with guidance for handling unfamiliar situations.
B. Ensures ethical behavior by all employees.
C. Shields the organization from liability in cases of loss of stockholder value due to
fraud.
D. Eases the investigative process performed by police and prosecutors in cases of
suspected fraud.
1.3 - Corporate Responsibility for Ethical
Behavior – Question 2 Answer
Correct Answer: A
“Values and Ethics: From Inception to Practice” states, in part, “... what does an employee do when unplanned
events occur? What reference does an individual look to for help in making decisions? ... This is why it is
important to have a defined set of organizational values and code of ethics – they create the “touchstone”
against which every unanticipated decision must be judged. Failure to have every individual in the organization
know and understand these values and ethical code leads to inconsistency and, in the worst cases, unethical or
fraudulent behavior.” (IV. Values, Ethics, and Accounting.)
Incorrect Answers:
B: A code of conduct cannot guarantee ethical behavior by employees.
C: A code of conduct cannot guarantee that an organization will be shielded from liability in cases of fraud.
D: A code of conduct does not ease law enforcement’s investigative process.
Study Tip
• You need to achieve an 80% on the quizzes you
attempt. If you have taken the quizzes twice and
still not achieved an 80%, create another 20
question quiz from the test bank available,
focusing (selecting) on material that you are
having difficulty with. In different words
“practice” what you don’t know rather than what
you do know.
SU 1.4 – Fraud and the Fraud Risk Model
• Types of Fraud
– Fraudulent Financial Reporting
• Mostly done by management
• Focus of external auditors, the PCAOB and the SEC
– Misappropriating of Assets
• Mostly done by employees (theft, embezzlement or
defalcation)
• Cause more internal problems then external problems
The Fraud Risk Model (Fraud Triangle)
SU 1.4 - The Fraud Risk Model (Fraud Triangle)
• Opportunity – ability of a person not only to
commit and also conceal the fraud
– Absence of oversight, inadequate controls, lack of
enforcement
– The only thing that can be controlled by
management
SU 1.4 - The Fraud Risk Model (Fraud
Triangle)
• Rationalization – ability to justify actions as
consistent with his or her personal code of ethics
– Principles and integrity vary among individuals
– Rationalizations include:
•
•
•
•
•
Being underpaid or overworked
Everyone else is doing it
Rank has its privileges
See revenge
Nobody will get hurt
SU 1.4 - The Fraud Risk Model (Fraud
Triangle)
• Rationalization – most difficult to appraise
– Difficulty to get insight into another persons
ethical principles
– Believe that the perpetrator was an honest person
SU 1.4 - The Fraud Risk Model (Fraud
Triangle)
• Pressures (motivations)
– Need for cash
– Fraud and reward is not always so direct
• Maybe other than monetary
• Pressure to manipulate financial reporting if
compensation is tied to financial results
• Other include debt covenants, meeting
budgets/earnings targets/analyst forecast
The Fraud Risk Model (Fraud Triangle) –
Pressures
Fraud Model as overlapping circles and
where you find the greatest risk
SU 1.4 – Fraud and the Fraud Risk Model
• Red Flags or Risk Factors indicating potential
fraud include:
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Missing documents
Large amounts of cash on hand
Unexplained budget variances
Unwillingness to take vacation
Poor supervision
Complaints by customers
SU 1.4 – Fraud and the Fraud Risk Model
• Investigative Resources and Techniques
– Documents
• Search for evidence-related documents including other
locations such as trash bins, shredders, etc.
• Alert to alternate documents via erasure and forgery
– Handwritten signatures
– Photocopies
– Torn, smudged, faded documents
SU 1.4 – Fraud and the Fraud Risk Model
• Investigative Resources and Techniques
– Documents (cont.)
• Public searches of information
– Public records
– Social media
– Privacy concerns
• Commercial online services
SU 1.4 – Fraud and the Fraud Risk Model
• Investigative Resources and Techniques
– Documents (cont.)
• Electronic evidence
• Interview
– Care should be taken when drawing conclusions
SU 1.4 – Practice Question 1
High risk of employee fraud is most likely when there is pressure, rationalization, and
A
Opportunity.
B
Internal control.
C
Personal integrity.
D
Limited responsibility.
SU 1.4 – Practice Question 1 Answer
Correct Answer: A
Opportunity creates risk of employee fraud.
Incorrect Answers:
B
Internal control mitigates the
risk of employee fraud.
C
Personal integrity mitigates the
risk of employee fraud.
D
Limited employee responsibility
mitigates the risk of employee
fraud.
SU 1.4 – Practice Question 2
Rationalization of a fraud by an employee may be in the form of all the
following except
A
Pressure from one’s spouse.
B
Feelings of being underpaid.
C
Belief in being overworked.
D
Belief that rank has its privileges.
SU 1.4 – Practice Question 2 Answer
Correct Answer: A
Pressure from one’s spouse is a motive for the misappropriation of assets.
Incorrect Answers:
B
Feelings of being underpaid may
be used by an employee to
justify or rationalize stealing.
C
Belief in being overworked may
be used by an employee to
justify or rationalize stealing.
D
Belief that rank has its privileges
may be used by an employee to
justify or rationalize stealing.
SU 1.4 – Practice Question 3
Fraudulent financial reporting is most often committed by
A
Management to deceive financial statement users.
B
An auditor while performing an audit.
C
Employees stealing assets.
D
Customers.
SU 1.4 – Practice Question 3 Answer
Correct Answer: A
Fraudulent financial reporting is committed by management in an attempt to
deceive financial statement users.
Incorrect Answers:
B
Auditors are not responsible for
financial reporting.
C
Misappropriation of assets is
most often committed by
employees.
D
Managers, not customers, are
responsible for financial
reporting.
SU 1.4 – Practice Question 4
What is the most likely reason for management to overstate expenses?
A
To minimize tax liability.
B
To earn a bonus.
C
To maximize net income.
D
To maximize cash on hand.
SU 1.4 – Practice Question 4 Answer
Correct Answer: A
The most likely reason for management to understate income by overstating
expenses is to minimize tax liability.
Incorrect Answers:
B
Management may understate
expenses to earn a bonus.
C
Management may understate
expenses to maximize net
income.
D
Understating expenses has no
direct effect on cash.
Study Tip
• Try to explain out loud a concept you are
trying to learn as though you are trying to
teach it to someone. A good place to do this
is in your car or in front of a mirror.
SU 1.5 – Addressing Fraud and Error
• Types of Controls
– Primary Controls
•
•
•
•
Preventive Controls
Detective Controls
Corrective Controls
Directive Controls
SU 1.5 – Addressing Fraud and Error
• Types of Controls
– Secondary Controls
• Compensatory (mitigative) controls may reduce risk (i.e.
segregation of duties)
• Complementary controls with other controls may
reduce risk to an acceptable level
SU 1.5 – Addressing Fraud and Error
• Segregation of Duties
• Independent checks and verification
– A Reconciliation between recorded amounts and assets
must be performed by
• someone unconnected with original transaction or
• without custody of the assets
• Safeguarding Controls
– Limiting access to assets to only authorized personnel (i.e.
lockbox system)
SU 1.5 – Practice Question
The frequency of the comparison of recorded accountability with assets (for the
purpose of safeguarding assets) should be determined by
A
The amount of assets independent of the cost of the comparison.
B
The nature and amount of the asset and the cost of making the comparison.
C
The cost of the comparison and whether the susceptibility to loss results from
errors or fraud.
D
The auditor in consultation with client management.
SU 1.5 – Practice Question 1 Answer
Correct Answer: B
Assets should be compared with the recorded accountability as frequently as the nature and
amount of the assets require, within the limits of acceptable costs of comparison. The costs of
safeguarding assets should not exceed the expected benefits.
Incorrect Answers:
A
The costs of controls should be considered when
making the comparison.
C
Whether the susceptibility to loss arises from
errors or fraud should have little bearing on the
frequency of the comparison.
D
Management, not the auditor, has responsibility
for internal control.
SU 1.5 – Practice Question 2
Internal controls may be preventive, detective, corrective, or directive. Which of the
following is preventive?
A
Requiring two persons to open mail.
B
Reconciling the accounts receivable subsidiary file with the control account.
C
Using batch totals.
D
Preparing bank reconciliations.
SU 1.5 – Practice Question 2 Answer
Correct Answer: A
Preventive controls are designed to prevent an error or an irregularity. Detective and corrective
controls attempt to identify and correct errors or irregularities that have already occurred.
Preventive controls are usually more cost beneficial than detective or corrective controls. Assigning
two individuals to open mail is an attempt to prevent misstatement of cash receipts.
Incorrect Answers:
B
Reconciling the subsidiary file with the master file may detect and lead to the
correction of errors, but the control does not prevent errors.
C
The use of batch totals may detect a missing or lost document but will not
necessarily prevent a document from becoming lost.
D
Bank reconciliations disclose errors in the accounts but have no preventive
effect.
SU 1.5 – Practice Question 3
Segregation of duties is a fundamental concept in an effective system of internal
control. Nevertheless, the internal auditor must be aware that this safeguard can be
compromised through
A
Lack of training of employees.
B
Collusion among employees.
C
Irregular employee reviews.
D
Absence of internal auditing.
SU 1.5 – Practice Question 3 Answer
Correct Answer: B
By segregating duties, organizations make it more difficult for one person to perpetrate a fraud.
When custody of the asset and recordkeeping for the asset are invested in different persons, a
fraud generally cannot be executed by one of the two parties. However, if they collude, the internal
control aspect of the segregation is nullified.
Incorrect Answers:
A
Lack of training by itself cannot negate effective separation of duties.
C
Irregular employee reviews may affect employee job performance, but they alone cannot
negate effective separation of duties.
D
While the absence of an internal audit activity may lessen the chances that an
organization will maintain effective internal control over the long run, by itself it cannot
negate effective segregation of duties.
Study Tip
• Always prepare for the next lecture first, as
opposed to catching up on material you are
behind on. There are plenty of weekends with
no classes that will allow you to catch up past
material. This way you are always prepared
for the next class and have identified (and
conveyed) what areas you need help with.
Essays cont.
Essay Question #2
SmallParts is a manufacturer of metal washers, screws, and other parts
required in the manufacture of various handmade craft and novelty
items. The firm has the ability to custom make virtually any small part,
provided the client is able to provide SmallParts with the dimensions
and tolerance required of the product. Because of its niche in the
market, SmallParts has over 1,000 clients. Unfortunately, many of its
small business clients eventually merge or cease operations. One of
the company’s biggest challenges is the return of shipped product.
Usually, this is because the small business client has ceased
operations. While most of the product is custom made, SmallParts has
found that much of it can be sold to other clients for adapted use. The
company’s accountant is reviewing the company’s internal controls
and financial accounting procedures, in particular, with respect to
inventory.
Essay Question #2
Currently, SmallParts has one salesperson responsible for
marketing returned product. This salesperson has exclusive
and total control over the returned product including
arranging of sales terms, billing, and collection. The
salesperson receives the returned product and attempts to
find a client who may be able to adapt the product for the
client’s use. The inventory of returned product is not entered
in the accounting records, under the logic that the cost is
sunk. Revenue generated from its sale is classified as other
revenue on the SmallParts income statement.
Sample Essay Requirements (partial)
1.
2.
3.
4.
Identify and describe the three objectives of a system of internal control.
Identify and explain three ways that the procedure for handling returned
product violates the internal control system of segregation of duties.
Identify and describe three ways that SmallParts can provide for better internal
control over its inventory of returned product.
The company accountant is concerned about SmallParts’ current procedure for
accounting for returned product and has turned to IMA’s Statement of Ethical
Professional Practice for guidance. Assume the company’s accountant identifies
a possible conflict of interest on the part of the salesperson responsible for the
returned product.
a)Identify the ethical principles that should guide the work of a management
accountant.
b)Identify and describe the standards that relate to this situation and explain
how they apply.
Sample Essay Response
Question 1: Identify and describe the three objectives of
a system of internal control.
Sample Response:
A good system of internal control is designed to provide
reasonable assurance regarding achievement of an
entity’s objectives involving effectiveness and efficiency
of operations, reliability of financial reporting, and
compliance with applicable laws and regulations.
Sample Essay Response
Question 2: Identify and explain three ways that the procedure for handling returned
product violates the internal control system of segregation of duties.
Sample Response:
Segregation of duties requires that no one person have control over the physical
custody of an asset and the accounting for it. There is no evidence to suggest
SmallParts makes any effort to account for the value of returned product, which may
indeed be significant. The one salesperson seems to be in charge of all aspects
related to returned product, including authorizing the returns, crediting the
customers, receiving the returns, handling the physical custody, finding new
customers, concluding sales, shipping, billing, and collecting. Most of these rules
should be separated.
Sample Essay Question #2 Information relative to answering #2 of
Question 2 has been circled in red.
SmallParts is a manufacturer of metal washers, screws, and other parts required in the manufacture of
various handmade craft and novelty items. The firm has the ability to custom make virtually any small
part, provided the client is able to provide SmallParts with the dimensions and tolerance required of
the product. Because of its niche in the market, SmallParts has over 1,000 clients. Unfortunately, many
of its small business clients eventually merge or cease operations. One of the company’s biggest
challenges is the return of shipped product. Usually, this is because the small business client has
ceased operations. While most of the product is custom made, SmallParts has found that much of it
can be sold to other clients for adapted use. The company’s accountant is reviewing the company’s
internal controls and financial accounting procedures, in particular, with respect to inventory.
Currently, SmallParts has one salesperson responsible for marketing returned product. This
salesperson has exclusive and total control over the returned product including arranging of sales
terms, billing, and collection. The salesperson receives the returned product and attempts to find a
client who may be able to adapt the product for the client’s use. The inventory of returned product is
not entered in the accounting records, under the logic that the cost is sunk. Revenue generated from
its sale is classified as other revenue on the SmallParts income statement.
Sample Essay Response
Question 3: Identify and describe three ways that SmallParts can
provide for better internal control over its inventory of returned
product.
Sample Response:
Separate responsibilities and duties. While the salesman may be
assigned to work with customers who return products, and find other
customers for these products, other staff should post credits to
customer accounts following written policy. The products should be
received, inventoried, booked and shipped just like regular products.
Sample Essay Response
Question 4: (Summarized)
a) Identify the ethical principles that should guide the work of a management accountant.
b) Identify and describe the standards that relate to this situation and explain how they apply.
Sample Response:
a)The Statement lists the following four ethical principles:
– Honesty, Fairness, Objectivity, Responsibility
b)Several standards from the Statement apply.
– Credibility: “Each practitioner has a responsibility to disclose deficiencies in internal controls.”
– Competence: duty to maintain an appropriate level of professional expertise relative to
standard procedure commonly used in the accounting of firms dealing with returned product
– Confidentiality: refrain from using this confidential information for unethical advantage, by
not informing firms of the lax controls and availability of steep discounts on returned product
– Integrity: mitigating any conflict of interest.
Small Parts Question
Item Description
Question 1
Reasonable Assurance
Effectiveness of operations
Efficiency of operationsi
Reliability of financial reporting
Other
Subtotal
Question 2
1 person should not control custody
& acctg.
Salesperson in charge of everything
No accounting for returned product
No tracking or returned product
Other
Subtotal
Maximum
Points
2
1/2
1/2
1/2
1/2
1/2
%
Correct
Score
0
0
0
0
0
0.00
2
1/2
1/2
1/2
1/2
1/2
0
0
0
0
0
0.00
Small Parts Question (continued)
Item Description
Question 3
Separate resp./segregation of duties
4 different ind. for ret. Prod. duties
Authority, recording, custody, reco.
Other
Subtotal
Maximum
Points
2
1/2
1/2
1/2
1/2
%
Correct
Score
0
0
0
0
0.00
SmallParts Question (continued)
Item Description
Question #4
a. Principles: max = 1
Honesty, Fairness, Objectivity, Responsibility
Two correct identifications
Four correct identifications
b. Standards max = 5
Competence
maintain appropriate level of prof competence
prepare complete & clear reports
perform in accord with laws, regs & tech stds
Confidentiality
refrain from disclosing confidential info
refrain from using info unethically
Integrity
refrain from activity discrediting the profession
avoid actual or apparent conflicts of interest
refrain fr activity prejudice ability to carry out duties
refrain fr activity subverting attn of org objectives
Credibility/Objectivity
communicate info fairly and objectively
disclose fully all relevant info
other
TOTAL FOR ALL QUESTIONS:
Maximum Points
6
% correct
Score
1/2
1
0
0
1/2
1/2
1/2
1/2
1/2
1/2
1
1/2
1
1
1/2
1/2
1/2
1/2
1/2
1/2
12
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0
0.00
Remember!
•
The CMA exam uses essays to reflect a more "real-world" environment in which candidates must
apply the knowledge they have acquired. Essays are graded on both writing skills and subject
matter. Partial credit IS available for essays that have some correct and some incorrect points.
Finally, it is important to remember that essays are not intended to test typing ability, so the time
you allocated for essay response is adequate to complete the questions even if you do not have the
best typing skills.
•
Answering multiple-choice questions is an effective method to study the material for both the
multiple-choice and essay sections of the exam. They are an excellent diagnostic tool that will allow
you to quickly identify your weak areas. Also, think about what your answer would be if the
question were not multiple-choice. When reviewing the correct and incorrect answer explanations,
your "essay answers" should be somewhat equivalent to the detailed answer explanations.
Essay
• Roughly 75% of points come from multiple choice. Essay only accounts for
25% of points.
• There are two essay questions for each section of the CMA exam. Each
question will have 43-6 parts that must be answered.
• Be sure you skim all essay parts before begin answering. This will help you
survey how much time to spend on each question from the beginning.
Some will be easy, just asking for a definition. Some will require
calculations. Show all your work. Even if your answer is wrong, showing
your work will give you partial credit.
• Be sure to answer the question correctly. If the question asks you to
compare or contrast something, don't define it. That is not what they are
looking for.

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