CHAPTER 1 1. An example of a financial transaction is a. the purchase of a computer b. a supplier’s price list c. a delivery schedule d. an employee benefit brochure 2. Most of the inputs to the General Ledger System come from the Financial Reporting System True False 3. One of the greatest disadvantages of database systems is that all data is always available to all users True False 4. Which of the following is not a business resource a. raw material b. labor c. information d. all are business resources 5. Transaction processing systems convert non-financial transactions into financial transactions True False 6. Information Technology (IT) audits can be performed by both internal and external auditors True False 7. Which level of management is responsible for short-term planning and coordination of activities necessary to accomplish organizational objectives a. operations management b. middle management c. top management d. line management 8. Which level of management is responsible for controlling day-to-day operations a. operations management b. middle management c. top management d. line management 9. Increased control is one of the key advantages of distributed data processing True False 10. The ability to achieve the goals of a system depends upon the effective functioning and harmonious interaction between its subsystems. This is called a. system decomposition b. system redundancy c. backup system d. subsystem interdependency 11. Information is a business resource True False 12. The internal auditor represents the interests of third-party outsiders True False 13. A balance sheet prepared in conformity with GAAP is an example of discretionary reporting True False 14. Independent auditing is performed by a. external auditors b. internal accountants c. licensed auditors d. third-party accountants 15. The database administrator is responsible for the security and integrity of the database True False 16. The Management Reporting System provides the internal financial information needed to manage a business. True False 17. When preparing discretionary reports, organizations can choose what information to report and how to present it. True False 18. Which subsystem is not part of the Accounting Information System? a. Transaction Processing System b. Expert System c. General Ledger/Financial Reporting System d. Management Reporting System 19. The term “accounting independence” refers to a. data integrity b. separation of duties, such as record keeping and custody of physical resources c. generation of accurate and timely information d. business segmentation by function 20. The value of information for users is determined by all of the following but a. reliability b. relevance c. convenience d. completeness 21. Information lacking reliability may still have value True False 22. The objectives of all information systems include all of the following except a. support for the stewardship function of management b. evaluating transaction data c. support for the day-to-day operations of the firm d. support for management decision making 23. In the distributed data processing approach a. computer services are consolidated and managed as a shared organization resource b. the computer service function is a cost center c. the end users are billed using a charge-back system d. computer services are organized into small information processing units under the control of end users 24. An example of a nonfinancial transaction is a. sale of products b. cash disbursement c. log of customer calls d. purchase of inventory 25. An information system is an example of a natural system True False CHAPTER 2 : TRUE OR FALSE 1. Processing more transactions at a lower unit cost makes batch processing more efficient than real-time systems. True 2. The process of acquiring raw materials is part of the conversion cycle. False 3. Directing work-in-process through its various stages of manufacturing is part of the conversion cycle. True 4. The top portion of the monthly bill from a credit card company is an example of a turn-around document. True 5. The general journal is used to record recurring transactions that are similar in nature. False 6. Document flowcharts are used to represent systems at different levels of detail. False 7. Data flow diagrams represent the physical system. False 8. Document flowcharts are often used to depict processes that are handled in batches. True 9. Program flowcharts depict the type of media being used (paper, magnetic tape, or disks) and terminals. False 10. System flowcharts represent the input sources, programs, and output products of a computer system. True 11. Program flowcharts are used to describe the logic represented in system flowcharts. True 12. Batch processing systems can store data on direct access storage devices. True 13. Backups are automatically produced in a direct access file environment. False 14. The box symbol represents a temporary file. False 15. Auditors may prepare program flowcharts to verify the correctness of program logic. True 16. A control account is a general ledger account which is supported by a subsidiary ledger. True 17. The most significant characteristic of direct access files is access speed. True 18. Real time processing is used for routine transactions in large numbers. False 19. Batch processing is best used when timely information is needed because this method processes data efficiently. False 20. An inverted triangle with the letter "N" represents a file in "name" order. False 21. Real-time processing in systems that handle large volumes of transactions each day can create operational inefficiencies. True 22. Operational inefficiencies occur because accounts unique to many concurrent transactions need to be updated in real time. False 23. Operational inefficiencies occur because accounts common to many concurrent transactions need to be updated in real time. True 24. Batch processing of noncritical accounts improves operational efficiency. True 25. Batch processing of accounts common to many concurrent transactions reduces operational efficiency. False 1. Which system is not part of the expenditure cycle? a. cash disbursements b. payroll c. production planning/control d. purchases/accounts payable 2. Which system produces information used for inventory valuation, budgeting, cost control, performance reporting, and make-buy decisions? a. sales order processing b. purchases/accounts payable c. cash disbursements d. cost accounting 3. Which of the following is a turn-around document? a. remittance advice b. sales order c. purchase order d. payroll check 4. The order of the entries made in the ledger is by a. transaction number b. account number c. date d. user 5. The order of the entries made in the general journal is by a. date b. account number c. user d. customer number 6. In general a special journal would not be used to record a. sales b. cash disbursements c. depreciation d. purchases 7. Which account is least likely to have a subsidiary ledger? a. sales b. accounts receivable c. fixed assets d. inventory 8. Subsidiary ledgers are used in manual accounting environments. What file is comparable to a subsidiary ledger in a computerized environment? a. archive file b. reference file c. transaction file d. master file 9. A journal is used in manual accounting environments. What file is comparable to a journal in a computerized environment? a. archive file b. reference file c. transaction file d. master file 10. In a computerized environment, a list of authorized suppliers would be found in the a. master file b. transaction file c. reference file d. archive file 11. Which of the following is an archive file? a. an accounts payable subsidiary ledger b. a cash receipts file c. a sales journal d. a file of accounts receivable that have been written off 12. Which document is not a type of source document? a. a sales order b. an employee time card c. a paycheck d. a sales return receipt 13. The most important purpose of a turn-around document is to a. serve as a source document b. inform a customer of the outstanding amount payable c. provide an audit trail for the external auditor d. inform the bank of electronic funds deposits 14. Which type of graphical documentation represents systems at different levels of detail? a. data flow diagram b. document flowchart c. system flowchart d. program flowchart 15. Data flow diagrams a. depict logical tasks that are being performed, but not who is performing them b. illustrate the relationship between processes, and the documents that flow between them and trigger activities c. represent relationships between key elements of the computer system d. describe in detail the logic of the process 16. Document flowcharts a. depict logical tasks that are being performed, but not who is performing them b. illustrate the relationship between processes, and the documents that flow between them and trigger activities c. represent relationships between key elements of the computer system d. describe the logic of the process 17. When determining the batch size, which consideration is the least important? a. achieving economies by grouping together large numbers of transactions b. complying with legal mandates c. providing control over the transaction process d. balancing the trade off between batch size and error detection 18. In contrast to a real-time system, in a batch processing system a. there is a lag between the time when the economic event occurs and the financial records are updated b. relatively more resources are required c. a greater resource commitment per unit of output is required d. processing takes place when the economic event occurs 19. In contrast to a batch processing system, in a real-time system a. a lag occurs between the time of the economic event and when the transaction is recorded b. relatively fewer hardware, programming, and training resources are required c. a lesser resource commitment per unit of output is required d. processing takes place when the economic event occurs 20. The type of transaction most suitable for batch processing is a. airline reservations b. credit authorization c. payroll processing d. adjustments to perpetual inventory 21. The type of transaction most suitable for real-time processing is a. recording fixed asset purchases b. recording interest earned on long-term bonds c. adjusting prepaid insurance d. recording a sale on account 22. Which step is not found in batch processing using sequential files? a. control totals b. sort runs c. edit runs d. immediate feedback of data entry errors 23. Both the revenue and the expenditure cycle can be viewed as having two key parts. These are a. manual and computerized b. physical and financial c. input and output d. batch and real-time 24. All of the following can provide evidence of an economic event except a. source document b. turn-around document c. master document d. product document 25. Which method of processing does not use the destructive update approach? a. batch processing using direct access files b. real-time processing c. batch processing using sequential files d. all of the above use the destructive update approach 26. The characteristics that distinguish between batch and real-time systems include all of the following except a. time frame b. resources used c. file format d. efficiency of processing 27. A file that stores data used as a standard when processing transactions is a. a reference file b. a master file c. a transaction file d. an archive file 28. Sequential storage means a. data is stored on tape b. access is achieved through an index c. access is direct d. reading record 100 requires first reading records 1 to 99 29. Real-time processing would be most beneficial in handling a firm's a. fixed asset records b. retained earning information c. merchandise inventory d. depreciation records 30. Which accounting application is least suited for batch processing? a. general ledger b. vendor payments c. sales order processing d. payroll 31. Which accounting application is best suited for batch processing? a. general ledger b. vendor payments c. sales order processing d. payroll 32. Operational inefficiencies occur because a. accounts both common and unique to many concurrent transactions need to be updated in real time. b. accounts common to many concurrent transactions need to be updated in real time. c. accounts unique to many concurrent transactions need to be updated in real time. d. None of the above are true statements 33. Operational efficiencies can be improved by a. updating accounts both common and unique to many concurrent transactions in real time. b. updating accounts both common and unique to many concurrent transactions in batch mode. c. updating accounts unique to many concurrent transactions in real time and updating common accounts in batch mode. d. None of the above are true statements IDENTIFICATION 1. This form is issued by the buyer, and presented to the seller, to indicate the details for products or services that the seller will provide to the buyer. Information included on this form would be products, quantities, and agreed-upon prices. purchase order 2. A record keeping tool used to record purchases in a manual accounting system. This "tool “would consist of recording all of the purchased orders issued to vendors in a chronological order. purchase journal 3. This document, prepared and maintained by the receiving department, is a sequential listing of all receipts. receiving log 4. Use letters with meaning. The postal state abbreviations are mnemonic. mnemonic codes 5. The policies and procedures that employees follow in completing the purchase of goods or materials, capturing vendor data and purchase quantities, and routing the resulting purchasing documents to the proper departments within the company are called: processes 6. The acquisition of materials and supplies and the related cash disbursements is referred to as: the procurement process 7. This form is prepared to document the need to make a purchase and requests that the specific items and quantities be purchased. purchase requisition 8. Represent items in some sequential order. Pre-numbered checks are one. sequential codes 9. Use sequential numbering in specific parts of the total code-all current assets begin with '1, fixed asset '2, etc. block codes 10. Use block codes and start assets with 1, liabilities with 2, etc. chart of accounts 11. Are similar to numeric codes with increased options. A two-character code. alphabetic codes CHAPTER 3 Ethics - are needed when conflicts arise—the need to choose Employees, management, stakeholders - In business, conflicts may arise between: How do managers decide on what is right in conducting their business? How do they achieve it? Business ethics involves finding the answers to two questions. What are those? Computer Ethics - concerns the social impact of computer technology (hardware, software, and telecommunications). What are the main computer ethics issues? Privacy Security Ownership of property Equity in access Environmental issues Artificial intelligence Unemployment and displacement Misuse of computer Characteristics of Legal Fraud: False Representation Material Fact Intent to deceive Justified Reliance Injury or loss Fraud - A false statement or disclosure with that fact must be substantial in inducing someone to act and Intent to deceive must exist. True - The misrepresentation must have resulted in justifiable reliance upon information, which caused someone to act. True or False? True - The misrepresentation must have caused injury or loss. True or False? Sarbanes-Oxley Act of 2002 - Its principal reforms pertain to Creation of the Public Company Accounting Oversight Board (PCAOB), auditor independence, corporate governance and responsibility, disclosure requirements, and New federal crimes for the destruction of or tampering with documents, securities fraud, and actions against whistle blowers. Employee Fraud - Committed by non-management personnel and usually consists of an employee taking cash or other assets for personal gain by circumventing a company's system of internal controls Management Fraud - Frequently involves using financial statements to create an illusion that an entity is more healthy and prosperous than it actually Management Fraud - Involves misappropriation of assets, it frequently is shrouded in a maze of complex business transactions Fraudulent Statements, Corruption, Asset Misappropriation - Three categories of fraud schemes according to the Association of Certified Fraud Examiners Fraudulent Statements - Misstating the financial statements to make the copy appear better than it is Fraudulent Statements - May also be related to management bonus packages being tied to financial statements Fraudulent Statements - May be tied to focus on short-term financial measures for success Fraudulent Statements -Usually occurs as management fraud Corruption - Involves bribery, illegal gratuities, conflicts of interest or economic extortion. Foreign Corrupt Practice Act of 1977 - Indicative of corruption in business world and impacted accounting by requiring accurate records and internal controls Asset Misappropriation - Most common type of fraud and often occurs as employee fraud Asset Misappropriation - making charges to expense accounts to cover theft of asset (especially cash) Lapping - using customer's check from one account to cover theft from a different account Transaction Fraud - deleting, altering, or adding false transactions to steal assets Internal Control Objectives According to AICPA SAS (SEPM) Safeguard assets of the firm Ensure accuracy and reliability of accounting records and information Promote efficiency of the firm's operations Measure compliance with management's prescribed policies and procedures Management Responsibility - The establishment and maintenance of a system of internal control is the responsibility of management Reasonable Assurance - The cost of achieving the objectives of internal control should not outweigh its - benefits Limitations of Internal Controls (PCMC) Possibility of honest errors Circumvention via collusion Management override Changing conditions Exposures of Weak Internal Controls (Risk) [DTCD] Destruction of an asset Theft of an asset Corruption of information Disruption of the information system SAS 78 / COSO Describes the relationship between the firm's internal control structure, auditor's assessment of risk, and the planning of audit procedures True - The weaker the internal control structure, the higher the assessed level of risk; the higher the risk, the more auditor procedures applied in the audit. True or False? Five Internal Control Components of SAS 78 / COSO Control environment Risk assessment Information and communication Monitoring Control activities Control Environment - Includes Integrity and ethics of management, Organizational structure, Role of the board of directors and the audit committee, Management's policies and philosophy, Delegation of responsibility and authority, Performance evaluation measures, External influences—regulatory agencies and Policies and practices managing human resources. Risk Assessment - Identify, analyze and manage risks relevant to financial reporting such as changes in external environment, risky foreign markets, significant and rapid growth that strain internal controls, new product lines, restructuring, downsizing and changes in accounting policies Information and Communication - The AIS should produce high quality information which identifies and records all valid transactions, provides timely information in appropriate detail to permit proper classification and financial reporting, accurately measures the financial value of transactions and accurately records transactions in the time period in which they occurred Monitoring - The process for assessing the quality of internal control design and operation Control Activities - Policies and procedures to ensure that the appropriate actions are taken in response to identified risks Control Activities Fall into two distinct categories IT controls - relate specifically to the computer environment Physical controls - primarily pertain to human activities Two Types of IT Controls General Controls - pertain to the entity wide computer environment Application Controls - ensure the integrity of specific systems General Controls - controls over the data center, organization databases, systems development, and program maintenance Application Controls - controls over sales order processing, accounts payable, and payroll applications Six types of Physical Controls - Transaction Authorization Segregation of Duties Supervision Accounting Records Access Control Independent Verification Transaction Authorization - used to ensure that employees are carrying out only authorized transactions General Authorizations - Authorization for everyday procedures Specific Authorizations - Authorization for non-routine transactions Segregation of Duties in Manual Systems - separation between authorizing and processing a transaction, custody and record keeping of the asset and sub tasks Segregation of Duties in Computerized Systems - separation between program coding,program processing and program maintenance Supervision - a compensation for lack of segregation; some may be built into computer systems Accounting Records - These provide an audit trail Access Controls - help to safeguard assets by restricting physical access to them Independent Verification - reviewing batch totals or reconciling subsidiary accounts with control accounts Transaction Authorization - The rules are often embedded within computer programs Segregation of Duties - A computer program may perform many tasks that are deemed incompatible thus the crucial need to separate program development, program operations, and program maintenance. Supervision - The ability to assess competent employees becomes more challenging due to the greater technical knowledge required Accounting Records - ledger accounts and sometimes source documents are kept magnetically and no audit trail is readily apparent Access Control - Data consolidation exposes the organization to computer fraud and excessive losses from disaster Independent Verification - When tasks are performed by the computer rather than manually, the need for an independent check is not necessary. However, the programs themselves are checked.
