WCTs

1. The management of Fab Furnishing Inc.
is in process of setting up its Enterprise Risk

Management (ERM) framework. You, as a consultant, are required to enlighten them about the
types of risks a business would consider as a part of its risk assessment process.
Explanation:
As your organization will soon be adopting an Enterprise Risk Management (ERM) framework, it is
important that you and your team are aware of the types of risks the organization may face. An
understanding of quantum and types of risks, will help management to devise plans to mitigate them and
achieve organizational goals.
For the purpose of risk assessment, the management must consider three types of risks, as guided by the
Committee of Sponsoring Organizations (COSO). The first type of risk, Inherent Risk is the risk that
prevails within the organization under the absence of any focused controls installed by the management to
reduce its likelihood or impact. This is the minimum amount of risk that the entity would be exposed to, if
no appropriate controls are set up. The second type of risk is Target Residual Risk, which is the ceiling to
an entity’s assumption of risk, considering that necessary controls are/will be put by the management in
order to alter its severity. An entity will aim at setting up controls in order to reduce the level of risk from
inherent risk to the target residual risk. It is the maximum amount of risk that the entity aims to pursue after
taking necessary focused actions. For example, an organization may establish strict scrutiny guidelines and
policies before extending credit to its customers in order to bring down the uncollectibles to an acceptable
level at 5%. The third type, Actual Residual Risk is the risk that an organization is exposed to even after
the necessary controls have been installed to alter the severity of the risk. Under effective controls, actual
residual risk will always be lesser than the target. If the actual residual risk exceeds the target, the
management will need to identify actions that bring the actual residual risk within the acceptable range i.e.
lesser than the target. For example, in spite of the stringent credit guidelines, if the uncollectibles stand at
7%, the organization will have to put further controls in order to bring them down to less than 5%.
In addition to the above, the entity should also identify risks for which unnecessary responses have been
deployed. These are considered unnecessary because they have not resulted in any measurable change in the
severity of risks. In these cases, the responses need to be reallocated for optimum utilization of its resources.
It is extremely important to consider these three types of risks in order to implement an effective ERM
process. I hope, the above information is sufficient for your decision-making process. Please, do not hesitate
to contact if you need additional information. I will be glad to provide you further assistance on this matter.
Regards,
Future CPA
2. With the passage of the Sarbanes-Oxley Act in 2002, the Securities and Exchange Commission
(SEC) asked the New York Stock Exchange (NYSE) and the National Association of Securities
Dealers (NASD) to develop additional guidance to companies on the role and membership of
audit committee so as to improve the effectiveness and independence of audit committees. In
response to an inquiry from a senior manager of a company that is considering going public, write
a memo discussing the expanded role of a company’s audit committee in light of the provisions
of the Sarbanes-Oxley Act.
Explanation:
Memorandum
To: The Senior Manager
From: The Accountant
Date: March 31, 2017
Re: To highlight the role of a company’s audit committee in light of the provisions of the Sarbanes-Oxley
Act
In order to strengthen corporate governance in public limited companies and to protect the interest of the
shareholders, Sarbanes-Oxley Act 2002 has laid the responsibility of establishing and maintaining an
effective internal control system on the management of the company. Moreover all publicly held companies
are required to have an audit committee which is responsible for overseeing the effectiveness and efficiency
of the internal controls put in place by the management and recommends improvements required if any.
The audit committee is an operating committee of the board of directors responsible for oversight. The
companies listed on US stock exchanges are required to establish audit committees made up solely of board
members independent from management. Both the New York Stock Exchange (NYSE) and the National
Association of Securities Dealers (NASD) made changes to their membership rules to include the expanded
role of the public company’s audit committee.
The Audit committee should consist of at least three and no more than six members of the board of directors.
Each committee member will be both independent and financially literate. At least one member of the audit
committee must qualify as a "financial expert”. The audit committee is responsible for determining whether
the company’s internal controls are effective and formally reporting on the status of those controls. It is also
required to recommend selection of an external auditor and approve the annual audit plan. It reviews and
distributes the audited financial statements. It is responsible for establishing a whistleblower program that
allows officers, employees, and other stakeholders to report financial accounting errors or improper actions
and to investigate and resolve the issues. It also circulates a Code of Ethics to senior officers and obtaining
their assent on a quarterly basis.
The Sarbanes-Oxley Act has proved to be very costly for public companies by requiring them to perform
extensive internal control tests and holding the top management personally and criminally liable in case of
failure to issue correct financial report. Audit committees play a vital role in the capital markets' investor
protection framework through their oversight of the audit engagement and their company's financial
reporting process.
It is essential that all members of management be made aware of the role and responsibility of the
management and the audit committee towards implementation and monitoring of internal controls, if we
want to smoothly convert and operate our company as a publicly traded company in the near future.
3. Following are selected tasks from the job description of a staff accountant at Purft, Inc:
• Endorsement, coding and recording of checks received for deposit

• Reconciliation of the accounts receivable sub-ledger to the general ledger
• Reconciliation of the accounts payable sub-ledger to the general ledger
• Reconciliation of investment and borrowing sub-ledgers to the general ledger
• Mailing of checks to vendors
• Recording of fixed asset transactions, including updates to the asset master file
You have been asked to prepare a memorandum discussing the internal control issues relating to the
selected tasks from the job description.
Explanation:
To: The Management, Purft Inc.
Re: Internal control violation visible from the job description of staff accountant.
I had the opportunity to review the job description laid down for the position of staff accountant. In my
observation there are certain duties that are being assigned to this position which lead to internal control
violations. To be effective, internal controls rely heavily on segregation of duties. It is essential that the
duties related to authorization, recording, custody and check be kept with separate individuals so that the
chance of a single person perpetrating an error or fraud and concealing the same does not happen. In the job
description of the staff accountant I observed that there are multiple instances of violation of this basic
internal control principle.
Firstly, the functions of endorsing and also recording the checks received lie with the same person. This
leaves it open for him/ her to divert the checks received and misapply these receipts by altering the
accounting records. The second violation stems from the fact that the same person is responsible for mailing
the checks to vendors and tying the accounts payable ledger to the general ledger. This gives opportunity to
the accountant to divert the outgoing checks to some other individual’s accounts and dressing up the payable
ledger with false records. For sound internal control practices, the responsibility of handling incoming and
outgoing checks should fall on some other person belonging to the Treasurer’s office. Also the staff
accountant is assigned the duty of recording fixed assets transactions as well as updating the asset master
file. It is advisable that these duties be segregated so that error if any on part of the accountant can be
rectified before being posted in asset master file.
I recommend that the job description for the post of the staff accountant needs to be revised so that the
company is able to adhere to the principles of internal controls and reduce the chances of misstatement of
financial reports and misappropriation of assets by way of fraud or human error. If need be I will be glad to
provide further guidance in drafting a revised job description for the position.
4. Mission Electronics, a private limited company plans to go public in the following year. The
company’s Board of Directors have approached their Vice President of Finance to write a
memorandum about the reporting requirements of Internal Control over Financial Reporting
(ICFR) of the company, that will henceforth be a part of its annual report.
Explanation:
As part of Mission Electronics company’s plans to go public in the following year, it must consider the
compliance requirements of Section 404 of the Sarbanes Oxley Act (SOX), 2002. According to the act,
public limited companies must assess the effectiveness of internal control over financial reporting. The act
also requires the auditor of the public company to attest and report on the management’s assessment of its
internal controls. The objective of the act is to protect the investors from fraudulent financial reporting and
provide greater transparency. Mission Electronics must upgrade its internal control according to the
framework provided by Committee of Sponsoring Organizations of the Treadway Commission (COSO).
According to COSO, the objective of internal control is to ensure reliability of financial reporting,
effectiveness and efficiency of operations and compliance with applicable laws and regulations. The
framework helps the company in evaluating its control environment, assess its risk assessment techniques,
improve information and communication systems, monitor the implementation of internal control
procedures and existing control activities.
Section 404 of SOX requires that every public limited company that files an annual report must include a
report, in which the management acknowledges its responsibility for establishing and maintaining adequate
internal control over financial reporting and provide an assessment of internal control effectiveness as of the
end of its fiscal year. The management’s report should identify the framework used to conduct the required
assessment of the effectiveness of the internal controls and an explicit statement on the effectiveness of the
internal controls and procedures for financial reporting. If there are any material weaknesses or significant
deficiencies, they should be disclosed. SOX also places responsibility on the external auditors of the
company to review the design, effectiveness and implementation of the internal control system over
financial reporting of the company and give an opinion on the management’s assertion of the internal
controls. The external auditor would conduct the audit in accordance with the standards of the Public
Company Accounting Oversight Board (PCAOB), which requires that the auditor provide a reasonable
assurance about the effectiveness of ICFR in all material aspects of the company. The external auditor
conducts procedures that are deemed necessary to evaluate the design and effectiveness of the internal
controls and provides an opinion on ICFR based on such procedures.
The requirements of SOX and the framework offered by COSO will enable the company in accurate
financial reporting, compliance with various laws and regulations and improve the efficiency and
effectiveness of the operations of the company. I am looking forward to cooperation from all departments
across the company in order to enable the company meet its reporting requirements. I am optimistic that
under our able management the company will see many more years of success and growth in the future. In
case of any further queries please feel free to contact me.
5. Following are selected tasks from the job description of a staff accountant at Purft, Inc:
SkyView Inc., a small start-up company, has hired you as a consultant to assess its financial
systems and related processes. During your review, you learn that the company's accountant is
responsible for providing general ledger access to others in the company, processing all financial
transactions in the general ledger, and printing checks. The president of the company must
authorize write-offs in the system, but the accountant has access to the president's username
and password. Prepare a memo to Sky View’s president assessing these responsibilities in the
context of segregation of duties. Also address the possibility of the accountant committing fraud.
Explanation:
To: The President, SkyView Inc.
From: The Consultant
Re: Internal control risk arising from responsibilities of the accountant in the context of segregation of
duties
Given the responsibility entrusted upon me to assess the company’s financial systems and related processes
in the capacity of a consultant, I have studied the flow of transactions and processes in the organization. I
submit my findings related to the risk of fraud arising from the role and responsibilities assigned to the
company’s accountant. The accountant of SkyView is responsible for not only recording all financial
transactions in the ledger but also for giving ledger access to others and at the same time printing checks for
making payments. This creates a great opportunity for error or even perpetration of fraud without fear of
detection.
Besides that, he also has access to your username and password; this allows him to authorize all write –offs
thus overriding the need for your approval. In a hypothetical scenario, it would be very easy for the
accountant to record cash sales as credit sales, and syphon off the amount into his own account and
authorize the write- off of the accounts receivable as bad debt using your user name and password.
An effective financial control over the records and assets of the company requires the segregation of duties
of authorization, approval, custody of assets and record keeping. A single person should not be in charge of
carrying out all or more than one of these responsibilities, instead they should each be done by different
individuals.
I understand that SkyView is in a startup phase with not sufficient number of employees for segregation of
duties. Keeping this in view I recommend that at least the task of record keeping and custody of assets be
properly segregated and the power to authorize write-offs should lie with you and no employee should have
access to your user name and password.
I strongly recommend that necessary changes be made in order to prevent any chances of error or fraud
within the organization.
6. Scenario:
Kelly Stephens, runs a confectionery in New York and is quite popular for her doughnuts. She
manages the store all by herself. Majority of her clients are office- goers and regular visitors at
the shop. All the sales are on cash basis until now. However, to boost her sales, she is
contemplating whether to extend credit to her customers. As part of the credit policy that she
plans to adopt, the customers will receive their monthly bills on the first day of the next month
and will require to pay by the 10th of the following month. You are required to write a
memorandum to Kelly, explaining the risks involved with the strategy to adopt credit sales and
suggest appropriate measures to mitigate such risks.
Explanation:
Dear Ms. Kelly,
Greetings for the day! We are given to understand that as part of your business expansion policy, you would
like to boost sales by extending credit to your customers. Credit sales is one of the quick ways to build
revenues for small businesses when compared to its competitors. It helps increase market share by selling to
a segment of customers who majorly deal in credit. Buyers’ loyalty will increase, and future sales can be
secured. Buyers will also be willing to pay a higher price for the convenience of credit purchase, resulting in
higher profitability on credit sales compared to cash sales. You can project a positive image of the company
to customers, suppliers and competitors as a company with many economic resources.
The primary risk of credit sales is, reduced cash flow. Balancing the potential for increased sales with the
risk of reduced cash flow is an important part of managing risks in your business. Care must be taken to
ensure that too much credit is not extended, otherwise, decrease in cash flow, will negatively affect your
ability to secure raw materials from suppliers. This will expose your business to liquidity risk and may
trigger need for external borrowings and in turn expose your business to interest rate risk. Your business
could also be exposed to credit risk, where customers may never pay the money due. This could drastically
bring down the overall profitability.
Credit risk may be mitigated by finding the right mix between credit and cash customers. The risk of bad
debts can be reduced by performing credit checks on customers, which estimates the probability of default
by the customers through which you can make informed decisions on extending credit. Shortening the time
period for repayment of debt, offering cash discounts for prompt payment, will also increase the cash flow.
Maintenance of proper monthly records of individual customers and timely billing is essential for credit
sales. Following up on payments will greatly help in expediting receipts. Volume of monthly consumption
by any customer must be kept in mind while deciding on the credit terms to be extended to him/ her.
Therefore, implementing the above presented measures will aid in achieving the business goals of higher
sales, supplemented with higher profitability and effective cash flows. Please feel free to get back to us for
further assistance.
Regards,
Future CPA
7. Sweet Temptations Inc., has recently discovered the use of exotic spices in chocolates and is
excited to introduce a new variety of spiced chocolates into the market as early as possible.
The management plans to hit the current market with the new variety by Christmas of this
year. The management understands that there are several factors in the business context that
it must consider in positioning its product in the market and has approached you, a business
consultant, to advise them on this matter. Write a memo to the CEO of Sweet Temptations
Inc., about the factors affecting the business context and how it influences its current and
future strategy and business objectives.
Explanation:
I am happy to hear about your upcoming product launch and in this regard, would like to highlight to you
the business context factors that affect your current and future business strategy and objectives.
In considering the business context, refer to all the trends, relationships and other factors that affect the
current and future strategy and business objectives. Business context may be dynamic (eg. launch of the
same variety of chocolates by competitor), complex with many interconnected and interdependent elements
such as availability of raw material, economic conditions of the market and even unpredictable at times,
where the environment changes quickly and in an unforeseen manner. The factors that influence business
context are the external and the internal environment in which the business operates.
External environment includes all the stakeholders that are outside the entity but may influence the entity’s
ability to achieve its strategies and business objectives. For example, they include suppliers, customers and
competitors who are not directly engaged in the entity’s operations but are affected by the entity;
government authorities, regulatory bodies who may influence the entity’s business environment directly; and
communities, interest groups who influence the entity’s reputation, brand and trust. The organization must
also consider the political, economic, social, technological, legal and environmental factors of the market in
which it operates.
Internal environment comprises of all those elements that are inside the entity and can affect its ability to
achieve strategies and business objectives and therefore, can directly influence the organization. They
include the board of directors, management and other personnel. Depending on the size of the business and
structure, these stakeholders play distinct roles at the divisional level as well as the entity as a whole. The
organization must also evaluate its current investment (cash, property & equipment), processes (activities,
policies, procedures) and technology to determine if additional resources are required for the achievement of
the business objectives.
Business context affects an entity’s risk profile in three stages: past, present and future performance. A
detailed study of the past performance can help the organization with valuable information in shaping its risk
profile. Current performance reveals how current trends, relationships, and other factors impact the risk
profile. An analysis of these factors in relation to future might help the organization to evolve its risk profile
towards the attainment of its targets.
Apart from strategy and objective setting, it is important that management includes the business context
perspective in all aspects of its business including governance and culture, performance, review, and
revision of workforce practices and information, communication and reporting.
A thorough understanding of the business context will bring shape to your business strategy and objective,
and ensure a successful product launch. My team and myself wish you all the very best in this regard. If you
feel you need additional information, please feel free to revert.
Regards,
Business Consultant
8. Pine Co. has hired a new manager who is interested in learning more about the Committee of
Sponsoring Organizations of the Treadway Commission (COSO) Enterprise Risk Management
framework, specifically the risk assessment element. In a memo to your fellow manager at Pine,
describe two key aspects of risk assessment according to the COSO framework. Type your
communication in the response area below the horizontal line using the word processor
provided.
Explanation:
To: The Manager
From: The Manager
Re: Key aspects of risk assessment according to the COSO framework
I would like to take this opportunity to congratulate you for your new job and welcome you to Pine Co. I
understand that you are interested in learning about the Committee of Sponsoring Organizations of the
Treadway Commission (COSO) Enterprise Risk Management framework. The Committee of Sponsoring
Organizations of the Treadway Commission (COSO) was established in 1985 to sponsor research into the
causes of fraudulent financial reporting. It is dedicated to providing thought leadership through the
development of frameworks and guidance on enterprise risk management, internal control and fraud
deterrence.
Enterprise Risk assessment (ERM) by the management of the company is one of the five essential
components of COSO. ERM provides a framework for risk management, which typically involves
identifying particular events or circumstances relevant to the organization's objectives (risks and
opportunities), assessing them in terms of likelihood and magnitude of impact, determining a response
strategy, and monitoring progress. This memo seeks to describe two key aspects of risk assessment as per
COSO framework; they are risk identification and risk analysis.
Risk identification includes an understanding of the current conditions in which the organization operates on
an internal, external and risk management context. It also includes the documentation of the material threats
to the organization’s achievement of its objectives. Risk analysis includes the calibration and, if possible,
creation of probability distributions of outcomes for each material risk. Risks identified need to be assessed,
considering their impact in hindering Pine Co, from achieving its objectives, so that the risk can be managed
whether by choosing to avoid, share or accept the risk after careful analysis.
Pine Co. has an efficiently operating ERM system in place. While working for the company you will learn a
lot of practical ways in which the ERM system is incorporated in the system of a company. If you have any
questions or would like to discuss the matter further, please do not hesitate to contact me.
9. You are part of a freelance business management consulting team that conducts seminars
across the state on management topics. Your topic for this week’s session is– ‘What steps can
an organization take to inculcate a risk-aware culture among its people?’ Top managers of
various companies will be at the seminar. Write a memo to the key note speaker covering
various aspects of this topics for the presentation.
Explanation:
Culture of an organization reflects its core values, behaviours and decisions. Culture has a profound
influence on how an organization identifies, accepts and manages risks. Risk-aware culture within an
organization enables its personnel to know the boundaries within which it operates and what it stands for.
Such culture demands strong understanding of and commitment to the values communicated from the top
level of the organization. According to the Committee of Sponsoring Organizations (COSO), which has
developed an integrated framework for internal controls, an entity’s core values form basis of Enterprise
Risk Management (ERM) and creation of a risk- aware culture forms an integral part thereof.
An organization can embrace a risk-aware culture by maintaining strong leadership that sets the tone
throughout the entity. To begin with the management must not view risk as negative; rather it must
understand that managing risk is critical to achieving the strategy and business objectives. The leadership of
the organization, must encourage personnel to contribute to the decision- making process as well as to
identify and communicate the risks to strategy and business objectives. The importance of risk awareness
can be enforced through accountability, where in the management documents polices and adheres to them
and conveys that lack of accountability will not be tolerated. To encourage a risk-aware decision making and
judgement, remuneration and incentives must be aligned to the core values of the organization. Risk-
awareness should be made an ongoing business requirement; at the top management level, this can be
achieved if management addresses risk in key business decisions and make everyone understand the
interrelationship between risks and their impact on the final decision making. At the staff level, ongoing
risk-awareness can be achieved through training and continuously sending messages that managing risk is
part of their daily responsibilities, and that it is critical to the entity’s success and survival.
The agenda of risk-aware culture can be best achieved by a management, which creates and sustains this
objective through explicit policies, rules, and standards of conduct and implicitly through leadership by
example to reflect its core values and standards of conduct.
I truly believe that all the points presented above will be sufficient to create a base for the topic to be
presented. Please, let me know if you would like to discuss this further.
Regards,
Management consultant
10. Mr. Joe, a new joinee in your CPA firm, needs your help. He is working on Enterprise Risk
Management framework of a client and needs to be enlightened about how would the
management assess the severity of risk. Please write a memo to him explaining the same.
Explanation:
Identification of risks followed by assessment of their severity is essential for the achievement of an
entity’s strategy and objectives. Severity of a risks is assessed at multiple levels of an organization
such as divisions, branches, operating units or functions, against the business objectives they may
impact. It is possible that the severity of risks assessed at one level, for example at operating unit
level, may be high, whereas the impact of such risk at the entity level, may be low. Therefore,
management must select measures to assess the severity of the risk according to the size, nature and
complexity of the entity and its risk appetite.
In determining the measures to be selected, the management must consider several aspects. Initially,
the likelihood and impact of the risks. The impact of risk may be positive or negative relative to the
strategy and objectives of the organization. Likelihood is the possibility of the risk occurring which
can be expressed qualitatively, quantitatively or by frequency of occurrence. Additionally, the time
horizon used to assess the risk must be the same as the time horizon set for achievement of the
business strategy and objectives. For example, the time horizon for specific business objectives may
be short-term such as one to two years, whereas the time horizon connected with mission, vision and
strategy of an organization is medium term to long term. Root causes for the risks must be identified;
as quite often, these tend to have a positive or negative impact on the management’s assessment of
risk. Finally, the management must try to understand the interdependencies that may exist between
the risks.
The measures to approach risk may either by qualitative, quantitative or a combination of both. Few
examples of qualitative approach are interviews, workshops, benchmarking that are easy to complete
but are limited in their ability to identify correlations or provide a cost-benefit analysis. Quantitative
approaches include modelling, decision trees, probabilistic models and non-probabilistic models, that
allow for precision and cost-benefit analysis. Typically, quantitative models are used for complex
and sophisticated activities. The anticipated severity of risks also influences the type of approach to
use.
Risks may be assessed by an individual, team or department. The same risk may be assessed by
different team yielding different results. Management must review each assessment in relation to the
approach, assumptions used and the perspective of the business objectives.
Understanding the classification of risks is important to assess their severity. Risks can be classified
as inherent, target residual or actual residual risk. Inherent risk is the risk to an entity for which the
management does not have any direct or focussed actions. Target residual risk to an entity is the risk
that the management assumes in pursuit of its strategy and objectives, in the presence of direct or
focussed actions by management to alter the severity of risk. Actual residual risk is the risk that
remains after management has taken actions to reduce the severity of risk. Ideally the residual risk
must be lower than target risk; however, if residual risk is greater than target risk, then additional
actions need to be taken to reduce the severity of risk.
Assessment of severity of risk is an iterative process that affects the achievement of an entity’s
strategy and objectives. Based on the risks identified and their severity, management decides on the
resources to deploy to reduce or maintain the risk within the risk appetite of the organization.
Should you have any queries, please feel free to revert to me. I will be happy to help!
Regards,
Future CPA
11. You are the internal audit manager for Clove Co. You have been asked to explain to the CEO
how technology can help with internal control monitoring.
In a memo to the CEO, contrast ongoing and separate evaluations as described in COSO, and
explain at least two advantages of using technology to facilitate these monitoring activities.
Type your communication in the response area below.
Explanation:
This memorandum is prepared to explain how technology can help with internal control monitoring and
some advantages of using technology to facilitate the monitoring activities which will help the company to
improve the internal control monitoring process.
Technology has enhanced an organization’s ability to monitor internal controls and risk. Internal control
systems can have embedded modules that look for unusual or suspicious transactions or relationships. This
makes it more efficient and effective for management to perform ongoing monitoring. For instance, the
technology can include bar code readers that capture data at its origin or voice recognition and output
systems. Technology can avoid human errors and potential frauds in processing involving extensive human
involvement, such as with traditional systems that have numerous accounting subsystems and require human
involvement for transactions from subsystems to be posted by data entry to the general ledger. Such
processes can be automated and IT systems can monitor such processes and avoid human errors.
Monitoring activities is one of the vital components of COSO’s Internal Controls- Integrated Framework as
it continuously evaluates the effectiveness of all the five components. To assess the adequacy and
effectiveness of internal controls, monitoring activities is performed by ongoing activities or by separate
evaluations. Ongoing monitoring activities include regularly performed supervisory and management
activities, such as continuous monitoring of customer complaints, or reviewing the reasonableness of
management reports. Continuous monitoring is often performed with the use of technology, such as
embedded software. Separate evaluations are monitoring activities that are performed on a non- routine
basis, such as periodic audits by the internal auditors.
Technology is evolving swiftly and the processes are automated across industries. It is becoming
increasingly difficult to monitor such complex systems using the traditional internal control monitoring
systems.
If you have any further questions or would like to have further discuss please do not hesitate to contact me.
12. You are a freelance writer for an economic weekly. You have been asked to prepare a memo to
the editor of the weekly, prior to its publishing. In the memo, discussing the importance of
setting risk appetite for an organization and what steps are taken in determination of risk
appetite. Use the COSO framework as guidance in developing the memo.
Explanation:
All decisions of an organization relating to its strategy and objectives are associated with risk of failure.
However, the risk of failure does not deter an organization from implementing its strategy and objectives;
instead it identifies and defines risk appetite in parallel with its strategy and understands that the risk
appetite is refined on an ongoing basis consistent with the changing environment and objectives. The
Committee of Sponsoring Organizations (COSO) has developed the Enterprise Risk Management
framework, which provides guidelines on determining risk appetite of an organization.
There is no standard approach to determine the risk appetite for all entities. Risk appetite is determined using
various approaches including discussions, review of past and current performance and modelling. An
organization may consider both internal as well as external stakeholders for this purpose. The management
also communicates the agreed- upon risk appetite to various levels within the organization. Some
organizations may develop quantitative measures to link to the risk appetite. Organizations consider several
parameters for framing their risk appetite with precision. They may consider strategic parameters like
considering new products or discontinuing existing product lines, investments in Property, Plant and
Equipment. Financial parameters like variability in financial performance, target return on assets, target
debt/ equity ratio etc. are also considered while framing the risk appetite. The organizations also consider
operating parameters such as safety targets, quality targets and concentration of customers.
In addition, the management may consider the organization’s risk profile, risk capacity, enterprise risk
management, capability and maturity when determining risk appetite. Risk profile provides information on
entity’s current level of risk and its distribution across various levels within the entity. Risk capacity is the
maximum amount of risk acceptable in pursuit of its strategy and business objectives. Therefore, an entity
must match its risk appetite with its risk capacity. The risk appetite can never be greater than the risk
capacity of the organization. Enterprise risk management (ERM) framework provides information on the
functioning and effectiveness of ERM within the organization. A mature organization is able to define ERM
capabilities that provide valuable insights into its existing risk appetite and risk capacity. On the other hand,
a less mature organization may lack the required level of understanding that may result in a broader risk
appetite statement. ERM framework also helps to check if the organization is operating within its risk
appetite.
Once the risk appetite is determined, it is articulated either as a single point or as a continuum and
communicated by the management and the board, across the entity. In cases of sensitivity, the management
restricts communication, while in other cases, they are even communicated to the external stakeholders.
Risk appetite guides an organization in allocation of its resources throughout the entity and at the individual
operational unit levels. Management, with board oversight must continually monitor risk appetite at all
levels of the organization and incorporate changes as needed.
I hope the above information has provided sufficient insight into the process of determining risk appetite by
organizations. Please, let me know if you need additional information.
Regards,
Freelancer
13. Assume that you are acting as a consultant for Winston Co. The president of the company is
considering implementing an enterprise risk management system. To evaluate whether to go
forward with the project, the president has asked you to describe the limitations of an enterprise
risk management system. Prepare a memorandum to Winston's president describing the purpose
and limitations of an enterprise risk management system.
Explanation:
As required by you, please find below, brief information about the Enterprise Risk Management [ERM]
system and its limitations. The enterprise risk management system is a process, effected by the board of
directors, management and other personnel, applied in a strategic setting across the enterprise. The primary
objective of an enterprise risk management system is to identify the potential events (risks and
opportunities) that affect the entity, understand the probability and impact of such risks and opportunities
and manage these within the risk appetite of the organization. While there are many advantages to
implementing an ERM system, before taking a decision regarding the implementation of the system, we also
need to understand its limitations.
Enterprise risk management has some distinct limitations. ERM focuses on risks that relate to future events,
which may or may not occur. Also, the response to risk is a matter of human judgment which has its own
limitations. Other factors that needs to be considered are, the potential break down of even a well designed
ERM system, collusion among two or more individuals, cost-benefit constraints and the management's
ability to override enterprise risk management decisions. These limitations, preclude the management from
providing absolute assurance about achieving the management's objectives.
In implementing the ERM system that is in line with the objectives of your organization, I suggest that your
carefully weigh the benefits and the limitations of the system, as provided.
Please feel free to contact me in case you have any queries or need further information on the subject.
14. Gypsy Inc. is a technology giant based out of California. It engages skilled individuals for
extended periods through contracts and offers flexibility to work. Its training methods include
seminars, on-the-job training, mentoring and simulations. Lately, it is finding it difficult to
attract skilled individuals for the job and is facing trouble due to high labour turnover in its
organization. Write a memo to the Senior HR manager, on what changes to bring about in the
HR policies and/or the organizational policies to attract, develop and retain capable employees.
Explanation:
Greetings for the day! We are given to understand that you are facing problem of high staff turnover in your
organization. We will try to touch upon guidelines on how to attract, develop and retain capable individuals.
Since the technology industry is exposed to high attrition and turnover, it is important to have right kind of
people to do right kind of work in the organization. An organization’s goals can be achieved only if the
management is able to define the human capital need to carry out the strategy and the organizational
objectives. Once the need has been identified, the human resource function plays a crucial role in assisting
the management by providing job descriptions, outlining the roles and responsibilities, facilitate training and
monitor individual performance.
The human resource team should aim at systematically attracting, training, mentoring, evaluating and
retaining the right kind of individuals (with preferred skill set and experience) through a structured
mechanism. At first, the management should try to identify and seek out such number of candidates who
display both competence for the proposed roles and compatibility with the organization’s desired risk- aware
culture, desired behaviour and operating style. Then the appointed individuals should be trained to specific
needs through methods like classroom training, self-study and on-the-job training. It is important during
training and the course of employment, that the importance of the standards of conduct and desired level of
Enterprise Risk Management (ERM) competencies are reinforced. Here the ERM competencies imply that
employees develop required knowledge, skills and expertise, considering the nature, extent of judgement
and limitation of authority applicable to a specific position. Guidance must be provided to the staff through
mentoring to align the individual’s skills with entity’s business objectives and adapting to the evolving
business environment. Evaluation of performance against standards set and timely feedback is crucial for the
achievement of business objectives. Thereafter, retention of such individuals demands providing incentives
(monetary as well as non- monetary) and reinforcing the desired level of performance through training
programs and promotion schemes.
It is crucial to also look at the cost- benefit aspect of various skill sets and experience. Throughout this
process, any actions not in accordance with the code of conduct, expectations and ERM responsibilities must
be identified, evaluated and rectified in due course of time. In addition to the above, the management must
on an ongoing basis, evaluate the necessity (temporary or permanent hire; retain or let go) and impact of
each individual role on the organization’s achievement of business objectives.
I hope the above information is of help to you and your organization to jumpstart changes to your HR
policy. Please do not hesitate to contact me for any questions you may have.
Regards,
Future CPA
15. Osmium Plastics LLP. is a firm specialized in manufacturing electrical conduits. The company
has a beginning inventory of $1 million and it has recently implemented just-in-time. Osmium
plans to raise loan and has approached Sky Bank. One of the key metrics Sky Bank scrutinizes
is the net income. The CEO asks you to prepare a memorandum explaining absorption costing
and variable costing and the preferred costing method for the company considering the impact
of inventory on net income.
Explanation:
This memorandum is designed to describe the absorption costing and variable costing and the preferred
costing method for the company considering the impact of inventory on net income.
Variable costing is a method of inventory costing in which all variable manufacturing costs (direct and
indirect) are included as inventoriable costs. All fixed manufacturing costs are excluded from inventoriable
costs and are instead treated as costs of the period in which they are incurred. Absorption costing is a
method of inventory costing in which all variable manufacturing costs and all fixed manufacturing costs are
included as inventoriable costs. That is, inventory “absorbs” all manufacturing costs. Under both variable
costing and absorption costing, all variable manufacturing costs are inventoriable costs and all
nonmanufacturing costs in the value chain such as research and development and marketing, whether
variable or fixed, are period costs and are recorded as expenses when incurred.
When there are beginning and ending inventories, absorption costing and variable costing will generally
result in different inventory valuations for beginning inventory, different inventory valuations for ending
inventory, and different incomes, but it is possible for the inventory balances and income to be the same
under the two methods. If beginning and ending inventory levels are zero, absorption costing and variable
costing will always result in the same income. If beginning inventory is zero and ending inventory is
positive, absorption costing will always result in higher income than variable costing, and a higher valuation
for ending inventory. If beginning inventory is positive and ending inventory is zero, absorption costing will
always result in lower income than variable costing, and a higher valuation for beginning inventory. When
inventory levels are increasing from period-end to period-end, as would be expected when the company is
growing, absorption costing will generally result in higher ending inventory valuations than variable costing,
and also higher income in each period. The reason is that absorption costing postpones recognizing ever-
increasing amounts of fixed manufacturing overhead on the statement of income, because increasing
amounts of fixed manufacturing overhead are capitalized as ending inventory.
As the company has positive inventory and it is expected to have zero inventory as it recently implemented
just-in-time, the best recommended costing method is variable costing. This will help the company to have
higher inventory valuation and income which is in line with the bank’s current requirements.
I would be delighted to assist you if you have any further questions.

16. A prospective client, Mr. Williams, who wants to start a business of jewellery making has
approached your CPA firm. He requires your help in selecting a costing method which would be
suitable for his prospective business. He explains that he will be procuring the raw material
required for making various pieces of jewellery in bulk and that each piece of jewellery will
require different quantity of material and labour hours to prepare. He informs you how he plans
to make and sell jewellery based on the latest market trends as well as make customized
jewellery pieces based on individual customer orders. You are required to write a memo to Mr.
Williams suggesting a suitable method of costing for his business. Also explain in the memo why
the method is best suited to his business needs and how various costs will be allocated to each
piece of jewellery.
Explanation:
Thank you for providing us with the required information about your prospective business processes and
giving us this opportunity to serve you. There are two types of costing systems, the job-order costing system
and the process costing system. The job-order costing system is the one suitable for your business need. In
order to help you understand the reason we are suggesting the job-order costing system, I would like to
explain both the costing systems in brief.
The job-order costing system is a suitable method of cost accounting for accumulating and allocating costs
to a specific job or a group of unique products. It is suitable when the products produced are relatively
expensive, heterogeneous and when the costs are easily identifiable to specific units or batch of units. This
method is especially suitable when the goods are unique or custom made. Compared to this, the process
costing system is suitable for homogenous products which are produced in bulk. It is used for accumulating
and allocating costs to goods that are relatively inexpensive and costs are not identifiable to specific units
because of mass production. From the above explanation, it must be evident to you that the job-order costing
system is best suited for your jewellery business.
For the purpose of allocating cost, each piece of jewellery will be treated as a separate cost center. Though
the purchase of raw material for making of jewellery will be done in bulk, the total raw material cost will be
allocated to each piece of jewellery based on the quantity and / or weight of raw material that goes in
manufacturing it. Similarly a log will be maintained to record the hours of skilled labour required in
production of each piece of jewellery. The fixed and variable overheads will be charged to each piece using
a pre-determined overhead rate. For example, labour hours utilized in preparing each piece of jewellery can
act as basis for allocation of the overhead costs. The normal wastage in the manufacturing process should be
charged directly to the piece of jewellery to which it relates. However, abnormal spoilage which occurs due
to unnecessary events, acts or conditions will be treated as a period cost. A job cost sheet should be
maintained for each separate job which will contain information about the date the job was started, finished
and handed over to the client or sold. The sheet will also contain all information regarding the cost and
quantity of raw material, labour hours utilized and overhead costs allocated to the job. The system of job-
order costing will assist the management in controlling operational efficiency, making better cost estimates
for similar jobs and pricing each piece of jewellery efficiently.
Hope all your queries have been addressed through this memo. In case you require any assistance in
implementation of the job-order costing system for your business, please feel free to contact our firm. We
will be pleased to provide all assistance needed.
17. Smith Andrews, a client of the CPA firm you are employed with is looking to start a garment
manufacturing business. He has briefly discussed the variable costing and / or absorption costing
method and requested your advice on the costing method which will enable to track and analyse
the effects of change in the volume of sales on the profitability of the company in the early
years. Write a memo to Mr. Andrews explaining how both the costing methods are
complimentary to each other to meet his purpose and also benefit the business in overall
reporting to external stakeholders.
Explanation:
I am writing this memorandum with reference to our discussion about your plan to start a garment
manufacturing business. Before giving an advice on this matter I would first like to briefly explain to you
both the variable and absorption costing methods, their differences and benefits, so as to enable you to take
an informed decision in the matter.
The variable costing and absorption costing are different methods for allocating direct and indirect
manufacturing costs to goods and services produced. Under the variable costing method, all the variable
costs related to raw material, labor, variable manufacturing, selling, general and administrative expenses are
deducted from total sales in order to arrive at the contribution margin. All fixed manufacturing overhead
expenses are expensed as a period cost and the value of closing inventory does not include any fixed
manufacturing overhead. Due to these reasons, the variable costing method is known as the direct costing
method. Unlike the variable costing method, under the absorption costing the portion of fixed and variable
manufacturing expenses related to goods sold during the year is expensed and those related to unsold goods
are capitalized as inventory. Due to this reason it is also called the full costing method. There is a difference
in the amount of net profit calculated under both the methods due to the manner in which the fixed
manufacturing overhead costs are treated.
Variable costing method will enable your firm to calculate the contribution margin, analyse the effect of
change in sales volume on the contribution margin and will help the firm in taking important cost, volume
and pricing decisions. Due to these reasons, it is said that variable costing is a suitable method for internal
reporting and management decision making purposes. During the initial years the fixed cost element of the
firm will be high. Under the variable costing method, the entire fixed cost will be expensed during the year,
due to which the profitability reflected by the financial statements will be low or they may even reflect a
loss. As compared to this, if the absorption costing method is used the element of fixed cost related to the
ending inventory will be capitalized due to which the profit will be comparatively higher. Thus, the
absorption costing method is more suitable for external reporting purposes. Lower profit margins or booking
losses in the initial years may have a demotivating effect on the investors of the firm and can also thereby
hinder the borrowing capacity of the firm. Most importantly the absorption costing method is an accepted
method under US GAAP, whereas the variable costing method is not allowed for external reporting
purposes.
The best part is that variable and absorption costing methods are complimentary to each other. Thus, I would
like to advise you to use the variable costing method but only for internal reporting and decision making
purposes, whereas to use the absorption costing method for external reporting purposes.
In case you have any queries or need any further information, please feel free to contact me.
18. Crypto Electronics LLP is a start-up electronic manufacturing firm. The company plans to
formalize accounting information system. The company hires Emily Grey as the accountant.
The CEO asks Emily Grey to prepare a memorandum explaining manufacturing and non-
manufacturing costs with examples.
Explanation:
This memorandum is designed as per your request to explain manufacturing and non-manufacturing costs.
Manufacturing costs are product costs as these are matched to the product and not expensed until the product
is sold. It represents sum of direct material, direct labor and overheads. It is included in inventory for goods
unsold at the end of the period. Direct materials are materials that are physically included in and can be
directly traceable to the final product. Direct materials costs include other costs such as freight in, storage
costs, import duties and purchasing and receiving department costs. Direct labor is the wages that are
incurred to convert the raw material into finished goods and are directly traceable to the product. Overheads
represent all costs that are not directly traceable to a product. It includes indirect materials such as lubricants
or small replacement parts for machines, cleaning supplies, miscellaneous materials like glue, screw, etc.
and indirect labor such as salaries for supervisors, maintenance team, factory security guards. Other indirect
factory overhead costs include factory rent, factory electricity and utilities, machine maintenance, property
taxes on factory property, depreciation of factory assets, insurance on factory assets.
Non-manufacturing costs are period costs as these are matched to the period incurred. Period costs are all
costs in the statement of income other than cost of goods sold. Period costs, such as marketing, distribution
and customer service costs are treated as expenses of the accounting period in which they are incurred
because they are expected to benefit revenues in that period and are not expected to benefit revenues in
future periods. Some costs such as research and development costs are treated as period costs because,
although these costs may benefit revenues in a future period if the research and development efforts are
successful, it is highly uncertain if and when these benefits will occur. Expensing period costs as they are
incurred best matches expenses to revenues.

19. Rudder Co. wants to raise capital for a new product line. The CFO has requested your advice, as
the company’s controller, on two alternatives being considered: the issuance of convertible debt
or the issuance of redeemable preferred shares.
Prepare a memo to the CFO outlining and discussing the issue that the company will need to
consider for each of the two alternatives for raising additional capital
Type your communication in the response are below.
Explanation:
To: CFO, Rudder Co.
From: Financial Controller, Rudder Co.
Date: March 3, 20X9
Re: Raising additional capital based on the two alternatives.
You have requested that I detail the different considerations to be made in the issuance of convertible debt or
the issuance of redeemable preferred shares.
Convertible bonds give bondholders the option to exchange the bond for a specific number of shares of the
issuing corporation’s common stock. This gives bondholders the opportunity to profit from increases in the
value of the common shares. Regardless of the price of the common shares, the value of a convertible bond
will be at least equal to its bond value without the conversion option. As the conversion option is valuable to
bondholders, convertible bonds can be issued with lower yields compared to otherwise identical straight
bonds. Potential bondholders have to pay a premium for convertible bonds or / and will be paid less interest
or coupons compared to a non-convertible bond due to the convertible nature of the bonds. In other words,
the company can raise more money or can reduce the future interest expense by offering the convertible
option in a bond. It will reduce the cost of debt.
A callable or redeemable preferred shares is a type of preferred shares in which the issuer has the right to
call in or redeem the stock at a predetermined price after a defined date. Preferred shareholders generally
have no voting rights but they have preference as to dividends and receipt of capital upon liquidation of the
company and they are paid a fixed amount of dividends. A callable preferred stock issue is advantageous to
the company, as it confers the flexibility to lower the issuer's cost of capital if interest rates decline or if it
can issue preferred stock later at a lower dividend rate. The company is protected from rising financing costs
and market fluctuations. If the financing costs decline, the company can redeem or call the preferred share at
the predetermined price and can reissue the preferred share at the lower financing cost.
As the cost of debt is always less than the cost of preferred equity, I recommend the issuance of convertible
debt if the debt is within the optimal capital structure. If the debt has already reached the threshold level, I
recommend the issuance of preferred shares as it will improve the debt to equity ratio.
If you have any questions, please contact me.

20. Yeager Company is considering several alternative capital investments. In evaluating the
investments, management of the company has used the payback and accounting rate of return
methods. Prepare a memorandum to Linda Gordon, the chief financial officer, describing the
limitations of these two methods for evaluating investments and suggesting other methods tha
t might be more appropriate.
Explanation:
As requested, this memorandum presents an evaluation of two methods used in evaluating investment
opportunities - payback method and accounting rate of return method. It also suggests alternative methods
that might be more appropriate in evaluating investment decisions.
The payback period method determines the length of time it takes for the initial cash outlay to be recovered
from the investment. A major limitation of this method is that neither does it consider the profitability of the
projects nor the time value of money in choosing the investment. The accounting rate of return method
determines an approximate rate of return by taking into account the accounting income divided by the
investment. While this method is simple and intuitive, it has a number of limitations such as it does not
consider the actual cash flows, no adjustment is made for project risk, the results are affected by the
depreciation method used and there is no adjustment for time value of money. Therefore, these methods are
not the most appropriate in determining the return on the various investment alternatives.
Capital budgeting techniques that involve the computation of time value of money are usually more
appropriate in determining the rate of return on investments. Time value needs to be considered because a
dollar earned today is more valuable than the promised dollars in the future as money can earn interest and is
worth more the sooner it is received. Accordingly, Yeager Co, can consider one or all of the following
methods: Discounted payback method, Internal rate of return method and Net present value method. The
discounted payback period method, unlike the payback period method, takes into consideration the present
value of the cash flows in determining the pay back period. The Internal rate of return method evaluates
investment alternatives based on the time adjusted rate of return on investment. It determines the interest
rate at which the net present value of all cash flows (inflows and outflows) from an investment is equal to
zero. The Net present value method evaluates an investment opportunity after comparing the present value
of all its future cash inflows and outflows. The advantage of using both the internal rate of return and the net
present value, apart from considering the time value of money are that the net result determined under both
methods are compared to a hurdle rate, that is based on market rates for similar investments and the entire
profitability of the project and risk factors are considered.
I recommend that the company should utilize capital budgeting techniques such as the Internal rate of return
and Net Present Value methods in order to evaluate the capital investment opportunities available to it.
These methods consider the time value of money and will help to make appropriate decisions that
maximize return on investment. If you have any questions regarding the above capital budgeting methods,
please feel free to contact me.
21. Gold, Inc. changed its credit policy several months ago in hopes of increasing sales. Since then,
there has been a dramatic increase in the number of accounts receivable that are past due.
Currently, the company calculates the allowance for doubtful accounts based on a percentage of
the ending receivables balance. The company’s controller now thinks it is more appropriate to
use a percentage of sales method to calculate the allowance for doubtful accounts.
Write a memorandum to the controller comparing and contrasting the two methods (percentage
of accounts receivable balance vs. percentage –of-sales).Recommend the method you think Gold
should use, and give reason to support your conclusion.
Explanation:
Memorandum
To: The Controller, Gold Inc.
Subject: Comparison and recommendation of method used to calculate allowance for doubtful debts.
In the light of increase in credit sales and resulting increase in the number of accounts receivable past due it
has become essential that we select an appropriate method for calculating the allowance for doubtful debts.
In order to do so, we need to understand the two methods widely used for calculating doubtful debt that are
the percentage of accounts receivable balance method and the percentage of sales method.
The Percentage of receivables method estimates bad debts by multiplying the ending accounts receivable
balance by the historical bad debt percentage. The procedure used is called aging of accounts receivable. It
works on the logic that older the accounts receivable, higher are its chances of becoming bad. Unlike the
percentage of sales method, the percentage of receivables method does not directly estimate bad debts
expense. This method actually estimates the ending balance of allowance for bad debts account and based on
that the amount to be charged as bad debt is determined.
Percentage of sales method is based on sales revenue and assumes that a certain percentage of the sales on
credit are non-collectable. Based on prior years, a company can reasonably estimate what percentage of the
sales will not be collected. An allowance for bad debt is computed by multiplying credit sales by this
percentage.
Currently, due to increased credit sales, our company is experiencing a rise in receivable accounts that are
past due. In such a situation I recommend to continue using the percentage of ending receivables method as
logically the older the age of an account receivable, less are the chances of recovering it completely. Using
this method we will be able to make appropriate provision as allowance for bad debts and also project the
accounts receivables at a more realistic figure.
22. A company's management is reviewing the annual billing for general liability insurance. The
provider has offered the company two options for payment. The first option is to pay the entire
premium in full at the time of commitment. The second option is to make a down payment of
30% of the premium at the time of commitment. The second option is to make a down payment
of 30% of the premium at the time of commitment and to pay the remaining 70% of the premium,
plus a 2% surcharge on the entire premium, over the 12-month policy period. As the financial
analyst, you have been asked by management to evaluate these options. Write a memo to the
CFO analysing the effects of each payment plan on working capital and net income. Type your
communication in the response area below.
Explanation: Memorandum
Re: Effects of payments plan on the working capital and net income.
This is to provide an analysis of the effects of the two alternative payment options offered by the provider of
our firm's general liability insurance. The analysis will describe the effects of each payment plan on the
firm's working capital and net income.
The first option is to pay the annual insurance premium in full at the time the policy is written. Use of this
option would result in a one-time, up-front reduction in cash for the amount of the annual premium and a
concurrent recognition of a prepaid asset, insurance paid in advance. Since the results of recording one time
payment is to reduce cash and increase another current asset by the same amount, there will be no change on
current assets and, therefore, no effect on working capital at the time the policy is first recorded. However,
immediate cash outflow would impact the liquidity accordingly.
Subsequently, over each of the next 12 months, 1/12th of the prepaid insurance asset will be recognized as
an expense. That recognition will be accomplished by an increase in insurance expense and a reduction in
the insurance paid in advance accounts. That monthly reduction in insurance paid in advance will reduce
current assets by 1/12th of the original balance and, thereby, reduce working capital by that amount each
month. The recognition of an expense each month will reduce monthly net income by a like amount.
The second option offered is to pay 30% of the annual policy premium as a down payment at the time the
policy is written and to pay the remaining 70%, plus a 2% surcharge on the entire premium, over the 12-
month policy period. Under this option, at the time the policy is written there would be a one-time, up-front
reduction in cash of 30% of the cost of the policy, which would be recognized as a prepaid asset, insurance
paid in advance. Since that payment would both increase and decrease a current asset by the same amount,
there would be no effect on working capital at that time. Over each of the next 12 months, 1/12th of the
down payment would be recognized as an expense by a reduction in the insurance paid in advance account
and an increase in insurance expense. Each month, 1/12th of the remaining 70% of the cost of the policy
also would be recognized as insurance expense and a reduction in cash as those premium amounts are paid.
In addition, the 2% surcharge paid each month would be recognized as an interest expense and a reduction
in cash.
Under this second option, the allocation of the 30% down payment to expense over the 12-month period and
the payment of the additional amount each month related to the remaining 70% would result in a reduction
in working capital of 1/12th of the annual premium each month. This is the same allocations as would occur
under the first option.
Under both options, insurance expense would be the same each month, so there would be no difference
between options in the effect on net income from payment of the insurance premium. However, under the
second option, the additional monthly payment of the 2% surcharge would reduce both working capital and
net income each month by the amount of that payment, a reduction not incurred if the first option is used.
In summary, while there would be differences in timing of cash outflow and accounting entries between the
two options, the major difference between the options would be the effect on both working capital and net
income that would occur as a result of the 2% premium surcharge required under the second option. We can
compare the opportunity cost of paying lump sum initially as per the first option with the surcharge under
second option and choose accordingly. If I can provide additional information, please let me know.
23. Three Bag Co., a bag manufacturer, is exploring the possibility of opening an additional
manufacturing plant. The new facility will require significant start-up costs. The CFO has asked
you to prepare an analysis of the potential investment using the return on investment and
internal rate of return financial models.
Prepare a memo to the CFO describing the data requirements for the two models and the
advantages and disadvantages of using each model.
Explanation:
To: CFO, Three Bag Co.
From: CPA Candidate.
Re: Using return on investment and internal rate of return models.
This memo is prepared to describe the data requirements of return on investment and internal rate of return
financial models.
Return on investment (ROI) is the ratio of a measure of return divided by a measure of investment. ROI is
most often computed using net income (income after interest and taxes) but it also may be computed using
operating income or operating income after taxes. It is easier to compute the return on investment as we only
need to know the total return and the initial investment to calculate the ROI. An advantage of ROI is that it's
a very simple method to help management decide whether a project is worth approving. However, it does
not consider the timing of cash flows and ignores the time value of money. It will be unreliable in situations
where the projected cash flows have a high value at a latter stage of the project’s life and less cash flows in
the earlier periods.
The internal (time-adjusted) rate of return (IRR) method is the rate of discount at which the present value of
the future cash flows will exactly equal the investment outlay (i.e., the rate that results in a NPV of zero).
This rate is compared with the minimum desired rate of return to determine if the investment should be
made. However, it is difficult to estimate the cash flows of the project with the time frame expectations. The
method is reliable only when there is an initial outlay followed cash inflows. If there is any intermittent
outflow, there will be multiple IRRs and it will be unreliable. Another flaw of IRR method is that it assumes
that the cash flows are reinvested at the IRR. Moreover, it is not easy to calculate IRR. However, IRR has
certain advantages. It considers the timing of cash flows and the time value of money.
If you have any further questions, please contact me.

24. MLO Inc., an Idaho-based consumer appliance company, plans to expand its operations to
Alabama and it expects a return of 18% from the fourth year. The company considers issuing
callable bonds or convertible bonds. The company’s CFO asked Anita Lopez, the financial
controller of MLO Inc., to evaluate the financing options. Prepare a memorandum to the CFO
assessing each financing option and your recommendation.
Type your communication in the response are below.
Explanation:
To: CFO, MLO Inc.
From: Anita Lopez
Financial Controller
MLO Inc.
Date: January 22, 20X9
Re: Assessing financing options of callable or convertible bonds.
This memorandum is prepared as per your instruction of evaluating the financing options for the expansion
of our business operations. Particularly, you are interested in knowing the best option for financing between
callable or convertible bonds.
As per the pecking order theory, internal financing is the best option of financing, followed by debt and
finally, equity. As the option of internal financing is not suggested, I assume this option is already
considered.
In a callable bond, the issuer has the right to redeem all or part of a bond issue at a specific price (i.e. call
price) if they choose too. The main advantage of having callable bond is that the company can redeem the
bond at any point and avoid paying the coupon payments or interest until the maturity of the bond. It is also
advantageous if the interest rate drops. If so, the company can redeem the high-interest paying bond and
replace it with new low-yield bonds. However, note that the price of the callable bonds is less than the non-
callable bonds as the call option is available and valuable to the bond issuers. As these are advantageous to
the bond issuer, they are adverse to the bond holders.
Convertible bonds give bondholders the option to exchange the bond for a specific number of shares of the
issuing corporation’s common stock instead of holding the bonds until maturity for redemption to cash. This
gives bondholders the opportunity to profit from increases in the value of the common shares. Regardless of
the price of the common shares, the value of a convertible bond will be at least equal to its bond value
without the conversion option. As the conversion option is valuable to bondholders, convertible bonds can
be issued with lower yields compared to otherwise identical straight bonds. Unlike callable bonds, these
cannot be redeemed prior to maturity.
Further, as the company expects to earn a return of 18% from the fourth year onwards, there is a high chance
that we will have enough cash flows to redeem the bond prior to its maturity. Thus, my recommendation of
financing is the issuance of callable bonds.
If you have any questions, please feel free to contact me.

25. The CEO of ABC, Inc. has asked for your advice about changing the company’s inventory method
from FIFO to LIFO. As the controller, you believe that LIFO is the best methodology for the
company as it is facing inflationary trends. Write a memo to the CEO supporting your
recommendation to change to LIFO for inventory costing purposes. In your memo, explain the
advantages and disadvantages of each method and identify conditions under which LIFO might
produce advantages over FIFO
Type your communication in the response area below the horizontal line using the word
processor provided.
Explanation:
To: The CEO, ABC Co.
From: The Controller, ABC Co.
Subject: Recommendation to change the inventory costing method to LIFO from FIFO
Our company has been using the FIFO i.e. the first in, first out, method of valuation of inventory till date as
it matches the actual flow of materials and hence is a logical choice. However for our business, the LIFO
method i.e. the last in, first out method is more suitable. In order to support my recommendation for change
in the valuation method for our company I would like to briefly discuss the advantages and disadvantages of
both the methods and also the conditions under which each method of inventory valuation is preferable.
In FIFO approach the amount for inventory in balance sheet closely reflects the current market value of
inventory on hand. This method of valuation is acceptable for both the US GAAP and IFRS reporting
purposes. For a company which deals in perishable goods, FIFO is more popular choice because it needs to
turnover its stock soon before they expire. However, this method is not suitable when stocks are being
purchased in many lots during a period of inflationary trend. During inflationary trend valuing inventory
using the FIFO method results in more profits and higher income taxes since the cost of goods sold is at old
price.
In my opinion it is more advantageous to switch to LIFO method because it provides a better measurement
of current earnings by matching most recent costs against current revenues. The chance of future write-
downs to market is minimized because the most recent inventory purchased at higher price is sold first. In
the periods of inflation, the current purchases at higher prices are matched against revenues thus preventing
overstatement of profit and thereby reducing income tax bill. This will allow the business to have more cash-
in-hand to use for investment opportunities or to purchase more inventories. However LIFO method of
inventory valuation is only allowed under the US GAAP financial reporting.
Currently our business is facing inflationary trends and which I believe will continue in the foreseeable
future. Since we are using the FIFO method of valuation we are booking higher profits and paying high
amount of taxes. Switching to the LIFO method will help us reduce our tax burden thereby freeing up cash
for better financial utilization. Also, since the operations of our company are limited to the United States, we
are free to follow LIFO method of inventory valuation which is an acceptable form of valuation under US
GAAP.
26. Assume that you are a consultant, providing services for Webster Corp. Webster is performing
a significant project based implementation of a new enterprise resource system. The company is
concerned about the difficulties in performing the project. Compose a memorandum to the
management describing the risks involved in executing a project that is cross functional in
nature.
Explanation:
This memo addresses the risks involved in implementing an Enterprise Resource System that is cross
functional in nature and provides mitigative solutions for the same.
Cross functionality in the business come with a diversity of experience, expertise and knowledge and, when
these different teams are synergized well, they can lead to higher level of creativity and help achieve the
goals of the organization. One of the main risks associated with having cross-functional teams is that they
may take a long time to develop synergies due to the diverse background and experiences. In the absence of
strong leaders, this system may lead to conflicts of interest among the teams and the company may fail in
implementing a successful ERP system.
The most important requirement for successful implementation of a cross functional project is the support of
the senior management. The senior management with the larger perspective of the goals of the organization
will be able to bring together the various functional managers across the organization. Cooperation among
the teams can be achieved, by clearly defining the functions and goals of the project manager and the
various functional managers. In addition to laying down the goals and the functions, the senior management
must lend appropriate support to the project managers decisions and ensure their successful implementation,
keeping in mind the timeline of the project.
Therefore, it is recommended that for successful implementation of the ERP system and to minimize
conflicts of interest between the cross-functional teams, the senior management should carefully spell out
their roles and responsibilities, coordinate the same with the teams, monitor and supervise their performance
and provide timely feedback. It cannot be stressed enough that team collaboration and proper
communication is of utmost importance.
If you have any queries or require any assistance for implementation of the project please feel free to contact
me.
27. You are newly licensed CPA working for Hurricane Glass, a glass manufacturing company. Your
manager is considering implementing flexible budgeting.
Prepare a memo to your manager describing flexible budgeting and its advantages and
disadvantages.
Explanation:
You have requested that I provide information about flexible budgeting and its advantages and
disadvantages. A flexible budget provides for changes in volume and is considered better than a static
budget, which is for a specific level of activity and does not change with volume. A flexible budget provides
more meaningful insights than a static budget when determining why a budget has variances and helps
managers in their control function. A flexible budget adjusts the static budget for the actual level of output.
A flexible budget can be setup using a three-step procedure. Since all costs are either variable with respect to
output units or fixed, these three steps require only information about budgeted selling price, budgeted
variable cost per output unit, budgeted fixed costs, and actual quantity of output units.
Flexible budgeting is specifically advantageous in businesses where costs are closely aligned with the level
of business activity such as retailing. It helps in evaluating the performance of managers and business units
as it is restructured based on activity levels. It also helps companies to find the root-cause of the deviation of
actual output from expected output. It is an effective tool in cost control as it helps in avoiding overspending
and it relies on current data.
However, there are some disadvantages of implementing flexible budgeting. It is difficult to formulate as the
cost structure may be complex in certain businesses. It cannot be easily embedded in an accounting
information system and compared with financial statements. It is also difficult to segregate the fixed cost
and variable cost. There is an element of unpredictability using flexible budget as it assumes continuity of
historic information.
If you have any additional questions about flexible budgeting or its implementation, kindly contact me.
28. You have been hired as a controller of Hughes Co., a small but growing business that
manufactures high-end electronics distributed through retail superstore. You plan to prepare
the current- year budget based on the previous year’s actual revenues and expenses. The
company has never had a formal budget.
Write a memo to the CEO justifying the need to establish a formal budget. Discuss the
advantages and disadvantages of the budget process.
Explanation:
Successful companies need to have proper strategies in place in order to reach their short term and long term
goals. But just a good strategy is not sufficient. It needs to be converted into action. This is the purpose of a
budget. A budget is a detailed plan for executing both long term as well as short term objectives of the
company. Along with planning it is also a very important tool used by management for monitoring the
progress of the company and ensuring that the activities of the company are progressing as planned by the
management.
There are various advantages of establishing an efficient budgeting process in the organization. The budget
process compels planning, target setting and making employees at various levels of management think about
the future progress of the company. This gives a sense of direction and targets to all the employees. These
targets motivate them to work towards fulfilling them. Also since the budget making process requires
involvement of top, middle and lower level managerial personnel, it gives each and every employee a sense
of belongingness towards the company and its objectives. Budgets promote essential principles of
communication and coordination by making the various departments and functions talk to the operations
and/or customer service functions. Budgets also serve as guides for future action based on past years’
performance. Most importantly, budgets are also useful monitoring tools and hence the working of the
organization can be continuously compared to the budgets and material variations can be immediately
analyzed and corrected, before it is too late.
However there are certain disadvantages of the budget process due to which certain companies do not prefer
to indulge in this process. Budgets are bureaucratic and coercive. Although control is important, lower level
management and employees may perceive it as dictatorial and may not fully accept or embrace the budget.
The process is also time consuming, expensive and sometimes department heads try to add cushion to their
budgets making them unrealistic. Also if the targets laid down by the budgets are too high and unrealistic,
they can lead to demotivation and demoralization of employee morale.
I am planning to prepare a budget for the current year, after taking the last year’s actual revenue and expense
figures as a base. I highly recommend that the employees from the top, middle and lower level management
also take part in this process so that they can be aware of the targets set for their respective departments and
be motivated to work towards achieving them.
I am looking forward to your kind cooperation in making this first planning and budgeting process a
successful one for Hughes Company.
29. The human resource manager at Revive Co. is considering allowing more employees to work
from home for one or two days a week. Some of the department managers are eagerly
encouraging the idea.
Write a memo to the department managers explaining the advantages and disadvantages of
telecommuting.
Explanation:
To: The Departmental Managers

Re: Advantages and disadvantages of telecommuting.
Telecommuting is a facility given by the employer to their employees, in which employees are
allowed flexibility in where and when they can perform their work. There can be many strategic
impacts of telecommuting and the management needs to determine the business case for creating an
employee telecommuting program.
The numerous advantages of working from home include improved recruitment and retention
because of increased employee satisfaction. Employees get to enjoy an improved employee work-life
balance which may find reflection in increased productivity and loyalty towards the company. It also
enables the company to hire qualified women workforce who are more willing to work with
companies that allow them a good work- home balance. Also fewer number of employees in
premises means reduced costs of office space and utilities. It is a beneficial arrangement for
employees on snow days or other low attendance work days.
However this arrangement is not without its disadvantage. Lack of face to face interaction makes it
difficult to keeping employees connected to the culture of the organization. Technical support cost
can be higher because of employees working in a less controlled environment. For instance, family
members may have access to work equipment. Staying connected and supervising employees who
work from home can be a challenge for managers. Capitalizing on lulls in job tasks in between big
projects is more difficult to manage when an employee is working from home than when the
employee is in the office.
Given the pros and cons it seems to be a good option to introduce the idea in its hybrid form of
allowing the employees to work from home for one or two days each week and requiring them to
come in to the office in person for the rest of the days. By backing it up with setting clear
expectations the company can bring forth a system that is beneficial to the employees as well as to
the management.
30. The management of Hewitt Company is considering adopting a balanced scorecard to measure
performance. Karen Wells, the chief financial officer for the company, has asked you to prepare
a memorandum describing a balanced scorecard and the advantages of adopting such a system.
Explanation:
In light of the management's consideration to implement a balanced scorecard system, a performance
measurement system, here is a memorandum describing the benefits of this system.
A balanced score card performance measurement system, is multi dimensional, in the sense it entails both
financial and non-financial measures which enables the management to effectively communicate the
organizational goals to all its employees. The measurement metrics are used to measure four perspectives,
namely, financial, customer, internal business processes and learning and growth. As a balanced scorecard
system measures performance using multiple parameters across these four perspectives, it is more strategic
than other performance measurement systems that are single-dimensional. For example, in measuring if
employee satisfaction and retention is met, you can look at both financial and non-financial measures like
rate of labour turnover, percentage of employees trained in total quality management, ideas and best
practices shared across organization etc. Additionally, the balanced scorecard allows the stakeholders to
look at the short, medium and long-term goals of the company at a glance.
As you can see, balanced score card system is a superior system of measuring performance and is clear and
effective way of communicating the management goals to the organization as a whole. Therefore, I
recommend the company should go forward with implementation of this system. If have any queries or need
further information regarding balanced score card, please feel free to contact me.
31. BB Corp began operations two years ago. With its rapid growth, it is looking for ways to attract
and retain qualified personnel BB Corp. is considering implementing an incentive plan for
salespeople, who are currently, paid a flat salary.
Prepare a memo to management describing how one such incentive plan could work. Be sure
to indicate the benefits and potential pitfalls of incentive compensation plans.
Explanation:
BB Corporation is currently going through a phase of rapid growth. Our products are receiving good
response from the market and hence it is essential that we spread our consumer base by entering new
markets and increasing the visibility of our company. If this happens we can continue to see rapid growth in
the foreseeable future as well. In order to make this happen we need to attract as well as retain efficient and
qualified sales personnel who can help the company achieve its sales targets. In order to attract, retain and
motivate qualified sale people it is essential to offer them sales incentive over and above their fixed
monthly salary.
Sales incentive compensation is a type of compensation which is based on the performance of each
employee and hence will vary from employee to employee. A flat salary works best for jobs where
contribution cannot easily be measured e.g. accounting or managerial jobs. But in sales job the contribution
by each employee can be easily measured by looking at the revenue they generate for the company. For such
roles it is beneficial that all employees be paid a compensation based directly on the revenue generated by
them, over and above their flat salary. This compensation can be in the form of annual cash bonus, stock
grant etc. This keeps sales personnel motivated and also acts as a reward to the efficient and hardworking
employees of the sales team. It is an excellent method of retaining the employees and letting them share a
part of the profits of the company for which they are working with dedication.
On the flipside, an incentive based plan could result in unhealthy competition among employees, being too
aggressive on customers or could promote excessive risk-taking by the sales people for pursuing short-term
profits. Also, during lean times when business is slow, even the best of sales personnel might find it difficult
to earn satisfactory incentives, which may demotivate them.
Hence it is essential that there should be a proper balance between what the company offers as a fixed salary
and what it offers as sales compensation over and above this salary. For this it is essential that the HR
department access the market conditions to develop the range of salary that should be offered to our sales
people as fixed and performance based variable compensation. In order for an incentive pay system to have
a meaningful impact on performance, it has to represent at least 10 percent of an employee’s
compensation. Also a system of rewarding employees more frequently like monthly or quarterly is found to
be more impactful. The management also needs to set up different level of sales targets to which these
incentives can be tied to.
It is essential that this sales incentive plan is clearly drafted and informed to each and every employee of the
sales team so that they feel rewarded and stay motivated to grow along with the growth of this organization.
32. The chief executive officer of Urton Corp., George Jones, is preparing for a strategic planning
session with the corporation's board of directors. The company has pursued a product
differentiation strategy in the past but is having difficulty maintaining margins due to
significant competition from domestic and foreign competitors. Write a memorandum
describing the product differentiation strategy and another strategy that might be pursued if
product differentiation is not working.
Explanation:
As requested by you, presented here is a memorandum on the product differentiation strategy pursued by
Urton Corp. and suggestion for an alternative strategy to improve margins in the face of heavy competition
from domestic and foreign competitors.
Urton Corp. is currently pursuing product differentiation strategy for selling its products. This strategy
involves, modifying a product such that it is different from its competitors and more attractive to the end
consumers, so that the company can charge a price higher than that being charged by its competitors. This is
not a one-time activity but an ongoing process wherein products/services are continuously improved through
innovation in physical characteristics such as durability, performance and aesthetics, improvement in
perceived differences such as brand name and advertising and make a difference in service to the end
customers through effective exchange policies, after sale support and assistance. Successful implementation
of product differentiation strategy for many years, requires investment on an ongoing basis in these product
differentiating factors. As the company has faced difficulty in recent times with this strategy and is unable to
increase its margins, it is time for the management to consider a strategy that would uplift it from the current
crisis. A cost leadership strategy can be considered.
A cost leadership strategy involves, cutting costs and improving efficiency, so as to allow the company to
offer products at lower prices. This strategy may be accomplished by implemented methods such as
reengineering, lean manufacturing, effective management of supply chain by sharing key information with
the suppliers, strategic alliances, globalization strategies by capitalizing in markets in other countries and
outsourcing processes to other firms, such the Urton Corp. can focus on its core competencies and value
creation activities.
To continue to remain competitive in both domestic and foreign markets, Urton Corp., must select and
implement a strategy that is in alignment with its core objectives. In case you have any queries or need
further information regarding the proposed change in strategy, please feel free to contact me.
33. You are participating in a series of economic seminars presented by your firm to improve the
consulting abilities of participants. During discussion of market demand, the firm partner
presenting the seminars explained the important distinction between a changes in the quantity
of a good or services demanded and a change in demand for a good or services. He pointed out
that a change in the quantity demanded results solely from a change in price and is shown
graphically as a movement along a given demand curve. He also noted that a change in demand
results from change in factors other than price and illustrated that a change in demand is
graphically depicted as a shift in a demand curve inward (left) or outward (right).
Following that discussion, the partner assigns you the responsibility of preparing for the next
seminar a memorandum that identifies the primary factors that might causes a change in market
demand and that describes the impact of those factors on demand.
Explanation:
Re: Primary factors that might causes a change in market demand.
This memorandum is designed to identify the primary factors that might causes a change in market demand
and that describes the impact of those factors on demand. We defined demand as consumer’s
willingness/intent and ability to pay a price for a particular goods or services. Willingness to purchase
suggests a desire, tastes and preferences. Ability to purchase suggests that income is important. Demand for
normal goods increases when income increases, but demand for inferior goods decreases when income
increases. Some of the other main causes of changes in demand for a commodity are: changes in the price of
the commodity, price of substitute, price of complements, advertising, changes in consumer expectations,
change in climate and season, inventions and innovations and others.
In general, when prices rise, buyers will typically buy less and vice versa when prices fall. However, the
demand of different products responds to price changes differently, products that are sensitive to price
change are said to be price elastic and inelastic pricing indicates a weak price influence on demand.
Availability of perfect substitute also effect demand of the goods and services because consumers of perfect
substitutes make their decision based on prices only. Evidently, the consumer will choose the cheapest
bundle. If the prices of the goods differed, there would be no demand for the more expensive good. On the
other hand, for complementary goods, if the price of one good increases, demand for both complementary
goods will fall. The more closely linked the goods are, the higher will be the cross elasticity of demand.
Change in tastes against a commodity leads to a fall in its demand, other factors affecting demand remaining
unchanged. Demand for certain products are determined by climatic or weather conditions. For example, in
summer there is a greater demand for cold drinks, fans, coolers etc. Similarly, demand for umbrellas and
raincoats are seasonal.
Other factors that causes change in demand are the growth of population and the number of buyers in the
market, a high growth of population over a period of time tends to imply a rising demand for essential goods
and services in general. A large number of buyers will constitute a large demand and vice-versa.
Introduction of new goods or substitutes as a result of inventions and innovations in a dynamic modern
economy tends to adversely affect the demand for the existing products, which as a result of innovations,
definitely become obsolete. For example the advent of electronic calculations has made adding machines
obsolete.
Consumer expectations with respect to price change in future can also impact current demand of a product.
Further, economic or global conditions at times can impact demand of various goods (for example: luxury
products) when consumer wish to hold back large spending, for example reduced demand due to
Coronavirus.
Market demands for many products in the present day are influenced by the seller’s efforts through
advertisements and sales propaganda. Demand is created through selling efforts. Of Course, there is always
a limit. When these factors change, the general demand pattern will be affected, causing a change in the
market demand as a whole.
As we have already seen above that demand of goods and services may be affected by many factors and
each factor to be closely monitored and therefore, market demand analysis is one of the crucial requirements
for the existence of any business enterprises.
34. You are a finance manager at an investment firm. The CEO has asked you to help train newly
hired staff by explaining the difference between leading, lagging and coincident economic
indicators.
Prepare a memo to the new employees discussing the different kinds of indicators and provide
examples of each type of indicator.
Explanation:
This memorandum is designed to describe the different kinds of indicators with examples.
A leading indicator is any economic factor that changes before the rest of the economy begins to go in a
particular direction and is used to predict the economy in the short-term. Leading indicators help market
observers and policymakers predict significant changes in the economy. These indicators represent evidence
about the future. Leading indicators include average weekly hours, average weekly initial claims for
unemployment insurance, manufacturer’s new orders for consumer goods and materials, vendor
performance, slower deliveries diffusion index, manufacturer’s new orders, nondefense capital goods,
building permits for new private housing units, stock price indices which reflect changes in stock market,
money supply, M2, interest rate spread, 10-year Treasury bonds less federal funds and index of consumer
expectations.
A coincident indicator usually changes at nearly the same time as the economy as a whole changes and is
used to determine the phase the economy is presently in expansion or contraction. These indicators represent
evidence about the present. Coincident indicators include employees on non-agricultural payrolls, personal
income less transfer payments, industrial production and manufacturing and trade sales.
A lagging indicator usually changes after the economy as a whole changes where the lag is generally by a
few quarters and is used to confirm evidence regarding the phase the economy is in expansion or
contraction. These indicators represent evidence about the past. Lagging indicators include average duration
of unemployment, inventories to sales ratio, manufacturing and trade labor cost per unit of output, average
prime rate for commercial and industrial loans, consumer instalment credit outstanding to personal income
ratio and consumer price index for services.

35. In the past, XYZ Co. has used forward contracts effectively to offset price vitality for the
purchase of raw materials. The CEO is considering extending this practice for the purchase of
additional raw materials. Write a memo to the CEO describing the factors that should be
considered in deciding whether to extend this practice.
Type your communication in the response area below the horizontal line using the word
processor provided.
Explanation:
To: The CEO, XYZ Co.
Date: March 31, 2017 (Note: Use today’s Date)
Re: Factors to be considered to extend the practice of using forward contracts for the purchase of additional
raw materials.
The company has no doubt in the past benefitted from successfully using the forward currency contracts as a
tool for hedging against the price fluctuations we face on import of raw material and I also understand your
wish to continue with the same practice for purchase of additional raw material. However I would like you
to draw your attention to the factors influencing the use of forward contracts.
The use of forward contracts exposes the company to Exchange rate, Credit and Interest rate risks that are
associated with it. In forward contracts we lock in the exchange rate at which the currency will be bought or
sold. Due to this the company forfeits the opportunity of profiting from a favourable exchange rate
movement which may take place in the future. This is the Exchange rate risk. Forward contract are signed
between individual parties as such contracts do not trade on centralized exchange. In case of a default by the
other party our company will be forced to sign another contract with a third party, thus being exposed to
Credit risk at that point of time. Also the price of forward contract is dependent on the differential between
the interest rates that can be earned with the two currencies. Variation in those rates can change the price of
the contract. If the party has already signed a forward contract it forgoes the opportunity to sign one at a
lower rate in the case of favourable change in interest rates.
However, due to forward contracts we are able to lock in the exchange rate as early as a year in advance.
This will enable us to plan and manage our finances and cash flows better at a future date as uncertainties
arising due to currency rate fluctuation are eliminated. They also help in protecting the cost at which the
goods or services are bought from abroad.
The company should consider the above mentioned risks and benefits of using forward contracts as a
hedging tool before deciding whether to apply the same for additional purchase of raw material in the future.
36. Prehnite Technologies is a start-up firm which has designed a cloud storage and messenger
services. Prehnite has successfully completed the proto testing. It is unable to decide the
revenue model. You are an IT consultant and are asked to submit a memorandum shortlisting
four digital business models and recommending the best one for Prehnite.
Explanation:
The digital business models are the subscription, freemium, free, pyramid, marketplace, access-over-
ownership, hypermarket, experience, on-demand and ecosystem model.
The subscription model disrupts through “lock-in” by taking a product or service that is traditionally
purchased on an ad hoc basis, and locking-in repeat custom by charging a subscription fee for continued
access to the product / service. The subscription model turns customers into subscribers for recurring
revenue. Digital consumers are much more informed and are increasingly favoring access over ownership.
The business focus is on gathering insights based on usage data, finding out what customers want, and then
delivering it as an intuitive service. Cash flow becomes less “bumpy” or dependent on make-or-break
holiday sales. The companies which follows the subscription model include Netflix, Dollar Shave Club and
Apple Music.
Freemium is a combination of the words "free" and "premium" used to describe a business model that offers
both free and premium services. The freemium business model works by offering simple and basic services
for free for the user to try and more advanced or additional features at a premium. The freemium model
disrupts through digital sampling, where users pay for a basic service or product with their data or
‘eyeballs’, rather than money, and then charging to upgrade to the full offer. It best works where marginal
cost for extra units and distribution are lower than advertising revenue or the sale of personal data. The
companies which follows the freemium business model include Spotify, LinkedIn, and Dropbox.
The free model disrupts with an ‘if-you’re-not-paying-for-the-product-you-are-the-product’ model that

involves selling personal data or ‘advertising eyeballs’ harvested by offering consumers a ‘free’ product or
service that captures their data / attention. The companies which follows the free business model include
Google and Facebook.
The pyramid model disrupts by recruiting an army of resellers and affiliates who are often paid on a
commission-only model. The companies which follows the freemium business model include Amazon,
Microsoft and Dropbox.
The best recommended model for Prehnite is the freemium model as it is not a new disruptive service. By
offering free part of the service, the company can attract new customers and the premium service can be
offered at a discount relative to the competitors to capture market share. It can then decide to add premium
services and charge for them.

37. HiPoint LLP, a Houston-based company, is a chain of electronic stores. The company plans to
set-up online stores to combat declining sales and margins. The CEO of Hipoint, Nick Young
asks Lorena Mendes CPA, the Head of Payments Systems, to submit a memorandum explaining
electronic data interchange (EDI) and its advantages and disadvantages.
Explanation:
To: Nick Young, CEO HiPoint LLP.
From: Lorena Mendes CPA, Head of Payments Systems
Re: This memorandum explains electronic data interchange (EDI) along with its advantages and
disadvantages.
Electronic Data Interchange (EDI) is the electronic interchange of business information using a standardized
format; a process which allows one company to send information to another company electronically rather
than with paper. The methods of EDI communication between trading partners can be point-to-point, value-
added network, public networks or proprietary networks.
In point-to-point, there is direct computer-to-computer private network link. In this method, there is no
reliance on third parties for computer processing, the organization controls over network access, there is a
possibility to use proprietary software standard in dealings with all trading partners.
Value-added network (VAN) is a privately-owned network that route the EDI transactions between trading
partners and in many cases it provides translation, storage and other processing. It is designed and
maintained by an independent company that offers specialized support to improve the transmission
effectiveness of a network. It avoids problems related to inter-organizational communication that results
from the use of differing hardware and software and receives data from sender, determines intended
recipient and places data in the recipient’s electronic mailbox.
Public networks are resources owned by third-party companies and leased to users on a usage basis. Though
it avoids cost of proprietary lines or VAN, there is a possible loss of data confidentiality on the internet and
attempted electronic frauds.
Some organizations have developed their own network for their own transactions and such networks are
called proprietary networks. These systems are costly to develop and operate because of proprietary lines,
although they are often extremely reliable.
The advantages of EDI include quick response and access to information, cost efficiency, reduced
paperwork, accuracy and reduced errors and error-correction costs and better communications and customer
service.
The disadvantages of EDI include total dependence upon computer system for operation, possible loss of
confidentiality of sensitive information, increased opportunity for unauthorized transactions and fraud,
concentration of control among a few people involved in the process, reliance on third parties (trading
partners, van), data processing, application and communications errors, potential legal liability due to errors,
potential loss of audit trails and information needed by management due to limited retention policies and
reliance on trading partner’s system.

38. Chris Ryan, the CEO of Ryan Financial Services, asked you to prepare a memorandum
describing blockchain, how it works, the characteristics of blockchain and its advantages and
disadvantages.
Explanation:
A blockchain is a digital record of transactions. The name comes from its structure, in which individual
records, called blocks, are linked together in single list, called a chain. Blockchains are used for recording
transactions made with cryptocurrencies, such as Bitcoin, and have many other applications.
In the blockchain process, transactions initiated are represented as a block or an online record. The block is
broadcasted to every party in the network to all parties who are connected. Once the parties in the network
authenticate the transaction, the block is added to the chain and transaction is processed. The blocks on the
chain are secure and permanent records that cannot be deleted.
Basically, blockchain consists of blocks that are chained. Each block is connected with the previous block
through links that contain timestamp and transaction data. It takes the form of a ledger that is decentralized
on a peer to peer network. The users can confirm transactions without a central authority certifying them.
Buyers and sellers interact directly without needing verification by third-party intermediary. Transaction
record is created in a blockchain, but identifying information is encrypted, and no personal information is
shared. Blocks of transactions, as well as individual transactions, are continuously validated so committing
frauds is very difficult. Algorithms also incorporate an ID for each buyer and seller in a transaction, adding
those IDs to the block.
The advantages of blockchain include high transparency in the transactions, which can be tracked
accurately. The ledgers are permanent record which cannot be altered. Every core transaction is processed
just once in one shared electronic ledger, thus, reducing redundancy and delays. Additionally, there is huge
cost savings compared to maintaining physical records and builds collaborative technology between
companies doing business. The ledger being distributed, publicly verified, and nearly real-time data mining,
and records verification reduces time and effort spent on reconciliation of information.
The disadvantages of blockchain include complex technology, regulatory clearance ambiguity and
complexity in implementation and training.
Blockchain technology is mostly used or explored in the financial services sector currently and spreading
into healthcare, legal, insurance, telecommunications, etc. These can take the following examples: settling of
stock trades, patient’s health records, insurance etc.
If you have any additional questions, please contact me.

39. The human resource manager of Talon, Inc. is considering allowing more employees to work from
home. Some of the department managers are eagerly encouraging the idea. Write a memo to the
department managers explaining the requirements, advantage and disadvantages of work from
home.
Explanation:
Many of you have been considering implementing remote work in your divisions. This memorandum is
designed to describe the requirements, advantage and disadvantage of remote work by employees.
Work from home is a growing trend in today’s work environment, in which employees can easily plug-in
from just anywhere they are. The prerequisites for remote work is well defined policy, which defines the
expectations, responsibilities, adherence to confidentiality, the eligibility and the other work from home
guidelines. In short, it ensures that all employees understand what is required of them when they choose to
work from home. Some companies have a regular option of remote working, others take it up during
emergencies. For example, during the recent times, Coronavirus has sparked a revolution in the work from
home scenario.
Remote work, works best when employees and supervisors communicate clearly about expectations. The
following checklist will help you establish a foundation for effective remote working and continued
productivity. Firstly, review technology needs and resources. Identify the technology tools employees use in
their daily work and determine whether the resources will be accessible when working from home.
Determine which platform(s) you will use to communicate as a team, clarify expectations for online
availability and confirm everyone has access to the technology tool(s). All the specific requests regarding
official security and client confidentiality must be stated in the policy. Be clear about your expectations with
employees for maintaining their current work schedule or if you are open to flexible scheduling based on
employee needs. Make a formal communication and accountability plan. Supervisors should tell employees
how often they should send updates on work plan progress and what those updates should include that is a
customized dashboard should be developed and shared with everyone so as to enable them to update the
same. Supervisors should also communicate how quickly they expect the employee to respond and the best
ways for the employee to contact the supervisor while working remotely. Current performance standards are
expected to be maintained by employees. Supervisors should articulate clear procedures regarding check-in
times and hours of availability. With proper planning, communication problems can be minimized.
Work from home has number of significant advantages. It provides employees, the flexibility to work from
home and this can improve their satisfaction, which in turn can reduce the turnover of the valuable
employees. A work from home policy allows you to adjust the days and hours of work. Employees feel no
rush, take breaks anytime they want and can manage a perfect work-life balance. Peak hour traffic
congestion is the biggest challenge that employees face every day. Indeed, work from home is the only
practical solution to deal with it. It also gets cheaper for employees as you don’t have to worry about your
travel expenses anymore. Finally, a systematic program may allow organizational savings as well by
reducing the required office and parking space and hence lower rental expenditure.
Inspite of the above advantages, remote work concepts have some potential disadvantages. It is also
important to remember that even as we enter a new, more flexible era of work, the office will continue to be
the place where your team can do their best work. Honing a workplace experience that fosters community,
collaboration, and the serendipitous encounters that lead to innovation will continue. With reduced personal
contact, employees may feel isolated. There is less opportunities to develop relationships. Also, the reduced
interaction between employees may reduce the number of ideas that arises from employee brainstorming. To
reduce this it is imperative to implement programmes to encourage effective interactions. Further adequate
planning needs to ensure to avoid any productivity slags and formal policy and security measures need to
have effective checks on confidentiality requirements.
Work from home concept can be significant to employee benefits that may results in improvements in
productivity. However, it is important for you to consider the implications of remote work and implement
controls and policies that mitigate the potential risks.
40. Ville Hotels Inc. is one of the leading budget hotel chains in US. Recently, the company started
facing stiff price competition with the rise of online hospitality service apps. The company’s
CEO asks you to prepare a memorandum explaining different strategies to compact the
disruption from the online apps and comment whether each strategy is suitable for the
company.
Explanation:
The different strategies to combat disruption are the block strategy, the milk strategy, the invest in disruption
model, the disrupt the current business strategy, the retreat into a strategic niche strategy, the redefine the
core strategy and the exit strategy.
The block strategy is the strategy to use all means available to inhibit the disruptor. These means can include
claiming patent or copyright infringement, erecting regulatory hurdles, and using other legal barriers. This
strategy may be less successful as there can be a number of online app companies from across the globe
which can compete and blocking all of them will be less successful. The milk strategy is extracting the most
value possible from vulnerable businesses while preparing for the inevitable disruption. This strategy is less
useful for Ville Hotels. The invest in disruption model is a model in which the company actively invest in
the disruptive threat, including disruptive technologies, human capabilities, digitized processes, or perhaps
acquiring companies with these attributes. This could be a good way to combat the disruption and it can help
in growing. The disrupt the current business strategy is the strategy of launching a new product or service
that competes directly with the disruptor, and leveraging inherent strengths such as size, market knowledge,
brand, access to capital, and relationships to build the new business. This is the best strategy to combat the
disruption.
The retreat into a strategic niche strategy is the strategy of focusing on a profitable niche segment of the core
market where disruption is less likely to occur. This strategy is not the best recommended one, however it
can be considered as an option by creating a special package for international travellers or students. The
redefine the core strategy is the strategy of building an entirely new business model, often in an adjacent
industry where it is possible to leverage existing knowledge and capabilities. The company can consider this
by expanding to gaming stations, theme parks etc. The exit strategy is the strategy of exiting the business
entirely and returning capital to investors, ideally through a sale of the business while value still exists. This
will also not be the best strategy as they are currently the leading budget hotel chains.
In the case of Ville Hotels Inc., the invest in the disruption model is a good way to combat disruption but the
disrupt the current business strategy which competes head on with the disruptor would be the best mode to
combat as Ville is currently the leading budget hotel chain.

41. Pure Pharma Research Inc. is a pharmaceutical research company specialized in cancer research
and precision medicine. The CEO of the company needs a memorandum explaining cloud
computing and the various types of cloud computing service operating models.
You have been requested to prepare a memorandum describing cloud computing and the various
types of cloud computing service operating models.
Explanation:
Cloud computing is the practice of using a network of remote servers hosted on the internet to store, manage
and process data, rather than a local server or a personal computer. It uses a network of remote servers to
store, manage and process data which is hosted on the internet. It provides on-demand network access to
shared pool of resources such as networks, servers, applications etc. The different types of cloud computing
include private clouds, public clouds, community clouds, virtual private clouds, hybrid clouds etc. Cloud
service delivery models are software as a service (SaaS), platform as a service (PaaS) and infrastructure as a
service (IaaS).
In Software as a Service (SaaS), the providers of the software application is responsible for running it on a
cloud infrastructure and applications are accessible from various client devices through thin client interface
such as a web browser (e.g. web-based email) and a program interface. In SaaS, the client does not manage
or control the underlying cloud infrastructure, including network, servers, operating systems, storage or even
individual application capabilities.
In Platform as a Service (PaaS), the provider supports consumer-created or acquired applications created
using programming languages, libraries, services and tools supported by the provider. In PaaS, consumers
do not manage or control the underlying cloud infrastructure, including network, servers, operating systems
or storage, but has control over the deployed applications and possibly configuration settings for the
application-hosting environment.
In Infrastructure as a Service (IaaS), the provider provides processing, storage, networks and other
fundamental computing resources in which the consumer is able to deploy and run arbitrary software, which
can include operating systems and applications. The consumers do not manage or control the underlying
cloud infrastructure but has control over operating systems, storage and deployed applications and possibly
limited control of select networking components.
If you have any questions, feel free to contact me.

42. Bluesky Electricals Inc. is a leader in the manufacturing of kitchen appliances. The CEO of
Bluesky Electricals requests you to prepare a memorandum explaining the difference between
supercomputers and mainframe computers.
Explanation:
Supercomputer is a broad term for one of the fastest computers currently available. A supercomputer is a
computer with a high level of performance compared to a general-purpose computer. The performance of a
supercomputer is commonly measured in floating-point operations per second (FLOPS) instead of million
instructions per second (MIPS). They are very expensive and are employed for specialized applications that
require immense amounts of mathematical calculations like number crunching. It is extensively used in
weather forecasting, scientific simulations, animated graphics, fluid dynamic calculations, nuclear energy
research, electronic design, and analysis of geological data in petrochemical prospecting.
Originally, mainframe was a term which referred to the cabinet containing the central processor unit or
“main frame” of a room-filling “Stone Age” batch machine. After the emergence of smaller "minicomputer"
designs in the early 1970s, the traditional big iron machines were described as “mainframe computers” and
eventually just as mainframes. Mainframe computers or mainframes are computers used primarily by large
organizations for critical applications; bulk data processing, such as census, industry and consumer statistics,
enterprise resource planning; and transaction processing. Nowadays, a mainframe is a very large and
expensive computer capable of supporting hundreds, or even thousands, of users simultaneously.
The key difference between a supercomputer and a mainframe is that a supercomputer channels all its power
into executing a few programs as fast as possible, whereas a mainframe uses its power to execute many
programs concurrently. Therefore, in some ways, mainframes are more powerful than supercomputers
because they support more simultaneous programs. However, supercomputers can execute a single program
faster than a mainframe. The distinction between small mainframes and minicomputers is vague, depending
really on how the manufacturer wants to market its machines.

43. Ollo Fashions Inc. is one of the fastest growing fashion companies. The company is spreading
its operations to different parts of the world and is looking ahead to improve the IT
infrastructure to match its growth. The company’s CEO Renata Christavo asks you to prepare a
memorandum explaining the difference between centralized, decentralized or distributed
processing
Explanation:
In an organization, computers are connected to each other which make a network. In the network, various
tasks are completed by different computers and data is shared among computers. Every computer is
controlled by different methods and there are different ways of processing performed on the network. On the
network, some computers have high processing power as compared to others.
Centralized systems are systems that use client / server architecture where one or more client nodes are
directly connected to a central server. This is the most commonly used type of system in many organizations
where client sends a request to a company server and receives the response. In-library there is one processor
attached to different terminals and library users can search any book from the terminal which includes
mouse, keyboard and screen. In centralized processing all the terminals are controlled by a single processor
(CPU) and any command can be fulfilled by a single processor and this type of network is called centralized
network. For example, mainframe and large server computing applications.
In decentralized processing, there are different CPU connected on the network and each processor can do its
job independent of each other. For example, in a Net cafe, all computers can perform their own tasks. This
type of network is called decentralized network.
Another type of processing also exists named distributed processing. In this type of processing different
CPU are connected to the network and are controlled by single CPU. For example, in air reservation system
there exists different terminals and processing is done from many locations and all the computers are
controlled by the single main processor. This type of network is called a distributed network.

44. Tintco, Inc. is a distributor of auto supplies. Currently, the corporation has a batch processing
system for processing all transactions and maintaining its inventory records. Batches are
processed monthly. George Wilson, the chief information officer for the corporation, is
considering adopting an online, realtime processing system. He has asked you (a consultant) to
prepare a memorandum describing the advantages of adopting such a system for the
corporation.
Explanation:
This memorandum describes real time processing system, which Tintco, Inc., is considering to adopt in the
near future. The memo highlights the advantages of this system when compared to the batch processing
system that is currently being followed by your organization.
Online Real-Time system (OLRT) is a continuous system of input, processing and output of data. In other
words, it processes transactions as they take place. This system ensures that the records of inventory are up-
to date at all times, which in turn facilitates management to obtain timely information on inventory levels
and enables them to take favorable decisions regarding inventory reordering and investment and cost of
goods sold. In comparison, the batch processing system that is currently being followed, updates information
only periodically (i.e.., every month). As there is delay in the input and output of information, the
information on inventory level, inventory value, and company profitability, are not reflective of current
situation and can be misleading for decision making purposes.
It is certain that the online real-time processing system will enable the management in better decision
making and will enhance the financial performance of the company. Therefore, I highly recommend that
Tintco Inc. should start implementing the online real-time processing system. In case you require any
additional information or have any queries, please feel free to contact me.
45. 3WAT, Inc is discussing the data-storage possibilities for their highly mobile workforce.
Currently, data is stored and laptop hard drivers and is not centrally available. Management is
concerned about data security, accessibility and cost.
Prepare a memo to management discussing various options for data storage for a highly mobile
workforce including advantages, disadvantages, and costs.
Explanation:
To: The Management
Re: Storage of data and its security for the company’s mobile workforce
Our company, given the kind of operations, has a high ratio of mobile workforce. Laptops and mobiles
provided to them give them a high level of mobility and flexibility. They are able to communicate, work and
report from remote locations. This arrangement is essential for the efficient working of our employees and
our company as a whole. However this has also led to issues of storage of data, its accessibility and data
security.
Our employees are currently storing their work related data on their laptop hard drives. But the problem this
creates is that each employee has access to their own data. The data is not stored at any central location. The
company and management is dependent of various employees for access of the data, not to mention the
possible risk of data being lost or stolen due to crashing of hard disk or even physically losing the laptop or
theft. Moreover the security of the data is low since the laptops are removed from the office premises often
and the data can be stolen if the employees do not take adequate measures to secure it. This can prove to be
costly for the company.
To get around this problem, the company can adopt several options available for storage. The first major
option available for mobile storage and access is a wide area network (WAN). A WAN is a geographically
distributed computer network and connected to a common database for sharing of data. The connection may
be private over dedicated phone lines which give better performance or public over the internet which is less
secure. In a WAN setup companies need to ensure the security of the database and establish appropriate
procedures for continuity of service and backup. WAN is costly to setup and maintain.
Another option available for mobile storage and access is cloud storage which involves the use of a third
party provider to manage remote storage of data using a series of servers over the internet. Cloud storage is a
new technology which has the advantages of cost effectiveness and accessibility over a wide range of mobile
devises including laptops, tablets and smart phones. But the disadvantage is the reliability on third party
provider to ensure security and privacy of the data and continuity of service. Also, changing service
providers may be a challenge.
Both the above options will give the company higher data security and centralized data pool yet accessibility
at all times. This will enable the management to have consolidated data available at all times, which will
help in taking quick and efficient managerial decisions. I recommend that the management should after
evaluating the options discussed above switch to a more secure and efficient method of data storage.
46. Biggy Advisors is a portfolio management company and it plans to develop a robo-advisor that
allows direct fund investments by investors. The CEO of Biggy asked you to prepare a
memorandum explaining the difference between supervised, unsupervised and reinforcement
learning
Explanation:
This memorandum is designed to describe the difference between supervised, unsupervised and
reinforcement learning.
In supervised learning, input data is used by the machine in which it is required to make predictions. These
get corrected when those predictions are wrong and this process continues till the desired level of accuracy
is achieved in the data. Linear regressions (continuous data) and logistics regressions (class of data) are used
in supervised learning. An example of supervised learning is technical analysis of stocks predicting the
support and resistance level.
Unsupervised learning is a type of machine learning algorithm used to draw inferences from datasets
consisting of input data without labelled responses. In unsupervised learning, input data is not labelled, the
machine takes the data and puts it in different bins depending on criteria it thinks is common among the data
put in one bin. Unsupervised learning is the training of machine using information that is neither classified
nor labelled and allowing the algorithm to act on that information without guidance. Here the task of
machine is to group unsorted information according to similarities, patterns and differences without any
prior training of data. Unlike supervised learning, the machine is restricted to find the hidden structure in
unlabelled data by themselves. Algorithms used in unsupervised learning includes Apriori algorithm and k-
Means. An example of unsupervised learning is market segmentation in advertising.
In reinforcement learning, machine learns from its own behaviour and takes action. When it fails it learns
from its mistakes and if it wins or is rewarded it will go further to process new actions. For example, in
video games when the machine is the opponent it learns from its mistakes and next times improves on the
move. Reinforcement learning differs from the supervised learning in a way that in supervised learning the
training data has the answer key with it so the model is trained with the correct answer itself whereas in
reinforcement learning, there is no answer but the reinforcement agent decides what to do to perform the
given task. In the absence of training dataset, it is bound to learn from its experience.

47. Bignet Systems Inc. is an IT provider for the online ticketing of travel industry. Recently, it
received a project for handling the online reservation of one of the largest hotel chains in Europe.
Nick Huang, the VP-Operations asked Sara Jacob, IT consultant, to recommend the best online
real time processing system. Nick has asked Sara to prepare a memorandum detailing the
advantages of the recommended system.
Explanation:
To: Nick Huang
VP-Operations, Bignet Systems Inc.
From: Sara Jacob
IT consultant
Re: Advantages of the best online real time processing system.
This memorandum is prepared as per the request of Nick Huang, VP-operations to evaluate the best online
real time processing system. The best recommended system is online transaction processing (OLTP). OLTP
is the processing system which are databases that support day-to-day operations. OLTP is effectively applied
in airline reservations systems, bank automatic teller systems, and internet website sales systems. This
system is suited in business where large number of users conduct short transactions.
OLTP produces records that are as up-to-date as possible. Another important attribute of an OLTP system is
its ability to maintain concurrency. It provides faster and more accurate forecast for revenues and expenses.
It provides a concrete foundation for a stable organization because of timely modification of all transactions.
It makes the transactions much easier on behalf of the customers by allowing them to make the payments
according to their choice. It broadens the customer base for an organization by simplifying and speeding up
individual processes.

48. Neo Cognitive Research Inc. is a scientific research organization. It is currently working on a
project to find the largest prime number. The largest prime number found had 23 million digits.
The Chief Operating Officer, Harry Wilkins, asked you (consultant) to prepare a memorandum
recommending the best computer suited for the project and rationale for the recommendation.
Explanation:
To: Mr. Harry Wilkins,
COO, New Cognitive Research Inc.
From: CPA Candidate
Re: Recommending the best computer suited for the largest prime number project.
This memorandum is prepared as per your request to evaluate the best suited computer to find the largest
prime number. The project requires system which can do extensive calculation and can handle large amount
of data. The most important characteristic to be considered for the project is processing speed. In this kind of
a scenario, the best recommended system is the supercomputers as they have the largest processing speed.
Supercomputers are extremely powerful, high-speed computers used for extremely high-volume and / or
complex processing needs. In other words, supercomputers are employed for specialized applications that
require immense amounts of mathematical calculations or number crunching.
Our current project is aimed at discovering the largest prime number. The previous largest prime number
had 23 million digits and most likely the number of digits to be handled are in the likes of 25 or 30 million
digits. This will be an extensive and tedious research and no other computer systems such as mainframe or
laptops or desktops have the processing capacity to deal such large amounts of data.
If you would like to have further information about the systems, please contact me.
49. Quboid Electronics Inc. manufactures entertainment systems. The company is considering
artificial intelligence to improve operational efficiency. The CEO of Quboid asked you to prepare
a memorandum explaining artificial intelligence (AI), its characteristics and application in various
fields.
Explanation:
Artificial Intelligence (AI) is an area of computer science that emphasizes the creation of intelligent
machines that work and react just like humans. AI is the simulation of human intelligence processes by
machines, especially computer systems. These processes include learning by the acquisition of information
and rules for using the information, reasoning by using rules to reach approximate or definite conclusions
and self-correction. It mimics perception, cognitive functions and displays a consciousness like human
minds. For instance, AI can do problem solving and learning skills.
AI has been successful in understanding speech, create real life simulations for training, self-driving cars,
image recognition, interpreting complex data and even learning and playing chess based on moves of the
opponent. AI research and application is being developed in various fields such as searching and planning;
reasoning and knowledge representation; perception such as speech recognition, facial recognition and
object recognition; move and manipulate objects such as navigation and mapping; natural language
processing which includes translation software such as Apple Siri and Google Translate; learning and
machine learning such as developmental robotics, algorithms to predict outcomes and deep learning.
AI can be broadly classified as weak AI and strong AI. Weak AI, also called narrow AI, is designed to be
focused on a narrow task and to seem very intelligent at it. Examples include Apple’s Siri, robots used in
manufacturing and computer games. Strong AI is designed to be capable of all cognitive functions that a
human may have. At this stage the AI we have is mostly weak AI and it is expected get closer to strong AI
in the next decade.

50. Altor Investors is an high-performing investment firm which is known for finding high-return
alternative investment. It is considering investing in cryptocurrency and the company has little
knowledge about cryptocurrency. Tim Altor, the CEO, asks you to prepare a memorandum
explaining the cryptocurrency and its characteristics. Also, recommend whether there are any
drawbacks which will make it a risky investment.
Explanation:
A cryptocurrency is a digital asset designed to work as a medium of exchange that uses strong cryptography
to secure financial transactions, control the creation of additional units and verify the transfer of assets. In
other words, it is the currency which is mined by miners who are the network of parties that authenticate the
transactions. Miners are generally computer programmers who get rewarded by getting digital currency.
Basically, mining serves authenticating transactions and generating digital currency. Mining needs a lot of
resources and is intended to be an arduous task. Individual blocks contain the proof of work of the miners
and is verified at every time a new block is generated. Miners ensure that the transaction is secure and
processed properly and safely. The miners add transaction records to public ledger.
The primary characteristic of cryptocurrency is that it is a medium of exchange just like currency. It is
created and stored electronically. It does not have intrinsic value and cannot be redeemed for another
commodity. Central bank does not determine supply for cryptocurrency, the network is distributed and
decentralized. Cryptocurrencies provide cheaper and faster peer-to-peer payment options without the need to
provide personal details. Regulatory requirements for cryptocurrencies are still not well established and how
different countries are going to react is yet to be seen.
Cryptocurrencies, especially Bitcoins, have been a controversial financial instrument and have numerous
drawbacks. Secure and private transactions can lead to making it easier for people to skirt the law. Third
parties involved in cryptocurrency, like those who produce wallets and exchanges, don’t always have the
same level of security as a coin’s network itself. They do not have an intrinsic value unlike any other asset
class or currency. It must be noted that the currency is based on gold standards. Cryptocurrency is only
accepted by certain vendors. Cryptocurrency mining is a CPU intensive process that requires an
extraordinary amount of resources for no purpose beyond regulating coin creation and encryption. The
cryptocurrency market is volatile, the value of coins can change wildly in a short amount of time. Not
having a central bank control cryptocurrency adds to its volatility as no central force can step in to correct
the markets. They can be traded for illegal activities. There is no way to recover coins if they are lost and
there is no system in place to protect the value of your coin. Cryptocurrency is software based and prone to
hackings and can have bugs and blockchain-based networks have some theoretical vulnerability.

51. Alistiar Research Company is specialized in psephology and is planning to expand its operations
into the field of data analysis of marketing, financial services and pharmaceutical sector. Ryan
Harris, the CEO of the company, asks you to prepare a memorandum describing the business
analytics and the various types of business analytics and whether it is recommended to
implement business analytics in the company for the targeted customers.
Explanation:
Business analytics (BA) is the practice of iterative, methodical exploration of an organization's data, with an
emphasis on statistical analysis. Business analytics is used by companies committed to data-driven decision-
making. The four types of business analytics are descriptive analytics, diagnostic analytics, predictive
analytics and prescriptive analytics.
Descriptive analytics tracks key performance indicators to understand the present state of a business. It is a
preliminary stage of data processing that creates a summary of historical data to yield useful information and
possibly prepare the data for further analysis. It analyses “What happened?” It examines data or content;
often performed manually. It is characterized by traditional business intelligence (BI) and visualizations
such as pie charts, bar charts, line graphs, tables or generated narratives.
Diagnostic analytics is a form of advanced analytics which examines data or content to answer the question
“Why did it happen?” It is characterized by techniques such as drill-down, data discovery, data mining and
correlations. Companies go for diagnostic analytics, as it gives in-depth insights into a particular problem.
At the same time, a company should have detailed information at their disposal, otherwise data collection
may turn out to be individual for every issue and time-consuming.
Predictive analytics is a form of advanced analytics that uses both new and historical data to forecast
activity, behavior and trends. Predictive analytics tells what is likely to happen. It involves applying
statistical analysis techniques, analytical queries and automated machine learning algorithms to data sets to
create predictive models. It uses the findings of descriptive and diagnostic analytics to detect tendencies,
clusters and exceptions, and to predict future trends, which makes it a valuable tool for forecasting. Despite
numerous advantages that predictive analytics brings, it is essential to understand that forecasting is just an
estimate, the accuracy of which highly depends on data quality and stability of the situation, so it requires a
careful treatment and continuous optimization.
Prescriptive analytics uses past performance to generate recommendations about how to handle similar
situations in the future. It analyses “How can we make it happen?”. It applies advanced analytics techniques
to make specific recommendations. It uses techniques such as graph analysis, simulation, complex event
processing, neural networks, recommendation engines, heuristics and machine learning. It is based on
optimization that helps achieve the best outcomes.
Based on the explanation given above, I strongly recommend implementing business analytics in our
organization. This will help us in performing marketing support, financial analytics and other analytics in all
types of business functions and industries.

52. Core Metals Inc. is planning to introduce a new database system. The CEO of the company asks
Shane Thompson to prepare a memorandum explaining different database controls.
Explanation:
The primary database controls is personnel policies (ARCCS). In addition to the usual controls over
terminals and access to the system, database processing also maintains controls within the database. These
controls limit the user to reading and / or changing (updating) only authorized portions of the database. The
database administrator (DBA) is responsible for maintaining the database and restricting access to the
database to authorized personnel. As users directly input data, strict controls over who is authorized to read
and / or change the database are necessary. Another personnel policy in database control is restricting
privileges. It limits the access of users to the database, as well as operations a particular user may be able to
perform. For example, certain employees and customers may have only read-only, not write privileges.
Further, users may be provided with authorized views of only the portions of the database for which they
have a valid need.
The second most important database control is file security and contingency planning. The database is
updated on a continuous basis during the day. The methods of backup and recovery include backup of
database and logs of transactions, sometimes referred to as systems logs. The approach is to backup the
entire database several times per week, generally to magnetic tape and also maintain a log of all transactions.
If there is extensive damage to a major portion of the database due to catastrophic failure, such as disk crash,
the recovery method is to restore the most recent past copy of the database and to reconstruct it to a more
current state by reapplying or redoing transactions from the log up to the point of failure. To avoid
catastrophic failure, database is replicated at one / more locations. Another control is to maintain a backup
facility with a vendor who will process data in case of an emergency.

53. The CEO of Stale Financial Services asks you to prepare a memorandum comparing and
contrasting the different auditor’s techniques for program testing.
Explanation:
You have requested a memorandum describing the different auditor’s techniques for program testing. There
are two different auditor’s techniques for program testing—auditing through the computer and auditing
around the computer.
In auditing through the computer, the program to be used for testing will be the actual entity program. The
auditor directly tests the input data on the entity’s application program. The emphasis of audit is on input
and processing stages of transaction processing. The primary auditor’s tool used is Computer Assisted Audit
Techniques (CAAT). This technique is more appropriate for highly automated IT systems which may result
in complex audit trails and no physical source documents. In this technique, the auditing is done using actual
client data such as transaction tagging, embedded audit module and controlled reprocessing. The test data
will be simulated data. Auditors process a set of auditor’s simulated test data through the entity’s system,
where the auditor knows the output of the test deck. The entity’s system is used to process the auditor’s data,
off-line and it does not affect live data in the entity’s system as the processing is done off-line. The auditors
only need to design simulated data for those conditions that the auditor intends to test. Also integrated test
facility (ITF) is used in which the test data is mixed with entity’s live data which avoids the risk of using test
data on a program which is different from the actual program used by the entity.
In auditing around the computer, the program is purchased separately by the auditor. The auditor processes
entity’s data independently and then investigates in case of any discrepancy in output. The emphasis of
audit is on input and output stages of transaction processing. In auditing around the computer, the major
auditing tool is manual audit procedures. This technique is more appropriate for simple batch systems with
proper audit trail which will provide similar level of confidence as auditing through the computer. The data
used will be actual client data, parallel simulation is used. The auditor re-processes entity’s live data on the
auditor’s software and then compares the output with the entity’s output.

54. Newkart LLP. is a start-up ecommerce company with an annual revenue of $1 million. The
company wants to bifurcate the business model based on the client type. You are asked by the
COO of the company to prepare a memorandum explaining the classification of an ecommerce
business model.
Explanation:
This memorandum is designed to explain the classification of ecommerce business models.
Ecommerce can be categorized into business to consumer (B2C), business to business (B2B) and business to
government (B2G).
In business to consumer (B2C), businesses sell directly to consumers online. The customer goes online and
shops for products; once the customer has ordered the product / service, a notification is sent to the business
which delivers the product / service to the consumer. The business connects with their customers via
marketing and advertisements. B2C ecommerce rely on intermediaries to facilitate the sales. Examples
include Amazon and Alibaba. The back end system connected to ecommerce enables them to handle orders
that come through the website such as order capture, payment gateway, enter accounting transactions and
order fulfillment.
In business to business (B2B), transactions are between businesses. It can be an intermediary like a
wholesaler or retailer who sells the product to final customer. B2B transactions need strong supply chains,
one company provides raw material to another and a B2C transaction involves sale of the finished product to
the end customer. Ecommerce in B2B model uses electronic data interchange (EDI), supply chain
management (SCM) or other IT systems. Also, payment is done via Electronic Fund Transfer (EFT).
Examples include office furniture manufacturers, web hosting services, advertising agencies, graphic design
services and leasing of commercial / retail space.
In business to government (B2G), businesses market and sell products / services to government and
government agencies. B2G, which is also known as public sector marketing, provides a way for businesses
to bid on government projects through the use of internet and real time bidding. Businesses can provide
additional documentation to advertise their products and services to bid for the contract with government
agencies. The online platform can be used to coordinate the work including coordinating online meetings,
review plans and manage progress between a business and government agency. The platform also provides
for reverse auctions, i.e., in the form of request for proposals (RFPs), request for information (RFI) and
request for quotations (RFQs) by posting tenders.

55. Electrokart Inc. is one of the fastest growing online electronics store in US. The company is
expanding its international operations and is looking ahead to improve the IT infrastructure to
match its growth. It plans to establish national sales companies or subsidiaries and each
subsidiary will act as a profit center. The company’s CEO Puff Miqdadi asks you to prepare a
memorandum explaining the different types of processing. Further the store would like to know
the most suitable type of processing considering their business and growth plans.
Explanation:
In an organization, computers are connected to each other which make a network. In the network, various
tasks are completed by different computers and data is shared among computers. Every computer is
controlled by different methods and there are different ways of processing performed on the network. On the
network, some computers have high processing power as compared to others.
Centralized systems are systems that use client / server architecture where one or more client nodes are
directly connected to a central server. This is the most commonly used type of system in many organizations
where client sends a request to a company server and receives the response. In-library there is one processor
attached to different terminals and library users can search any book from the terminal which includes
mouse, keyboard and screen. In centralized processing all the terminals are controlled by a single processor
(CPU) and any command can be fulfilled by a single processor and this type of network is called centralized
network.
In decentralized processing, there are different CPU connected on the network and each processor can do its
job independent of each other. For example, in a Net cafe, all computers can perform their own tasks. This
type of network is called decentralized network.
Another type of processing also exists named distributed processing. In this type of processing different
CPU are connected to the network and are controlled by single CPU. For example, in air reservation system
there exists different terminals and processing is done from many locations and all the computers are
controlled by the single main processor. This type of network is called distributed network.
The best suited processing for Electrokart is distributed processing as it plans to have subsidiaries in each
country wherein all the revenue and expenses are processed remotely in the corresponding countries, yet the
consolidated information will be available in the master database in the headquarters.

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1. The management of Fab Furnishing Inc.

is in process of setting up its Enterprise Risk

To: The Senior Manager

From: The Accountant

Date: March 31, 2017

• Endorsement, coding and recording of checks received for deposit

From: The Accountant

Date: March 31, 2017

From: The Consultant

Date: March 31, 2017

From: The Manager

Date: March 31, 2017

Re: Key aspects of risk assessment according to the COSO framework

Type your communication in the response area below.

I would be delighted to assist you if you have any further questions.

I would be delighted to assist you if you have any further questions.

Re: Raising additional capital based on the two alternatives.

If you have any questions, please contact me.

To: The Controller, Gold Inc.

From: The Accountant

Date: March 31, 2017

From: CPA Candidate.

Re: Using return on investment and internal rate of return models.

If you have any further questions, please contact me.

Re: Assessing financing options of callable or convertible bonds.

If you have any questions, please feel free to contact me.

To: The Departmental Managers

Re: Advantages and disadvantages of telecommuting.

I would be delighted to assist you if you have any further questions.

The free model disrupts with an ‘if-you’re-not-paying-for-the-product-you-are-the-product’ model that

If you have any questions, please contact me.

From: Lorena Mendes CPA, Head of Payments Systems

I would be delighted to assist you if you have any further questions.

If you have any additional questions, please contact me.

If you have any questions, please contact me.

If you have any questions, feel free to contact me.

If you have any additional questions, please contact me.

If you have any additional questions, please contact me.

To: The Management

From: The Accountant

Date: March 31, 2017

If you have any additional questions, please contact me.

Re: Advantages of the best online real time processing system.

If you have any additional questions, please contact me.

From: CPA Candidate

If you have any additional questions, please contact me.

If you have any additional questions, please contact me.

If you have any additional questions, please contact me.

I would be delighted to assist you if you have any further questions.

If you have any additional questions, please contact me.

If you have any additional questions, please contact me.

If you have any additional questions, please contact me.

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