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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 Part 3, Section D Part 3 D – 1 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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 www.LearnCia.com Antitrust policies Employment laws Part 3, Section D, Topic 1 Financial and security laws Part 3 D – 2 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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 www.LearnCia.com Part 3, Section D, Topic 1 Rationing Government control of the quantity supplied of a specific item. Part 3 D – 3 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com 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. Part 3, Section D, Topic 1 Part 3 D – 4 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 1 Part 3 D – 5 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 1 Part 3 D – 6 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com 1990 act that establishes rights for disabled individuals. Part 3, Section D, Topic 1 Part 3 D – 7 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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) www.LearnCia.com Part 3, Section D, Topic 1 Part 3 D – 8 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 1 Part 3 D – 9 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 1 Part 3 D – 10 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 2 Part 3 D – 11 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 2 Part 3 D – 12 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 2 Part 3 D – 13 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 2 Part 3 D – 14 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 2 Part 3 D – 15 V3.0 THE IIA’S CIA LEARNING SYSTEMTM International Financial Organizations World Bank European Investment Bank Transnational corporations International Monetary Fund www.LearnCia.com Part 3, Section D, Topic 2 Part 3 D – 16 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 2 Part 3 D – 17 V3.0 THE IIA’S CIA LEARNING SYSTEMTM Tax Classifications Progressive High-income taxpayers pay a larger fraction of income. www.LearnCia.com Proportional High- and lowincome taxpayers pay the same fraction of income. Part 3, Section D, Topic 3 Regressive Low-income taxpayers pay a larger fraction of income. Part 3 D – 18 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 3 Part 3 D – 19 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 3 Part 3 D – 20 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 3 Part 3 D – 21 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 4 Part 3 D – 22 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com • Pays costs within a predetermined ceiling. • Appropriate when a fixed price cannot be accurately determined. Part 3, Section D, Topic 4 Part 3 D – 23 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 4 Part 3 D – 24 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 5 Part 3 D – 25 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 5 Part 3 D – 26 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 5 Part 3 D – 27 V3.0 THE IIA’S CIA LEARNING SYSTEMTM Reinforcing Activity 3-10 Part 3, Section D, Topic 5 Nature and Rules of Legal Evidence www.LearnCia.com Part 3, Section D, Topic 5 Part 3 D – 28 V3.0 THE IIA’S CIA LEARNING SYSTEMTM Economic Cycles Peak Peak Trough Time www.LearnCia.com Part 3, Section D, Topic 6 Part 3 D – 29 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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 = www.LearnCia.com This Year's Index Last Year's Index Last Year's Index Part 3, Section D, Topic 6 Part 3 D – 30 V3.0 THE IIA’S CIA LEARNING SYSTEMTM Effects of High Inflation Multiplier Effect Money spent Income created Increases velocity of money and raises demand www.LearnCia.com Increases employment and income Prices rise Demand falls Multiplier effect short-circuited Part 3, Section D, Topic 6 Part 3 D – 31 V3.0 THE IIA’S CIA LEARNING SYSTEMTM Effects of High Inflation Demand-pull inflation: Increase in aggregate demand increases prices. Cost-push inflation: Rising prices www.LearnCia.com Declining exports, consumer spending, and business growth Increase in production costs reduces supply and increases prices. Part 3, Section D, Topic 6 Part 3 D – 32 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 6 Part 3 D – 33 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 6 Part 3 D – 34 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 6 Part 3 D – 35 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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 www.LearnCia.com Flow of goods and services Flow of dollars Businesses Part 3, Section D, Topic 6 Markets for Production Factors Wages, rent, and profit = GDP Part 3 D – 36 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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 www.LearnCia.com Part 3, Section D, Topic 6 Part 3 D – 37 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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 www.LearnCia.com • Manufacturing and trade sales • Industrial production • Personal income Part 3, Section D, Topic 6 • Money supply • Stock prices • Unemployment claims Part 3 D – 38 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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 www.LearnCia.com Part 3, Section D, Topic 6 Part 3 D – 39 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 6 Part 3 D – 40 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com Part 3, Section D, Topic 6 Part 3 D – 41 V3.0 THE IIA’S CIA LEARNING SYSTEMTM 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. www.LearnCia.com • 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. Part 3, Section D, Topic 6 Part 3 D – 42 V3.0 THE IIA’S CIA LEARNING SYSTEMTM End of Section D Questions? www.LearnCia.com Part 3, Section D Part 3 D – 43 V3.0
