BAO Objective Exam cheat sheet

Standard-setting hierarchy: legislation outranks regulations, which outrank accounting standards, which outrank interpretive guidance; a conflict is resolved in that order.

A principles-based framework states objectives and qualitative characteristics; a rules-based framework supplies bright-line thresholds and detailed scope exceptions.

Governance separation of duties: the board sets strategy and oversight, management executes, the audit committee oversees external reporting and the external auditor.

Independence safeguards for the audit committee include no material consulting fees to the auditor, at least one financial expert, and a charter defining authority.

Internal control framework has five components: control environment, risk assessment, control activities, information and communication, and monitoring activities.

A control deficiency is a design or operating shortfall; a significant deficiency is less severe than a material weakness but important enough to merit governance attention.

Ethical decision tests: legality, stakeholder impact, disclosure test (would the decision survive publication), and consistency (would it apply to anyone in the same position).

Regulatory filing deadlines and thresholds are jurisdiction-specific; confirm the applicable statute rather than assuming a single global rule.

Accounting equation: Assets = Liabilities + Equity; every transaction preserves this equality.

Accrual basis records revenue when the performance obligation is satisfied and expenses when the obligation is incurred, regardless of cash timing.

Revenue recognition steps: identify the contract, identify performance obligations, determine transaction price, allocate price to obligations, recognize on satisfaction.

Depreciation: straight-line = (cost − residual) / useful life; double-declining = 2 / life × carrying amount; units-of-production = (cost − residual) × units used / total units.

Inventory cost flow: FIFO leaves the newest costs in ending inventory; weighted average smooths price changes; LIFO is not permitted under IFRS.

Lower of cost and net realizable value writes inventory down; the write-down is not reversed under US GAAP but may be reversed under IFRS when conditions improve.

Impairment test compares carrying amount with recoverable amount (higher of fair value less costs to sell and value in use); the excess is the impairment loss.

Statement of cash flows: operating (accrual earnings adjusted for non-cash items and working capital), investing (long-term assets), financing (debt and equity).

Contribution margin = sales − variable costs; contribution margin ratio = contribution margin / sales.

Break-even units = fixed costs / unit contribution margin; break-even sales = fixed costs / contribution margin ratio.

Target profit volume = (fixed costs + target profit) / unit contribution margin.

Margin of safety = actual (or budgeted) sales − break-even sales; expressed as a percentage, divide by actual sales.

High-low method: variable cost per unit = (highest cost − lowest cost) / (highest activity − lowest activity); fixed cost = total cost at a point − variable rate × activity.

Overhead applied = predetermined rate × actual activity; underapplied when actual overhead exceeds applied, overapplied when applied exceeds actual.

Relevant costs are future and differ between alternatives; sunk costs and allocated fixed costs that do not change are irrelevant to the decision.

A favorable variance is not automatically good: a materials price variance may reflect cheaper, lower-quality inputs that raise usage and rework costs.

Audit risk model: audit risk = inherent risk × control risk × detection risk; detection risk is the auditor-controlled component, so higher inherent or control risk requires more substantive testing.

Assertions tested: occurrence, completeness, accuracy, cut-off, classification (transactions); existence, rights and obligations, completeness, valuation (balances).

Evidence reliability ranking: auditor's direct observation and external confirmations outrank internally generated documents, which outrank oral representations.

Materiality is set as a percentage of a benchmark (profit before tax, revenue, total assets, or equity); performance materiality is lower to cover undetected misstatements.

Sampling risk is the risk that the sample conclusion differs from the population; non-sampling risk is human error, wrong procedures, or misinterpretation.

An unmodified opinion requires the financial statements to be free of material misstatement; a qualified opinion is issued for material but not pervasive departures.

Going concern: if substantial doubt exists but disclosure is adequate, an unmodified opinion with an emphasis-of-matter or material-uncertainty paragraph may be appropriate.

Independence prohibits an auditor from assuming management responsibilities, preparing source records, or having a direct material financial interest in the client.

Taxable income = accounting income adjusted for permanent differences (never taxable or deductible) and temporary differences (timing reversals).

A permanent difference changes the effective tax rate; a temporary difference creates a deferred tax asset or liability at the enacted future rate.

Deferred tax asset recognition requires probable future taxable profit sufficient to use the deductible difference or loss carryforward.

Valuation allowance reduces a deferred tax asset to the amount more likely than not to be realized.

Progressive rate structures apply marginal rates to brackets; the average rate equals total tax divided by total taxable income and is always below the marginal rate.

Tax base of an asset is the amount deductible for tax purposes in future periods; if it equals carrying amount, no temporary difference exists.

A tax position is recognized only if it is more likely than not to be sustained on technical merit; the benefit is measured at the largest amount more than 50 percent likely to be realized.

Jurisdictional nexus, filing thresholds, and rates vary; never apply a single assumed rate without confirming the governing tax statute.

Contract formation requires offer, acceptance, consideration, capacity, and legality; a counteroffer terminates the original offer.

An agent binds a principal when acting with actual authority (express or implied) or apparent authority created by the principal's manifestations to a third party.

Fiduciary duties of agents and directors: duty of care (informed, reasonable process) and duty of loyalty (no self-dealing, no undisclosed conflict).

Business judgment rule protects directors who act in good faith, on an informed basis, and without personal interest, even if the outcome is poor.

Statute of frauds categories commonly include land sales, contracts that cannot be performed within one year, and suretyship promises.

Negligence elements: duty, breach, causation (actual and proximate), and damages; comparative or contributory fault may reduce or bar recovery.

Ethical frameworks: utilitarianism weighs aggregate consequences; deontology applies duties and rules regardless of outcome; virtue ethics asks what a person of integrity would do.

Whistleblower protections generally require a reasonable good-faith belief of a legal violation and reporting through a defined internal or regulatory channel.

IT general controls cover access management, change management, program development, and computer operations; they underpin reliance on automated application controls.

Application controls are input (validation, edit checks), processing (run-to-run totals, reasonableness tests), and output (distribution, reconciliation) controls.

Segregation of duties in IT: developers do not have production access, and the person who authorizes a change does not implement it.

A test of one automated control may support the full period only if general controls over program changes and access are effective.

Batch total reconciliation compares record counts, financial totals, and hash totals before and after processing to detect lost or altered records.

Encryption protects confidentiality in transit and at rest; hashing provides integrity evidence but is not reversible and is not encryption.

Business continuity differs from disaster recovery: continuity keeps critical operations running, recovery restores systems after an outage.

A SOC report: SOC 1 covers controls relevant to financial reporting; SOC 2 covers security, availability, processing integrity, confidentiality, and privacy.