CIA Part 1 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 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. i
CIA Part 1 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 ii 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CIA Part 1 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 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. iii
CIA Part 1 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 iv 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CIA Part 2 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 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. i
CIA Part 2 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 ii 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CIA Part 2 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 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. iii
CIA Part 2 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 Answers to Questions... 179 iv 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CIA Part 3 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 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. i
CIA Part 3 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 ii 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CIA Part 3 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 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. iii
CIA Part 3 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 iv 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CIA Part 3 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 Answers to Questions... 250 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. v
CIA Part 3 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 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. i
CIA Part 3 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 ii 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.
CIA Part 3 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 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited. iii
CIA Part 3 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 Answers to Questions... 265 iv 2017 HOCK international, LLC. For personal use only by original purchaser. Resale prohibited.