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Questions and Answers
What is the purpose of the preliminary preparation phase in operational auditing?
What is the purpose of the preliminary preparation phase in operational auditing?
What is one of the main responsibilities of those charged with governance regarding financial statements?
What is one of the main responsibilities of those charged with governance regarding financial statements?
Which of the following skills is NOT typically required of an internal auditor?
Which of the following skills is NOT typically required of an internal auditor?
Which attribute ensures that information presented is interpretatively clear for users?
Which attribute ensures that information presented is interpretatively clear for users?
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What is one key function of an audit committee?
What is one key function of an audit committee?
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Which aspect is NOT a responsibility of auditors during the audit process?
Which aspect is NOT a responsibility of auditors during the audit process?
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Which characteristic is essential for members of an audit committee?
Which characteristic is essential for members of an audit committee?
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What is one of the objectives of an audit committee?
What is one of the objectives of an audit committee?
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Which tier of assurance providers includes the 'Big 4' accounting firms?
Which tier of assurance providers includes the 'Big 4' accounting firms?
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What is considered a common user of financial statements beyond shareholders?
What is considered a common user of financial statements beyond shareholders?
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How is assurance defined in the context of auditing?
How is assurance defined in the context of auditing?
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What is the primary focus of auditing?
What is the primary focus of auditing?
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Which of the following is an element of a performance audit?
Which of the following is an element of a performance audit?
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Which aspect is NOT typically involved in the reporting and follow-up phase of operational auditing?
Which aspect is NOT typically involved in the reporting and follow-up phase of operational auditing?
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What does due care ensure auditors do during the audit process?
What does due care ensure auditors do during the audit process?
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Which of the following describes the role of auditing in the context of social and environmental reporting?
Which of the following describes the role of auditing in the context of social and environmental reporting?
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What is the selling price of the hoverboard after the 15% deduction from its initial cost?
What is the selling price of the hoverboard after the 15% deduction from its initial cost?
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How much does the company intend to increase the selling price of the hoverboard when applying a 45% increase?
How much does the company intend to increase the selling price of the hoverboard when applying a 45% increase?
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What is the calculated markup percentage based on the cost of production and the new selling price?
What is the calculated markup percentage based on the cost of production and the new selling price?
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What is a key advantage of using full cost pricing?
What is a key advantage of using full cost pricing?
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Which factor most influences market-based pricing?
Which factor most influences market-based pricing?
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In market-based pricing, what typically occurs when prices increase?
In market-based pricing, what typically occurs when prices increase?
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What does price elasticity of demand measure?
What does price elasticity of demand measure?
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Which of the following is NOT a commonly used cost base in cost-based pricing?
Which of the following is NOT a commonly used cost base in cost-based pricing?
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What does the margin of safety indicate for a business?
What does the margin of safety indicate for a business?
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How is the break-even point (BEP) calculated using the contribution margin technique?
How is the break-even point (BEP) calculated using the contribution margin technique?
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What does the contribution margin ratio represent?
What does the contribution margin ratio represent?
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Which statement correctly describes the break-even analysis graphical presentation?
Which statement correctly describes the break-even analysis graphical presentation?
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If Morola Limited's expected sales are 700 hoverboards and the break-even point is 400 units, what is the margin of safety in units?
If Morola Limited's expected sales are 700 hoverboards and the break-even point is 400 units, what is the margin of safety in units?
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What is the first step in the planning process?
What is the first step in the planning process?
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In the context of variable costs and selling price, how can variable costs as a percentage be expressed?
In the context of variable costs and selling price, how can variable costs as a percentage be expressed?
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What does the control phase of operations involve?
What does the control phase of operations involve?
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What equation represents the required sales to achieve a target profit?
What equation represents the required sales to achieve a target profit?
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How many units need to be sold to achieve a profit of $52,500, given that the fixed costs are $84,000?
How many units need to be sold to achieve a profit of $52,500, given that the fixed costs are $84,000?
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If the contribution margin ratio is 28%, what is the required sales in dollars to cover fixed costs and achieve the target profit?
If the contribution margin ratio is 28%, what is the required sales in dollars to cover fixed costs and achieve the target profit?
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What happens to the break-even point (BEP) when there is an 8% discount on the selling price?
What happens to the break-even point (BEP) when there is an 8% discount on the selling price?
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In the context of CVP analysis, what is a sales mix?
In the context of CVP analysis, what is a sales mix?
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What is the impact of increasing fixed and variable costs by 10% on the BEP?
What is the impact of increasing fixed and variable costs by 10% on the BEP?
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What formula is used to calculate BEP units for a mix of two products?
What formula is used to calculate BEP units for a mix of two products?
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If management decides to save $8,400 through a cost reduction program, what is the likely outcome?
If management decides to save $8,400 through a cost reduction program, what is the likely outcome?
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Study Notes
Operational Auditing
-
Five Phases
- Preliminary Preparation - gathering in-depth company information.
- Field Survey - identification of problem areas and sensitive issues.
- Program Development - step-by-step program creation.
- Audit Application - detailed review of the data.
- Reporting and Follow Up - communication with senior management and the audit committee.
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Skill Sets of an Internal Auditor
- Strong business acumen.
- Ability to gather leading ideas from global sources.
- Strong relationships with risk function and management.
- Innovative reporting practices.
Audit Committees
- Enhance effective accountability in both private and public sectors.
- Facilitate independent involvement in governance processes.
- Provide a forum for directors, management, and auditors to discuss & resolve issues related to management risk and financial reporting obligations.
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Requirements for effective Audit Committees
- Sufficient size, independence, and technical expertise.
- Consisting solely of independent directors.
- Members must be financially literate.
- At least one member with financial expertise.
- Some members with industry understanding.
Role and Objectives of the Audit Committee
- Assist directors in fulfilling their responsibilities.
- Improve credibility and objectivity of the accounting process.
- Improve effectiveness of internal and external audit functions.
- Facilitate communication between the board and internal/external auditors.
- Ensure independence of internal/external auditors.
- Strengthen the role and influence of non-executive directors.
- Foster an ethical culture within the organization.
Assurance and Auditing
- Assurance Engagement- engagement where an assurance practitioner provides a conclusion to enhance user confidence about the evaluation or measurement of a subject matter against criteria.
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Auditing - involves accumulating and evaluating evidence about information. Determines the correspondence between information and established criteria. Results are communicated to interested users.
- May include elements of performance audits, compliance audits, internal control assessments, and reviews.
- Includes voluntary reporting on environmental, employee, and social issues.
- Incorporates both financial and non-financial information.
- Auditors must address environmental issues impacting a client's financial reports, even if not explicitly disclosed.
Preparers and Auditors
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Responsibilities of those charged with governance:
- Prepare financial statements.
- Information must be:
- Relevant: impacts user decisions about entity performance.
- Reliable: free from material misstatements (errors or fraud).
- Comparable: consistent over time and with other entities.
- Understandable: easily interpretable for decision-making.
- True and Fair reporting requires consistent application of an applicable framework.
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Auditor Responsibilities:
- Professional Skepticism: independent and questioning mindset to thoroughly investigate evidence.
- Professional Judgement: using expertise, knowledge, and training to make judgments.
- Due Care: diligent application of standards and documentation of each audit stage.
Three Tiers of Assurance Providers in NZ and AUS
- First Tier: Big 4 (Deloitte, Ernst & Young, KPMG, PWC)
- Mid Tier: Firms with significant presence and international affiliations (Grant Thornton, BDO).
- Next Tier: Local accounting firms.
Demand for Audit and Assurance Services
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Users of financial statements:
- Investors: current or potential investors make decisions about buying, holding, or selling shares.
- Suppliers: evaluate an entity's ability to repay for goods.
- Customers: assess the entity's going concern to rely on them for goods.
- Lenders: determine if loan repayments can be made on time.
Cost Based Pricing
- Choosing a markup involves setting a target rate of return for company owners, which depends on their investment expectations.
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Potential Cost Bases for Cost Based Pricing:
- Variable manufacturing cost.
- Total variable cost of the product.
- Manufacturing cost.
- Full cost of the product.
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Advantages of using Full Cost:
- Simple to use and apply.
- Allows full recovery of production costs.
- Price stability.
- Long-term planning and forecasting.
- Uses readily available cost accounting data.
Market Based Pricing
- Begins with a target price customers are willing to pay for a product or service.
- Managers strive to determine what customers are willing to pay.
- Market prices are influenced by product differentiation and competition.
- Companies with differentiated products can integrate customer demand into their pricing policies.
- Price elasticity of demand describes the sensitivity of sales to price changes.
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Factors considered in market-based pricing:
- Historical information to estimate price changes on sales volume.
- Understanding customer value.
- Competitor prices to set product/service prices.
- Online auction websites for hard-to-value products.
Break Even Analysis
- Break Even Point (BEP): the point where total sales revenue equals total costs (fixed and variable).
- BEP Calculation (Units): Fixed costs / Contribution margin per unit.
- BEP Calculation (Sales): Fixed costs / Contribution margin ratio.
Break Even Analysis Graphic Presentation (CVP Graph)
- Visual representation of cost, volume, and profit.
- Horizontal Axis: Level of activity (units).
- Vertical Axis: Dollars (revenue and costs).
- BEP is the intersection of total sales revenue and total costs lines.
- Profit area is the gap between total sales revenue and total costs.
- Loss area is the gap below the total costs line.
Margin of Safety
- Difference between expected sales and break even sales.
- Indicates the amount sales can drop before incurring a loss.
- Higher margin of safety means more "breathing room" if expected sales don't materialize.
- Adequacy of margin of safety depends on business characteristics (competitive position, general economic conditions).
Margin of Safety Calculation
- Margin of Safety (in $): Actual expected sales - Break even sales.
- Margin of Safety Ratio: Margin of safety / Expected sales.
Short and Long Term Planning
- Planning: future decision-making, setting goals and targets, forward-looking, scenario analysis, risk evaluation, core of management accounting tasks.
- Continuous Process: Begins before operations start.
- Benchmark: Provides a standard for assessing future performance.
- Control Phase: Comparing actual performance to plans and analyzing variances.
Morola Example (Target Profit)
- Requirement: Determine the sales needed to achieve a target profit of $52,500.
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Calculation:
- Required Sales (in $): Variable costs + Fixed costs + Target profit.
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Required Sales (in Units):
- Calculate required sales in $ and divide by selling price per unit.
- Simplified Calculation: Fixed costs + Target profit / Contribution margin ratio.
CVP for Profit Planning
- Allows managers to predict the effects of events like:
- Changes in sales revenue or costs.
- Competitor discounts.
- Equipment investment (fixed costs to reduce labor (variable costs).
- Profitability changes with variable or fixed cost changes.
CVP with Multiple Products
- Determines the sales mix that yields the highest profitability.
- Assumes a constant sales mix.
- Calculation (BEP Units): Fixed costs / Weighted average contribution margin.
Morola Example (Multiple Products)
- Two hoverboards: LED and Hip Hop.
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To determine the BEP units for the product mix, you need to:
- Determine the contribution margin per unit for each hoverboard.
- Determine the sales mix (the percentage of each hoverboard in total sales).
- Calculate the weighted average contribution margin per unit.
- Divide the total fixed costs by the weighted average contribution margin per unit to find the BEP units for the mix.
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Description
This quiz covers the five phases of operational auditing, including preliminary preparation, field surveys, program development, audit application, and reporting. Additionally, it explores the skill sets required for internal auditors and the role of audit committees in governance and accountability. Test your knowledge on these essential concepts!
