Foreign Currency Risk

Mr. Roberts said that he is inclined to accept the arrangement however, he is concerned about the
Thai firm's proposal that transactions be stated and paid in the Thai currency, the Baht. He asks that
you explain in a memorandum what the implications would be if he agrees to accept payment in
Baht.

Type your communication below the line in the response area below.

REMINDER: In CPAexcel, the Written Communications are graded on key words. These
are words that need to be included in the message in order to address the subject matter.
However, on the exam itself, "Your response will be graded for both technical content and
writing skills. Technical content will be evaluated for information that is helpful to the
intended reader and clearly relevant to the issue. Writing skills will be evaluated for
development, organization, and the appropriate expression of ideas in professional
correspondence. Use a standard business memorandum or letter format with a clear
beginning, middle, and end. Do not convey information in the form of a table, bullet point
list, or other abbreviated presentation."

To: Mr. Paul Roberts, CEO, Best Alloy, Inc.

From: I.M. Candidate
Re: Transactions in Baht

This is to respond to your request for information about the implications if Best Alloy
accepts payment in a foreign currency (Thai Baht).

When the terms of a business contract provide that transactions will be settled in a
currency other than an entity's domestic currency, the transactions are said to be
"denominated in a foreign currency." For Best Alloy, agreeing to accept payments from
the Thai firm in Baht would result in the transactions being denominated in a foreign
currency.

A company that has accounts receivable denominated (to be settled) in a foreign currency
face a currency exchange risk that does not occur when accounts receivable are collected
in the domestic currency of the company. Because the rate at which one currency will
exchange for another currency may change continuously, there is the risk that an
unfavorable exchange rate change will occur between the time a receivable is established
and the time it is collected.

For example, assume that the dollar value of a receivable to be satisfied in a foreign
currency is $100 when the receivable is recognized. Subsequent to recognizing the
receivable, but before it is collected, the exchange rate between the dollar and the
foreign currency changes. As a result of the change in exchange rates, at the date the
receivable is collected and the foreign currency received, the dollar value of the foreign
currency is less than $100. To the extent the dollar value of the foreign currency at the
date of collection is less than the dollar value at the date the receivable was recognized
(i.e., the date of the sale), a loss has occurred. That loss, which would be reported as a
currency exchange loss, would reduce net income from the sale transaction.

It also is possible that a favorable change in the exchange rate could occur. In that case,
the dollar value of the foreign currency when it is collected would be greater than the
dollar value of the original receivable, and a gain would be recognized.

Please let me know if you would like additional information or if I can be of further help.
I.M. Candidate

Compensating Balance

In a meeting with Ron Jacobs, the manager of your company, he disclosed that the firm is in
the early stages of negotiating a $100,000 short-term loan with Block Bank, a local
commercial bank with which your firm has no previous relationship. The loan would be used to
temporarily increase inventory to meet higher seasonal demand.

The bank has offered a one-year, $100,000 loan at 6.00%, with a requirement that 10% of the
original loan be maintained as a compensating balance. Mr. Jacobs asks that you explain in a
memorandum what a compensating balance is and what effect it would have on the cost or
other elements of the proposed borrowing.

To: Mr. Ron Jacobs, Manager

From: I.M. Candidate
Re: Compensating Balances

This is to provide the information you requested concerning the nature of a

compensating balance when required by a bank and the implications of such a
requirement.

A compensating balance is an amount that a borrower is required by the terms of a

loan agreement to maintain in a demand deposit account with the lender during the
term of the loan. The amount of the compensating balance is usually expressed as a
percent of the original loan amount.

A requirement to maintain a compensating balance has two primary effects on the

borrowing. First, the actual amount of the loan that is available to be used is reduced
by the amount of the required compensating balance. Under the terms proposed by
Block Bank, only $90,000 of the $100,000 would be available for inventory
purchases. The other $10,000 (.10 x $100,000) would continue to be held in our
account with Block Bank as a condition of the loan.

The second effect on the borrowing is that the effective interest rate would be
greater than the 6.00% stated rate. Since only $90,000 of the loan is available to
use, the effective cost of the borrowing should be based on $90,000, not $100,000.
Thus, under the Block Bank proposal, the annual interest cost of $6,000 ($100,000
x .06) is effectively the cost of borrowing $90,000 and the effective interest rate is
6.67% ($6,000/$90,000), not 6.00%.

Please let me know I can provide additional information.

I.M. Candidate
Enterprise-Level Risks

Alex Poindexter is the controller of Ensenada Products, a small, publicly held manufacturing
company that operates in both the U.S. and Mexico. Ensenada Products Board of Directors
concerns about, and interest in, how to better manage enterprise-level risks motivates their
request that Alex write a letter that defines enterprise risk management (ERM) and discusses
what risks should be considered as a part of ERM. The Board also wants Alex to explain what
benefits accrue to an organization that implements an effective system for managing
enterprise-level risks.

To: Ensenada Products Board of Directors

From: Alex Poindexter
Re: Enterprise-Level Risks

Enterprise risk management (ERM) concerns the identification and management of

events and circumstances that may impact the ability of an entity to achieve its
objectives. A number of corporate frauds, including Enron Corp., WorldCom, Adelphia
Communications, Tyco International, Global Crossing, and Qwest Communications
scandals have increased concern with, and attention to, enterprise risk
management.

A number of risks should be considered as a part of enterprise risk management.

These risks include damage to the organization's reputation, business interruption
due to disaster (e.g., flood) or human events (e.g., a labor strike), liability to third
parties, distribution or supply chain failure, risk related to the market environment,
to regulatory or legislative changes, due to market competition or failure to attract
or retain key staff or management, technology failure, failure of a disaster recovery
plan, and loss of data. COSO's ERM framework (a cube) includes four objectives,
eight components, and three levels of organizational units.

The benefits of effectively implementing systems for managing enterprise-level risks

include aligning the organization's risk appetite with its strategy such that the
organization chooses to assume an appropriate level of risk, rather than assuming
an unknown or inappropriately low or high level of risk. Assessment of an
organization's risk appetite and strategy also enables the development of
mechanisms to better manage risk. Risk management also creates the possibility for
improving an organization's risk responses. For example, organizations may choose
to avoid, reduce, share, or to accept, risks. Better management of enterprise-level
risks also reduces the likelihood of disruptive operational surprises and losses.

Enterprise level risk management enables organizations to better identify potential

risk events and to establish responses, thereby reducing surprises in the associated
costs and losses. Risk management also enables the ability to manage multiple and
cross enterprise risks. For example, Ensenada Products has divisions both in the
United States and Mexico. The risks related to political instability along the U.S.,
Mexican border, coupled with risks of smuggling and drug traffic at the border must
be assessed jointly to determine whether and how they pose risks and threats to
Ensenada's operations. The assessment of enterprise-level risks can also lead to the
identification of opportunities to enhance an organization's business prospects. For
example, assessing the risks related to online sales and activities may give rise to
the realization that additional opportunities exist in online markets that have not
been previously considered. Finally, enterprise-level risk assessment can improve
capital deployment. Specifically, risk information can allow management to better
assess its capital needs and to improve capital allocations among competing projects
and alternatives.
In short, enterprise-level risk assessment promises a number of important insights
and advantages to Ensenada Products. I look forward to exploring these
opportunities further with you.

Sincerely,

Internal Control

Issues related to corporate governance are of increasing concern in capital markets. Write a
memorandum to a corporate Board of Directors that considers some of the events that
transpired at WorldCom. WorldCom's CEO (Bernard Ebbers) and CFO (Scott Sullivan),
authorized, executed, and recorded falsified accounting transactions that inflated revenue by
about $11 billion. WorldCom's Board of Directors approved these transactions. This fraud
earned Ebbers and Sullivan 25 year and 15 year prison terms, respectively. The specific topics
that the board would like you to cover are a definition of internal control and how the events
at WorldCom relate to the goal of an appropriate "tone at the top" in relation to an
organization's system of accounting control. The board would also like you to discuss what
controls might have helped prevent the WorldCom fraud.

To: Board of Directors

From: Accountant
Re: Internal Control at WorldCom

Internal control is a set of processes that are designed to provide reasonable

assurance regarding the achievement of objectives related to the effectiveness and
efficiency of operations, reliability of financial reporting, and compliance with
applicable laws and regulations. Internal control is primarily the responsibility of
management and the entity's Board of Directors.

An organization desiring an effective internal control must have top management

that is ethical and pro-active in establishing this tone and culture. That this tone was
lacking at WorldCom, is evidenced by the events described above. Positive strategies
for creating an ethical culture include management emphasizing the critical role of
ethics and integrity to organizational success, and, emphasizing the role of mission
statements and codes of conduct in promoting integrity. In addition, managements'
actions, as well as their words, must embody a culture of integrity and ethical
conduct.

Controls that might have helped prevent the fraud that occurred at WorldCom
include the segregation of duties between the accounting functions that authorized,
executed, and recorded the falsified accounting transactions is one important
(absent) control in this scenario. In addition, the WorldCom Board of Directors did
not appear to be independent of management and did not effectively execute its
oversight function. Hence a stronger, independent Board of Directors likely would've
helped prevent the WorldCom fraud. Finally, a similarly strong, independent,
professional WorldCom Audit Committee might also have lessened the likelihood or
success of the WorldCom fraud.

In short, the WorldCom case illustrates the hazards of an unethical management

"tone at the top", inadequate segregation of duties, and a Board of Directors that
failed its fiduciary responsibility of management oversight.

Sincerely,
Credit Card Processing and Encryption

Melanie Hogsbath has started a successful pet lodging, grooming, care and entertainment,
e.g., dog walking, business, Hogsbath's PetPoria. Many of Melanie's transactions are executed
by credit card at her website. A customer of Melanie's recently expressed concerns regarding
entering credit card information into Melanie's website. Melanie has called you to ask about
the possibility of providing her with a more secure credit card processing system. More
specifically, she has recently read an article about "encryption" and asks your opinion of its
value to her business. Please write Ms. Hogsbath a memo that discusses encryption - what it is
and how it may be useful to her business. Explain what system risks it may help her address.
Briefly describe symmetric versus asymmetric encryption and the implications to Melanie for
implementing either type of encryption for credit card information at her website.

To: Ms. Hogsbath

From: Accountant
Re: The role and importance of "encryption" in credit card processing

Encryption is the process of transforming information using an algorithm to make it

unreadable to anyone except those possessing special knowledge, usually referred
to as a key (source: Wikipedia). Encryption technology uses a mathematical
algorithm to translate cleartext (plaintext) - text that can be read and understood -
into ciphertext (text which has been mathematically scrambled so that its meaning
cannot be determined). A key is then required to translate the ciphertext back into
plaintext.

An effective implementation of encryption can guard against risks to privacy, i.e.,

the protection of data-in-transit against unauthorized access, and authentication,
i.e., user identification. Hence, well designed and implemented encryption lessens
the likelihood of the theft of credit card numbers and personal information from her
website.

Symmetric encryption -- also called Single-key encryption or private-key encryption

uses a single algorithm to encrypt and decrypt the text. The sender uses the
encryption algorithm to create the ciphertext and sends the encrypted text to the
recipient; the sender must also let the recipient know which algorithm was used to
encrypt the text; the recipient then uses the same algorithm (essentially running it
in reverse) to decrypt the text.

Asymmetric encryption -- also called public/private-key encryption and private-key

encryption uses two paired encryption algorithms to encrypt and decrypt the text. If
the public key is used to encrypt the text, the private key must be used to decrypt
the text; conversely, if the private key is used to encrypt the text, the public key
must be used to decrypt the text.

To acquire a public/private key pair, the user applies to a certificate authority (CA);
the CA registers the public key on its server and sends the private key to the user;
when someone wants to communicate securely with the user, they access the public
key from the CA server, encrypt the message and send it to the user; the user then
uses the private key to decrypt the message.

Although the ciphertext created with symmetric encryption can be very secure, the
symmetric encryption methodology itself is inherently insecure because the sender
must always find a way to let the recipient know which encryption algorithm to use.
Hence, symmetric encryption is most commonly used with "data-at-rest," i.e., data
that is stored in an archive or data warehouse.
Asymmetric encryption is more complicated, cumbersome, and secure. With
asymmetric encryption the transmission is more secure because only the private key
can decrypt the message and only the user has access to the private key. Hence,
well designed asymmetric encryption offers a higher level of security but (also adds
a bit of complexity to the system). In addition, as computing moves towards
ubiquitous or mobile computing (e.g., m-commerce), asymmetric encryption can
create compatibility problems since the certificate authority system may not yet be
adapted to the latest technology platforms.

To summarize, your online customers may desire the level and type of assurance
that is provided by encryption. Specifically, encryption can be useful in reducing
consumer concerns about credit card number and identity theft in online
transactions. A number of alternatives exist for implementing encryption technology
into online transactions. The best alternative for your business would depend of the
level of security that you desire and the corresponding costs (and potential
complexities) associated with that level of encryption.

Business Continuity Plan

Willie Dixon, the President and CEO of "The Back Door Man" has a growing and successful
business repairing and replacing screen doors, entry doors, and garage doors. His business
includes about 1000 employees at a headquarters and 23 branch offices. The business does
not have business continuity (BCPs) or disaster recovery plans (DRPs). President Dixon has
requested that you draft a letter suggesting the motivation, and a process, for creating a BCP.

To: President Willie Dixon

From: Accountant
Re: Business Continuity Plan

A business continuity plan (BCP) is critical to enabling your business to recover in

the event of a natural or human-based disaster, or a disruption of services. Creating
a BCP is one element of organizational risk management. Hence, developing a BCP
should be part of a broader strategy and approach to addressing significant strategic
and business threats and risks. The following six steps present one model of the
process for developing a BCP.

Create a business continuity policy and program -- Create a framework and

structure for the BCM, based in an overall risk management strategy. Identify the
scope of the plan, its key roles, and assign individuals to roles.

Understand and evaluate organizational risks -- Identify key organizational

activities and processes to determine the activities, and their costs, that are needed
to prevent their interruption, and, ensure their restoration in the event of
interruption. Identify the maximum tolerable interruption periods by function and
organizational activity.

Choose business continuity strategies -- Define alternative methods to ensure

sustainable delivery of products and services. Key decisions will likely include
desired recovery times, distance to recovery facilities, required personnel,
supporting technologies, and impact on stakeholders.

Develop and complete a BCP response -- Document and formalize the BCP plan.
Define protocols for defining and handling crisis incidents. Create, assign roles to,
and train the incidence response team(s).
 Exercise, maintain and review the plan -- -- Test the required technology and
implement all proposed recovery processes. Update the plan as business processes
and risks evolve.

Embed the plan in the organization's culture -- Design and deliver education,
training and awareness materials to enable effective responses to identified risks.
Manage change processes to ensure that the BCP integrates into the organization's
culture.

Following these steps should enable the creation of a BCP that greatly reduces the
threat of key organizational risks disrupting future business success.

Biometric Security System

GenghisKhan.Com Airlines is considering ways to enhance the physical security of its data
center, which is located in a suburb of New York City, consists of 10,000 ft. 2, and is regularly
used by about 30 employees. Currently, access to the data center requires a proximity card;
individual employees receive cards. The company is considering implementing a biometric
fingerprint scanner to increase security. Please define each of the following security risks, and
comment on the effectiveness of the proposed biometric security in addressing them: (1)
Piggybacking; (2) Phishing; (3) Sharing access cards; (4) Packet sniffing.

To: GenghisKhan.Com Airlines

From: Accountant
Re: Proposed biometric security system

Biometric scanning technologies authenticate identity using an individual's unique

body features, such as voice, retina, fingerprint, or signature. The cost of biometric
identification technologies are dropping and such systems are increasingly reliable
and valid. In considering such systems, GenghisKhan.Com should consider an
integrated system that combines multi-factor identification, potentially including by
knowledge (e.g., password), by device (e.g., a keycard) and by body (e.g., voice
print or fingerprint). The proposed biometric fingerprint scanning technology would
relate to the security risks as follows:

In piggybacking, an unauthorized user gains entry into a restricted area by

following an authorized user, using the authorized user's entry credentials to gain
access. The level of piggybacking might be reduced by the proposed biometric
system, but a better (though perhaps more expensive) control over this risk would
be hiring security guards or installing video systems to monitor entry stations.

Phishing attempts are requests for information delivered via email or text
messaging (when sent by text message, these are called smishing). This risk would
be unaffected by the use of biometric identification technologies.

Sharing access cards. The proposed biometric systems would eliminate this risk.
Employees could not share access cards in a system that included biometric
identification.

Packet sniffing programs capture packets of data as they move across a computer
network. This risk would be unaffected by the use of biometric identification
technologies.
Control Procedures

Roger Johnson, a CPA, worked as a volunteer at the International Commonwealth Track and
Field Games (ICTFG). Each day of the six-day games, about $100,000 in cash and $2 million
in credit card revenues came into the accounting office. Roger's volunteer duties included
counting cash each evening and reconciling the credit card receipts and credit card fee
payments to the cash receipts journal and general ledger. Control procedures required at least
two individuals to be present in the accounting office at all times. However, Melanie Smurf, the
other volunteer who was to work with Roger on Thursday evening, had a six-year-old daughter
who was ill. Hence, Melanie requested that Roger count the cash and perform the
reconciliations for this day by himself, since she could not fulfill her volunteer duties that
evening.

Please write a memo discussing the role of monitoring of internal control in improving
corporate governance and how the monitoring of internal control is relevant to the issue
identified in this question.

Memo:

Over time, controls deteriorate. This deterioration is called "entropy." Control

monitoring is important because people forget, quit jobs, get lazy, get distracted, or,
come to work drunk, stoned, or hung over; in addition, machines fail and technology
changes.

Monitoring is the core, foundational component in the COSO ERM model. Its position,
i.e., as the foundation of risk management, is intentional. Monitoring is essential to
achieving strong internal control and effective risk management. With good control
monitoring control problems are identified, and identified more quickly. Decision
makers receive better, more timely information. Certifications of internal control are
easier and more timely, and organizations are more efficient and have lower costs.

Effective cash control requires segregation of duties. Monitoring the control

requirement, i.e., that at least two individuals be present for cash counts, would
reveal that a backup, additional individual is needed in the system, to ensure that no
individual ever counts cash alone. Hence, monitoring is useful, as in this case, in
revealing that the specified control procedures are infeasible or inadequate.

In short, the situation at ICTFG suggests a control deficiency that should be

identified by effective monitoring and corrected through proper segregation of
duties.

Sincerely,

Accountant
Enterprise Resource Planning System

he Cup-O-Cake Company (COCC) manufactures cupcakes, wedding cakes, and other baked
desserts which are delivered through grocery stores, caterers, and restaurants. COCC has
recently begun a complex IT project, built around an enterprise resource planning system, to
replace accounting, customer relations management, supply chain management, and
inventory control systems. Although the system is built around SAP, management decided to
customize many of the SAP modules to ensure a better fit with existing organizational
processes. Unfortunately, the implementation is not going well. Implemented modules, after
initial testing, are evidencing difficulties, including transactions failing to execute, and data
errors emerging in the enterprise-wide databases. Please write a memo to the head of the IT
steering committee that considers:

1. the major roles of each of the following in resolving the above issues and problems: the
IT steering committee, the lead systems analyst, applications programmers, and end-users,

2. what processes, within the systems development lifecycle, may have led to the above
failures.

Type your communication below the line in the response area below.

To: IT Steering Committee Chair

From: Accountant
Re: Resolving SAP implementation issues at COCC

Question #1: In relation to the issues that are emerging in the SAP implementation
at COCC, the roles of the following parties should be:

The IT steering committee: bears primary responsibility for approving and

prioritizing information technology projects. Their responsibility in relation to
implementation failures would depend upon how their role was defined in relation to
the project. Hence, it is not clear from the case what the role of the IT steering
committee would be in resolving these issues.

The lead systems analyst: Responsible for developing overall programming logic and
functionality. Failures of the system may be an indicator of problems in this
responsibility. Should be interviewed regarding why the implementation is not
proceeding smoothly.

Applications programmers: Given that considerable customization is occurring in the

implementation, pinpointing the causes of these failures will be a critical diagnostic
activity. Hence, interview applications programmers to help determine why these
implementation failures are occurring, particularly in relation to customized
programming.

End-users: Gathering additional information about when, why and how the system is
failing to operate as promised will be an additional critical diagnostic activity. Hence,
interviewing end users as to these issues should be informative in resolving them,
by allowing for more precise diagnosis of the nature of the failures.

Question #2: Failures at the implementation stage may be traced back to one of
several possible failures earlier in the systems development process. For example:
Feasibility may have been mis-assessed in the planning and feasibility assessment
stage. Hence, the system, as conceived and implemented, may be infeasible.

The assessment of system requirements may have been poorly executed, meaning
that actual system requirements do not match those proposed in the system
planning documents.

Failure at the design stage would lead to an improper specification of the technical
system architecture or the definition of the interfaces between modules and
subsystems. This could also explain the system failure.

Failure at the development stage could result in inadequate hardware and IT

infrastructure for the system. This would mean that the hardware and other IT (for
example network) resources may be inadequate to the demands of the system.

A failure at the testing stage may result from inadequate testing at normal
operational loads, meaning that the system may work in a test environment but may
fail in the more demanding, actual environment within which the system must work.

A failure at the implementation stage may result from inadequate training of users in
the new system or in insufficient time to allow users to gain a complete working
knowledge of the new system.

Sincerely,

Accountant

Segregation of Duties

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 learned that the company accountant
is responsible for providing general ledger access to others in the company, processing of
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 user name
and password.

Prepare a memorandum to Skyview's president assessing these responsibilities in the context

of segregation of duties. Also assess the possibility of the accountant committing fraud.

To: Skyview President

Re: Redemption Treatment

You have requested that an independent assessment of Skyview's financial systems

and related processes. In a properly controlled financial system the duties of
authorization of transactions, approval of transactions, custody of assets, and record
keeping should all be segregated. In other words, these functions should all be
performed by different individuals. Your current financial system and processes do
not include this proper segregation of duties. Skyview's accountant has incompatible
duties that would allow him to make an error or perpetrate a fraud and prevent its
detection. He processes transactions and has access to assets (printed checks). As
an example, he could process fictitious purchase transactions to his own shell
companies and cause payments to be made for goods or services that were not
received by Skyview.
In addition, the fact that the accountant has access to your user name and password
allows him to circumvent the control provided by your being the only individual
authorized to write off accounts. This would allow the accountant to process an
unauthorized sales transaction to his own shell company and use your user name
and password to write off the account.

I recommend that you purchase or develop a new financial accounting system that
would include appropriate segregation of duties to ensure that no individual in the
organization has the ability to perpetrate errors or fraud without it being detected in
the normal course of operations. In addition, you should establish polices regarding
the maintenance and confidentiality of user names and passwords to ensure that the
controls cannot be circumvented. While such actions will, in the short-term increase
the costs of the accounting system, they will help to prevent the potentially
disastrous occurrence of a major fraud at Skyview.

If you have any questions, please contact me.

Enterprise Risk Management

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.

To: Winston Co. President

Re: Limitations of an enterprise risk management system

You have requested that I provide you with information about an enterprise risk
management system. You are particularly concerned with the limitations of such a
system. The primary purpose of an enterprise risk management system is to provide
processes to identify potential risks to achieving a company's objectives, and, to
manage those risks to be within the company's risk appetite.

In considering implementation of an enterprise risk management system, it is

important to recognize that these systems have limitations. All enterprise risk
management systems rely on judgments about future events that may or may not
occur. Also, while an enterprise risk management system provides information about
risks to achieving the company's objectives, it does not provide complete assurance
that the objectives will be achieved. Finally, as with all control systems, an
enterprise risk management system can break down for a number of reasons,
including bad judgments about risks and their impact, collusion among two or more
individuals, or override by management. Also, due to cost-benefit constraints, no
enterprise risk management system can be perfect.

Adopting a structured plan for assessing the need for and developing a high-quality
ERM system can mitigate these risks. If you have any additional questions about
enterprise risk management systems, please contact me.
Real-time Processing

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, real-time processing system. He has asked you (a consultant)
to prepare a memorandum describing the advantages of adopting such a system for the
corporation.

To: Mr. George Wilson, CIO

Tintco, Inc.
From: CPA Candidate

As you requested, this memorandum describes the advantages of implementing an

online, real-time processing system for inventory. As you are aware, Tintco, Inc.
currently uses a batch processing system that processes transactions monthly. The
primary advantage of an online, real-time processing system is that it provides more
timely (and therefore more accurate) information for decisions. In a batch system,
inventory data are only accurate when the records are updated (i.e., each month).
Therefore, decisions about ordering inventory, inventory value, and company
profitability are not based on timely information. As a result, management cannot do
a very good job of managing inventory. If the company implements an online, real-
time system, information about inventory levels, inventory investment, and cost of
goods sold would be available on a continuous basis. As a result, business decisions
will be based on accurate and timely information. This should result in much better
decisions and better financial performance.

It is clear that an online, real-time inventory system is superior to your current

batch processing system. If you would like to have additional information about
implementation of a new inventory processing system, please contact me.

Payback and Accounting Rate of Return Methods

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
that might be more appropriate.

To: Ms. Linda Gordon, CFO

Yeager Company
From: CPA Candidate

You have requested that I provide an evaluation of the two methods that Yeager
Company uses for capital budgeting: the payback and the accounting rate of return
methods.

As you know, the payback method evaluates investments based on the length of
time it takes to recapture the initial investment. The payback method has two major
limitations. First, it ignores the overall profitability of the investment. Second, it
does not take into account the time value of money. These are major limitations
which can result in selecting investments that are not consistent with maximization
of the company's return on investment.
The accounting rate of return method evaluates investment alternatives based on
their rate of accounting return. Like the payback method, the accounting rate of
return method ignores the time value of money. As a result, it too can result in
choosing investments that may not result in maximization of the company's return
on investment.

The most effective capital budgeting techniques are those that consider the time
value of money. As an example, the net present value method evaluates investment
alternatives based on the present values of the future cash flows of the investments.
It considers both the total profitability of the investment and the time value of
money. Another technique, the internal rate of return method, evaluates investment
alternatives based on their time-adjusted rates of return. This technique also
considers the total profitability of the investment and adjusts for the time value of
money.

I would suggest that you consider replacing your current techniques for capital
budgeting with a technique or techniques that are superior, such as the present
value and the internal rate of return techniques. If you have any other questions
about capital budgeting, please contact me.

Advantages and Disadvantages of Going Public

Talon, Inc. is a privately held manufacturing company. Management of the company is

considering taking the company public through the issuance of common stock.

Terry Savage, the president of the company, has asked you prepare a memorandum describing
the advantages and disadvantages of going public.

To: Mr. Terry Savage, President

Talon, Inc.
From: CPA Candidate

As you requested, this memorandum describes the advantages and disadvantages of

taking your company, Talon, Inc., public. A primary advantage of going public is that
Talon will have access to a much larger pool of equity capital. The company's stock
will trade on an organized market. Therefore, the company can more easily issue
additional stock. Because the stock of the company is publicly traded, it can be used
for business acquisitions, and the company can offer stock-based compensation to
Talon's employees. Finally, the owners of Talon are afforded the opportunity to
readily sell all, or a portion, of their investment in the company. Therefore, the
owners' investments become liquid.

The primary disadvantage of going public is the cost. There are significant costs
involved in the initial public offering of stock, and the continuing costs of compliance
with SEC laws and regulations, including the Sarbanes-Oxley Act. Being a public
company necessarily causes management to focus on maximizing stock price, which
may not be in the best long-term interest of Talon. Finally, public companies must
disclose significant amounts of information that becomes available to competitors,
customers, and potential corporate raiders.

Because of these significant costs and benefits, it is important that the board of
directors of Talon carefully evaluate the decision about whether or not to go public.
If you need any additional information, please contact me.
Balanced Scorecard

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.

To: Ms. Karen Wells, CFO

Hewitt Company
From: CPA Candidate

I understand that you are considering implementing a balanced scorecard

performance measurement system at Hewitt Company. This memorandum explains
the nature and benefits of such a system.

The balanced scorecard is a performance measurement system that includes both

financial and nonfinancial measures. It includes measures in the four perspectives of
financial, customer, internal business processes, and learning and growth. By
measuring performance with multiple measures across these four perspectives, a
balanced scorecard is more strategic than other systems that rely primarily on
financial measures. It aids in communicating the company's strategy to all members
of the organization and helps insure that they work to achieve the organization's
strategic goals.

I suggest that you continue with your plan to implement a balanced scorecard
system because I believe that it is superior to other single-dimensional systems.

If you have any questions, please contact me.

Performance Measures

The management of Taylor Corporation is attempting to adopt new performance measures.

Henry Warren, the chief executive officer, has asked you to prepare a memorandum describing
how management should choose between alternative measures.

To: Mr. Henry Warren, CEO

Taylor Corporation
From: CPA Candidate

This memorandum is designed to assist you in deciding how to select among

different performance measures for Taylor Corporation.

Selecting among different performance measures requires an understanding how the

measures will be used. Possible uses include for compensation, resource allocation,
and business unit performance. Different measures are more appropriate for
different purposes.

It is important that all performance measures reflect the strategy of the company.
Measures that are strategic communicate the goals of the organization and motivate
management to pursue those goals. Performance measures must also represent
economic reality. They should provide a clear and accurate measure of relative
performance. Finally, if the measures are used to evaluate and compensate
managers, they should be sensitive to factors that are in the manager's control and
not sensitive to factors beyond the manager's control. The measures should be
clearly controllable by the manager being evaluated.

As you can see, selection of appropriate performance measures is a complex

process. If you would like to discuss your selection of measures in more detail,
please contact me.

Cost System

The controller of Tennyson, Inc., Howard Lester, is concerned that the company's costing
system is not providing good information about product costs. As a result, he fears that the
company is not making good sales or production decisions. Currently, the company uses a
simple job order costing system and allocates service department costs on the direct method.
Prepare a memorandum to Mr. Lester describing the importance of having good cost
information and ways in which the existing system may be improved.

To: Mr. Howard Lester, Controller

Tennyson, Inc.
From: CPA Candidate

At your request, this memorandum provides information about the importance of a

good cost system and the manner in which Tennyson's system may be improved.

It is essential that a company's cost system reflect accurately the costs of

production. Product cost information is a very important input into a number of
business decisions, including those involving product pricing, inventory levels, and
allocation of productive resources. Historically, the company has allocated service
department costs on the direct method. This method simply allocates the costs of
each service department to production departments based on the relative level of
use. The direct method can result in inaccurate costing when service departments
provide significant amounts of services to other service departments.

Two methods of cost allocation are superior to the direct method: the step method
and the reciprocal method. The step method allocates service department costs to
other service departments as well as the production departments, starting with the
service departments that provide the most services to other service departments.
The reciprocal method uses simultaneous equations to allocate costs to production
departments, resulting in the most accurate allocation of costs when service
departments provide services to other service departments.

Because of the importance of developing accurate cost information, I encourage you

to evaluate your current system of costing. As described, the step and the reciprocal
methods of allocation of service department costs are superior to the direct method
which is currently being used by the firm.

Enterprise Resource Management System

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
management describing the risks involved in executing a project that is cross-functional in
nature.

To: Webster Corp. President

Re: ERP project management
From: CPA Candidate

You have requested that we provide information about the issues involved in
executing a project to implement an enterprise resource management system. In
particular, you are concerned that the cross-functional nature of the project will be
difficult to manage.

You should understand that the cross-functional nature of this project creates
additional risk of failure that must be controlled. The most important requirement
for success of a cross-functional project is full support by top management. The
team must have this support to get adequate cooperation from the various
functional managers of the organization. This also means that the relationships
between the project manager and various functional managers must be clearly
defined to avoid conflict. Finally, senior management must support the project
manager's decisions, recognizing that these decisions must be made quickly and
with limited information to ensure that the project remains on schedule. If senior
management recognizes and resolves these issues, the risk of failure will be
significantly reduced.

If you have any additional questions about the issues regarding completing the
project, please contact me.

Responsibility Accounting System

Tom Miller, the controller of Winston Corporation, is considering establishing a responsibility

accounting system for the corporation. Tom would like you to prepare a memorandum
describing a responsibility accounting system and its advantages over a typical budgeting and
reporting systems.

To: Mr. Tom Miller, Controller

Winston Corporation
From: CPA Candidate

As we discussed, Winston Corporation is considering implementing a responsibility

accounting system. A responsibility accounting system is one that evaluates center
managers based on reports that include only revenues and costs that a particular
manager can control. If the manager is responsible for both revenues and costs, the
center is referred to as a profit center. A cost center is one in which the manager is
only responsible for costs.

The primary advantage of a responsibility accounting system is that managers are

rewarded based on factors that are within their control, creating a direct
relationship between their performance and their performance evaluation. When
being evaluated with a responsibility accounting system, managers are not
frustrated by receiving performance evaluations that are influenced significantly by
external factors. Also they are not rewarded for performance that results from
factors outside of their control. Therefore, from a management evaluation
standpoint, a responsibility accounting system has a significant advantage over
traditional accounting systems.

If you need any additional information about such systems, please contact me.