CPA Review Course Notes: Management Services and Auditing Theory

Comprehensive vocabulary flashcards covering Management Services (Cost Accounting, CVP, Budgeting, Capital Budgeting, Economics) and Auditing Theory (Assurance, Risks, Evidence, Reporting, Ethics).

Direct materials

Raw materials that can be physically and directly associated with the finished product during the manufacturing process.

Manufacturing overhead

Costs that are indirectly associated with the manufacture of the finished product, including indirect materials, indirect labor, depreciation on factory buildings, and insurance.

Fixed costs

Costs that remain the same in total regardless of changes in the activity level, meaning fixed costs per unit vary inversely with activity.

Variable costs

Costs that vary in total directly and proportionately with changes in the activity level and remain constant per unit at every level of activity.

Relevant range

The range of activity over which a company expects to operate during the year and throughout which the behavior of costs is assumed to be linear.

Least Squares Method (Regression Analysis)

A statistical technique that determines the line of best fit for a set of observations by minimizing the sum of the squared deviations, represented by the formula $y = a + bx$.

Coefficient of Correlation ($r$)

A measure of the relative strength of the linear relationship between two variables, ranging from $-1.0$ to $+1.0$.

Coefficient of Determination ($r^2$)

The proportion of the total variation in $Y$ that is accounted for by the regression equation; it serves as a measure of 'goodness of fit'.

Prime costs

The sum of direct materials costs and direct labor costs.

Conversion costs

The sum of direct labor costs and manufacturing overhead costs.

Opportunity Cost

The benefit or profit foregone by selecting one alternative course of action as opposed to another.

Contribution margin

The amount of revenue remaining after deducting variable costs, expressed as a per unit amount or as a ratio.

Break-even point

The level of activity at which the company realizes no income and suffers no loss; where total revenue equals total cost.

Margin of Safety

The difference between actual or budgeted sales and break-even sales.

Degree of Operating Leverage (DOL)

A measure of a company’s earnings volatility computed by dividing total contribution margin by net income.

Absorption Costing

A costing method that includes all manufacturing costs (direct materials, direct labor, and both variable and fixed manufacturing overhead) in the cost of a unit of product; also called Full Costing.

Variable Costing

A costing method that includes only variable manufacturing costs in the cost of a unit of product and treats fixed manufacturing overhead as a period cost; also called Direct Costing.

Standard Cost

A planned unit cost of a product, component, or service produced in a period, used as a benchmark for measuring performance.

Material Price Variance (MPV)

Calculated as $(Actual\,price - Standard\,price) \times Actual\,quantity\,purchased$.

Master Budget

A set of interrelated budgets that constitutes a plan of action for a specified time period, traditionally starting with the Sales Budget.

Zero-based budgeting

A planning process in which each manager must justify a department's entire budget from a base of zero every period.

Sunk Costs

Non-recoverable costs incurred in the past that cannot be changed by any present or future decision.

Goal congruence

Occurs when units of an organization have incentives to perform for a common interest and adhere to the company's overall objectives.

Residual Income (RI)

The difference between operating income and the minimum peso return required on a company’s operating assets ($RI = Operating\,Income - (Minimum\,Rate\,of\,Return \times Operating\,Assets)$).

Economic Value Added (EVA)

A specific version of residual income that measures real economic gains using the weighted average cost of capital ($WACC$).

Transfer Price

The monetary value or price charged by one segment of a firm for goods and services it supplies to another segment of the same firm.

Net Present Value (NPV)

A discounted cash flow technique that compares the present value of net cash flows with the capital outlay required by an investment.

Internal Rate of Return (IRR)

The interest rate that causes the present value of a proposed capital expenditure to equal the present value of the expected net annual cash flows.

Weighted Average Cost of Capital (WACC)

The overall cost of capital from all organization financing sources, including long-term debt, preferred stock, and common equity.

Current Ratio

A liquidity ratio expressing the relationship of current assets to current liabilities ($Current\,Ratio = \frac{Current\,Assets}{Current\,Liabilities}$).

Economic Order Quantity (EOQ)

The quantity to be ordered that minimizes the sum of the ordering and carrying costs ($EOQ = \sqrt{\frac{2aD}{k}}$, where $a$ is ordering cost, $D$ is annual demand, and $k$ is carrying cost per unit).

Program Evaluation and Review Technique (PERT)

A network model developed to aid managers in controlling large-scale, complex problems through a probabilistic diagram of interrelated activities.

Learning Curve

Describes efficiencies arising from experience, showing that productivity increases with production size but at a decreasing rate.

Normal Good

A good for which demand increases as consumer income increases.

Assurance engagement

An engagement in which a practitioner expresses a conclusion designed to enhance the degree of confidence of intended users other than the responsible party.

Professional skepticism

An attitude that includes a questioning mind, being alert to conditions which may indicate possible misstatement due to error or fraud, and a critical assessment of evidence.

Control risk

The risk that a material misstatement will not be prevented, or detected and corrected, on a timely basis by the entity's internal control.

Detection risk

The risk that procedures performed by the auditor to reduce audit risk to an acceptably low level will not detect a misstatement that exists and could be material.

Tracing

An audit procedure testing the completeness assertion by starting from original source documents and following them forward to the accounting records.

Vouching

An audit procedure testing the existence or occurrence assertion by starting from accounting records and following them backward to the original source documents.

Attribute sampling

A statistical sampling method used primarily in tests of controls to estimate the rate of deviation from internal control procedures.

Variables sampling

A statistical sampling method used primarily in substantive testing to estimate the numerical measurement or peso value of a population.

Subsequent events

Events occurring between the date of the financial statements and the date of the auditor's report that may affect the financial statements.

Key Audit Matters (KAM)

Those matters that, in the auditor’s professional judgment, were of most significance in the audit of the financial statements of the current period.

Independence of mind

The state of mind that permits the provision of an opinion without being affected by influences that compromise professional judgment.