Transcript CIA_LS_P3_SD.9711033.. - Raven Global Training

THE IIA’S CIA LEARNING SYSTEMTM
Section Topics
1. Impact of
government
legislation and
regulation on
business
2. Trade legislation
and regulations
www.LearnCia.com
3. Taxation schemes
4. Contracts
5. Nature and rules
of legal evidence
6. Key economic
indicators
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Impact of Government
Legislation and Regulation
Governments affect businesses through economic and
trade policies, taxes, subsidies, legislation, and
regulations in order to ensure stability and equality in
markets and to advance agendas.
Common government interventions:
Market
controls
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Antitrust
policies
Employment
laws
Part 3, Section D, Topic 1
Financial
and security
laws
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Direct Market Controls
Price Floors
Price Ceilings
Legal minimum on price
of goods and services:
Legal maximum on price
of goods and services:
• Minimum wage
• Agricultural prices
supports or subsidies
• Rent controls
• Credit card interest
rate ceilings
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Part 3, Section D, Topic 1
Rationing
Government control
of the quantity
supplied of a specific
item.
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Arguments For and Against Antitrust Enforcement
For Enforcement
• Monopolies and oligopolies are
inefficient, produce excess profits.
• Price fixing and collusion serve no
social purpose.
• Antitrust laws ban deceptive or unfair
practices, help consumers make
educated decisions.
• Trust busting increases competition.
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Against Enforcement
• Big is not necessarily bad.
• Antitrust legislation penalizes
successful, efficient organizations
that make better and/or cheaper
products. Regulating these firms to
enhance competition is
counterproductive.
• International markets favor large,
integrated organizations. Other
governments support such firms.
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Major US Antitrust Legislation
Sherman Act of 1890: Cornerstone of antitrust legislation;
declares monopolies in restraint of interstate trade illegal.
Clayton Act of 1914: Prohibits specific practices that
lead to the creation of monopolies.
Federal Trade Commission Act of 1914: Created the
Federal Trade Commission, which enforces antitrust laws.
Robinson-Patman Act of 1936: Makes it illegal to
discriminate in price to different purchasers of same item.
Wheeler-Lea Act of 1938: Expanded FTC’s
responsibilities concerning false advertising and product
claims.
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International Laws Regulating Competition
Competition Act (Canada): Oldest antitrust statute in the
western world; covers all aspects of competition in
Canada, from cartels to merger review, and applies to
nearly every business in Canada.
European Community Treaty (EU): Articles 81 and 82
prohibit cartels and other “concerted practices” that
distort competition and the willful acquisition or
maintenance of monopoly power; new 2004 regulations
strengthen the EU’s Competition Commission and
allow the EU to block mergers that would lessen
competition.
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US Employee and Human Rights Laws:
Fill in the blanks
Law
Description
National Labor
Relations Act
1935 act that protects rights of workers to
organize, create unions, and bargain collectively.
Fair Labor Standards
Act
1938 act that established a minimum wage for
certain classes of workers.
Title VII of the Civil
Rights Act
Americans with
Disabilities Act
1964 act that prohibits discrimination in the
workplace.
Family and Medical
Leave Act
1993 act that guarantees rights to employees
eligible for parental and family leave.
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1990 act that establishes rights for disabled
individuals.
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International Employee and Human Rights Laws:
Fill in the blanks
Law
Description
Ontario Human
Rights Code
Consolidates all protections of Americans with
Disabilities Act, Age Discrimination in Employment
Act, and Title VII of Civil Rights Act. (Canada)
Charter of Rights
and Freedoms
Provides right to challenge statutory provisions or
government programs that discriminate or fail to
afford equal treatment. (Canada)
Treaty of
Amsterdam
Protects fundamental rights such as gender and
racial equality, employment equality,
nondiscrimination, and data privacy. (EU)
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US Legislation Affecting Financial Systems
Controls and Security Issues
Securities and Exchange Act of 1934: Gave SEC power and
responsibility for setting accounting and reporting standards.
US RICO Act of 1970: Anti-racketeering legislation.
US PATRIOT Act of 2001: Expanded the authority of US law
enforcement for the stated purpose of fighting terrorism in
the US and abroad.
Sarbanes-Oxley Act of 2002: Provides oversight of
management and auditor abuses in reporting and
disclosing financial information.
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International Laws Affecting Security Issues
Anti-terrorism Act of 2001 (Canada): Defines terrorism
and makes it a punishable offense within Canada’s
Criminal Code.
Treaty of Amsterdam (EU): Outlines reforms to the
common foreign security policy that establishes antiterrorism policies and encourages cooperation to
safeguard security in Europe.
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Theory of Comparative Advantage
Opportunity cost of two producers
Country X
Country Y
Imports bananas from
Country Y because growing
them would cost too much.
Exports bananas because growing
them is cheap. Has a comparative
advantage in growing bananas.
Exports tractors made in
specialized factories. Has a
comparative advantage in
making tractors.
Imports tractors from Country X
because making them would cost
too much.
Differences in opportunity cost and comparative
advantage create the gains from trade.
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Discussion Question
Which of the following trade barriers impose
excise taxes on imported goods?
A. Tariffs
B. Import quotas
C. Nontariff trade barriers
D. Dumping
Answer: A. Tariffs are imposed to create
national revenues or to protect specific
industries from competition.
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Impact of Tariffs and Quotas
• Imported products become more expensive and imports
drop.
• Domestic producers sell more products if demand
remains the same.
• Consumers pay higher prices since domestic prices rise
against increased demand.
• Domestic producers can produce more units at the same
cost and sell at a higher price.
• Income is transferred to the government from consumers
through tariff revenues.
• Inefficient industries expand and resources are shifted
away from industries that may have a better comparative
advantage internationally.
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Arguments Supporting
Free Trade and Protectionism
Supporting Free Trade
Supporting Protectionism
• Facilitates maximization of the
world’s resources and brings a higher
income level for all.
• Promotes competition and prevents
monopolies.
• Increases the variety of available
goods.
• Lowers costs through economies of
scale.
• Enhances the flow of ideas and
facilitates the spread of technology.
• International trade destroys domestic
jobs and gives jobs to foreign
workers.
• Firms don’t all play by the same rules
and get unfair competitive advantage
by paying workers less and not
enacting pollution control laws.
• Strong domestic industries are vital
for national security.
• New industries need temporary trade
restrictions at the start.
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International Trade Agreements:
Fill in the blanks
Agreement
Description
GATT
Sets forth binding tariffs between member countries, which
generally means countries cannot raise their tariffs from the
agreed-upon levels; continuing trade rounds negotiate tariff
reductions.
WTO
Administers trade agreements, provides a forum for
negotiations, and handles disputes between trading partners.
NAFTA
Lowered trade barriers among the US, Mexico, and Canada in
1993, making this the largest geographical free trade zone in
the world.
EU
Customs and economic union of 27 independent, democratic
European countries supporting free trade and fixed exchange
rates.
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International Financial Organizations
World Bank
European
Investment
Bank
Transnational
corporations
International
Monetary
Fund
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Discussion Question
Which of the following is true of floating exchange rate
systems?
A. They establish clear rules for long-term
viability.
B. They do not diminish trade growth.
C. They resolve payment imbalances among
nations.
D. They do not result in volatile exchange rates.
Answer: B. These systems encourage trade
growth but can result in volatile exchange rates.
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Tax Classifications
Progressive
High-income
taxpayers pay a
larger fraction of
income.
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Proportional
High- and lowincome taxpayers
pay the same
fraction of income.
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Regressive
Low-income
taxpayers pay a
larger fraction of
income.
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Types of Taxes
• Payroll tax: levied directly on wages and salaries;
second most important source of federal revenue.
• Corporate income tax: levied on accounting profits
of organizations.
• Sales tax: percentage of the amount paid for
goods and services; most important source of
revenue for states.
• Use tax: collected for a specific need like a gas
tax levied to maintain roads.
• Value-added tax (VAT): equivalent of sales
tax on any action creating value.
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Types of Taxes
• Property tax: based on value of taxable
property; important source of local government
funding.
• Ad valorem tax: tax using base value of item.
• Capital gains tax: levied on the profit released
upon sale of a capital asset.
• Excise tax: levied on a particular commodity
such as liquor; based on quantity rather
than value.
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Discussion Question
Which of the following is true of transfer pricing for
taxation?
A. It allows firms to shift income to divisions in lower-tax
countries.
B. It is a critical part of a domestic tax minimization
strategy.
C. Firms have total control in setting prices.
D. It raises a firm’s worldwide tax obligations.
Answer: A. Transfer pricing lowers a firm’s
worldwide tax obligations.
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Contract Elements:
Fill in the blanks
Element
Description
Mutual agreement
Express or implied agreement; must be evidence that
parties understand and agree to contract obligations.
Consideration
Something of value must be exchanged by both
parties, such as cash, goods, or a promise to do
something.
Competent parties
Parties must have the capacity to understand the
terms of the contract.
Proper subject
matter
The contract must have a lawful purpose.
Mutual right to
remedy
Parties must have an equal right to remedy a breach
of terms by the other party.
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Types of Common Contracts
Fixed Price
Cost Reimbursement
• Price agreed to up front.
• Includes price
adjustment and repricing provisions.
• Requires only contractor’s
“best efforts.”
• Includes performance
incentives.
• Specifies level of effort.
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• Pays costs within a predetermined ceiling.
• Appropriate when a fixed
price cannot be accurately
determined.
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Evaluating Contracts
When reviewing contracts for risks,
weaknesses, and control issues, check items
such as:
• Performance measurement methodology, project
reporting, and work acceptance.
• Audit rights.
• Change orders, cost accounting, billing, insurance
coverage, and substantial completion terms.
• Documentation requirements.
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Categories of Evidence:
Fill in the blanks
Evidence Type
Description
Physical
Includes physical objects such as clothing, weapons,
tools, machines, photographs, maps, and models.
Demonstrative
Representation of an object, such as photos, x-rays,
movies, and maps.
Experimental
Result of an experiment conducted outside or inside
the court under circumstances similar to the case.
Documentary
Most common type of trial evidence; includes written
instruments like checks, receipts, and invoices.
Testimony
When witnesses are called on to testify about all types
of physical evidence, events, and facts.
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Categories of Evidence:
Fill in the blanks
Evidence Type
Description
Digital or
electronic
Increasingly used, in the form of e-mail messages,
digital photographs, spreadsheets, and databases.
Scientific
Produced by expert scientific techniques such as
experiments, chemical evaluation, and other tests.
Circumstantial
Of an indirect nature that implies the existence of the
main fact but doesn’t prove it; includes fingerprints
and DNA evidence.
Hearsay
Out-of-court statement offered to prove the truth of a
matter; typically inadmissible except for exceptions
including business records and police statements.
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Discussion Question
Which of the following is the highest quality,
most persuasive audit evidence?
A. Statistical samples
B. Manufacturer’s own product quality report
C. Employee testimonials
D. Firm’s own inventory estimate
Answer: A. Statistical samples are more
persuasive than nonstatistical samples.
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Reinforcing Activity 3-10
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Nature and Rules of Legal Evidence
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Economic Cycles
Peak
Peak
Trough
Time
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Inflation
Inflation is the decrease in the purchasing power of
money and the increase in the price level for goods
and services.
It is measured in two steps:
• Calculate the average level of all prices using indices
like the CPI.
• Calculate changes in price level over time.
Inflation Calculation
Rate of Inflation =
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This Year's Index  Last Year's Index
Last Year's Index
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Effects of High Inflation
Multiplier Effect
Money
spent
Income
created
Increases velocity of
money and raises
demand
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Increases
employment
and income
Prices
rise
Demand
falls
Multiplier effect
short-circuited
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Effects of High Inflation
Demand-pull inflation:
Increase in aggregate
demand increases prices.
Cost-push inflation:
Rising
prices
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Declining exports,
consumer
spending, and
business growth
Increase in production
costs reduces supply and
increases prices.
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Types of Unemployment
Frictional unemployment: Short-duration
unemployment caused by the normal workings of the labor
market such as temporary layoffs and workers changing
jobs.
Structural unemployment: Type of demand doesn’t
match the available labor force (too many computer
programmers or auto workers) and is caused by changes
in the overall economy such as population and
technology.
Cyclical unemployment: Caused by ups and downs
in the business cycle, specifically by a lack of demand for
labor.
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Economic Growth
An increase in real GDP over a period of time expressed as an
overall increase in GDP or the increase in real GDP per capita.
Elements of economic growth
• Physical capital: Assets must be available with which to
produce goods and services and to make workers more
productive.
• Technological knowledge: Technological improvements tend to
increase productivity.
• Human capital: Labor quality is higher when the workforce has
skills and knowledge acquired through education, training, and
experience.
• Natural resources: Renewable and nonrenewable resources can
impact standards of living and productivity around the world.
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Discussion Question
Demand-side economic policies attempt to
increase or decrease demand by
A. creating incentives for business to expand.
B. deregulating industries.
C. lowering taxes.
D. decreasing government spending.
Answer: C. Lowering taxes gives consumers
more take-home pay, causing them to spend
more.
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Gross Domestic Product (GDP)
The total value of all goods and services produced
during the year.
Income = GDP
Spending = GDP
Households
Markets for
Goods and
Services
Revenue = GDP
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Flow of goods
and services
Flow of dollars
Businesses
Part 3, Section D, Topic 6
Markets for
Production
Factors
Wages, rent, and
profit = GDP
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Calculating the GDP
Expenditures approach:
Income approach:
Wages
Household Expenditures
+ Business Expenditures
+ Government Purchases
+ Foreign Expenditures
= GDP
+ Rents
+ Interest
+ Profits
+ Nonincome Charges
GNP
+ Net Foreign Income
= GDP
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Types of Economic Indicators
Lagging
Coincident
Leading
Changes after
the economy:
Changes with
the economy:
Changes ahead
of the economy:
• Unemployment
rate
• GDP
• Building
permits
• Bank prime
rate
• Outstanding
bank loans
• Unemployment
duration
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• Manufacturing
and trade sales
• Industrial
production
• Personal
income
Part 3, Section D, Topic 6
• Money supply
• Stock prices
• Unemployment
claims
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Leading Economic Indicators
+ for GDP
– for GDP
Unemployment claims
Decrease
Increase
Stock market prices
Increase
Decrease
Housing starts/building permits
Increase
Decrease
Money supply
Increase
Decrease
Inventory
Decrease
Increase
Industrial production
Increase
Decrease
New orders for consumer goods
Increase
Decrease
Indicator
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Discussion Question
Which of the following is the major task of the
Federal Reserve Board?
A. Acting as fiscal agent for the government
B. Providing a system for check collection
C. Controlling the money supply
D. Supervising member banks
Answer: C. The tools the Fed uses to control
the money supply can have powerful effects on
the economy.
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Tools of U.S. Monetary Policy
Changing reserve requirements: Increasing or decreasing the
minimum amount of resources that banks must hold against
deposits. This has a significant impact on the money supply and is
a tool of last resort for monetary controls.
Changing the discount rate: Increasing or decreasing the
interest rate on loans the Fed makes to commercial banks. This has
a minimal effect on the economy, and the Fed wants commercial
banks to consider it the lender of last resort.
Conducting open-market operations: The Fed buys or sells
government securities (bonds, notes, bills) in the open market from
the public. This is the most frequently used monetary control.
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Strengths and Weaknesses of US Monetary Policy
Strengths
Weaknesses
• Can be altered relatively quickly
compared to fiscal policy, which
requires legislation.
• Is immune to interference from
Congress and is less influenced by
political consequences.
• Is generally more conservative than
fiscal policy.
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• Control of money supply can be
unpredictable due to changes in
banking regulations.
• Fed actions may not have desired
consequences since it can’t control
banks and individual behavior.
• Uncertainty and time lags create
problems in implementing policy.
• Cannot force an expansion of the
money supply; cannot force the
public to borrow money from banks.
• Monetary policy may be subordinated
to fiscal policy.
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End of Section D
Questions?
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