ACCOUNTING INFORMATION SYSTEMS A PRACTITIONER EMPHASIS 7TH EDITION BY CYNTHIA HEAGY, CONSTANCE LEHMA by QuentinAxel

TEST BANK

ACCOUNTING INFORMATION SYSTEMS A PRACTITIONER EMPHASIS 7TH EDITION BY CYNTHIA HEAGY, CONSTANCE LEHMANN TEST BANK Chapter 1 Significance of Accounting Information Systems and the Accountant’s Role MULTIPLE CHOICE QUESTIONS 1.

Which of the following is not accounting information? A. Total direct/indirect labor hours B. Delivery equipment cost C. Computer training schedule D. Next year’s sales budget

C 2.

In what terms can accounting information be expressed? A. Units, percentages, and money B. Money, ratios, and text C. Money, percentages, and text D. Units, percentages, and text

A 3.

Which of the following statements does not apply to accounting information? A. Accounting information meets the legitimate needs of external users. B. Accounting information is generated by only external activities. C. Accounting information communicates among parties transacting business with one another. D. Accounting information provides a basis for informed management decision making.

B 4.

Which of the following groups requires accounting data with the broadest perspective? A. Entry-level managers B. First-level managers C. Middle-level managers D. Upper-level managers

D 5.

Which of the following statements is not true? A. An accounting system deals primarily with economic events that affect an organization’s accounting equation. B. Some accounting events may mature into accounting transactions while others may not. C. Only accounting events that have matured into accounting transactions must be captured and reported by the accounting system.

Most accounting transactions result from an organization’s day-to-day operations.

C 6.

From what do accounting transactions result? A. Both external and internal activities B. External activities C. Internal activities D. Neither external nor internal activities

A 7.

Which of the following statements about a manual accounting system is not correct? A. Very little data beyond the basic elements are included. B. Data are stored in only one location. C. Errors and inconsistencies are common. D. Data are processed for external reporting.

B 8.

For decision-making purposes, managers require data from which source(s) and in which terms? A. Internal and external sources in only monetary terms B. Internal sources in non-monetary terms and external sources in monetary terms C. Internal sources in non-monetary terms and external sources in monetary terms D. Internal and external sources in both monetary and non-monetary terms

D 9.

Which of the following best describes a manual accounting system? A. Slow and prone to error B. Limited in the volume of data it can process C. Fast and accurate D. A and C, but not B E. A and B, but not C

E 10.

What essential functions are performed by computer hardware? A. Input, processing, output, and instruction of data B. Input, storage, and instruction of data, and decision making C. Input, processing, storage, and output of data D. Input, storage, and output of data and decision making

C 11.

What are the roles of people in computerized accounting systems? A. To monitor the processing of data and to interpret data B. To manufacture hardware, write software, and maintain the accounting system C. To supervise and control the accounting function D. A and B, but not C E. A, B, and C

E 12.

Which of the following statements is not true? A. Trustworthy accounting information and reliable computer equipment can prevent the failure of an organization, even if incompetent and dishonest people carry out the accounting function. B. A good accounting system may not guarantee an organization’s success, but a bad one can destroy an organization. C. The difference between good and bad accounting systems lies in the way they are developed, operated, and controlled. D. An accounting system is expected to carry out its tasks without the need for upper management’s day-to-day concern.

A 13.

Who are the users of accounting systems? A. Financial accountants, managerial accountants, and system developers B. Financial accountants, managerial accountants, system developers, and tax accountants C. Financial accountants, managerial accountants, system developers, and governmental accountants D. Financial accountants, managerial accountants, governmental accountants, and tax accountants

D 14.

Who is most responsible for operation of the accounting system in an organization? A. The controller and the chief executive officer B. The controller and the chief financial officer C. The controller and the board of directors D. A and B, but not C E. B and C, but not A

B 15.

Which of the following statements is false? A. Internal auditors lack the necessary independence to express opinions about the financial statements of the organizations for which they work. B. Internal auditors ensure that an organization’s accounting system is properly designed to meet the organization’s present and future needs. C. An external auditor who performs a financial statement audit is not required by professional standards to gain an understanding of the client’s accounting information system before expressing an opinion. D. If an external auditor finds the controls over the accounting system to be adequate, he or she may be able to reduce the amount of testing of transactions and account balances necessary to support an opinion on the fairness of the financial statements.

16.

The Sarbanes-Oxley Act prohibits which of the following? A. Consulting firms from forming alliances with software vendors B. Consulting firms from advising on e-business and security issues C. Public accounting firm partners from serving as members of boards of directors D. Public accounting firms from providing consulting services to its auditing clients

D 17.

Which of the following certifications is specifically designed for internal auditors? A. Certified information systems auditor B. Certified internal auditor C. Certified public accountant D. Certified fraud examiner

B 18.

Which of the following organizations can audit a company to determine whether the company has the correct number of licenses for the number of users? A. Accenture Consultants B. Business Program Accreditation Association C. Business Software Alliance D. All of these

C TRUE/FALSE QUESTIONS 1.

With the implementation of e-commerce, many companies have dramatically reduced the number of their suppliers and/or customers. T

Contemporary accounting information systems include data that could not be economically collected before the current level of computerization. T

The largest volume of accounting information is prepared for external reporting purposes. F

The content and format of accounting information for external reporting are regulated by internal policies and procedures, while the content and format of accounting information for internal reporting are determined by accounting rule-making bodies. F

The information used for external reporting and the information supporting management decision making and operations come from the same primary source. T

Order entry and billing, sales information, financial analysis, and cash management are all included in the definition of an events-based accounting system.

T 7.

An auditor who performs a financial statement audit is required by professional standards to gain an understanding of the client’s accounting information system before expressing an opinion. T

Auditors do not need substantial technical knowledge about accounting systems to be able to carry out their responsibilities. F

The Sarbanes-Oxley Act prohibits public accounting firms from providing consulting services to its auditing clients. T

10.

Accounting information is expressed only in monetary terms. F

11.

An events-based accounting system captures and stores only the data needed for financial reporting. F

12.

One purpose of an accounting information system is to meet an organization’s statutory reporting requirements. T

13.

Another purpose of an accounting information system is to provide relevant and accurate accounting information to those who need it and when they need it. T

14.

External transactions arise largely from the accumulation of cost data and the assignment of costs to products, business units, or activities. F

15.

The most common mode of acquiring accounting software systems today is for a company to develop its own systems internally. F

16.

Several professional organizations that provide support to auditors include the American Institute of Certified Public Accountants, the Institute of Internal Auditors, the Information Systems Audit and Control Association, the Association of Certified Fraud Examiners, The Association of Government Accountants, and the Central Intelligence Agency. F

17.

The “beginning ERP market” includes companies with revenues of $500 million or more. F

18.

Under the Sarbanes-Oxley Act of 2002, auditors are prohibited from providing any nonaudit services to its clients. T

19.

The Certified Internal Auditor certification program is sponsored by the Information Systems Audit and Control Association. F

SHORT ANSWER/ESSAY QUESTIONS 1.

What are the purposes of an accounting information system? Answer: To meet an organization’s statutory reporting requirements. To provide relevant and accurate accounting information to those who need it and when they need it. To protect the organization from possible risks stemming from abuse of accounting data or of the system itself. To conduct, or at least enable, most business processes.

What are the major components of a computerized accounting system? Answer: Hardware, software, and people

Describe the importance of an accounting system in an organization. Answer: An accounting system touches most or all of an organization’s activities. It touches the organization’s external activities through the transaction documents sent to customers, vendors, and employees, through the financial statements prepared for the stockholders and creditors, and through the tax and regulatory reports sent to government agencies. The accounting system touches the internal activities through product costing, reflecting the conversion of raw materials into finished products. It also touches internal activities through budgets and budget tracking.

Identify the various types of auditors and briefly describe what they do. Answer: Auditors are classified into three groups--external, internal, and governmental. External auditors perform a public service by expressing an opinion about the “fairness” of a client’s financial statements. Internal auditors are employed by organizations to perform

auditing for corporate management. Governmental auditors are employed by government agencies to report to government officials and public officials. 5.

Below is a list of several certification designations. Another list provides the names of organizations that sponsor the certifications. Record the letter of the correct sponsoring organization beside the certification designation. One organization may sponsor more than one certification. Certification Designation Certified Information Systems Auditor Certified Management Accountant Certified Information Systems Security Professional Certified Public Accountant Certified Fraud Examiner Certified Information Technology Professional Certified Information Security Manager Certified Internal Auditor

Correct answer a c f d b e a g

Sponsoring Organizations a. Information Systems Audit and Control Association b. Association of Certified Fraud Examiners c. Institute of Management Accountants d. American Institute of CPAs and state boards of Public Accountancy e. American Institute of CPAs f. International Information Systems Security Certification Consortium g. Institute of Internal Auditors 6.

What are the key components of an accounting information system? Answer: The key components of an accounting information system are computer hardware, accounting software, and people.

What are four possible categories for accounting software if based on the size of company it services? Answer: Four possible categories are low end market, middle market, beginning ERP market, and tier 1 market.

What is the difference in an external auditor and an internal auditor? Answer: External auditors express an opinion about the “fairness” of a client’s financial statements. They are independent of the client organizations, working individually or for accounting firms. Internal auditors are employed by business firms to perform auditing

work for corporate management. They ensure that accounting systems are properly designed to meet the organization’s present and future needs, monitor the effectiveness of internal controls, and provide advice on operational efficiency within the organization. 9.

Define the difference between an event and a transaction. Answer: An event/business activity may or may not result in a transaction, but a transaction is always an event.

Chapter 2 Accounting Systems Documentation MULTIPLE CHOICE QUESTIONS 1.

Accounting systems documentation is used for which of the following? A. To communicate how an accounting system works B. To communicate management's overall corporate strategy C. To describe the role of financial planners in an organization D. To depict a company's hierarchical organizational chart

A 2.

What does the Sarbanes-Oxley Act of 2002 require relative to documentation? A. A company must document its internal control in detail. B. A company must document its internal control at a general level. C. A company must document each step in its cash receipts and disbursements processes in detail. D. A company must document each step in its cash receipts and disbursements processes at a general level.

A 3.

Documentation types can be divided into two group according to which of the following? A. Cost B. Ease of understanding C. Intended recipients D. Complexity

C 4.

What type of documentation describes an accounting system from the outside looking in? A. System design documentation B. Top-down design documentation C. User documentation D. Technical documentation

C 5.

Which of the following statements concerning user documentation is true? A. User documentation describes the system from the outside looking in. B. Different classes of users have different capabilities and needs and require different types of user documentation. C. User documentation emphasizes how to operate the system and includes instructions for executing the various programs and instructions for handling data. D. All of the above statements are true.

What does end-user documentation include? A. Control procedures B. Error recovery procedures C. Names of technical support people who participated in preparing the documentation D. A and B

D 7.

Who would be most likely to use system documentation? A. Auditors B. Management C. Human resources D. Administrative support

A 8.

Which of the following applies to documentation standards? A. Standards must conform to applicable industry, national or international conventions. B. Each item of documentation should bear the name of person checking and authorizing documentation for use. C. Each item should bear the date and name of person preparing it. D. All of the above apply.

D 9.

What is one question that documentation standards can answer? A. How long should the documentation be? B. What authorizations are required? C. What amount should the cost of documentation be restricted to? D. How should documentation be discarded?

B 10.

How should distribution of or access to documentation be handled? A. Through multiple channels B. Saved so that is can be a basis of comparison for future documentation development C. On a need-to-know basis D. None of the above

C 11.

Which of the following issues should system narrative descriptions attempt to cover? A. Relationship of every member in the organization as they pertain to the system B. Cost of the system C. The relationship between the current system documentation and any past documentation D. System specifications

D 12.

What is the appropriate use of a narrative description? A. When there is not enough justification to hire technical personnel to develop graphical documentation B. As an alternative to graphical representation C. As a companion to graphical representation D. None of the above

C 13.

What are two types of system documentation? A. Narrative description; relationship-entity diagram B. Narrative description; data flow diagrams C. Linear matrix diagram; relationship-entity diagram D. Cost-benefit analysis; data flow diagram

B 14.

What are two types of block diagrams? A. Horizontal block diagrams; program block diagrams B. Horizontal block diagrams; hierarchical block diagrams C. Hierarchical block diagrams; functional block diagrams D. Functional block diagrams; program block diagrams

B 15.

In the following horizontal block diagram, what do the connecting lines represent?

A. B. C. D. D

Interlevel association of parent-child relationship Movement of paperwork from one group to another Flow of documents, transactions, and objects among sources and destinations Major information flows among subsystems of the accounting information system

16.

What is the correct labeling, in correct order, for the following data flow diagram symbols?

A. Source of data, data store, destination of data B. Data store, process that transforms data, source or destination of data C. Destination of data, source of data, process that transforms data D. Process that transforms data, destination of data, source of data A 17.

Which of the following statements about data flow diagrams is correct? A. They can only be understood when used in conjunction with block diagrams. B. They show what an accounting system is doing and how the system is doing it. C. They are also called functional information diagrams. D. They provide a more detailed representation of an accounting information system than do block diagrams.

D 18.

Data flow diagrams include what symbols? A A stop-sign indicating that a process is complete B. A circle to indicate a process or operation C. A square to indicate the beginning point of a diagram D. A square to indicate a data store

B 19.

Which is not true about a level 0 data flow diagram? A. It describes the entire system of interest on a sheet of paper. B. It shows all the major processes, data stores, and external entities. C. Each process can be exploded into subprocesses. D. It can only accommodate up to a 10.0 level to ensure understandability.

D 20.

What is a disadvantage of a data flow diagram? A. Inability to show relationships among subsystems B. Poor communications tool C. Difficulty of understanding for nontechnical personnel D. Inability to represent points of detail

21.

What does the following symbol represent in a data flow diagram?

A. B. C. D.

Data store Flow direction Source or destination of data Process that transforms data

A 22.

Which of the following is not a characteristic of system flowcharts? A They are governed by national and international standards. B. They show technical details. C. They are used to guide the construction of new systems and maintain/evaluate existing systems. D. They are also known as problem definition documentation.

D 23.

Which of the following statements about a system flowchart is correct? A. It is usually designed for top-management. B. It focuses on the role of accountants in the system. C. It shows what a system does and how it does it. D. It is amenable to complex accounting systems than to simple systems.

C 24.

What is the difference in an internal control flowchart and a system flowchart? A. An internal control flowchart uses fewer symbols than a system flowchart. B. An internal control flowchart shows functional areas to indicate the authorization of transactions, the custody of assets, and the recording of transactions. C. An internal control flowchart is prepared prior to preparing a system flowchart. D. An internal control flowchart needs an auditor's input for accurate development.

B 25.

What is the symbol that can be used as short-hand for a group of symbols for a process that may be repeated in several locations in a system flowchart? A. Pre-defined operation symbol B. Display device symbol C. Organizational change symbol D. Communication link symbol

26.

Which is not true about system flowchart symbols? A. They are more numerous than are data flow diagram symbols. B. Rigid conventions determine their use. C. Labels attached to the symbols are self-explanatory. D. Completely different sets of symbols are used for computerized and manual systems.

D 27.

Which of the following statements about system flowcharts is correct? A. Like other graphical representations, system flowcharting is not governed by national and international standards. B. Because it is governed by standards, flowcharting is not a subjective activity. C. Individual styles can help achieve a clear and orderly layout. D. If two different people flowchart the same system, the flowcharts will be identical.

C 28.

What is a step that should be taken prior to creating a system flowchart? A. List the steps in the system processes. B. Determine what software should be used. C. Avoid making decisions based on personnel requests as this biases the development. D. Restrict the research of the accounting system to the outputs of the system.

A 29.

Which of the following symbolic representations indicates that a purchase order has been prepared?

d. C

30.

In the figure below, what does the flowcharting symbol at Point A represent?

Point A

Cash sale? Enter sales data

Sales transaction file

Yes

Cash receipts transaction file

A. B. C. D.

A manual operation Initiation of a process A computerized operation A decision

D 31.

Which of the following serves as a bridge between broad system design documentation and detailed system flowcharts? A. Data flow diagrams B. Block diagrams C. Narrative descriptions D. HIPO charts

A 32.

Which type of documentation shows the flow of data through various stages of processing without regard for the logic of the individual processing activities? A System flowchart B. Hierarchical block diagram C. Structure chart D. Data flow diagram

D 33. What is the most common, flexible, and useful type of overall design documentation for an accounting information system? A. System flowcharts B. Pseudocode C. HIPO charts D. Block diagrams A

34.

Which type of system documentation provides the most detail? A. System flowchart B. Block diagram C. Data flow diagram D. System narrative description

A 35.

What are the broadest and most detailed forms of system documentation, respectively? A. Block diagrams; system flowcharts B. Narrative descriptions; block diagrams C. System flowcharts; narrative descriptions D. Narrative descriptions; system flowcharts

D 36.

Which of the following statements about computer-assisted system documentation tools is correct? A. They consist primarily of flowcharting programs. B. They are restricted to helping create block diagrams. C. They have the disadvantage of being difficult to distribute. D. They are also known as accounting systems development guideline tools.

37.

What type of documentation is the following?

A. B. C. D.

Data flow diagram System flowchart Hierarchical block diagram Horizontal block diagram

A 38.

The system flowchart symbol for a filing a paper document (such as filing a copy of a paid invoice by date) is:

39.

The system flowchart symbol for a decision (such as whether the customer is approved) is:

TRUE/FALSE QUESTIONS 1.

System documentation is prepared for the benefit of top management. F

End-user documentation typically includes a list of programs with operating instructions. T

Unauthorized documentation circulating in an organization should be immediately destroyed. F

A type of system documentation is pseudocode. T

System documentation can include narrative description or graphical representation. T

Because of the differences in each type of system documentation, there is rarely an overlap of flexibility in accommodating users’ needs. F

Narrative descriptions are the dominant choice of documentation for showing details. F

Information about a system's goals and objectives should be included in a narrative description. T

A horizontal block diagram is typically prepared prior to preparing a detailed hierarchical block diagram. F

10.

Because of the limited amount of detail, block diagrams are generally used in conjunction with other documentation that shows complementary aspects of an accounting system. T

11.

Documentation as it relates to accounting systems is a communication device that describes in pictures, words, or both how to use the system, and what the system does, and how the system operates. T

12.

User documentation offers an inside view of the accounting system and is written in precise technical language. F

13.

A narrative description should cover the reasons for having the accounting system, including the background, the objectives of the system, and the scope of the system. T

14.

A hierarchical block diagram shows the subsystems of an accounting system and the direction of the information flows among the subsystems. F

15.

A data flow diagram show what an accounting system is doing and how the system is doing it. F

16.

The initial data flow diagram is called a context diagram. T

17.

A systems flowchart uses only four symbols. F

18.

A systems flowchart identifies all existing control procedures for preventing or detecting errors and irregularities. F

19.

Systems flowcharts suffer from a lack of standard flowcharting symbols. F

20.

In a systems flowchart, a rectangle represents a process, or operation. T

SHORT ANSWER/ESSAY QUESTIONS 1.

Arrange by increasing amount of detail the types of system documentation that are frequently used by accountants.

Answer: Narrative description, block diagram, data flow diagram, system flowchart 2.

One guideline for creating an effective system flowchart is to show the source and disposition of all major documents and copies of those documents. What are four other guidelines? Answer: Refer to Exhibit 2.8–Guidelines for Effective System Flowcharting.

Explain the difference between a horizontal and a hierarchical block diagram. Answer: A horizontal block diagram shows the subsystems of an accounting system and the direction of the information flows among the subsystems. A hierarchical block diagram shows the analysis of an accounting system into successive levels of subsystems or, alternatively, the synthesis of subsystems into a complete system.

Draw four symbols used in a system flowcharts and explain their meanings. Answer: Refer to Exhibit 2.7–System Flowcharting Symbols.

List three questions that document standards should answer.

      

What are four forms of systems documentation used frequently by accountants?    

Answer: Any three of the following: Who should prepare the various types of documentation? What should be included (and omitted)? How should the material be presented? What authorizations are required for each type of documentation? How should the documentation be prepared? How should documentation be distributed and used? What procedures are appropriate for reviewing and maintaining the various types of documentation?

Answer: Narrative description Block diagram Data flow diagram System flowchart List three guidelines for effective systems flowcharting.

            

 

Answer: Any three of the following : Start with the entry of data into the system you are flowcharting. Show all working files or database tables. Show the source and disposition of all major documents and reports. This does not apply to paper journals and ledgers since they do not flow anywhere. Use arrowheads on all flow lines to indicate the direction of the flow. Make the direction of the flow lines primarily from left to right and top to bottom. Occasionally, these directions can be reversed when it makes the flowchart more concise, but this should be done sparingly. Avoid crossing flow lines to the extent possible. Put the entire system on one page unless it is impractical to do so. Use on-page and off-page connectors sparingly. An overuse of connectors indicates poor layout and makes the flowchart hard to follow. Use telegraphic, keyword active style in the words on the flowchart, leaving out nonessential words, such as a, an, the. When abbreviating is necessary, use standard abbreviations only, or use a footnote or legend to explain nonstandard abbreviations. Include written comments whenever it helps make a flowchart more complete or easier to understand. Comments can be included within the flowchart using the comment symbol, or they can be included as footnotes at the bottom or on one side. If showing segregation of duties, used vertical columns, horizontal rows, or the organizational change symbol. Do not leave dangling branches. A dangling branch occurs when a process suddenly stops on the flowchart, but obviously needs other activities to complete the process. Explain what happens with a note or show data going into another system. Do not leave the reader wondering. Place a title, the preparer’s name, and the date on all pages of the flowchart. Number pages as “page x of n,” for example, “page 1 of 3,” so the reader will know when the flowchart is complete. Use a template for symbols if drawing the flowchart by hand.



Draw a flowchart for a computerized accounting system depicting the preparation of two copies of a customer invoice. The first copy is sent to the customer and the second copy is filed by date. Answer: Prepare invoice 2

Customer invoice

To customer

Define the following terms: file maintenance, level 0 DFD, data flow diagrams, exception report, system flowchart.

Answer: file maintenance (unique, non-routine, should be done by someone other than person doing day-to-day recording, includes adding/deleting accounts/customers/vendors), level 0 (entire system on one sheet, basic processes, major tasks), dfd (what system does and how it does it), exception report (shows deviations from a norm ONLY), system flowchart (most detailed, what system does and how it does it).

MATCHING QUESTIONS Several types of system documentation are listed below. A. System flowchart B. Block diagram C. Narrative description D. Data flow diagram E. Internal control flowchart Fill in the letter that corresponds to the type of documentation that is defined in 1-4 below. One type may be used more than one time, and some types may not be used at all.

1. B

Provides an overview of an accounting system in terms of its major subsystems.

Explains the reasons for having the accounting system, including the background, the objectives of the system, and the scope of the system.

C 3.

Provides a more detailed representation of an accounting system than a block diagram can provide but has fewer technical details than does a system flowchart.

D 4. A

Emphasizes the flow of data elements through an accounting system and the role of computer programs and human beings in the processing of accounting data.

Chapter 3 Essential Elements and Basic Activities of Accounting Systems

MULTIPLE CHOICE QUESTIONS 1.

Which of the following is an example of an internally generated source document? A. Debit memo from bank B. Remittance advice C. Employee time card D. Customer purchase order

C 2.

Which of the following data elements would NOT be on a purchase order? A. Quantity ordered B. Invoice number C. Vendor number D. Product number

B 3.

When preparing a customer invoice, which document could be used as the source for the ship date? A. Bill of lading B. Receiving report C. Vendor invoice D. Purchase order

A 4.

Which of the following can save time in recording and posting a credit sale? A. General journal B. Purchases journal C. Payroll journal D. Sales journal

D 5.

What is the main advantage of special journals in a paper-based accounting system? A. Reduction in time required B. Increased computer processing speed C. Reduction in documentation required D. Decreased emphasis on controls

Which of the following financial statements reports the profitability of an organization for a stated period of time such as a month or a year? A. Statement of Changes in Ownership Equity B. Statement of Income C. Balance Sheet D. Statement of Cash Flows

B 7.

Which of the following data elements are essential in a journal? A. Transaction date, explanation, and dollar amount of each debit and credit B. Dollar amount of each debit and credit, account name and number, and explanation C. Transaction date, dollar amount of each debit and credit, and account name and number D. Account name and number, transaction date, and unique identifier for the transaction

C 8.

Financial statements are presented in a particular format and contain certain data items as dictated by which of the following? A. Industry standards B. Generally accepted accounting principles C. The organization’s accounting policies D. All of the above

D 9.

Below are some of the basic activities in a paper-based accounting system: i. Post (copy) data from journals to the appropriate accounts in the general ledger ii. Record transactions in the appropriate journals iii. Post (copy) data from journals to the appropriate accounts in the subsidiary ledgers iv. Complete source documents

In what order do these activities occur? A. iv, ii, iii, i B. ii, i, iii, iv C. iv, ii, i, iii D. ii, iv, iii, i A 10.

What type of account in the general ledger has a related subsidiary ledger? A. Detail B. Chart C. Control D. General

11.

What is another name for the accounts in a chart of accounts? A. Transaction accounts B. Control accounts C. Master accounts D. General ledger accounts

D 12.

Which of the following is the best reason for keeping subsidiary ledger accounts current? A. To compute liquidity ratios B. To prepare financial statements C. To check if a sale will exceed a customer’s credit limit D. All of the above

C 13.

Which of the following is not a typical special journal used for recording transactions? A Sales B. Customer C. Cash disbursements D. Cash receipts

B 14.

In which of the following journal(s) would a cash sale be recorded? A. Sales B. Cash disbursements C. Cash receipts D. Both A and C

D 15.

In which journal would you most likely record accrued interest receivable? A. General journal B. Purchases journal C. Sales journal D. Cash disbursements journal

A 16.

Which file stores data to be used repeatedly for processing transactions? A. Reference file B. Open file C. Program file D. Master file

A 17.

What type of file contains invoice data for which payment has not yet been received? A. Transaction B. Master

C. D.

Open Reference

C 18.

What type of file is used to store data about transactions that have been started but not completed? A. Transaction B. Master C. Open D. Reference

C 19.

What type of file is set up during a processing operation and is purged when the operation is completed? A. Backup file B. Archive file C. Scratch file D. Program file

C 20.

The chart of accounts file is what type of file? A. Open file B. Reference file C. Transaction file D. Program file

B 21.

Which of the following is a use of the chart of accounts reference file? A. To store data about completed transactions B. To determine if an account number is valid C. To store data about incomplete transactions D. To store temporary data for processing

B 22.

What is the main purpose of a general ledger master file? A. To store account balances to be presented in reports B. To match up account numbers in files C. To store temporary records pertaining to a group of like transactions D. To store detailed information about subsidiary ledger control accounts

A 23.

Which of the following statements about particular data files is correct? A. Transaction files correspond to paper ledgers in paper-based accounting systems. B. Master files correspond to the paper journals in paper-based accounting systems. C. Transaction files are a hybrid of master files and open files.

The general ledger master file stores the account balances reported on the financial statements.

D 24.

What file in a computerized accounting system corresponds to a paper subsidiary ledger in a paper-based system? A. Transaction file B. Master file C. Open file D. Reference file

B 25.

What file in a computerized accounting system corresponds to documents awaiting further processing in a paper-based system? A. Transaction file B. Master file C. Open file D. Reference file

C 26.

What file in a computerized accounting system corresponds to a paper journal in a paperbased system? A. Transaction file B. Master file C. Open file D. Reference file

A 27. What file in a computerized accounting system corresponds to a paper general ledger in a paper-based system? A. Transaction file B. Master file C. Open file D. Program file B 28.

Which data element most likely would not be included in the Investment Securities master file? A. Security code B. Cost C. Name D. Purchase order number

29.

Which of the following methods can be used to create a transaction file? A. Keying in or scanning data found on source documents B. Transmitting data electronically C. Extracting data from master files or open files D. All of the above can be used.

D 30.

Which of the following is the most expensive method for creating a transaction file? A. Keying in or scanning data found on source documents B. Transmitting data electronically C. Extracting data from master files or open files D. All of the above

A 31.

Accountants and other users are generally concerned with which type of file organization? A. Logical B. Physical C. Functional D. Magnetic

A 32.

Which file can update a subsidiary ledger master file? A. Customer invoice open file B. Customer master file C. Transaction file D. Inventory master file

C 33.

Which of the following statements about posting, or updating, is correct? A. Real-time posting updates the appropriate master files immediately upon entry of transaction data in the system. B. Batch posting updates the appropriate master files immediately upon entry of transaction data into the system. C. Batch posting has advantages in situations in which data must be current. D. In a real-time posting, the transaction data are accumulated in a transaction file until the end of the accounting period.

34.

In regard to real-time and batch posting, or updating, which of the following statements is correct? A. Real-time posting is always preferred because batch posting is slow. B. A system may use both kinds of posting. C. A system can do one kind of posting or the other, not both. D. A system will NOT use batch posting if the system is installed on a mainframe computer. B

35. Which of the following systems is one where the master and open files are posted, or updated, immediately? A. Microcomputer system B. Mainframe computer system C. Batch system D. Real-time system D 36.

Which of the following would least likely benefit from real-time posting? A. Bank account balances B. Property and depreciation C. Customer accounts receivable D. Merchandise inventory

B 37.

Which of the following is not a current trend in computerized accounting systems? A. A point-of-sale terminal in a sales department B. An automated teller machine in a bank C. An electronic time clock located in an operating facility D. A spreadsheet report of financial information

D 38.

What type of file provides a permanent record of the transactions recorded during an accounting period? A. Transaction file B. Master C. Open file D. Archive file

D 39.

Which of the following is a characteristic of real-time posting/updating? A. Real-time posting provides for the immediate update of the master file upon entering of transaction data. B. Real-time posting preceded batch posting because of its simplicity. C. Real-time posting results in systems that are sensitive to error contamination. D. Both A and C are characteristics of real-time posting/updating.

40.

The following symbolic representation indicates a file update, or posting.

(a) file before being updated Post/Update

(b)

What is the type of file on the left side of the posting process represented by the letter (b)? A. Master file B. Open file C. Parameter file D. Transaction file D 41.

What file in a computerized accounting system corresponds to a pending file in a paperbased system? A. Transaction file. B, Master file. C. Open file. D. Reference file.

C 42.

With regard to batch v. real-time posting, which of the following is correct? A. Real-time posting is preferred because it is faster than batch posting. B. Real-time posting has no effect on computer processing time. C. Batch posting is less costly in terms of computer and personnel resources than real-time posting. D. None of the above.

C 43.

What file in a computerized accounting system corresponds to a special journal in a paper-based system? A. Transaction file. B. Master file. C. Open file. D. Reference file.

44.

What file in a computerized accounting system corresponds to a sub-ledger (such as accounts receivable) in a paper-based system? A. Transaction file. B. Master file. C. Open file. D. Reference file.

B 45.

What file in a computerized accounting system corresponds to a pay rate table in a paperbased system? A. Transaction file. B. Master file. C. Open file. D. Reference file.

D 46.

Which of the following defines a reference file in a computerized system? A. A file that stores data used repeatedly for processing transactions (e.g., payroll tax table) B. A file that stores data on pending items such as sales orders C. A file that stores detailed information about general ledger control accounts D. A file that stores daily transaction data such as sales transactions

A 47.

Which of the following defines a transaction file? A. The equivalent of a subsidiary ledger in a manual system B. A file that has one record for each inventory item C. The equivalent of a journal in a manual system D. The equivalent of a reference file in a manual system

C 48.

What happens to the size (number of records) of the customer master file when it is updated to reflect the customer’s payment of an outstanding invoice? A. Decreases B. Increases C. Remains the same D. Cannot be determined

C 49.

In which area would real-time posting be most valuable in light of the added resources necessary to maintain a real-time system? A. Inventory B. General ledger C. Sales D. Payroll

50.

Which of the following is (are) an example(s) of an open file in a computerized system? A. Purchase order B. Sales order C. Vendor invoice D. All of these are examples of an open file

D 51.

Which of the following defines a master file in a computerized system? A. A file for storing data on pending items such as sales orders B. A file for storing data on day-to-day operations such as sales C. A file for storing detailed information about general ledger control accounts (similar to a subsidiary ledger) D. A file for storing backup data

C 52.

Which of the following files is (are) updated by the sales transaction file? A. Customer master file B. Sales order open file C. Customer open invoice file D. Inventory master file E. All of these are updated by the sales transaction file

E 53.

Which of the following statement(s) about real-time posting is (are) correct? A. Real-time posting requires more computer and personnel resources than batch posting. B. With real-time posting one single error may result in numerous errors. C. Real-time posting allows users to have updated information throughout the business day. D. All of these are true about real-time posting.

D 54.

What file in a computerized system is equivalent to the accounts payable subsidiary ledger in a manual system? A. Vendor master file B. General ledger master file C. Sales order open file

A 55.

Which of the following defines a scratch file? A. A temporary file used during processing and is purged when the operation is completed B. A file that stores instructions to tell the computer how to process data C. A file that stores permanent records of transactions D. A duplicate copy of a file made for security reasons and stored off-site

56.

What is the purpose of an open customer invoice file in a computerized system? A. To store data about customer invoices that have not yet been paid B. To store data about daily sales transactions C. To store data that are used repeatedly for processing transactions D. To store data about customers such as addresses

A 57.

Which of the following is (are) a typical transaction file(s) in a computerized system? A. Cash receipts B. General journal C. Sales D. All of these are typical transaction files in a computerized system.

D 58.

What happens to the size (number of records) of the open customer invoice file when it is updated to reflect the customer’s payment of an outstanding invoice? A. Cannot be determined B. Remains the same C. Decreases D. Increases

C 59.

What happens to the size (number of records) of the cash receipts transaction file when a cash receipt for a customer invoice is posted? A. Stays the same B. Cannot be determined C. Increases D. Decreases

C 60.

Which of the following defines a source document? A. An essential data element B. A document that captures data about transactions and other events C. The electronic capture of data D. A listing of general ledger entries

B 61. Which of the following defines a shipping transaction file in a computerized system? A. A file that stores data about sales requiring more than one shipment B. A file that stores data about purchases C. A file that stores data about purchases requiring the receipt of more than one shipment D. A file that stores data about sales A

62.

Which of the following defines sales (customer) invoice? A. A document that captures the data about a sale to a customer B. A document that captures the data about a purchase from a vendor C. A document used to bill a vendor D. A written contract between a shipper and a carrier

A 63.

Which of the following defines a cash receipts prelist? A. A written contract between the shipper and the carrier B. A list of transactions in chronological order C. An element in an accounting system to classify monetary measurements D. A record (by date) of all cash receipts

D 64.

Which of the following are essential data elements in a customer master file? A. Customer code, name, address, customer type, credit limit, credit terms, account balance beginning of year, year-to-date sales, year-to-date payments, amount owing B. Vendor code, name, address, credit limit, credit terms, account balance, year-to date purchases, amount owed C. Employee code, name, address, spouse/dependents, job skills, pay rate, birth date, deductions code, insurance D. Security code, name, number of shares/units, purchase date, cost, interest/dividends received

A 65.

Which of the following statements is NOT correct? A. In batch posting, the master and open file records are up to date only after posting is completed. B. Batch posting is more expensive than real-time posting. C. Batch posting is best done when there is no conflicting activity on the system. D. With batch posting, a user can print a proof list of the transaction file before posting to try to catch errors.

B TRUE/FALSE QUESTIONS 1.

Some examples of elements of a paper-based accounting system include accounts, chart of accounts, ledgers, and outputs. T

A bill of lading is a written contract between the shipper, the carrier engaged in the transportation of the goods, and the receiver of the goods. F

A ledger lists transactions in chronological order and is considered “the book of original entry.” F

As accountants, we are interested in how a file is organized in a logical, or conceptual, sense as opposed to the how the file is organized physically. T

The source documents and outputs are very similar in paper-based and computerized accounting systems. T

As with general journals in a paper-based accounting system, the main purpose of subsidiary master files in a computerized system is to store detailed information about general control accounts. F

The general ledger master file stores information that supports both accounting and operating activities while the subsidiary ledger master files stores information that mainly supports accounting activities. F

An open file contains the data about transactions that have been started but cannot be fully processed until a subsequent event occurs. T

Four types of files in a computerized accounting system are scratch files, backup files, application files, and archive files. F

10.

The major difference in outputs from a computerized system and a paper-based system is the number and speed with which outputs from a computerized system can be generated. T

11.

One of the essential elements of a paper-based accounting system is a chart of accounts. T

12.

One of the essential elements of a paper-based accounting system is the posting of data. F

13.

An example of a source document is a receiving report. T

14.

A bill of lading is a written contract between the shipper and the consignee. F

15.

A journal is a listing in chronological order that is created to record a particular type of transaction. T

16.

Each control account in the general ledger has one subsidiary ledger that contains several accounts. T

17.

The balance sheet reports the profitability of an organization for a stated period of time such as a month or a year. F

18.

In a computerized accounting system, an open file represents documents awaiting further processing in a paper-based system. T

19.

In a computerized accounting system, master files represent journals in a paper-based system. F

20.

The sales transaction file is used to update the customer master file, the inventory master file, the sales order open file, and the customer invoice open file. T

SHORT ANSWER/ESSAY QUESTIONS 1.

Identify and describe the four types of files in a computerized accounting system. Answer: A scratch file is set up during a processing operation and is purged when the operation is completed. It is a very temporary file. A backup file is a duplicate copy of a file that is made for security reasons. An archive file is a file or copy of a file that provides a permanent record of the transactions captured during an accounting period. A program file contains instructions to tell the computer how to process data stored in the accounting system.

List at least three of the six basic activities of a computerized accounting system. Answer: Students may list any of the following: 1. 2.

Preclassifying transactions according to type. Creating a transaction file for each class of like transactions for each data capturing period.

3. 4. 5. 6. 3.

Updating, or posting to, the subsidiary ledger master files and open files. Summarizing transaction files and transferring the summarized data to a general journal transaction file. Updating, or posting to, the general ledger master file Preparing documents and reports

Compare batch versus real-time posting. Answer: Batch processing involves posting or updating in a batch, often times after the close of a business day. At a designated time, the data from the transaction files are used to update master file and open files-similar to posting in a paper-based system. An effect of batch posting is that master and open file records are only up-to-date after posting has occurred. With real-time posting, data are captured for each transaction which can immediately be used to update the appropriate master and open files. The frequently touted advantage of real-time posting is the availability of up-to-the-minute information.

Discuss the significant similarities between paper-based accounting systems and computerized accounting systems. Answer: An accounting system, whether paper-based or computerized, consists of two broad categories: (1) essential elements, that is where data are captured, recorded, processed, stored, and reported, and (2) basic activities, that is, how data are captured, recorded, processed, stored, and recorded in the essential elements.

Identify four typical open files in a computerized accounting systems listed in the textbook. Answer: 1. Sales order open file 2. Customer invoice open file 3. Purchase order open file 4. Vendor invoice open file

Explain the difference in a special journal and a general journal. Answer: A special journal is used to record a particular type of transaction, e.g. sales transactions. A general journal is used to record all transactions that are not recorded in special journals.

Give an example of a numbering system for a chart of accounts. Answer: 1000 - 1999 - Assets

2000 - 2999 - Liabilities 3000 - 3999 - Ownership Equity 4000 - 4999 - Revenues 5000 - 5999 - Expenses 8.

Explain the difference in a general ledger and a subsidiary ledger. Answer: The general ledger is a collection of all the asset, liability, ownership equity, revenue, and expense accounts used by an organization. A subsidiary ledger is used for a large number of accounts of one type. A control account representing the like accounts is retained in the general ledger.

Compare batch versus real-time posting. List one advantages of real-time posting and one advantage of batch posting. List 1 disadvantage of real-time posting and 1 disadvantage of batch posting. Indicate an area where real-time posting would be advantageous. Answer: Real-time: immediate updates to information, availability of up-to-the minute information. Batch: proof list allows checking of information before updating (minimizes errors), requires less computer resources. Disadvantages--Real-time: costly (computer and personnel resources), slows down computer, errors propagated through system; batch: updates only when posting done, up-to-minute information not available. Might use real-time for inventory or possibly, accounts receivable.

Chapter 4

Data Flows, Activities, and Structure of Accounting Systems MULTIPLE CHOICE QUESTIONS 1.

What is an example of a transaction? A. A meeting between middle and upper-level managers B. Deciding on corporate strategy C. Depreciation of equipment D. Taking action on a customer for non-payment of goods/services

C 2.

Which of the following is (are) true regarding transactions? A. May be reported individually B. May be reported as part of aggregate information C. May be reported to external auditors only D. A&B E. B&C

D 3.

Which of the following is necessary for printing of the sales journal? A. Open customer invoice file and customer master file B. Customer master file and cash receipts transaction file C. Customer master file and sales transaction file D. Sales transaction file and open customer invoice file

C 4.

Which of the following statements is not correct? A. The sales transaction file is used to update the customer master file. B. The open customer invoice file holds data about incomplete transactions. C. The customer master file is used to update the open customer invoice file. D. The sales transaction file captures detailed sales transaction data in chronological order.

C 5.

Which of the following statements about updating an open customer invoice file is correct? A. Only cash sales are added. B. Only credit sales are added. C. Both cash and credit sales are added, but the cash sales are eliminated at the end of the accounting period.

Both cash and credit sales are added, because the file provides a source of sales history.

D 6.

What are the primary activities of an accounting information system? A. Input (capture), store, process, output (communicate) data B. Interface, communicate, store, process information C. Input, store, post, process information D. Classify, compare, summarize, calculate data

A 7.

What are the primary activities of an accounting information system? A. Input (capture) data B. Store data C. Process data D. Output (communicate) data E. All of the above are primary activities.

E 8.

What are the support activities of an accounting information system? A. People, input, process B. People, technology, input C. People, technology, control D. People, process, control

C 9.

Which of the following statements about the input activity is correct? A. Input is an interface between users and the accounting system. B. Input is an information process activity that produces an output. C. Input captures and classifies transactions in an accounting system. D. Input captures and transforms data according to a prescribed set of instructions.

A 10.

When inputting data, what is one of the most common errors that can occur? A. Misspelling of names B. Transposing digits in a number C. Making an incorrect journal entry D. Duplicating entries

11.

Which of the following is not true about input data? A. Input data is an interface between the computer software and the accounting system. B. Input data can be captured on source documents. C. Input data can be prone to errors. D. Input data can be verified by various activities.

A 12.

Which of the following is not a type of processing function? A. Retrieving B. Sorting C. Comparison D. Summarization

A 13.

Which of the following is one of the most common processing activities? A. Merging B. Summarization C. Comparison D. Updating, or posting

D 14.

What is a process activity that updates balances in a master file? A. Classification B. Calculation C. Posting D. Summarization

C 15.

Which of the following statements about information processing activities is not correct? A. Capturing transaction data in machine-readable form reduces error input data. B. File maintenance is a nonroutine process in which changes are made to a master file through direct intervention by a user. C. Typical master file maintenance changes are updating account balances, deleting unwanted records, and adding new records to a file. D. The basic types of processing are classification, comparison, summarization and calculation.

C 16.

Which of the following processes requires the direct intervention by users? A. Updating and posting B. File maintenance C. Calculation D. Summarization

17.

Which of the following is not an example of master file maintenance? A. Increasing and decreasing account balances in records B. Adding new records to a file C. Deleting unwanted records from a file D. Changing the content of existing records

A 18.

What does the data processing activity of sorting involve? A. Rearranging the records in a file into a meaningful sequence B. Determining which data must be archived C. Grouping all files into related categories D. Grouping all data by specific type of account

A 19.

Which of the following activities involve an interface between users and the accounting system? A. Input and process B. Process and store C. Input and output D. Output and process

C 20.

What should be characteristics of the information provided by an accounting system? A. Useful B. Timely and inexpensive C. Easy to understand D. Useful and easy to understand E. All of these

D 21.

What is an example of a status report? A. Income statement B. List of all sales transactions for a certain period C. Report on effectiveness of controls in the system D. Report of the estimated purchases for the year

A 22.

What are information formats called? A. Paper reports B. Activity requirements C. General ledger summaries D. Forms

23.

What framework has proved to be a successful attempt to unify the elements and processes that are common to all accounting systems? A. Business processes B. Accounting data base C. Hierarchies D. Road maps

A 24.

Which of the following statements regarding subsystems is true? A. Subsystems are defined in the broadest terms. B. The same subsystems are present in all types of organizations. C. Subsystems perform well-defined transaction-processing functions. D. Subsystems are referred to as "logical branches" in accounting software packages.

C 25.

Which of the following statements regarding subsystems is not true? A. The components of a system are referred to as subsystems. B. A subsystem has its own data inputs, processes, storage, and outputs. C. Subsystems generally operate independently of each other.

C The following block diagram shows the integration of some accounting subsystems and an overview of an accounting information system. Use this diagram to answer the next two questions.

Sales Order Processing

(1)

Purchase Order Processing

(3)

(5)

(2)

Vendor Invoicing

Cash Receipts

Cash Disbursements

(4)

26.

What is the subsystem labeled (2)? A. General ledger B. Cost accounting C. Customer invoicing D. Inventory management

C 27.

What is the subsystem labeled (5)? A. Receiving B. General ledger C. Shipping D. Customer invoicing

A 26.

Which of the following files is not used in the customer invoicing subsystem? A. Sales transaction file B. Open sales order file C. Customer master file D. Open customer invoice file

27.

Which of the following are subsystems of the inventory process in both manufacturing and service organizations? A. Production, control, cost accounting B. Production, control, inventory management C. Cost accounting, inventory management D. Cost accounting, inventory management, production control

C 28.

Which is not true about the financial process? A. Revenue, purchasing, and production events are initially recorded in the financial process. B. Transaction data that are captured in other processes are transferred to the financial process. C. Some transactions are originally recorded in the financial process. D. Some end-of-period adjustments are required in the financial process.

A 29.

The payroll subsystem can be a part of which business process? A. Revenue B. Expense C. Inventory D. Purchasing

30.

Which subsystem is responsible for accounting for the raw materials, finished goods, and merchandise inventories? A. Production control B. Sales order processing C. Inventory management D. Purchase order processing

C 31.

Which of the following is a decision support activity? A. The sales subsystem B. The accounts receivable subsystem C. The sales analysis subsystem D. The shipping subsystem

C 32.

The sales analysis subsystem refers to what activity and supports which business process? A. Shows current sales information; supports the financial process. B. Matches sales with accounts receivable information; supports the revenue process. C. Analyzes historical sales data; supports the revenue process. D. Matches sales with accounts receivable information; supports the financial process

C 33.

Which of the following is not a subsystem in the revenue process? A. Shipping B. Receiving C. Customer invoicing D. Cash receipts

B 34.

Which of the following subsystems are in the inventory process? A. Production control, inventory management, cost accounting B. Inventory management, cost accounting, accounts payable C. Inventory management, cost accounting, accounts receivable D. Production control, receiving, inventory management

A 35.

Assume that data from the purchases transaction file have been transferred to the general journal transaction file. The general journal transaction file has been used to update the general ledger master file. What is the result if a trial balance is prepared at this time? A. Inventory shows an increase, and accounts payable shows a decrease B. Inventory shows a decrease, and accounts payable shows an increase C. Inventory shows an increase, and accounts payable shows an increase D. Inventory shows no change, and accounts payable shows no change

36.

Assume a firm has paid an invoice for merchandise it purchased earlier and the appropriate data have been entered in the cash disbursements transaction file. Data from the cash disbursements transaction file have been transferred to the general journal transaction file. What is the result if a trial balance is prepared at this point? A. Accounts payable shows a decrease, and cash shows an increase B. Accounts payable shows no change and cash shows no change C. Accounts payable shows a decrease, and cash shows a decrease D. Accounts payable shows an increase, and cash shows an increase

C TRUE/FALSE QUESTIONS 1.

It is possible for a transaction to be initiated by programmed instructions in a computer program. T

A transaction's final resting place ordinarily is in an archive file. T

All transaction data are classified by the account they affect. T

File maintenance is a routine process that occurs at specific time intervals. F

The two interfaces between an accounting system and its users are the outputs and the general ledger file. F

Status reports focus on the balances recorded in the transaction files after updating has been completed. F

More than one status or activity report may be produced from a single file, each formatted to meet a different need. T

Only one status or activity report may be produced from a single file formatted to meet a specific need. F

Output from the accounting system is reserved for internal users only. F

10.

The business processes comprise the most specific level of subsystems in an accounting information system. F

11.

Each of the accounting subsystems, for example, purchase order processing, receiving, vendor invoicing, cash disbursements, is a stand-alone system. F

12.

Any organization that provides goods or services on demand requires a sales subsystem. T

13.

A cash sale is recorded in only the cash receipts transaction file. F

14.

When a user enters a customer code in the sales transaction screen, the user also enters the customer name. F

15.

The cash receipts transaction file is used to update the open customer invoice file and the customer master file. T

16.

A new account is added to the Chart of Accounts through the sales transaction file. F

17.

Periodically, data in the sales transaction file and the cash receipts transaction file are summarized and transferred to the general journal transaction file. T

18.

The transaction data in the general journal transaction file are used to update the customer master file. F

19.

The income statement and the balance sheet are prepared from data in the general ledger master file. T

20.

One type of processing in an accounting system is merging. T

21.

The four business processes in an accounting information system are revenue, purchasing, inventory, and investment. F

22.

One of the subsystems of the purchasing process is receiving. T

SHORT ANSWER/ESSAY QUESTIONS 1.

Name one accounting system activity other than input data. Answer: Store data, process data, or output (communicate) data

Name, explain, and give examples of four different ways that data are processed. Answer: Students could name, explain, and give examples of any four of the following processing activities: classification; comparison; summarization, or aggregation; calculation, or computation; updating, or posting; file maintenance; sorting; or merging.

What are the two major types of reports that are produced by an accounting information system? Answer: Status reports and activity reports

What are the support activities of an accounting information system? Answer: Manage people, manage technology, and manage internal control

Name three business processes. Answer: Any three of revenue, purchasing, inventory, financial

Name the subsystems of the inventory process in a manufacturing organization. Answer: Production control, inventory management, and cost accounting

Name and give a brief description of two business processes. Answer: Any two of revenue, purchasing, inventory, or financial business process. The revenue process (also called selling cycle or selling and collection process) pertains to the distribution of goods and services to customers and others and the receipt of money in exchange for the goods and services. The revenue process is typically broken down into its subsystems-- sales, sales order processing, shipping, and accounts receivable (customer invoicing and cash receipts). The purchasing process (also called expenditure, procurement, or acquisition process) has to do with the acquisition of goods and services and the disbursement of money in

exchange for the goods and services. The purchasing process is typically broken down into its subsystems--purchase order processing, receiving, accounts payable (vendor invoicing and cash disbursement). Payroll may be considered a separate process or included in the purchasing process. The inventory process varies according to the type of organization. In manufacturing and construction organizations, the inventory process encompasses events related to the transformation of raw materials into finished goods, the accumulation of product costs, and the management of inventories. In this environment, the inventory process is often called the production process. In a merchandising organization, the inventory process encompasses events related to the accumulation of product costs and the management of merchandise inventories. In a service organization, the inventory process encompasses events related to the accumulation of the cost of services and the management of parts and supplies inventory. The inventory process is broken down into its subsystems depending on the nature of the organization. For example, in a manufacturing organization the subsystems would be production control, inventory management, and cost accounting. The financial process includes (1) data captured in and transferred from other processes, (2) transactions originally recorded in the financial process, and (3) end-of-period adjustments required in the financial process. 8.

Identify three subsystems of the business processes you described in the previous question. Answer: Please refer to Exhibit 4.26 in the textbook for a block diagram of the subsystems in the business processes.

What are the major activities of an accounting information system? Answer: Input (capture) data, process data, store data, and output (communicate) data.

10.

What are the support activities of an accounting information system? Answer: Manage people, manage technology, and manage internal control.

11.

What is one of the most common errors made when inputting data? Answer: A transposition error in which two digits in a number are inadvertently interchanged.

12.

List three of the four processes covered by an accounting information system. Choose one of those processes, and list two examples of subsystems (modules) that might be included in that process.

Answer: Revenue (Sales Order, Shipping, Invoicing, A/R, Cash Receipts, Sales analysis), Purchasing (PO, Receiving, A/P, Payroll, Cash Disbursements), Inventory (Production, inventory management, analysis), Financial (G/L).

Chapter 5 Reporting Process, Coding Methods, and Audit Trails MULTIPLE CHOICE QUESTIONS

Which of the following is not a general principle that forms a foundation for effective reporting? A. Emphasis on both physical and financial measures B. Comparative reporting C. Necessity for lengthy reports D. Exception reports

C 2.

Which of the following factors does not influence the frequency of reporting? A. The type of data reported B. The significance of the data C. The nature of the activity D. The conciseness of the report

D 3.

Which of the following factors influences the frequency of reporting? A. The type of data reported B. The conciseness of the report C. The length of the report D. The writing ability of the accountant

A 4.

In which of the following situations should the frequency of reporting be weekly or even daily? A. The data are critical to the detection of an out-of-control situation. B. The data are related to the processing of natural resources such as pulp timber. C. The data are used for comparison reporting. D. The data are used for responsibility reporting.

A 5.

Of the following business organizations, which one requires daily financial statement preparation? A. An oil drilling rig manufacturer B. A bank C. A tool manufacturing company D. A video store

B 6.

What kind of reporting calls for arranging together actual data for a current period and actual data for a prior period? A. Function reporting B. Financial reporting C. Exception reporting D. Comparative reporting

D 7.

What is the arranging of records in order of severity of the problem with the most severe t the beginning of the reports known as? A. Exception reporting B. Function reporting C. Record sequencing D. Comparative reporting

C 8.

What is record sequencing? A. Arranging together actual data for a current period or actual data for a prior period B. Arranging records in order of severity of the problem C. Daily reporting of monetary data for financial managers D. Selecting records based on differences

B 9.

Effective exception reporting depends on an accounting information system having the ability to do which of the following? A. Sequence selected records based on the size of the differences between comparative account balances B. Select records based on differences between current actual account balances and prior period actual account balances C. Select records based on differences between actual account balances and the budgeted amount for those accounts D. All of the above are important for effective exception reporting.

D 10.

What is a solution to the problem that exception reporting may have the most severe problems appearing on the report's back pages? A. Record sequencing B. Comparative reporting C. Coding methods D. Responsibility reporting

A 11.

Which of the following is an example of exception reporting? A. Providing reports of production hours worked to personnel

B. C. D.

Providing reports of dollar denominated data to sales personnel Providing reports of data with significant deviance from expected results to managers Providing financial reports to the chief financial officer

C 12.

Which of the following is not a general principle that forms a foundation for effective reporting? A. Emphasis on monetary measures only B. Frequency of reporting C. Reporting by function D. Necessity for concise reports

A 13.

Which relationship among reporting frequency, type of data reported, and functional responsibilities is a common pattern? A. Daily reporting of monetary data for financial managers B. Monthly reporting of physical data for production managers C. Daily reporting of monetary data for production managers D. Daily reporting of physical data for production managers

D 14.

Which of the coding methods represents a logical association between the characters forming the code and the item being identified? A. Block coding B. Sequence code C. Group code D. Mnemonic code

D 15.

Postal zip codes are examples of which type of coding system? A. Sequence code B Mnemonic code C. Group code D. Block code

C 16

What does entity coding identify? A. Master file records B. Transaction event C. Receipt of sales order D. Acceptance of sales order

A 17

What is a set of processing references that enables the tracing of an event from its source to its destination or from its destination back to its sources known as? A. Sequencing records

B. C. D.

Hierarchical report Audit trail Coding methods

C 18.

Which of the following would be suitable to use as a reference identifier in an audit trail? A. The vendor’s invoice date B. The vendor’s invoice number C. The document number of a check issued D. The date of a check issued

C 19.

Which of the following would not be suitable as a reference identifier in an audit trail? A. Customer invoice B. Document number of checks issued C. Purchase order number D. Internally generated numbers that represent completed transaction

C 20.

Numbers that are used as unique reference identifiers should have which of the following characteristics? A. Represent the initiation of a transaction B. Derived from externally generated documents C. Represent the completion of a transaction D. Derived from internally generated documents E. Both C and D

E 21.

Reference identifiers are necessary to provide adequate audit trails for which of the following reasons? A. A reference identifier is unique to each event, account, and document. B. The identifier allows an auditor to trace a data item's location to its preceding location. C. The reference identifier sets up the processing references for an audit trail. D. All of the above are reasons why reference identifiers are necessary.

D 22.

What is one problem with exception reporting? A. It allows management to focus on data with significant deviations from expected results. B. It requires selection based on differences. C. It may have the most severe problems appearing on the report’s back pages. D. It directs management to unusual results.

23.

What type of reporting includes data that measure activities over which a particular manager has some authority? A. Comparative reporting B. Exception reporting C. Functional reporting D. Responsibility reporting

D 24.

Providing reports of production hours worked to production personnel, dollar denominated data to sales personnel, and financial reports to the chief financial officer are examples of what kind of reporting? A. Reporting by exception B. Reporting by function C. Reporting by responsibility D. Reporting by comparison

B 25.

Which type of data is more useful in accounting reports that cover a short period of time? A. Financial B. Physical C. Abstract D. Temporal

B 26.

Which of the following is not used for event coding in accounting information systems? A. A sale B. Receipt of a sales order C. A vendor D Acceptance of a sales order

C 27.

Which of the following is a general principle of effective reporting? A. Necessity for lengthy reports B. Comparative reporting C. Bidirectional reporting D. Multidimensional reporting

B 28.

Production managers usually prefer the use of which measure of performance in reports that cover a short period of time? A. Financial measures B. Exception measures C. Physical measures D. Comparative measure

29.

The most common reporting of physical units is for which of the following? A. Unassigned hours in a CPA firm B. Hours billed C. Inventory D. Employee turnover rate

C 30.

What is a feature or benefit of comparative reporting? A. It arranges records in order of severity of the problem with the most severe at the beginning of the report. B. It arranges together actual data for a current period with either budget data for the current period or actual data for a prior period. C. It allows management to focus on data with significant deviations from expected results. D. It provides reports of production hours worked to production personnel.

B 31.

Which of the following languages uses standardized tags for business and financial data so they can be easily searched with web browsers? A. Hypertext Markup Language (HTML) B. Structured Query Language (SQL) C. Query by Example (QBE) D. Extensible Business Reporting Language (XBRL)

32.

What language uses a standardized tag such as <us-gaap-ci:AssetsHeldSale> to enable the retrieval of information about assets held for sale from multiple balance sheets? A. Hypertext Markup Language (HTML) B. Extensible Business Reporting Language (XBRL) C. Structured Query Language (SQL) D. Data Definition Language (DDL)

33.

What is the primary benefit of creating XBRL financial reports and electronically disseminating them? A. The results of a company’s operations can be graphically displayed. B. Information can be published one time and then extracted electronically for other purposes thereby eliminating the need to identify and reenter the data. C. Information stored in tables can be easily accessed through a query language. D. Data can be easily shared by authorized users.

B 34.

Which of the following formats would most likely eliminate reentry of data and significantly reduce reporting costs for a business?

A. B. C. D.

Electronic spreadsheet Electronic word processor HTML XBRL

D 35.

Which of the following tools would allow an auditor to most easily and efficiently compare a client company’s financial results with those of its competitors? A. HTML tagging B. XBRL tagging C. Database management system D. Electronic spreadsheet

B 36.

Which of the following defines the specific tags for individual items of data when converting a human-readable financial report to HTML? A. Taxonomy B. Namespace C. Element D. Instance document

A 37. What is the format the Securities and Exchange Commission (SEC) has mandated for filing financial information? A. Comma-delimited files . XML files C. HTML files D. XBRL files D 38.

Which of the following computer languages is used specifically for Web applications? A. Structured query language (SQL) B. Extensible markup language (XML) C. Web services description language (WSL) D. Enterprise application language (EAL)

B 39.

Which of the following languages is a financial reporting language developed in part by the accounting profession? A. Extensible markup language (XML) B. Extensible business reporting language (XBRL) C. Structured query language (SQL) D. Hypertext markup language (HTML)

40.

Which of the following statements is correct regarding extensible business reporting language (XBRL)? A. XBRL is used to identify the content of financial data. B. XBRL is used to format the presentation of financial data on web pages. C. XBRL uses hypertext markup language (HTML) tags. D. XBRL reports words and figures as standalone blocks of data.

A 41. Which of the following statements is correct regarding extensible business reporting language (XBRL)? A. B. C. D.

XBRL avoids errors by eliminating the need to reenter data. XBRL is equivalent to hypertext markup language (HTML). XBRL does NOT require the use of tags. XBRL was developed by a single company.

A 42. What is the advantage of extensible business reporting language (XBRL) over extensible markup language (XML)? A. XBRL employs standardized tags. B. XBRL is objective. C. XBRL is independent. D. XBRL allows the user to define the tags. A 43.

Extensible business reporting language (XBRL) has which of the following characteristics? A. XBRL allows for reliable and automatic exchange of financial information across all software formats. B. XBRL essentially is hypertext markup language (HTML) for financial data and t therefore is basically the same as HTML. C. XBRL does NOT require the use of tags. D. XBRL was developed by a single company, whereas HTML was developed by a consortium of many companies, government agencies, and organizations.

A 44.

Which of the following computer languages would best support the activity of identifying the balances of the cash and cash equivalent accounts of several companies and extracting them to an electronic spreadsheet for analysis? A. Extensible markup language (XML) B. Extensible business reporting language (XBRL) C. Electronic data gathering and retrieval (EDGAR) D. Hypertext markup language (HTML)

B 45.

Which of the following is the appropriate format for an element in XBRL?

A. B. C. D.

<Inventories>40000</Inventories> <Inventories>40000<Inventories> Inventories:40000:/Inventories <Inventories:40000:/Inventories>

A 46.

What are dictionaries of element names that represent financial report concepts? A. Namespaces B. Taxonomies C. Elements D. Instance documents

B 47.

What is a document that has been tagged according to the rules of XBRL? A. Extensible document B. Interchange document C. Instance document D. X.12 document

C 48.

Which of the following identifies the organization that maintains the definitions of elements used in XBRL? A. Namespace B. Taxonomy C. Element D. Instance document

A 49. Which of the following is/are TRUE with regard to XBRL? XBRL has tags which provide financial information in a context. XBRL adds the ability to search across platforms. XBRL facilitates the handling of financial data and reduces the potential for errors. All of these are true statements about XBRL. D

TRUE/FALSE QUESTIONS 1.

Effective exception reporting requires the ability to select records based on the similarities between an account’s current balance and its prior year’s balance. F

Most accounting software packages provide the capability for exception reporting. F

Numbers that should be used for unique identifiers for coding an audit trail are prenumbered documents that represent the initiation of a transaction and numbers of externally generated documents. F

Numbers that should be used for unique identifiers for coding an audit trail are prenumbered documents that represent the completion of a transaction and numbers of internally generated documents. T

A purchase order number would not be suitable as a reference identifier in an audit trail. T

Generally, the more frequently accounting data are reported, the better. F

Generally, the less frequently accounting data are reported, the better. T

Production managers usually prefer the use of financial measure of performance over physical measures of performance in reports that cover a short period of time. F

Record sequencing is the process of placing data in a specified order. T

10.

Receipt of a sales order could be used for event coding in accounting information systems. T

11.

Concise reports contain only physical measures. F

12.

Production managers prefer the use of physical measures of performance rather than monetary measures in reports covering short reporting periods. T

13.

The more frequently data are reported, the better. F

14.

Responsibility reporting is the process of reporting data to a manager that measure activities over which the manager has some authority and for which the manager is held responsible. T

15.

The meaning of comparative reporting is that only data reflecting a significant deviation from expected, budgeted, or normal should be reported to managers. F

16.

Exception reporting is the arrangement together of actual data for a current period with either budget data for the current period or actual data for a prior period, thereby facilitating comparison of the data. F

17.

Reporting by function presents data according to the functional duties of managers. T

18.

A sequence code uniquely identifies an object and is assigned in numerical sequence. T

19.

A block code leads an accountant or auditor from a data item’s specific location in the accounting information system to its preceding or successor location. F

20.

A reference identifier assigns meaning to various positions in a code. F

SHORT ANSWER/ESSAY QUESTIONS 1.

What are the disadvantages of using mnemonic codes? Include at least two examples. Answer: Mnemonic codes lack flexibility. For example, state abbreviations are easily confused, such as mistaking AL (Alabama) for Alaska (AK). In Microsoft Word, “o” must be used for the command Format because “F” is used for File.

Explain why reference identifiers are necessary to provide adequate audit trails. Answer: A reference identifier is unique to each event, account, and document. The identifier allows an auditor to trace a data item’s location in the accounting information system to its preceding or succeeding location. The reference identifier is the coding that sets up the processing references for an audit trail to enable the tracing of an event from its source to its destination or vice versa.

Explain what is meant by bidirectional and multidimensional aspects of audit trails. Answer:

Audit trails must go from beginning to end as well as from the end back to the beginning with turns in between. An audit trail may begin with originating documents traced through journals, beginning and ending balances, ledgers, and output reports and documents. Conversely, audit trails may begin with output documents which should be traceable through ledgers, beginning and ending balances, journals, and originating documents. 4.

Describe in what situations the frequency of reporting should be weekly or even daily. Answer: Reporting should be daily or weekly when data are important to the detection of an outof-control situation or to make a specific decision.

Explain the meaning of exception reporting. Answer: Exception reporting means that only data reflecting a significant deviance from expected, budgeted, or normal should be reported to managers. Management should be furnished reports covering only those aspects of operations that are likely to require management attention. Management should not waste time scanning large sets of data when only a few data sets suggest problems that may require some remedial action. The periodic aging of accounts receivable report is an example.

Below is an exception report for records selected because of the size of their variance. If the system would allow you to order the list of customers from the most severe variance to the lease severe variance, what would be the order of the records? SOUTHWEST SALES REPS, INC. SALES BY CUSTOMER FOURTH QUARTER 2012 Customers

This Year

Last Year

Variance

Budget

Variance

Barrett Company

$30,000

$26,000

$4,000+

$32,000

$2,000-

Cardenas Bros.

94,000

95,000

1,000-

90,000

4,000+

Estrada Coaches

72,000

69,000

3,000+

80,000

8,000-

Reed Enterprises

52,000

44,000

8,000+

54,000

2,000-

Tran Industries

39,000

35,000

4,000+

31,000

8,000+

Wise Imports

80,000

85,000

5,000-

90,000

10,000-

Page 1 of 1

Answer: Wise, Tran, Estrada, Reed, Barrett, Cardenas

What are the reporting principles discussed in this chapter? Answer: Some of the reporting principles discussed in this chapter are: a. Necessity for concise reports b. Emphasis on both physical and monetary measures c. Frequency of reporting d. Responsibility reporting e. Comparative reporting f. Exception reporting g. Reporting by function

What is an audit trail? Answer: An audit trail is a set of processing references that enables the tracing of an event from its source to its destination or, alternatively, from its destination back to its source.

What numbers should NOT be used for unique reference identifiers? Answer: Numbers that should NOT be used for unique identifiers include (1) numbers of internally generated, pre-numbered documents that represent the initiation (as opposed to the completion) of a transaction and (2) numbers of any externally generated documents..

10.

Describe a situation where a report should be generated weekly or even daily and give two examples of reports a manager would probably want to receive daily. Answer: Out of control situation, physical data used in decision-making (e.g. units of production reports, deviations such as NSF checks returned, variations that require immediate attention). Exception reports, activity reports would likely be requested more frequency.

11.

Define what an audit trail is and what it does. Give two examples of numbers that should NOT be used as identifiers. Answer: Audit trail: ability to follow an event or transaction from origination to destination. Numbers that should NOT be identifiers: Customer PO, vendor invoice number, number representing initiation of transaction, rather than completion.

Chapter 6 Internal Control and Risk Assessment MULTIPLE CHOICE QUESTIONS 1.

Which of the following best defines internal control? A. Internal rules and/or regulations with which organizations are expected to comply regarding accounting standards and preparation of financial data. B. A process by which management gains reasonable assurance that its objectives will be achieved. C. Procedures for input of and access to information systems used for internal analysis of an organization's short-term and long-term objectives. D. A system of checks and balances that allows an organization to maintain control over its resources (data, systems, and all other assets).

B 2.

Why is internal control so important? A. Internal control is encouraged by several regulatory organizations, and it is required by law for publicly traded companies in an enactment in 1978 by the Cohen Commission. B. Internal control is essential in lowering costs due to errors and irregularities in an organization by using risk assessment and risk management techniques. C. Internal control enables management to maintain control over all its activities and it provides a measure of protection against erroneous or fraudulent financial reporting. D. The U.S. Congress has enacted legislation requiring management of publicly-traded companies to report on the effectiveness of their internal control.

C 3.

Which of the following best describes the Foreign Corrupt Practices Act of 1977 (amended 1988)? A. It recommended that every publicly traded company include a report in its annual report assessing the effectiveness of the company’s internal control structure and procedures. B. This act made it a felony to intercept electronic communications and a misdemeanor to break into electronic mail storage facilities.

In accordance with section 1029, "Fraud and Related Activity in Connection with Access Devices," this act made it a crime to produce or use a counterfeit access device. It established provisions for record keeping and internal control for companies registered with the Securities and Exchange Commission.

D 4.

Which of the following best describes the Sarbanes-Oxley Act of 2002? A. It recommended that every publicly traded company include a report in its annual report assessing the effectiveness of the company’s internal control structure and procedures. B. This act made it a felony to intercept electronic communications and a misdemeanor to break into electronic mail storage facilities. C. In accordance with section 1029, "Fraud and Related Activity in Connection with Access Devices," this act made it a crime to produce or use a counterfeit access device. D. It established provisions for record keeping and internal control for companies registered with the Securities and Exchange Commission.

A 5.

Which of the following first required that an organization have internal control? A. Securities and Exchange Act B. AICPA Professional Standards C. Foreign Corrupt Practices Act D. Treadway Commission

C 6.

Which of the following is not a reason that an external auditor would have an interest in an organization's internal control? A. Internal control provides a measure of protection against erroneous or fraudulent financial reporting. B. The external auditor is required to evaluate internal control in planning an external audit, according to generally accepted auditing standards. C. Strong internal control can eliminate the test of controls required to be performed by the external auditor. D. The Sarbanes-Oxley Act of 2002 requires the external auditor attest to and report on management’s assessment of internal control.

C 7.

Which of the following best describes the requirement for a company to report on the effectiveness of its internal control? A. A company is required to report on the effectiveness of its internal control only if the company is a bank or a thrift with assets of $150 million or more.

B. C. D.

Each publicly traded company is required to report on the effectiveness of its internal control. Each publicly traded and privately held company is required to report the effectiveness of its internal control. A company is not required to report on its internal control, but almost every publicly traded company voluntarily reports on the effectiveness of its internal control.

B 8.

Which of the following documents has become the widely accepted authority on internal control and is the basis for the others? A. The AICPA’s Statement of Auditing Standard No. 78 B. COSO’s Internal Control - Integrated Framework C. Information Systems Audit and Control Foundation’s COBIT D. Institute of Internal Auditors Research Foundation’s Systems Auditability and Control Report

B 9.

Which of the following is not one of the three categories of entity objectives? A. Compliance with applicable laws and regulations B. Effectiveness and efficiency of operations C. Human resource policies and practices D. Quality of information E. Organizational strategy

C 10.

Which of the following are entity objective categories? A. Effectiveness and efficiency of operations, safeguarding of assets, strategy-setting, and quality of information B. Organizational strategies, quality of information, effectiveness and efficiency of operations, and compliance with applicable laws and regulations C. Compliance with applicable laws and regulations, risk assessment objectives, risk response, and quality of information D. Effectiveness and efficiency of operations, quality of information, safeguarding of assets, and organizational control

B 11.

Which of the following are some of the characteristics of high quality information? A. Accurate, relative, current, and confidential (when necessary) B. Accurate, complete, operational, and accessible C. Accurate, confidential (when necessary), complete, and relevant D. Accurate, explicit, internal, and confidential (when necessary)

12.

Why do organizational objectives stress the importance of quality information? A. Quality information is required for accounting systems to operate effectively. B. Investors, creditors, managers, and other users rely on this information. C. The organization's reputation depends on the output of quality information. D. External auditors insist that the information provided them be of high quality.

B 13.

The five interrelated components of internal control (according to the COSO framework) include the following: A. Control environment, risk assessment, control activities, organizational structure, and monitoring B. Control environment, risk assessment, integrity and ethical values, information and communication, and monitoring. C. Control environment, risk assessment, control activities, information and communication, and monitoring D. Control environment, risk assessment, control activities, information and communication, and human resource policies and practices

C 14.

Which of the internal control components provides the foundation for all the other components of internal control? A. Risk assessment B. Information and communication C. Monitoring D. Internal environment

D 15.

Which of the following factors are included in the internal environment? A. Human resource policies and practices, integrity and ethical values, commitment to competence, and board of directors or audit committee B. Human resource policies and practices, integrity and ethical values, risk assessment, and organizational structure C. Board of directors, management’s philosophy and operating style, commitment to competence, and quality of information D. Assignment of authority and responsibility, organizational structure, effective and efficient operations, and management’s philosophy and operating style

16.

Which factor has the most influence on the effectiveness of an organization's internal control? A. Competent, dedicated, trustworthy employees B. Board of directors C. Written policies and procedures D. Employee training

A 17.

The effectiveness of the board of directors in contributing to internal control is best enhanced by which of the following? A. Its independence B. Its superiority to management C. Its stockholder representation D. Its legal power to govern the corporation

A 18.

An audit committee is a subcommittee under the direction of whom? A. The controller B. The treasurer C. The CEO D. The board of directors

D 19.

Which of the following is not a responsibility of an audit committee? A. Recommending an external auditor B. Attesting to the fairness of the financial statements C. Reviewing significant financial information D. Seeing that an effective internal control is maintained

B 20.

Which of the following is not an essential component of the audit function of an organization? A. Senior management B. Audit committee C Internal auditors D. External auditors

A 21.

Which of the following statements regarding the audit committee is true? A. It is a standing subcommittee of the board of directors. B. Its main objectives are to protect against management wrongdoing and to increase public confidence in the independent auditor's opinion. C. The committee should be composed of independent board members. D. A, B, and C E. B and C only

22.

The audit committee is responsible for all of the following except: A. Appointing and overseeing the external auditors B. Directing investigations of possible fraud C. Establishing internal control D. Reviewing financial information

C 23.

From the following factors, which one is least likely to impact the internal environment? A. Management philosophy and operating style B. Human resource policies and practices C. Job descriptions D. Integrity and ethical values

C 24.

Which of the following characteristics usually does not describe a management philosophy or operating style that affects the internal environment? A. Management's behavior toward other managers or personnel B. Management's approach to external political factors C. Management's attitude toward accounting functions D. Management's approach to business risk

B 25.

Which of the following generally expresses the organizational structure? A. Organizational chart B. Managerial decision-making framework C. Responsibility accounting chart D. Functional model

A 26.

Which of the following is not defined by the formal organizational structure? A. Areas of responsibility B. Limits of managerial authority C. Lines of reporting D Organizational goals and objectives

D 27.

Which of the following best describes the importance of risk assessment? A. Risk assessment allows management to determine the extent of the internal controls required to eliminate inherent risk and to minimize control risk. B. Risk assessment is necessary to set priorities for risks in order of frequency so the most frequently occurring risks can be eliminated in a cost effective manner.

As go the risks, so go the insurance premiums and costs. Risk assessment is management's primary tool to lower insurance premiums and casualty losses. Risk assessment helps management set priorities and determine the organization’s risk response.

D 28.

The main goal in risk assessment is which of the following? A. To achieve the lowest possible losses associated with risks identified in the assessment process B. To reduce risks to the minimum level possible consistent with factors of assessment involved C. To provide "reasonable assurance" and an acceptable level of risk while achieving the lowest total cost (cost of controls added to loss from risk) D. To establish the most comprehensive control activities possible at a reasonable cost to the organization

C 29.

Which of the following is not a consequence of uncontrolled risk? A. Data are produced that nobody uses or believe. B. Management spends time dealing with unavoidable problems. C. Public image is tarnished. D. Critical information is unavailable when needed.

B 30.

Which of the following includes risks that are all related to accounting information system activities? A. Computer system failure, information security breaches, errors and irregularities in transaction authorization B. Computer fraud, errors and irregularities in transaction authorization, and internal audit fraud C. Fraudulent financial reporting, external audit fraud, and concealment of illegal acts D. Inadequate training, system failure, risk disclosure, and irregularities in transaction authorization

A 31.

Which of the following is not a consequence of uncontrolled risks? A. Credit ratings are eroded. B. Favorable audit opinions are received. C. Important decisions are based on faulty data. D. Resources are lost, wasted, or abused.

32.

What are the component factors in the assessment of risk? A. Estimated probable loss and the estimated frequency of occurrence B. Effectiveness of security measures and the value of the item involved C. Estimated frequency of occurrence and the nature of the asset D. Seriousness of the risk and the security measures employed

A 33.

Which of the following is true concerning the cost/benefit model for risk analysis? A. As costs of controls increase, costs associated with risks decrease. B. As costs of controls increase, costs associated with risks increase. C. As total costs increase, costs associated with risks increase. D. As total costs decrease, costs of controls decrease.

A 34.

What is the optimal point of reasonable assurance for internal control? A. When all possible controls are implemented B. When the cost of controls equals the savings on losses from risks C. When standard costing is used in inventory accounts D. When no discrepancies exist between the inventory physical count and the inventory account balance

B 35.

IT governance A. Should be part of enterprise governance. B. Has historically been ignored in corporate governance matters. C. Refers to issues surrounding technology solutions. D. All of the above describe IT governance.

D 36.

Which of the following best describes the Sarbanes-Oxley Act of 2002? A. This act requires publicly-traded companies to include a report in its annual report assessing the effectiveness of the company's internal control structures/procedures. B. This act made it a felony to intercept electronic communications and a misdemeanor to break into electronic mail storage facilities. C. This act makes it a crime to produce or use a counterfeit access device. D. This act established provisions for record-keeping and internal control for companies registered with the Securities and Exchange Commission.

A 37.

Which of the following is TRUE regarding the Enterprise Risk Management (ERM) framework?

A. B. C. D.

The ERM framework replaces the COSO internal control framework. Proper identification of risk can help management properly allocate resources. The COSO requested the assistance of Ernst and Young for development of the ERM. All of the above are true statements regarding ERM.

B 38.

The audit committee is responsible for all the following EXCEPT: A. Appointing and overseeing the external auditors. B. Directing investigations of possible fraud. C. Establishing internal control. D. Reviewing financial information.

C 39.

What is the definition of internal control? A. A process designed to guarantee that objectives related to organizational strategy, quality of reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations will be achieved. B. A process designed to provide reasonable assurance that objectives related to organizational strategy, quality of reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations will be achieved. C. A process designed to provide reasonable assurance that objectives related to ethical values and integrity, quality of reporting, effectiveness and efficiency of operations, and compliance with applicable laws and regulations will be achieved. D. A process designed to guarantee that objectives related to ethical values and integrity, quality of reporting, SOX compliance, and efficiency of operations will be achieved.

B 40.

Which of the following statements is FALSE with regard to the Enterprise Risk Management (ERM) framework? A. The ERM is primarily focused on the risk aversion of management. B. The ERM discusses the relationship between risk and strategy-setting. C. The ERM is an ongoing process that permeates the entire company. D. The ERM affects strategy-setting through risk identification.

A 41.

Which of the following is true regarding Type II SAS 70 reports? A. They include the company's opinion of the internal control system of a third-party service provider.

B. C. D.

They include the results of testing of the third-party service provider's internal control system. The report must cover the third-party service provider's audit period. All of the above are true statements regarding the Type II SAS 70 report.

D 42.

Which of the following are required by the Sarbanes-Oxley Act of 2002? A. Rotation of a company's external auditing firms every five years. B. Limited loans under special circumstances to executive management. C. Attestation as to the contents of the financial statements by the CEO and CFO. D. All of the above.

C 43.

Which of the following is NOT a key area for focus in IT governance? A. Responsible handling of transactions, events and decisions, to include management of mobile IT components such as laptops and PDAs. B. Choice of public accounting firm to perform the annual audits and provide tax consulting services. C. Management of contracts and relationships with service providers (i.e., outsourcing partners). D. Timely and transparent disclosure of financial information and performance measures.

B 44.

Who is ultimately responsible for the implementation of cost-effective internal controls? A. The director of internal auditing. B. The chief executive officer. C. The information systems audit manager. D. All of these individuals are ultimately responsible for the implementation of cost-effective internal controls.

B 45.

The primary objective of an external auditor’s obtaining an understanding of a client’s internal control is to provide the auditor with which of the following? A. Evidential matter to use in reducing detection risk. B. Knowledge necessary to plan the audit and related testing. C. A basis from which to modify tests of controls. D. Information necessary to prepare flowcharts.

46.

The Foreign Corrupt Practices Act requires which of the following? A. The auditor engaged to examine the financial statements must report to the SEC all illegal payments. B. A publicly-held company must establish an independent audit committee to monitor the effectiveness of a company’s internal controls. C. U.S. firms doing business abroad must report sizable payments to non-U.S. citizens to the U.S. Justice Department. D. A company registered with the SEC must devise and maintain an adequate internal control. E. All of these are required by the Foreign Corrupt Practices Act.

E 47.

Which of the following statements about internal control is CORRECT? A. Exceptional strong internal control is enough for the auditor to eliminate substantive tests on a significant account balance. B. Properly maintained internal control reasonably ensures that collusion among employees cannot occur. C. The cost-benefit relationship is a primary criterion that should be considered in designing internal control. D. The establishment and maintenance of internal control is an important responsibility of the internal auditor. E. All of these are correct statements about internal control.

48.

Which of the following concepts are fundamental to the Enterprise Risk Management (ERM) framework? A. The ERM framework is a process applied across the enterprise B. The ERM framework is effected by people to allow the organization to achieve its objectives. C. The ERM framework is applied in strategy setting to identify events and manage risk within the organization’s risk appetite. D. All of the above are concepts fundamental to the ERM framework.

D 49.

Which of the following describe categories of entity objectives that must exist before management can identify potential events? A. High-level strategic goals aligned with and supporting the organization’s vision or mission. B. Effectiveness and efficiency of internal reporting. C. Relevance of non-financial information and reporting. D. Compliance with all laws and regulations. E. All of these are categories of entity objectives.

50.

Event identification includes: A. Only negative events that impact risk. B. Only positive events that indicate opportunities. C. Both positive and negative events. D. Neither positive nor negative events.

C Use the following graph of the cost/benefit model for risk analysis to answer the next five questions.

5 60.

What does (1) represent? A. Total cost B. Loss area C. Cost of controls D. Level of assurance E. Optimal point of reasonable assurance

A 61.

What does (2) represent? A. Total cost B. Loss area C. Cost of controls D. Level of assurance E. Optimal point of reasonable assurance

62.

What does (3) represent? A. Total cost B. Loss area C. Cost of controls D. Level of assurance E. Optimal point of reasonable assurance

63.

What does (4) represent? A. Total cost B. Loss area C. Cost of controls D. Level of assurance E. Optimal point of reasonable assurance

E 64.

What does (5) represent? A. Total cost B. Loss area C. Cost of controls D. Level of assurance E. Optimal point of reasonable assurance

D TRUE/FALSE QUESTIONS 1.

The Sarbanes-Oxley Act of 2002 recommended that every publicly traded company include a report in its annual report assessing the effectiveness of the company’s internal control structure and procedures. T

One factor of the internal environment is management’s philosophy and operating style. T

One factor of the internal environment is integrity and ethical values. T

One factor of the internal environment is the audit committee. T

One factor of the internal environment is the board of directors. T

One factor of the internal environment is organizational structure. T

Two factors of the internal environment are the board of directors and control activities. F

Public interest in internal control is not as high now as it was twenty years ago. F

Controls must be justified by the benefits to be derived. T

10.

Three characteristics of high-quality information are that it is accurate, complete, and required by more than 70% of the users of the accounting system. F

11.

The Sarbanes-Oxley Act of 2002 requires each member of the audit committee of a publicly traded company to be an independent member of the board of directors. T

12.

The Sarbanes-Oxley Act of 2002 requires that a publicly traded company’s independent auditor report directly to the audit committee. T

13.

Internal control is a state, or condition, of an organization’s internal control at a point in time. F

14.

Parties who are interested in an organization’s internal control include management, stakeholders, legislators, auditors, and professional organizations. T

15.

The Foreign Corrupt Practices Act was passed to protect investors by improving the accuracy and reliability of corporate disclosures made pursuant to the securities laws. F

16.

Management is not required to report on its internal control. F

17.

The four objectives in the internal control framework are related to organizational strategy, effectiveness of reporting (internal and external), effectiveness and efficiency of operations, and compliance with applicable laws and regulations. T

18.

The internal environment is the organizational infrastructure that supports internal control. T

19.

One of the basic factors of the internal environment is an historical perspective of the organization. F

20.

One of the basic factors of the internal environment is the board of directors or audit committee. T

21.

The audit committee is composed of top managers of a company. F

22.

The organizational structure defines limits of managerial authority, areas of responsibility, and lines of reporting. T

23.

The Enterprise Risk Management (ERM) framework discusses the relationship between risk and strategy-setting. T

24.

The Sarbanes-Oxley Act (SOX) allows the director of internal audit to attest to the internal control system of the company. F

25.

IT governance refers to the board of directors’ policies and procedures related to the choice of IT audit firms. F

26.

Type II SAS 70 reviews are required for all third party service providers. T

27.

The Sarbanes-Oxley Act (SOX) requires that the external audit firm for a company be rotated every five years. F

SHORT ANSWER QUESTIONS 1.

The president of a small company boasted to associates at a business club, "Fortunately, we don't need internal control. You see, we're a family business, and we're not going to steal from one another." Discuss the wisdom of the president’s statement. Answer: The president of the small company should be informed that internal control deals with risks other than just theft. Internal control will ensure quality of information, effectiveness and efficiency of operations, and compliance with applicable laws and regulations. In addition, many people have paid a high price to learn that intrafamily theft can indeed occur.

An organization has just been audited by its external auditors. One recommendation made by the auditors was to establish human resource policies and practices to strengthen the organization’s control environment. Discuss the kinds of human resource policies and practices the organization should consider.

 



 

Answer: Key human resource policies and practices that should be included in any discussion are: Information security breaches Hiring. The organization should hire the best people it can and should pay proper attention to the competency and integrity of prospective employees. Newly hired employees should be assigned to responsibilities they can handle and for which they are best suited. Orientation and Training. Management should recognize the importance of effectively orienting and training employees and should use a variety of formal and informal training techniques. Evaluating and Counseling. Periodic performance review and evaluation procedures should focus on helping employees improve performance or, where necessary, transferring the employees to more suitable work or even terminating them. Promoting. Promotion policies should reward employees for outstanding performance. The prospect of promotion helps create an environment in which employees see the possibility of long-term careers with an organization. Compensating. Employees must be properly compensated for their performance in carrying out their assigned responsibilities. Remedial Actions. An organization should establish written policies and procedures stating the disciplinary actions that will follow violations of expected behavior. Prompt, impersonal disciplinary action sends a message that violations will not be tolerated.



In addition, employees should have the resources available to them that are necessary to fulfill their job responsibilities. These resources include a supportive working environment, appropriate technology, information, and effective supervisors to whom they can turn for help when needed. What are the documents that have contributed to our understanding of internal control and the methods to achieve effective internal control? Answer: The documents are: a. The Committee of Sponsoring Organizations of the Treadway Commission’s Internal Control-Integrated Framework (COSO) b. The Institute of Internal Auditors Research Foundation’s Systems Auditability and Control Report (SAC) c. The Information Systems Audit and Control Foundation’s Control Objectives for Information and Related Technology (COBIT) d. The American Institute of Certified Public Accountants’ Statement of Auditing Standards No. 94 - The Effect of Information Technology on the Auditor’s Consideration of Internal Control in a Financial Statement Audit: An Amendment to SAS No. 55. e. The Committee of Sponsoring Organizations Enterprise Risk Management—Integrated Framework.

What are the components of internal control? Answer: The components of internal control are: a. Internal environment b. Objective setting c. Event identification d. Risk assessment e. Risk response f. Control activities d. Information and communication e. Monitoring

What are four indications of management’s philosophy and operating style? Answer: Indicators of management’s philosophy and operating style are: a. Behavior toward other managers or personnel b. Approach to business risk c. Attitude toward accounting functions d. Attitude toward information processing

Define what a SAS 70 review is used for AND describe what the two different types of reports that can result from one of these reviews will contain. Answer: SAS 70 examinations enable service organizations to obtain a single report for all/most of its user organizations' audit responses. It is essential to the due diligence required for potential outsourced activities, and for the requirements of Sarbanes-Oxley. The type I report describes the controls at a specific point in time, with an audit opinion regarding whether the descriptions present fairly the relevant aspects and whether the controls were suitably designed for specified control objectives. The type II report also includes an opinion of whether the controls tested were operating with sufficient effectiveness to provide reasonable assurance that control objectives were achieved during specified period (usually 6-12 months).

Describe 4 requirements pertaining to Sarbanes-Oxley. Answer: Any four of these: Management attestation to internal controls, auditor attestation to internal controls, firms cannot provide non-audit services contemporaneously with audit, PCAOB formed with 5 "financially literate" members--3 non-CPAs, audit partner on job must be rotated every 5 years, audit committee membership requirements/duties (at least one financially iterate member), no personal loans to executives, criminal penalties for destroying/creating documents that impede investigation, disclosure of material adjustments/off-balance sheet transactions with unconsolidated entities.

Describe the risk response component of the Enterprise Risk Management (ERM) framework. Answer: There are four responses to identified risk: avoid, reduce/mitigate, share, or accept. Management determines the response to identified risks in an attempt to achieve a residual risk level aligned with the organization’s risk tolerance or appetite, and reviews the relation to the costs v. benefits of those risk responses. In addition to considering responses to risk on an individual or group basis, management also considers the aggregate effect of risk responses across the organization (portfolio approach).

Define Enterprise Risk Management. Answer: It is a process that is applied in a strategy setting that is effected by the board of directors, management and other personnel. It is applied across the entity, and includes an identification of potential events (both positive/opportunities and negative/risks) as well as the response to those events. The ERM allows management to manage risk within the organization’s risk appetite and provides reasonable assurance of the entity objectives related to strategy, information reporting, effectiveness/efficiency of operations, and compliance with applicable laws and regulations.

10.

Provide some examples of risks to accounting information systems.          

11.

List some examples of things that would change the risk profile of an organization.         

12.

Answer: Information security breaches Computer system failure and/or improper backup of the system Accounting system’s inability to meet the organization’s and users’ needs Excessive hardware and software acquisition costs Excessive operating and maintenance costs Inadequate training, development, and supervision of personnel Errors and inappropriate acts in transaction and master file maintenance authorizations Errors and inappropriate acts in data input, processing, and output Fraudulent financial reporting Concealment of illegal acts

Answer: Changes in the operating environment New personnel (especially changes in executive management) New or modified accounting systems/new technology Rapid growth Corporate reengineering Expansion into new markets or product lines Expanded foreign operations New accounting pronouncements Government legislation (e.g., Sarbanes-Oxley Act)

Define the following risk responses: avoid, reduce, share, accept. Answer:

Avoiding risk means stopping or quitting the activity so as to get rid of the risk. Reducing the risk means that management takes steps to reduce the likelihood and/or impact of the identified risk, through control activities or other means. Sharing the risk means reducing the likelihood or impact of the risk by transferring some of the risk, such as is done when insurance is purchased to protect an organization from losses due to fire. Accepting the risk means taking no action to reduce the likelihood and/or impact of the risk. In some cases, a risk cannot be avoided, but the organization decides to ignore the risk because it is either impossible to control for, it is too expensive to control, or the realization of the risk will have little impact on the achievement of management objectives.

Chapter 7

Control Activities MULTIPLE CHOICE QUESTIONS

Control activities can be designed to provide reasonable assurance that all except which of the following will happen? A. Transactions will be recorded to permit preparation of financial statements. B. All risks will be eliminated. C. Access to assets will be permitted only in accordance with management’s authorization. D. The recorded accountability for assets will be compared with the existing assets at periodic intervals.

B 2.

Which of the following control activities would most likely influence the behavior of managers? A. Monitoring compliance with internal controls B. Limiting direct access to assets by physical isolation and security devices C. Establishing budgets or standards and identifying variances from these budgets or standards D. Supporting employees with the resources necessary to discharge their responsibilities

C 3.

Of the following control activities, which is the most effective? A. Bonding of employees B. Segregation of duties C. Rotation of assignments D. Enforced vacations

B 4.

The segregation of duties between the custody of cash and the recording of cash receipts best illustrates which of the following control concepts? A. Oversight B. Isolation C. Redundancy D. Accountability

What is the single most effective control that avoids allowing one person to be in a position to perpetrate and then conceal errors or inappropriate activities? A. The segregation of authorization of transactions, custody of related assets, and modification or creation of related data and program files (or paperbased records). B. The requirement that each employee take a vacation each year. C. The establishment of an internal auditing department. D. The bonding of personnel in positions that necessitate handling cash and negotiable securities. [CIA adapted]

A 6.

Which of the following duties should be segregated for good internal control? A. Approval of credit from issuance of sales orders B. Shipment of goods and entry of shipping transaction data C. Receipt of cash and maintenance of the cash account D. All of the above are proper segregation of duties.

D 7.

The authority to grant credit for returns and allowances should be independent of which function? A. Shipping B. Sales order processing C. Billing (sometimes called customer invoicing) D. Cash receipts

C 8.

Which of the following would be the most effective user password? A. Smith B. 123456789 C. tuttle236cog D. ssssssssssss

C 9.

Which of the following controls is the most effective for preventing unauthorized access to data and program files? A. No access except during normal working hours B. Fingertip scanners C. Policy prohibiting unauthorized access D. Passwords

B 10.

For what purpose would the system administrator be likely to use a user rights table? A. To create an audit trail for detecting access violations B. To plan for access security

C. D.

To encrypt data for high-level protection To store user authentication codes

B 11.

To enable a user to access data and program files, what should the user be required to enter? A. A parity check B. A personal identification code C. A self-diagnosis test D. An echo check

B 12.

What is the purpose of user authentication? A. To verify that the user is entitled to enter transaction data B. To verify the identity of the user C. To verify that the user can access data files D. To verify that the transaction was authorized

B 13.

Data access control activities include which of the following? A. User authentication, encryption, firewall, automatic log off B. Encryption, batch controls, directory and file attributes C. User authentication, user rights, callback device, check digit D. Segregation of duties, user authentication, automatic rollback

A 14.

Which of the following controls most likely would assure that an organization can reconstruct its files? A. Hardware controls that are built into the computer by the computer manufacturer. B. Backup copies of data and program files that are stored away from originals. C. Personnel, who are independent of data input, perform parallel simulations. D. System flowcharts that provide accurate descriptions of input and output operations.

B 15.

Which of the following represents weak internal control? A. The design and implementation is performed in accordance with management's specific authorization. B. Any and all changes in application programs have the authorization and approval of management. C. Provisions exist to protect data files from unauthorized access, modification, or destruction.

Application developers test their own new or modified applications before the applications are implemented. [CMA adapted]

D 16.

General controls apply to the reliability and consistency of the overall information processing environment. To what do application controls apply? A. All information processing activities B. The flow of data in and among individual applications C. The assignment and supervision of personnel D. Accounting systems that use databases

B 17.

Which of the following transactions is least likely to require the entry of a specific authorization code? A. Weekly payroll totaling $10,000 B. Cash disbursement for $1,000 C. $2,000 write-down of obsolete inventory D. $500 credit sale to a new customer

A 18.

What is the most common computer-related problem confronting organizations? A. Hardware malfunction B. Input errors C. Disruption to the processing activities as a result of natural disasters D. Fraud [CIA adapted]

B 19.

What is the most likely source of errors in a computerized accounting system? A. Operator action B. Output C. Processing D. Input [CMA adapted]

D 20.

What kind of reasonable assurance do check digits, screen properties, and reasonableness tests provide? A. Processing has been performed as intended without omission or double counting of transactions. B. Only authorized persons have access to files. C. Data have been correctly entered. D. Coding of data internal to the computer did not change when the data were moved from one internal storage location to another. [CIA adapted]

C 21. An employee in the receiving department keyed in a receiving record and inadvertently omitted the purchase order number. What control will prevent this error? A. Anticipation of contents B. Sequence check C. Reasonableness test D. Smartcard [CMA adapted] A 22. Some of the more important control activities in computerized accounting information systems are validity checks, reasonableness checks, and checks for logical relationships. How are these activities classified? A. Control total validation routines B. Hash totals C. Output controls D. Input verification controls D 23. A clerk was entering a sales transaction in her cash register and accidentally entered a sales representative code for a terminated employee. This error could have been detected if the system included a A. Dual read check B. Valid code check C. Valid character check D. Reasonableness test B 24.

Which of the following would detect a data input error in the entry of a customer code? A. A logic check B. A combination check C. A valid code check D. A parity check

C 25.

Which of the following is an example of a data verification check? A. The system checks that a numerical amount in a field does not exceed some predetermined amount. B. As the system corrects errors and data are successfully resubmitted, the causes of the errors are printed out. C. The system returns an error message if the value entered in a field does not match one in a reference file of permissible values. D. After transaction data are entered, certain data are sent back to the workstation for comparison with data originally sent.

C 26.

Omen Company is a manufacturer of men’s shirts and distributes weekly sales reports to each sales manager. The quantity 2R5 appeared in the quantity sold column for one of the items on the weekly sales report for one of the sales managers. What is the most likely explanation for what occurred? A. The output quantity was stated in hexadecimal numbers. B. The computer malfunctioned during execution. C. The printer malfunctioned and the “R” should have been a decimal point. D. The system did not contain a verification control for input data. CMA adapted]

D 27.

What kind of input control is involved when a self-checking digit is appended to a customer account number? A. Data verification control B. Data capture control C. Classification and identification control D. Hash control

A 28.

While entering data into a cash receipts transaction file, an employee transposed two numbers in a numeric code. Which of the following controls would have prevented this type of error? A. Sequence check B. Record check C. Self-checking digit D. Field-length check

C 29.

The authority for establishing credit policy normally resides with which of the following? A. Treasurer and upper management B. Controller and upper management C. Sales department and upper management D. Credit department and upper management

D 30.

The authority for establishing selling prices normally resides with which of the following? A. Treasurer and upper management B. Controller and upper management C. Sales department and upper management D. Credit department and upper management

31.

The authority for ordering goods and services normally resides with which of the following? A. Treasurer B. Originating department manager C. Controller D. Employee who initiates the order

B 32.

The authority for receiving incoming shipments of goods and the responsibility for checking them normally resides with which of the following? A. Receiving department and quality control personnel B. Purchasing agent and quality control personnel C. Employee who initiated the order and quality control personnel D. Quality control personnel

A 33.

The authority for approving employee time data normally resides with which of the following? A. The payroll department B. The personnel department C. An employee’s immediate supervisor D. The controller

C 34.

The authority for disbursing cash for vendor payments or payroll disbursements normally resides with which of the following? A. The cash disbursements clerk B. The treasurer C. The credit manager D. The purchasing agent

B 35.

The need for prenumbered documents best relates to which of the following? A. Validation of transactions B. Segregation of duties C. Authorization of transactions D. Processing of all transactions

D 36.

What type of control is control total analysis? A. Input control B. Processing control C. Output control D. Access control

37.

In the processing of a batch of purchase transactions, which of the following would be used to compute a hash total? A. Vendor account numbers B. Dollar amounts of vendor invoices C. Number of vendor invoices in batch D. Number of inventory items purchased

A 38.

The accuracy and completeness of the general ledger update process can be tested y comparing the accounts receivable balance before the update, the total debits and credits to the accounts receivable account in the sales transaction file, and the accounts receivable balance after the update. What does this process use? A. Check digit analysis B. Control total analysis C. Validity analysis D. Hash total analysis

B 39.

What is a function of control totals? A. To ensure that all authorized transactions are processed once and only once B. To ensure that as a batch transmittal ticket progresses through the various processing stages it is not altered C. To verify the accuracy and completeness of programmed processing D. To ensure that an initial computation is correct and has not been altered during processing

C 40.

When data are to be maintained at a company’s site, which keys should be used for encryption? A. Private B. Public C. Digital D. Both A and B

A 41.

When using both private and public keys for cryptography, which of the following statements is correct? A. The digital certificate is used for encryption. B. The private key is used for decryption. C. The public key is used for decryption. D. The digital certificate is used for decryption.

B 42.

Which of the following statements regarding cryptography is not correct? A. Much emphasis is placed on the encryption side of cryptography.

B. C. D.

When using private and public keys, the decrypting key is never sent anywhere. A solution to the problem of securing data that leave their original location is the private key. Locating encryption keys on Web servers is not as difficult as once believed.

C 43.

Disaster recovery plans should include all of the following EXCEPT: A. An alternative means to continue processing after disaster. B. A strong audit trail for all transactions. C. Required employee training and periodic testing of the plan. D. All of the above should be included in the disaster recovery plan.

B 44.

Disaster recovery plans help reduce which of the following types of risk? A. Business risk. B. Information access risk. C. General controls risk. D. All of the above.

A 45.

The BEST explanation for the absence of complete information on computer crime would be: A. Abuse is handled as an internal matter. B. Hesitant disclosure of abuse due to embarrassment. C. Documentation of abuses hasn't caught up with actual abuses. D. Most computer crime is not caught and/or reported.

D 46.

Of the following control activities, which is the MOST effective for minimizing the possibility of fraudulent activity? A. Bonding of employees. B. Segregation of duties. C. Rotation of assignments. D. Enforced vacations.

B 47.

When auditing a client's database, the purpose of extracting high value and old invoices is to: A. Determine which vendors and employees have the same addresses. B. Determine potential invoices for review. C. Determine unusual relationships between high dollar amounts and past due invoices. D. Determine which invoices are open and are past due.

48.

What is the advantage of having a “hot site” as a back-up control? A. Power and space are available at the site to set up processing equipment on short notice (e.g., after a disaster).. B. The site is located in another branch of the company in a neighboring county. C. The system is configured in a manner similar to the normal day-to-day processing and is available for immediate use. D. All of the above are advantages of having a hot site.

C 49.

Which of the following are methods of auditing in computerized environments? A. Auditing around the computer. B. Auditing with the computer. C. Auditing through the computer. D. B and C only. E. All of the above.

E 50.

Which of the following defines the integrated test facility (ITF) method of auditing through the computer? A. Hypothetical data are used to test programmed controls and logic. B. The auditor uses another program to test actual data and compare them to the company’s results. C. Artificial data are used to test the accounting information system. D. A module is inserted into the application to monitor and collect data.

C 51.

What are controls that concern all computer activities? A. General controls. B. Application controls. C. Change controls. D. IT audit controls.

A 52.

What is (are) included in IT governance? A. The corporate charter, policies, and bylaws of the corporation. B. The issues surrounding IT management and security. C. The entire organization’s management of resources and risks. D. All of these are included in IT governance.

D 53.

Which of the following statements about computer forensics experts is (are) TRUE? A. Erasing all data on the computer by the fraud perpetrator makes it impossible for the forensics expert to extract evidence.

B. C. D.

Computer forensic experts collect evidence and information for use in fraud cases using legally accepted methods. Computer forensics experts are NOT allowed to train the company’s employees. All of these statements are true.

B 54.

Which of the following controls would be most effective in assuring the proper custody of investment securities? A. Direct access to securities in the safety deposit box is limited to only one corporate office. B. Personnel who post investment security transactions in the general ledger master file are prohibited from updating the investment securities master files C. The purchase and sale of investment securities are executed upon the specific authorization of the board of directors. D. The balances in the investment security master file are periodically compared with the physical investment securities by independent personnel.

D 55.

The total computed on which of the following would be a hash total for payroll applications? A .Hours worked. B. Total debits/credits. C. Net pay. D. Department numbers.

D 56.

Segregation of duties reduces the opportunities for a person to be in a position to do which of the following? A. Perpetrate and conceal errors and inappropriate acts. B. Record both cash receipts and cash disbursements. C. Journalize entries and prepare financial statements. D. Establish control activities and authorize transactions.

A 57.

ABC Company inputs sales transaction data in batches that are subject to edit checks. What would be a direct output of the edit checks? A. Printout of all user IDs and passwords. B. Report of all missing sales invoices. C List of all voided shipping documents. D. Report of all rejected sales transactions.

58.

Which of the following is (are) application controls A. Access security. B. Passwords. C. Input controls. D. All of the above. E. None of the above.

C 59.

Self-checking digits are used to detect which of the following errors? A. Processing data in the wrong sequence. B. Losing data between processing functions. C. Assigning a valid code to the wrong customer. D. Entering an invalid customer code.

D 60.

Which of the following procedures is most likely to prevent the improper disposition of equipment? A. A periodic analysis of the scrap sales and the repairs and maintenance accounts. B. The segregation of duties between those authorized to dispose of equipment and those authorized to enter the disposition transaction. C. The use of serial numbers to identify equipment that can be sold. D. A periodic comparison of equipment removal work orders with the authorizing documentation.

B 61.

What should be the role of an information services steering committee? A. Initiate all applications development; set priorities for implementing, applications; develop system security. B. Assign duties to systems personnel; prepare and monitor application implementation plans; prepare system flowcharts. C. Establish/approve information processing policies, system projects, and priorities for implementing systems; evaluate effectiveness of processing operations; monitor processing activities. D. Decide on specific information needs; prepare detailed plans for system evaluations; set priorities for developing applications; decide what computer hardware will be purchased.

C 62.

A company updates its account receivable master file weekly and retains the master files and corresponding transaction files for the most recent two-week period. What is the purpose of this practice? A. Permit reconstruction of the master file if needed. B. Match logical relationships to detect errors in the master file records. C. Verify run-to-run totals. D. Match logical relationships to detect errors in the master file records.

A 63. What is a control to ensure that transactions are reconstructed correctly after an unplanned termination of processing? A. Automatic rollback. B. Record count and control total. C. Anticipation and hash total. D. Concurrence and sequence number. A 64. What is a popular way of shielding an organization’s private network from intruders outside of the organization? A. File attributes. B. Uninterruptible power supply. C. Auxiliary power supply. D. Firewall. D 65.

Which of the following concepts relate to control activities? A. Isolation and accountability. B. Redundancy and oversight. C. Comparison and assistance. D. A and B only. E. All of the above.

E 66.

which of the following is (are) categories of control activities? A. Information processing. B. Physical controls. C. Performance reviews. D. Segregation of duties. E. A, B, and D only. F. All of the above.

F 67.

Which of the following represent physical controls? A. Separation of the authorization and modification functions of purchasing. B. Alarms and surveillance cameras for the warehouse. C. Back-ups of all master files. D. All of the above.

B 68.

What are general computer controls? A. Controls related to the flow of data in and among support applications. B. Controls related to the reliability and consistency of the processing environment.

C. D.

Controls that separate functions that are not compatible. Controls to authorize staff to use specific programs.

B 69.

What is automatic rollback? A An in-house backup that is completed through the Internet. B. A pricing method used by retailers. C. feature that backs out incomplete transactions. D. A feature that aids in the recovery of data.

C 70.

Which of the following is a valid method for monitoring internal control? A. Conducted as a separate project by IT auditors and supervisory personnel. B. Conducted on an ongoing basis by flagging items that should be investigated. C. Conducted as a separate project by IT auditors and supervisory personnel or conducted on an ongoing basis by flagging items that should be investigated. D. None of these is a valid method for monitoring internal control.

C 71

Which of the following is the most effective type of internal control? A. Automated detective controls. B. Automated preventive controls. C. Manual detective controls. D. Manual preventive controls.

B 72.

A disaster recovery plan is which of the following? A. An application control. B. An automated preventive control. C. A general control. D. An automated application control.

C 73.

What are the three types of firewalls? A. On-screen applications, operating system-based firewalls, and general firewalls. B. On-screen applications, offline firewalls, and applications-based firewalls. C. Screen routers, offline firewalls, and general firewalls. D. Screen routers, operating system-based firewalls, and applications-based firewalls.

74.

A warehouse employee of a retail company was able to conceal the theft of items of inventory by entering adjustment transactions to the inventory transactions to the inventory transaction file indicating that the items had been damaged or lost. What control would have prevented the adjustments from being recorded? A. Including a check digit in the inventory part number. B. Requiring separate authorization for input of adjustment transactions. C. Including a parity check on the inventory part number. D. Providing an edit check for the validity of the inventory part number. [CIA adapted]

B 75.

An accounts payable program posted a payable to a vendor not included in the vendor master file. What is a control that would have prevented this error? A. Validity check. B. Range check. C. Reasonableness test. D. Parity check. [CIA adapted]

A 76.

What principle of segregation of duties is demonstrated by segregating the duties of hiring personnel from distributing payroll checks? A. Authorization of transactions from the custody of related assets. B. Operational responsibility from recordkeeping responsibility. C. Human resources function from the controllership function. D. Administrative controls from the internal accounting controls. [CMA adapted]

A 77.

Which of the following is an effective way to reduce business risk? A. Having a strong internal control system B. Having well-documented management policies and procedures. C. Having regular assessments of the risks to information assets. D. Having a documented and regularly tested disaster recovery plan.

TRUE/FALSE QUESTIONS 1.

A network that uses fiber optic cable provides better access security than cables that transmit electrical impulses. T

To provide a high level of assurance, a large organization would normally not need more than fifty controls. F

Computer hardware controls are built in by the manufacturer. T

General controls apply to the reliability and consistency of the overall information processing environment, and they support application controls. T

A trend is a movement away from programming controls into computer software and toward placing controls in human operating procedures. F

Control activities include a variety of operational procedures, may be physical in nature, and include techniques that ensure the security of computer programs, files, and networks. T

In the process of identifying control activities, you must first identify risks. T

A current trend with respect to the placement of controls is a movement away from controls programmed into computer software toward controls in human operating procedures. F

According to SAS 94, control activities can be classified into performance reviews, physical controls, segregation of duties, and authorizations. F

10.

Performance measures should be quantitative as opposed to qualitative. T

11.

Physical controls protect assets from theft and destruction. T

12.

Duties that should be segregated are authorization of transaction and other events, custody of assets, and modification or creation of related data and program files. T

13.

General controls relate to the flow of data in and among individual applications, such as customer billing and cash receipts. F

14.

A disaster recovery plan is an application control. F

15.

The monitoring of internal control can be conducted on an ongoing basis, as a separate project, or as a combination of both. T

16.

Disaster recovery plans should be practiced regularly so that everyone knows what they are supposed to do in the event of a disaster. T

17.

Hiring trustworthy employees is the best way to minimize the opportunity for fraudulent activity, T

18.

Computer crimes are always reported and easily investigated. F

19.

Computer forensics involves putting together the facts and computer evidence necessary to prosecute computer criminals. T

20.

SAS 94 allows auditing around the computer in complex IT environments. F

SHORT ANSWER/ESSAY QUESTIONS 1.

Monitoring control activities to determine if they are adequate and effective can be done on an ongoing basis, as a separate project, or as a combination of both. Briefly compare monitoring on an ongoing basis versus monitoring as a separate project. Answer: Ongoing monitoring includes various comparisons and reconciliations that are inherent in routine supervisory activities. Examples of on-going monitoring activities are preparing and investigating items on exception reports, being alert to data that do not “look” right, comparing inventory that has been counted to the inventory balances in the accounts, comparing investment securities stored in a vault with the balances in the accounts, reconciling the bank statement with the cash account, reconciling data prepared for operational purposes with data on financial statements, and making other comparisons to ensure that the accounting records correspond to economic reality. Monitoring conducted as a separate project provides for a more concentrated focus on the adequacy and effectiveness of control activities than does an ongoing monitoring process. Monitoring projects are generally the responsibility of an organization’s internal auditors.

Identify and briefly describe the classification scheme for control activities. Answer: Performance reviews are designed to mitigate risks that can have an adverse effect on meeting objectives in the broad category of effectiveness and efficiency of operations. Physical security control activities mitigate risks that can an adverse effect on the achievement of management objectives in the broad categories of effectiveness and efficiency of operations. Segregation of duties ensures that a single individual cannot both perpetrate and conceal an error or an inappropriate act and mandates that certain duties be segregated. Information processing control activities are designed to mitigate risks that have an adverse effect on achieving objectives in all three categories-quality of information, effectiveness and efficiency of operations, and compliance with applicable laws and regulations.

Identify the general control activities that are desirable for information processing systems. Answer: a. Access security b. Network and data service center operation controls c. System software acquisition, implementation, and maintenance controls d. Application software selection (or development), implementation, and maintenance controls

List and describe the two basic types of encryption. Answer: Transposition rearranges (or scrambles) the order of the bits, characters, or blocks of characters. Substitution replaces the actual bits, characters, or blocks of characters with substitutes; for example, a number replaces a letter.

Identify five commonly used input verification controls. Answer: Students may list any five of the following: a. Valid codes b. Reasonableness of amounts c. Valid data type d. Valid field length e. Logical relationships

f. g.

Anticipated contents Valid date

Describe the process of cryptography using private and public keys. Answer: If a business requests sensitive data from another party, it can forward to the sending party an encrypting key, or public key. The sending party will then use the public key to encrypt data and then send the encrypted data to the requesting party. The requesting party will use its related private key, or decrypting key, to decode the information.

Explain what key(s) would be used by a business transmitting sensitive data and why the key(s) would be used. Answer: If a business keeps data on site, there is no need to maintain a separate key to decode encrypted information so only a private key is needed. However, the problem of security arises when data leave their original location. For instance, data are encrypted using the private key, which will also be needed by the recipient of the information to decrypt it. The security of the information will be compromised when the private key is sent from sender to receiver. Therefore, a second key, or public key, must be used to transmit data.

What are the underlying fundamental concepts of control activities? Answer: Isolation, redundancy, comparison, assistance, oversight, and accountability

What are the three types of firewalls? Answer: Screening routers, operating-system based firewalls, and application-based firewalls.

10.

Name and define the three kinds of batch backup strategies. Answer: Full–All data, regardless of when or if it has previously been backed up. Incremental–All data that have been modified since the last incremental backup. Differential–All data that have been modified since the last full backup.

11.

List AND describe three of the four methods available for auditing through the computer described in SAS 94. Indicate the LEVEL of IT knowledge necessary for each of the methods you describe (e.g., extensive knowledge, or little knowledge). Answer: Test data (auditor uses hypothetical transactions to audit programmed controls and logic--little knowledge of IT required), parallel simulation (auditor simulates/duplicates firm's output with another computer program to test actual data--some knowledge of IT required), integrated test facility (auditor uses artificial data to test how AIS performs tasks--requires high level of IT knowledge), embedded audit module (auditor installs module to monitor system and collect data--requires high level of IT knowledge).

12.

Define computer forensics. Include in your explanation a list of 5 of the activities that computer forensic experts can do. Answer: Computer forensics experts put together the facts and computer evidence necessary to prosecute computer criminals. Using legally accepted methods, they can: 1) access information (even if it was deleted by the user) and prepare the case, 2) testify in court, and 3) train IT auditors and security staff to help in the investigation. Computer forensic experts can also 4) train employees in security awareness and 5) provide an evaluation (with recommendations) of the company’s IT security environment.

Chapter 8 The Financial Process

MULTIPLE CHOICE QUESTIONS 1.

What is the core activity of an accounting information system? A. The revenue process B. The purchasing process C. The financial process D. The transaction process

C 2.

Which financial statements constitute the basic reporting requirements in the financial process? A. Statement of owners’ equity, statement of cash flow, and balance sheet B. Balance sheet, income statement, and statement of cash flow C. Income statement, statement of cash flow, and statement of owners’ equity D. Balance sheet, statement of owners’ equity, and income statement

B 3.

Which of the following is not an example of horizontal analysis? A. Common dollar analysis B. Data comparisons C. Absolute changes D. Percentage changes

A 4.

Which of the following is an example of vertical analysis? A. Data comparisons B. Absolute changes C. Common dollar analysis D. Percentage changes

C 5.

What is the listing of account names used in the financial process along with the codes assigned to the accounts called? A. Module B. Chart of accounts C. Inactive account D. Master account

In accounting software packages, what is the equivalent term for accounts in a subsidiary ledger? A. Master accounts B. Modules C. Sub-accounts D. Normal accounts

C 7.

In accounting software packages, what are accounts that have no sub-accounts called? A. Normal accounts B. Master accounts C. Sub-accounts D. Statistical accounts

A 8.

What is the term that accounting software packages use for control accounts? A. Normal accounts B. Chart of accounts C. Sub-accounts D. Master accounts

D 9.

Which module composes the financial process in AIS software packages? A. The customer module B. The vendor module C. The general ledger module D. The inventory module

C 10.

What type of account is used to accumulate physical, as opposed to monetary, data? A. Normal account B. Statistical account C. Sub-account D. Master account

B 11.

Which of the following is not a type of entry in the financial process? A. Data captured in and transferred from other processes to the financial process B. Transactions originally recorded in the financial process C. End-of-period adjustments required in the financial process D. Planning and control for the purchase of inventory and other resources

12.

What types of entries are recorded in the financial process? A. Data captured in and transferred from other processes B. Reversing entries C. End-of-period adjustments D. All of the above are types of entries recorded in the financial process.

D 13.

Which of the following are efficiency features in data entry? A. Recurring entries B. Automatic distribution entry C. Auto-enter D. All of the above are efficiency features in data entry.

D 14.

A processing feature unique to the general ledger module is one that allows the altering of recorded transactions if they have not been permanently posted. What is the feature called? A. Provisional posting B. Pencil posting C. Ink posting D. Both A and B

D 15.

Because entries can still be made in the earlier interim periods, closings for interim periods are known as what? A. Soft closings B. Hard closings C. Horizontal closings D. Vertical closings

A 16.

In what important respect is the general ledger module distinguished from the other modules? A. The general ledger module is a financial reporting module. B. The general ledger module is associated with specific business processes. C. The general ledger module is used to record the planning and control activities related to purchases. D. The general ledger module is used to record the acquisition, management, and promotion activities related to employees.

A 17.

What type of transaction would not initially be recorded in the general ledger? A. Payment of a lawsuit settlement of $5 million B. Payroll C. Disposal of long-term assets D. Issuance or retirement of bonds and stock

B 18.

What type of transaction would initially be recorded in the general ledger? A. Payment of a lawsuit settlement of $5 million B. Payroll C. Purchases from vendors D. Sales to customers

A 19.

The financial process encompasses which of the following activities? A. Summarized transaction and other event data from the other processes B. Events that do not fall within the revenue, purchasing, or inventory processes C. Events necessary to keep general ledger accounts up-to-date D. All of the above are included in the financial process.

D 20.

Which of the following is not a part of the financial process? A. Budget preparation B. Inventory management C. Events that do not fall within the revenue, purchasing, or inventory processes D. Summarized transaction and other event data from the other processes

B 21.

Which of the following is a part of the financial process? A. Inventory management B. Sales order processing C. Budget preparation D. Vendor invoicing

C 22.

Which of the following is part of the financial process because it is an event that does not fall within the revenue, purchasing, or inventory processes? A. Cost accounting B. Payment of stock dividends C. Accounts receivable D. Cash receipts

B 23.

Which of the following is not an event that falls within the financial process because it appropriately falls within the revenue, purchasing, or inventory processes? A. Payment of bond interest B. Issuance of bonds C. Vendor invoicing

Issuance of stocks

C 24.

Because the financial process must recognize events that keep the general ledger accounts up-to-date, which of the following is/are included in the financial process? A. The recognition of prepaid expenses B. The recognition of accrued assets C. The recognition of depreciation expense D. All of the above are included in the financial process.

D 25.

Which of the following processes receives summarized information from the other processes? A. Revenue process B. Inventory process C. Financial process D. Purchasing process

C 26.

When an account is designated as an “inactive account,” which of the following is true of its status? A. The accounting information system will prevent further entries from being made to the account. B. The account is immediately deleted from the general ledger. C. Entries may still be made to the account. D. The account remains active until the accounting period is closed and is deleted after the accounting period is closed.

27.

Adjustments that must be reversed at the beginning of each accounting period are often accomplished using which data entry efficiency feature? A. Automatic distribution entry B. Recurring entry C. Time-sensitive entry D. Dollar versus cents entry

28.

Which of the following is an advantage of a system that permits out-of-balance entries? A. Accountants can circumvent security policies. B. Accountants can correct mistakes more easily. C. Accountants can debit various accounts one day and complete the offsetting credits the next day. D. Accountants can close the books in a timely manner.

C 29.

Which of the following describes an example(s) of transaction risks in the financial process? A. Transactions approved/created by unauthorized persons. B. Transactions for unauthorized amounts. C. Adjusting entries approved/created by unauthorized persons. D. All of the above.

D 30.

Which of the following is TRUE about activities in the financial process? A. File maintenance activities should be separated from daily activities. B. Daily activities, file maintenance, and adjusting entries should done by a supervisor. C. Adjusting entries should be done by the person who handles file maintenance activities. D. Daily activities in the financial process should be handled by the person who has custody of cash.

A 31.

Which of the following represent proper information processing controls in the f financial process? A. Summarized daily information should be filed for future reference. B. Output distribution should be limited to authorized individuals. C. Checks of transactions only need to be done on transactions posted in other departments. D. All of the above represent proper information processing controls in the financial process.

B 32.

What is the internal audit department’s role in the control structure of the financial process? A. The periodic review of management reports should be done daily by the internal audit department. B. The internal audit department should be in charge of developing and reviewing all budgets. C. Provision should be made for independent confirmation of data appearing in management reports.

None of the above is an appropriate activity for the internal audit department.

C 33.

Which of the following represents a processing control in the financial process? A. Input data should be verified as accurate in the various processes. B Special authorization should be required for the disposal of capital resources. C. The distribution of internal reports containing financial information should be carefully controlled and recorded. D. Summarized information received from other processes should be periodically reviewed to determine that the accuracy of financial statements.

D 34.

When an account is designated as "inactive," which of the following is NOT true of its status? A. The accounting system will prevent further entries from being made to the account. B. The accounting system will immediately delete the account from the chart of accounts. C The account remains active until the accounting period is closed and financial statements issued. D. All of the above are false regarding inactive accounts.

B 35.

Which of the following illustrates a difference between GAAP and IFRS? A. Under IFRS, component depreciation is allowed. B. Under IFRS, impairment adjustments cannot be reversed. C. Under IFRS, the classification of some financial instruments will cause a change to GAAP-calculated debt ratios. D. Under IFRS, whether or not an entity is consolidated has to do with whether the consolidation was handled using the purchase method.

C TRUE/FALSE QUESTIONS

The financial process is the core activity of the accounting information system. T

Accounting information system software packages are usually composed of modules, with one or more modules composing a part of related accounting information system processes. T

The balance sheet and statement of cash flow constitute the basic reporting requirements in the financial process.

F 4.

Mainframe and minicomputer based accounting packages, being designed for large transaction volumes, almost universally support the dollar-entry method for entering monetary values. F

Closings for interim periods are known as hard closings. F

Accounting information system software packages use the term “normal accounts” for the equivalent subsidiary ledger conventionally used in accounting. F

Generally speaking, transactions that are categorized as sales, purchases, cash payments, cash receipts, or payroll are initially recorded in the general ledger module. F

The most significant conceptual difference between manual and computerized accounting systems is that in the computerized financial process, the vast majority of transactions are first recorded in other processes and then transferred to the financial process. T

Horizontal analysis of financial statements is the presentation of each item as a percentage of some base amount. F

10.

Vertical analysis of financial statements is the presentation of data comparisons, absolute changes, and percentage changes. F

11.

The chart of accounts is the listing of account names stored in the financial process along with codes assigned to the accounts. T

12.

The first field of an account identifier begins with a sequence code. F

13.

An account that stores the cubic feet of gas sold is an example of a statistical account. T

14.

The chart of accounts that is a listing of all account names, along with their numbers and codes assigned to the accounts (general ledger). T

15.

Recurring entry is a feature that automates the process of recording transactions and adjustments that are encountered repeatedly. T

16.

The transfer of data to the general ledger module from other modules can be made in summary or in detail. T

17.

Provisional posting can be used whether the accounting system uses real-time or batch posting. F

18.

An inactive account should be immediately removed from the general ledger for security reasons. F

19.

The internal audit department chooses the external auditor. F

20.

A transaction processing risk found in the financial process includes the processing of unauthorized transactions. T

21.

FOB Destination means that title to the goods being shipped transfers to the customer when the items reach the customer’s receiving dock. T

SHORT ANSWER/ESSAY QUESTIONS 1.

List three types of ratios that place information in a context so that relationships may be judged. Answer: Answers will vary. Some of the acceptable answers are the following: Current ratio Quick ratio Profit on the sales dollar Asset turnover

List the types of entries recorded in the financial process. Answer: Data captured in and transferred from other processes to the financial process Transactions originally recorded in the financial process End-of-period adjustments required in the financial process

In an accounting information system software package, is the ability to enter outof-balance entries a defect or a benefit? Discuss your position. Answer: The ability to enter out-of-balance entries appears to be a sign of lack of internal control. However, certain situations may require this feature. For example, if a batch of transactions cannot be completed at the end of one day, the out-ofbalance feature will permit the batch to be completed the next day. Or if only the account to be debited is known but not the account to be credited, the debits can be entered one day and the credits entered later.

What types of business processes are first reflected in the general ledger module? Answer: Only miscellaneous business processes are first recorded in the general ledger module. Those transactions that are not categorized as sales, purchases, cash payments, cash receipts, or payroll are generally initially recorded in the general ledger module. For example, issuance or retirement of bonds and stock are not related to either customers or vendors. Therefore, such financing transactions are recorded in the general ledger module unless there is a module for bonds payable. Some so-called “miscellaneous” transactions may involve very large amounts. For instance, payment of a lawsuit settlement of $5 million would probably be recorded in the general ledger module.

Describe inactive accounts and explain why it is important to retain inactive accounts in the general ledger. Answer: An inactive account is one in which all anticipated entries have been made and the account is no longer needed. While no further entries should be made to that account, the account should be maintained in the general ledger since it is needed for the remainder of the present year for current reporting and is needed during next year for comparative reporting.

Explain the difference in master accounts, sub-accounts, and normal accounts. Answer:

Master accounts are similar to control accounts as the term is conventionally used in accounting. Sub-accounts are analogous to accounts in a subsidiary ledger. Accounts that have no sub-accounts are called normal accounts. 7.

What are the three types of transactions recorded in the financial process? Answer: The three types of transactions are: data captured in and transferred from other processes, transactions originally recorded in the financial process, and end-ofperiod adjustments.

Why is the time-sensitive entries feature useful? Answer: Without the time-sensitive entry feature the books for an old reporting period have to be closed before making entries in a new period. This creates a problem when, for example, payroll time worked in the new period needs to be recorded.

List and explain four examples (out of the ten listed in the text) of transaction risk in the financial process. Answer: Any of four of the following: Unauthorized transactions: e.g., transactions approved/created by unauthorized persons, transactions for unauthorized amounts, transactions created at unauthorized times (e.g., when the company is closed). Incorrect/non-recorded/fictitious transactions: e.g., transactions that are not recorded (e.g., payments to vendors), or are fictitious (e.g., recording credit sales that never happened) to give false impressions of the company’s activity, leading to misstated financial statements. Unauthorized or incorrect adjusting entries: e.g., duplicated entries or improper entries can misrepresent the underlying economics of the company. Incomplete information: e.g., obstruction in the flow of information can lead to decisionmakers not having complete information for critical decisions. Incorrect transfer of information: e.g., when the summary control account balances do not agree with the detailed data in subsidiary ledger master files. Information procession errors: e.g., exposure of assets to unauthorized use, loss or misappropriation. Improper allocation: e.g., incorrect intracompany allocations that distort responsibility reports. Problems with transaction activity not being reported in the proper accounting period: e.g., not adjusting unearned revenue or prepaid expense accounts properly. Incorrect reported account balances: e.g., not recording impairment of fixed or intangible assets. Improper tax calculations: e.g., penalties assessed for late filing of, or failure to file, government tax or regulatory reports because of computation based on erroneous data.

10. List and explain three examples of information processing control activities in the financial process.

Answer: Authorization Controls: Only authorized personnel should have access to the reporting function. Access can be controlled through user identification and passwords. The chart of accounts and associated coding schemes should be properly authorized, and a method of uniquely identifying transactions should be established. General and specific authorizations should be defined for recording, processing, and reporting transactions. These authorizations should extend to procedures for handling adjusting and closing entries and for end-of-period cut-off. Similar authorizations are required for access to the accounting information system and for such sensitive activities as file maintenance. Special authorization should be required for the disposal of capital resources. Authority to write down or write off assets and authority to initiate the disposal of assets should be separated from responsibility for actual disposal. Data Verification Controls: Input data should be verified as accurate in the various processes. Data input directly into the GL module, such as depreciation calculations, should be reviewed periodically and checked for reasonableness. Processing Controls: For data input directly into the GL module, there should be documentation and independent checks of transactions. Summarized information received from other processes for the purpose of preparing financial statements should be periodically reviewed to determine that the financial statements are accurately stated. Output controls limiting who has access to generated reports should be enforced, so that for example, competitors do not receive reports that include proprietary costing information. 11.

Define the following: chart of accounts, credit rating, FOB point, picking list. Answers: Chart of accounts: listing of account names stored in financial process along with codes assigned to them; credit rating: classification of customer as to creditworthiness; FOB point: location where title changes hands from shipper to customer (e.g., FOB shipping, FOB destination); picking list: shows where items to be shipped are located in warehouse (like a grocery list arranged by position of product in store).

12.

Define "soft" and "hard" closings. Be sure to indicate the DIFFERENCE between the two. Answers: Soft closings allows interim closings, one can make additional or prior period adjustments. Hard closings are like permanent posting, no entries allowed after period closing. If time-sensitive entries are allowed, one may be allowed to make prior period adjustments (with proper approval).

13.

Describe some of the differences between GAAP and IFRS. Answer: Examples of the differences between IFRS and US GAAP financial reporting include: Differences in revenue recognition: under IFRS, there are four categories of revenue: sale of goods, services, others’ use of entity assets (e.g., royalties), and construction; some of the allowable methods for revenue recognition differ from GAAP Differences in impairment adjustments: under IFRS, adjustments can be reversed, and the impairment testing model differs from US GAAP models Differences in the treatment of some expenses: under US GAAP, all research and development costs must be expensed, under IFRS, development costs meeting specific criterion can be capitalized Differences in depreciation: under IFRS, component depreciation is allowable— e.g., the depreciation of a corporate jet would include different depreciation methods/lives for the fuselage and the engine(s)—while under GAAP, the entire asset (in this case, the entire plane) is depreciated using one method/economic useful life value. Differences in the treatment of expenses related to inventory and leased assets: under IFRS, the LIFO costing assumption is prohibited, and IFRS does not recognize the operating v. capital lease classification characteristic of GAAP (operating leases are a form of off-balance sheet financing under US GAAP) Differences in the classification of some financial instruments: e.g., under IFRS, convertible instruments must be split between liability and equity classifications, which could cause changes to an organization’s GAAP-calculated debt ratio and affect related debt covenants Differences in how entities are consolidated: under IFRS, whether or not an entity is consolidated is determined by how much power one company has to govern financial and operating policies of another

Chapter 9 The Revenue Process MULTIPLE CHOICE QUESTIONS 1.

What is the location at which title to goods changes from the shipping organization to the customer known as? A. Picking list B. Cash and carry C. Standing orders D. FOB point

D 2.

What is(are) the method(s) of accounting for accounts receivable? A. Balance forward B. Open item C. Both A and B are methods of accounting for accounts receivable. D. Neither balance forward nor open item is an appropriate method.

C 3.

Which of the following is a control document for cash receipts? A. Remittance advice B. Credit memorandum C. FOB D. Picking list

A 4.

What are the activities encompassed by the revenue process? A. Advertising, promotion and sales order solicitation B. Sales order receipt and processing C. Shipping D. All of the above are activities of the revenue process.

D 5.

What is the most critical report for shipping activities? A. Picking list B. Remittance advice C. Credit memorandum D. FOB

An aging accounts receivable report is commonly used for which of the following purposes? A. As a tool for contacting customers regarding overdue amounts B. As a basis for calculating the bad debt provision C. As a tool for writing off small, miscellaneous, delinquent amounts D. All of the above are purposes of an aging accounts receivable report.

D 7.

Which type of report lists individual invoices by customer? A. Detailed aging B. Summary aging C. Exclusive aging D. Proprietary aging

A 8.

Which of the following is not a method of payment application for open item accounts? A. Automatic identification B. Intermittent identification C. Pre-identification D. Post-identification

B 9.

What is the spreading of customer billing throughout the month by dividing customer accounts into groups and billing each group at a different time during the month known as? A. Preauthorization billing B. Remittance billing C. Cycle billing D. Rotation billing

C 10.

With which of the methods of payment application for open item accounts is a person required to identify the open invoices being paid, as well as any credits being taken? A. Automatic identification B. Post-identification C. Pre-identification

C 11.

Which of the following methods is the most commonly used payment application for open item accounts? A. Automatic identification B. Post-identification C. Pre-identification D. Intermittent identification

12.

What document identifies the products and quantities ordered and gives the warehouse location, aisle number, shelf position, bin number, or other reference to the location of the goods? A. FOB B. Picking list C. Remittance advice D. Credit memo

B 13.

Which of the following is true regarding the balance forward method of accounting for accounts receivable? A. Payments are applied to the outstanding balance rather than to particular invoices. B. Payments are correlated with individual invoices. C. Invoice records remain in the open invoice file until payment is received. D. Invoice records remain open at the end of the period.

A 14.

Which of the following is not true regarding the balance forward method of accounting for accounts receivable? A. Payments are applied to the outstanding balance rather than to particular invoices. B. No attempt is made to match individual payments and invoices. C. Invoice records remain in the open invoice file until payment is received. D. The open invoice file is archived at the end of the period.

C 15.

Which of the following is true regarding the open item method of accounting for accounts receivable? A. Payments are applied to the outstanding balance rather than to particular invoices. B. Invoice records remain in the open invoice file until payment is received. C. The open invoice file is archived at the end of the period. D. No attempt is made to match individual payments and invoices.

B 16.

Which of the following is not true regarding the open item method of accounting for accounts receivable? A. Invoice records remain in the open invoice file until payment is received. B. Payments are correlated with individual invoices. C. Straightforward information is provided for the preparation of an aging schedule. D. No attempt is made to match individual payments and invoices.

D 17.

What are the principal events to be recorded in the revenue process? A Sales orders in the sales order module B. Shipping order C. Billing of the customer D. Receipt of cash from customers

All of the above are principal events to be recorded in the revenue process.

E 18.

Which of the following is not included in the revenue process? A. Shipping B. Accounts receivable C. Payment of stock dividends D. Sales order processing

C 19.

Which of the following is included in the revenue process? A. Contra accounts B. Sales order processing C. Vendor invoicing D. Inventory management

B 20.

The revenue process encompasses which of the following? A. Events related to the acquisition of goods and services B. Events related to the transformation of raw materials into finished goods C. Events related to the distribution of goods and services to customers D. Events necessary to keep general ledger accounts up-to-date

C 21.

Sales, sales order processing, shipping, and accounts receivable are all part of which of the following processes? A. The financial process B. The revenue process C. The purchasing process D. The inventory process

B 22.

The process that encompasses events related to the distribution of good and services to customers and the receipt of money in exchange for these goods and services is known as what process? A. The purchasing process B. The financial process C. The revenue process D. The inventory process

23.

For sales analysis reporting, one of the most important factors is which of the following? A. Precise data B. Relevant data C. Timely data D. Product data

B 24.

What is the purpose of sales analysis reporting? A. It gives management a basis for judging the performance of individual sales personnel. B. Customers providing disappointing gross profit on the sales dollar may be identified. C. Historical sales data are used to provide planning and control information for managers. D. All of the above are valid purposes of sales analysis reports.

D 25.

While advertising, promotion, and sales solicitations are functions in the business revenue process, the costs of these activities are accounted for in which process(es)? A. The purchases and financial processes B. The inventory process C. The revenue process D. The financial process

A 26.

A prompt payment term such as “2/10:n/30" means which of the following? A. The gross amount is due in ten days. B. The customer can earn a 2% cash discount by paying within 10 days of the invoice date. C. The customer can earn a 10% cash discount by paying within 2 days of the invoice date. D. The customer can earn a 10% cash discount by paying within 30 days.

B 27.

If a customer's payment is delayed for an excessive period of time, what is the appropriate notice to be sent? A. An invoice B. A statement C. A dun D. A discount

C 28.

From time to time, an organization may decide to write off old, small amounts of accounts receivable because of which of the following? A. Customers have taken discounts that they have not earned.

B. C. D.

Customers have taken allowances promised by salespeople that have not been recognized with billing. The amount is less than $20 and over ninety days old. All of the above may cause an organization to decide to write off small, apparently uncollectible amounts.

D 29.

Which of the following is an application of the recurring entry concept? A. Automatic identification B. Standing orders C. New orders D. Remittance advice

B 30.

Which type of report lists individual past due invoices by customer? A. Detailed A/R aging. B. Summary aging. C. Customer master file. D. Vendor master file.

A 31.

Which of the following represent cash handling risks in the revenue process? A. Misappropriation of cash receipts. B. Improper reconciliation of the cash account. C. Uncollectible accounts written off without proper authorization. D. All of the above are associated with cash handling risks in the revenue process.

D. 32.

Which of the following represents the proper segregation of duties in the revenue process? A. The person who handles deposits also reconciles the cash account. B. A clerk in the treasury office opens mail and posts cash receipts. C. The inventory management and shipping functions are in different buildings. D. Sales representatives can check on the status of shipments and make adjustments to the order.

C 33.

Which of the following controls ensures the accuracy of transactions in the revenue process? A. Every transaction is reviewed at the end of the month. B. Independent checks should be made to ascertain that the correct prices are being charged to pre-approved customers. C. Invoice quantities and amounts should be verified against the sales order and shipping records, with discrepancies reported if over a certain amount. D. All of the above ensure the accuracy of transactions in the revenue process.

34.

Which of the following is an action resulting from the “receipt of cash” trigger in a salessupport organization? A. Adding to the open customer invoice file. B. Creation a sales transaction file record. C. Creation of a cash receipts transaction file record. D. Collection of transaction-based query information.

C 35.

Which of the following actions result from a pledge (with agreement to pay) to a nonprofit organization? A. A receivable is recorded. B. The cash receipts transaction file increases by one record. C. A purchase order is generated. D. The open invoice file record is closed.

A 36.

Which of the following is effected through the sales order module? A Issuance of sales orders. B. Monitoring of outstanding sales orders. C. Reporting on the time it takes to fill sales orders. D. All of the above.

D 37.

Which of the following is an action that follows the shipment notification to a customer in the revenue process of a merchandising or manufacturing organization? A. Creation of a sales transaction file record. B. Closing of the open purchase order file record. C. Updating the inventory master file. D. Creation of the vendor receipt file.

C TRUE/FALSE QUESTIONS 1.

The revenue process includes not only reporting but also facilitating and controlling certain business processes of the firm. T

In the open item system, payments are applied to the outstanding balance rather than against particular invoices. F In the balance forward system, invoices are regarded as open only during the current period, and the open invoice file is archived at the end of the period. T

A significant disadvantage of the balance forward method is the difficulty in resolving specific items disputed by a customer since they no longer appear in the active files. T

The most common report for the revenue process is an aging of accounts receivable. T

Standing orders represent an application of the recurring entry concept. T

Preparing an aging schedule for balance forward accounts is straightforward even though no detail may be available before the current period. F

A detailed aging of open item accounts lists individual invoices by customer. T

The primary purpose of the revenue process is to summarize data and report on the overall financial progress and status of the firm. F

10.

While advertising, promotion, and sales solicitations are functions in the business revenue process, the costs of these activities are accounted for in the purchases and financial processes. T

11.

Purposes of the revenue cycle include not only reporting, but also the facilitation and control of certain business activities. T

12.

The revenue activities for a merchandising organization progress from advertising and soliciting orders; to recording and acknowledging a sales order; to shipping the order; to billing the customer; to collecting, recording and depositing cash from the customer. T

13.

When a retail cash sale is made the transaction is recorded in only the sales transaction file. F

14.

If goods are shipped by a common carrier, a shipping document provides a contract between the shipper and the carrier. F

15.

A sales return involves a partial reduction of sales revenue. F

16.

A remittance advice is used as a source document for entering receipts in the cash receipts transaction file. T

17.

A sales order identifies the products and quantities ordered and gives the warehouse location, aisle number, shelf position, bin number, or other reference to the location of the goods. F

18.

A detailed aging report of open item accounts lists individual invoices by customer, whereas a summary aging report requires only one line for each customer with all invoices for a single customer combined. T

19.

One requirement of a good audit trail in the revenue process is that it enables you to trace from source documents to transaction files, to master files, to open invoice file, to data transferred to the GL T

20.

Using the pre-identification method for recording customer payments, the accounting system matches the remittances with specific open items using a type of artificial intelligence program F

21.

Inventory management and file maintenance should be handled by the inventory supervisor. F

22.

The discounts taken report is an output of the inventory process. T

23.

A risk associated with the inventory process includes pricing changes not being properly recorded. T

SHORT ANSWER/ESSAY QUESTIONS 1.

Why is preparing an aging schedule for balance forward accounts more difficult than for open item accounts? Answer: Preparing an aging schedule for balance forward accounts is not straightforward because no detail may be available before the current period. For those balance forward systems that do not maintain details before the current month, the aging must be calculated by reference to other data.

What are the principal events to be recorded in the revenue process? Answer: The principal events to be recorded in the revenue process are the recording of sales orders, shipping orders (usually the picking list), billing of customers, and receipt of cash from customers.

Discuss the advantages of a computerized accounting information system for recording payments. Answer: A computerized accounting information system provides a more effective way to avoid clerical errors common with a manual system. For example, customer remittances are immediately entered into the accounting information system, and a proof list for a batch of checks is printed. This summed list serves as a listing of checks for the bank deposit. This avoids preparation of a prelist separate from entry of data in the records and eliminates errors made in transcribing data from the prelist to the books.

Describe cycle billing and its advantages. Answer: Instead of billing at one time each month, customer billing is spread throughout the month by dividing customer accounts into groups and billing each group at a different time during the month. This spreads the processing of customer remittances over the month. Bank credit card operations, gasoline marketing companies, and department store chains all benefit from cycle billing.

Explain why gross profit analysis is more useful than sales analysis. Answer: Gross profit analysis is more useful than sales analysis because it may reveal that what management thinks is an excellent customer is, in reality, a loss to the company. When the cost of sales efforts is associated with a particular customer, that customer may be a losing proposition.

When is it necessary to have a sales order processing module in the revenue process? Answer: A sales order module is necessary then you have a timing difference between the receipt of an order and the shipment of goods or the provision of services.

What is the difference between credit limit, credit rating, and credit hold?

Answer: A credit limit sets a maximum on the amount of credit that will be extended to a customer. A credit rating is a classification of customers by creditworthiness. A credit hold restricts additional credit to a customer until payments are received. 8.

What is the difference in the balance forward and the open item methods of accounting for customer accounts? Answer: The balance forward method applies receipts to the outstanding balance rather than against particular invoices; no attempt is made to match individual payments and invoices. Invoices are regarded as open only during the current period, and the open invoice file is archived at the end of the period. Under the open item method, receipts are correlated with individual invoices. Invoice records remain in the open invoice file until payment is received.

List two exception-type reports that would be generated in the revenue process related to the collection of accounts receivable. Answer: Aging (open-item, detailed aging, summary. balance forward), discounts taken.

10.

Define "balance forward" and "open item" billing. List an advantage of each type of billing process. Answer: Balance forward applies receipts of cash to the entire outstanding balance, and does not differentiate between individual invoices (e.g., Visa bill). Open item billing applies receipts of cash to individual invoices. An advantage of the former is that it is good for a customer making payments, but it is difficult to resolve disputes. An advantage of the latter is that it is easy to resolve disputes, but applying payments to individual open invoices is a very time-intensive process.

11.

List and explain three of the common control activities associated with sales and billing. Answer: Any three of the following: 1) customer credit risks: e.g., extending credit to poor credit risk individuals or businesses, granting credit to customers in excess of the authorized amount, or failing to perform credit checks on new customers. 2) Discounts and allowances risks: e.g., offering excessive discounts or allowances, ignoring credit terms, or facilitating kickbacks. 3) Billing risks: e.g., errors or misstatements of billing amounts, failure to record sales, or failure to bill customers. 4) Pricing risks: e.g., giving “favorable pricing” arrangements not in compliance with stated policies, failing to update prices as costs change, or arbitrarily assigning prices to products, 5) Recording risks: e.g., recording sales at less than the amount billed, recording receivables for sales never made,

improperly classifying or not recording returns/allowances, or misappropriated credit memos. 12.

List and explain three examples of information processing authorization controls. Answer: Any three of the following: using levels of passwords, access to information can be limited to authorized personnel. Access can also be limited to both data and program files. Proper authorization of transactions is an input control. Proper authorization of transactions are required for the approval of credit terms, the setting of prices, the shipment of goods or provision of services, the granting of credit for returns and allowances, the determination of discounts, and the writing off of uncollectible receivables. Pricing controls should be maintained to ensure that they are updated when required, and that any discounts (e.g., volume discounts) are properly authorized by written policies and procedures. Deviations from standard prices, or credit extended to non-approved customers should result in an exception report so that management can review and follow up on these exceptions. Delinquent accounts should be promptly identified and followed up independently from the routine servicing of accounts receivable and cash receipts. Formal policies should be in place for investigating and following up on backorders, returns, credit memos, and write-offs of uncollectible accounts.

13.

Give two examples of data verification controls found in the revenue process. Answer: Any two of the following: the input must be validated to determine that data are accurate. Reasonableness checks can be programmed into computerized accounting systems. For example, sales quantities and shipment quantities should be positive. Data that fail the verification tests should be rejected and reported. Any exceptions should be authorized by a supervisor.

14.

Describe three of the functions typically found in the sales order function. Answer: The typical functions for a sales order processing module are shown in Exhibit 9.12. The first section contains those actions required to setup the SO module for use. These include various default values to be automatically used in data entry screens, the design of forms used in the module, and setup of tables of values that are used for data lookup purposes. Data entry is the second function, which is principally composed of the recording of sales orders, the completion or release of an order (including the printing of the shipping document), and the recording of merchandise returns. These entries might be done daily. The third principal function is printing various sales order reports. Note that operation of the sales order module relies heavily on data stored in the accounts receivable module, and the SO module contains an open file (open sales order file) but no master file. Thus, the end-of-period processes are simple. Canceled sales orders should

be erased from the file. Completed (or closed as opposed to open) sales orders should be transferred to a history file, and finally, products required for open sales orders should be reconciled with the reserved stock shown in the inventory module. 15.

List and discuss two exception-type reports generated in the revenue process related to the collection accounts receivable and how a manager would make use of these reports. Answer: Aging (open-item, detailed aging, summary. balance forward), discounts taken. Managers can use the information in these reports to monitor collections, follow up on past-due balance, and review customer activity.

16.

List five of the six actions that result from a shipment notification (shipment to a customer) in a merchandising or manufacturing organization. Answer: Create a sales transaction file record, close the open sales order file record, reduce inventory master file field, issue customer invoice, add record to open customer invoice file, update customer master file field.

17.

List two of the three actions that result from the collection of an accounts receivable for a sales-supported organization. Answer: Create a cash receipts transaction file record, close the open customer invoice record, update the customer master file field.

Chapter 10 The Purchasing Process

MULTIPLE CHOICE QUESTIONS

What is a common flow of data in the purchasing process? A. Sales order processing, shipping, invoicing, and receiving cash B. Receiving inventory, storing inventory, and shipping inventory C. Ordering goods, receiving, invoicing, and disbursing cash D. Ordering goods, shipping, and disbursing cash

C 2.

Why are audit trails for the purchasing process somewhat more complicated than those for the revenue process? A. The revenue process involves the revenue recognition principle. B. The purchasing process usually includes only a single journal entry and, therefore, provides inadequate support. C. The purchasing process may involve two journal entries often made at difference times. D. The revenue process is vulnerable to errors when posting from the cash receipts journal.

C 3.

What is the most voluminous task in the purchasing process? A. Accounts payable data entry B. Purchase order data entry C. Cash payments data entry D. Receiving data entry

B 4.

Which of the following is true about retainages? A. Most organizations, with the exception of construction contractors, must have retainages. B. Most organizations have this feature in its payables module. C. Retainages are more applicable to payables than to receivables. D. Retainages provide additional assurance that an agreed upon task will be completed.

D 5.

What are alternative names for the purchasing process? A. Expenditure, receiving, procurement

B. C. D.

Receiving, expenditure, acquisition Ordering, receiving, procurement Expenditure, procurement, acquisition

D 6.

“Resources” in the purchasing process refer to what? A. To tangible goods and to intangible services B. To tangible and intangible goods and to services C. To intangible goods and to tangible services D. To intangible goods and to services

B 7.

Which of the following is not correct with regard to goods and services? A. Goods and services do not include services provided by the organization’s employees as these are not external goods or services. B. Goods and services are purchased to meet an organization’s needs. C. In recent years, considerable debate has brewed over how much competition organizations should foster among their vendors. D. While organizations commonly use only one accounting firm, they have traditionally dealt with larger numbers of raw materials and merchandise vendors.

A 8.

When is purchasing initiated? A. When inventory records indicate that the quantity on hand has reached the average order size B. When an order has been placed with the vendor C. When a manager authorizes a purchase requisition and forwards it to the purchasing department D. When a manager approves a purchase order

C 9.

Where are purchase order data stored? A. Completed purchase order file B. Open invoice file C. Inventory order file D. Open purchase order file

D 10.

Which of the following initiates a bidding situation among suppliers? A. Request for quotation; request for proposal B. Request for bid response; request for quotation C. Request for deliverables; request for quotation D. Request for proposal; request for bid response

11.

Which of the following statements is false? A. Payment for goods and services typically makes the largest demand on an organization’s cash. B. Most commonly, after a purchase order has been approved, a manager will then deal with vendors directly. C. The order for goods and services has traditionally been in the form of a paper purchase order that is mailed to a vendor. D. Purchasing personnel are responsible for periodically reviewing the file records and following up on unfilled orders.

B 12.

Which of the following statements is true? A Petty cash limits tend to smaller in small organizations and higher in larger organizations. B. Actual disbursement of cash is the responsibility of the accounts payable department. C. Cash disbursements to a vendor may not be made from petty cash. D. It is not wise to “net out” a payable to and a receivable from a trading partner.

D 13.

What should disbursement records include? A. Date, name of payee, amount of check, and description of good or service B. Date, name of payee, amount of check, and vendor’s invoice number C. Date, name and number of payee, amount of check and vendor’s invoice number D. Date, name of payee, amount, description of good or service, and vendor’s invoice number

C 14.

What are the two major data entry processes? A. Creation and issuance of purchase orders; recording of cash disbursements B. Creation and issuance of purchase orders; recording of merchandise received and services rendered C. Recording of merchandise received and services rendered; recording of cash disbursements D. Creation and issuance of purchase orders; recording of accounts payable

B 15.

Why is the automatic distribution entry useful in the accounts payable module? A. An invoice must be channeled through several check points before approval for payment is made. B. There are many invoices that run through an organization’s accounts payable cycle. C. Any manager can pull up invoices in the form of exception or periodic reports to determine any “red flags.”

It permits the specification of a master account to which entries will be made.

D 16.

What is a unique aspect of vendor maintenance? A. Add a new vendor B. 1099 tasks C. Deactivate a vendor D. Tax Form 1099

B 17.

An organization must have a regular schedule for making payments of invoices. Which are criteria for selection of invoices for payment? A. Select all invoices coming due on or before a specified date B. Select all invoices with a specified vendor C. All of the above D. None of the above

C 18.

Which of the following are principal reports required for effective management of the purchasing process? A. Vendor performance; outstanding purchase orders B. Vendor invoices; discounts lost C. All of the above D. B only

C 19.

Where is there rarely a deficiency in the audit trail between? A. Purchases journal and cash disbursements B. Purchases journal and vendor accounts C. Vendor accounts and cash disbursements D. Cash disbursements and vendor accounts

D 20.

Which is an example of an acquired good? A. Patents and janitorial services B. Computer programs and consultants C. Fixed assets and raw materials D. Catering company and accounting firms

C 21.

What is a major source of purchasing errors? A. Data entry errors B. Not setting budgets for managers C. Not validating the purchase order D. EDI errors

A 22.

What documents the receipt of goods? A. Receipt verification B. Ticket C. Purchase validation D. Invoice

B 23.

When do disbursement activities begin? A. Upon receipt of goods B. After validation of receipt of goods C. Upon approval of the invoice D. After data has been keyed into the open invoice file

C 24.

When is a cash requirements forecast prepared? A. After invoices have been approved for payment B. After a schedule of aged accounts payable has been prepared C. Before a schedule of aged accounts payable has been prepared D. At regular intervals

D 25.

What are listings of the cash disbursements transaction file are referred to? A. Accounts payable master file B. Check register C. Invoice register D. Vendor master file

B 26.

Which of the following is effected through the Purchase Order module? A. Issuance of purchase orders B. Monitoring of outstanding purchase orders C. Reporting on outstanding purchase orders D. All of the above

D 27.

Which of the following is false regarding the accounts payable module? A. Single checks issued by a company are referred to as manual checks. B. A batch of checks may be posted after a proof list is prepared. C. Printing batches of checks is an efficient way of issuing checks. D. Posting may be invoked several times a day.

A 28.

After an organization compares the vendor invoice with the purchase order data and the receiving data, the invoice data are then keyed into what file?

A. B. C. D.

Purchase order file Open invoice file Accounts payable file Receiving transaction file

B 29.

Recording a payable after the invoice is matched with other documents requires which journal entry? A. Debit to cash; credit to accounts payable B. Debit to accounts payable; credit to unbilled payables C. Debit to unbilled payables; credit to cash D. Debit to unbilled payables; credit to accounts payable

D 30.

What has replaced the traditional paper purchase order? A. Electronic Data Exchange B. Facsimile C. Optical scanners D. Graphical user interfaces

A 31.

After an organization compares the vendor invoice with the purchase order data and the receiving data, the invoice data are then keyed into which file? A. Open purchase order file. B. Open vendor invoice file. C. Open accounts transaction file. D. Open customer invoice file.

B 32.

Which of the following are the principal reports required for the effective management of the purchasing process? A. Vendor performance. B. Outstanding sales orders. C. Discounts taken. D. All of the above.

A 33.

Which of the following is NOT a reason why a company would be motivated to use an EDI system for purchase orders? A. With an EDI system, purchase orders can be sent through the computer to a vendor. B. An EDI system is inexpensive to purchase and easy to implement. C. EDI systems reduce the possibility of human data entry error. D. With the computerized EDI system, there is less paperwork involved.

34.

What are two major data entry processes (think of the processes that require the most entry items per transaction)? A. Creation and issuance of purchase orders; recording of cash disbursements. B. Creation and issuance of purchase orders; recording of merchandise received and services rendered. C. Recording of merchandise received and services rendered; recording of cash disbursements. D. Creation and issuance of purchase orders; recording of accounts payable.

B 35.

Which of the following describes the best physical control(s) over cash disbursements? A. All disbursements to vendors over $50 are made with prenumbered checks. B. Cash can be disbursed to vendors when approved by the purchasing manager. C. Access to inventory is limited to authorized personnel only. D. All of the above are good physical controls over cash disbursements.

A 36.

Which of the following is TRUE regarding the segregation of duties in the purchasing process? A. The authority to approve disbursement vouchers should be separate from the authority to sign checks. B. Segregation of computerized functions can be attained through the use of passwords, file/record locks, and designated terminal access. C. The password system allows a receiving clerk to read, but not write to, an open purchase order. D. All of the above are true regarding the segregation of duties in the purchasing process.

D 37.

Which of the following control activities ensure that the hours worked by a contractor are valid? A. The contractor provides a weekly printout of time charged per job from his company’s system. B All employee time should be positive and bear a reasonable relationship to the standard 40-hour work week. C. Claims for large hours or excessive wage rates are reviewed quarterly by the Vice President of Human Resources. D. The contracting office provides the names and tax identification numbers of all contractors prior to the processing of payroll.

38.

Which of the following represent batch controls for the processing of purchase orders? A. Control totals. B. Record counts. C. Hash totals. D. All of the above are batch controls that would be used in the processing of purchase orders.

D 39.

Which of the following modules would you expect to find in the purchasing function? A. Sales Order Processing, Accounts Payable, Vendor Invoicing, Disbursements. B. Purchase Order Processing, Accounts Receivable, Receiving, Vendor Invoicing. C. Purchase Order Processing, Accounts Payable, Vendor Invoicing, Disbursements. D Sales Order Processing, Accounts Payable, Vendor Invoicing, Receiving, Cash Receipts.

C 40.

Which of the following are actions that result from the receipt of a properly authorized purchase requisition? A. Issuance of a purchase order. B. Adding the record to the open purchase order file. C. Both a and b. D. Neither a nor b.

C 41.

The following actions are associated with which of the following triggers in the purchasing process: A. Associate/match purchase order, receiving report, vendor invoice. B. Add to open vendor invoice file. C. Update vendor master file. D. Receipt of goods. E. Shipment to customer. F. Arrival of due date for payment. G. None of the above.

D 42.

Which of the following actions result from the disbursement of cash for payment in the purchasing process? A. Creation of the vendor invoice file. B. Creation of a new record in the cash disbursement file. C. Closing of the open sales order file record. D. Closing of the receiving transaction file record.

B 43.

Which of the following is/are the principal report(s) required for the effective management of the purchasing process? A. Vendor performance. B. Outstanding sales orders. C. Discounts taken. D. All of the above.

A 44.

B 45.

B TRUE / FALSE 1.

Warehouse personnel are responsible for periodically reviewing the open purchase order file and following up on unfilled orders. F

Competitive bidding is a relatively uncomplicated procedure in that the lowest priced bidder that can meet the needs of the organization will be accepted. F

The delivery of goods or provision of contracted services places the organization under an obligation to pay the vendor. T

Financial planners want an aging that monitors the expected timeliness of delivery while purchasing officers desire an aging that estimates future cash requirements. F

Providing managers with budgets delegates authority to managers to spend up to a prescribed ceiling on goods and services related to their assigned responsibilities. T

An organization should compare the vendor’s invoice with the purchase order data and the open invoice file. F

Petty cash limits often tend to be higher in small organizations than they are in large, well-run organizations. T

A listing of the cash disbursements transactions file is referred to as the cash disbursements journal, or check register. T

In most accounting information systems, the purchasing function is represented by two modules: purchase order and receiving, sometimes referred to as the vendor module. F

10.

Rarely is there a deficiency in the audit trail between the cash disbursements journal and the vendor accounts since the check number is ordinarily used as a posting reference. T

11.

The purchasing process normally includes purchase order processing, receiving, and accounts payable. T

12.

While a budget is important for planning and control, it does not have any special purpose in the purchasing process. F

13.

Because purchase orders are not completed transactions, they do not need to be stored in a file. F

14.

An organization is not under an obligation to pay a vendor until the organization receives the vendor’s invoice. F

15.

Two reports that are helpful to management in selecting invoices to pay are the cash requirements forecast and the schedule of aged accounts payable. T

16.

Cash disbursements to vendors are recorded in the cash disbursements transaction file which is then used to update the open vendor invoice file and the vendor master file. T

17. In most AISs, the purchasing function is represented by two modules-purchase order and accounts receivable. F 18.

The addition of a new vendor is handled in the vendor account maintenance function of the purchase order module. F

19.

The most common deficiency in audit trails in the purchasing process is postings from the cash disbursements transaction file. F

20.

Retainages are commonly required for construction contractors. T

21.

The use of prenumbered checks is an effective preventive control in the purchasing process. T

22.

Invoices for received items not yet paid are stored in the purchases transaction file. F

23.

For a purchase order system to be effective, it must be a real-time system. F

SHORT ANSWER/ESSAY QUESTIONS 1.

List and explain the activities in the purchasing process. Answer: Procuring goods and vendor services. Goods and services are purchased to meet an organization’s needs. Goods may consist of raw materials, parts or components, supplies, merchandise, fixed assets, or intangibles such as patents or computer programs. Acquired services included those provided by contractors, catering companies, janitorial companies, consultants, law firms, and accounting firms. These services also include those provided by the organization’s employees. Paying for procured goods and vendor services. Vendors must be paid for the goods and services they provide.

Define and explain the purpose of retainages. Answer: Retainages are most commonly required for construction contractors. Most large construction contracts require progress payments as certain milestones in the project are reached. Assume that a school district awards a $1 million construction contract so that as each one-fourth of the contract is completed, onefourth of the contract amount is to be paid, with a 10 percent deduction (or retainage) to assure completion of the contract. When the contract is complete and the building is accepted, then the final payment is due plus the earlier amounts retained. The purpose is to provide additional assurance that the contractor will complete the agree upon task to the satisfaction of the company.

Describe some factors which may complicate competitive bidding. Answer: Several factors may complicate competitive bidding. First, only one or two vendors may choose to respond to the solicitation. The other vendors may feel that the vendor would not be worthwhile or that they have little expectations of winning. Second, several vendors may respond, but the purchasing department may decide to look elsewhere for the required goods or services and not to accept any of the bids. Third, where complex goods or services are involved, the vendors’ proposals may vary so much that the purchasing agent and requesting managers find themselves trying to compare “applies with oranges.”

Identify and describe at least three principal reports required for effective management of the purchasing process. Answer: Students may choose any three of the following to identify and describe. Vendor performance report. Helps to monitor the effectiveness of vendors in achieving price, quality, and delivery promises. Future cash requirements. Useful for financial planners so that estimates can be made of future cash requirements arising from the purchase orders. Expected timeliness of delivery. Purchasing officers can maintain contact with suppliers and obtain assurance that all actions are being taken so that merchandise will arrive by the scheduled dates. Whereas this aging report for purchasing officers will include all purchase orders, another PO report will include only those POs related to shipments expected to arrive in the immediate future. This report can be used to anticipate these arrivals at the receiving dock and to reschedule personnel and equipments so that the unloading and placing of merchandise in stock is expedited. Cash budget. This report is integrated along with the PO cash requirements forecast. Discounts lost report. Used to judge the efficacy of a company’s cash payments operation.

Identify and describe the two data entry points for the purchasing process that attention must be focused on. Answer: Purchase order entry. Data entry for purchase points is likely the most voluminous task in the purchasing process. All the detail of what you wish to order must be entered into the system, although some efficiencies have been designed into the process through lookup tables. Accounts payable data entry. This includes purchase transactions and cash payments transactions. Cash payments transactions require that you select invoices to pay.

What are the advantages of EDI over paper purchase orders? Answer: By linking the accounting information system of the purchasing organization with its vendors, EDI speeds up the purchasing process, reduces the costs of paperwork, and eliminates data entry errors.

What are some of the key reports required for effective management of the purchasing process? Answer: Some key reports are the vendor performance report, PO cash requirements forecast, expected deliveries report, discounts lost report, and schedule of aged accounts payable.

What is the purpose of the unbilled payables account in the purchasing process and when it is debited and credited? Answer: The purpose of the unbilled payables account is to allow a purchaser to record receipt of goods before receiving the vendor invoice. The account is credited when inventory items are received. (Inventory is debited.) When the vendor invoice is received, unbilled payables is debited and accounts payable is credited.

List two reports generated by the purchasing process and indicate what they are used for. Answer: Vendor performance (reviews performance of vendors--e.g., timeliness, defective goods), outstanding purchase orders (unfilled orders, aging, cash requirements, monitor deliveries), PO cash requirements, discounts lost (judges efficacy of cash payment operations).

10.

Define electronic data interchange (EDI). List 3 of the advantages of implementing an EDI system.

Answer: EDI replaces the traditional paper purchase order. Involves an electronic message transmitted from the purchasing organization's computer to the vendor's computer. Advantages include: speeding up the purchasing process, reducing the costs of paperwork, eliminating/reducing data entry errors. 11.

List three of the four efficiency features for data entry AND give examples of each.. Answer: Recurring entries (depreciation, interest accrual), automatic distribution entries/allocation entries (departmental allocation of tax bill/property tax), dollars v. cents (format to have decimal), auto-enter (data with fixed number of characters, automatically moves to next field).

12.

Discuss two of the risks associated with the procurement of vendor goods and services. Answer: 1) Risks related to improper purchases: e.g., purchases made for individual (as opposed to organizational) use, purchases of supplies not needed, purchases recorded incorrectly (or not at all), or purchases made with unfavorable payment terms. 2) Risk related to the payment of wages: e.g., wages paid for unauthorized or incomplete work, wages paid to fictitious employees, wages paid based on erroneous wage rates, payroll expenses/taxes incorrectly classified, or incorrect deductions/withholding.

13.

Discuss risks associated with the payment of invoices (i.e., disbursement of cash) in the purchasing process. Answer: Payment made for goods/services that are not authorized or have not been received, discounts lost because of late payments, misappropriation of discounts taken, duplicate payments, forged signatures/endorsements, or alterations to the vendor invoice or payee on a disbursement.

14.

Explain why an analysis of vendor performance is an important control in the purchase function. Answer: Consistent and regular review of vendor performance is important to determine 1) how long it takes to receive an order, 2) the quality of the orders received (e.g., rejected shipment report), and 3) how often items are back-ordered aid management in determining whether a vendor is meeting the company’s

expectations. Reviews of purchasing agent performance to determine productivity and compliance with set procedures also help management monitor the purchasing process. Performance reviews of the personnel who inspect shipments received should also be done regularly to make sure inspectors are not receiving kickbacks or rejecting too many shipments. 15.

Discuss the typical authorization controls one would expect to find in the purchasing process in information processing. Answer: Proper authorization is needed to initiate a purchase order, to receive goods and services, to capture/approve employee data, and to disburse cash. Authority to initiate the purchasing process generally resides with the departmental manager. Purchases are generally handled by a purchasing agent (after proper authorization of the order has been verified). Authorized vendors and or purchase levels should be reviewed and updated as necessary. Rejected purchase orders should be captured by the system in an exception report. The receipt of goods should be verified by a receiving clerk, with the quantities received verified against the original order. The goods received should also be compared to the vendor’s shipping document. The clerk can verify this information through the open purchase order file. The use of electronic time cards aids in the capture of employee time data, allowing supervisors to verify employee time (especially overtime or special-time rates). Limits can be set so that, for example, an employee cannot input time in excess of 60 hours per week without a supervisor’s authorization. The accounts payable department has the authority to disburse cash. The treasurer has the final responsibility to determine that proper supporting data has been entered into the system to substantiate the claim for payment. The computer can compare the purchase order data and the receiving report with the vendor invoice data before a voucher is prepared. Checks in excess of a pre-set amount should require a second signature. The meter readings on the automatic check-signing equipment and all prenumbered checks should be properly accounted for (i.e., issued, voided, unused).

16.

Describe output controls typically found in the purchasing process. Answer: Output controls typically found in the purchasing process include the preparation of reports such as the cash disbursements report (i.e., check register). The listing of check numbers can be compared to the number of checks issued/printed and the number of vouchers processed. The bank reconciliation should be performed by an individual who is independent of check printing and signing. Care must be

taken to ensure that all paychecks are properly distributed to employees and that all vendor checks are mailed. 17.

List four of the five actions that result from the receipt of merchandise from a vendor. Answer: Physical count of shipment, create inventory adjustments transaction file (if needed), create purchases and receiving transaction file, close record in open purchase order file, update inventory master file.

Chapter 11

The Inventory Process MULTIPLE CHOICE QUESTIONS 1.

What is lead time? A. The period of time between shipment of ordered goods and receipt B. The time required by customers for receipt of goods purchased C. The period of time between the ordering of a product and its receipt D. The maximum time inventory is to remain on the shelf

C 2.

What is safety stock? A. The quantity of inventory necessary to avoid the loss of sales due to stockout B. The optimum order size to prevent a stockout C. The quantity that minimizes inventory for “just in time” inventory D. The sum of the lead time stock and stockout stock

A 3.

What is economic order quantity? A. Maximum order quantity B. A result of balancing holding costs against order costs C. A quantity that is determined by the minimum holding cost D. The sum of the safety stock and lead time stock

B 4.

What is the most popular inventory control report? A. Excess inventory report B. Inventory turnover report C. Sales and gross profit report D. Order recommendation report

D 5.

What report is essential to organizations using “just in time” operations to minimize inventory? A. Excess inventory report B. Returns and allowances report C. Inventory and PO aging report D. Order recommendation report

Which of the following is a leading supply chain management system? A. Great Plains B. Manugistics C. ACCPAC D. MAS90

B 7.

Which of the following are software systems that expand an organization’s reach outside to suppliers and customers? A. Enterprise resource planning systems B. Just in time inventory systems C. Supply chain management systems D. None of the above

C 8.

When is an order placed for additional products? A. When the quantity available for sale reaches the stockout level B. When quantity available for sale declines to the lead time stock level C. When sales fall below the maximum stocking level D. When inventory falls to the economic order quantity

B 9.

Which of the following is not a common inventory problem for mercantile organizations? A. Maintaining an economic level of inventory on hand B. Avoiding obsolete inventory C. Managing a selection of products to achieve satisfactory profitability D. Determining the lead time for products

D 10.

What report is essential to organizations using the "just in time" inventory approach? A. Excess inventory report. B. Returns and allowances report. C. Inventory and PO aging report. D. Order recommendation report.

C 11.

Which of the following control activities would protect inventory from theft? A. Limited access to the warehouse containing inventory. B. Allowing only the inventory manager to authorize removal of items from the warehouse. C. Only the shipping clerks can verify the shipments and deliver the items to the warehouse.

All of the above are control activities that would protect inventory from theft.

A 12.

What type of control activity is the security system on an inventory warehouse? A. Corrective. B. Detective. C. Preventive. D. Corrective and detective.

C 13.

Which of the following does not represent an effective segregation of duties in the inventory process? A. Responsibility for reviewing inventory evaluations and approving changes to inventory valuations (e.g., write-downs or write-offs) should be separated from the maintenance of perpetual inventory records. B. Responsibility for reviewing inventory evaluations and approving changes to inventory valuations (e.g., write-downs or write-offs) should be separated from the maintenance of perpetual inventory records. C. The functions of custody of inventory and the responsibility for the maintenance of the inventory master file records should be separated. D. The clerks who handle maintenance of perpetual inventory records should also handle recording the receipt of shipments from vendors.

D 14.

Which of the following represent authorization controls for information processing in the inventory process? A. Written approval should be required before any item of equipment, materials, goods, or scrap can be removed from the plant facilities. B. Inventory part or product numbers should be validated by check digits or by table/file look-up. C. Access to inventory in the warehouse should be limited to only those individuals authorized by badge or biometrics. D. Prenumbered documents should be used for all inventory adjustments, disposals, and work order requisitions.

A 15. Where does most of the data entry relating to inventory occur? A. In the inventory and revenue processes. B. In the revenue and financial processes. C. In the revenue and purchasing processes. D. In the inventory and purchasing process. C

16.

What is the system called that uses technology to manage the purchase and receipt of merchandise in a manner that minimizes inventory on hand? A. Enterprise resource planning systems (ERP). B. Just-in-time inventory (JIT). C. Inventory control modules (ICM). D. Electronic data interchange (EDI).

B 17.

What is a characteristic of radio frequency identification (RFID) that makes it preferable to universal product codes (UPC)? A. RFID codes can identify a class or type of product, and can identify an individual product as it moves along the supply chain. B. RFID can only be used with enterprise resource planning (ERP) systems, while UPC cannot be used with ERP systems. C. RFID tags are smaller than UPC tags and cannot be detached by the user. D. None of the above are reasons the RFID is preferable to UPC.

A 18.

Which of the following is NOT an advantage of radio frequency identification (RFID)? A. RFID may provide information allowing a credit card user to be identified or other surveillance unknown to the consumer. B. RFID codes can identify a class or type of product, and can identify an individual product as it moves along the supply chain. C. RFIDs codes can be scanned from further away than universal product codes (UPC), allowing for better tracking of inventory. D. All of the above are advantages of RFIDs.

A 19.

Which of the following represent risks associated with outsourcing? A. Renegotiation risk. B. Geopolitical risk. C. Privacy of sensitive information. D. All of the above are risks associated with outsourcing.

D 20.

Which of the following is NOT a reason for outsourcing? A. Lower labor costs overseas. B. Quality of the component will not decrease. C. Loss of jobs in the home country. D. Higher levels of technical knowledge in the third-party service provider’s country.

TRUE/FALSE QUESTIONS 1.

Because of the similarities in inventory processes of manufacturing organizations, treatment of inventory problems in the paper industry would be treated like those in the automobile manufacturing industry. F

Lead time is the period of time between the order of a product and receipt from the vendor. T

All accounting system inventory control modules use a perpetual inventory system. T

The larger the quantity of safety stock, the larger the stockout cost. F

The order excess inventory report calls attention only to those overstocked items that are important in dollar value. T

In a batch posting system, posting to the inventory master file is accomplished simultaneously with data entry. F

Inventory management is one of the simplest AIS processes. F

To monitor the status of inventory receipts, a purchasing department must have a report that shows inventory on hand and committed along with open purchase orders and the date related merchandise is expected to be received. T

An inventory turnover report shows which products may need additional advertising or promotion in order to improve performance.

F 10.

An ERP software encompasses all internal operations. T

11.

Most data entry relating to inventory occurs in the revenue and purchasing processes rather that in the inventory module. T

12.

Two methods to account for inventory are flexible and static. F

13.

Lead time stock is that quantity of inventory deemed necessary to avoid the loss of sales due to stockouts. F

14.

The reorder point is reached when the stock on hand equals the safety stock. F

15.

The economic order quantity is the order size that minimizes holding cost plus stockout cost. T

16.

The maximum stocking level equals the economic order quantity. F

17.

Software systems that extend an organization’s reach outside to suppliers and customers, managing the planning and flow of merchandise inventory, are known as supply chain management systems. T

18.

Most data entry relating to inventory occurs in the inventory process. F

19.

If the sum of free stock and units on order equals the reorder point, the recommended order size is equal to the economic order quantity. T

20.

The purpose of the excess inventory report is to assure that sufficient inventory is on hand to meet sales demand. F

21.

An important report in the inventory process is one that shows sales and gross profit by product. T

22.

RFID codes have international standards. T

23.

RFID codes hold more information than UPC codes, but cannot be scanned from as far away as UPCs. F

24.

The inventory manager should be the only person who has access to the inventory on hand. F

SHORT ANSWER/ESSAY QUESTIONS 1.

List three of the four tasks that supply chain management systems can perform. Answer: Students may answer any three of the following four tasks. Rationalization of the location and production capabilities of factories and distribution centers Unification of world-wide inventory management and order fulfillment Optimization of the global supply chain Integration of tax efficiency into the global planning process

Name some factors that may cause management to deviate from an order size recommendation. Answer: Expected cash shortages Expected changes in the rate of sales Expected shortages of the product

Discuss various activities in the inventory process. Answer: The three basic activities for the inventory process of mercantile organizations include receiving, storing, and shipping. When merchandise is received, personnel with appropriate skill and knowledge levels are assigned to inspect the merchandise for quality standards. The merchandise may be stored in structures which can vary according to the organization. Products are often purchased and sold in different units with the requirement that it be repackaged. Based on a sales order, merchandised is pulled, packed, and delivered to customers. In some cases, there is no physical packaging.

List and discuss some reports that are used to help manage the inventory process. Answer: Order Recommendations Report. This report includes only those inventory items that are at or below the reorder point and may also suggest the appropriate order size. Excess Inventory Report. This report serves to call management’s attention to significantly overstocked items.

Inventory Turnover Report. This report can be relied on to indicate dormant stock items. Sales and Gross Profit Report. This report can be used to draw attention to those products that are marginally desirable and might need additional advertising and/or promotional emphasis to improve their performance. Returns and Allowances Report. This report shows the merchandise returns and allowances for each product that have been granted to customers due to shipment errors and defective merchandise. Inventory and PO Aging Report. By reviewing this report, purchasing managers can anticipate shortages in merchandise and, if the added expense can be justified, expedite vendor shipments. 5.

What are the main activities in the inventory process for a mercantile organization? Answer: The main activities in the inventory process for a mercantile organization are receiving merchandise from vendors, inspecting the merchandise, counting and comparing the merchandise received with the packing slip and the purchase order, transferring the inventory to storage, repackaging the merchandise, rotating the merchandise, pulling the sold merchandise for shipment, packaging the sold merchandise, and shipping the sold merchandise to customers.

What are the tasks that supply chain management software can perform? Answer: Supply chain management software can systematize the location and production capabilities of factories and distribution centers, unify world-wide inventory management and order fulfillment, optimize the global supply chain, and integrate tax efficiency into the global planning process.

What are the end of period processing options in the inventory module? Answer: The end of period processing options in the inventory module are to post transactions to the general ledger, archive and reset the inventory adjustments journal, and delete superannuated accounts.

Define the following: lead time, safety stock, reorder point, ordering costs, economic order quantity.

Answer: Lead time (period between ordering restock and receipt or units/day * days to receive), safety stock (quantity of inventory maintained to avoid stock outs or stock out v. holding costs), reorder point (safety stock + lead-time stock or units sold per day * number of days to receive), ordering costs (include creation of PO, sending it out, handling merchandise, paying invoice), EOQ (minimum order quantity, optimum order quantity, holding v. ordering costs). 9.

Discuss some of the risks associated with the inventory process.

           

10.

Answer: Inventory is one of the most liquid assets held by a company. Consequently, there are a number of risks associated with the misappropriation of this valuable asset. These risks include: Material misstatement of inventory valuation. Improper classification or determination of inventory costs. Errors in cost allocations. Improper application of cost flow models (e.g., FIFO, LIFO, average cost) Errors in the perpetual inventory records resulting in overstocking or obsolescence of items in inventory. Improper evaluation of carrying costs versus stockout costs. Failure to identify low turnover inventory items Improper evaluation of the market value of inventory. Excessive losses due to shrinkage or theft of inventory. Misappropriation of materials or goods due to manipulation of inventory adjustments or valuations. Unauthorized shipments of inventory. Fictitious physical counts of inventory to conceal pilferage. Errors can also arise due to the improper classification of goods held on consignment. Discuss control activities related to the physical safeguarding of inventory. Answer: Much of the burden of safeguarding inventories falls on physical security measures (a preventive control activity). Limited access storerooms or warehouses, security fences, electronic sensing and monitoring devices, surveillance cameras, fire/smoke detectors, and security patrols all play an important role. Access to inventory and inventory records should be controlled by badges, biometrics, user identification and/or passwords. Locks and security codes should be changed periodically to further limit unauthorized access. Employees in sensitive areas should be bonded to minimize loss to the company in the case of fraud. Other physical controls include quality control procedures (with regard to acceptance of shipments from vendors) and regular physical counts of inventory on hand. The results of the physical count should be compared to the computer-generated inventory on hand listing.

11.

Discuss output controls commonly found in the inventory process. Answer: Strong output controls should be in place when setting up the programmed criteria to initiate a purchase order transaction (e.g., when setting up automatic reorder points). Changes to the master file records should be strictly controlled. Reports regarding reorders, spoilage, and obsolescence of inventory should be distributed to the appropriate managers for review.

12.

Discuss the advantages and disadvantages of radio frequency identification (RFID). Give two examples of companies who have implemented RFID systems. Answer: RFIDs can identify not only a class or type of product, but also can identify an individual product as it moves along the supply chain and ends up in the possession of an individual. Other advantages of RFID over UPC technology include the ability to scan the code from further away (in some cases, up to 90 feet away), better tracking of inventory movement (making it easier to track theft), and efficiencies in product recall and detection of counterfeit items. The RFID tag is quite small, and its transponder contains a memory chip that allows for the unique product code. The tag is detected as it passes through the electromagnetic zone by an antenna in the transceiver. This eliminates the need for a laser reader, such as is required to read a UPC code. While this technology is extremely valuable for tracking inventory and replacing cashiers with point-of-sale checkout stands, there are privacy issues that should be considered. For example, if the RFID tag is not erased at checkout, it could be easily read without the consumer’s knowledge and may also provide information allowing a credit card user to be identified or other surveillance unknown to the consumer. Auditors and accounting professionals involved with the development and implementation of RFID technology at their company should be aware of the security concerns, and ensure that these issues are addressed. Companies that have considered implementing RFID for parts tracking include Delta Airlines and the Boeing Company. Retailers, such as Wal-Mart, have instituted a scheduled implementation of RFID for its supply chain.

13.

Discuss the benefits and risks of outsourcing that should be considered before enlisting a third party service provider. Answer: The most common reason to outsource is to save money. This can mean savings in labor and/or component costs. In addition, some outsourced services such as customer technical support services can provide 24/7 support for worldwide operations. Sometimes, the technology is more advanced at another organization so that the outsourced component is produced more cheaply and with higher quality.

   

  14.

Risks related to outsourcing are Geopolitical issues (e.g., wars, embargos) Currency fluctuations Jobs in the contracting organization’s home country can be lost due to the outsourcing of the activity or component. Security, in the sense that laws in the third-party service provider’s country might differ from those of the lead organization’s country. For example, laws regarding information privacy, patents, and copyrights in countries such as India and Thailand differ significantly from the laws in the US. Renegotiation risk Issues related to the quality of the product or service outsourced. Discuss ways that an organization can minimize the risks associated with outsourcing. Answer: The key to protecting an organization interested in outsourcing a good or service lies in the strength of its service level agreement (SLA). These SLAs can require due-diligence reviews, SAS 70 reports (discussed in chapter 6), and specific definitions of what is required of the third-party service provider. In addition, the SLA can specify requirements with regard to the protection of information assets, and can request that background checks be performed on employees.

Chapter 12

Database Structure of Accounting Systems MULTIPLE CHOICE QUESTIONS 1.

Which of the following files is not owned by the account receivable application in a conventional accounting system? A. Open customer invoice file B. Customer master file C. Cash receipts transaction file D. Vendor master file

D 2.

Why are conventional files easy to understand and operate? A. Data are separated into files that mimic journals and ledgers in manual systems. B. Data are disaggregated but can be combined in numerous ways. C. Data can be visually checked. D. Data can be posted in real time.

A 3.

Which of the following statements is true about databases whether used on mainframes, midrange computers, networks, or personal computers? A. The theory and structure are substantially the same, but the design and management issues are different. B. The theory, structure, and design are substantially the same, but the management issues are different. C The theory, structure, design, and management issues are substantially the same. D. The theory, structure, design, and management issues are different.

C 4.

Which of the following statements about an index file is (are) true? A. It is an auxiliary file to a data file that is used to increase the speed at which records in the related data file are sorted and accessed. B. It contains only two fields. C. It is maintained in order of the index key. D. All of the above statements about an index file are true.

Which of the following statements is true about a database management system? A. It is a software program specially designed to convert conventional files into a database. B. It is a collection of software specially designed to manage the data in a database in response to instructions issued by application programs or requests made by users. C. It is an application program that manages the instructions issued by users to process data. D. It is a collection of software that contains metadata and a data dictionary.

B 6.

Which of the following statements is not an advantage of a database? A. Data storage and retrieval methods are designed by application developers. B. Data elements can be combined in virtually limitless ways. C. Each data element needs to be stored only one time. D. Application programs are independent of the physical structure of the data they process.

A 7.

Which of the following are disadvantages of a database? A. Increased hardware requirements, required technical skills, and integrated data B. Increased hardware requirements, vulnerability to system failure, and integrated data C. Required technical skills, difficult conversion from conventional files, and highquality and efficient data D. Increased hardware requirements, required technical skills, and difficult conversion from conventional files

D 8.

Which of the following is the most important query language used in database management systems? A. COBOL B. C C. SQL D. Visual Basic

C 9.

What is meant by the “logical” structure of a database? A. The way the data are thought about, or viewed, by users B. The way the data are stored on storage devices C. The internal level of a database D. The conceptual and internal levels of a database

10.

Which of the following statements about the internal level of a database is true? A. It is the physical implementation of the conceptual level. B. It includes the file organizations to store data on the physical storage devices. C. It is the way all the data in the entire database are viewed logically. D. A and B, but not C E. B and C, but not A

D 11.

Which level of the database architecture relates to the way all the data in the entire database are logically viewed? A. Physical level B. Conceptual level C. Internal level D. External level

B 12.

Which of the following statements about a relationship in a database is correct? A. It is a connection or interaction between tables. B. It may exist because of the nature of the data elements themselves. C. It may exist because of the need to relate information in the database in some prescribed manner. D. A and B, but not C E. A, B, and C

E 13.

What type of relationship do a customer table and an invoice table have? A. One-to-one B. One-to-many C. Many-to-many D. A and B, but not C

B 14.

What type of relationship do a customer table and an inventory table have? A. One to one B. One-to-many C. Many-to-many D. B and C, but not A

C 15.

Which of the following relationships is asymmetrical in terms of how one record in the first table is related to one or more records in the second table and how one record in the second table is related to one or more records in the first table? A. One-to-one relationship B. One-to-many relationship C. Many-to-many relationship D. B and C, but not A

B 16.

Which of the following statements about the conceptual schema of a database is true? A. It is for the entire database and is at the conceptual level of the database architecture. B. It is a subset of the internal schema that is required by a particular application program or users. C It describes how the internal subschema is implemented physically. D It is a subset of the database that describes how the database is implemented.

A 17.

Which of the following statements best describes mapping in a database? A. Mapping is the process of implementing the conceptual relationship in a database. B. Mapping defines the relationship among the three levels of a database. C Mapping is the process of making a data element in one schema correspond to an element in another schema. D. Mapping is the process of implementing a particular application as requested by the users.

C 18.

Where does mapping occur? A. Between the external and conceptual levels B. Between the external and internal levels C. Between the conceptual and internal levels D. A and C E. B and C

D 19. What are the subroutines called that define the external and conceptual schema in a database management system? A. Application programs B. Data definition language C. Query language D. Business rules B 20.

What is a data dictionary? A. It is a special file, stored in an application program, that provides instructions for processing data. B. It is a special file, stored in data definition language, that makes a data element in one schema correspond to an element in another schema. C. It is a special file that is required to initiate the processing of data. D. It is a special file, stored in the database itself, that provides metadata on the description, structure, and type of each data element stored in the database.

21.

Which of the following is not included in a data dictionary? A. A list of records where each particular data element is stored B. The cost of the data element C. The source of each calculated data element D. A description of each data element

B 22.

What is (are) the function(s) of a database administrator? A. To participate in the preliminary planning for a database B. To select the database management system product C. To write the data definition language software for the database D. A and B E. B and C

D 23.

Which of the following statements about an object-oriented database is true? A. It can handle maps, graphs, images, audio, and video as well as the familiar text and numbers. B. It is more user friendly than a relational database. C It contains a collection of records stored in tables. D. It performs faster than a relational database.

A 24.

What is one or a group of data elements that uniquely identifies a record? A. A primary key B An index key C. A foreign key D. A locator key

A 25.

What is a foreign key? A. It is a nonkey data element that depends on another nonkey data element. B. It is a data element that uniquely identifies a record. C. It is the primary key of a table that is placed in another table so the tables can be joined. D. A and B, but not C

C 26.

Which combination below would make the following statement correct? The operations are used on one source table whereas the operations are used on two source tables. A. Selection and join : projection and union B. Selection and projection : join and intersection C Projection and union : intersection and difference D. Intersection and difference : selection and projection

27.

What operation produces a new table with only the desired columns from a single source table? A. Selection B. Projection C. Join D. Union

B 28.

What is the operation that materializes the relationship between tables? A. Union B. Insertion C. Projection D. Join

D 29.

What are data elements that are not stored in a database but are calculated on demand from other data elements that are stored in the database? A. On-line data elements B. Virtual data elements C. Stationery data elements D. Index data elements

B TRUE/FALSE QUESTIONS 1.

An accounting system can be structured to provide routine information and respond to spontaneous requests for information. T

The earliest computerized accounting systems used conventional files that separated accounting data into dependent files. F

Conventional file processing systems are not easily understood and operated, but control problems in these systems are amenable to simple solutions. F

A database system consists of two major components--a database and a database management system. T

In practice, a database is defined as an organization’s total collection of data on computer storage devices. T

In an accounting system that uses a database, the application programs interact with the data stored in the database rather than with the database management system. F

A query language is a high-level English-like language that enables users to make ad hoc, spur of the moment, requests from a computer. T

A framework that is helpful for discussing different aspects of a database is its architecture. T

In a one-to-many relationship, one record in the first table matches many records in the second table, but one record in the second table matches only one record in the first table. T

10.

Schemas exist at the external and conceptual levels, but not at the internal level. F

11.

A database administrator is responsible for planning, organizing, and maintaining the database to satisfy users’ needs. T

12.

In the relational model, data are perceived by the user to be arranged in simple tables with rows and columns. T

13.

The selection operation is used in a relational database to produce a new table with only the desired columns of the desired rows from a single source table. F

14.

A database system consists of a database and a database management system. T

15.

The fact that tables are pooled into one reservoir gives a database its remarkable ability to relate data elements even though they are stored in different tables. T

16.

An index file contains metadata, which is data about data. F

17.

A database management system is a collection of software specially designed to manage the data in a database in response to instructions issued by application programs or requests made by users. T

18.

Most companies develop their database management systems in house. F

19.

A query language is a low-level, programming language. F

20.

The database architecture includes an external level, which is the physical implementation of the conceptual level. F

21.

In a one-to-many relationship, one record in the first table matches many records in the second table, and one record in the second table matches many records in the first table. F

22.

A primary key is one or a group of data elements that uniquely identifies a record. T

23.

A foreign key is a data element on which the database management system builds an index file. F

SHORT-ANSWER QUESTIONS 1.

What activities of an organization must an accounting system be able to support? Answer: An accounting system must be able to support an organization’s operations, mandatory external reporting requirements, and management decision making.

Describe data redundancy in an accounting system and the problems it causes. Answer: Data redundancy means storage of the same data in several different files. This condition causes a lack of data quality, data inconsistency, and inefficient use of resources. Lack of data quality results when the same data are stored in more than one location and a change to the data is not made in all locations. Data inconsistency results when, for example, data stored in more than one location is stored in different formats. A social security number could be stored in one file with a nine-digit numeric format but with a packed decimal format in another file. Inefficient use of resources results because secondary storage is wasted by storing the same data in multiple locations. Also, it is costly to input the same data in storage more than one time.

Compare the data hierarchy of a conventional file to that of a database. Answer: A database contains files which contain records. Records contain fields, or data elements, which contain bytes, or characters. Bytes contain bits. The hierarchy from the file level to the bit level is similar in both database and conventional file systems. The difference in the hierarchy is that a database goes one step further to pool all the files into one reservoir called a database.

List the advantages and disadvantages of a database system. Answer: One advantage of a database system is data integration. Because of data integration, data elements can be combined in virtually limitless ways, providing the illusion of files of varying content and format. Another advantage is program and data independence. Application programs are independent of the physical structure of the data they process. Therefore, the physical structure of the data in the database can be changed without necessitating a change in the application programs that access the data. This data independence feature also makes it easy for users to retrieve data. Another advantage is programming simplification. Database management systems are normally supplied with all storage, retrieval, and similar processes already in place. All that remains for application developers is interfacing their programs with the database management system. Another advantage is data quality and efficiency. Each data element is stored only once, and multiple programs can access every data element as needed. A final

advantage is data security. Security features can be written into a database management system to prevent unauthorized access or inadvertent contamination of data. A disadvantage of a database system is increased hardware requirements. A database management system places heavy demands on the central processing unit because of its large number of instructions. Also, secondary storage may need to be increased to accommodate access linkages, such as index files. The software itself may be large; some mainframe database management systems require several million bytes of storage. Another disadvantage is required technical skills. The successful implementation and operation of a database management system require that application developers and other information systems personnel have database technical skills. On the other hand, it is relatively easy to implement and operate a personal computer database management system. Another disadvantage of a database system is difficult conversion from conventional files. Converting existing application programs to work with a database management system requires the modification of program code relating to the storage and structure of the existing files. Moreover, data that formerly resided in independent data files must be restructured for inclusion in the database. Another disadvantage is vulnerability to system failure. Every application depends on the database management system. The failure of any component of the system can bring operations to a standstill. A final disadvantage is the potential for error contamination. The immediate availability of data to many different users precludes easy isolation and correction of erroneous data. 5.

Define a database management system and describe its role. Answer: A database management system is a collection of software specially designed to manage the data in a database in response to instructions issued by application programs or requests by users. A database management system product makes it possible for users to interface with a database in three ways--through application programs, through a query language, and through the forms and reports facilities of the database management system.

What are the differences in the logical and physical structures of a database? How do these structures relate to the three levels of the database architecture? Answer: The logical structure is the way the data are thought about, or viewed, by users, while the physical structure is the way the data are physically stored on storage devices. The external and conceptual levels in the database architecture correspond to the logical structure. The internal level in the database architecture represents the physical structure of the database.

17.

Identify the types of relationships that can exist between tables in a database. Answer: There are three kinds of relationships--one-to-one, one-to-many (many-to-one), and many-to-many. In a one-to-one relationship, one record in the first table matches only one record in the second table, and one record in the second table matches only one record in the first table. In a one-to-many relationship, one record in the first table matches many records in the second table, but one record in the second table matches only one record in the first table. In a many-to-many relationship, one record in the first table matches many records in the second table, and one record in the second table matches many records in the first table.

What does a database schema define? Answer: A database schema defines the logical view of the data if the schema is at the external level or the conceptual level, or the physical view of the data if the schema is at the internal level. It also defines the relationships among the data elements, the domains for the data elements, and the business rules that apply to the data. Domain is a set of all possible values a data element can have. For example, it could be specified that quantity sold can be between 1-9999. Business rules are constraints on business activities that can be enforced by the database or application programs. A constraint that can be enforced by a database would be the value of the data elements. For example, an edit rule would enforce that one particular data element must have four digits and begin with the number 1 if for department one or begin with the number 2 if for department two.

Define the two database models discussed in the chapter. Answer: The relational model is easy to build, and the relationships in this model can be defined on an ad hoc basis, making it very flexible and allowing users to build and implement relational databases. The object-oriented model is able to handle maps, graphs, images, audio, and videos as well as the familiar text and numbers.

10.

What are some of the advantages of an accounting system that uses a database? Answer: Data integration, program and data independence, programming simplification, data quality and efficiency, and data security.

11.

If database management systems are so nifty, why does any company still operate a conventional file, or legacy, system? Answer: DBMSs have increased hardware requirements and require technical skills. Conversion from conventional files to a DBMS is difficult. The system is vulnerable to failure and has a greater potential for error contamination.

12.

What are the three ways in which a user can interface with a database management system? Answer: Through application programs, a query language, or the forms and reports facilities of the DBMS.

13.

List the rules regarding where the foreign key should be placed EACH OF the following relationships: one-to-one, one-to-many, many-to-many. Answer: One-to-one: In either table; one-to-many: on the many side; many-to-many: first break down the many-to-many into two one-to-many relationships, then follow the rule for the one-to-many relationship.

14.

What is a concatenated (or compound or composite) key? Answer: The primary key of a table (usually a bridge table created to break down a many-to-many relationship) that is made up of more than one data element.

Chapter 13

Developing a Relational Database for an Accounting Information System MULTIPLE CHOICE QUESTIONS 1.

The participation of which of the following individuals is not necessary in the development of a database system? A. Accountants B. Marketing managers C. Human resource managers D. Board of directors

D 2. What are some characteristics of normalized tables? A. They comprise the transaction files, master files, open files, and reference files in an accounting system. B. They are free of data redundancy and anomalies. C. They ensure the stability of the database over time. D. A and B, but not C E. A, B, and C E 3.

Which of the following data elements are not included in a sales invoice? A. Invoice number, invoice date, customer code, customer name B. Sales representative name, sales representative commission, sales representative discount C. Product number, quantity sold, product description, unit sales price D. Extended amount, total due, customer address

B 4.

Which of the following data elements are called repeating data elements in an invoicing application? A. Product number, product description, invoice number, customer code B. Product number, product description, unit sales price, quantity sold C. Product number, unit sales price, invoice date, quantity sold D. Product number, unit sales price, customer city, customer code

Which of the following best describes a transitive dependency? A. A transitive dependency exists when a nonkey data element depends on a primary key data element. B. A transitive dependency exists when a nonkey data element depends on another nonkey data element. C. A transitive dependency exists when a primary key data element depends on another primary key element. D. A transitive dependency exists when a primary key data element depends on a nonkey element.

B 6.

A method for arranging data elements in a way that reduces anomalies is referred to as which of the following? A. Internalization B. Normalization C. Visualization D. Assimilation

B 7.

Which of the following statements regarding normal form is not correct? A. First normal form places all repeated data elements in separate tables and assigns appropriate keys. B. Second normal form places all nonkey fields that are fully specified by something other than the complete key in separate tables. C. The second normal form is relevant only if a record has a compound key. D. The third normal form places all redundant key fields in separate tables.

D 8.

Which of the following statements regarding normal forms is incorrect? A. A table is in first normal form if it has multivalued or repeating data elements. B. A table that has a single primary key is in second normal form. C. Converting a table into second normal form applies only to a table that has a composite key. D. A table is in third normal form if it is in second normal form and has no transitive dependencies.

A 9.

What does converting a table with multiple values into first normal form accomplish? A. Reduction of data redundancy B. Elimination of the risk of errors in the data C. Elimination of anomalies D. Elimination of data redundancy and elimination of anomalies

A The following data apply to the next two questions:

Consider the following open purchase order file in which each record contains the following fields: delivery instructions purchase order date part number purchase order number quantity ordered unit price vendor number 10.

What data elements should be moved to a separate file to put the open purchase order file in the first normal form? A. Part number, unit price, quantity ordered B. Part number, vendor number, purchase order number, quantity ordered C. Purchase order number, quantity ordered, part number D. Purchase order number, unit price, quantity ordered

A 11.

What would be the key for the new file created in Question 10? A. Part number/quantity ordered B. Part number/vendor number C. Purchase order number/part number D. Purchase order number/quantity ordered

C 12.

A primary key is one or a group of data elements that uniquely identifies what? A. A file B. A record C. A transaction D. A byte

B 13.

What would be a likely primary key for the customer table? A. Customer name B. Customer code C. Invoice number D. Invoice date

B 14.

What does an entity in the REA framework consist of? A. Resource, agent, and organization B. Resource, organization, and event C. Event, agent, and organization D. Resource, agent, and event

15.

What are resources, events, and agents called in the REA framework? A. Properties B. Dependencies C. Entities D. Attributes

C 16.

In the REA framework, relationships among entities can be which of the following? A. One-to-one B. One-to-many (many-to-one) C. Many-to-many D. All of the above

D 17.

Which of the following statements concerning entity-relationship modeling is true? A. It has a strong theoretical base but seldom is used in practice. B. It is a method for arranging data elements after the decision has been made to implement a relational database management system. C. It involves identifying and documenting the system outputs and the contents of the outputs that are required by users. D. The entity-relationship diagram depicting the model is read from top to bottom and cannot be read from bottom to top.

B 18.

What does an ellipse represent in an entity-relationship diagram? A. Relationship B. Attribute C. Entity D. Activity

B 19.

Which of the following statements is true about symbols used in the entity-relationship diagram? A. A line links an attribute to an attribute. B. An ellipse represents an attribute. C. A diamond represents an attribute. D. A square represents an entity.

B 20.

Which of the following is the first step in developing a database for an accounting system using the REA framework approach? A. Identify and document the relationships among the events, resources, and agents that are of interest to users. B. Identify and document the business events, or activities, that are of interest to users and the resources and agents that are related to the events.

C. D.

Identify and document attributes that are related to the resources, events, agents, and relationships that are of interest to users. Determine what tables to create and what data elements to put in which tables by referring to an E-R diagram.

B Use the following scenario for the next three questions. Suppose that you are developing a relational database for an accounting system using the REA framework approach. The organization makes over-the-counter sales where the customer walks in, an employee (sales rep) sells products to the customer and turns over the products to the customer, and the customer walks out. All sales are on credit, and employees are paid commissions on their sales. 21.

In the REA framework, which of the following entities are involved in the business process described in the scenario? A. Inventory, employee, customer, sale B. Inventory, product number, invoice number, customer C. Employee, product number, customer, sale D. Invoice number, product number, customer, sale

B 22.

What is a resource in the sale event in the REA framework? A. Purchase order B. Inventory C. Employee D. Customer

B 23.

In the REA framework, which of the following are agents in the sale event? A. Employee and inventory B. Inventory and customer C. Employee and customer

C 24.

What is a step that is specific to the REA framework approach and not to the system output approach in developing a database for an accounting system? A. Identify and document what data elements need to be stored to produce the required output. B. Determine what tables to create and what data elements to put in which tables by using a process called data normalization. C. Identify and document the attributes that are related to resources, events, agents, and relationships that are of interest to users. D. Identify and document the system outputs and the contents of the outputs that are of interest to users.

25.

The implementation of a database begins by defining which of the following? A. Users' attributes B. System's outputs C. Organization's events D. Database schema

D Use the following tables to answer the next three questions. Neither the order in which the data elements are presented in these tables nor the capitalization of the names of the data elements has any significance. Invoice Table CustCode

InvNo

EmpCode

InvDate

Invoice Line Table Qty

InvNo

ProdNo

Inventory Table ProdNo

Desc

Price

Employee Table EmpName

EmpCode

CommRate

Customer Table Name

26.

City

CustCode

Which of the following would be the primary keys of the first three tables above? A. CustCode, InvNo, ProdNo B. InvNo, InvNo/ProdNo, ProdNo C. InvNo/CustCode, ProdNo/Qty, ProdNo D. InvDate/InvNo, ProdNo, Desc

B 27.

Which of the following data elements serves as both a primary and a foreign key in the five tables above? A. InvNo B. CustCode C. EmpCode D. A and B, but not C E. A, B, and C

28.

What is the type of relationship between the invoice table and the invoice line table? A. One-to-one B. One-to-many C. Many-to-one D. Many-to-many

B TRUE/FALSE QUESTIONS 1.

For an accounting system to be successful, only the system's developers and the organization's accountants must actively participate in developing the database for the accounting system. F

The end product of developing a database for an accounting system is a set of “normalized” tables that will store the data. T

A table in a relational database can have multiple values for one cell. F

A database table cannot have duplicate rows because that would be counterproductive to the goal of reducing data redundancy. T

Converting a table into second normal form (2NF) only applies to a table that has a composite key. T

Accounting information system activities are the events according to the REA framework. F

An entity-relationship diagram is prepared to document entities, relationships, and perhaps attributes. T

A study of the business processes would uncover the relationships among events, resources, and agents. T

One distinct difference in the system output approach and the REA framework approach is that the REA framework approach focuses on identifying the desired system outputs. F

10.

The REA approach focuses on identifying the business events, or activities, in the organization. T

11.

The end product of developing a relational database is a set of “rationalized” tables. F

12.

In a database table for sales transactions, you need to store “extended amount” and “total due.” F

13.

A table in a relational database can have multiple values for one cell. F

14.

A transitive dependency exists when a nonkey data element depends on, or is determined by, another nonkey data element. T

15.

A table is in the first normal form if it has no transitive dependencies. F

16.

Converting a table into the second normal form applies to a table that has a composite key. T

17.

Tables in a relational database are documented by a data flow diagram. F

18.

In the REA framework, an event is a business activity. T

19.

In the REA framework, entities, resources, and agents are collectively referred to as events. F

20.

In the REA framework approach to developing a relational database for an accounting system, the first step is to identify and document the business events, or activities, that are of interest to users and the resources and agents that are related to the events. T

SHORT ANSWER QUESTIONS 1.

Briefly describe the approaches used in developing the relational database for an accounting system.

Answer: Two approaches are used. The system output approach is the traditional approach and begins by identifying the contents of the desired system outputs, such as a report or a document. The REA framework approach is a new approach and is gaining in popularity. This approach starts by identifying the entities [resources, events and agents ( REA)] in the organization and their relationships. 2.

Briefly summarize the steps performed in developing a database system for an accounting system using the system output approach. Answer: Five steps are performed sequentially to develop a relational database system for an accounting system using the system output approach. The steps are to: a. b. c. d. e.

Identify and document the system outputs and the contents of the outputs that are required by users. Identify and document what data elements need to be stored to produce the output. Determine what tables to create and what data elements to put in which tables by using a process called data normalization. Evaluate the tables to determine if additional tables need to be created. Document the tables with a data access diagram.

What are the three steps that will normalize data with respect to the third normal form? Answer: a. Move all repeating data elements to a new table, and assign primary keys to the original and new tables. This step converts data into first normal form (1NF). b. Move all nonkey data elements to a new table if they do not depend on, or are not determined by, the entire primary key, and assign primary keys to the original and new tables. This step converts the data into second normal form (2NF). c. Move any transitive dependencies to new tables, and assign primary keys to the original and new tables.

Briefly summarize the steps required to develop a database for an accounting system using the REA framework approach. Answer: The steps required to develop a database accounting system are as follows: a. Identify and document the business events, or activities, that are of interest to users and the resources and agents that are related to the events. b. Identify and document the relationships among the events, resources, and agents that are interest to users. c. Identify and document the attributes that are related to the resources, events, agents, and relationships that are of interest to users.

d. e. f. 5.

What are the steps required to develop a relational database for an accounting system using the system output approach?

     6.

Determine what tables to create and what data elements to put in which tables by referring to the E-R diagram. Evaluate the tables to be sure they are in the third normal form. Document the tables with a data access diagram.

Answer: The steps required to develop a database using the system output approach are to: Identify and document the system outputs and the contents of the outputs that are required by users. Mock-ups of the reports and documents serve as documentation of the outputs. Identify and document what data elements need to be stored to produce the output. A list serves as documentation of the necessary data elements. Determine what tables to create and what data elements to put in which tables by using a process called data normalization. Evaluate the tables to determine if additional tables need to be created. Document the tables with a data access diagram. What is the step that will normalize data with respect to the first normal form? Answer: The step to normalize data with respect to the first normal form is to move all repeating data elements to a new table and assign primary keys to the original and new tables.

What is an insertion anomaly? Answer: An insertion anomaly occurs when we attempt to store a value for one data element but cannot because the value of another data element is unknown.

PURCHASE ORDER Purchase order number: PO156 Purchase order date:Oct 6, 2012 TO: ABC Corporation (C1704) 2500 Bay Area Blvd. Houston, TX 77058

Thank you for your order!

Product No F135 G1456 B3429

Description Excel Book Using Access Visio for Dummies

Unit Price $ 25.00 $ 35.00

Quantity 4 10

Total $ 100.00 $ 350.00

$ 45.00

$ 225.00

Total

$ 675.00

Using the SYSTEM OUTPUT approach, determine the tables needed and put them in third normal form. Be sure to identify primary, foreign, and/or composite (concatenated) keys as necessary. Primary keys and composite keys should be underlined, while foreign keys should be identified with an asterisk. LIST ALL TABLES FOR FIRST, SECOND and THIRD normal forms.

Answer: First normal form: (PO table) PONUM (primary), POdate, VendCode, Name, Address (PO line table): PONUM-PRODNO(primary), Desc, Cost, Qty Second normal form: (PO line table): PONUM-PRODNO (primary), Qty (Inventory table): PRODNO (primary), Desc, Cost Third normal form: (PO table): PONUM (primary), POdate, VendCode* (PO line Table): PONUM-PRODNO (primary), Qty (Inventory Table): PRODNO (primary), Desc, Cost (Vendor Table): VENDCODE, Name, Address

Consider the following elements needed to produce a sales order (see figure below): Date

Customer zip code

Cost per unit

Sales order number Customer name Customer address Customer city

Employee name Quantity ordered Employee region Total price Product number Total sales order Product description

Determine the tables necessary to put this information in third normal form. SHOW ALL RESULTING TABLES FROM FIRST, SECOND, and THIRD normal forms. Be sure to identify primary keys, concatenated keys and foreign keys. Primary keys and concatenated keys should be underlined, and foreign keys should be indicated with an asterisk (*).

SALES ORDER Sales order number: S1099876 Sales order date: October 30, 20XX TO: ABC Corporation 2987 Bay Oaks Dr. Clear Lake City, TX 77057 John Smith, Houston region Product No Thank you for your order!

P198765 P349842 P368742 P498111

Description Card-playing dogs Velvet Elvis Looney Tunes Celine Dion

Total Sales Order

Unit Price $15.00 $14.00 $20.00 $16.00

Quantity 25 20 45 10

Total $375.00 $280.00 $900.00 $160.00

$1,715.00

Answer: First normal: (non-repeating) SALES ORDER NUMBER, date, customer name, customer address, customer city, customer zip code, employee name, employee region. (Repeating): PRODUCT NUMBER, product description, cost per unit, quantity ordered (totals are virtual data elements). Second normal: (non-repeating) SALES ORDER NUMBER, date, customer name, customer address, customer city, customer zip code, employee name, employee region. Product line table: PRODUCT NUMBER*/SALES ORDER NUMBER*, quantity ordered Product table: PRODUCT NUMBER, product description, cost per unit.

Third normal: Product table: SALES ORDER NUMBER, date, customer code*, employee code* Product line table: PRODUCT NUMBER*/SALES ORDER NUMBER*, quantity ordered. Employee table: EMPCODE, employee name, employee region Customer table: CUSTOMER CODE, customer name, customer address, customer city, customer zip code 10.

Consider the following elements needed to produce a purchase order (see figure below): Purchase order number Product number Purchase order date Product description Vendor code Quantity purchased Vendor name Unit cost Vendor address Purchase Agent Name Total ordered Total due Using the SYSTEM OUTPUT approach, determine the tables needed and put them in third normal form. Be sure to identify primary, foreign, and/or composite (concatenated) keys as necessary. Primary keys and composite keys should be underlined, while foreign keys should be identified with an asterisk. LIST ALL TABLES FOR FIRST, SECOND and THIRD normal forms.

PURCHASE ORDER Purchase order number: Purchase order date: TO: Vendor Code Name Address Purchase Agent Name Product No

Description

Thank you for your order!

Total

Unit Price

Quantity

Total

Answer: First normal form: (PO table) PONUM (primary), POdate, VendCode, Name, Address, Agent Name (PO line table): PONUM-PRODNO(primary), Desc, Cost, Qty Second normal form: (PO line table): PONUM-PRODNO (primary), Qty (Inventory table): PRODNO (primary), Desc, Cost Third normal form: (PO table): PONo (primary), POdate, VendCode*, Agent Code* (PO line Table): PONUM-PRODNO (primary), Qty (Inventory Table): PRODNO (primary), Desc, Cost (Vendor Table): VENDCODE, Name, Address (Agent Table): AGENTCODE, Agent Name, commission rate, etc.

Chapter 14 Electronic Business MULTIPLE CHOICE QUESTIONS 1.

Which of the following statements best characterizes electronic business? A. Electronic business is a sale or a purchase transaction completed over a computer network. B. Electronic business is a cash receipts or a cash disbursements transaction completed over a computer network. C. Electronic business is the identification of business opportunities over a computer network. D. Electronic business is any process that a business organization conducts over a computer network.

D 2.

EDI falls into which area of electronic business? A. Business to business B. Business within an organization C. Business to consumer D. A and B

A 3.

What is the most significant benefit from EDI implementation? A. Cost reduction from paper work elimination B. The ability to capture and exercise a degree of control over customers C. Increased speed in trading in merchandise D. Increased bargaining ability with suppliers

C 4.

Given the legal status of EDI transactions, which of the following is correct? A. They should be followed up by legally binding paper documentation. B. They can stand on their own merit legally and need no paper support. C. They are legally unenforceable and depend on the trust engendered between trading partners. D. They should be given legal status by written contracts executed between trading partners.

The basic EDI standard most commonly used by businesses in the USA is A. ANSI B. EDIFACT C. X12 D. No single standard is used by most businesses in the USA.

C 6.

The EDI standard most commonly used by businesses in the USA is A. A comprehensive standard that encompasses all lines of businesses B. The only common factor in EDI used by USA businesses is that they are all approved by a standards setting organization. C. There is a single standard with extensive standard variations to accommodate unique requirements of various industries. D. Most businesses in the USA use an international standard.

C 7.

The most common EDI document is a(n) A. Invoice B. Purchase order C. Shipping note D. Price list

B 8.

EDI transactions are typically between which of the following? A. Companies in the same industry B. Companies in different industries C. A vendor and a value-added reseller D. Both A and B

A 9.

Which of the following EDI over the Internet approach uses templates to map the EDI messages from the way the data are stored in a database to the EDI standard message and processes the message on the client’s side? A. Internet EDI B. Web-EDI C. XML/EDI

C 10.

If a purchaser pays for merchandise based upon the receiving report and no invoice is sent, the process is known as A. Payment on receiving report (PRR) B. Invoiceless settlement system (ISS) C. Evaluated receipts settlement (ERS) D. Paperless due settlement (PDS)

11.

What is the most frequently used barcode symbology in the grocery industry? A. Code 39 B. Postnet C. Universal Product Code (UPC) D. Interleaved 2 of 5 E. PDF 417

C 12.

What would Interleaved 2 of 5 most likely be used for? A. Drug items B. Multiple unit packages C. Small items D. Items sold by weight E. Items sold by volume

C 13.

What characterizes a “discrete” bar code (as contrasted with “continuous”)? A. It has a fixed length. B. It has inter-character gaps. C. It represents a limited amount of data. D. It uses white and black bars to represent data. E. None of the above

B 14.

A standard barcode symbology that is not continuous is classified as A. Discrete B. Fixed length C. Delimited D. Unitized

A 15.

A barcode symbology that is not continuous is A. Universal product code B. Code 39 C. Interleaved 2 of 5 D. All of these symbologies are continuous.

C 16.

Bar codes are most widely used in which application(s)? A. General ledger B. Sales order and accounts receivable C. Accounts payable and purchase order D. Inventory

17.

What is/are benefits of using automatic ID? (Bar code is the most common example.) A. Low cost of implementation B. Reduced cost of data entry C. Significantly increased accuracy of data entry D. Both A and B E. A, B, and C

E 18.

The symbology used to label a Scotch brand, 800 megabyte tape drive using its part number of SC800T would most likely be A. Universal Product Code (UPC) B. Code 39

B 19.

DataGlyphs are created using A. Ones and zeros B. Plus and minus signs C. Slashes and backslashes D. Bars

C 20.

The technology permitting data on an ordinary business document to be encoded in what appear to be decorative touches on the document is A. PDF417 B. OCR C. ASCII D. DataGlyphs

D 21.

The UPC bar code has a center divider with the field on the left and the field on the right representing A. The industry and the company ID, respectively B. The product ID and the company ID, respectively C. The company ID and the product ID, respectively D. The company ID and the industry, respectively

C 22.

The barcode symbology that uses several (more than 2) bar widths is A. Code 39 B. UPC

23.

Which of the following statements is/are true regarding a digital signature? A It is generated from the contents of the message and the sender’s private key. B. Extra data are appended to an electronic message to identify and authenticate the sender and message data using public-key encryption. C. If the receiver of a message sees that a digital signature is attached, the receiver can be confident that no one has altered the message and that the sender is who the sender claims to be. D. It is generated from the contents of the message and the sender’s private key and extra data are appended to an electronic message to identify and authenticate the sender and message data using public-key encryption.

D 24.

How can companies that use e-commerce prevent repudiation? A. Incorporate firewalls in their systems B. Make payments using electronic funds transfer C. Create audit trails by logging message transmissions D. Use digital signatures

D 25.

Which of the following web assurance services provides a report indicating whether there are adequate controls over the company’s IT-based system and a description of the management’s assertions to the effectiveness of the controls? A. TRUSTe B. VeriSign C. BBB OnLine D. WebTrust E. SysTrust

E 26.

Which of the following web assurance services assures the consumer that the site is genuine and not a “spoof” site? A. TRUSTe B. VeriSign C. BBB OnLine D. WebTrust E. SysTrust

B 27.

Which of the following is(are) common third-party web assurance service(s) for ecommerce? A. TRUSTe B. VeriSign C. BBB OnLine D. WebTrust E. SysTrust F. All of these

28.

What is the name of a business-to-business configuration where a company provides its own Web-based EDI hosting service? A. Internet EDI B. Web-EDI C. XML/EDI D. VAN/EDI

B 29.

Which of the following technologies would an organization use to prevent access to its private network? A. Digital signature B. Firewall C. Web assurance service D. Encryption

B 30.

Which of the following technologies acts as a go-between between a company employee and the Internet? A. Digital signature B. Proxy server C. Web assurance service D. Encryption

B 31.

What can a company do to protect an e-commerce customer’s personal information that the company has stored? A. Assign user rights to company employees B. Implement a proxy server C. Require digital signatures D. Adopt web assurance service standards

A TRUE/FALSE QUESTIONS 1.

Companies are rapidly moving their EDI transaction to the Internet because this approach is much less expensive while providing the same level of security as value-added networks. F

In addition to conducting business-to-business over the Internet, business-to-business can also be conducted over an Extranet. T

An Extranet consists of two Intranets and one value added network. F

The acronym “VAN” means value added network. T

A self-checking symbology is one that supports check digits. F

Most bar code symbologies use both the spaces (white bars) as well as the dark bars to encode data. T

The international EDI standard is called EDIFACT representing Electronic Data Interchange for Administration, Commerce, and Transportation. T

Continuous bar codes are those that have no inter-character gaps. T

The “quiet zone” is the white spaces between bar codes. F

10.

A firewall consists of hardware and software that filter messages going out on the Internet. F

11.

Electronic business is any transaction (such as a purchase or a sale) completed over a computer network that involves the transfer of ownership or rights to use goods or services. F

12.

Electronic data interchange is the computer exchange of business documents between two organizations by telephone, radio, microwave, satellite transmission, or the Internet using a public standard format. T

13.

Trading partners are two organizations who agree to join in a business arrangement to trade commodities. F

14.

EDI standards are set under the supervision of the American National Standards Institute domestically and the United Kingdom internationally. F

15.

The complete format specifications for any EDI document is known as a transaction set. T

16.

Internet EDI employs the services of both the Internet and a VAN. F

17.

In Web-EDI, a trading partner logs onto the web site and completes a form that is submitted to the web server where it is validated and packaged as an EDI message. T

18.

A security feature for Extranets is to create tunnels of secured data flows using cryptography and authorization algorithms. T

19.

Although the rapid availability of data is a benefit of bar codes, it is very expensive to implement. F

20.

Security issues related to e-business include confidentiality of the messages, authentication to determine if the sender is who the sender claims to be, and prevention of access to the clients and servers on the network. T

SHORT ANSWER/ESSAY QUESTIONS 1.

Identify the three approaches to support EDI over the Internet and briefly describe each one. Answer: The three approaches are Internet EDI, Web-EDI, and XML/EDI. Internet EDI replaces VANs with Internet service providers. Standards for using encryption and digital certificates to secure EDI messages have been developed by a group called EDIINT. The trading partners purchase connectivity software that supports EDIINT. Web-EDI allows a small business to participate in EDI using only a browser and an Internet connection. The larger company provides a Web-based EDI hosting service with web-based forms for every EDI message it accepts. The smaller trading partner can log onto the larger company’s web site and complete a form. This form goes to the larger company’s web server where it is validated, packaged as an EDI message, and then routed as a normal EDI message. XML/EDI uses templates that enable the mapping of EDI messages from the way the data are stored in a database to the EDI standard message. XML/EDI processes the message on the client’s side. The client company has to upgrade its accounting package to one that supports XML/EDI. The client downloads the XML/EDI template and a software agent helps the client create the document.

Dave is designing a member ID card to issue to customers of his video rental store. He wishes to print a barcode on the card that represents a member’s name and telephone

number. Which symbology would you recommend to Dave and why? Select from those symbologies covered in this chapter. Answer: Code 39 should be selected because it can represent both alphabetic and numeric characters. 3.

Jones Manufacturing Company has just received notice from its most important customer—MasMart—that EDI will be the sole method of handling all data exchanges and remittances with its suppliers within twelve months. A. Describe the various ways that this change can benefit Jones. B. Jones sells its product in North America, Latin America, and the Far East. If Jones anticipates using EDI with all its customers, what EDI protocol should it adopt as a standard? If MasMart uses X12, what does this suggest regarding EDI communications between Jones and MasMart? Answers: A. Jones will benefit from reduced paperwork cost and reduced cost of processing transactions. With an integrated system, no data entry will be required to receive and process purchase orders from MasMart. What were paper price lists and invoices will be delivered electronically, and cash collections should be speeded up through use of electronic funds transfer. Some reduction in inventory may occur for Jones, although it would be far greater if Jones also extended EDI trading to Jones’ suppliers. B. Jones should adopt EDIFACT as a standard if it will be using EDI internationally since it is the widely used international protocol. Since MasMart uses X12, Jones should probably use a VAN that will convert the EDIFACT data sent into X12 for MasMart and convert data sent from MasMart to Jones from X12 to EDIFACT.

If Jones Manufacturing (see preceding question) were requested by MasMart to affix barcodes to products sold to MasMart, which of the symbologies discussed in this chapter would most likely be selected and why? Answer: The Universal Product Code would most likely be selected.

Identify three of the four functions of a VAN listed in the chapter. Answer: a. Provide implementation and continuing support for new EDI users b. Accept EDI transmissions to outside parties and store them c. Translate the transmissions from the sender’s format to that of the recipient, if necessary d. Deliver EDI transmissions when requested by intended recipients

Identify at least two benefits of EDI. Answer: a. The elimination of the expense of purchasing, handling, and mailing paper documents b. Efficiencies gained by avoiding data entry of incoming documents c. Integrating one’s operations with suppliers and customers

Identify the two barcode symbologies discussed in the text along with a brief description. Answer: Code 39 A discrete symbology of nine bars of which five are black and four are white. It is alphanumeric and is widely used outside the grocery industry. University Product Code (UPC) A symbology that can be printed directly on grocery packages. It is numeric, fixed length, and continuous.

List the three types of e-business and give one example of each. Answer: Business to business—EDI Business within the organization—Intranet and bar coding Business to consumer—retailing transactions on the Web

Briefly explain the difference in point-to-point versus value-added-network EDI architecture. Answer: In point-to-point architecture a customer’s computer is connected directly via a dedicated line into a vendor’s computer. A VAN is a service provider that expedites the delivery of electronic documents over a private network.

10.

Define a digital signature. Answer: A digital signature is extra data appended to a message which identifies and authenticates the sender and message data using public-key encryption.

11.

Explain the differences between VeriSign, TRUSTe, BBBOnline, CPA WebTrust, and SysTrust by indicating what each assurance service attests to. Answer: TRUSTe (www.TRUSTe.org) Similar to the Good Housekeeping Seal, this assurance service attests to the privacy of personal information, how that information is collected and used, and whether the information will be shared. Often choices are given to the consumer

as to whether they want the information shared with other businesses. Review of the TRUSTe icon will also indicate to the consumer the security procedures for protecting information and how inaccuracies in the information can be corrected. VeriSign (www.verisign.com) The purpose of this service is to assure the consumer that the site is genuine and not a “spoof” site. Protection from alteration or interception of financial data and online forms is assured. Presence of the VeriSign symbol does not provide assurance regarding the business practices of the site. BBBOnLine (www.online.org) Presence of this symbol on a website assures the user that the business: 1) is a member of their local Better Business Bureau (BBB), 2) has been in business for at least a year, and 3) has committed to abide by the BBB truth-in-advertising standards, and 4) must provide procedures for dispute resolution with consumers over the goods or services on the website. The symbol also implies that the company has agreed to responsible advertising on websites geared for children. WebTrust (infotech.aicpa.org/Resources) This symbol tells the consumer that the website has been independently examined by CPAs, who have issued a report attesting to the business practices (including how orders are processed and/or returned), information security, controls over private information (e.g., encryption of credit card numbers). SysTrust (infotech.aicpa.org/Resources) SysTrust goes beyond the “family” of services offered through WebTrust to attest to the reliability of an entity’s IT-based systems. The CPA evaluates the client’s system based on criteria related to controls, security, availability, processing integrity, and confidentiality. 12.

Define an Electronic Data Interchange (EDI) system. List three advantages to using one of these systems. Answer: EDI replaces the traditional purchase order system by allowing the electronic exchange of information related to purchase orders between the vendor and the purchasing company. Advantages include: reduction in paperwork and input errors, speeding up the purchasing process, reduction in number of vendors (with closer relationships with the remaining vendors), prices usually are negotiated and fixed for a longer period, planned products and product volume information exchanged with vendors (for planning purposes)

Chapter 15 AIS Selection and Implementation MULTIPLE CHOICE QUESTIONS 1.

Software that groups an organization’s accounting function with finance, sales, manufacturing, and human resources into a coherent, integrated system is referred to as a what? A. Global resource planning package B. Enterprise resource planning package C. Worldwide enterprise resource package D. Global accounting information package

B 2.

Which of the following is not an ERP package? A. Oracle E-Business Suite B. Lawson Enterprise C. Microsoft Dynamics GP D. Peachtree by Sage

D 3.

What is AIS installation? A. The transfer of AIS programs to client computers B. A process that is more comprehensive than implementation C. A process that includes conversion planning and training of new personnel D. All of the above are true about AIS installation.

A 4.

What is modular conversion to a new accounting information system? A. A conversion method that is used when a company has a number of locations, and the AIS is to be installed at each location B. The opposite of a parallel conversion C. The installation of one AIS component at a time and the loading of data only for that component D. A conversion method in which the old system is stopped and existing data are imported to the new system.

C 5.

What is a Gantt chart? A. A diagram planning tool showing the order in which to perform tasks B. A bar chart with all major tasks on the vertical axis and a calendar on the horizontal axis

C. D.

A bar chart with all major tasks on the horizontal axis and a calendar on the vertical axis A decision chart designed to determine a single versus multiple suppliers

B 6.

Because the failure of an AIS may mean bankruptcy for an organization, what is the most stressful method of conversion to an AIS? A. Direct conversion B. Modular conversion C. Parallel conversion D. Pilot conversion

A 7.

What is a common threat in AIS software selection? A. The danger of adopting “cutting edge” technology that contains defects B. Newer software products have a greater number of “bugs.” C. The language in licensing contracts D. All of these are common threats in AIS software selection.

D 8.

What is the most significant advantage of a single supplier of an AIS? A. Greater expertise is available. B. The choice of suppliers will greatly expand. C. One party is responsible for implementation. D. None of these is a significant advantage.

C 9.

What is the most difficult problem associated with parallel conversion to a new AIS? A. The same personnel are needed to operate both systems. B. Implementing real-time processing is difficult. C. Conversion teams must travel from store to store for implementation of the new system. D. Parallel conversions are the most expensive and time consuming type of conversion.

B 10.

What is the first step in planning projects? A. Divide the team into subcommittees with members on more than one subcommittee. B. Perform an informal survey of system users. C. Prepare a preliminary list of constraints. D. Outline the various tasks required.

TRUE/FALSE QUESTIONS 1.

Bar codes are one example of an automatic identification technology used by manufacturers. T

Today, the model for AIS acquisition is to purchase a computer hardware system adequate for the system and then hire programmers to develop the software. F

Many CPAs advise against any modifications of a commercial off-the-shelf AIS. T

Most AIS developers permit no changes to programs, while the next largest group permits only limited changes. T

Parallel conversion is also known as the “big bang.” F

Newer AIS software products will have a greater number of “bugs” than older products. T

If you buy an AIS system directly from a developer, you may have more ability to negotiate than if you buy from a VAR. F

Merchantability refers to the ability of a product to perform some function. T

The current business model for AIS implementation is to purchase a commercial off-theshelf accounting software package. T

10.

The development of accounting systems for microcomputers led to the concentration of accounting functions within the accounting department. F

11.

ERP software caught on so quickly because of its simplicity and low cost. F

12.

Two very good tools for gathering in formation to help select the best accounting system are The Accounting Library and CTS Guides. T

13.

Most accounting VARs handle only one to three accounting software packages. T

14.

Pilot conversion is the installation of one AIS module at a time and loading of data only for that module. F

15.

With parallel conversion, the old system is stopped and the new system is started. F

16.

One way to identify the preliminary requirements of an AIS system is to determine the inadequacies of the existing system. T

17.

Finding the best accounting package for an organization is easy. F

18.

A subcommittee having representatives from all functional areas of the organization should write demonstration scripts that are used to guide demonstrations of the AIS packages. T

SHORT ANSWER QUESTIONS 1.

Discuss what is meant by enterprise resource planning (ERP) packages and give some examples of the leading packages. Answer: ERP packages are AISs designed for companies with worldwide operations. In contrast to the traditional mainframe packages that they replace, the name ERP can be attributed more to the scope of these packages than to the uniqueness of their contribution to an accounting software design. The most extensive packages are designed to support and to conduct the internal operations of every aspect of an organization. They are designed to be adaptable to any industry and have been successfully implemented in several industries. But they do not possess the functionality to succeed in several industries. Process manufacturers, such as petroleum refining, chemical, and paper, have seldom found ERP software adequate to monitor and control their manufacturing processes, and they continue to rely on either proprietary software or specialized packages. The leading ERP packages discussed in this chapter include SAP ERP, Oracle EBusiness Suite, and the Microsoft Dynamics product lines.

Distinguish between AIS installation and AIS implementation.

Answer: AIS installation involves the transfer of AIS programs to client computers whereas implementation is far more comprehensive. It includes installation, but also encompasses conversion planning, resolution of operational and software incompatibilities, data transfer to the new system, training of client personnel, testing the new system, and monitoring operations for an initial period. 3.

Discuss the various methods of conversion to an AIS system. Answer: There are various methods of conversion to an AIS system. Modular conversion is the installation of one AIS module at a time and the loading of data only for that module. For example, an organization acquiring three modules of an AIS (GL, AR, AP), might decide to install GL in January, AR in February, and AP in March. Pilot conversions are used when there are a number of locations and the AIS or a component of it is to be installed at each location. A chain store operation such as J. C. Penney Company, upon selecting a new AIS for its retail stores, would likely make at least one or two prototype conversions to test the system. With parallel conversion, you continue to operate the old AIS while simultaneously implementing the new AIS. Thus, the two systems are run in parallel until it is concluded that the new system is operating satisfactorily. Direct conversion, the opposite of parallel conversion, is also known as the “big bang.” With direct conversion, the old system is stopped, and existing data are ported to the new s system. Then the new system is started.

List the tasks required in a systems acquisition project. Answer: The tasks required in a systems acquisition project are: a. Create the Project Team and Plan the Project. This involves organizing the project team, which will ordinarily be composed of employees from various functional areas of the organization, and planning the project. b. State Preliminary Requirements and Constraints. c. Gather Market and Product Information. This can be accomplished through vertical market sources, such as trade associations and their publications, and the Internet. Horizontal market sources should also be reviewed such as various Internet sites that list leading providers of microcomputer accounting packages, The Accounting Library, and CTS Guides. d. Prepare a Short Vendor List. This will probably include several of the companies/products described in the first part of Chapter 15. e. Define the Detailed Requirements. Each software package has databases containing attributes of AIS packages. After you complete the on-screen questionnaires, the software provides reports in a variety of formats showing the relative ranking of AIS packages based on the criteria you have specified. f. Prepare and Distribute Request for Proposals. g. Evaluate Proposals.

h. Create Scripts and Plan Demonstrations. A subcommittee having representatives from all functional areas should write demonstration scripts that will be used to guide demonstrations of the products. i. Contact References and Evaluate Vendors. j. Evaluate Products and Make Final Decision. k. Install and Test Hardware and Software. l. Train Users with Demonstration Data. m. Convert and Load Data Files and Test. n. Evaluate Operation of the New System. 5.

Discuss issues involved in system acquisition. Answer: Several issues are involved in system acquisition. For instance, the degree of program modification permitted becomes important because many CPAs advise against any modification of a packaged AIS. The reason is that when new versions of the software are released, the modification must be re-done. The plurality of software companies permits no changes to programs, while the next largest group permits only limited changes. Another issue in system acquisition pertains to single versus multiple suppliers. An advantage of a single supplier is that one party has sole responsibility for the entire implementation. If multiple vendors provide different programs and implementation, processing problems can be blamed on any component of the system. A single vendor for an entire AIS may be feasible when you acquire an ERP package because these companies sell direct. However, two advantages of multiple suppliers are (1) greater expertise may be available and (2) the choice of potential suppliers will be greatly expanded. Conversion methodology is yet another issue that must be addressed. Various conversions methods may be used including: modular, pilot, parallel, and direct. Finally, the last issue for system acquisition involves the planning tools for the project. It is essential that all steps in the project be carefully planned. The Gantt Chart is a bar chart of all major steps with a calendar on the horizontal axis. It depicts the calendar time required for each task. However, it does not show the order in which tasks must be performed. Therefore, a network diagram can be useful for this purpose.

What is the difference in AIS installation and AIS implementation? Answer: By AIS installation, we mean the transfer of AIS programs to client computers. AIS implementation is far more comprehensive. It includes installation, but also encompasses conversion planning, resolution of operational and software incompatibilities, data transfer to the new system, training of client personnel, testing the new system, and monitoring operations for an initial period.

What are four issues in system acquisition?

a. b. c. d. 8.

Answer: Degree of program modification Single versus multiple suppliers Conversion methodology Planning tools Describe two planning tools used in AIS selection and implementation. Answer: Carefully planning all tasks in the AIS implementation project is essential. Two useful planning tools are the network diagram and the Gantt Chart. A network diagram shows all the major tasks and the order in which the tasks must be performed. Such a diagram is depicted in Exhibit 15.2. A Gantt Chart is a bar chart of all the major tasks on the vertical axis and a calendar on the horizontal axis. It depicts the budgeted calendar time required for each task. The chart in Exhibit 15.3 describes a system selection and implementation plan. It shows only the budgeted times. As the project proceeds, the actual times can be shown with additional bars along side of the budgeted times.