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CIA Part 1 Table of Contents

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Table of Contents

Exam Introduction ............................................................................................................. 1

Box Styles Used in This Book 1

Section I – Mandatory Guidance – Introduction ............................................................. 2

The Mission of Internal Audit ........................................................................................... 3

Mandatory Guidance ......................................................................................................... 3

The Core Principles 4

Introduction to the Standards 5

Types of Standards 6

Recommended Guidance.................................................................................................. 8

A. Definition of Internal Auditing ...................................................................................... 8

The Purpose, Authority, and Responsibility of the Internal Audit Activity 8

The Internal Audit Charter 9

Organizational Status of the Internal Audit Activity 11

Consulting Services 13

B. IIA Code of Ethics ....................................................................................................... 14

C. International Standards .............................................................................................. 16

C1. Comply with the IIA’s Attribute Standards ............................................................. 16

C2. Maintain Independence and Objectivity .................................................................. 16

Independence and Objectivity 16

Fostering Independence 17

Direct Interaction with the Board 19

Fostering Objectivity 19

C3-4. Proficiency and Necessary Skills ......................................................................... 24

Standard 1210: Proficiency 25

C5. Exercise Due Professional Care .............................................................................. 33

Standard 1220: Due Professional Care 33

C6. Promote Continuing Professional Development .................................................... 35

C7. Quality Assurance and Improvement Program ...................................................... 37

1. Internal Assessments (Standard 1311) 38

2. External Assessments (Standard 1312) 40

Standard 1320: Reporting on the Quality Assurance and Improvement Program 42

Standard 1321: Conforming to the Standards of Internal Auditing 44

Standard 1322: Disclosure of Noncompliance 45

Table of Contents CIA Part 1

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Section II – Internal Control & Risk – Introduction ....................................................... 47

A. Types of Controls (e.g. Preventive, Directive, Input, Output, etc.) ......................... 48

Defining Control 48

Classifying Controls 48

Timing of the Controls 52

Establishing the Control Process 54

Limitations of Internal Controls 59

B. Management Control Techniques ............................................................................. 59

Monitoring the Control System 62

Controls in the Accounting Cycles 63

Revenue-Receivable Cycle 63

Purchases-Payable Cycle 66

Payroll Cycle 68

Cash Receipts Cycle 69

Cash Disbursement Cycle 70

C. Internal Control Framework Characteristics & Use ................................................. 71

The COSO Model 71

D. Alternative Control Frameworks ................................................................................ 79

The CoCo Model 79

The Cadbury Model (Precursor to Turnbull) 80

The Turnbull Report 80

E. Risk Vocabulary and Concepts.................................................................................. 82

Benefits of Risk Management 83

Types of Risk 84

Internal and External Risk 85

The Risk Management Process 86

Risk Appetite and Risk Tolerance 93

Managing Operations Risk 94

Managing Finance Risk 94

Enterprise Risk Management (ERM) 95

Cost-Benefit Analysis in Risk Assessment and Decision Making 101

F. Fraud Risk Awareness .............................................................................................. 102

Types of Fraud 102

Conditions Necessary for Committing Fraud 103

Management Fraud 105

Responsibility for Fraud Detection 107

Responsibility of the Internal Auditor 107

Conducting a Fraud Investigation 108


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Section III – Conducting Internal Audit Engagements – Introduction ...................... 112

A. Data Gathering .......................................................................................................... 113

A1. The Preliminary Survey .......................................................................................... 113

Reporting Survey Results 115

A2. Checklists and Questionnaires .............................................................................. 116

Questionnaires 116

A3. Interviewing ............................................................................................................. 118

A4. Observation ............................................................................................................. 122

A5. Conduct Engagement to Identify Key Risks and Controls .................................. 123

Types of Risk Exposures 124

Assessing Risks for Likelihood and Impact 126

Risk Mapping Based on Likelihood and Impact 127

Responding to Risks 127

The Use of Matrices 128

A6. Sampling .................................................................................................................. 130

Statistical and Nonstatistical Sampling 131

Choosing the Correct Population 132

Areas in Which Sampling is Used 132

Sampling Risk 133

Confidence Level and Precision 134

Determining Sample Size 134

Methods of Attribute Sampling 136

Dealing with Errors in the Sample 137

Tolerable Error and Sample Error 138

Extrapolating Variables Sampling Results to the Population 138

Probability-Proportional-to-Size Sampling (PPS) 140

Using a Random Number Table 142

B. Data Analysis and Interpretation ............................................................................. 145

B1. Computerized Audit Tools and Techniques ......................................................... 145

Data Mining and Extraction 145

Testing the Computer System 146

Computer-Assisted Audit Techniques (CAAT) 147

Other CAAT Methods 148

B2. Spreadsheet Analysis ............................................................................................. 151

Spreadsheet Use 151

Spreadsheet Risk 152

B3. Analytical Review Techniques ............................................................................... 154

Identifying the Cause of the Problem 158

Techniques Listed in Implementation Guide 2320 161

1. Comparisons with Budgets (Variance Analysis) 161


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2. Trend 161

3. Regression Analysis 163

4. Ratio Analysis 166

B4. Benchmarking ......................................................................................................... 176

Benchmarking Process 176

Types of Benchmarking 177

Limitations of Benchmarking 177

B5. Draw Conclusions ................................................................................................... 178

Results of the Engagement 178

Criteria for Observations and Recommendations 180

C. Data Reporting .......................................................................................................... 181

C1. Reporting Test Results to Auditor-in-Charge ....................................................... 181

C2. Develop Preliminary Conclusions Regarding Control ......................................... 183

D. Documentation and Working Papers ...................................................................... 184

Function of Working Papers 184

Contents of the Working Papers 185

Computer or Electronic Working Papers 186

Types of Working Paper Files 186

Summaries in Working Papers 188

Control of the Working Papers 190

Retention of the Working Papers 192

Granting Access to the Working Papers 193

E. Process Mapping, Including Flowcharting ............................................................. 194

Flowcharts 194

Data Flow Diagram 195

Narratives 196

F. Evaluate Relevance, Sufficiency, and Competence of Evidence .......................... 196

Hierarchy of Reliability and Persuasiveness of Audit Evidence 199

Appendix A: Glossary ................................................................................................... 203

Appendix B: Sample Internal Audit Activity Charter .................................................. 206

Appendix C: Practice Advisories for Quality Assurance and Improvement Program208

Appendix D: 40 Common Forms of Fraud ................................................................... 216

Answers to Questions ................................................................................................... 218



Table of Contents

Part 2 Exam Introduction .................................................................................................. 1

Box Styles Used in This Book 1

Section I – Managing the Internal Audit Function – Introduction .................................. 2

Managing the Internal Audit Function 3

Topic I A. Strategic Role of Internal Auditing .................................................................. 3

A1. Initiating and Managing Change ................................................................................ 4

A2. Build and Maintain Networking with Others in the Organization ............................ 8

Other Organization Executives 8

The Audit Committee 8

A3. Organize and Lead a Team in Mapping and Business Improvement ..................... 9

Business Process Mapping 9

Improving the Process 10

A4. Assess and Foster Ethical Climate of Board and Management ............................ 11

Ethics Advocates 12

Resolving Complaints 14

Fostering an Ethical Climate in the Company 15

Code of Conduct Policy 16

A5. Educate Senior Management ................................................................................... 16

A6. Internal Audit Key Performance Indicators ............................................................ 17

Establishing the Performance Measurement Process 19

Examples of Internal Audit Effectiveness and Efficiency Metrics 21

Reporting and Monitoring KPIs 22

A7. Coordinating Activities with Other Bodies and Groups ........................................ 23

Coordination with External Auditor 24

Coordination with Regulatory Bodies 27

Coordination with Other Internal Assurance Functions 27

Assurance Maps 29

A8. Assess Adequacy of Performance Measurement System .................................... 31

Topic I B. Operational Role of Internal Audit ................................................................ 32

B1. Developing Policies and Procedures ...................................................................... 32

Planning 34

Setting the Goals of the Internal Audit Activity 34

B2. Review the Role of Internal Audit in the Risk Management Process ................... 36

B3. Direct Administrative Activities ............................................................................... 36

Developing the Engagement Work Schedules 36

Managing Resources 37



The Internal Audit Budget 38

Recruiting and Promoting 38

Job Descriptions 39

Training, Staff Development, and Performance Evaluations 39

B4. Interviewing Candidates for Internal Audit Positions ............................................ 40

Asking Good Questions 41

Listening Effectively 41

B2. Review the Role of Internal Audit in the Risk Management Process ................... 41

Possible Roles for Internal Audit 43

Determination of Role of IAA in Risk Management 44

B5. Report on the Effectiveness of Risk Management ................................................. 45

Assessing the Adequacy of Risk Management Processes for Formal Consulting Services 48

B6. Report on Effectiveness of Internal Control Framework ....................................... 49

B7. Maintain an Effective Quality Assurance and Improvement Program ................. 52

1. Internal Assessments (Standard 1311) 53

2. External Assessments (Standard 1312) 55

Standard 1320: Reporting on the Quality Assurance and Improvement Program 57

Standard 1321: Conforming to the Standards of Internal Auditing 59

Standard 1322: Disclosure of Noncompliance 60

Topic I C: Establish Risk-Based Internal Audit Plan .................................................... 62

C1-4. Identify and Prioritize Engagements .................................................................... 62

C5. Determine Resource Requirements ........................................................................ 65

C6. Communicate Plans and Obtain Board Approval .................................................. 66

Types of Engagements ................................................................................................... 68

A. Conduct Assurance Engagements ............................................................................ 69

1. Risk and Control Self-assessments 69

a) Facilitated Approach (Facilitated Team Workshops) 70

b) Questionnaire Approach (Surveys) 72

c) Self-Certification Approach 72

2. Audits of Third Parties and Contract Auditing 73

3. Quality Audit Engagements 76

4. Due Diligence Audit Engagements 79

5. Security Audit Engagements 81

6. Privacy Audit Engagements 81

7. Performance Audit Engagements 83

8. Operational Audit Engagements 84

9. Financial Audit Engagements 85

B. Compliance Audit Engagements ............................................................................... 92

Environmental Audits 92

C. Consulting Services ................................................................................................... 96



Considerations for Formal Consulting Engagements 96

Due Professional Care in Consulting Engagements 98

C1. Internal Control Training 100

C2 Business Process Mapping 101

C3. Benchmarking 101

C4 System Development Reviews 103

C5 Design of Performance Measurement Systems 104

Other Consulting Engagements 105

Section II – Managing Individual Engagements .......................................................... 106

Topic II A. Plan Engagements ...................................................................................... 106

The Engagement Planning Process 107

Planning Considerations 108

A1. Establish Engagement Objectives/Criteria and Finalize Scope .......................... 109

Engagement Objectives 109

Engagement Scope 110

A2. Plan Engagement to Assure Identification of Key Risks and Controls .............. 111

The Preliminary Survey 112

Documentation of the Preliminary Survey 114

A3. Complete a Detailed Risk Assessment of Each Audit Area ................................ 115

A4. Determine Engagement Procedures and Prepare Work Program ...................... 117

Engagement Work Program 117

Engagement Procedures 118

Sufficiency of Evidence 118

Reliability of Evidence 119

Relevant Evidence 119

Useful Evidence 119

Sources of Evidence 119

Types of Evidence 120

Selected Engagement Procedures 120

Tracing and Vouching 121

A5 – 6. Determine Level of Resources Needed and Construct Schedule ................. 124

Staff Schedule and Schedule Aids 125

Topic II B. Supervising the Engagement ..................................................................... 125

B1. Direct/Supervise Individual Engagements ............................................................ 125

B4. Review Working Papers ......................................................................................... 125

Supervision 125

Review Working Papers 126

B2. Nurture Instrumental Relations, Build Bonds and Work with Others................. 127

B3. Coordinate Work Assignments Among Team Members ..................................... 127



B5. Conduct Exit Conference ....................................................................................... 128

Objectives of Exit Conference 128

B6. Complete Engagement Staff Performance Appraisals ........................................ 129

Topic II C. Communicating Engagement Results ....................................................... 130

C1. Initiate Preliminary Communication with Client ................................................... 130

C2. Communicate Interim Progress ............................................................................. 131

C3 – 4. Develop Recommendations When Appropriate and Prepare Report ........... 132

Criteria for Communicating 132

Guidelines for Quality Communications 137

C5 – 8. Approve and Distribute Report ........................................................................ 139

Management’s Response to the Report 139

Distribution of the Report 140

Communicating Sensitive Information 142

Topic II D. Monitor Engagement Outcomes ................................................................ 146

Monitor Engagement Outcomes and Conduct Appropriate Follow-Up 146

The Appropriate Method of Follow-Up 147

Methods Monitoring Progress 148

Management’s Acceptance of Risk 149

Section III – Fraud Risks and Controls ........................................................................ 151

Topic III A. What Fraud is and Types of Fraud ............................................................ 151

Committing Fraud 152

Topic III B, C, and E. Fraud Engagements ................................................................... 154

Responsibility for Fraud Prevention and Detection 154

Assessment of Fraud Risk for the Organization 155

Internal Audit Responsibilities During Engagement 157

Fraud Investigations 159

Topic III D. Complete a Process Review to Improve Controls ................................... 161

Topic III F. Support a Culture of Fraud Awareness .................................................... 162

IIIG. Interrogation and Investigation Techniques ....................................................... 165

Topic III H. Forensic Auditing ....................................................................................... 168

Appendix A: Sample Code of Conduct ........................................................................ 169

Appendix B: Practice Advisories for Quality Assurance and Improvement Program ............... 171




Table of Contents

Exam Introduction ............................................................................................................. 1

Section I – Governance and Business Ethics ................................................................. 2

IA. Corporate Governance Principles .............................................................................. 2

Corporate Governance and Risk Assessment, Internal Control, and Risk Management 3

Defining Governance 4

Principles of Good Governance 5

Cornerstones of Good Corporate Governance 6

The Governance Process Relationship with Risk and Control 7

Internal Audit’s Role in Corporate Governance (PA 2110-3) 8

IB. Environmental and Social Safeguards ....................................................................... 9

IC. Corporate Social Responsibility ............................................................................... 12

Section II – Risk Management ........................................................................................ 15

IIA. Risk Management Techniques ................................................................................. 15

Benefits of Risk Management 16

Risk Appetite 16

Risk Appetite, Capacity, and Tolerance 17

Types of Risk 21

Internal and External Risk 22

The Risk Management Process 23

ISO 31000 Principles, Framework and Process 30

IIB. Organizational Use of Risk Frameworks – ERM ..................................................... 34

Cost-Benefit Analysis in Risk Assessment and Decision Making 42

Section III – Organizational Structure/Business Processes and Risk ........................ 43

IIIA. Control Implications of Different Organizational Structures ................................ 43

Elements of the Organizational Structure 44

IIIB. Structure of the Organization ................................................................................. 46

Components of an Organization 48

Departmentation 51

Matrix Organizations 52

Span of Control 52

IIIC. Typical Schemes in Various Business Cycles ...................................................... 53

Supply Chain Management 53

Lean Manufacturing 54

IIID. Business Process Analysis .................................................................................... 56



Tools for Analyzing Business Processes 56

IIIE. Inventory Management Techniques & Concepts .................................................. 65

Inventory Costs 65

Other Inventory Terms 66

Methods of Inventory Cost Management 67

Other Inventory Systems 69

IIIF. Electronic Commerce .............................................................................................. 70

Business-To-Business (B2B) 70

Electronic Data Interchange (EDI) 71

Business-To-Consumer (B2C) 72

Consumer-To-Consumer (C2C) 72

Electronic Payment Processing 73

IIIG. Business Development Life Cycles ....................................................................... 74

IIIH. The International Organization for Standards (ISO) ............................................. 77

III I. Outsourcing Business Processes .......................................................................... 78

Section IV – Communication .......................................................................................... 79

IVA. Communication ....................................................................................................... 79

The Communication Process 79

Interpersonal Communication 81

Channels of Communication in Organizations 81

Problems (Noise) in Communication 84

Methods to Improve Communication 85

Listening 85

Electronic Communications 87

IVB. Stakeholder Relationships...................................................................................... 89

Managing Stakeholders 90

Section V – Management and Leadership Principles ................................................... 91

VA. Strategic Management ............................................................................................. 91

VA 1. Global Analytical Techniques ............................................................................... 96

Industry Structures (And How Structure Impacts Pricing) 96

Porter’s Five Forces Model 99

Competitive Strategies 102

Competitive Analysis 107

Market Signals 110

Industry Evolution 111

VA 2. Industry Environment ......................................................................................... 115

Competitive Strategies for Different Types of Industries 115

Competition in Global Industries 119



VA 3. Strategic Decisions ............................................................................................. 122

Analysis of Integration Strategies 122

Capacity Expansion 124

Entry into New Businesses 126

VA 4. Forecasting .......................................................................................................... 127

Forecasting Techniques ............................................................................................... 127

Using Regression Analysis in Forecasting 127

Using Probability Concepts in Forecasting 137

VA 5. Quality Management............................................................................................ 141

Quality Management and Productivity 141

Total Quality Management (TQM) 141

Cost of Quality 143

Measuring Quality 144

Six Sigma 144

VA 6. Decision Analysis ................................................................................................ 144

VB. Organizational Behavior ........................................................................................ 145

VB 1. Organizational Theory ......................................................................................... 145

VB 2. Organizational Behavior ..................................................................................... 145

Motivation Theories 145

Needs-based Theories of Motivation 145

Process-Based Motivational Theories 147

Impact of Job Design 150

VB 3. Group Dynamics .................................................................................................. 151

Traits of Group Dynamics 151

Stages of Group Development 155

Organizational Politics 156

VB 4. Human Resource Processes .............................................................................. 157

Human Resource Planning 157

Employee Recruitment 157

Employee Selection 158

Career Development 160

VB 5. Risk/Control Implications of Different Leadership Styles ................................ 160

VB 6. Performance ......................................................................................................... 160

Compensation and Benefits 166

VC Management Skills and Leadership Styles ........................................................... 167

VC 1. Lead, Inspire, Mentor and Guide People ........................................................... 167

VC 2. Create Group Synergy in Pursuing Collective Goals ....................................... 167

Studies on Leadership 167

Contingency Theories of Leadership 168

Transformational Leadership 170



VC 3. Team Building and Assessing Team Performance .......................................... 171

Participative Management 171

Team Effectiveness 173

VD. Conflict Management ............................................................................................. 174

VD 1. Conflict Resolution .............................................................................................. 174

VD 3. Conflict Management .......................................................................................... 174

Winning and Losing 175

Conflict Triggers 175

Principles of Conflict Management 176

Conflict Management Strategies 177

VD 2. Negotiation Skills ................................................................................................ 181

VD 4. Added-Value Negotiating .................................................................................... 181

Approaches to Negotiations 181

Effective Negotiations 182

Overcoming Resistance 182

Added-Value Negotiating 183

Principled Negotiation 183

Third-Party Negotiations 184

VE. Project Management / Change Management ........................................................ 185

VE 1. Change Management ........................................................................................... 185

VE 2. Project Management Techniques ....................................................................... 187

Section VI – Information Technology and Business Continuity................................ 190

Information Technology (IT) ......................................................................................... 191

General Controls 192

Application Controls 197

IT Control Frameworks ................................................................................................. 201

COBIT Components 203

COBIT Maturity Model 204

Functional Areas of Information Operations 205

Systems Development .................................................................................................. 206

Program Development and Documentation Controls 213

Computer Programs and Software .............................................................................. 215

Systems Software.......................................................................................................... 215

Operating Systems 215

Evaluation and Selection of Vendor-Supplied software 216

Software Piracy 217

End-User Computing 217

Organizing the Information Systems Function 219


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Data Communications and Telecommunications Networks ...................................... 221

Voice over Internet Protocol (VoIP) 222

Types of Networks 223

Client/Server Networking 226

The Internet .................................................................................................................... 227

Telecommunications and Network Auditing 229

System Security ............................................................................................................. 230

Viruses, Trojan Horses, and Worms 231

Cybercrime and Defenses Against Cybercrime 232

Encryption 235

Privacy 236

Business Continuity / Contingency Planning ............................................................. 237

Disaster Recovery 238

Databases....................................................................................................................... 240

Accessing Files 240

History of Database Development 241

Entity-Relationship Modeling 241

Database Structure 242

Distributed Databases 243

Deadly Embrace 243

Database Management System (DBMS) 243

Database Development 244

Database Use and Maintenance 244

The Database Administrator 245

Enterprise Resource Planning ..................................................................................... 246

Appendix A – 34 IT Processes ...................................................................................... 248




Table of Contents

Section VII – Financial Management ................................................................................ 1

A 1. Financial Accounting Concepts and Principles ...................................................... 1

Objectives of Accounting Information 1

Qualitative Characteristics of Accounting Information 2

Elements to the Financial Statements 3

Recognition of Financial Statement Elements 4

Accrual Accounting 4

External Financial Statements .......................................................................................... 5

1. The Balance Sheet (Statement of Financial Position) 5

2. Statement of Comprehensive Income 8

3. Statement of Changes in Equity 12

4. The Statement of Cash Flows (IAS 7) 12

5. Notes to the Financial Statements 16

A 2. Intermediate Concepts of Financial Accounting ................................................... 17

Bonds 17

Leases 18

Pensions 19

Types of Pension Plans 19

Intangible Assets (IAS 38) 21

Amortization and Impairment of Intangible Assets 22

Research & Development 23

A 3. Advanced Concepts of Financial Accounting ....................................................... 23

Accounting for Business Combinations (IFRS 3) 23

Consolidation of Financial Statements (IAS 27) 25

Partnerships 27

Accounting for Foreign Currency Denominated Transactions 28

A 4. Financial Statement Analysis (Ratio Analysis) ..................................................... 29

Comparative Financial Statement Analysis 29

Vertical Common-Size Financial Statements 29

Horizontal Index-Number Trend Series Analysis 31

Ratio Analysis 32

A 5. Capital Structure and Types of Debt and Equity ................................................... 42

Bonds 44

The Bond Instrument 47

Equity 55

Cost of Capital 62

A 6. Financial Instruments (Derivatives) ....................................................................... 73



Forward Contracts 74

Futures Contracts 74

Stock Options 77

A 7. Cash Management ................................................................................................... 83

The Operating Cycle 84

Cash Flow Management 88

A 8. Valuation Models ..................................................................................................... 94

The Fair Value (Appropriate Price) of a Share of Stock 94

A 9. Business Valuation ................................................................................................ 100

A 10. Inventory Valuation .............................................................................................. 103

Valuing the Inventory When It Is Purchased 103

Determining Which Item Is Sold 103

The Frequency of Determining Inventory Balances 106

Lower of Cost or Net Realizable Value 109

Inventory Calculations 110

A 11. Capital Budgeting ................................................................................................ 113

The Stages in Capital Budgeting 114

Identifying and Calculating the Relevant Cash Flows 114

Irrelevant Cash Flows 117

Capital Budgeting Methods 118

1) Payback Period or Payback Method 118

2) Discounted Payback Period 119

3) Net Present Value (NPV) Method 120

4) Internal Rate of Return (IRR) 123

5) The Accounting (or Average) Rate of Return 123

A 12. Taxation Schemes ............................................................................................... 125

B. Managerial Accounting ............................................................................................ 130

B 1 and B 2. General Concepts and Costing Systems ............................................... 130

Classifications of Costs 130

The Difference Between Costs and Expenses 130

Direct Versus Indirect Costs 130

Costs Based on Level of Activity (Fixed, Variable and Mixed Costs) 131

Production vs. Period Costs 134

Cost of Goods Sold (COGS) and Cost of Goods Manufactured (COGM) 137

Costing Systems ........................................................................................................... 139

Introduction to Cost Measurement Systems 139

Overhead Allocation ...................................................................................................... 142

Manufacturing Overhead Allocation 143

Traditional (Standard) Allocation Method 144



The Process of Accounting for Factory Overhead 148

Over-Applied and Under-Applied Manufacturing Overhead 149

B 3. Cost Concepts ........................................................................................................ 152

Process Costing ............................................................................................................ 152

Steps in Process Costing 154

Process Costing Summary 163

Job-Order Costing ......................................................................................................... 164

Operation Costing ......................................................................................................... 164

Life-cycle Costing .......................................................................................................... 165

Activity-Based Costing ................................................................................................. 167

Variable and Absorption Costing ................................................................................. 172

Fixed Factory Overheads Under Absorption Costing 173

Fixed Factory Overheads Under Variable Costing 173

Effects of Changing Inventory Levels 173

Income Statement Presentation 174

B 4. Relevant Costs – Decision Making ....................................................................... 177

Make-or-Buy Decisions 177

Special Order Decisions 180

Sell or Process Further Decisions 183

Disinvestment Decisions 185

B 5. Cost-Volume-Profit (CVP) Analysis ...................................................................... 186

Contribution Margin Income Statement 189

Breakeven Analysis 189

Profit Requirement 193

B 6. Transfer Pricing ..................................................................................................... 201

B 7. Responsibility Centers and Responsibility Accounting ..................................... 208

Evaluating the Manager vs. Evaluating the Business Unit 210

Allocation of Common Costs 210

The Contribution Income Statement Approach to Evaluation 212

B 8. Operations Budgeting ........................................................................................... 216

The Budgeting Cycle 216

Budget/Profit Planning Manual 216

The Annual/Master Budget or Profit Plan 217

The Master Budget 217

Development of the Master Budget 218

Section VIII – Global Business Environment .............................................................. 230

A. Economic / Financial Environments ....................................................................... 230

The Decision to Market Internationally 230

Evaluating Alternatives for International Operations 230



Designing an International Marketing Program 231

Successful Global Marketing 233

Global Development and Expansion Strategies 233

Transnational Corporations 234

B. Cultural/Political Environments ............................................................................... 235

Attitudes toward Global Operations 235

Cultures and their Differences 236

National Culture Differences 237

Leadership in Global Organizations 238

Training and Working in a Foreign Country 239

C. Legal and Economics – General Concepts ............................................................ 240

Forms of Business Organization 240

Contracts 242

National Income Accounting 246

Economic Growth 249

Unemployment and the Economy 251

Costs of Unemployment 252

Full Employment and the Natural Rate of Unemployment 253

Inflation and the Economy 253

Costs of Inflation 254

D. Impact of Government Legislation and Regulation on Business ......................... 255

Monetary Policy in the United States 255

Federal Reserve System 255

Controlling the Nation’s Money Supply and Short-Term Interest Rates 255

Fiscal Policy 257

Strengths and Weaknesses of Monetary Policy and Fiscal Policy 260

Governmental Regulations 261

International Trade 263


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