Lambers CPA review business envoirnment and concepts

CPA
CPAREVIEW
REVIEW

1
4
3
2
Financial
Business
Auditing &
Regulation
Accounting
and
Environment
Attestation
&
Concepts
Reporting
by
by
Joseph R. Lanciano,
CPA,
Vincent
Lambers,
MBA,
CPA,
Vincent
W.W.
Lambers,
CPA

and MST, CPA,
Michael F. Farrell,
J.D.
and
ArthurMBA,
E.
Reed,
MBA,
DonaldPaul
T.
Hanson,
Richard
Delgaudio,
MBA,CPA,
CPA.
Debole,MBA,
J.D
William A. Grubbs, MBA, CPA


4 
Business Environment 
and Concepts 
 
by 
Vincent W. Lambers, CPA 
 Donald T. Hanson, MBA, CPA 
Ronald LaPlante, CPA, CMA, CIA 

 

 
 
 
Published by 

 
 

 

Copyright © 2012 by LearnForce Partners, LLC.
All rights reserved. No part of this publication
may be reproduced in any form without the
written permission of the publisher.


ACKNOWLEDGMENTS
 
It would be impossible to write a CPA examination preparation book of any kind
without the assistance of the American Institute of Certified Public Accountants, and
their various operating divisions, in granting permission to use various materials. We
respectfully acknowledge and thank those persons in the American Institute who
promptly answered our inquiries.
We also acknowledge the following sources, with our thanks for their assistance:
Material from the Certified Management Accountant Examinations, Copyright ©
1988 through 1996 by the Institute of Certified Management Accountants is reprinted
and/or adapted with permission.
Solutions to the CMA examination questions reprinted with the permission of
Multimedia Management Training, Inc.
Questions from Investment Planning: Multiple Choice Questions Workbook, Lesson

2, Keir Educational Resources, Revised February 2003, reproduced with permission
of Keir Educational Resources.
Special thanks to the National Conference of Commissioners on Uniform State Laws.
Material from their web site on Uniform Partnership Act reproduced with permission.

Lambers CPA Review
North Andover, Massachusetts
January 2011


Chapter Subjects of
Volume 4 — BUSINESS ENVIRONMENT AND CONCEPTS
Chapter One
CORPORATE GOVERNANCE
Chapter Two
PROCESS AND PROJECT MANAGEMENT
Chapter Three
MICROECONOMICS WITH STRATEGY EMPHASIS
Chapter Four
BUSINESS CYCLES
Chapter Five
ECONOMIC MEASURES
Chapter Six
FOREIGN EXCHANGE
Chapter Seven
FINANCIAL MODELING
Chapter Eight
STRATEGIES FOR SHORT- AND LONG-TERM FINANCING OPTIONS
Chapter Nine
FINANCIAL STATEMENT IMPLICATIONS OF LIQUID ASSET MANAGEMENT

Chapter Ten
INFORMATION TECHNOLOGY IMPLICATIONS IN THE BUSINESS ENVIRONMENT
Chapter Eleven
COST ACCOUNTING: ACTUAL COST, JOB ORDER AND PROCESS
Chapter Twelve
COST ACCOUNTING: JOINT PRODUCTS AND STANDARD COSTS
Chapter Thirteen
MANAGERIAL ANALYSIS AND CONTROL
Chapter Fourteen
MANAGERIAL PLANNING AND CONTROL

Material from Uniform CPA Examination Questions and Unofficial
Answers, copyright © 1977 through 2010 by the American Institute
of Certified Public Accountants, Inc., is reprinted (or adapted) with
permission.


 

Chapter One
Corporate Governance
Governance is the sum of procedures and foundation created by a board to communicate, direct,
manage and monitor the actions of an organization and moving it toward accomplishing its
objectives.

1. The Role of the Board of Directors:
a. The Board of Directors is an elected or assigned group of individuals who jointly monitor the
activities of a company or entity
b. The Board’s activities are steered by authorities and responsibilities given by another
authority (stockholders)

2. 8 Basic Board of Director Duties With Regard to Financial Reporting:
a. Review and monitor corporate procedures (operating through strategic) including
financial plans
b. Establish policies of ethical conduct and oversee adherence to those policies (“Tone at
the Top”). These policies can also be enhanced by management.
c. Understand the corporate risk profile and monitor risk management programs.
d. Comprehend the organization’s financial statements and oversee adequacy of all internal
controls including financial controls.
e. Monitor chief executive officer (CEO) compensation and goal setting.
f. Oversee the process of efficient and effective financial reporting to the stockholders.
g. Establish senior management succession.
h. Review the functioning of the Board of Directors and committees to determine candidates
for succession.
3. Securities and Exchange Commission (SEC) The Security and Exchange Commission gave
the United States Stock Exchange Boards (NYSE, AMEX) and NASDAQ the authority to:
a. Mandate that all members of the Board of Directors be independent. Independence in
this instance means that “no material direct or indirect relationships within an
organization, including its Board members, with customers, vendors, immediate family
who are customers or vendors. Stockholdings are considered independent of
management. The SEC requires a five-year cooling off period from any relationship
mentioned above before a board member can be considered independent.
b. Expand the Board of Director’s and associated committee’s authority. This includes
audit committees.
4. Audit Committee An Audit Committee is composed of outside directors that have the power
to:
a. Appoint, compensate and supervise external auditors
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b. Monitor the independence of its own committee members
c. Confidentially monitor the accounting and internal control process
d. Hire outside advisors such as legal counsel and other topical experts

An Audit Committee must be no smaller than 3 members and be independent of the
organization. The Audit Committee must be financially literate, one member must accounting/financial
experience (CPA,CMA). The Audit Committee must have the ability to create a charter specifying its
policies, tasks and authority. It must also be able to oversee the preparation of the financial statements
from an internal (employees) and external (auditors) perspective.
In addition to the above, an Audit Committee must:
a.
b.
c.
d.
e.

Prepare an audit process report annually which will be available to the Board of Directors
Handle and rectify complaints on accounting, internal control and audit affairs.
Receive reports from external auditors
Monitor disagreements between auditors and management
Monitor quarterly and annual reports

5. Internal Control is the monitoring and actions of an organization created to ensure that
information in reports is recorded, processed, summarized and communicated within a specified
time period. These procedures give credence to the fact that financial statements adhere to a
reporting framework (Generally Accepted Accounting Principles/International Financial
Reporting Standards).
6. Committee of Sponsoring Organizations (COSO) consists of the AICPA, FEI, IMA, IIA and
AAA appointees who established a framework of internal control that was issued in 1992. This is

the framework of internal control for public companies in the United States.
Other frameworks include the Control Objectives for Information and Related Technology
(COBIT) and Auditing Standard 5. COBIT is administered by the Information System Audit
and Control Association (ISACA), whereas Auditing Standard 5 is issued by the Public Company
Accounting Oversight Board (PCAOB).
In 2004 COSO updated the framework to incorporate Enterprise Risk Management (ERM) that
enhanced the internal control framework it originally issued. Both frameworks are now
incorporated into ERM and are in use today.
7. Enterprise Risk Management (ERM) uses strategic and operational procedures to identify,
assess, manage and control possible occurrences or circumstances in order to give reasonable
assurance to the Board of Directors, Audit Committee, and management regarding the
accomplishing of the organization’s objectives.
Enterprise Risk Management entails:

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a. Coordinating risk appetite and strategy. How much risk is an organization willing to
endure in order to attain its strategic goals.
b. Supporting risk response decisions to either avoid, reduce, share or accept risk.
c. Decreasing operational unawareness and associated costs, losses or unexpected
occurrences.
d. Determining and mitigating organization-wide risks that will enhance and encourage
effective and integrated responses to risk.
e. Seeking proactive opportunities in determining risk occurrences
f. Placing capital where it would be most effective in mitigating risk.
The COSO Model is a three dimensional perspective when viewing ERM. The four objectives
are strategic (such as a mission statement, long term goals), operations (short term efficient and

effective use of resources), reporting (reliability of financial information) and compliance (legal
and statutory matters.
It is important to know the 8 components of Enterprise Risk Management.
a. Internal Environment is the tone of an organization. Views on risk, integrity and ethics
should be determined by senior management and monitored by the board of directors.
b. Objective Setting is the creation of accomplishment tasks that are consistent with an
organization’s mission statement and risk appetite.
c. Event Identification is defined as internal and external activities affecting tasks toward
achieving organizational objectives that must be identified and determined to be a risk or
opportunity. These events must be communicated to management.
d. Risk Assessment is the scrutiny of risk to determine potential occurrence and effect of risk
on the organization. It also entails determining how to manage risk whether it be inherent or
residual.
e. Risk Response is used to avoid, reduce, share or accept risk. This must be performed by
management assuming that management is aware of both organizational risk tolerance (risk
in individual tasks) and risk appetite (the overall organizational risk management is willing to
endure).
f. Control Activities are the rules and tasks created and put into place to enable risk responses
to occur.
g. Information and Communication: Appropriate data is gathered and disseminated in a
timely manner and medium in order for those using it to accomplish tasks. This is especially
important to management in managing change in an organization. The lines of
communication can be top-down, bottom-up and across functions or divisions.
h. Monitoring either by management and/or inside or outside evaluators such as auditors and
regulatory agencies.

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Summary
The framework does not work in the same manner in every organization due to unique
effectiveness and limitations scenarios. The chart below summarizes the basic roles of the
different groups in an organization.
Group
Board of Directors/Audit Committee
Executive Management
Operations Management
Auditors

Basic Roles
Monitoring oversight entity-wide
Monitoring oversight with delegation duties
Executing duties to mitigate risk
Advisory role in ongoing risk reduction
activities
Identification of risk

Chief Risk Officer

 
 

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Chapter One 
Multiple Choice Questions 

 
1. Which of the following is NOT a board of
directors’ responsibility or requirement?

d. the firm’s opinion about audit fees in
matters discussed with non-firm
accountants.

a. more than one member of the board of
directors should be a financial expert.
b. monitoring the work of the external
auditors.
c. oversight of the financial reporting
process.
d. functional supervisor of the chief audit
executive.

5. Compensation disclosure required by the
SEC includes
a. the chief operating officer’s salary.
b. the chief information officer’s stock
options received.
c. the chief financial officer’s car parking
allowance in a private parking lot.
d. the chief risk officer’s bond conversion
options.

2. The time that must pass in order for a
member of the board directors to be
considered independent from a company

where that member was once an employee
according to the National Association of
Securities Dealers Automated Quotation
Systems is

6. What is best definition of a company’s
risk tolerance or its risk appetite?
a. risk tolerance is the sum of all of the risks
that a company is willing to endure in order
to achieve its goals.
b. risk appetite is the product of all of the
risk tolerances in a company’s business
processes.
c. risk tolerance is the amount of inherent
risk experienced by a company at any time.
d. risk appetite is the remaining risk after a
company implements its internal controls.

a. one year.
b. two years.
c. three years.
d. five years.
3. A chief audit executive should report
administratively to the
a. the chief operating officer.
b. the chief executive officer.
c. the board of directors.
d. the chief financial officer.

7. All of the following are external monitors

of a company EXCEPT

4. A CPA firm performing an audit under
Section 404 of the Sarbanes-Oxley Act is
required to communicate all of the following
matters to the board of directors EXCEPT

a. the board of directors
b. securities analysts
c. legal counsel
d. vendors

a. the subjective aspect of management’s
significant accounting practices.
b. disagreements with management.
c. all material misstatements, corrected or
uncorrected.

1Q 1 


8. The difference in the fine assessed by the
Securities and Exchange Commission
between a certification and a willful
certification on and by a chief executive or
chief financial officer that does not adhere to
the requirements of the Sarbanes-Oxley Act
is

a. perpetual inventory system.

b. economic order quantity formulas.
c. material requirements planning.
d. just-in-time inventory system.
13. What is the BEST example of an
escalation trigger department that would
identify a risk event?

a. $5 million.
b. $4 million.
c. $2 million.
d. $0.

a. board of directors.
b. help desk.
c. quality inspection team.
d. environmental disaster crew.
14. Enterprise Risk Management can
provide for all of the following EXCEPT

9. The most efficient way for a board of
directors to audit itself is through the use of
a. another board of directors’ assessment.
b. the audit committee.
c. questionnaires.
d. external auditor inquiry.

a. assurance against encountering a black
swan event.
b. improving methods of investing risk
capital.

c. coordinating efforts against simultaneous
risks.
d. encourages control of opportunities.

10. The audit committee should have in
place a mechanism to handle the reports and
concerns of all of the following groups
EXCEPT

15. Accounts receivable write-off is BEST
handled by which department?

a. stockholders.
b. risk officers.
c. external auditors.
d. whistleblowers.

a. accounts payable
b. shipping
c. marketing
d. treasury

11. Which of the following is NOT one of
the five original components of internal
control regarded by the Committee of
Sponsoring Organizations of the Treadway
Commission (COSO)?

16. Which of the following is NOT part of
the control environment?

a. tone at the top
b. organizational structure
c. business processes
d. human resource policies

a. control activities.
b. risk assessment.
c. information and communication.
d. event identification.

17. Which of the following statements is
FALSE?

12. Which of the following is LEAST
effective in monitoring the inventory level
of a company?

a. operating management has the
responsibility to carry out risk mitigation.

1Q 2 


b. chief risk officers measure risk on an
ongoing basis.
c. internal auditors act as advisors regarding
risk.
d. chief executive officers have the equal
responsibility of risk oversight along with
the board of directors.

b. a small fixed salary and a larger
commission package based upon economic
value added.
c. stock options.
d. restricted stock to be redeemed at the end
of three years.
22. The nominating committee assigned to
staff the board of directors has which of the
following responsibilities?

18. Limitations to Enterprise Risk
Management includes all of the following
EXCEPT

a. chooses the external auditors.
b. implements governance guidelines.
c. determines employee salaries.
d. monitors chief executive officer
succession.

a. subjective decisions regarding risk.
b. inappropriate analytical assessment of risk
appetite.
c. management override of controls.
d. collusion among employees.

23. The greatest conflict among those
externally monitoring the activities of a
company listed below is:

19. Which of the following is NOT part of
managing change in a company?
a. an effective method to receive requests for
process improvements.
b. an effective method to scrutinize
proposed enhancements to processes.
c. an effective method to quickly implement
change.
d. an effective method to test the effects of
change.

a. company attorneys who provide inside
legal counsel.
b. investment analysts who rate the company
stock and are employed by an investment
bank.
c. creditors who monitor the company’s
financial ratios for compliance to
agreements.
d. a stockholder who has a minor role in the
possible takeover a company.

20. A method that is NOT effective in
responding to inherent risk is

24. Technology would play the SMALLEST
role in which of the following COSO
framework components?

a. avoidance.
b. reduction.
c. sharing.
d. acceptance.

a. control environment.
b. monitoring.
c. information and communication.
d. control activities.

21. The LEAST effective method of
executive compensation to dovetail
management and stockholder objectives is
a. a bonus given after five years for
performance.

1Q 3 


28. Which of the following is LEAST likely
to be a role of an external auditor with
regard to corporate governance?

25. Losses on long-lived assets should be
mitigated by

a. informing the board of directors regarding
corporate governance.
b. ensuring compliance with risk mitigation
procedures.

c. assessing areas of risk during the course
of an audit.
d. follow-up on recommendations regarding
risk in management letter communication.

a. co-insurance for the book value of the
asset.
b. assessments of risk by the board of
directors.
c. insurance carried on them based upon
independent valuation by an appraiser.
d. a predetermined amount at the time of the
purchase of the long-lived asset.

29. Change communication would be most
useful in which of the following situations?

26. A separate compliance department of a
company in a heavily regulated industry is
more likely to

a. informing employees regarding
reassignment of certain personnel.
b. informing employees regarding
mandatory attendance of a continuing
professional education event.
c. informing employees of a remote attempt
of a takeover by another company.
d. informing employees of a change in a
minor process affecting one percent of the

company.

a. respond quicker to outside threats to an
individual company within the industry.
b. strengthen operating controls over the
long-lived assets of the company.
c. maintain greater independence from the
company.
d. have a more unbiased awareness of
company risk.
27. Which of the following groups has the
LEAST amount of responsibility for
corporate governance?

30. Change communication is best enhanced
by
a. a top-down approach in communicating
changes.
b. a bottom-up approach in communicating
changes.
c. involvement of affected employees in
creating new change procedures.
d. including the monitoring process of the
change in an external audit.

a. board of directors.
b. operations management.
c. executive management.
d. internal auditors.

 
 
 

 
 
 
1Q 4 


Chapter One
Answers to Multiple Choice Questions
1. A One financial expert is appropriate according to the Sarbanes-Oxley Act. The other choices
are a board of directors’ responsibility.
2. C NASDAQ requires that three years elapse between prior company employment and
appointment to the board of directors by an individual. The New York Stock Exchange requires
that five years elapse between these two circumstances.
3. B A chief audit executive should report administratively to the chief executive officer and
functionally to the board of directors.
4. D It may inappropriate and it is not a Sarbanes-Oxley Act requirement for external auditors to
discuss fees of other firm’s accountants with the board of directors unless instructed to do so by
the board of directors.
5. C All compensation of the chief financial officer must be disclosed to the Securities and
Exchange Commission, but not the compensation of the COO, CIO or CRO.
6. B Risk tolerance related to individual business processes range of risk allowed. Multiplying
all of the risks of the business processes together equals the risk appetite for a company.
7. A The board of directors are an internal monitor of a company, the other choices are all
external monitors.
8. B The fine for a certification of false information by a CEO or CFO is one million dollars,
while a willful certification of false information has a five million dollar penalty, a difference of

$4 million.
9. C A board would most likely answer a questionnaire created by the members most truthfully
and objectively more than those who would be less informed of strategic matters internally or
externally.
10. A Stockholders ultimately vote on board members positions and are not part of the
governance process that is recommended in the Sarbanes-Oxley Act.
11. D Event identification along with risk assessment and risk response were added in 2004 to
the COSO framework in establishing Enterprise Risk Management parameters for a company.
12. C Material requirements planning monitors the amount of periodic production required based
upon past trends of customer ordering to determine future customer needs. Inventory is better
monitored using a perpetual system involving economic order quantities based upon analytical
information or a just-in-time process driven by customer demand that allows for lean or no
inventories.

1S 1 


13. B The quickest and most accurate response to a risk event would be an information
technology help desk member who would route a request to the appropriate personnel. The other
choices would involve a larger lapse of time from end user or event to mitigation of risk.
14. A No one can assure the complete avoidance of an unexpected or remote event from
occurring.
15. A Someone outside of the sales/accounts receivable/sales returns function should be
responsible for the approval or execution of writing off uncollectible accounts.
16. C Business processes themselves are not part of a control environment. They need to be
monitored and organized in an appropriate manner. The other choices are all part of the control
environment according to COSO.
17. D The board of directors has the ultimate responsibility for ERM that is then delegated to
executive management.
18. B Inappropriate assessment of risk appetite is not a limitation to ERM as much as it is the

analytical, objective judgment involved by individuals in determining it as a product of risk
tolerances and is not basic control within ERM. All of the other choices are specific detailed or
inherent limitations to mitigating risk.
19. C Efficiency is not always appropriate in managing change. Time taken to explain and
implement change can go a long way in mitigating resistance to it. This may be an appropriate
slowing of the process for a more long-lasting satisfaction with the change among those affected.
20. A Avoiding risk does not eliminate and may not even mitigate it, thus it the least effective
method for handling it.
21. C Stock options have the most short-term horizon of the four choice listed. Economic value
added to a company determines economic profit of a company that includes a cost of capital in
sustaining company growth along with accounting profit.
22. D Monitoring chief executive officer succession is a specific duty of a board of director’s
nominating committee. That committee does not involve itself with other responsibilities carried
out by the management.
23. B Investment analysts may have a conflict of interest if they are rating securities of a
company that happens to be soliciting the investment bank employer of the analysts for
underwriting their securities.
24. A The control environment relates to individual opinions, values and attitudes toward a
company’s control environment that would involve written policies and procedures and not
necessarily technology for their creation.

1S 2 


25. C Independent assessment represents the best choice to determine the long-lived asset value
to mitigate the risk of inadequate insurance for the asset.
26. D Appropriate separation from management by the compliance department would tend to
alleviate some or most of a company bias imposed or influenced by the control environment. It
is not appropriate for the compliance department to be completely separated from the company
whose compliance is being monitored.

27. D Internal auditors may advise regarding corporate governance procedures but are not
responsible for its creation or implementation. All of the other groups in the answer choices are
responsible.
28. B An external auditor can never assure complete compliance with risk mitigation procedures.
29. A The breakup of work groups may sometimes be traumatic in the short-term and cause
resistance to that particular change by affected employees. Communication well in advance of
the change in a clear, appropriate manner may ease some or even most of the resistance to this
potential sensitive matter.
30. C Involving employees affected by a change to become change agents themselves best
enhances the way change can be communicated in a company both formally and informally
among employees.
 

1S 3 



 

Chapter 2
Process and Project Management
This chapter focuses on the process and project management sections in the Business Environment &
Concepts section of the CPA Exam. The first part of the chapter will focus on Process Management,
whereas the second part will focus on the Project Management area. There are quite a few lists in this
chapter that need to be learned and memorized.
Process Management can be defined as “an all encompassing approach to obtain continuous fitness of
product or service improvement in and through the actions performed in an organization”. In other words
it is the coordination of organizational activity in harnessing improvement and streamlining it to achieve
greater profitability.
There are many approaches to process management that can be taken. Initially the overall benefits of

process management are decreasing customer product returns, decreasing warranty provisions made,
decreasing amounts of capital tied to inventory, increasing perception of product value, decreasing
processing costs and increasing reliance in process schedules.
1. Total Quality Management (TQM)
Total Quality Management (TQM) uses quantitative methods to constantly enhance organizational
processes. It also involves coordination of managers and employees goals to those of the organization. In
addition, TQM involves strategic planning due to the significant number of quality costs that compose
product pricing and the lengthy implementation process.
There are four objectives to TQM:
a.
b.
c.
d.

Top notch consistent product quality
Instant and consistent reaction to customer desires
More adaptability in maintaining customers varying requirement
Lower costs through enhancements and removing non-value added work

Faulty processes are usually the reason for poor quality. An organization may require a paradigm shift in
corporate style in order to improve faulty processes. Proactive management, corporate-wide training, and
enabling all levels of employees to make decisions on product quality are ways to improve faulty
processes. Preventive and not corrective action is encouraged. Improvement teams can be used to help
focus on problem awareness.
There are five key required aspects of TQM. These are:
a. TQM should offer acute focus on customer satisfaction as job retention depends on it
b. Focus on internal and external customers (purchasing, receiving, assembly, shipping, sales) where
each department if a customer to the succeeding department
c. Analyzing critical success factors (an organization can only improve if it knows what and how to
measure)

d. Constant improvement of finished goods and services
2 1 
 


 
e. Reliance on co-workers and departments across the organization
An organization’s ability to measure its performance is an essential factor for improvement.
Measurement aspects include the Deming cycle (plan-do-check-act). This cycle measures how processes
are thought of, carried out, monitored and improved upon. Another familiar measurement aspect is
benchmarking, which compares an organization’s processes against the best in the class at a particular
process.
Other measurement aspects include:
a. Statistical Control which uses charts to monitor defects
b. The Taguchi quality loss function determines the financial loss due to quality defects in an
organization’s products and services
c. A Pareto Diagram shows that just a few deficient processes create the majority of losses.
d. The Ishikawa (cause and effect diagram) shows the cause of a certain event over a time period
and isolates reasons for defects.
Measurable quality costs can be segregated into two categories in an organization’s quality reports. These
are conformance costs and nonconformance costs. Conformance costs are those costs that occur before
a product is shipped or a service is provided. Examples of these costs (preventative costs) can be training,
evaluation and vendor costs. Appraisal costs such as inspections, testing by employees or departments
are also examples of conformance costs.
Nonconformance costs are those costs that occur after a process is completed internally, or after a
product or service is provided to the customer. Examples of these costs are internal failure costs such as
scrap or retooling of machines. External failure costs also fall into this category, examples being
warranties, product returns, lawsuit and faulty product costs.
2. Shared Services
An organization may decide to group non-required and support staff into one separate department,

division or company to enhance already existing services. This streamlining action of shared services
can improve consistency, core process concentration and tracking of common costs.
There can be some pitfalls to utilizing shared services. These can include:
a.
b.
c.
d.

A narrow focus on needs in the short term to spend needlessly.
Lack of specialized knowledge to affect proper deployed shared sources
Faulty or too rapid of implementation. A slower implementation is more effective.
Administrative and financial failure due to lack of coordination with employees of different skills
sets and the inability to set pricing for the services they provide.
e. Lost internal control during the change process and inherent risks during the process should be
monitored and mitigated immediately.

2 2 
 


 
3. Outsourcing
Outsourcing is acquiring a product or service instead of producing it. In today’s business world some of
the more common functions to be outsourced include information technology, human resources, customer
service and transaction processing. An organization may gain some benefits by outsourcing. These
include:
a.
b.
c.
d.

e.

Gaining outside knowledge and access to new technologies
Acquiring less expensive services than those produced in-house
Avoiding inventory obsolescence
Minimizing administrative overhead
Enhancing quality in products or services

Outsourcing can also expose an organization to some risks. Risks include:
a.
b.
c.
d.
e.
f.

Excess costs involved in specific knowledge
Loss of human expertise
Internal control loss of quality
Loss of knowledge exclusivity
Strategic planning suffers due to reliance on outside expertise
Production rigidity may be experienced on supply chain loss.

4. Foreign Operations
Off-shore (Foreign) operations offer the allure of cost savings as costs of doing business in the United
States can appear to be prohibitive. Other gains that can be had by off-shore operations are:
a.
b.
c.
d.

e.
f.

Quality of service can be maintained or improved
New Sources of expertise acquired that may not be available domestically
The off-shore operation may turn into a strategic business unit for the foreign operation
Can offer a refocus on core domestic business operations
New processes are implemented quicker in a new operation
Drains on capital decreased if core business is profitable and off-shoring is done inexpensively

There are many different business and control problems associated with off-shore operations. Conditions
such as language and cultural differences can have a substantial effect on the success (or failure) of offshore operations. Problems include:
a.
b.
c.
d.
e.
f.
g.
h.

The savings never materialize
Exorbitant training costs and language barriers
Unproductive staff
Inability to acquire productive staff due to competition abroad in particular services
Focus on tasks may shift from a foreign worker’s standpoint
Cultural differences in work habits
Initiative to be proactive might not occur in order not to be disrespectful of the corporate office
Plateaued employees become unmotivated with mundane tasks

2 3 
 


 
5. Implementing Total Quality Management
The implementation of TQM does not occur instantly. It involves careful consideration and patience to
succeed in a procedural insertion. There are basic steps and organization should take when instituting
TQM.
The year one step is to “prepare and plan”. Organizations must develop a quality oversight committee
and implementation team. This implementation team and their techniques must be approved by the Board
of Directors and CEO for the TQM to work properly. Year one steps also include instilling training
programs on TQM techniques in order to increase awareness of quality, determine common data
recognition regarding quality techniques, and develop appropriate goals and minimum standards. These
training programs should occur at all organization levels.
In addition, year one activities include conducting quality audits. These audits will review and compare
organizational steps against those of best practice organizations. The first year audits will also determine
organizational assets and liabilities regarding quality. Gap analysis should also be conducted to pinpoint
the exact areas where quality enhancements are needed in an organization’s process. The organization
should then develop a plan to improve quality in the short and long term. The short term plan should use
smaller implementation projects and gradually build to larger ones in the long term.
Year two steps are to teach and deploy employee training sessions conducted by qualified instructors in
TQM techniques. Quality teams should also be developed. These teams should have a member from
each proper area of the organization participate in order to monitor the results of improvements
throughout the organization. These members become “owners” of the quality process. Year two steps
also include creating a gauging system of performance that would revamp the accounting system to
communicate pinpoint accuracies in appropriate tasks that may entail many general ledger accounts.
In year three the steps will examine, make decisions and change the TQM program. These steps include:
a. Compensating and reinforcing TQM enhanced improvement and employee behavior (morale
boosting).

b. Involve vendor participation to ensure reasonable expectations of quality, timeliness of product
delivery, commitments as colleagues of TQM, and consistency of products.
c. Update TQM techniques on regular basis
6. Business Process Engineering (BPR)
Business Process Engineering (BPR) is the intricate scrutiny and complete makeover of business and
production activities in an organization. It is done to increase quality and cut costs. Key considerations
of BPR are:
a.
b.
c.
d.

Asking why we are doing this? Is there a reason we are performing this task this way?
Creating new thoughts regarding work patterns
Upheaval of processes needed
Linking all process together in a “cause and effect” relationship

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BPR requires that some steps be taken in order to support it. First, emphasis should be placed on the
process and not organization in review of the workflow. Second, BPR supports paradigm shifts and large
changes over time versus a few incremental changes in work flow processes. Previous thought processes
regarding workflow are eliminated. Technology may be used to drive the change in thought process.
7. Management Schools of Thought
There are several management “schools of thought” that may be asked on the CPA Exam. One of these
thoughts is the Just-In-Time Inventory System that has the following characteristics:
a. Demand-pull in nature. Customer orders trigger activity.

b. Work teams are multiskilled across manufacturing functions to get the work accomplished
c. Inventory is reduced or eliminated as it is worked on as soon as it arrives from a vendor. This is
also known as lean production, no waste or inventory is allowed.
d. Vendors must adhere to on-time quality product delivery
e. Operates on “Kanban” or ticket system to move inventory between workstations to attain a
finished product.
8. Process (Demand Flow)
Process (or demand flow) is the study of activities that combine to take a raw material and turn it into a
finished good. There are value added steps throughout the process that should encompass effectiveness,
efficiency and adaptability. The process should address the following:
a.
b.
c.
d.

Does the work involved improve the product?
Does the output end up when and where a customer would want it?
Does the product cost too much compared to other products?
Is the workflow process adaptable to customer requirements should those requirements change?

9. Theory of Constraints (TOC)
Theory of Constraints (TOC) is based upon the premise that “time is money”. It focuses on quickening
of the manufacturing process. Time is measured in cycles and the main cycle is the time between receipt
of a customer purchase order to the shipment of that order. Imbedded in the cycle are non-value added
activities. This subset of cycle time is called processing, or value added time. The percentage of
processing time that encompasses the cycle time is called manufacturing cycle efficiency. The
manufacturing cycle efficiency percentage should be monitored by management and should be as high as
possible.
In manufacturing processes TOC views all costs except raw materials as fixed costs. The reason is that
the processes can be delayed (bottlenecked) because of labor, overhead and machinery (not the raw

material). The process of TOC Review involves these aspects:
a. Determine constraints using a workflow diagram
b. Decide which products should be manufactured given the constraints. Those with the greatest
throughput margin offer the greatest opportunities for future sales. This margin is (Sales minus
Raw Materials Costs). The costs are deemed supervariable.
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c. Optimize process flow through the constraint by determining a proper time amount for the
process. This is done while keeping the flow constant and identifying the steps in the process
right up to the constraint.
d. Add labor, overhead or fixed assets to alleviate the constraint and improve cycle time.
e. Reengineer the workflow process if necessary for flexibility and cycle time improvement
f. Can also work for overhead management and adopting activity based costing to properly allocate
activity costs.
10. Six Sigma
Six Sigma is a management technique to eradicate defects and minimize variations in a manufacturing
process. It uses experts (sometimes call black belts) to keep improving the process using quantifiable
measures such as increased income and decreased costs. Six standard deviations from a man in a
population is where the term “Six Sigma” is derived. It means that near 100% of product contains no
defects.
The goals and aspects used are quite similar to those of TQM and were inspired by William Edward
Deming’s model of quality improvement. Six Sigma has two main processes. The first one enhances
existing product and follows the following steps:
a.
b.
c.
d.

e.

Define a problem from a customer’s viewpoint
Measure job flow tasks and gather data
Analyze the data to discover problems in job flows
Improve the process by experimenting with new process flows
Control future work flows by creating control points in the new work flow patterns and monitor
improvements

The second Six Sigma Process determines new work flow processes for a product. This second Six
Sigma process will:
a.
b.
c.
d.
e.

Define goals consistent with customer desire and international
Measure steps and procedures that are essential to product quality, capability and risks
Analyze different work flow patterns and decide on the ideal one
Design the detail of the new work patterns and roll it out incrementally
Verify the ideal design will work properly, prepare a trial run and deliver it to the new process
owners.

11. The International Standard Organization (ISO)
The International Standards Organization (ISO) developed areas of quality control standards that are
used throughout the world in many companies and provide common databases of knowledge for constant
improvements by gauging efforts within organizations and steps to alleviate environmental issues. The
different ISO Series are:
a. ISO 9000 Series covers quality management standards

b. ISO 14000 Series covers management of environmental systems
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c. ISO 25000 and 27000 relate to software and security quality in information systems

Part 2 Project Management
Project Management is a procedure to plan, organize, direct and control organizational assets in order
for goals to be accomplished within a specific time period and a specified monetary figure.
Organizational assets include human capital, fixed assets, funding and time. A project’s life expectancy
encounters four phases. These phases are:
a. Contemplating a start of a project due to determine goals, scope, funding, management and
participants
b. Determine work quality specifications, milestones, finished product details and amount of work
required
c. Carry out the project as well as monitor, adjust and document it as necessary
d. Finish the project; turn it in for evaluations and recommendations.
The project management environment can be depicted by a triangle show below.
Scope & Quality 

Time Constraints 

Monetary Constraints 

The most important of these constraints is the quality of the items given to the organization at the end of
the project. The Project Management Environment includes as part of the three constraints:
a. Monetary Budgets
b. Time Budgets

c. Work parameters to guard against “Scope Creep”, where non essential tasks are included in the
actual performance of the project.
d. All of the constraints work either conversely or inversely with one another.
1. Enterprise Resource Planning (ERP) is used to manage a project throughout all of an
organization’s departments. This is the use of one database for all of the required information to
complete the project (SAP, Oracle). Customizing ERP is a costly, cumbersome process and it
may be easier to change certain business processes that to update ERP software.

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2. Project Management techniques include Gantt charts that depicts starting and ending times of
projects noted on a calendar. Gantt charts show the interrelationships of tasks within a
project. Histograms are bar charts used to determine the number of instances for certain events.
Network analysis determines the quickest route through a project by detailing each event
involving work steps within a project.
3. Performance Evaluation Review Technique (PERT) is used when constructing a large asset
such as an airplane, skyscraper, etc. Each project has a starting and ending point with milestones
and accomplished tasks interspersed though the diagram. Connecting lines between the
milestones depict time spent to accomplish a certain task. By mapping out and measuring the
time required to accomplish tasks, the longest time to complete a project can be determined. This
is called the Critical Path.
The critical path has no slack time on it, thus all of the tasks on the critical path cannot be
delayed, or the entire project is delayed. PERT is also known as the critical path method since the
concepts are intertwined. Since there is no slack time on the critical path, if the time to complete
a project is shortened, the first place to “crash” the project are the tasks on the critical path. The
tasks that alleviate the greatest time constraints or are the least costly should be crashed first.
Using PERT (Critical Path Method) will also identify:

a.
b.
c.
d.

Idle or slack time
Where additional personnel are required
The need for lead time to receive outside inventory or labor
Tasks that can be completed simultaneously

PERT does not clearly depict relationships of one task to another as clearly as a Gantt Chart.
PERT uses a weighted average of time expected to perform each task. One sixth of the weight is
given each to the shortest possible and longest possible expected times to complete the tasks.
Two-thirds of the weight is given to the most suitable amount of time needed to complete a task.
Critical Path Method is helpful when times to complete tasks are previously known and incentive
is given to shorten times for future tasks.
4. Other Models used in Project Management
There are other models that are used in Project Management. Algorithms are used to determine
shortest routes for scheduling in transportation situations. This can be used to determine
movement of products by trucks or the flow of a product such as oil.
5. Job Responsibilities for Project Personnel
A Steering Committee oversees the entire project. They are specifically responsible for:
a.
b.
c.
d.

Alleviating disputes between organization management and project members
Making sure the project stays in budget
Funding is made to the project in a timely manner

Representing stakeholders in negotiations with management
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Stakeholders can be one person or an organization within or external to the project organization.
The stakeholders have a financial interest in the success and completion of a project. Managers,
sponsors and team members can be stakeholders.
Whereas sponsors provide monetary backing for the projects, managers actually lead the team
members of the project. The manager’s primary goal is to manage people, deal with and resolve
conflict within and between teams. Managers do not need to be experts in every aspect of the
project.
Team members carry out the tasks required to complete the specific tasks of a project. They
enter and leave the project as requested.

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