Senior Management of Mega Corp

question 13

Multiple Choice

Senior management of Mega Corp. is entitled to receive large bonuses if they achieve earnings targets. What is the effect of this on the risks associated with recording of revenue?

• A) It increases inherent risks associated with revenue cutoff and existence assertions.
• B) It increases inherent risks associated with revenue cutoff and completeness assertions.
• C) It increases control risks associated with revenue cutoff and existence assertions.
• D) It increases control risks associated with revenue cutoff and completeness assertions.

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Definitions:

Fixed Resource

An asset or resource in production that cannot be easily increased or decreased in the short term, such as land or machinery.

Diminishing Returns

The principle that says as more of a variable input is added to a fixed input, the incremental gain in output will eventually decrease.

Normal Profits

The level of profit that is necessary to cover the costs of a firm, including the opportunity costs of capital, ensuring the firm remains in business.

Implicit Cost

The opportunity cost equal to what a firm must give up in order to use resources it already owns, without paying rent or purchasing them.