AIS
Chapter 1
Multiple-Choice Questions
1. Which of the following is NOT a financial
transaction?
a. purchase of products
b. cash receipts
c. update valid vendor file
d. sale of inventory
2. The following are subsystems of the
Accounting Information System, EXCEPT
a. Transaction Processing System.
b. Human Resources System.
c. General Ledger/Financial Reporting System.
d. Management Reporting System.
3. Which of the following is NOT a purpose of the
Transaction Processing System?
a. managing and reporting on the status of financial investments
b. converting economic events into financial
transactions
c. distributing essential information to operations
personnel to support their daily operations
d. recording financial transactions in the
accounting records
4. The objectives of the data collection activity of
the general model for Accounting Information
Systems are to collect data that are
a. relevant and redundant.
b. efficient and objective.
c. efficient and redundant.
d. efficient and relevant.
5. Which of the following is NOT a characteristic
of effective information?
a. relevance
b. accuracy
c. summarization
d. precision
6. Which of the following is NOT a database management task?
a. retrieval
b. storage
c. summarization
d. deletion
7. When viewed from the highest to most
elemental level, the data hierarchy is
a. attribute, record, file.
b. record, attribute, key.
c. file, record, attribute.
d. file, record, key. e. key, record, file.
8. Which is NOT an accountant’s primary role in
in- formation systems?
a. system user
b. system auditor
c. system designer
d. system programmer
9. Which of the following is NOT an objective of
all information systems?
a. support for the stewardship function of
management
b. support for management decision making
c. support for the day-to-day operations of the
firm
d. all of the above are objectives
10. Which of the following best describes the
activities of the materials management function?
a. purchasing, receiving, and inventory control
b. receiving, sales, distribution, and purchasing
c. receiving, storage, purchasing, and accounts
payable
d. purchasing, receiving, and storage e.
purchasing, storage, and distribution
11. Which of the following best describes the
activities of the production function?
a. maintenance, inventory control, and production
planning
b. production planning, quality control,
manufacturing, and cost accounting
c. quality control, production planning,
manufacturing, and payroll
d. maintenance, production planning, storage,
and quality control e. manufacturing, quality
control, and maintenance
12. Which of the following best describes the
activities of the accounting function?
a. inventory control, accounts payable, fixed
assets, and payroll
b. fixed assets, accounts payable, cash disbursements, and cost accounting
c. purchasing, cash receipts, accounts payable,
cash disbursements, and payroll
d. inventory control, cash receipts, accounts
payable, cash disbursements, and payroll
e. inventory control, cost accounting, accounts
payable, cash disbursements, and payroll
13. Which statement best describes the issue of
distributed data processing (DDP)?
a. The centralized and DDP approaches are
mutually exclusive; an organization must choose
one approach or the other.
b. The philosophy and objective of the organization’s management will determine the extent of
DDP in the firm.
c. In a minimum DDP arrangement, only data
input and output are distributed, leaving the tasks
of data control, data conversion, database
management, and data processing to be centrally managed.
d. The greatest disadvantage of a totally distributed environment is that the distributed
information processing unit locations are unable
to communicate and coordinate their activities.
e. Although hardware (such as computers,
database storage, and input/output terminals)
can be effectively distributed, the systems
development and maintenance tasks must remain
centralized for better control and efficiency.
S—external user: stakeholder
a. Internal Revenue Service
S
b. Inventory control manager
c. Board of directors
d. Customers
e. Lending institutions
f. Securities and Exchange Commission
g. Stockholders
h. Chief executive officer
i. Suppliers j. Bondholders
S
INFORMATION SYSTEM CATEGORIZATION
Classify the following items as either:
TPS—transaction processing system
FRS—financial reporting system
MRS—management reporting system
a. Variance reports
b. Sales order capture
c. Balance sheet
d. Budgets
e. Purchase order preparation
f. Tax returns
g. Sales summary by product line
h. Cash disbursements preparation
i. Annual report preparation
j. Invoice preparation
k. Cost-volume-profit analysis
14. Which of the following is a disadvantage of
distributed data processing?
a. End-user involvement in systems operation is
decreased.
b. Disruptions due to mainframe failures are
increased.
c. The potential for hardware and software
incompatibility across the organization is
increased.
d. The time between project request and completion is increased.
e. All of the above are disadvantages.
CHAPTER 2
Multiple-Choice Questions
1. Which statement is NOT true?
a. Business activities begin with the acquisition of
materials, property, and labor in exchange for
cash.
b. The conversion cycle includes the task of
determining raw materials requirements.
c. Manufacturing firms have a conversion cycle
but retail firms do not.
d. A payroll check is an example of a product
document of the payroll system.
e. A journal voucher is actually a special source
document.
USERS OF INFORMATION
Classify the following users of information as
either:
I—internal user
T—external user: trading partner
2. A documentation tool that depicts the physical
flow of information relating to a particular
transaction through an organization is a
a. system flowchart.
b. program flowchart.
c. decision table.
d. work distribution analysis.
e. systems survey.
3. Sequential file processing will not permit
a. data to be edited on a separate computer run.
b. the use of a database structure.
c. data to be edited in an offline mode.
d. batch processing to be initiated from a
terminal.
e. data to be edited on a real-time basis.
4. The production subsystem of the conversion
cycle includes all of the following EXCEPT
a. determining raw materials requirements.
b. make or buy decisions on component parts.
c. release of raw materials into production.
d. scheduling the goods to be produced.
5. Which of the following files is a temporary file?
a. transaction file
b. master file
c. reference file
d. none of the above
6. A documentation tool used to represent the
logi- cal elements of a system is a(n)
a. programming flowchart.
b. entity relationship diagram.
c. system flowchart.
d. data flow diagram.
7. Which of the following is NOT an advantage of
real-time processing files over batch processing?
a. shorter transaction processing time
b. reduction of inventory stocks
c. improved customer service
d. all are advantages
8. Which statement is NOT correct?
a. Legacy systems may process financially
significant transactions.
b. Some legacy systems use database technology.
c. Mainframes are exclusive to legacy systems,
while modern systems use only the client- server
model.
d. All the above are true.
9. Which statement is NOT correct?
a. Indexed random files are dispersed throughout
the storage device without regard for physical
proximity with related records.
b. Indexed random files use disk storage space
efficiently.
c. Indexed random files are efficient when
processing a large portion of a file at one time.
d. Indexed random files are easy to maintain in
terms of adding records.
10. Which statement is NOT correct? The indexed
sequential access method
a. is used for very large files that need both direct
access and batch processing.
b. may use an overflow area for records.
c. provides an exact physical address for each
record.
d. is appropriate for files that require few
insertions or deletions.
11. Which statement is true about a hashing
structure?
a. The same address could be calculated for two
records.
b. Storage space is used efficiently.
c. Records cannot be accessed rapidly.
d. A separate index is required.
12. In a hashing structure
a. two records can be stored at the same
address.
b. pointers are used to indicate the location of all
records.
c. pointers are used to indicate location of a
record with the same address as another record.
d. all locations on the disk are used for record
storage.
13. An advantage of a physical address pointer is
that
a. it points directly to the actual disk storage
location.
b. it is easily recovered if it is inadvertently lost.
c. it remains unchanged when disks are
reorganized.
d. all of the above are advantages of the physical
address pointer.
14. Which of the following is NOT true of a turnaround document?
a. They may reduce the number of errors made
by external parties.
b. They are commonly used by utility companies
(gas, power, water).
c. They are documents used by internal parties
only.
d. They are both input and output documents.
15. Which of the following is NOT a true
statement?
a. Transactions are recorded on source documents and are posted to journals.
b. Transactions are recorded in journals and are
posted to ledgers.
c. Infrequent transactions are recorded in the
general journal.
d. Frequent transactions are recorded in special
journals.
16. Which of the following is true of the
relationship between subsidiary ledgers and
general ledger accounts?
a. The two contain different and unrelated data.
b. All general ledger accounts have subsidiaries.
c. The relationship between the two provides an
audit trail from the financial statements to the
source documents.
d. The total of subsidiary ledger accounts usually
exceeds the total in the related general ledger
account.
17. Real-time systems might be appropriate for
all of the following EXCEPT
a. airline reservations.
b. payroll.
c. point-of-sale transactions.
d. air traffic control systems.
e. all of these applications typically utilize realtime processing.
18.
is the system flowchart symbol for: a.
on-page connector.
b. off-page connector.
c. home base.
d. manual operation. e. document.
19. A chart of accounts would best be coded
using a(n) ______________ coding scheme. a.
alphabetic
b. mnemonic
c. block
d. sequential
20. Which of the following statements is NOT
true?
a. Sorting records that are coded alphabetically
tends to be more difficult for users than sorting
numeric sequences.
b. Mnemonic coding requires the user to
memorize codes.
c. Sequential codes carry no information content
beyond their order in the sequence. d. Mnemonic
codes are limited in their ability to represent
items within a class.
21. A coding scheme in the form of acronyms and
other combinations that convey meaning is a(n)
a. sequential code.
b. block code.
c. alphabetic code.
d. mnemonic code.
CHAPTER 3
Multiple-Choice Questions
1. Management can expect various benefits to
follow from implementing a system of strong
internal control. Which of the following benefits is
least likely to occur?
a. reduction of cost of an external audit
b. prevention of employee collusion to commit
fraud
c. availability of reliable data for decision-making
purposes
d. some assurance of compliance with the Foreign
Corrupt Practices Act of 1977
e. some assurance that important documents and
records are protected
2. Which of the following situations is NOT a
segregation of duties violation?
a. The treasurer has the authority to sign checks
but gives the signature block to the assistant
treasurer to run the check-signing machine.
b. The warehouse clerk, who has custodial
responsibility over inventory in the warehouse,
selects the vendor and authorizes purchases
when inventories are low.
c. The sales manager has the responsibility to
approve credit and the authority to write off
accounts.
d. The department time clerk is given the undistributed payroll checks to mail to absent
employees.
e. The accounting clerk who shares the recordkeeping responsibility for the accounts receivable
subsidiary ledger performs the monthly reconciliation of the subsidiary ledger and the control
account.
3. The underlying assumption of reasonable
assurance regarding implementation of internal
control means that
a. auditor is reasonably assured that fraud has
not occurred in the period.
b. auditors are reasonably assured that employee
carelessness can weaken an internal control
structure.
c. implementation of the control procedure should
not have a significant adverse effect on efficiency
or profitability.
d. management assertions about control
effectiveness should provide auditors with
reasonable assurance.
e. a control applies reasonably well to all forms of
computer technology.
4. To conceal the theft of cash receipts from
custom- ers in payment of their accounts, which
of the fol- lowing journal entries should the
bookkeeper make?
DR
a. Miscellaneous Expense
b. Petty Cash Cash
c. Cash
d. Sales Returns
CR
Cash
Cash
Accounts
Receivable
Accounts
Receivable
e. None of the above
5. Which of the following controls would best prevent the lapping of accounts receivable?
a. Segregate duties so that the clerk responsible
for recording in the accounts receivable subsidiary
ledger has no access to the general ledger.
b. Request that customers review their monthly
statements and report any unrecorded cash
payments.
c. Require customers to send payments directly to
the company’s bank.
d. Request that customers make checks payable
to the company.
6. Providing timely information about transactions
in sufficient detail to permit proper classification
and financial reporting is an example of
a. the control environment.
b. risk assessment.
c. information and communication.
d. monitoring.
7. Ensuring that all material transactions
processed by the information system are valid
and in accordance with management’s objectives
is an example of
a. transaction authorization.
b. supervision.
c. accounting records.
d. independent verification.
8. Which of the following is often called a
compen- sating control?
a. transaction authorization
b. supervision
c. accounting records
d. independent verification
9. Which of the following is NOT an element of
the fraud triangle?
a. ethics
b. justifiable reliance
c. situational pressure
d. opportunity
10. The fraud scheme that is similar to the
‘‘borrowing from Peter to pay Paul’’ scheme is a.
expense account fraud.
b. bribery.
c. lapping.
d. transaction fraud.
CHAPTER 4
1. Which document is NOT prepared by the sales department?
a.
b.
c.
d.
packing slip
shipping notice
bill of lading
stock release
2. Which document triggers the update of the inventory subsidiary ledger?
a.
b.
c.
d.
bill of lading
stock release
sales order
shipping notice
3. Which function should the billing department NOT perform?
a. record the sales in the sales journal
b. send the ledger copy of the sales order to accounts receivable
c. send the stock release document and the shipping notice to the billing department as proof of
shipment
d. send the stock release document to inventory control
4. When will a credit check approval most likely require specific authorization by the credit department?
a.
b.
c.
d.
when verifying that the current transaction does not exceed the customer’s credit limit
when verifying that the current transaction is with a valid customer
when a valid customer places a materially large order
when a valid customer returns goods
5. Which type of control is considered a compensating control?
a.
b.
c.
d.
segregation of duties
access control
supervision
accounting records
6. Which of the following is NOT an independent verification control?
a. The shipping department verifies that the goods sent from the warehouse are correct in type
and quantity.
b. General ledger clerks reconcile journal vouchers that were independently prepared in various
departments.
c. The use of pre-numbered sales orders.
d. The billing department reconciles the shipping notice with the sales invoice to ensure that
customers are billed for only the quantities shipped.
7. Which function or department below records the decrease in inventory due to a sale?
a.
b.
c.
d.
warehouse
sales department
billing department
inventory control
8. Which situation indicates a weak internal control structure?
a.
b.
c.
d.
the AR clerk authorizes the write off of bad debts
the record-keeping clerk maintains both AR and AP subsidiary ledgers
the inventory control clerk authorizes inventory purchases
the AR clerk prepares customer statements every month
9. The bill of lading is prepared by the
a.
b.
c.
d.
sales clerk.
warehouse clerk.
shipping clerk.
billing clerk.
10. Which of following functions should be segregated?
a.
b.
c.
d.
opening the mail and recording cash receipts in the journal
authorizing credit and determining reorder quantities
shipping goods and preparing the bill of lading
providing information on inventory levels and reconciling the bank statement
CHAPTER 5
1. Which document helps to ensure that the receiving clerks actually count the number of goods
received?
a. packing list
b. blind copy of purchase order
c. shipping notice
d. invoice
2. When the goods are received and the receiving report has been prepared, which ledger may be
updated?
a.
b.
c.
d.
standard cost inventory ledger
inventory subsidiary ledger
general ledger
accounts payable subsidiary ledger
3. Which statement is NOT correct for an expenditure system with proper internal controls?
a.
b.
c.
d.
Cash disbursements maintain the check register.
Accounts payable maintains the accounts payable subsidiary ledger.
Accounts payable is responsible for paying invoices.
Accounts payable is responsible for authorizing invoices.
4. Which duties should be segregated?
a.
b.
c.
d.
matching purchase requisitions, receiving reports, and invoices and authorizing payment
authorizing payment and maintaining the check register
writing checks and maintaining the check register
authorizing payment and maintaining the accounts payable subsidiary ledger
5. Which documents would an auditor most likely choose to examine closely to ascertain that all
expenditures incurred during the accounting period have been recorded as a liability?
a.
b.
c.
d.
invoices
purchase orders
purchase requisitions
receiving reports
6. Which task must still require human intervention in an automated purchases/cash disbursements
system?
a.
b.
c.
d.
determination of inventory requirements
preparation of a purchase order
preparation of a receiving report
preparation of a check register
7. Which one of the following departments does not have a copy of the purchase order?
a.
b.
c.
d.
the purchasing department
the receiving department
accounts payable
general ledger
8. Which document typically triggers the process of recording a liability?
a.
b.
c.
d.
purchase requisition
purchase order
receiving report
supplier’s invoice
9. Which of the following tasks should the cash disbursement clerk NOT perform?
a.
b.
c.
d.
review the supporting documents for completeness and accuracy
prepare checks
approve the liability
mark the supporting documents paid
10. Which of the following is true?
a.
b.
c.
d.
The cash disbursement function is part of accounts payable.
Cash disbursements is an independent accounting function.
Cash disbursements is a treasury function.
The cash disbursement function is part of the general ledger department.
CHAPTER 6
1. The document that captures the total amount of time that individual workers spend on each
production job is called a
a.
b.
c.
d.
time card.
job ticket.
personnel action form.
labor distribution form.
2. An important reconciliation in the payroll system is when
a. the general ledger department compares the labor distribution summary from cost accounting
to the disbursement voucher from accounts payable.
b. the personnel department compares the number of employees authorized to receive a
paycheck to the number of paychecks prepared.
c. the production department compares the number of hours reported on job tickets to the
number of hours reported on time cards.
d. the payroll department compares the labor distribution summary to the hours reported on time
cards.
3. Which internal control is not an important part of the payroll system?
a. supervisors verify the accuracy of employee time cards
b. paychecks are distributed by an independent paymaster
c. the accounts payable department verifies the accuracy of the payroll register before
transferring payroll funds to the general checking account
d. the general ledger department reconciles the labor distribution summary and the payroll
disbursement voucher
4. The department responsible for approving pay rate changes is
a.
b.
c.
d.
payroll
treasurer
personnel
cash disbursements
5. Which function should distribute paychecks?
a.
b.
c.
d.
personnel
timekeeping
paymaster
payroll
6. Which transaction is not processed in the fixed asset system?
a.
b.
c.
d.
purchase of building
repair of equipment
purchase of raw materials
sale of company van
7. Depreciation
a. is calculated by the department that uses the fixed asset.
b. allocates the cost of the asset over its useful life.
c. is recorded weekly.
d. results in book value approximating fair market value.
8. Depreciation records include all of the following information about fixed assets EXCEPT the
a.
b.
c.
d.
economic benefit of purchasing the asset.
cost of the asset.
depreciation method being used.
location of the asset.
9. Which control is not a part of the fixed asset system?
a.
b.
c.
d.
formal analysis of the purchase request
review of the assumptions used in the capital budgeting model
development of an economic order quantity model
estimates of anticipated cost savings
10. Objectives of the fixed asset system do NOT include
a.
b.
c.
d.
authorizing the acquisition of fixed assets.
recording depreciation expense.
computing gain and/or loss on the disposal of fixed assets.
maintaining a record of the fair market value of all fixed assets.
11. Which of the following is NOT a characteristic of the fixed asset system?
a.
b.
c.
d.
acquisitions are routine transactions requiring general authorization
retirements are reported on an authorized disposal report form
acquisition cost is allocated over the expected life of the asset
transfer of fixed assets among departments is recorded in the fixed asset subsidiary ledger
CHAPTER 7
1. Which of the following is not an advantageous reason to reduce inventories?
a.
b.
c.
d.
e.
Inventories provide a competitive advantage.
Inventories can invite overproduction.
Inventories are expensive to maintain.
Inventories may conceal problems.
All of these are good reasons to reduce inventories.
2. The fundamental EOQ model
a.
b.
c.
d.
e.
provides for fluctuating lead times during reorder cycles.
is relatively insensitive to errors in demand, procurement costs, and carrying costs.
focuses on the trade-off between production costs and carrying costs.
is stochastic in nature.
is best used in conjunction with a periodic inventory system.
3. Refer to the equation for the EOQ in the text. Car Country, a local Ford dealer, sells 1,280 small SUVs
each year. Keeping a car on the lot costs Car Country $200 per month, so the company prefers to order
as few SUVs as is economically feasible. However, each time an order is placed, the company incurs total
costs of $300. Of this $300, $240 is fixed and $60 is variable. Determine the company’s economic order
quantity.
a.
b.
c.
d.
e.
8
16
18
56
62
4. Which line segment represents the reorder lead time?
a.
b.
c.
d.
e.
AB
AE
AF
BC
AC
5. Which line segment identifies the quantity of safety stock maintained?
a. AB
b. AE
c. AC
d. BC
e. EF
6. Which line segment represents the length of time to consume the total quantity of materials ordered?
a.
b.
c.
d.
e.
DE
BC
AC
AE
AD
7. Which of the following is NOT a principle of lean manufacturing?
a.
b.
c.
d.
Products are pushed from the production end to the customer.
All activities that do not add value and maximize the use of scarce resources must be eliminated.
Achieve high inventory turnover rate.
A lean manufacturing firm must have established and cooperative relationships with vendors. e.
All of the above are lean manufacturing principles.
8. All of the following are problems with traditional accounting information EXCEPT:
a.
b.
c.
d.
e.
Managers in a JIT setting require immediate information.
The measurement principle tends to ignore standards other than money.
Variance analysis may yield insignificant values.
The overhead component in a manufacturing company is usually very large.
All of these are problems associated with traditional accounting information.
9. Which of the following is NOT a problem associated with standard cost accounting?
a. Standard costing motivates management to produce large batches of products and build
inventory.
b. Applying standard costing leads to product cost distortions in a lean environment.
c. Standard costing data are associated with excessive time lags that reduce its usefulness.
d. The financial orientation of standard costing may promote bad decisions.
e. All of the above are problems with standard costing.
10. Which one of the following statements is true?
a. ERP evolved directly from MRP.
b. ERP evolved into MRP and MRP evolved into MRP II.
c. MRP II evolved from MRP and MRP II evolved into ERP.
d. None of the above is true.
CHAPTER 8
1. Sequential access means that
a.
b.
c.
d.
data are stored on magnetic tape.
the address of the location of data is found through the use of either an algorithm or an index.
to read any record on the file, all of the preceding records must first be read.
each record can be accessed in the same amount of time.
2. Which file has as its primary purpose to provide historical financial data for comparative financial
reports?
a.
b.
c.
d.
journal voucher history file
budget master file
responsibility file
general ledger history file
3. Which of the following statements is true?
a. Journal vouchers detailing transaction activity flow from various operational departments into
the GLS, where they are independently reconciled and posted to the journal voucher history file.
b. Journal vouchers summarizing transaction activity flow from the accounting department into
the GLS, where they are independently reconciled and posted to the general ledger accounts.
c. Journal vouchers summarizing transaction activity flow from various operational departments
into the GLS, where they are independently reconciled and posted to the general ledger
accounts.
d. Journal vouchers summarizing transaction activity flow from various operational departments
into the GLS, where they are independently reconciled and posted to the journal voucher
history file.
4. Which of the following statements best describes a computer-based GL/FRS?
a.
b.
c.
d.
Most firms derive little additional benefit from a real-time FRS.
Batch processing is typically not appropriate for transaction processing of GLS.
The sequential file approach is an inefficient use of technology.
A batch system with direct access files recreates the entire database each time the file is
updated.
5. Which of the following is NOT a potential exposure of the FRS?
a.
b.
c.
d.
a defective audit trail
general ledger accounts that are out of balance with subsidiary accounts
unauthorized access to the check register
unauthorized access to the general ledger
6. Which task should the general ledger perform?
a.
b.
c.
d.
update the general ledger
prepare journal vouchers
have custody of physical assets
have record-keeping responsibility for special journals of subsidiary ledgers
7. The Ozment Corporation uses a performance reporting system that shows online the data for each
subordinate who reports to a supervisor. The data presented show the actual costs incurred during the
period, the budgeted costs, and all variances from budget for that subordinate’s department. The name
of this system of reporting is
a.
b.
c.
d.
e.
contribution accounting.
responsibility accounting.
flexible budgeting.
program budgeting.
cost-benefit accounting.
8. Which of the following is not a characteristic of the strategic planning process?
a.
b.
c.
d.
e.
emphasis on both the short and long run
analysis of external economic factors
review of the attributes and behavior of the organization’s competition
analysis and review of departmental process
analysis of consumer demand
9. The following are all output reports of the financial reporting system, EXCEPT
a.
b.
c.
d.
variance analysis report.
statement of cash flows.
tax return.
comparative balance sheet.
10. Which of the following budgeting processes is LEAST likely to motivate managers toward
organizational goals?
a.
b.
c.
d.
e.
setting budget targets at attainable levels
participation by subordinates in the budgetary process
use of management by exception
holding subordinates accountable for the items they control
having top management set budget levels
11. Which of the following would normally be considered in a strategic plan?
a.
b.
c.
d.
e.
setting a target of 12 percent return on sales
maintaining the image of the company as the industry leader
setting a market price per share of stock outstanding
distributing monthly reports for departmental variance analysis
tightening credit terms for customers to 2/10, n/30
12. At what level of management is the long-range planning function most important?
a.
b.
c.
d.
e.
at top management levels
at middle management levels
at lower management levels
for staff functions
for line functions
13. Which of the following is the basic purpose of a responsibility accounting?
a.
b.
c.
d.
e.
variance analysis
motivation
authority
budgeting
pricing
14. Which statement below best describes a profit center?
a. The authority to make decisions affecting the major determinants of profit, including the power
to choose its markets and sources of supply.
b. The authority to make decisions affecting the major determinants of profit, including the power
to choose its markets, sources of supply, and significant control over the amount of invested
capital.
c. The authority to make decisions over the most significant costs of operations, including the
power to choose the sources of supply.
d. The authority to provide specialized support to other units within the organization. e. The
responsibility for combining the raw materials, direct labor, and other factors of production into
a final product.
15. Which statement below best describes an investment center?
a. The authority to make decisions affecting the major determinants of profit, including the power
to choose its markets and sources of supply.
b. The authority to make decisions affecting the major determinants of profit, including the power
to choose its markets and sources of supply, and significant control over the amount of invested
capital.
c. The authority to make decisions over the most significant costs of operations, including the
power to choose the sources of supply.
d. The authority to provide specialized support to other units within the organization.
e. The responsibility for developing markets for and selling of the output of the organization.
CHAPTER 9
1. The data attributes that a particular user has permission to access are defined by the
a.
b.
c.
d.
e.
operating system view.
systems design view.
database schema.
user view.
application program.
2. The database approach has several unique characteristics not found in traditional (flat-file) systems.
Which of the following statements does not apply to the database model?
a. Database systems have data independence; that is, the data and the programs are maintained
separately except during processing.
b. Database systems contain a data-definition language that helps describe each schema and
subschema.
c. The database administrator is the part of the software package that instructs the operating
aspects of the program when data are retrieved.
d. A primary goal of database systems is to minimize data redundancy.
e. Database systems provide increased accessibility to data and flexibility in its usage.
3. One of the first steps in the creation of a relational database is to
a. integrate accounting and nonfinancial data.
b. plan for increased secondary storage capacity.
c. order data-mining software that will facilitate data retrieval.
d. create a data model of the key entities in the system.
e. construct the physical user view using SQL.
4. Database currency is achieved by
a.
b.
c.
d.
e.
implementing partitioned databases at remote sites.
employing data-cleansing techniques.
ensuring that the database is secure from accidental entry.
an external auditor’s reconciliation of reports from multiple sites.
a database lockout that prevents multiple simultaneous access.
5. The installation of a database management system is likely to have the least impact on
a.
b.
c.
d.
e.
data redundancy.
entity-wide sharing of common data.
exclusive ownership of data.
the logic needed to solve a problem in an application program.
the internal controls over data access.
6. The functions of a database administrator are
a.
b.
c.
d.
e.
database planning, data input preparation, and database design.
data input preparation, database design, and database operation.
database design, database operation, and equipment operations.
database design, database implementation, and database planning.
database operations, database maintenance, and data input preparation.
7. A relational database system contains the following inventory data: part number, description,
quantity on-hand, and reorder point. These individual items are called
a.
b.
c.
d.
attributes.
relations.
associations.
occurrences.
8. Which of the following is a characteristic of a relational database system?
a. All data within the system are shared by all users to facilitate integration.
b. Database processing follows explicit links that are contained within the records.
c. User views limit access to the database.
d.
Transaction processing and data warehousing systems share a common database.
9. Partitioned databases are most effective when
a.
b.
c.
d.
users in the system need to share common data.
primary users of the data are clearly identifiable.
read-only access is needed at each site.
all of the above.
10. Database entities
a.
b.
c.
d.
e.
may contain zero or many occurrences.
are represented as verbs in an ER diagram.
may represent both physical assets and intangible phenomena.
are often defined by common attributes that also define other entities.
are unique to a specific user view.
11. A transitive dependency
a.
b.
c.
d.
e.
is a database condition that is resolved through special monitoring software.
is a name given to one of the three anomalies that result from unnormalized database tables.
can exist only in a table with a composite primary key.
cannot exist in tables that are normalized at the 2NF level.
is none of the above.
12. A partial dependency
a. is the result of simultaneous user requests for the same data in a partitioned database
environment.
b. is a name given to one of the three anomalies that result from unnormalized database tables.
c. can exist only in a table with a composite primary key.
d. may exist in tables that are normalized at the 2NF level.
e. is none of the above.
13. Repeating group data
a. is a form of data redundancy common to replicated databases in a distributed database
environment.
b. is a name given to one of the three anomalies that result from unnormalized database tables.
c. can exist only in a table with a composite primary key.
d. cannot exist in tables that are normalized at the 2NF level.
e. is none of the above.
14. The database model most likely to be used in the development of a modern (not legacy) system is
a.
b.
c.
d.
e.
hierarchical
structured
relational
network
navigational
15. Typical DBMS features include all of the following EXCEPT
a.
b.
c.
d.
e.
database interface design and development.
backup and recovery.
program development.
database access.
all of these are typical DBMS features.
16. Which of the following is least likely to be an attribute of an employee table in a normalized
database?
a.
b.
c.
d.
e.
employee name
employee address
employee number
employee supervisor’s name
all of these would be attributes of the employee table in a normalized database.
17. The advantages to using a partitioned database approach include all of the following EXCEPT
a.
b.
c.
d.
e.
the possibility for the deadlock phenomenon is reduced.
user control is increased.
transaction processing time is decreased.
the potential for wide-scale disaster is reduced.
these are all advantages of partitioned databases.
18. Of the following, select the attribute that would be the best primary key in an inventory table.
a.
b.
c.
d.
ITEM NAME
ITEM LOCATION
ITEM COST
ITEM NUMBER
e. ITEM SUPPLIER
CHAPTER 10
1. The concept of duality means that an REA diagram must consist of
a.
b.
c.
d.
e.
two events—one of them economic and the other support.
two agents—one of them internal and the other external.
two resources—one increased and the other decreased by the same event.
all of the above.
none of the above.
2. Each economic event in an REA diagram is always
a.
b.
c.
d.
e.
linked to at least two resource entities.
linked to two external agents.
linked to two internal agents.
linked to another economic event.
linked to a support event.
3. Which of the following are characteristics of economic agents?
a.
b.
c.
d.
They participate in economic events, but do not assume control of the resources.
They participate in economic events, but not in support events.
Internal agents are employees of the company whose system is being modeled.
External agents are not employees of the company whose system is being modeled. e. All of the
above describe agents.
4. Which of the following is true?
a.
b.
c.
d.
e.
REA diagram entities are arranged in constellations by entity class.
ER diagrams present a static picture of the underlying business phenomena.
Entity names in ER diagrams are always in the noun form.
Events entity names in REA diagrams are in the verb form.
All of the above are true statements.
5. Which of the following events would be LEAST likely to be modeled in an REA diagram?
a. customer inquiries
b. sales to a customer
c. accounts payable
d. cash
e. all of these events would be modeled
6. Which of the following associations would most likely describe the relationship between an internal
agent and an economic event?
a.
b.
c.
d.
e.
1:M
1:1
M:M
0:M
none of the above
7. Which of the following tables would most likely have a composite key?
a.
b.
c.
d.
e.
Take Order
Ship Goods
Inventory-Ship Link
Cash
none of the above
8. Which of the following associations requires a separate table in the database?
a.
b.
c.
d.
1:1
1:M
M:M
all of the above
9. When assigning foreign keys in a 1:1 association
a. the primary key of each table should be embedded as a foreign key in the related table.
b. the primary key on the 0,1 side of the relation should be embedded as the foreign key on the 1,1
side.
c. the primary key on the 1,1 side of the relation should be embedded as the foreign key on the 0,1
side.
d. a link table must be created to accept the foreign keys of both tables.
e. none of the above is true.
10. When assigning foreign keys in a 1:M association
a. the primary key of each table should be embedded as a foreign key in the related table.
b. the primary key on the 0,M side of the relation should be embedded as the foreign key on the
1,1 side.
c. the primary key on the 1,1 side of the relation should be embedded as the foreign key on the
0,M side.
d. a link table must be created to accept the foreign keys of both tables.
e. none of the above is true.
CHAPTER 11
1. Closed database architecture is
a.
b.
c.
d.
e.
a control technique intended to prevent unauthorized access from trading partners.
a limitation inherent in traditional information systems that prevents data sharing.
a data warehouse control that prevents unclean data from entering the warehouse.
a technique used to restrict access to data marts.
a database structure that many of the leading ERPs use to support OLTP applications.
2. Each of the following is a necessary element for the successful warehousing of data EXCEPT
a.
b.
c.
d.
e.
cleansing extracted data.
transforming data.
modeling data.
loading data.
all of the above are necessary.
3. Which of the following is typically NOT part of an ERP’s OLAP applications?
a.
b.
c.
d.
e.
decision support systems
information retrieval
ad hoc reporting/analysis
logistics
what-if analysis
4. There are a number of risks that may be associated with ERP implementation. Which of the following
was NOT stated as a risk in the chapter?
a. A drop in firm performance after implementation because the firm looks and works differently
than it did while using a legacy system.
b. Implementing companies have found that staff members, employed by ERP consulting firms, do
not have sufficient experience in implementing new systems.
c. Implementing firms fail to select systems that properly support their business activities.
d. The selected system does not adequately meet the adopting firm’s economic growth.
e. ERPs are too large, complex, and generic for them to be well integrated into most company
cultures.
5. Which statement is NOT true?
a. In a typical two-tier client-server architecture, the server handles both application and database
duties.
b. Client computers are responsible for presenting data to the user and passing user input back to
the server.
c. Two-tier architecture is for local area network applications where the demand on the server is
restricted to a relatively small population of users.
d. The database and application functions are separated in the three-tier model.
e. In three-tier client-server architectures, one tier is for user presentation, one is for database and
applications access, and the third is for Internet access.
6. Which statement is NOT true?
a. Drill-down capability is an OLAP feature of data mining tools available to the user.
b. The data warehouse should be separate from operational systems.
c. Denormalization of data involves dividing the data into very small tables that support detailed
analysis.
d. Some decisions supported by a data warehouse are not fundamentally different from those that
are supported by traditional databases.
e. Data cleansing involves transforming data into standard business terms with standard data
values.
7. Which statement is LEAST accurate?
a. Implementing an ERP system has more to do with changing the way an organization does
business than it does with technology.
b. The phased-in approach to ERP implementation is particularly suited to diversified organizations
whose units do not share common processes and data.
c. Because the primary reason for implementing an ERP is to standardize and integrate operations,
diversified organizations whose units do not share common processes and data do not benefit
and tend not to implement ERPs.
d. To take full advantage of the ERP process, reengineering will need to occur.
e. A common reason for ERP failure is that the ERP does not support one or more important
business processes of the organization.
8. SAP, one of the leading ERP producers, makes several modules available to adopters. Which of the
following is not a SAP module?
a.
b.
c.
d.
e.
Business Process Support
Internet Development Support
Logistics
E-Commerce Support
Human Resources
9. Auditors of ERP systems
a. need not be concerned about segregation of duties because these systems possess strong
computer controls.
b. focus on output controls such as independent verification to reconcile batch totals.
c. are concerned that managers fail to exercise adequate care in assigning permissions.
d. do not see the data warehouse as an audit or control issue at all because financial records are
not stored there.
e. need not review access levels granted to users because these are determined when the system
is configured and never change.
10. Which statement is most correct?
a.
b.
c.
d.
e.
SAP is more suited to service industries than manufacturing clients.
J.D. Edwards’s ERP is designed to accept the best-practices modules of other vendors.
Oracle evolved from a human resources system.
PeopleSoft is the world’s leading supplier of software for information management.
SoftBrands provides enterprise software for the hospitality and manufacturing sectors.
CHAPTER 12
1. Which of the following statements is correct?
a.
b.
c.
d.
e.
TCP/IP is the basic protocol that permits communication between Internet sites.
TCP/IP controls Web browsers that access the Web.
TCP/IP is the document format used to produce Web pages.
TCP/IP is used to transfer text files, programs, spreadsheets, and databases across the Internet.
TCP/IP is a low-level encryption scheme used to secure transmissions in higher-level (HTTP)
format.
2. Which of the following best describes a system of computers that connects the internal users of an
organization distributed over a wide geographic area?
a. LAN
b.
c.
d.
e.
Internet
decentralized network
multidrop network
intranet
3. Sniffer software is
a. used by malicious Web sites to sniff data from cookies stored on the user’s hard drive.
b. used by network administrators to analyze network traffic.
c. used by bus topology intranets to sniff for carriers before transmitting a message to avoid data
collisions.
d. an illegal program downloaded from the Web to sniff passwords from the encrypted data of
Internet customers.
e. illegal software for decoding encrypted messages transmitted over a shared intranet channel.
4. Which of the following statements is true?
a.
b.
c.
d.
e.
Cookies were originally intended to facilitate advertising on the Web.
Cookies always contain encrypted data.
Cookies are text files and never contain encrypted data.
Cookies contain the URLs of sites the user visits.
Web browsers cannot function without cookies.
5. A message that is contrived to appear to be coming from a trusted or authorized source is called
a.
b.
c.
d.
e.
a denial of service attack.
digital signature forging.
Internet protocol spoofing.
URL masquerading.
a SYN-ACK packet.
6. A DDos attack
a. is more intensive than a Dos attack because it emanates from single source.
b. may take the form of either a SYN flood or smurf attack.
c. is so named because it affects many victims simultaneously, which are distributed across the
Internet.
d. turns the target victim’s computers into zombies that are unable to access the Internet.
e. none of the above is correct.
7. A ping signal is used to initiate
a.
b.
c.
d.
e.
URL masquerading.
digital signature forging.
Internet protocol spoofing.
a smurf attack
a SYN-ACK packet.
8. A digital signature
a.
b.
c.
d.
e.
is the encrypted mathematical value of the message sender’s name.
is derived from the digest of a document that has been encrypted with the sender’s private key.
is derived from the digest of a document that has been encrypted with the sender’s public key.
is the computed digest of the sender’s digital certificate.
allows digital messages to be sent over an analog telephone line.
9. Which of the following statements about the client-server model is correct?
a. It is best suited to the token ring topology because the random-access method this topology
uses detects data collisions.
b. It distributes both data and processing tasks to the server node. The client-server model can use
the bus or ring topology.
c. It is most effective when used as a bus topology because its deterministic access method avoids
collisions and prevents data loss during transmissions.
d. It is more efficient than the bus or ring topologies because it transmits an entire file of records
to the requesting node rather than only a single record.
e. It is not used in conjunction with either the bus or ring topologies.
10. Which of the following statements is correct?
a. A bridge is used to connect a LAN and a WAN.
b. Packet switching combines the messages of multiple users into a packet for transmission. At the
receiving end, the packet is disassembled into individual messages and distributed to the user.
c. The decision to partition a database assumes that no identifiable primary user exists in the
organization.
d. Message switching is used to establish temporary connections between network devices for the
duration of a communications session.
e. A deadlock is a temporary phenomenon that disrupts transaction processing. It will resolve itself
when the primary computer completes processing its transaction and releases the data the
other nodes need.
Quiz # 1
Identification
Get the answer from the words/phrases below for the questions that follow. Wrong spelling is wrong.
System
Component
Subsystem
Transaction
Accounts
Agent
Data
Information
Feedback
Attribute
Files
Record
Information System
Accounting Information
System
Management Information
System
Transaction Processing System
Financial Reporting System
Management Reporting
System
Subsystem Interdependency
External Users
Internal Users
System Decomposition
Operations Management
Middle management
Top management
Relevance
Efficiency
Timeliness
Accuracy
Completeness
Summarizatio
Operations Management1.Business organization is divided horizontally into several levels of activity.
Business operations form the base of the pyramid and then followed by.
System2.This is a group of two or more interrelated components or subsystems that serve a common
purpose.
Subsystem Interdependency 3.A system’s ability to achieve its goal depends on the effective
functioning and harmonious interaction of its subsystems. If a vital subsystem fails or becomes
defective and can no longer meet its specific objective, the overall system will fail to meet its objective.
Information System 4.This is a set of formal procedures by which data are collected, processed into
information, and distributed to users.
Transaction 5.It is an event that affects or is of interest to the organization and is processed by the
information system as a unit of work.
Management Reporting System 6.This provides internal management with special-purpose financial
reports and information needed for decision making such as budgets, variance reports, and responsibility
reports.
External Users 7.These users include creditors, stockholders, potential investors, regulatory agencies, tax
authorities, suppliers, and customers.
Information 8.This causes the user to take an action that he or she otherwise could not, or would not,
have taken.
Relevance 9.A fundamental task of the system designer is to analyze users' needs. This satisfies which
rule of data collection?
Feedback 10.This is a form of output that is sent back to the system as a source of data.
True or False
Write True if the statement if True, False if the statement is False. Wrong spelling is wrong.
False 11.Backbone systems are general-purpose systems or systems customized to a specific industry. The
users have standard business practices that permit the use of such system.
False 12.Geographic location divides the organization into areas of specialized responsibility based on
tasks.
True 13.Receiving is the task of accepting the inventory. It includes counting and checking physical
condition of items.
False 14.Production planning is a primary manufacturing activity without which raw materials cannot be
assembled to finish products.
True 15.DDP involves reorganizing the IT function into small information processing units (IPUs) that are
distributed to end users and placed under their control.
True 16.The flat-file model describes an environment in which individual data files are not related to other
files. End users in this environment own their data files rather than share them with other users.
Thus, stand-alone applications rather than integrated systems perform data processing.
False 17.The database model is a framework for modeling an organization’s critical resources, events, and
agents and the relationships between them.
True 18.ERP is an information system model that enables an organization to automate and integrate its
key business processes.
True 19.IT auditing is usually performed as part of a broader financial audit.
False 20.The conceptual system is the medium and method for capturing and presenting the information.
The computer professionals determine the most economical and effective technology for accomplishing the
task.
Quiz #2 - AIS 2213-4
I. Identification
Supply the answer on the questions that follow from the words listed below. Wrong spelling is wrong.
Asset maintenance
Language
Personnel Action Forms
Blind copy
File Transfer Protocol
Point of sale systems
Cardinality
Insertion anomaly
Purchase Order
Computer-aided design
Job tickets
REA model
Credit authorization
Lean manufacturing
Responsibility accounting
Economic events
Management by Exception
Sales Journal
Enterprise resource planning
Materials requirements
planning
Smurf attack
Entity relationship diagram
eXtensible Business Reporting
Online transaction processing
Value chain analysis
Voucher's payable system
Purchase Order 1. This is prepared from purchase requisitions that are sorted by Vendor if necessary.
Sales Journal 2. his is a special journal used for recording completed sales transactions.(1 Point)
Credit Authorization 3.The credit department is organizationally and physically segregated from the
sales department. When credit is approved, the sales department clerk pulls the various copies of the sales
sales department. When credit is approved, the sales department clerk pulls the various copies of the sales
orders from the pending file and releases them to the billing, warehouse, and shipping departments.(1
Point)
Point of sale systems 4. This is used by businesses like grocery stores that exchange goods directly for
cash in a transaction. Only cash, checks, and bank credit card sales are valid. The organization maintains
no customer accounts receivable.(1 Point)
Voucher's payable system 5.Under this system, the AP department uses cash disbursement vouchers
and maintains a voucher register. After the AP clerk performs the three-way match, he or she prepares a
cash disbursement voucher to approve payment.(1 Point)
Blind copy 6.The purpose of this is to force the receiving clerk to count and inspect inventories prior to
completing the receiving report. At times, receiving docks are very busy and receiving staff are under
pressure to unload the delivery trucks and sign the bills of lading so the truck drivers can go on their
way.(1 Point)
Asset Maintenance 7. This involves adjusting the fixed asset subsidiary account balances as the assets
(excluding land) depreciate over time or with usage.(1 Point)
Personnel Action Forms 8.These documents identify employees authorized to receive a paycheck and
are used to reflect changes in hourly pay rates, payroll deductions, and job classification.(1 Point)
Job Tickets 9.This captures the time that individual workers spend on each production job. Cost
accounting uses these documents to allocate direct labor charges to work-in-process (WIP) accounts.(1
Point)
Lean manufacturing 10. This involves doing more with less, eliminating waste, and reducing production
cycle time.(1 Point)
Computer-aided design 11.Engineers use this to design better products faster. They increase engineers’
productivity, improve accuracy by automating repetitive design tasks, and allow firms to be more
responsive to market demands.(1 Point)
Materials requirements planning 12.These systems are limited in focus and geared toward determining
how much raw materials are required to fulfill production orders.(1 Point)
Responsibility accounting 13.This concept implies that every economic event that affects the
organization is the responsibility of and can be traced to an individual manager.(1 Point)
Management by Exception 14.This principle suggests that managers should limit their attention to
potential problem areas rather than being involved with every activity or decision.(1 Point)
eXtensible Business Reporting Language 15.This is the internet standard specifically designed for
business reporting and information exchange. The objective is to facilitate the publication, exchange, and
processing of financial and business information.(1 Point)
Entity relationship diagram 16. This is a graphical representation used to depict the data model.
Cardinality 17. It is the degree of association between two entities.(1 Point)
Insertion anomaly 18. It is impossible to add data to the database because of the new data does not
have a primary key.(1 Point)
REA model 19. This is an accounting framework for modeling an organization’s critical resources, events,
and agents and the relationships between them.(1 Point)
Value chain analysis 20. This distinguishes between primary activities and support activities: primary
activities create value; support activities assist in the achievement of the primary activities.(1 Point)
Economic events 21. These are phenomena that effect changes (increases or decreases) in resources.
Online transaction processing 22. Are those applications that operationally support the day-to-day
activities of the business. If these applications fail, so does the business.(1 Point)
Enterprise resource planning 23. The trend in information systems is toward implementing highly
integrated, enterprise-oriented systems. These are not custom packages designed for a specific
organization. Instead, they are generalized systems that incorporate the best business practices in use.
Organizations mix and match precoded software components to assemble.(1 Point)
Smurf Attack 24. Involves three parties: the perpetrator, the intermediary, and the victim. It is
accomplished by exploiting an Internet maintenance tool called a ping, which is used to test the state of
network congestion and determine whether a particular host computer is connected and available on the
network.(1 Point)
File Transfer Protocol 25. This is used to transfer text files, programs, spreadsheets, and databases
across the Internet.(1 Point) ex
II. True or False
Write True if the statement of true, False if the statement is false. Wrong spelling is wrong.
FALSE (IP SPOOFING) 26. Dos is a form of masquerading to gain unauthorized access to a Web server
and/or to perpetrate an unlawful act without revealing one’s identity.(1 Point)
True 27. Secure Electronic Transmission is an encryption scheme developed by a consortium of technology
firms and banks (Netscape, Microsoft, IBM, Visa, MasterCard, and so on) to secure credit card
transactions.(1 Point)
FALSE (CORE APPLICATIONS) 28. Business analysis applications are also called online transaction
processing (OLTP) applications.(1 Point)
FALSE (baligtad - more to do with changing the way.... Than it does with technology) 29.
Implementing an ERP system has more to do with technology than it does with changing the way an
organization does business.(1 Point)
True 30. The REA approach to modeling business processes helps managers focus on the key elements of
economic events and identify the nonvalue-added activities that can be eliminated from operations.
True 31. ER and REA diagrams differ visually in a significant way. Entities in ER diagrams are of one class,
and their proximity to other entities is determined by their cardinality and by what is visually pleasing to
keep the diagrams readable. Entities in an REA diagram, however, are divided into three classes and
organized into constellations by class on the diagram.
FALSE 32. Under the DDP approach, remote users send requests via terminals for data to the central site,
which processes the requests and transmits the data back to the user.
True 33. Multiple indexes can be used to create a cross-reference, called an inverted list, which allows
even more flexible access to data.
FALSE (Database usage reporting) 34. The database access feature captures statistics on what data
are being used, when they are used, and who uses them. The database administrator (DBA) uses this
information to help in assigning user authorization and in maintaining the database(1 Point)
FALSE (There are two ways) 35. The only way users access the database is via user application
programs. With this, data processing procedures (both batch and real-time) for transactions such as sales,
cash receipts, and purchases are essentially the same as they would be in the flat-file environment.(1
Point)
True 36. A cost center is an organizational unit with responsibility for cost management within budgetary
limits.
True 37. When all three elements are known with certainty, the problem is structured. Payroll calculation is
an example of a structured problem.(1 Point)
True 38. ABC is a method of allocating costs to products and services to facilitate better planning and
control. It accomplishes this by assigning cost to activities based on their use of resources and assigning
cost to cost objects based on their use of activities.(1 Point)
FALSE 39. Upon receipt of the voucher packet, the AP clerk removes the liability by debiting the AP
subsidiary account or by recording the check number and payment date in the voucher register. The
voucher packet is filed in the open voucher file.(1 Point)
FALSE 40. Upon receiving the goods from the warehouse, the shipping clerk reconciles the physical items
with the stock release, the packing slip, and the shipping notice to verify that the order is correct. The ship
goods function thus serves as an important independent verification control point and is the last
opportunity to detect errors before shipment. The shipping clerk packages the goods, attaches the packing
slip, completes the shipping notice, and prepares a remittance advise.
AIS Master Reviewer 1 8 - Accounting Info System Test bank
Accounting Information Systems (ACT INFO)
Chapter 1—The Information System: An
Accountant’s Perspective
12. A backbone system is completely finished,
tested, and ready for implementation.
TRUE/FALSE
ANS: F
1. Information is a business resource.
13. The internal auditor represents the interests of
third-party outsiders.
ANS: T
2. An information system is an example of a natural
system.
ANS: F
ANS: F
14. Information Technology (IT) audits can be
performed by both internal and external auditors.
ANS: T
3. Transaction processing systems convert nonfinancial transactions into financial transactions.
15. The single largest user of computer services is
the personnel function.
ANS: F
4. Information lacking reliability may still have value.
ANS: F
ANS: F
16. Increased control is one of the key advantages of
distributed data processing.
5. A balance sheet prepared in conformity with
GAAP is an example of discretionary reporting.
ANS: F
ANS: F
17. The flat-file approach is most often associated
with so-called legacy systems.
6. The Management Reporting System provides the
internal financial information needed to manage a
business.
ANS: T
7. Most of the inputs to the General Ledger System
come from the Financial Reporting System.
ANS: F
8. When preparing discretionary reports,
organizations can choose what information to report
and how to present it.
ANS: T
9. Retrieval is the task of permanently removing
obsolete or redundant records from the database.
ANS: F
ANS: T
18. In a flat-file system, files are easily shared by
users.
ANS: F
19. Legacy systems were eliminated in the effort to
make systems Y2K compliant.
ANS: F
20. One of the greatest disadvantages of database
systems is that all data is always available to all
users.
ANS: F
21. Under SOX legislation auditors are no longer
allowed to provide consulting services to audit
clients.
10. Systems development represents 80 to 90
percent of the total cost of a computer system.
ANS: T
ANS: F
22. Under SOX legislation auditors are no loger
allowed to provide consulting services to their
clients.
11. The database administrator is responsible for the
security and integrity of the database.
ANS: T
ANS: F
They cannot provide such services to audit clients
but may still provide them to non-audit clients
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MULTIPLE CHOICE
c. convenience
1. Which of the following is not a business resourc e?
d. completeness
a. raw material
ANS: C
b. labor
6. An example of a nonfinancial transaction is
c. information
a. sale of products
d. all are business resources
b. cash disbursement
ANS: D
c. log of customer calls
2. Which level of management is responsible for
short-term planning and coordination of activities
necessary to accomplish organizational objectives?
d. purchase of inventory
a. operations management
7. An example of a financial transaction is
b. middle management
a. the purchase of computer
c. top management
b. a supplier’s price list
ANS: C
c. a delivery schedule
d. line management
ANS: B
d. an employee benefit brochure
3. Which level of management is responsible for
controlling day-to-day operations?
ANS: A
8. Which subsystem is not part of the Accounting
Information System?
a. top management
a. Transaction Processing System
b. middle management
c. operations management
b. Expert System
d. executive management
c. General Ledger/Financial Reporting System
ANS: C
d. Management Reporting System
4. 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
ANS: B
9. The major difference between the Financial
Reporting System (FRS) and the Management
Reporting System (MRS) is the
a. FRS provides information to internal and external
users; the MRS provides information to internal
users
b. system redundancy
c. backup system
b. FRS provides discretionary information; the MRS
provides nondiscretionary information
d. subsystem interdependency
ANS: D
5. The value of information for users is determined
by all of the following but
c. FRS reports are prepared using information
provided by the General Ledger System; the MRS
provides information to the General Ledger System
d. FRS reports are prepared in flexible,
nonstandardized formats; the MRS reports are
prepared in standardized, formal formats
a. reliability
b. relevance
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ANS: A
b. the key
10. The purpose of the Transaction Processing
System includes all of the following except
c. the file
d. the attribute
a. converting economic events into financial
transactions
ANS: D
b. recording financial transactions in the accounting
records
15. In a database, a complete set of attributes for a
single occurrence of an entity class is called
c. distributing essential information to operations
personnel to support their daily operatio ns
a. a key
d. measuring and reporting the status of financial
resources and the changes in those resources
c. a record
b. a file
d. a character
ANS: D
11. The Transaction Processing System includes all of
the following cycles except
a. the revenue cycle
ANS: C
16. Effective information has all of the following
characteristics except
a. relevance
b. the administrative cycle
b. completeness
c. the expenditure cycle
c. summarization
d. the conversion cycle
d. structure
ANS: B
12. The primary input to the Transaction Processing
System is
ANS: D
17. Database management tasks do not include
a. a financial transaction
a. summarization
b. an accounting record
b. storage
c. an accounting report
c. retrieval
d. a nonfinancial transaction
d. deletion
ANS: A
ANS: A
13. When designing the data collection activity,
which type of data should be avoided?
18. The author distinguishes between the
Accounting Information System and the
management Information System based on
a. data that is relevant
a. whether the transactions are financial or
nonfinancial
b. data that is efficient
c. data that is redundant
b. whether discretionary or nondiscretionary reports
are prepared
d. data that is accurate
c. the end users of the reports
ANS: C
d. the organizational structure of the business
14. The most basic element of useful data in the
database is
ANS: A
a. the record
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19. Which activity is not part of the finance function?
a. cash receipts
b. separation of duties, such as record keeping and
custody of physical resources
c. generation of accurate and timely information
b. portfolio management
d. business segmentation by function
c. credit
ANS: B
d. general ledger
24. In the distributed data processing approach
ANS: D
a. computer services are consolidated and managed
as a shared organization resource
20. Market research and advertising are part of
which business function?
b. the computer service function is a cost center
a. materials management
c. the end users are billed using a charge-back
system
b. finance
c. marketing
d. computer services are organized into small
information processing units under the control of
end users
d. production
ANS: C
ANS: D
21. Which function manages the financial resources
of the firm through portfolio management, banking,
credit evaluation, and cash receipts and
disbursements?
a. accounting
25. The data control group is responsible for
a. performing the day-to-day processing of
transactions
b. security and integrity of the database
b. finance
c. liaison between the end user and data processing
c. materials management
d. providing safe storage for off-line data files
d. distribution
ANS: C
ANS: B
26. Data processing does not involve
22. Which of the following is not part of the
accounting function?
a. data control
a. managing the financial information resource of
the firm
b. computer operations
c. system maintenance
d. data conversion
b. capturing and recording transactions in the
database
ANS: C
c. distributing transaction information to operations
personnel
27. Independent auditing is performed by
d. managing the physical information system of the
firm
a. external auditors
ANS: D
c. licensed auditors
23. The term “accounting independence” refers to
d. third-party accountants
a. data integrity
ANS: A
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b. internal accountants
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28. Which individual is least involved in new systems
development?
a. systems analyst
d. confidence that all data is current
ANS: B
b. external auditor
33. Disadvantages of distributed data processing
include all of the following except
c. end user
a. mismanagement of organizationwide resources
d. data librarian
b. hardware and software incompatibility
ANS: D
c. cost reductions
29. The objectives of all information systems include
all of the following except
d. difficulty in hiring qualified IT professionals
a. support for the stewardship function of
management
ANS: C
34. Advantages of distributed data processing
include each of the following except
b. evaluating transaction data
a. cost reductions
c. support for the day-to-day operations of the firm
d. support for management decision making
b. better management of organization resources
c. improved operational efficiency
ANS: B
d. increased user satisfaction
30. Which individuals may be involved in the
Systems Development Life Cycle?
ANS: B
a. accountants
35. Disadvantages of the distributed data processing
approach include all of the following except
b. systems professionals
c. end users
a. possible mismanagement of organization
resources
d. all of the above
b. redundancy of tasks
ANS: D
c. software incompatibility
31. An appraisal function housed within the
organization that performs a wide range of services
for management is
d. system is not responsive to the user’s situation
ANS: D
36. ERP packages include all of the following
modules except
a. internal auditing
b. data control group
a. human resources
c. external auditing
b. general ledger
d. database administration
c. inventory management
ANS: A
d. they include all of the above
32. Advantages of a database system include all of
the following except
ANS: D
37. All of the following are external end users except
a. elimination of data redundancy
b. open access to all data by all users
a. cost accountants
c. single update for changes in data
b. creditors
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c. stockholders
3. Transactions with trading partners include
____________________ and
____________________.
d. tax authorities
ANS: A
ANS: sales, purchases
38. Useful information must possess all of the
following characteristics except
a. relevance
4. A system is a group of two or more interrelated
components that
___________________________________.
b. timelessness
ANS: serve a common purpose
c. accuracy
d. completeness
5. The task of locating and transferring an existing
record from the database for processing is called
data ____________________.
ANS: B
ANS: retrieval
39. The objectives of an information system include
each of the following except
6. Three ways that a business can be divided into
segments are by __________________________,
__________________________ and by
__________________________.
a. support for the stewardship responsibilities of
management
b. furthering the financial interests of shareholders
ANS: geographic location, product lines, function
7. Three activities that are part of the finance
function are __________________________,
__________________________, and
__________________________.
c. support for management decision making
d. support for the firm’s day-to-day operations
ANS: B
40. Accountants play many roles relating to the
accounting information system, including all of the
following except
ANS: portfolio management, treasury, credit, cash
disbursements, cash receipts
a. system users
8. Two distinct ways to structure the Data Processing
Department are ____________________ and
____________________.
b. system designers
ANS: centralized, distributed
c. system auditors
9. Two methods to acquire information systems are
to __________________________ and to
__________________________.
d. system converters
ANS: D
ANS: develop customized systems, purchase
commercial systems
SHORT ANSWER
1. Entities outside the organization with a direct or
indirect interest in the firm, such as stockholders,
financial institutions, and government agencies, are
called ____________________.
ANS: stakeholders
10. Audits are conducted by
____________________, ____________________,
and ____________________ auditors.
ANS: internal, external, IT
11. Sales of products to customers, purchases of
inventory from vendors, and cash disbursements are
all example of __________________________.
2. The process of breaking a system into smaller
subsystem parts is called
______________________________.
ANS: financial transactions
ANS: system decomposition
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12. The three major subsystems of the AIS are
_______________________________,
___________________________, and
_______________________________.
their audit clients. This is now prohibited from doing
so under SOX legislation.
ANS: the transaction processing system, the general
ledger/financial reporting system, the management
reporting system
ANS: Reports used by management that the
company is not obligated by law, regulation, or
contract to provide. These are often used for
internal problem-solving issues rather than by
external constituents.
19. What is discretionary reporting?
13. The __________________________ and
__________________________ standards that
characterize the AIS clearly distinguish it from the
MIS.
ANS: legal, professional
20. Name the five characteristics of information?
ANS: Relevance, accuracy, completeness,
summarization, and timeliness.
14. The transaction processing system is comprised
of three cycles: __________________________,
__________________________, and
__________________________.
Chapter 2—Introduction to Transaction
Processing
ANS: revenue, expenditure, conversion
1. Processing more transactions at a lower unit cost
makes batch processing more efficient than realtime systems.
15. The REA model identifies an organization’s
____________________, ____________________,
and ____________________.
TRUE/FALSE
ANS: T
2. The process of acquiring raw materials is part of
the conversion cycle.
ANS: resources, events, agents.
16. Sarbanes-Oxley legislation requires that
management designs and implements controls over
the entire financial reporting process. What systems
does this include?
ANS: This includes the financial reporting system, the
general ledger system, and the transaction
processing systems that supply the data for financial
reporting.
17. Why is it necessary to distinguish between AIS
and MIS?
ANS: Because of the highly integrative nature of
modern information systems, management and
auditors need a conceptual view of the information
system that distinguishes key processes and areas of
risk and legal responsibility from the other (nonlegally binding) aspects of the system. Without such
a model, critical management and audit
responsibilities under SOX may not be met.
18. How has SOX legislation impacted the consulting
practices of public accounting firms?
ANS: Prior to SOX, a gray area of overlap existed
between assurance and consulting services. Auditors
were once allowed to provide consulting services to
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ANS: F
3. Directing work-in -process through its various
stages of manufacturing is part of the conversion
cycle.
ANS: T
4. The top portion of the monthly bill from a credit
card company is an example of a turn-around
document.
ANS: T
5. The general journal is used to record recurring
transactions that are similar in nature.
ANS: F
6. Document flowcharts are used to represent
systems at different levels of detail.
ANS: F
7. Data flow diagrams represent the physical system.
ANS: F
0
ANS: F
8. Document flowcharts are often used to depict
processes that are handled in batches.
20. An inverted triangle with the letter “N”
represents a file in “name” order.
ANS: T
ANS: F
9. Program flowcharts depict the type of media
being used (paper, magnetic tape, or disks) and
terminals.
21. Real-time processing in systems that handle large
volumes of transactions each day can create
operational inefficiencies.
ANS: F
10. System flowcharts represent the input sources,
programs, and output products of a computer
system.
ANS: T
ANS: T
22. Operational inefficiencies occur because
accounts unique to many concurrent transactions
need to be
updated in real time.
11. Program flowcharts are used to describe the
logic represented in system flowcharts.
ANS: F
ANS: T
12. Batch processing systems can store data on
direct access storage devices.
23. Operational inefficiencies occur because
accounts common to many concurrent transactions
need to be
ANS: T
updated in real time.
13. Backups are automatically produced in a direct
access file environment.
ANS: T
ANS: F
24. Batch processing of noncritical accounts
improves operational efficiency.
14. The box symbol represents a temporary file.
ANS: T
ANS: F
25. Batch processing of accounts common to many
concurrent transactions reduces operational
efficiency.
15. Auditors may prepare program flowcharts to
verify the correctness of program logic.
ANS: F
ANS: T
MULTIPLE CHOICE
16. A control account is a general ledger account
which is supported by a subsidiary ledger.
1. Which system is not part of the expenditure cycle?
ANS: T
a. cash disbursements
17. The most significant characteristic of direct
access files is access speed.
b. payroll
c. production planning/control
ANS: T
d. purchases/accounts payable
18. Real time processing is used for routine
transactions in large numbers.
ANS: C
ANS: F
2. Which system produces information used for
inventory valuation, budgeting, cost control,
19. Batch processing is best used when timely
information is needed because this method
processes data
performance reporting, and make-buy decisions?
a. sales order processing
efficiently.
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b. purchases/accounts payable
b. accounts receivable
c. cash disbursements
c. fixed assets
d. cost accounting
d. inventory
ANS: D
ANS: A
3. Which of the following is a turn-around
document?
8. Subsidiary ledgers are used in manual accounting
environments. What file is comparable to a
a. remittance advice
subsidiary ledger in a computerized environment?
b. sales order
a. archive file
c. purchase order
b. reference file
d. payroll check
c. transaction file
ANS: A
d. master file
4. The order of the entries made in the ledger is by
ANS: D
a. transaction number
b. account number
9. A journal is used in manual accounting
environments. What file is comparable to a journal
in a
c. date
computerized environment?
d. user
a. archive file
ANS: B
b. reference file
5. The order of the entries made in the general
journal is by
c. transaction file
d. master file
a. date
ANS: C
b. account number
10. In a computerized environment, a list of
authorized suppliers would be found in the
c. user
d. customer number
a. master file
ANS: A
b. transaction file
6. In general a special journal would not be used to
record
c. reference file
d. archive file
a. sales
ANS: C
b. cash disbursements
11. Which of the following is an archive file?
c. depreciation
a. an accounts payable subsidiary ledger
d. purchases
b. a cash receipts file
ANS: C
7. Which account is least likely to have a subsidiary
ledger?
a. sales
7
c. a sales journal
d. a file of accounts receivable that have been
written off
0
ANS: D
a. depict logical tasks that are being performed, but
not who is performing them
12. Which document is not a type of source
document?
b. illustrate the relationship between processes, and
the documents that flow between them
a. a sales order
and trigger activities
b. an employee time card
c. a paycheck
c. represent relationships between key elements of
the computer system
d. a sales return receipt
d. describe the logic of the process
ANS: C
ANS: B
13. The most important purpose of a turn-around
document is to
a. serve as a source document
17. When determining the batch size, which
consideration is the least important?
a. achieving economies by grouping together large
numbers of transactions
b. inform a customer of the outstanding amount
payable
b. complying with legal mandates
c. provide an audit trail for the external auditor
c. providing control over the transaction process
d. inform the bank of electronic funds deposits
d. balancing the trade off between batch size and
error detection
ANS: A
ANS: B
14. Which type of graphical documentation
represents systems at different levels of detail?
18. In contrast to a real-time system, in a batch
processing system
a. data flow diagram
a. there is a lag between the time when the
economic event occurs and the financial records
b. document flowchart
c. system flowchart
are updated
d. program flowchart
b. relatively more resources are required
ANS: A
15. Data flow diagrams
c. a greater resource commitment per unit of output
is required
a. depict logical tasks that are being performed, but
not who is performing them
d. processing takes place when the economic event
occurs
b. illustrate the relationship between processes, and
the documents that flow between them
ANS: A
and trigger activities
19. In contrast to a batch processing system, in a
real-time system
c. represent relationships between key elements of
the computer system
a. a lag occurs between the time of the economic
event and when the transaction is recorded
d. describe in detail the logic of the process
b. relatively fewer hardware, programming, and
training resources are required
ANS: A
c. a lesser resource commitment per unit of output is
required
16. Document flowcharts
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d. processing takes place when the economic event
occurs
ANS: D
b. turn-around document
c. master document
d. product document
20. The type of transaction most suitable for batch
processing is
ANS: C
a. airline reservations
25. Which method of processing does not use the
destructive update approach?
b. credit authorization
a. batch processing using direct access files
c. payroll processing
b. real-time processing
d. adjustments to perpetual inventory
c. batch processing using sequential files
ANS: C
21. The type of transaction most suitable for realtime processing is
a. recording fixed asset purchases
d. all of the above use the destructive update
approach
ANS: C
26. Which symbol represents a data store?
b. recording interest earned on long-term bonds
27. Which symbol represents a manual operation?
c. adjusting prepaid insurance
28. Which symbol represents accounting records?
d. recording a sale on account
29. Which symbol represents a document?
ANS: D
22. Which step is not found in batch processing using
sequential files?
a. control totals
30. Which symbol represents a magnetic tape
(sequential storage device)?
31. Which symbol represents a decision?
32. The characteristics that distinguish between
batch and real-time systems include all of the
following
b. sort runs
c. edit runs
except
d. immediate feedback of data entry errors
a. time frame
ANS: D
23. Both the revenue and the expenditure cycle can
be viewed as having two key parts. These are
b. resources used
c. file format
a. manual and computerized
d. efficiency of processing
b. physical and financial
ANS: C
c. input and output
33. A file that stores data used as a standard when
processing transactions is
d. batch and real-time
a. a reference file
ANS: B
24. All of the following can provide evidence of an
economic event except
b. a master file
c. a transaction file
d. an archive file
a. source document
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ANS: A
c. accounts unique to many concurrent transactions
need to be updated in real time.
34. Sequential storage means
d. None of the above are true statements
a. data is stored on tape
ANS: B
b. access is achieved through an index
39. Operational efficiencies can be improved by
c. access is direct
d. reading record 100 requires first reading records 1
to 99
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.
ANS: D
35. Real-time processing would be most beneficial in
handling a firm’s
a. fixed asset records
c. updating accounts unique to many concurrent
transactions in real time and updating common
accounts in batch mode.
b. retained earning information
d. None of the above are true statements
c. merchandise inventory
ANS: C
d. depreciation records
SHORT ANSWER
ANS: C
1. List two of the three transaction cycles.
36. Which accounting application is least suited for
batch processing?
ANS: expenditure cycle, conversion cycle, revenue
cycle
a. general ledger
2. Documents that are created at the beginning of
the transaction are called
b. vendor payments
__________________________.
c. sales order processing
ANS: source documents
d. payroll
ANS: C
37. Which accounting application is best suited for
batch processing?
3. ______________________________________ are
the two data processing approaches used in modern
systems.
ANS: Batch processing and real-time processing
4. Give a specific example of a turn-around
document.
a. general ledger
b. vendor payments
ANS: credit card, electricity, water, or telephone bill,
etc.
c. sales order processing
d. payroll
5. Explain when it is appropriate to use special
journals.
ANS: D
38. Operational inefficiencies occur because
a. accounts both common and unique to many
concurrent transactions need to be updated in real
time.
ANS: Special journals are used to record large
volumes of recurring transactions that are similar in
nature.
6. What are the subsystems of the revenue cycle?
ANS: sales order processing, cash receipts
b. accounts common to many concurrent
transactions need to be updated in real time.
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7. What are the subsystems of the expenditure
cycle?
ANS: time lag, resource use, efficiency
16. Give one advantages of real-time data collection.
ANS: purchasing, cash disbursements, payroll
8. Most organizations have replaced the general
journal with a _______________________________.
ANS: journal voucher system
9. Provide a specific example of a general ledger
account and a corresponding subsidiary ledger.
ANS: certain transaction errors can be prevented or
detected and corrected at their source.
17. In one sentence, what does updating a master
file record involve?
ANS: Updating a master file record involves changing
the value of one or more of its variable fields to
reflect the effects of a transaction.
ANS:
accounts receivable control account and accounts
receivable subsidiary, accounts payable control
account and accounts payable subsidiary, inventory
control and a subsidiary of specific inventory
18. What is destructive update?
ANS: Destructive update involves replacing an old
data value with a new value and thus destroying the
original.
items, fixed asset control account and a subsidiary of
specific fixed assets, notes receivable/payable
Chapter 3—Ethics, Fraud, and Internal
Control
and individual notes receivable and payable
TRUE/FALSE
10. Name five documentation techniques?
1. The ethical principle of justice asserts that the
benefits of the decision should be distributed fairly
to those who share the risks.
ANS: entity-relationship diagrams, data flow
diagrams, document flowcharts, system flowcharts,
program flowcharts
ANS: T
2. The ethical principle of informed consent suggests
that the decision should be implemented so as to
minimize all of the risks and to avoid any
unnecessary risks.
11. Why is the audit trail important?
ANS: The audit trail is used to track transactions
from the source document to the financial
statements and vice versa. Accountants use the
audit trail to correct errors, answer queries, and
perform audits.
ANS: F
12. List a method of data processing that uses the
destructive update approach?
ANS: batch method using direct access files or realtime processing
3. Employees should be made aware of the firm’s
commitment to ethics.
ANS: T
13. Only four symbols are used in data flow
diagrams. What are they?
4. Business ethics is the analysis of the nature and
social impact of computer technology, and the
corresponding formulation and justification of
policies for the ethical use of such technology.
ANS: process, data store, data flow, entity
ANS: F
14. Which flowchart depicts the relationship
between processes and the documents that flow
between them and trigger activities?
5. Para computer ethics is the exposure to stories
and reports found in the popular media regarding
the good or bad ramifications of computer
technology.
ANS: document flowcharts
ANS: F
15. What are the three characteristics that are used
to distinguish between batch and real-time systems.
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6. Source code is an example of intellectual property.
0
ANS: T
ANS: F
7. Copyright laws and computer industry standards
have been developed jointly and rarely conflict.
19. A key modifying assumption in internal control is
that the internal control system is the responsibility
of management.
ANS: F
ANS: T
8. Business bankruptcy cases always involve
fraudulent behavior.
20. Database management fraud includes altering,
updating, and deleting an organization’s data.
ANS: F
ANS: F
9. Defalcation is another word for financial fraud.
10. The trend toward distributed data processing
increases the exposure to fraud from remote
locations.
21. While the Sarbanes-Oxley Act prohibits auditors
from providing non-accounting services to their
audit clients, they are not prohibited from
performing such services for non-audit clients or
privately held
ANS: T
companies.
11. The external auditor is responsible for
establishing and maintaining the internal control
system.
ANS: T
ANS: F
ANS: T
ANS: T
22. The Sarbanes-Oxley Act requires the audit
committee to hire and oversee the external auditors.
12. Segregation of duties is an example of an internal
control procedure.
ANS: T
13. Controls in a computer-based information
system are identical to controls in a manual system.
ANS: F
14. Preventive controls are passive techniques
designed to reduce fraud.
23. Section 404 requires that corporate management
(including the CEO) certify their organization’s
internal controls on a quarterly and annual basis.
ANS: F
24. Section 302 requires the management of public
companies to assess and formally report on the
effectiveness of their organization’s internal
controls.
ANS: F
ANS: T
15. Ethical issues and legal issues are essentially the
same.
25. The objective of SAS 99 is to seamlessly blend
the auditor’s consideration of fraud into all phases of
the audit process.
ANS: F
ANS: T
16. Internal control systems are recommended but
not required of firms subject to the Foreign Corrupt
Practices Act.
MULTIPLE CHOICE
ANS: F
17. Operations fraud is the misuse or theft of the
firm’s computer resources.
1. Which ethical principle states that the benefit
from a decision must outweigh the risks, and that
there is no alternative decision that provides the
same or greater benefit with less risk?
a. minimize risk
ANS: T
b. justice
18. The Foreign Corrupt Practices Act requires only
that a firm keep good records.
c. informed consent
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d. proportionality
a. is perpetrated at a level to which internal controls
do not apply
ANS: D
b. involves misstating financial statements
2. Individuals who acquire some level of skill and
knowledge in the field of computer ethics are
involved in which level of computer ethics?
c. involves the direct conversion of cash or other
assets to the employee’s personal benefit
a. para computer ethics
d. involves misappropriating assets in a series of
complex transactions involving third parties
b. pop computer ethics
ANS: C
c. theoretical computer ethics
d. practical computer ethics
7. Forces which may permit fraud to occur do not
include
ANS: A
a. a gambling addiction
3. All of the following are issues of computer security
except
b. lack of segregation of duties
a. releasing incorrect data to authorized individuals
b. permitting computer operators unlimited access
to the computer room
c. permitting access to data by unauthorized
individuals
c. centralized decision making environment
d. questionable integrity of employees
ANS: C
8. Which of the following best describes lapping?
d. providing correct data to unauthorized individuals
ANS: B
a. applying cash receipts to a different customer’s
account in an attempt to conceal previous thefts of
funds
b. inflating bank balances by transferring money
among different bank accounts
4. Which characteristic is not associated with
software as intellectual property?
c. expensing an asset that has been stolen
a. uniqueness of the product
d. creating a false transaction
b. possibility of exact replication
ANS: A
c. automated monitoring to detect intruders
9. Operations fraud includes
d. ease of dissemination
ANS: C
a. altering program logic to cause the application to
process data incorrectly
5. For an action to be called fraudulent, all of the
following conditions are required except
b. misusing the firm’s computer resources
a. poor judgment
c. destroying or corrupting a program’s logic using a
computer virus
b. false representation
c. intent to deceive
d. creating illegal programs that can access data files
to alter, delete, or insert values
d. injury or loss
ANS: B
ANS: A
10. Who is responsible for establishing and
maintaining the internal control system?
6. One characteristic of employee fraud is that the
fraud
a. the internal auditor
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b. the accountant
d. comparing the accounts receivable subsidiary
ledger to the control account
c. management
ANS: A
d. the external auditor
ANS: C
15. A well-designed purchase order is an example of
a
11. The concept of reasonable assurance suggests
that
a. preventive control
a. the cost of an internal control should be less than
the benefit it provides
b. a well-designed system of internal controls will
detect all fraudulent activity
b. detective control
c. corrective control
d. none of the above
ANS: A
c. the objectives achieved by an internal control
system vary depending on the data processing
method
16. A physical inventory count is an example of a
d. the effectiveness of internal controls is a function
of the industry environment
b. detective control
a. preventive control
c. corrective control
ANS: A
12. Which of the following is not a limitation of the
internal control system?
a. errors are made due to employee fatigue
b. fraud occurs because of collusion between two
employees
d. feedforward control
ANS: B
17. The bank reconciliation uncovered a
transposition error in the books. This is an example
of a
a. preventive control
c. the industry is inherently risky
d. management instructs the bookkeeper to make
fraudulent journal entries
b. detective control
c. corrective control
ANS: C
d. none of the above
13. The most cost-effective type of internal control is
ANS: B
a. preventive control
b. accounting control
18. In balancing the risks and benefits that are part
of every ethical decision, managers receive guidance
from each of the following except
c. detective control
a. justice
d. corrective control
b. self interest
ANS: A
c. risk minimization
14. Which of the following is a preventive control?
d. proportionality
a. credit check before approving a sale on account
ANS: B
b. bank reconciliation
19. Which of the following is not an element of the
internal control environment?
c. physical inventory count
a. management philosophy and operating style
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a. to avoid collusion between the programmer and
the computer operator
b. organizational structure of the firm
c. well-designed documents and records
d. the functioning of the board of directors and the
audit committee
ANS: C
20. Which of the following suggests a weakness in
the internal control environment?
a. the firm has an up-to-date organizational chart
b. monthly reports comparing actual performance to
budget are distributed to managers
c. performance evaluations are prepared every three
years
b. to ensure that supervision is not required
c. to prevent the record keeper from authorizing
transactions
d. to enable the firm to function more efficiently
ANS: C
24. Segregation of duties in the computer-based
information system includes
a. separating the programmer from the computer
operator
b. preventing management override
d. the audit committee meets quarterly with the
external auditors
c. separating the inventory process from the billing
process
ANS: C
d. performing independent verifications by the
computer operator
21. Which of the following indicates a strong internal
control environment?
ANS: A
a. the internal audit group reports to the audit
committee of the board of directors
25. Which of the following is not an internal control
procedure?
b. there is no segregation of duties between
organization functions
a. authorization
b. management’s operating style
c. there are questions about the integrity of
management
c. independent verification
d. adverse business conditions exist in the industry
d. accounting records
ANS: A
ANS: B
22. According to SAS 78, an effective accounting
system performs all of the following except
26. The decision to extend credit beyond the normal
credit limit is an example of
a. independent verification
a. identifies and records all valid financial
transactions
b. authorization
b. records financial transactions in the appropriate
accounting period
c. segregation of functions
d. supervision
c. separates the duties of data entry and report
generation
ANS: B
27. When duties cannot be segregated, the most
important internal control procedure is
d. records all financial transactions promptly
ANS: C
a. supervision
23. Which of the following is the best reason to
separate duties in a manual system?
b. independent verification
c. access controls
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d. accounting records
32. The board of directors consists entirely of
personal friends of the chief executive officer. This
indicates a weakness in
ANS: A
28. An accounting system that maintains an
adequate audit trail is implementing which internal
control procedure?
a. the accounting system
b. the control environment
a. access controls
c. control procedures
b. segregation of functions
d. this is not a weakness
c. independent verification
ANS: B
d. accounting records
33. Computer fraud can take on many forms,
including each of the following except
ANS: D
a. theft or illegal use of computer-readable
information
29. Employee fraud involves three steps. Of the
following, which is not involved?
b. theft, misuse, or misappropriation of computer
equipment
a. concealing the crime to avoid detection
b. stealing something of value
c. theft, misuse, or misappropriation of assets by
altering computer-readable records and files
c. misstating financial statements
d. theft, misuse, or misappropriation of printer
supplies
d. converting the asset to a usable form
ANS: C
ANS: D
30. Which of the following is not an example of
independent verification?
a. comparing fixed assets on hand to the accounting
records
b. performing a bank reconciliation
c. comparing the accounts payable subsidiary ledger
to the control account
34. When certain customers made cash payments to
reduce their accounts receivable, the bookkeeper
embezzled the cash and wrote off the accounts as
uncollectible. Which control procedure would most
likely prevent this irregularity?
a. segregation of duties
b. accounting records
c. accounting system
d. permitting authorized users only to access the
accounting system
d. access controls
ANS: D
ANS: A
31. The importance to the accounting profession of
the Foreign Corrupt Practices Act of 1977 is that
a. bribery will be eliminated
b. management will not override the company’s
internal controls
35. The office manager forgot to record in the
accounting records the daily bank deposit. Which
control procedure would most likely prevent or
detect this error?
a. segregation of duties
b. independent verification
c. firms are required to have an effective internal
control system
c. accounting records
d. firms will not be exposed to lawsuits
d. supervision
ANS: C
ANS: B
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36. Business ethics involves
c. management override
a. how managers decide on what is right in
conducting business
d. stability of systems
ANS: D
b. how managers achieve what they decide is right
for the business
c. both a and b
d. none of the above
41. Management can expect various benefits to
follow from implementing a system of strong
internal control. Which of the following benefits is
least likely to occur?
a. reduced cost of an external audit.
ANS: C
b. prevents employee collusion to commit fraud.
37. All of the following are conditions for fraud
except
c. availability of reliable data for decision-making
purposes.
a. false representation
d. some assurance of compliance with the Foreign
Corrupt Practices Act of 1977.
b. injury or loss
c. intent
d. material reliance
e. some assurance that important documents and
records are protected.
ANS: D
ANS: B
38. The four principal types of fraud include all of the
following except
42. Which of the following situations is not a
segregation of duties violation?
a. bribery
a. The treasurer has the authority to sign checks but
gives the signature block to the assistant treasurer to
run the check-signing machine.
b. gratuities
c. conflict of interest
b. The warehouse clerk, who has the custodial
responsibility over inventory in the warehouse,
selects the vendor and authorizes purchases when
inventories are low.
d. economic extortion
ANS: B
39. The characteristics of useful information include
a. summarization, relevance, timeliness, accuracy,
and completeness
b. relevance, summarization, accuracy, timelessness,
and completeness
c. timeliness, relevance, summarization, accuracy,
and conciseness
d. disaggregation, relevance, timeliness, accuracy,
and completeness
ANS: A
c. The sales manager has the responsibility to
approve credit and the authority to write off
accounts.
d. The department time clerk is given the
undistributed payroll checks to mail to absent
employees.
e. The accounting clerk who shares the record
keeping responsibility for the accounts receivable
subsidiary ledger performs the monthly
reconciliation of the subsidiary ledger and the
control account.
ANS: B
40. Internal control system have limitations. These
include
a. possibility of honest error
43. Which of the following is not an issue to be
addressed in a business code of ethics required by
the SEC?
b. circumvention
a. Conflicts of interest
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b. Full and Fair Disclosures
c. locking the warehouse
c. Legal Compliance
d. preparing a trial balance
d. Internal Reporting of Code Violations
e. counting inventory
e. All of the above are issues to be addressed
ANS: A. preventive; B. detective; C. preventive; D.
detective; E. detective
ANS: E
SHORT ANSWER
Use the internal control procedures listed below to
complete the statements.
1. What are the main issues to be addressed in a
business code of ethics required by the SEC?
segregation of duties
ANS: Conflicts of interest, Full and Fair Disclosures,
Legal Compliance, Internal Reporting of Code
Violations, Accountability
2. List the four broad objectives of the internal
control system.
specific authorization
general authorization
accounting records
access controls
independent verification
ANS: safeguard assets, ensure the accuracy and
reliability of accounting records, promote
organizational efficiency, comply with
management’s policies and procedures
supervision
7. A clerk reorders 250 items when the inventory
falls below 25 items. This is an example of
__________________________.
3. Explain the purpose of the PCAOB
ANS: The PCAOB is empowered to set auditing,
quality control, and ethics standards; to inspect
registered accounting firms; to conduct
investigations; and to take disciplinary actions.
ANS: general authorization
8. The internal audit department recalculates payroll
for several employees each pay period. This is an
example of __________________________.
4. What are the five internal control components
described in the SAS 78 / COSO framework
ANS: independent verification
ANS: the control environment, risk assessment,
information and communication, monitoring, and
control activities
5. What are management responsibilities under
section 302 and 404?
ANS: Section 302 requires that corporate
management (including the CEO) certify their
organization’s internal controls on a quarterly and
annual basis. Section 404 requires the management
of public companies to assess and formally report on
the effectiveness of their organization’s internal
controls.
6. Identify to indicate whether each procedure is a
preventive or detective control.
9. Locking petty cash in a safe is an example of
__________________________.
ANS: access controls
10. Approving a price reduction because goods are
damaged is an example of
__________________________.
ANS: specific authorization
11. Using cameras to monitor the activities of
cashiers is an example of
__________________________.
ANS: supervision
a. authorizing a credit sale
12. Not permitting the computer programmer to
enter the computer room is an example of
_______________________________.
b. preparing a bank reconciliation
ANS: segregation of duties
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13. Sequentially numbering all sales invoices is an
example of __________________________.
the stolen check. This is in effect a small scale Ponzi
scheme.
ANS: accounting records
20. What are the six broad classes of physical control
activities defined by SAS 78?
14. What are the five conditions necessary for an act
to be considered fraudulent?
ANS: false representation, material fact, intent,
justifiable reliance, and injury or loss
ANS: Transaction authorization, segregation of
duties, supervision, access controls, accounting
records, independent verification
Chapter 4—The Revenue Cycle
15. What is the objective of SAS 99?
ANS: The objective of SAS 99 is to seamlessly blend
the auditor’s consideration of fraud into all phases of
the audit process.
TRUE/FALSE
1. The packing slip is also known as the shipping
notice.
16. Distinguish between exposure and risk.
ANS: F
ANS: Exposure is the absence or weakness of a
control which increases the firm’s risk of financial
loss or injury. Risk is the probability of incurring such
a loss or injury.
2. The bill of lading is a legal contract between the
buyer and the seller.
17. Explain the characteristics of management fraud.
3. Another name for the stock release form is the
picking ticket.
ANS: Management fraud typically occurs at levels
above where the internal control system is effective.
Financial statements are frequently modified to
make the firm appear more healthy than it actually
is.
If any misappropriation of assets occurs, it is usually
well hidden.
ANS: F
ANS: T
4. Warehouse stock records are the formal
accounting records for inventory.
ANS: F
5. The purpose of the invoice is to bill the customer.
ANS: T
18. The text discusses many questions about
personal traits of employees which might help
uncover fraudulent activity. What are three?
6. In most large organizations, the journal voucher
file has replaced the formal general journal.
ANS: executives: with high personal debt, living
beyond their means, engaged in habitual gambling,
appear to abuse alcohol or drugs, appear to lack
personal codes of ethics, appear to be unstable
19. Give two examples of employee fraud and
explain how the theft might occur.
ANS: T
7. The cash receipts journal is a special journal.
ANS: T
8. In the revenue cycle, the internal control “limit
access” applies to physical assets only.
ANS: Charges to expense accounts: Cash could be
stolen and charged to a miscellaneous expense
account. Once the account is closed, detection
would be more difficult.
Lapping: This involves converting cash receipts to
personal use. If a customer’s check is taken, his/her
balance will not reflect a payment and will be
detected when a statement is sent. In order to
conceal this fraud, a later payment is used to cover
7
ANS: F
9. In real-time processing systems, routine credit
authorizations are automated.
ANS: T
10. In a computerized accounting system,
segregation of functions refers to inventory control,
accounts receivable, billing, and general ledger tasks.
0
ANS: F
11. A written customer purchase order is required to
trigger the sales order system.
d. three subsystems –sales order processing, credit
authorization, and cash receipts
ANS: B
2. The reconciliation that occurs in the shipping
department is intended to ensure that
ANS: F
12. Inventory control has physical custody of
inventory.
a. credit has been approved
ANS: F
13. The principal source document in the sales order
system is the sales order.
ANS: T
14. Sales orders should be prenumbered documents.
b. the customer is billed for the exact quantity
shipped
c. the goods shipped match the goods ordered
d. inventory records are reduced for the goods
shipped
ANS: C
ANS: T
3. The adjustment to accounting records to reflect
the decrease in inventory due to a sale occurs in the
15. Integrated accounting systems automatically
transfer data between modules.
a. warehouse
ANS: T
16. If a customer submits a written purchase order,
there is no need to prepare a sales order.
b. shipping department
c. billing department
ANS: F
d. inventory control department
17. Sales return involves receiving, sales, credit, and
billing departments, but not accounts receivable.
ANS: D
ANS: F
4. Which document triggers the revenue cycle?
a. the sales order
18. A remittance advice is a form of turn-around
document.
b. the customer purchase order
c. the sales invoice
ANS: T
19. A bill of lading is a request for payment for
shipping charges.
d. the journal voucher
ANS: F
5. Copies of the sales order can be used for all of the
following except
ANS: B
20. In point of sale systems, authorization takes the
form of validation of credit card charges.
a. purchase order
ANS: T
b. credit authorization
MULTIPLE CHOICE
c. shipping notice
1. The revenue cycle consists of
d. packing slip
a. one subsystem–order entry
ANS: A
b. two subsystems–sales order processing and cash
receipts
6. The purpose of the sales invoice is to
c. two subsystems –order entry and inventory control
7
a. record reduction of inventory
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b. transfer goods from seller to shipper
a. the customer purchase order is received
c. bill the customer
b. the backordered goods are shipped
d. select items from inventory for shipment
c. the original goods are shipped
ANS: C
d. customers are not billed for backorders because a
backorder is a lost sale
7. The customer open order file is used to
ANS: B
a. respond to customer queries
12. Usually specific authorization is required for all of
the following except
b. fill the customer order
c. ship the customer order
a. sales on account which exceed the credit limit
d. authorize customer credit
b. sales of goods at the list price
ANS: A
c. a cash refund for goods returned without a receipt
8. The stock release copy of the sales order is not
used to
d. write off of an uncollectible account receivable
ANS: B
a. locate and pick the items from the warehouse
shelves
13. Which of following functions should be
segregated?
b. record any out-of-stock items
c. authorize the warehouse clerk to release custody
of the inventory to shipping
a. opening the mail and making the journal entry to
record cash receipts
b. authorizing credit and determining reorder
quantities
d. record the reduction of inventory
ANS: D
c. maintaining the subsidiary ledgers and handling
customer queries
9. The shipping notice
a. is mailed to the customer
d. providing information on inventory levels and
reconciling the bank statement
b. is a formal contract between the seller and the
shipping company
ANS: A
c. is always prepared by the shipping clerk
14. Which situation indicates a weak internal control
structure?
d. informs the billing department of the quantities
shipped
a. the mailroom clerk authorizes credit memos
ANS: D
b. the record keeping clerk maintains both accounts
receivable and accounts payable
10. The billing department is not responsible for
subsidiary ledgers
a. updating the inventory subsidiary records
c. the warehouse clerk obtains a signature before
releasing goods for shipment
b. recording the sale in the sales journal
c. notifying accounts receivable of the sale
d. the accounts receivable clerk prepares customer
statements every month
d. sending the invoice to the customer
ANS: A
ANS: A
11. Customers should be billed for backorders when
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15. The most effective internal control procedure to
prevent or detect the creation of fictitious credit
0
memoranda for sales returns is to
a. all sales are profitable
a. supervise the accounts receivable department
b. all sales are recorded
b. limit access to credit memoranda
c. credit is authorized
c. prenumber and sequence check all credit
memoranda
d. inventory to be shipped is not stolen
ANS: A
d. require management approval for all credit
memoranda
20. Which control does not help to ensure that
accurate records are kept of customer accounts and
inventory?
ANS: D
16. The accounts receivable clerk destroys all
invoices for sales made to members of her family
and does not record the sale in the accounts
receivable subsidiary ledger. Which procedure will
not detect this fraud?
a. prenumber and sequence check all invoices
a. reconcile accounts receivable control to accounts
receivable subsidiary
b. authorize credit
c. segregate custody of inventory from record
keeping
b. reconcile the accounts receivable control to the
accounts receivable subsidiary ledger
d. segregate record keeping duties of general ledger
from accounts receivable
c. prepare monthly customer statements
ANS: B
d. reconcile total sales on account to the debits in
the accounts receivable subsidiary ledger
21. Internal controls for handling sales returns and
allowances do not include
ANS: C
a. computing bad debt expense using the percentage
of credit sales
17. Which department is least likely to be involved in
the revenue cycle?
b. verifying that the goods have been returned
c. authorizing the credit memo by management
a. credit
d. using the original sales invoice to prepare the
sales returns slip
b. accounts payable
c. billing
ANS: A
d. shipping
22. The printer ran out of preprinted sales invoice
forms and several sales invoices were not printed.
The best internal control to detect this error is
ANS: B
18. Which document is included with a shipment
sent to a customer?
a. sales invoice
a. a batch total of sales invoices to be prepared
compared to the actual number of sales invoices
prepared
b. stock release form
b. sequentially numbered sales invoices
c. packing slip
d. shipping notice
c. visual verification that all sales invoices were
prepared
ANS: C
d. none of the above will detect this error
19. Good internal controls in the revenue cycle
should ensure all of the following except
ANS: A
23. Which department prepares the bill of lading?
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a. sales
ANS: D
b. warehouse
28. A cash prelist is
c. shipping
a. a document that records sales returns and
allowances
d. credit
b. a document returned by customers with their
payments
ANS: C
24. A remittance advice is
a. used to increase (debit) an account receivable by
the cash received
b. is a turn-around document
c. the source of information used to prepare
monthly statements
d. none of the above
ANS: D
c. is retained by the customer to show proof of
payment
29. An advantage of real-time processing of sales is
a. the cash cycle is lengthened
d. none of the above
b. current inventory information is available
ANS: B
25. A weekly reconciliation of cash receipts would
include comparing
c. hard copy documents provide a permanent record
of the transaction
a. the cash prelist with bank deposit slips
d. data entry errors are corrected at the end of each
batch
b. the cash prelist with remittance advices
ANS: B
c. bank deposit slips with remittance advices
d. journal vouchers from accounts receivable and
general ledger
30. Commercial accounting systems have fully
integrated modules. The word “integrated” means
that
ANS: A
a. segregation of duties is not possible
26. At which point is supervision most critical in the
cash receipts system?
b. transfer of information among modules occurs
automatically
a. accounts receivable
c. batch processing is not an option
b. general ledger
d. separate entries are made in the general ledger
accounts and the subsidiary ledgers
c. mail room
ANS: B
d. cash receipts
31. The data processing method that can shorten the
cash cycle is
ANS: C
27. EDI trading partner agreements specify all of the
following except
a. selling price
a. batch, sequential file processing
b. batch, direct access file processing
c. real-time file processing
b. quantities to be sold
d. none of the above
c. payment terms
ANS: C
d. person to authorize transactions
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32. Which of the following is not a risk exposure in a
microcomputer accounting system?
a. reliance on paper documentation is increased
b. functions that are segregated in a manual
environment may be combined in a microcomputer
accounting system
d. a memo prepared in the mailroom
ANS: C
37. The revenue cycle utilizes all of the following files
except
a. credit memo file
c. backup procedures require human intervention
b. sales history file
d. data are easily accessible
c. shipping report file
d. cost data reference file
ANS: A
33. Which journal is not used in the revenue cycle?
ANS: D
38. All of the following are advantages of real-time
processing of sales except
a. cash receipts journal
b. sales journal
a. The cash cycle is shortened
c. purchases journal
b. Paper work is reduced
d. general journal
c. Incorrect data entry is difficult to detect
ANS: C
d. Up-to-date information can provide a competitive
advantage in the marketplace
34. Periodically, the general ledger department
receives all of the following except
ANS: C
a. total increases to accounts receivable
SHORT ANSWER
b. total of all sales backorders
1. Distinguish between a packing slip, shipping
notice, and a bill of lading.
c. total of all sales
ANS: The packing slip travels with the goods to the
customer, and it describes the contents on the
order.
d. total decreases in inventory
ANS: B
35. The credit department
a. prepares credit memos when goods are returned
b. approves credits to accounts receivable when
payments are received
c. authorizes the granting of credit to customers
Upon filling the order, the shipping department
sends the shipping notice to the billing department
to notify them that the order has been filled and
shipped. The shipping notice contains additional
information that the packing slip may not contain,
such as shipment date, carrier and freight charges.
ANS: C
The bill of lading is a formal contract between the
seller and the transportation carrier; it shows legal
ownership and responsibility for assets in transit.
36. Adjustments to accounts receivable for
payments received from customers is based upon
2. State two specific functions or jobs that should be
segregated in the sales processing system.
a. the customer’s check
ANS: sales order processing and credit approval;
inventory control (record keeping) from warehouse
(custody); and general ledger from accounts
receivable subsidiary ledger
d. none of the above
b. the cash prelist
c. the remittance advice that accompanies payment
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3. State two specific functions or jobs that should be
segregated in the cash receipts system.
ANS: cash receipts (custody) from accounts
receivable (record keeping); and general ledger from
accounts receivable subsidiary ledger
mail room (receiving cash) and accounts receivable
subsidiary ledger
4. List two points in the sales processing system
when authorization is required.
ANS: credit check, sales returns policy, preparation
of cash prelist
5. For the revenue cycle, state two specific
independent verifications that should be performed.
ANS: shipping verifies that the goods sent from the
warehouse are correct in type and quantity;
billing reconciles the shipping notice with the sales
order to ensure that customers are billed only for
the quantities shipped;
general ledger reconciles journal vouchers submitted
by the billing department (sales journal),
inventory control (inventory subsidiary ledger), and
cash receipts (cash receipts journal)
treasurer determines that all cash received got to
the bank
6. What task can the accounts receivable
department engage in to verify that all checks sent
by the customers have been appropriately deposited
and recorded?
ANS: The company should periodically, perhaps
monthly, send an account summary to each
customer listing invoices and amounts paid by check
number and date. This form allows the customer to
verify the accuracy of the records. If any payments
are not recorded, they will notify the company of the
discrepancy. These reports should not be handled by
the accounts receivable clerk or the cashier.
7. What specific internal control procedure would
prevent the sale of goods on account to a fictitious
customer?
ANS: credit check
procedure that would prevent or detect this fraud.
ANS: supervision (two people) when opening the
mail; customer complaints when monthly
statements mailed
9. A customer payment of $247 was correctly posted
in the general ledger but was recorded as $274 in
the customer’s account receivable. Describe a
specific internal control procedure that would detect
this error.
ANS: reconcile the accounts receivable control
account to the accounts receivable subsidiary ledger;
compare control totals of cash received with total
credits to A/R subsidiary ledger
10. Goods are shipped to a customer, but the
shipping department does not notify billing and the
customer never receives an invoice. Describe a
specific internal control procedure that would detect
this error.
ANS: Billing department matches the stock release
copy of the sales order (from shipping) to the
invoice, ledger, and file copies of the sales order
(sent directly to billing), and then mails the invoice
to the customer. After a certain amount of time has
passed, the billing department should investigate
any unmatched invoice, ledger, and file copies of the
sales order.
11. A clerk embezzles customer payments on
account and covers up the theft by making an
adjustment to the accounts receivable ledger.
Describe a specific internal control procedure that
would prevent this fraud.
ANS: segregation of duties; do not let one person
have custody of payments and the ability to make
adjustments to the records; all adjustments to
accounts receivable records must be authorized
12. A credit sale is made to a customer, even though
the customer’s account is four months overdue.
Describe a specific internal control procedure that
would prevent this from happening.
ANS: perform a credit check and require
management approval for all sales to accounts that
are overdue
13. What specific internal control procedure would
prevent a customer from being billed for all 50 items
ordered although only 40 items were shipped?
8. The clerk who opens the mail routinely steals
remittances. Describe a specific internal control
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ANS: billing should reconcile the shipping report with
the sales order
14. What specific internal control procedure would
prevent the shipping clerk from taking goods from
the storeroom and sending them to someone who
had not placed an order?
ANS: shipping clerk should not have access to the
storeroom
15. What specific internal control procedure would
prevent an accounts receivable clerk from issuing a
fictitious credit memo to a customer (who is also a
relative) for goods that were “supposedly” returned
from previous sales?
ANS: credit memo should be authorized after
verifying the return of goods based on evidence
from the person who received the goods
3. The organization structure should be such that the
perpetration of a fraud requires collusion between 2
or more individuals.
20. What is automation and why is it used?
ANS: Automation involves using technology to
improve the efficiency and effectiveness of a task.
Automation of the revenue cycle is typically used to
reduce overhead costs, make better credit granting
decisions, and better collect outstanding accounts
receivable.
21. What is the objective of re-engineering?
ANS: The objective of re-engineering is to greatly
reduce costs by identifying and eliminating non
value-added tasks and also by streamlining
necessary existing processes.
16. What specific internal control procedure would
prevent an increase in sales returns since salesmen
were placed on commission?
22. What are the key segregation of duties related to
computer programs that process accounting
transactions.
ANS: customer credit should be verified by the credit
department reduce commissions for sales returns
ANS: Response: The tasks of design, maintenance,
and operation of computer programs need to be
segregated. The programmers who write the original
computer programs should not also be responsible
for making program changes. Both of these functions
must also be separate from the daily task of
operating the system.
17. What specific internal control procedure would
detect the misplacement of a sales invoice after
preparation and not mailed to the customer? The
invoice was never found.
ANS: all documents should be prenumbered
18. What function does the receiving department
serve in the revenue cycle?
ANS: The receiving department counts and inspects
items which are returned by customers. The
receiving department prepares a return slip of which
a copy goes to the warehouse for restocking, and a
copy goes to the sales order department so that a
credit memo can be issued to the customer.
19. What are the three rules that ensure that no
single employee or department processes a
transaction in its entirety.
23. How is EDI more than technology? What unique
control problems may it pose?
ANS: EDI represents a unique business arrangement
between the buyer and seller in which they agree, in
advance, to the terms of their relationship on such
items as selling price, quantities, delivery times,
payment terms and methods of handling disputes.
The terms of agreement are binding. One problem is
ensuring that only valid transactions are processed.
Another risk is that a non-trading partner will
masquerade as a trading partner and access the
firm's processing systems.
24. What makes point-of-sales systems different
from revenue cycles of manufacturing firms?
ANS: The three rules that ensure segregation of
functions are:
ANS: In point-of-sale systems, the customer literally
has possession of the items purchased, thus the
inventory is in hand. Typically, for manufacturing
firms, the order is placed and the good is shipped to
the customer at some later time period. Thus,
updating inventory at the time of sale is necessary in
1. Transaction authorization should be separate
from transaction processing
2. Asset custody should be separate from asset
record keeping.
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point-of-sale systems since the inventory is changing
hands, while it is not necessary in manufacturing
firms until the goods are actually shipped to the
customer.
7.
25. Give three examples of Access Control in a Pointof-Sale (POS) system.
8.
ANS: Lock on the cash drawer
Internal cash register tape that can be accessed only
by the manager
Physical security over the inventory. The following
are examples: Steel cables to secure expensive
leather coats to the clothing rack. Locked showcases
to display jewelry and costly electronic equipment.
Magnetic tags attached to merchandise, which will
sound an alarm when removed from the store.
Note to Instructor: Some physical security devices
could also be classified as supervision
Chapter 5—The Expenditure Cycle Part I:
Purchases and Cash Disbursements
Procedures
10.
11.
12.
13.
TRUE/FALSE
1.
9.
14.
Purchasing decisions are authorized by
inventory control.
15.
ANS: T
2.
3.
4.
5.
6.
The blind copy of the purchase order that goes
to the receiving department contains no item
descriptions.
ANS: F
Firms that wish to improve control over cash
disbursements use a voucher system.
ANS: T
In a voucher system, the sum of all unpaid
vouchers in the voucher register equals the
firm’s total voucher payable balance.
ANS: T
The accounts payable department reconciles the
accounts payable subsidiary ledger to the
control account.
ANS: F
The use of inventory reorder points suggests the
need to obtain specific authorization.
ANS: F
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16.
17.
18.
19.
20.
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Proper segregation of duties requires that the
responsibility approving a payment be
separated from posting to the cash
disbursements journal.
ANS: T
A major risk exposure in the expenditure cycle is
that accounts payable may be overstated at the
end of the accounting year.
ANS: F
When a trading partner agreement is in place,
the traditional three way match may be
eliminated.
ANS: T
Authorization of purchases in a merchandising
firm occurs in the inventory control department.
ANS: T
A three way match involves a purchase order, a
purchase requisition, and an invoice.
ANS: F
Authorization for a cash disbursement occurs in
the cash disbursement department upon receipt
of the supplier’s invoice.
ANS: F
An automated cash disbursements system can
yield better cash management since payments
are made on time.
ANS: T
Permitting warehouse staff to maintain the only
inventory records violates separation of duties.
ANS: T
A purchasing system that employs electronic
data interchange does not use a purchase order.
ANS: F
Inventory control should be located in the
warehouse.
ANS: F
Inspection of shipments in the receiving
department would be improved if the
documentation showed the value of the
inventory.
ANS: F
One reason for authorizing purchases is to
enable efficient inventory management.
ANS: T
If accounts payable receives an invoice directly
from the supplier it needs to be reconciled with
the purchase order and receiving report.
ANS: T
Supervision in receiving is intended to reduce
the theft of assets.
ANS: T
MULTIPLE CHOICE
d. the quantity of items received
1. The purpose of the purchase requisition is to
ANS: C
a. order goods from vendors
6. The purchase order
b. record receipt of goods from vendors
a. is the source document to make an entry into the
accounting records
c. authorize the purchasing department to order
goods
b. indicates item description, quantity, and price
d. bill for goods delivered
c. is prepared by the inventory control department
ANS: C
d. is approved by the end-user department
2. The purpose of the receiving report is to
ANS: B
a. order goods from vendors
7. The reason that a blind copy of the purchase order
is sent to receiving is to
b. record receipt of goods from vendors
a. inform receiving when a shipment is due
c. authorize the purchasing department to order
goods
b. force a count of the items delivered
d. bill for goods delivered
c. inform receiving of the type, quantity, and price of
items to be delivered
ANS: B
3. All of the following departments have a copy of
the purchase order except
d. require that the goods delivered are inspected
ANS: B
a. the purchasing department
8. The receiving report is used to
b. the receiving department
a. accompany physical inventories to the storeroom
or warehouse
c. accounts payable
b. advise the purchasing department of the dollar
value of the goods delivered
d. general ledger
ANS: D
4. The purpose of the purchase order is to
c. advise general ledger of the accounting entry to
be made
a. order goods from vendors
d. advise the vendor that the goods arrived safely
b. record receipt of goods from vendors
ANS: A
c. authorize the purchasing department to order
goods
9. When a copy of the receiving report arrives in the
purchasing department, it is used to
d. approve payment for goods received
a. adjust perpetual inventory records
ANS: A
b. record the physical transfer of inventory from
receiving to the warehouse
5. The open purchase order file in the purchasing
department is used to determine
c. analyze the receiving department’s process
a. the quality of items a vendor ships
d. recognize the purchase order as closed
b. the best vendor for a specific item
ANS: D
c. the orders that have not been received
10. The financial value of a purchase is determined
by reviewing the
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a. packing slip
15. Because of time delays between receiving
inventory and making the journal entry
b. purchase requisition
a. liabilities are usually understated
c. receiving report
b. liabilities are usually overstated
d. supplier’s invoice
c. liabilities are usually correctly stated
ANS: D
d. none of the above
11. Which document is least important in
determining the financial value of a purchase?
ANS: A
16. Usually the open voucher payable file is
organized by
a. purchase requisition
b. purchase order
a. vendor
c. receiving report
b. payment due date
d. supplier’s invoice
c. purchase order number
ANS: A
d. transaction date
12. In a merchandising firm, authorization for the
payment of inventory is the responsibility of
ANS: B
a. inventory control
17. Which of the following statements is not correct?
b. purchasing
a. the voucher system is used to improve control
over cash disbursements
c. accounts payable
b. the sum of the paid vouchers represents the
voucher payable liability of the firm
d. cash disbursements
ANS: C
c. the voucher system permits the firm to
consolidate payments of several invoices on one
voucher
13. In a merchandising firm, authorization for the
purchase of inventory is the responsibility of
d. many firms replace accounts payable with a
voucher payable system
a. inventory control
b. purchasing
ANS: B
c. accounts payable
18. In the expenditure cycle, general ledger does not
d. cash disbursements
a. post the journal voucher from the accounts
payable department
ANS: A
14. When purchasing inventory, which document
usually triggers the recording of a liability?
a. purchase requisition
b. post the account summary from inventory control
c. post the journal voucher from the purchasing
department
d. reconcile the inventory control account with the
inventory subsidiary summary
b. purchase order
c. receiving report
ANS: C
d. supplier’s invoice
19. The documents in a voucher packet include all of
the following except
ANS: D
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a. a check
ANS: C
b. a purchase order
24. Of the following duties, it is most important to
separate
c. a receiving report
a. warehouse from stores
d. a supplier’s invoice
b. warehouse from inventory control
ANS: A
20. To maintain a good credit rating and to optimize
cash management, cash disbursements should arrive
at the vendor’s place of business
a. as soon as possible
c. accounts payable and accounts receivable
d. purchasing and accounts receivable
ANS: B
b. on the due date
25. In a firm with proper segregation of duties,
adequate supervision is most critical in
c. on the discount date
a. purchasing
d.by the end of the month
b. receiving
ANS: C
c. accounts payable
21. The cash disbursement clerk performs all of the
following tasks except
d. general ledger
ANS: B
a. reviews the supporting documents for
completeness and accuracy
26. The receiving department is not responsible to
b. prepares checks
a. inspect shipments received
b. count items received from vendors
c. signs checks
d. marks the supporting documents paid
c. order goods from vendors
ANS: C
d. safeguard goods until they are transferred to the
warehouse
22. When a cash disbursement in payment of an
accounts payable is recorded
ANS: C
b. the income statement is changed
27. The major risk exposures associated with the
receiving department include all of the following
except
c. the cash account is unchanged
a. goods are accepted without a physical count
d. the liability account is decreased
b. there is no inspection for goods damaged in
shipment
a. the liability account is increased
ANS: D
c. inventories are not secured on the receiving dock
23. Authorization for payment of an accounts
payable liability is the responsibility of
d. the audit trail is destroyed
a. inventory control
ANS: D
b. purchasing
c. accounts payable
28. When searching for unrecorded liabilities at the
end of an accounting period, the accountant would
search all of the files except
d. cash disbursements
a. the purchase requisition file
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b. the cash receipts file
b. all checks signed by check-signing equipment
c. the purchase order file
c. checks over a certain dollar amount manually
signed by the treasurer
d. the receiving report file
ANS: B
d. checks over a certain dollar amount manually
signed by the cash disbursements clerk
29. In regards to the accounts payable department,
which statement is not true?
ANS: C
33. The document which will close the open
purchase requisition file is the
a. the purchase requisition shows that the
transaction was authorized
b. the purchase order proves that the purchase was
required
a. purchase order
b. vendor invoice
c. receiving report
c. the receiving report provides evidence of the
physical receipt of the goods
d. none of the above
d. the supplier’s invoice indicates the financial value
of the transaction
ANS: C
ANS: B
34. Goods received are inspected and counted to
30. In a computerized system that uses an economic
order quantity (EOQ) model and the perpetual
inventory method, who determines when to reorder
inventory?
a. determine that the goods are in good condition
a. the inventory control clerk
b. determine the quantity of goods received
c. preclude payment for goods not received or
received in poor condition
d. all of the above
b. the purchasing department
ANS: D
c. the vendor
d. the computer system
35. If a company uses a standard cost system,
inventory records can be updated from the
ANS: D
a. vendor invoice
31. Firms can expect that proper use of a valid
vendor file will result in all of the following benefits
except
b. purchase order
a. purchasing agents will be discouraged from
improperly ordering inventory from related parties
d. purchase requisition
b. purchases from fictitious vendors will be detected
c. the most competitive price will be obtained
d. the risk of purchasing agents receiving kickbacks
and bribes will be reduced
ANS: C
c. receiving report
ANS: C
36. If a company uses an actual cost system,
inventory records can first be updated from the
a. vendor invoice
b. purchase order
c. receiving report
32. In a real-time processing system with a high
number of transactions, the best and most practical
control over cash disbursements is to have
d. purchase requisition
ANS: A
a. all checks manually signed by the treasurer
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37. Copies of a purchase order are sent to all of the
following except
ANS: receiving report
3.
a. inventory control
List specific jobs that should be segregated in
the purchases processing system.
ANS: inventory control from warehouse, general
ledger from accounts payable subsidiary ledger
b. receiving
c. general ledger
4.
d. accounts payable
ANS: C
List specific jobs that should be segregated in
the cash disbursements system.
ANS: general ledger from accounts payable
subsidiary ledger, accounts payable subsidiary ledger
from cash disbursements
38. The receiving report
a. is used to update the actual cost inventory ledger
5.
b. accompanies the goods to the storeroom
c. is sent to general ledger
d. is returned to the vendor to acknowledge receipt
of the goods
ANS: B
39. A supplier invoice
ANS: Accounts payable should compare the price on
the purchase order to the price on the supplier’s
invoice. Accounts payable should recalculate the
math (extensions and additions) and check all other
charges such as freight, tax, etc.
6.
a. is included with the goods
b. shows what was ordered even if all was not
shipped
Describe an internal control procedure that
would detect that a vendor overcharged for
goods delivered.
Describe an internal control procedure that
would prevent payment of a invoice for goods
that were never delivered.
ANS: Accounts payable should match every item on
every invoice to a receiving report.
c. is sent by vendor to accounts payable
7.
d. none of the above
ANS: C
Describe an internal control procedure that
would prevent issuing two checks in payment of
the same invoice.
a. part of accounts payable
ANS: The supporting documents should be marked
“paid” after the check is signed. A computerized
system will tag the invoice number as paid.
b. an independent accounting function
8.
40. The cash disbursement function is
c. a treasury function
d. part of the general ledger department
ANS: C
SHORT ANSWER
1.
Which internally generated document should be
compared to the supplier’s invoice to verify the
price of an item?
ANS: Receiving department employees have custody
of the asset and record keeping responsibilities.
Without proper supervision, employees may fail to
count and inspect incoming shipments. Without
proper supervision, shipments may disappear from
the receiving dock before being transferred to the
warehouse.
9.
ANS: purchase order
2.
Which internally generated document should be
compared to the supplier’s invoice to verify the
quantity being billed for?
7
Explain why supervision is so important in the
receiving department.
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What type of error or fraud might happen if the
accounts payable ledger is not periodically
reconciled to the control account in the general
ledger?
ANS: errors in A/P processing would go undetected,
overstated payments produce debit balances in A/P.
10. What type of error or fraud might happen if
suppliers’ invoices are not compared to
purchase orders or to receiving reports before
payment?
ANS: payment at higher than anticipated prices,
overpayment for goods not received
11. What internal accounting control(s) would be
the most effective in preventing a storekeeper
from taking inventory home at night? When
shortages become apparent, he claims the
goods were never received.
ANS: receiving records items received on a receiving
report, storekeeper initials receipt of goods
12. Why should the copy of a purchase order, which
is sent to receiving, be a “blind” copy?
ANS: to force workers in receiving to count and
inspect the goods received
17. Explain why a three way match may not be
required for transactions covered by a trading
partner agreement.
ANS: Under a trading partner agreement the parties
contractually agree to terms of trade such as price,
quantities to be shipped, discounts, and lead times.
With these sources of potential discrepancy
eliminated, financial information about purchases is
known in advance and the vendor’s invoice provides
no critical information that cannot be derived from
the receiving report. Thus, a three way match is
unnecessary.
Chapter 6—The Expenditure Cycle Part II:
Payroll Processing and Fixed Asset
Procedures
TRUE/FALSE
1. Time cards are used by cost accounting to allocate
direct labor charges to work in process.
ANS: F
13. What is(are) the purpose(s) of maintaining a
valid vendor file?
2. The personnel department authorizes changes in
employee pay rates.
ANS: Inventories should only be acquired from valid
vendors. This control procedure helps to deter the
purchasing agent from buying inventories at
excessive costs and receiving kickbacks or from
buying from an entity in which the purchasing agent
has a relationship, such a relative or a friend.
ANS: T
3. Most payroll systems for mid-size firms use realtime data processing.
ANS: F
14. Name two major benefits of automating the
purchasing effort.
4. To improve internal control, paychecks should be
distributed by the employee's supervisor.
ANS: improved inventory control, better cash
management, streamlining the purchasing effort
ANS: F
15. What function or department typically initiates
a purchase in a merchandising business?
5. Employee paychecks should be drawn against a
special checking account.
ANS: T
ANS: Inventory control determines that the level of
certain items warrants restocking and sends a
purchase requisition to purchasing.
6. Because a time clock is used, no supervision is
required when employees enter and leave the work
place.
16. Where in the purchasing/cash disbursement
functions is access control exercised?
ANS: F
ANS: physical control of inventory and cash, access
to documents that control physical assets –such as
purchase requisitions, purchase orders, receiving
reports, etc.
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7. Inventory control performs the formal record
keeping function for fixed assets.
ANS: F
8. The depreciation schedule shows when assets are
fully depreciated.
0
ANS: T
9. Authorization to dispose of fixed assets should be
issued by the user of the asset.
20. The fixed asset disposal report authorizes the
user department to dispose of a fixed asset.
ANS: F
ANS: F
MULTIPLE CHOICE
10. Work-in-process records are updated by payroll
personnel.
1. The document that captures the total amount of
time that individual workers spend on each
production job is called a
ANS: F
11. Ideally, payroll checks are written on a special
bank account used only for payroll.
a. time card
b. job ticket
ANS: T
c. personnel action form
12. The supervisor is the best person to determine
the existence of a “phantom employee” and should
distribute paychecks.
d. labor distribution form
ANS: B
2. An important reconciliation in the payroll system
is
ANS: F
13. Payroll processing can be automated easily
because accounting for payroll is very simple.
a. general ledger compares the labor distribution
summary from cost accounting to the disbursement
voucher from accounts payable
ANS: F
14. Timekeeping is part of the personnel function.
ANS: F
15. Fixed asset accounting systems include cost
allocation and matching procedures that are not part
of routine expenditure systems.
b. personnel compares the number of employees
authorized to receive a paycheck
c. production compares the number of hours
reported on job tickets to the number of hours
reported on time cards
d. payroll compares the labor distribution summary
to the hours reported on time cards
ANS: T
16. Asset maintenance involves only the recording of
depreciation charges. Physical improvements are
always expensed.
ANS: F
ANS: A
3. Which internal control is not an important part of
the payroll system?
a. Supervisors verify the accuracy of employee time
cards.
17. Fixed Asset Systems must keep track of the
physical location of each asset to promote
accountability.
b. Paychecks are distributed by an independent
paymaster.
ANS: T
18. Time cards capture the total time an individual
worker spends on each production job.
ANS: F
19. Accounting conventions and IRS rules sometime
specify the depreciation parameters to be used.
ANS: T
c. Accounts payable verifies the accuracy of the
payroll register before transferring payroll funds to
the general checking accounting.
d. General ledger reconciles the labor distribution
summary and the payroll disbursement voucher.
ANS: C
4. Which transaction is not processed in the Fixed
Asset System?
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d. maintaining a record of the fair market value of all
fixed assets
a. purchase of building
b. improvement of equipment
ANS: D
c. purchase of raw materials
9. Which of the following is not a characteristic of
the Fixed Asset System?
d. sale of company van
ANS: C
5. Depreciation
a. Acquisitions are routine transactions requiring
general authorization.
a. is calculated by the department that uses the fixed
asset
b. Retirements are reported on an authorized
disposal report form.
b. allocates the cost of the asset over its useful life
c. Acquisition cost is allocated over the expected life
of the asset.
c. is recorded weekly
d. results in book value approximating fair market
value
ANS: B
6. Depreciation records include all of the following
information about fixed assets except
a. the economic benefit of purchasing the asset
d. Transfer of fixed assets among departments is
recorded in the fixed asset subsidiary ledger.
ANS: A
10. In the payroll subsystem, which function should
distribute paychecks?
a. personnel
b. timekeeping
b. the cost of the asset
c. paymaster
c. the depreciation method being used
d. payroll
d. the location of the asset
ANS: C
ANS: A
7. Which control is not a part of the Fixed Asset
System?
11. Where does the responsibility lie for reconciling
the labor distribution summary and the payroll
disbursement voucher?
a. formal analysis of the purchase request
a. cash disbursements
b. review of the assumptions used in the capital
budgeting model
b. cost accounting
c. personnel
c. development of an economic order quantity
model
d. general ledger
d. estimates of anticipated cost savings
ANS: D
ANS: C
12. Which of the following statements is not true?
8. Objectives of the Fixed Asset System do not
include
a. Routine payroll processing begins with the
submission of time cards.
a. authorizing the acquisition of fixed assets
b. Payroll clerks must verify the hours reported on
the time cards.
b. recording depreciation expense
c. computing gain and/or loss on disposal of fixed
assets
7
c. Payroll reconciles personnel action forms with
time cards and prepares paychecks.
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d. Cash disbursements signs paychecks and forwards
them to the paymaster for distribution.
b. to prevent an absent employee’s check from
being lost
ANS: B
c. to avoid paying absent employees for payday
13. In a manufacturing firm, employees use time
cards and job tickets. Which of the following
statements is not correct?
d. to prevent the paymaster from cashing unclaimed
checks
ANS: A
a. Job tickets are prepared by employees for each
job worked on, so an employee may have more that
one job ticket on a given day.
17. Which of the following is not a reasonable
control for fixed assets?
b. An individual employee will have only one time
card.
a. Proper authorization is required for acquisition
and disposal of fixed assets.
c. The time reported on job tickets should reconcile
with the time reported on time cards.
b. Fixed asset records show the location of each
asset.
d. Paychecks should be prepared from the job
tickets.
c. Fully depreciated assets are immediately disposed
of.
ANS: D
d. Depreciation policies are in writing.
14. Which department is responsible for approving
changes in pay rates for employees?
ANS: C
a. payroll
18. Cost accounting updates work-in -process
accounts from
b. treasurer
a. time cards
c. personnel
b. the labor distribution summary
d. cash disbursements
c. job tickets
d. personnel action forms
ANS: C
15. Which of the following situations represents a
serious control weakness?
a. Timekeeping is independent of the payroll
department.
ANS: C
19. Payroll uses time card data to do all of the
following except
a. prepare the payroll register
b. Paychecks are distributed by the employees
immediate supervisor.
b. update employee payroll records
c. prepare the labor distribution summary
c. Time cards are reconciled with job tickets.
d. Personnel is responsible for updating employee
records, including creation of records for new hires.
d. prepare paychecks
ANS: C
ANS: B
20. Payroll checks are typically drawn on
16. Why would an organization require the
paymaster to deliver all unclaimed paychecks to the
internal audit department?
a. the regular checking account
a. to detect a “phantom employee” for whom a
check was produced
c. a wages payable account
b. a payroll imprest account
d. petty cash
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ANS: B
d. personnel action form
21. The personnel action form provides
authorization control by
ANS: C
a. preventing paychecks for terminated employees
26. A control technique that can reduce the risk of a
terminated employee being paid is
b. verifying pay rates for employees
a. a security camera viewing the time clock
c. informing payroll of new hires
b. the supervisor taking role during the shift
d. all of the above
c. paychecks being distributed by an independent
paymaster
ANS: D
22. Accounting records that provide the audit trail
for payroll include all of the following except
d. reconciliation of time cards and job tickets
ANS: C
a. time cards
27. Accounts payable
b. job tickets
a. signs paychecks
c. payroll register
b. prepares the payroll voucher
d. accounts payable register
c. reconciles time cards and employee records
ANS: D
d. distributes paychecks to employees
23. Personnel actions forms are used to do all of the
following except
ANS: B
a. activate new employees
28. All of the following are processed by the Fixed
Asset System except
b. terminate employees
a. sale of unneeded equipment
c. record hours worked
b. purchase of raw materials
d. change pay rates
c. repair of production equipment
ANS: C
d. purchase of a new plant
24. The payroll department performs all of the
following except
ANS: B
a. prepares the payroll register
29. The Fixed Asset System performs all of the
following except
b. distributes paychecks
a. determines the need for new assets
c. updates employee payroll records
b. maintains depreciation records
d. prepares paychecks
c. records retirement and disposal of assets
ANS: B
d. tracks the physical location of fixed assets
25. The document that records the total amount of
time spent on a production job is the
ANS: A
a. time card
30. The payroll department performs all of the
following except
b. job ticket
a. prepares paychecks
c. labor distribution summary
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b. transfers adequate funds to the payroll imprest
account
c. updates employee payroll records
35. Asset disposal
a. occurs as soon as an asset is fully depreciated
b. requires no special authorization
d. prepares the payroll register
ANS: B
c. automatically initiates the purchase of a
replacement asset
31. Depreciation
d. must follow formal authorization procedures
a. assures that assets are reported at fair market
value
ANS: D
SHORT ANSWER
b. is discretionary for many firms
1. Describe an internal control procedure that would
prevent an employee from punching the time clock
c. allocates the cost of an asset over its useful life
d. is the responsibility of the department using the
asset
for another, absent employee.
ANS: C
ANS: supervision of the time clock at the start of the
shift
32. The Fixed Asset System is similar to the
expenditure cycle except
2. Why should the employee’s supervisor not
distribute paychecks?
a. fixed asset transactions are non-routine and
require special authorization and controls
ANS: A form of payroll fraud involves a supervisor
submitting fraudulent time cards for nonexistent
employees. The resulting paychecks, when returned
to the supervisor are then cashed by the supervisor.
b. fixed assets are capitalized, not expensed
c. both a and b
3. Describe an internal control procedure that would
prevent a supervisor from stealing the unclaimed
paychecks of employees who have been terminated.
d. none of the above
ANS: C
33. Asset maintenance involves
a. the recording of periodic depreciation
b. adjusting the asset records to reflect the cost of
physical improvements
c. keeping track of the physical location of the assets
d. all of the above
ANS: D
34. The Fixed Asset Systems does all of the following
except
a. records acquisition of assets
b. records improvements to assets
c. estimates the fair market value of assets in service
d. records the disposal of assets
ANS: This type of fraud can be reduced or eliminated
by using a paymaster to distribute paychecks to
employees in person. Any uncollected paychecks are
then returned to payroll. Also, mail final paychecks
to terminated employees.
4. Why should employee paychecks be drawn
against a special checking account?
ANS: A separate imprest account is established for
the exact amount of the payroll based on the payroll
summary. When the paychecks are cashed, this
account should clear leaving a zero balance. Any
errors in checks (additional checks or abnormal
amounts) would result in a non-zero balance in the
imprest account and/or some paycheck would not
clear. This will alert management to the problem so
corrective action can be taken.
5. Why should employees clocking on and off the job
be supervised.
ANS: C
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ANS: A form of payroll fraud involves employees
clocking the time cards of absent employees.
Bysupervising the clocking in and out process, this
fraud can be reduced or eliminated.
6. What is a personnel action form?
ANS: The personnel action form provides the payroll
department with a list of currently active employees,
so that any submission of time cards by supervisors
for fictitious or ex-employees will not be processed.
7. In a manufacturing firm, employees typically fill
out two different documents regarding their time
worked. What are they? Why are there two?
ANS: The two documents are the time card and the
job ticket. Two are required because the time card
records all the time worked by an employee during
the period while the job ticket details the time by
project.
8. List two types of authorization required in the
Fixed Asset System.
longer on hand. Prepare reports about the disposal
of assets.
13. Describe an internal control that would prevent
the charging of depreciation expense to the
maintenance department for a sweeper that is now
located in and used by the engineering department.
ANS: Prepare reports about the transfer of fixed
assets. Perform an annual physical inventory and
note the location of assets. Budget and then hold
each department accountable for depreciation
expense for assets located in each department.
14. Describe an internal control that would prevent
the acquisition of office equipment which is not
needed by the firm.
ANS: A higher organizational level or other
appropriate person authorizes fixed asset
acquisitions; part of the authorization is showing
that a need for the asset exists.
15. What negative consequences result when fixed
asset records include assets that are no longer
owned by the firm?
ANS: authorization to purchase the asset and to
dispose of the asset
9. List four types of data that appear on a
depreciation schedule.
ANS: item description, depreciation method, useful
life, date acquired, cost, salvage value, accumulated
depreciation, depreciation expense per period, book
value
10. Which documents prompt the fixed asset
department to create a fixed asset record?
ANS: the receiving report and the disbursement
voucher
11. Describe an internal control that would prevent
an employee from stealing a computer and then
reporting it as scrapped.
ANS: Supervisors must authorize the disposal of the
computer. Unless so authorized, the record will
continue to show that the employee is responsible
for the computer.
12. Describe an internal control that would prevent
the payment of insurance premiums on an
automobile that is no longer owned by the company.
ANS: Perform an annual physical inventory of fixed
assets and adjust the records to reflect assets no
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ANS: On the financial statements, assets will be
overstated and depreciation expense could be
overstated. Assets on property tax returns will be
overstated and too much tax will be paid. Insurance
premiums will be paid on nonexistent assets.
16. Explain the purpose of each of the following
documents used in the payroll system: the personnel
action form, the job ticket, the time card.
ANS: The personnel action form is a document which
identifies employees who should receive a paycheck;
reflects changes in pay rates, payroll deductions, and
job classifications. The job ticket collects information
on the time individual workers spend on each
production job. The time card captures the total
time that an employee is at work.
17. How do fixed asset systems differ from the
expenditure cycle?
ANS: The fixed asset system processes nonroutine
transactions for a wider group of users in the
organization than the expenditure cycle. Further, the
expenditure cycle processes routine acquisitions of
raw materials inventories for the production
function and finished goods inventories for the sales
function. The expenditure cycle transactions are
oftentimes automatically approved by the system,
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while fixed asset transaction approvals typically
demand individual attention due to the uniqueness
of the transactions.
18. What is recorded by the asset maintenance part
of the Fixed Asset System?
ANS: T
6. Because a time clock is used, no supervision is
required when employees enter and leave the work
place.
ANS: F
ANS: periodic depreciation following an approved
depreciation schedule and physical improvements to
the asset to increase the subsidiary account and to
adjust the depreciation schedule
7. Inventory control performs the formal record
keeping function for fixed assets.
19. How are the following carried out in the Fixed
Asset System: authorization, supervision,
independent verification?
8. The depreciation schedule shows when assets are
fully depreciated.
ANS: Independent authorization is required to
acquire an asset and to formalize the depreciation
schedule.
ANS: F
ANS: T
9. Authorization to dispose of fixed assets should be
issued by the user of the asset.
ANS: F
Supervision must be exercised over the physical
assets.
Independent verification must confirm the location,
existence, and condition of the assets.
20. Which department authorizes changes to
employee pay rates?
10. Work-in-process records are updated by payroll
personnel.
ANS: F
11. Ideally, payroll checks are written on a special
bank account used only for payroll.
ANS: The personnel department via the personnel
action form
ANS: T
Chapter 6—The Expenditure Cycle Part II: Payroll
Processing and Fixed Asset Procedures
12. The supervisor is the best person to determine
the existence of a “phantom employee” and should
distribute paychecks.
TRUE/FALSE
ANS: F
1. Time cards are used by cost accounting to allocate
direct labor charges to work in process.
ANS: F
13. Payroll processing can be automated easily
because accounting for payroll is very simple.
ANS: F
2. The personnel department authorizes changes in
employee pay rates.
14. Timekeeping is part of the personnel function.
ANS: T
ANS: F
3. Most payroll systems for mid-size firms use realtime data processing.
15. Fixed asset accounting systems include cost
allocation and matching procedures that are not part
of routine expenditure systems.
ANS: F
ANS: T
4. To improve internal control, paychecks should be
distributed by the employee's supervisor.
ANS: F
5. Employee paychecks should be drawn against a
special checking account.
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16. Asset maintenance involves only the recording of
depreciation charges. Physical improvements are
always expensed.
ANS: F
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17. Fixed Asset Systems must keep track of the
physical location of each asset to promote
accountability.
a. Supervisors verify the accuracy of employee time
cards.
b. Paychecks are distributed by an independent
paymaster.
ANS: T
18. Time cards capture the total time an individual
worker spends on each production job.
ANS: F
19. Accounting conventions and IRS rules sometime
specify the depreciation parameters to be used.
c. Accounts payable verifies the accuracy of the
payroll register before transferring payroll funds to
the general checking accounting.
d. General ledger reconciles the labor distribution
summary and the payroll disbursement voucher.
ANS: C
ANS: T
20. The fixed asset disposal report authorizes the
user department to dispose of a fixed asset.
4. Which transaction is not processed in the Fixed
Asset System?
a. purchase of building
ANS: F
b. improvement of equipment
MULTIPLE CHOICE
1. The document that captures the total amount of
time that individual workers spend on each
production job is called a
a. time card
c. purchase of raw materials
d. sale of company van
ANS: C
5. Depreciation
b. job ticket
c. personnel action form
a. is calculated by the department that uses the fixed
asset
d. labor distribution form
b. allocates the cost of the asset over its useful life
ANS: B
c. is recorded weekly
2. An important reconciliation in the payroll system
is
d. results in book value approximating fair market
value
a. general ledger compares the labor distribution
summary from cost accounting to the disbursement
voucher from accounts payable
ANS: B
b. personnel compares the number of employees
authorized to receive a paycheck to the number of
paychecks prepared
6. Depreciation records include all of the following
information about fixed assets except
a. the economic benefit of purchasing the asset
b. the cost of the asset
c. production compares the number of hours
reported on job tickets to the number of hours
reported on time cards
c. the depreciation method being used
d. payroll compares the labor distribution summary
to the hours reported on time cards
ANS: A
d. the location of the asset
ANS: A
3. Which internal control is not an important part of
the payroll system?
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7. Which control is not a part of the Fixed Asset
System?
a. formal analysis of the purchase request
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b. cost accounting
b. review of the assumptions used in the capital
budgeting model
c. personnel
c. development of an economic order quantity
model
d. general ledger
ANS: D
d. estimates of anticipated cost savings
ANS: C
12. Which of the following statements is not true?
8. Objectives of the Fixed Asset System do not
include
a. Routine payroll processing begins with the
submission of time cards.
a. authorizing the acquisition of fixed assets
b. Payroll clerks must verify the hours reported on
the time cards.
b. recording depreciation expense
c. computing gain and/or loss on disposal of fixed
assets
d. maintaining a record of the fair market value of all
fixed assets
ANS: D
9. Which of the following is not a characteristic of
the Fixed Asset System?
c. Payroll reconciles personnel action forms with
time cards and prepares paychecks.
d. Cash disbursements signs paychecks and forwards
them to the paymaster for distribution.
ANS: B
13. In a manufacturing firm, employees use time
cards and job tickets. Which of the following
statements is not correct?
a. Job tickets are prepared by employees for each
job worked on, so an employee may have more that
one job ticket on a given day.
a. Acquisitions are routine transactions requiring
general authorization.
b. Retirements are reported on an authorized
disposal report form.
c. Acquisition cost is allocated over the expected life
of the asset.
d. Transfer of fixed assets among departments is
recorded in the fixed asset subsidiary ledger.
b. An individual employee will have only one time
card.
c. The time reported on job tickets should reconcile
with the time reported on time cards.
d. Paychecks should be prepared from the job
tickets.
ANS: A
10. In the payroll subsystem, which function should
distribute paychecks?
a. personnel
ANS: D
14. Which department is responsible for approving
changes in pay rates for employees?
a. payroll
b. timekeeping
b. treasurer
c. paymaster
c. personnel
d. payroll
d. cash disbursements
ANS: C
11. Where does the responsibility lie for reconciling
the labor distribution summary and the payroll
disbursement voucher?
ANS: C
15. Which of the following situations represents a
serious control weakness?
a. Timekeeping is independent of the payroll
department.
a. cash disbursements
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b. Paychecks are distributed by the employees
immediate supervisor.
b. update employee payroll records
c. prepare the labor distribution summary
c. Time cards are reconciled with job tickets.
d. prepare paychecks
d. Personnel is responsible for updating employee
records, including creation of records for new hires.
ANS: C
ANS: B
20. Payroll checks are typically drawn on
16. Why would an organization require the
paymaster to deliver all unclaimed paychecks to the
internal audit department?
a. the regular checking account
b. a payroll imprest account
c. a wages payable account
a. to detect a “phantom employee” for whom a
check was produced
d. petty cash
ANS: B
b. to prevent an absent employee’s check from
being lost
21. The personnel action form provides
authorization control by
c. to avoid paying absent employees for payday
d. to prevent the paymaster from cashing unclaimed
checks
ANS: A
a. preventing paychecks for terminated employees
b. verifying pay rates for employees
c. informing payroll of new hires
17. Which of the following is not a reasonable
control for fixed assets?
d. all of the above
a. Proper authorization is required for acquisition
and disposal of fixed assets.
b. Fixed asset records show the location of each
asset.
ANS: D
22. Accounting records that provide the audit trail
for payroll include all of the following except
a. time cards
c. Fully depreciated assets are immediately disposed
of.
b. job tickets
c. payroll register
d. Depreciation policies are in writing.
d. accounts payable register
ANS: C
ANS: D
18. Cost accounting updates work-in -process
accounts from
23. Personnel actions forms are used to do all of the
following except
a. time cards
a. activate new employees
b. the labor distribution summary
b. terminate employees
c. job tickets
c. record hours worked
d. personnel action forms
d. change pay rates
ANS: C
ANS: C
19. Payroll uses time card data to do all of the
following except
24. The payroll department performs all of the
following except
a. prepare the payroll register
a. prepares the payroll register
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b. distributes paychecks
a. determines the need for new assets
c. updates employee payroll records
b. maintains depreciation records
d. prepares paychecks
c. records retirement and disposal of assets
ANS: B
d. tracks the physical location of fixed assets
25. The document that records the total amount of
time spent on a production job is the
ANS: A
a. time card
30. The payroll department performs all of the
following except
b. job ticket
a. prepares paychecks
c. labor distribution summary
b. transfers adequate funds to the payroll imprest
account
d. personnel action form
c. updates employee payroll records
ANS: C
26. A control technique that can reduce the risk of a
terminated employee being paid is
d. prepares the payroll register
ANS: B
a. a security camera viewing the time clock
31. Depreciation
b. the supervisor taking role during the shift
a. assures that assets are reported at fair market
value
c. paychecks being distributed by an independent
paymaster
b. is discretionary for many firms
d. reconciliation of time cards and job tickets
c. allocates the cost of an asset over its useful life
ANS: C
d. is the responsibility of the department using the
asset
27. Accounts payable
ANS: C
a. signs paychecks
32. The Fixed Asset System is similar to the
expenditure cycle except
b. prepares the payroll voucher
c. reconciles time cards and employee records
d. distributes paychecks to employees
a. fixed asset transactions are non-routine and
require special authorization and controls
ANS: B
b. fixed assets are capitalized, not expensed
28. All of the following are processed by the Fixed
Asset System except
c. both a and b
a. sale of unneeded equipment
ANS: C
b. purchase of raw materials
33. Asset maintenance involves
c. repair of production equipment
a. the recording of periodic depreciation
d. purchase of a new plant
b. adjusting the asset records to reflect the cost of
physical improvements
ANS: B
d. none of the above
c. keeping track of the physical location of the assets
29. The Fixed Asset System performs all of the
following except
d. all of the above
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ANS: D
ANS: F
34. The Fixed Asset Systems does all of the following
except
7. The SAP R/3 system organizes business processes
into four categories: financial, logistics, human
resources, and business process support.
a. records acquisition of assets
ANS: T
b. records improvements to assets
d. records the disposal of assets
8. The objective of the Economic Order Quantity
model is to reduce total inventory costs by
minimizing carrying costs and ordering costs.
ANS: C
ANS: T
35. Asset disposal
9. The work-in-process file is the subsidiary ledger
for the work-in -process control account.
c. estimates the fair market value of assets in service
a. occurs as soon as an asset is fully depreciated
ANS: T
b. requires no special authorization
10. Move tickets authorize the storekeeper to
release materials to work centers.
c. automatically initiates the purchase of a
replacement asset
ANS: F
d. must follow formal authorization procedures
11. An operating characteristic of modern
manufacturing firms is that labor is replaced with
capital so that the firm can be more efficient and
therefore more competitive.
ANS: D
Chapter 7—The Conversion Cycle
TRUE/FALSE
ANS: T
1. The philosophy of customer satisfaction
permeates the world-class firm.
12. Computer Integrated Manufacturing focuses on
reducing the complexity of the physical
manufacturing layout of the shop floor.
ANS: T
2. Reports generated by the cost accounting system
include performance reports and budget reports.
ANS: T
3. The cost accounting system authorizes the release
of raw materials into production.
ANS: F
13. The only objective of the Just-In-Time philosophy
is to reduce inventory levels.
ANS: F
ANS: F
14. Accounting in a world-class manufacturing
environment emphasizes standard cost and variance
analysis.
4. Batch processing creates a homogeneous product
through a continuous series of standard procedures.
ANS: F
ANS: F
15. Identifying cost drivers is an essential step in
implementing the Just-In-Time philosophy.
5. The bill of materials specifies the types and
quantities of the raw materials and subassemblies
used in producing a single unit of finished product.
ANS: F
ANS: T
6. A purchase requisition authorizes the storekeeper
to release materials to individuals or work centers in
the production process.
7
16. A world class information system produces very
little paper.
ANS: T
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17. Internal control procedures are virtually identical
in a world-class manufacturing environment and in a
traditional manufacturing environment.
b. authorize release of raw materials
c. direct the movement of work-in-process
d. determine material requirements
ANS: F
ANS: A
18. In a world-class company, all activities, from
acquisition of raw materials to selling the final
product, form a “chain of customers.”
4. Which process creates a homogeneous product
through a continuous series of standard procedures?
ANS: T
a. batch process
19. The two subsystems of a traditional conversion
cycle are the production system and the delivery
system.
b. make-to-order process
ANS: F
d. none of the above
20. Manufacturing resources planning (MRP II) has
evolved into electronic resource planning (ERP).
ANS: C
c. continuous process
ANS: F
5. An example of a continuous process is the
production of
MULTIPLE CHOICE
a. wedding invitations
1. Which item does not describe a world-class
company?
b. milk products
c. jet aircraft
a. the goal of a world-class company is to delight its
customers
b. customers in a world-class company are external
departments only
c. world-class companies work in cross-functional
teams
d. all of the above
ANS: B
6. All of the following are characteristics of batch
processing except
a. each item in the batch is similar
d. a world-class company has a flat organizational
structure
b. batches are produced in accordance with detailed
customer specifications
ANS: B
c. batches are produced to replenish depleted
inventory levels
2. Which subsystem is not a part of the production
system?
a. directing the movement of work through the
process
d. setting up and retooling is required for different
batches
ANS: B
b. determining raw material requirements
7. When determining which items to produce, a firm
must know
c. authorizing work to be performed
a. last year’s production level
d. monitoring the flow of cost information related to
production
b. raw material inventory levels
ANS: D
c. the standard cost of the item
3. The purpose of the cost accounting system is to
d. the sales forecast
a. produce information for inventory valuation
ANS: D
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8. The production schedule is
ANS: C
a. the expected demand for the firm’s finished goods
for a given year
12. The storekeeper releases raw materials based on
the
b. the formal plan and authority to begin production
a. production schedule
c. a description of the type and quantity of raw
materials and subassemblies used to produce a
single unit of finished product
b. materials requisition
d. the sequence of operations during manufacturing
d. bill of materials
c. work order
ANS: B
ANS: B
9. A move ticket
13. Which of the following is not an assumption of
the Economic Order Quantity model?
a. is the formal plan and authority to begin
production
a. demand for the product is known with certainty
b. specifies the materials and production required
for each batch
b. total cost per year of placing orders is fixed
c. records the work done in each work center
d. there are no quantity discounts
d. authorizes the storekeeper to release materials to
work centers
ANS: B
c. lead time is known and is constant
14. Firms hold safety stock to compensate for
ANS: C
10. The internal control significance of the excess
materials requisition is that it
a. indicates the amount of material released to work
centers
a. mathematical weaknesses of the Economic Order
Quantity model
b. variations in lead time or daily demand
c. fluctuations in carrying costs
d. uncertainty in the estimation of ordering costs
b. identifies materials used in production that
exceed the standard amount allowed
ANS: B
c. indicates the standard quantities required for
production
d. documents the return to raw materials inventory
of unused production materials
15. What is the economic order quantity if the
annual demand is 10,000 units, set up cost of placing
each order is $3 and the holding cost per unit per
year is $2?
ANS: B
a. 174
11. Inventory control performs all of the following
tasks except it
b. 123
a. provides production planning and control with the
inventory status report of finished goods
c. 245
d. none of the above
ANS: A
b. updates the raw material inventory records
16. If the daily demand is 40 units and the lead time
is 12 days, the reorder point is
c. prepares a materials requisition for each
production batch
d. records the completed production as an increase
to finished goods inventory
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a. 52 units
b. 48 units
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c. 480 units
d. financial
d. none of the above
ANS: C
ANS: C
21. Which situation violates the segregation of
functions control procedure?
17. Which statement is not correct?
a. general ledger creates a new cost record upon
receipt of a work order from production planning
and control
b. cost accounting updates the cost record with data
gathered from the materials requisition
c. general ledger posts summary information about
the manufacturing process based on a journal
voucher prepared by cost accounting
d. cost accounting computes variances and applies
overhead to individual cost records
ANS: A
a. production planning and control is located apart
from the work centers
b. inventory control maintains custody of inventory
items
c. cost accounting has custody of and makes entries
on cost records
d. work centers record direct labor on job tickets
ANS: B
22. All of the following are internal control
procedures that should be in place in the conversion
cycle except
a. calculation and analysis of direct material and
direct labor variances
18. Which of the following is not a category of
critical success factors in most manufacturing
companies?
b. retention of excess materials by work centers
a. product quality
c. physical count of inventory items on hand
b. customer service
c. revenue generation
d. limited access to raw material and finished goods
inventories
d. resource management
ANS: B
ANS: C
23. Process simplification focuses on
19. Computer integrated manufacturing groups all of
the following technologies except
a. using Computer Numerical Controlled machines
which stand alone within a traditional setting
a. robotics
b. completely automating the manufacturing
environment
b. materials requirements planning
c. reducing the complexity of the physical
manufacturing layout of the shop floor
c. automated storage and retrieval systems
d. computer aided design
d. organizing the process into functional
departments
ANS: B
20. The SAP R/3 system provides pre-defined
modules to support business processes in the all of
the following categories except
ANS: C
a. human resources
24. A manufacturing process that is organized into
group technology cells utilizing no human labor is
called
b. business process support
a. islands of technology
c. strategic
b. process simplification
c. Computer Integrated Manufacturing
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d. traditional manufacturing
b. warranty claims
ANS: C
c. scheduling delays
25. An example of automation of manufacturing
design is
d. proceeds from the sale of scrap
ANS: D
a. Computer Aided Engineering
30. A flexible manufacturing system
b. Automated Storage and Retrieval Systems
a. creates bottlenecks in the process
c. Computer Numerical Control
d. robotics
b. leads to an “us” versus “them” attitude among
workers
ANS: A
c. shortens the physical distance between activities
26. An example of automation of manufacturing
planning is
d. is organized along functional lines
ANS: C
a. Computer Aided Engineering
31. Deficiencies of the traditional cost accounting
information system include all of the following
except
b. Automated Storage and Retrieval Systems
c. Materials Requirements Planning
a. an emphasis on financial performance
d. Computer Numerical Control
b. inaccurate cost allocations
ANS: C
c. an emphasis on standard costs
27. Firms implement a Just-In-Time inventory
approach to
d. immediate feedback about deviations from the
norm
a. reduce investment in inventories
b. determine the optimum inventory level using the
EOQ model
ANS: D
32. Which statement is not correct?
a. an activity driver is a means to measure the
activity used by the cost object
c. camouflage production problems
d. ensure overproduction of inventory
b. cost object describes the work performed in a firm
ANS: A
c. activities cause costs
28. Characteristics of Just-In-Time manufacturing
include all of the following except
d. cost objects create a demand for activities
a. push manufacturing
ANS: B
b. zero defects
33. Firms are adopting Activity Based Costing (ABC)
because
c. reduced setup time and small lot sizes
a. it facilitates the analysis of variances
d. reliable vendors
b. it more accurately allocates costs to products
ANS: A
c. it recognizes the importance of direct labor as a
component of total manufacturing cost
29. The cost of poor quality includes all of the
following except
d. the financial nature of the reports permits
comparisons to be made among different types of
products
a. cost of rework
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34. In traditional firms, information reporting
38. Transaction authorization occurs in a traditional
manufacturing environment in all of the following
ways except
a. provides financially oriented information relating
to operations
a. production planning and control initiates
production with a work order
ANS: B
b. presents detailed information about activities
c. shows the allocation of costs first to activities and
then to cost objects
d. identifies nonessential activities
b. movement of the work through the production
process follows the move ticket
c. the sales department modifies work orders to
match changes in demand
ANS: A
d. the materials requisition authorizes the
storekeeper to release materials to the work centers
35. Types of information provided by Activity Based
Costing include
ANS: C
a. a description of the single activity driver used for
overhead application
39. Manufacturing flexibility incorporates four
characteristics. These include all of the following
except
b. the dollar value of the direct material usage
variance
a. high product quality
c. identification of cost drivers
b. high inventory levels
d. details of the components of the single overhead
cost pool
c. automation of manufacturing processes
ANS: C
ANS: B
36. Which statement is not correct?
40. The stages of the automation continuum are (in
order)
a. the benchmark approach compares key activities
with similar activities in other firms
b. critical success factors include product and
process quality
d. physical reorganization of production facilities
a. traditional, computer-integrated manufacturing,
islands of technology, process simplification
b. process simplification, traditional, islands of
technology, computer-integrated manufacturing
c. the ABC model includes two perspectives: an
allocation of cost perspective and a process
perspective
c. traditional, islands of technology, process
simplification, computer-integrated manufacturing
d. in world-class manufacturing firms, quality control
activities at the end of the process are essential
d. traditional, process simplification, computerintegrated manufacturing, islands of technology
ANS: D
ANS: C
37. All of the following are documents in batch
process production systems except
Chapter 8—General Ledger, Financial Reporting, and
Management Reporting Systems
a. production schedule
TRUE/FALSE
b. route sheet
c. materials requisition
1.
The most common means of making entries
in the general ledger is via the journal voucher.
d. purchase order
ANS: T
ANS: D
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2.
Individuals with access authority to general
ledger accounts should not prepare journal
vouchers.
ANS: T
3.
The journal voucher is the document that
authorizes entries to be made to the general ledger.
ANS: T
4.
Each account in the chart of accounts has a
separate record in the general ledger master file.
ANS: T
5.
The responsibility center file is primarily
used by the Financial Reporting System.
ANS: F
14.
The control function entails evaluating a
process against a standard and, if necessary, taking
corrective action.
ANS: T
15.
Standards are the basis for evaluating actual
performance.
ANS: T
16.
A report is said to have information content
if it eliminates uncertainty associated with a problem
facing the decision maker.
ANS: F
ANS: F
6.
Management reporting is often called
discretionary reporting because it is not mandated
as is financial reporting.
ANS: T
7.
Primary recipients of financial statement
information are internal management.
17.
An inventory out-of-stock report is an
example of a programmed, on-demand report.
ANS: T
18.
A principle of responsibility accounting is
that managers are responsible for controllable and
uncontrollable costs.
ANS: F
19.
The manager of a cost center is responsible
for cost control and revenue generation.
ANS: F
8.
The Management Reporting System is a
nondiscretionary system.
ANS: F
9.
When evaluating decision alternatives, one
option is to take no action.
20.
Designing an effective management
reporting system does not require an understanding
of the information managers need to deal with the
problems they face.
ANS: T
ANS: F
ANS: F
10.
In most cases intangible decision criteria
can be quantified.
ANS: F
11.
One benefit of the Management Reporting
System is that it can alert management to delays in
project implementation.
ANS: T
21.
The formalization of tasks principle suggests
that management should structure the firm around
the unique skills sets of key individuals.
ANS: F
22.
If a manager delegates responsibility to a
subordinate, he or she must also grant the
subordinate authority to make decisions.
ANS: T
12.
Responsibility refers to an individual’s
obligation to achieve desired results.
ANS: T
13.
A firm with a wide span of control tends to
have relatively more layers of management.
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23.
Operational control involves motivating
managers at all levels to use resources, including
materials, personnel, and financial assets, as
productively as possible.
0
ANS: F
24.
The block code is the coding scheme most
appropriate for a chart of accounts.
5. The most important advantage of an alphabetic
code is that
a. meaning is readily conveyed to users
ANS: T
b. sorting is simplified
MULTIPLE CHOICE
c. the capacity to represent items is increased
1. The coding scheme most appropriate for a chart
of accounts is
d. missing documents can be identified
a. sequential code
ANS: C
b. block code
6. Entries into the General Ledger System (GLS) can
be made using information from
c. group code
a. the general journal
d. mnemonic code
b. a journal voucher which represents a summary of
similar transactions
ANS: B
2. A common use for sequential coding is
c. a journal voucher which represents a single,
unusual transaction
a. creating the chart of accounts
d. all of the above
b. identifying inventory items
ANS: D
c. identifying documents
d. identifying fixed assets
7. Which statement is not correct? The general
ledger master file
ANS: C
a. is based on the firm’s chart of account
3. The most important advantage of sequential
coding is that
b. contains a record for control accounts
c.is an output of the Financial Reporting System
(FRS)
a. missing or unrecorded documents can be
identified
b. the code itself lacks informational content
d. supplies information for management decision
making
c. items cannot be inserted
ANS: C
d. deletions affect the sequence
8. What type of data is found in the general ledger
master file?
ANS: A
a. a chronological record of all transactions
4. When a firm wants its coding system to convey
meaning without reference to any other document,
it would choose
b. the balance of each account in the chart of
accounts
a. an alphabetic code
c. budget records for each account in the chart of
accounts
b. a mnemonic code
d. subsidiary details supporting a control account
c. a group code
ANS: B
d. a block code
9. Which report is not an output of the Financial
Reporting System (FRS)?
ANS: B
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a. variance analysis report
a. trial balance
b. statement of cash flows
b. adjusted trial balance
c. tax return
c. general ledger
d. comparative balance sheet
d. general journal
ANS: A
ANS: B
10. Which steps in the Financial Accounting Process
are in the correct sequence?
14. Risk exposures in the General Ledger and
Financial Reporting Systems include all of the
following except
a. record the transaction, post to the ledger, prepare
the adjusted trial balance, enter adjusting entries,
prepare financial statements
a. loss of the audit trail
b. unauthorized access to the general ledger
b. record the transaction, prepare the unadjusted
trial balance, record adjusting journal entries, record
closing entries, prepare financial statements
c. loss of physical assets
c. record the transaction, post to the ledger, record
adjusting entries, prepare the unadjusted trial
balance, prepare financial statements
ANS: C
d. record the transaction, post to the ledger, prepare
the adjusted trial balance, prepare financial
statements, record closing entries
d. general ledger account out of balance with the
subsidiary account
15. Which situation indicates an internal control risk
in the General Ledger/Financial Reporting Systems
(GL/FRS)?
a. the employee who maintains the cash journal
computes depreciation expense
ANS: D
11. Which statement is not correct?
a. the post-closing trial balance reports the ending
balance of each account in the general ledger
b. one purpose of preparing the unadjusted trial
balance is to ensure that debits equal credits
c. financial statements are prepared based on the
unadjusted trial balance
d. the unadjusted trial balance reports control
account balances but omits subsidiary ledger detail
ANS: C
12. What account appears on the postclosing trial
balance?
a. income summary
b. the cash receipts journal voucher is approved by
the Treasurer
c. the cash receipts journal vouchers are
prenumbered and stored in a locked safe
d. the employee who maintains the cash receipts
journal records transactions in the accounts
receivable subsidiary ledger
ANS: D
16. With a limited work force and a desire to
maintain strong internal control, which combination
of duties performed by a single individual presents
the least risk exposure?
a. maintaining the inventory ledger and recording
the inventory journal voucher in the general ledger
b. recording the inventory journal voucher in the
general ledger and maintaining custody of inventory
b. machinery
c. rent expense
c. maintaining the cash disbursements journal and
recording direct labor costs applied to specific jobs
d. interest income
ANS: B
d. preparing the accounts payable journal voucher
and recording it in the general ledger
13. Financial statements are prepared from the
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ANS: C
17. The audit trail fulfills all of the following purposes
except
d. the MRS focuses on internal decision-making
information
ANS: D
a. provides the ability to answer inquiries
21. Which statement is not true?
b. ensures the accuracy of the application software
a. authority refers to an individual’s obligation to
achieve desired results
c. fulfills governmental regulations
b. if an employee is given the responsibility for a
task, that employee should be given authority to
make decisions within the limits of that task
d. offers a means for preventing, detecting, and
correcting errors
ANS: B
18. Which best describes a batch process General
Ledger System (GLS)
c. the level of detail provided to an employee is a
function of the employee’s position with the firm
d. all of the above are true
a. paper documents are eliminated
ANS: A
b. the general ledger master file is updated each
night
22. Which statement is not true? The manager’s
span of control
c. there is a time lag between transaction processing
and posting to the general ledger
a. is narrow for routine and repetitive tasks
d. no direct access or querying of the General Ledger
is possible
ANS: C
19. An advantage of a batch General Ledger System
(GLS) is that
a. separation between authorization and transaction
processing is strictly enforced
b. the general ledger master file is recreated with
each update
b. is related to the number of layers of management
c. affects the amount of detail provided to a
manager
d. can affect employee morale and motivation
ANS: A
23. Short-range planning involves
a. setting goals and objectives of the firm
b. planning the production schedule for the next
quarter
c. updates and reconciliation of transactions occur as
a step within the transaction cycle
c. planning the growth of the firm
d. errors and out-of-balance conditions are identified
at the end of the month
d. deciding on the degree of diversification among
the firm’s products
ANS: C
ANS: B
20. A characteristic of the Management Reporting
System (MRS) is
24. Long-range planning involves
a. the MRS operates in conformity with generally
accepted accounting principles
b. it is a legal requirement that the MRS be installed
and functioning properly
c. the MRS is developed by implementing SEC
requirements
a. planning the marketing and promotion for a
product
b. presenting department heads with budgetary
goals for the next year
c. preparing a work force utilization budget for the
next quarter
d. deciding the optimum size of the firm
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ANS: D
c. span of control
25. The level of management that makes tactical
planning decisions is
d. all of the above
ANS: D
a. top management
b. middle management
30. All of the following are elements of problem
structure except
c. operations management
a. certainty
d. front-line management
b. data
ANS: B
c. procedures
26. The decision to enter a new market is an
example of
d. objectives
ANS: A
a. strategic planning
b. tactical planning
31. All of the following are examples of programmed
reports except
c. management control
a. cash flow reports for Division B
d. operational control
b. year-to-date local income tax payments made by
all employees living in City X and working in City Y
ANS: A
27. All of the following are elements of operational
control decisions except
c. inventory exception reports for Division G
d. equipment utilization reports for Plant M
a. determining the scope of the activity
ANS: B
b. setting operating standards
32. A fundamental principle of responsibility
accounting is that
c. evaluating performance
a. managers are accountable only for items they
control
d. taking corrective action when necessary
ANS: A
b. a manager’s span of control should not exceed
eight people
28. In contrast to tactical planning decisions,
management control decisions, and operational
control decisions, strategic planning decisions
usually
c. structured reports should be prepared weekly
d. the information flow is in one direction, top-down
a. are more focused
ANS: A
b. have a shorter time frame
33. Which statement is not true? Responsibility
accounting
c. are unstructured
a. involves both a top-down and bottom-up flow of
information
d. have a high degree of certainty
ANS: C
29. Which of the following management principles
affects the management reporting system?
b. acknowledges that some economic events cannot
be traced to any manager
c. creates a budget
a. formalization of tasks
d. compares actual performance with budget
b. authorization
ANS: B
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34. What mechanism is used to convey to managers
the standards by which their performance will be
measured?
a. the responsibility report
a. emphasis on both the short and long run.
b. review of the attributes and behavior of the
organization’s competition.
c. analysis of external economic factors.
b. the scheduled report
d. analysis of consumer demand.
c. the budget
ANS: A
d. all of the above
39. Which of the following performance measures
can not result in dysfunctional behavior?
ANS: C
a. price variance
35. All of the following concepts encourage goal
congruence except
b. quotas
a. detailed information reporting at all management
levels
c. ROI
b. authority and responsibility
d. net income
c. formalization of tasks
e. all of the above can result in dysfunctional
behavior
d. responsibility accounting
ANS: E
ANS: A
36. Which of the following statements is NOT true?
40. Which of the following best describes a profit
center:
a. Sorting records that are coded alphabetically
tends to be more difficult for users than sorting
numeric sequences.
a. authority to make decisions affecting the major
determinants of profit, including the power to
choose its markets and sources of supply.
b. Mnemonic coding requires the user to memorize
codes.
b. authority to make decisions affecting the major
determinants of profit, including the power to
choose its markets and sources of supply, and
significant control over the amount of invested
capital.
c. Sequential codes carry no information content
beyond their order in the sequence.
d. Mnemonic codes are limited in their ability to
represent items within a class.
ANS: B
c. authority to make decisions over the most
significant costs of operations, including the power
to choose the sources of supply.
37. Which file has as its primary purpose to present
comparative financial reports on a historic basis?
d. authority to provide specialized support to other
units within the organization.
a. journal voucher history file
b. budget master file
e. responsibility for combining the raw materials,
direct labor, and other factors of production into a
final product.
c. responsibility file
ANS: A
d. general ledger history file
ANS: D
38. All of the following are characteristics of the
strategic planning process except the
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Ch01 - chapter 1
Accounting Information Systems (ACC 3202)
ACCOUNTING INFORMATION SYSTEMS/2e
TURNER / WEICKGENANNT
Test Bank: CHAPTER 1: Introduction to AIS
1NOTE: All new or adjusted questions are in red. New questions are identified by the letter A as part of the question
number; adjusted questions are identified by the letter X as part of the question number.
End of Chapter Questions:
1. When a company receives returned goods from a customer, the business process to accept the return would most
likely be a(n):
A. Administrative process
B. Conversion process
C. Expenditure process
D. Revenue process
2. Which of the following is least likely to be an output of the accounting information system?
A. A check
B. A report
C. An invoice
D. A bar code
3. Which of the following is not true of the supply chain?
A. The supply chain includes vendors.
B. The supply chain excludes customers.
C. The supply chain includes information flows.
D. The supply chain include secondary suppliers.
4. Which of the following is not an objective of IT enablement?
A. Increased accuracy of data
B. Reduced cost
C. Reduced security problems
D. Increased efficiency
5. The correct order of the computer data hierarchy is:
A. Byte, bit, record, field, file, database
B. Bit, byte, record, field, file, database
C. Bit, byte, field, record, file, database
D. Bit, byte, field, record, database, file
6. The process of searching for identifiable patterns in data is called:
A. Sequential processing
B. Data warehousing
C. Data mining
D. Real-time processing
7. An IT enabled system for purchasing that is an “invoice-less” system is called a(n):
A. Automated matching system
B. Evaluated receipt settlement
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C. E-payables
D. Point of sale system
8. The COSO report written for the purpose of assisting managers in the challenge of managing risk in their
organization is entitled:
A. Internal Control – Integrated Framework
B. Enterprise Risk Management – Integrated Framework
C. Corporate Governance Guidance
D. IT Governance Guidance
9. Accountants have some form of use of the AIS in all but which role?
A. User
B. Programmer
C. Auditor
D. Designer
10. Which of the following is not true of unethical behavior?
A. The only category of unethical behavior for accountants is inflating revenue.
B. Accountants are often pressured to help commit or coverup unethical behavior.
C. Hacking is an unethical behavior that accountants should be concerned about.
D. An accounting information system can be used to cover up unethical behavior.
ANSWERS TO QUESTIONS 1 - 10 (FROM THE TEXTBOOK)
1. D
6. C
2. D
7. B
3. B
8. A
4. C
9. B
5. C
10. A
TEST BANK – CHAPTER 1 – MULTIPLE CHOICE
11. A prescribed sequence of work steps preformed in order to produce a desired result for the organization is called
a(n):
A. Accounting Information System
B. Business Process
C. Financial Transaction
D. Capital Transaction Process
12. The process that must identify the transactions to be recorded, capture all the important details of the
transactions, properly process the transaction details, and provide reports is termed the:
A. Revenue Process
B. Expenditure Process
C. Accounting Information System
D. Business Process
13.
An accounting information system serves many functions - which of the following is NOT one of those functions?
A. Capture the details of a transaction
B. Implement the start of a transaction
C. Provide reports of transactions
D. Process the transactions details into appropriate accounts
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14. The proper order of activity in an accounting information system would be as follows:
A. Capture, Record, Process, Report
B. Process, Record, Capture, Report
C. Capture, Process, Report, Record
D. Record, Capture, Process, Report
15. Which of the following is not one of the general types of business processes identified by the textbook?
A. Revenue Processes
B. Expenditure Processes
C. Conversion Processes
D. Human Resource Processes
16. Which of the following statements, related to business processes, is false?
A. Each business process has a direct effect on the financial status of the organization.
B. A business process is initiated by a particular kind of event.
C. A business process has a well-defined beginning and end.
D. Each business process is usually completed in a relatively short period.
17. Which of the following is least likely to be part of an accounting information system function?
A. Record the accounting data in the appropriate records
B. Generation of data to be part of the information system.
C. Process the detailed accounting data.
D. Report the summarized accounting data.
18. Work steps that are internal controls within the business process would include:
A. Using an electronic register to record all sales transactions.
B. Combining both manual and computer based records.
C. Reconciling a cash register at the end of each day.
D. Preparation of internal reports to monitor the performance of a specific department.
19. Five different components of the accounting information system were presented in the textbook. Which of the
following is not one of those components?
A. Work steps within a business process intended to capture accounting data as the business process occurs.
B. Work steps that are internal controls within the business process to safeguard assets and to ensure the
accuracy and completeness of the data.
C. Work steps that generate both internal and external reports.
D. Work steps to assure that all business processes are recorded using computer-based procedures.
20. Output from an accounting information system would include:
A. Checks to vendors
B. Invoices from vendors
C. Customer statements
D. Purchase orders
21. The entities, processes, and information flows that involve the movement of materials, funds, and related
information through the full logistics process, from the acquisition of raw materials to the delivery of the finished
produces to the end use is a set of linked activities referred to as:
A. Management Information System
B. Supply Chain
C. Accounting Information System
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D. Logistics Management
22. The organization and control of all materials, funds, and related information in the logistics process, from the
acquisition of raw materials to the delivery of finished products to the end user is referred to as:
A. Supply Chain Management
B. Management Information System
C. Logistics Management
D. IT Enablement
23. When discussing the supply chain:
A. Any concern about vendors would relate only to those vendors with which a company has direct contact.
B. Service providers would not be part of the supply chain.
C. Concern would not extend beyond the point where the product is shipped to a customer.
D. An entity may not be able to directly control all of the interrelated activities within the supply chain.
24. Using IT systems to enhance efficiency and effectiveness of internal or supply chain processes is called:
A. Information Technology Enablement
B. Information Systems Control
C. Information Technology Process Engineering
D. Information Technology Business Processes
25. The purposeful and organized changing of business processes to make them more efficient is referred to as:
A. Information Technology Engineering
B. Information Systems Management
C. Business Process Reengineering
D. Business Process Supply Chain
26. The use of BPR (Business Process Reengineerin) is a two-fold: (1) Aligns business processes with the IT systems
used to recorded processes and, (2):
A. Improves the efficiency and effectiveness of these processes.
B. Reduces the cost of these processes.
C. Enhances the usefulness of these processes.
D. Increases the accuracy of the process.
27. The smallest unit of information in a computer system can have only one of two values, zero or one, and is referred
to as a(n):
A. Field
B. Record
C. Byte
D. Bit
28. A unit of storage that represents one character is referred to as a:
A. Byte
B. Bit
C. Bat
D. Field
29. A set of related fields is referred to as a:
A. File
B. Record
C. Byte
D. Binary Digit
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30. Each record is made up of related:
A. Files
B. Bytes
C. Name
D. Fields
31. A collection of data stored on a computer in a form that allows the data to be easily accessed, retrieved,
manipulated, and stored is referred to as a(n):
A. Accounting Information System
B. Information Technology
C. Database
D. Master File
32. A collection of data stored in several small two-dimensional tables that can be joined together in many varying
ways to represent many different kinds of relationships among the data is referred to as a(n):
A. Database
B. Master File
C. Relational Database
D. Relation Based Accounting Software
33. Accounting software traditionally uses two different types of files. The file type that is relatively permanent and
used to maintain the detailed data for each major process is a(n):
A. General Ledger
B. Master File
C. Transaction File
D. Subsidiary File
34. Accounting software traditionally uses two different types of files. The file type that is the set of relatively
temporary records that will be process to update the permanent file is referred to as a(n):
A. Master File
B. General File
C. Transaction File
D. Subsidiary File
35. The chart of accounts would be a good example of a:
A. Transaction File
B. Master File
C. Field
D. Record
36. The organization of files in a computer system normally uses one of two different access methods. The access
method where the files store records in sequence, with one record stored immediately after another, is referred to
as:
A. Chronological Access
B. Sequential Access
C. Random Access
D. Numerical Access
37. The organization of files in a computer system normally uses one of two different access methods. The access
method where the files are not stored in sequence, one record not stored immediately after another, is referred to
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as:
A.
B.
C.
D.
Indexed Access
Batch Access
Sequential Access
Random Access
38. There are two modes of processing transactions in accounting systems. The mode that requires all similar
transactions be grouped together and be processed at the same time, is referred to as:
A. Batch Processing
B. Online Processing
C. Real-time Processing
D. Sequential Processing
39. There are two modes of processing transactions in accounting systems. The mode that will record transactions,
one at a time, is referred to as:
A. Batch Processing
B. Online Processing
C. Real-Time Processing
D. Sequential Processing
40. A type of online processing where a transaction is processed immediately so that the output is available
immediately is termed:
A. Virtual Processing
B. Sequential Processing
C. Real-Time Processing
D. Batch Processing
41. An integrated collection of enterprise-wide data that includes five to ten fiscal years of non-volatile data, used to
support management in decision making and planning is referred to as:
A. Operational Database
B. Relational Database
C. Data Storage
D. Data Warehouse
42. This type of database contains the data that are continually updated as transactions are processed and includes
data for the current fiscal year and supports day-to-day operations is referred to as a(n):
A. Data Warehouse
B. Data Storage
C. Relational Database
D. Operational Database
43. The data in the data warehouse are said to be enterprise-wide because:
A. The data relate to all areas of the business.
B. The data are pulled from each of the operational databases and maintained in the data warehouse for many
fiscal periods.
C. All areas of the business are able to access the data warehouse.
D. All transactions across the all areas of the business are recorded in the data warehouse.
44. The process of searching data within the data warehouse for identifiable patterns that can be used to predict
future behavior is referred to as:
A. Data mining
B. Data digging
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C. Data housing
D. Data querying
45. Two or more computers linked together to share information and / or resources is referred to as a(n):
A. Computer Intranet
B. Computer Internet
C. Computer System
D. Computer Network
46. This type of computer network is one that spans a relatively small area - often confined to a single building or
group of buildings, and are intended to connect computers within an organization.
A. Local Area Network
B. Land Arena Network
C. Extranet
D. Internet
47. The global computer network, or “information super highway”, is the:
A. WAN
B. Intranet
C. Internet
D. LAN
48. A company’s private network, accessible only to the employees of that company is the:
A. WAN
B. Intranet
C. Internet
D. LAN
49. This computer network is similar to a company’s intranet except that it does allow access to selected outsiders,
such as buyers, suppliers, distributors, and wholesalers.
A. Ultranet
B. Internet
C. Extranet
D. LAN
49A. A contemporary type of computer infrastructure that is used by an increasing number of companies involves the
use of shared services, software, and / or data stored on servers at a remote location, which are accessible over a
network, is referred to as:
A. Database
B. Cloud Computing
C. Internet
D. Relational Internet
50. The use of electronic means to enhance business processes is termed:
A. E-business
B. Electronic data interchange
C. Point of sale system
D. E-commerce
51. The intercompany, computer-to-computer transfer of business documents in a standard business format is called:
A. E-business
B. E-commerce
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C. Local area network
D. Electronic data interchange
52. Which of the following is NOT one of the three components of electronic data interchange?
A. Commerce - encompasses all forms of electronic trading.
B. Intercompany - two or more companies conducting business electronically.
C. Standard business format - necessary so that the various companies can interact and trade electronically.
D. Computer to computer - indicates that each company’s computers are connected via a network.
53. This term refers to a system of hardware and software that captures retail sales transactions by standard bar
coding.
A. E-business
B. Electronic data interchange
C. Point of sale system
D. E-commerce
54. When a point of sale system is used and a customer checks out through a cash register, which of the following
processes occur?
A. Net income is computed
B. Inventory values are updated
C. Accounts payable balances are updated
D. Replacement inventory is purchased
55. A system of computer hardware and software in which the software matches an invoice to its related purchase
order and receiving report is called:
A. Point of sale system
B. Electronic data interchange
C. Automated matching
D. Evaluated receipt settlement
56. An invoice-less system in which computer hardware and software complete an invoice-less match that is a
comparison of the purchase order with the goods received is termed:
A. Evaluated receipt settlement
B. Automated matching
C. Electronic invoice presentation and payment
D. Enterprise resource planning
57. This system enables a vendor to present an invoice to its trading partner via the internet, eliminating the paper,
printing, and postage costs of traditional paper invoicing.
A. Evaluated receipt settlement
B. Electronic invoice presentation and payment
C. Automated matching
D. Electronic data interchange
58. A multi-module software system designed to manage all aspects of an enterprise usually broken down into
modules such as financials, sales, human resources, and manufacturing, is referred to as a(n):
A. Electronic data system
B. Electronic data interchange
C. Enterprise resource planning
D. Electronic resource program
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59X. Management has the responsibility, and the ability, to take action to reduce risks or to lessen the impact al nearly
all risks an organization faces. The steps taken by management to lessen the risk or reduce the impact of the risk,
are referred to as:
A. Programs
B. Risk assessment
C. Information evaluation
D. Controls
60. Which of the following groups of professionals within an organization have a history of designing and
implementing the controls to lessen risks?
A. Management
B. Accountants
C. Human Resources
D. Lawyers
61. Which of the following is not one of broad categories of controls?
A. The risk that assets will be stolen or misused.
B. The risk of errors in accounting data or information.
C. The risk of loss due to a natural disaster.
D. The risk of fraudulent activity by employees.
62. Which of the following is not a risk inherent in an IT system?
A. Computer security breaches.
B. Computers being stolen.
C. Erroneous input of data.
D. Hardware or software failure.
63X. A comprehensive report on enterprise risk management was issued by this organization.
A. American Accounting Association
B. New York Stock Exchange
C. Institute of Internal Auditors
D. Committee on Sponsoring Organizations
64. A process, effected by an entity’s board of directors, management and other personnel, applied in strategy setting
and across the enterprise, designed to identify potential events that may effect the entity, and manage risk to be
withing its risk appetite, to provide reasonable assurance regarding the achievement of entity objectives is referred
to as:
A. Enterprise resource planning
B. Enterprise risk management
C. IT system control structure
D. Corporate governance structure
65. In order to achieve the objective of managing risk, management should establish control structures that include, at
a minimum:
A. Accounting internal controls.
B. Accounting internal controls, IT controls, corporate governance, enterprise risk management, and IT
governance.
C. IT controls, IT governance, corporate governance, and accounting internal controls.
D. IT controls and accounting internal controls.
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66. The company’s development and adherence to this should reduce the opportunities for managements or
employees to conduct fraud.
A. Code of ethics
B. Internal control structure
C. Application controls
D. Corporate governance
67X. The COSO report, Internal Controls – Integrated Framework, identified interrelated components of internal control.
Which of the following is not one of those components?
A. Monitoring
B. Risk assessment
C. Control activities
D. Enterprise risk management
68. IT controls can be divided into two categories. Which of the following is a correct statement of one of those
categories?
A. Application controls apply overall to the IT accounting system.
B. Application controls apply to the prevention of erroneous or incomplete input or processing of data.
C. Application controls are used specifically in accounting applications to control inputs, processing, and output.
D. Application controls are used to prohibit fraudulent financial reporting.
69. An elaborate system of checks and balances, whereby a company’s leadership is held accountable for building
shareholder value and creating confidence in the financial reporting processes, is referred to as:
A. Enterprise risk management
B. Corporate governance
C. Application controls
D. Internal control structure
70. The purpose of this 2002 act was to improve financial reporting and reinforce the importance of corporate ethics.
A. Foreign Corrupt Practices Act
B. Sarbanes-Oxley Act
C. Securities and Exchange Act
D. Treadway Act
71. Which of the following is not one of the corporate functions interrelated within the corporate governance system?
A. Management Oversight
B. Ethical Conduct
C. Risk Assessment
D. Financial Stewardship
72. The proper management, control, and use of IT systems are known as:
A. IT Governance
B. IT Controls
C. IT Risk Management
D. IT Code of Ethics
73. Accountants have several possible roles related to accounting information systems. Which of the following is not
normally one of those roles?
A. Auditor of an AIS
B. User of the AIS
C. Programmer of the AIS
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D. Design of the AIS
74. There are many reasons for accountants to become aware of potential unethical behaviors. Which of the following
is not one of the reasons identified by the authors?
A. Accountants are responsible for identifying unethical and illegal activities.
B. Accounts assist in developing and implementing internal control structures that should decrease the chance
of unethical actions.
C. Accountants are often pressured to assist in, or cover up, unethical actions.
D. Accountants deal with assets or records that could easily tempt accountants to engage in unethical behavior.
ANSWERS TO TEST BANK – CHAPTER 1 – MULTIPLE CHOICE:
11. B
24. A
37. D
12. C
25. C
38. A
13. B
26. A
39. B
14. A
27. D
40. C
15. D
28. A
41. D
16. A
29. B
42. D
17. B
30. D
43. B
18. C
31. C
44. A
19. D
32. C
45. D
20. B
33. B
46. A
21. B
34. C
47. C
22. A
35. B
48. B
23. D
36. B
49. C
49A. B
50.
51.
52.
53.
54.
55.
56.
57.
58.
59X.
60.
61.
62.
A
D
A
C
B
C
A
B
C
D
B
C
B
63X. D
64. B
65. C
66. A
67X. D
68. C
69. B
70. B
71. C
72. A
73. C
74. A
TEST BANK – CHAPTER 1 – TRUE/FALSE:
75. A business process has a well-defined beginning and end.
TRUE
76. Each business process has a direct effect on the financial status of an organization.
FALSE: The process could have an indirect effect.
77. Few accounting information systems rely on computer hardware and software to track business processes.
FALSE: Most accounting information systems rely on computer hardware and software.
78. The rethinking and redesigning that occur during business process reengineering are aided by the use of
information technology.
TRUE
79. There are very few business processes that have the potential to be improved by IT enablement.
FALSE
80. Business process reengineering should leverage the capabilities of information technology to improve the
efficiency of business processes.
TRUE
81. It is important for accountants to have some understanding of basic computer terminology.
TRUE
82. When files are organized as sequential access, and the user needs to access record number 250, the previous 249
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records will be read by the computer before reading record number 250.
TRUE
83. When files are organized as sequential access, the sequence is normally based on one key record in each file.
FALSE: the key is a field – not a record
84. Batch processing is best suited to applications that have large volumes of similar transactions that can be
processed as regular intervals.
TRUE
85. Online processing is the opposite of real-time processing.
FALSE: Online processing is the opposite of batch processing.
86. Batch processing is best suited to sequential access files.
TRUE
87. Online processing is best suited to sequential access files.
FALSE: random access files, not sequential access files.
88. Online processing is best suited to situations were there is a large volume of records but only a few records are
needed to process any individual transaction.
TRUE
89. Each time a new transaction is completed, parts of the data warehouse must be updated.
FALSE: parts of the operational database must be updated.
90. Data in the data warehouse are called nonvolatile because they do not change rapidly in the same way that
operational data change.
TRUE
91. A system of local area networks connected over any distance via other net work connections is called a WAN, or
wide area network.
TRUE
92. E-business is a type of e-commerce.
FALSE: e-commerce is a type of e-business
93. The “intercompany” component of electronic data interchange means that two or more companies are conducting
business electronically.
TRUE
94. In order to have an automated matching system it is necessary to have access to paper copies of purchase orders
and invoices.
FALSE: All of the related files need to be online.
95. When automated matching is used, the system will not approve an invoice for payment unless the items and
quantities match with the packing slip and the prices match the purchase order prices.
TRUE
96. The evaluated receipt settlement system is an IT enabled system that reduces the time and cost of processing
customer payments.
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FALSE: processing vendor payments.
97. ERP systems are based on a relational database system.
TRUE
98. Traditional accounting software is much more comprehensive and encompassing that ERP software.
FALSE
99. Before ERP software systems, modules such as human resources were in separate software but well integrated
with the accounting software.
FALSE: were NOT well integrated.
100. Although accountants are heavily involved in the creation, implementation, and monitoring of the control
structure, management has the ultimate responsibility to establish a control environment.
TRUE
101. Once a company has decided on the control processes needed, it is not necessary to have an ongoing assessment
of risks.
FALSE: it is necessary to have an ongoing assessment of risks.
102. A code of ethics should reduce opportunities for employees to conduct fraud if management emphasizes the cost
and disciplines or discharges those who violate it.
TRUE
103. IT systems are to be chosen and implemented to support the attainment of strategies and objectives.
TRUE
104. It is likely that an accountant will select a career path, within accounting, that will not in some way, involve the use
of an accounting information system.
FALSE
105. An auditor cannot make informed decisions necessary to complete the audit without an understanding of the
accounting information system.
TRUE
106. The accounting information system is often the tool used to commit or cover up unethical behavior.
TRUE
ANSWERS TO TEST BANK – CHAPTER 1 – TRUE/FALSE:
75. True
82. True
89. False
76. False
83. False
90. True
77. False
84. True
91. True
78. True
85. False
92. False
79. False
86. True
93. True
80. True
87. False
94. False
81. True
88. True
95. True
96. False
97. True
98. False
99. False
100. True
101. False
102. True
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103.
104.
105.
106.
True
False
True
True
Hall 5e TB Ch03 - AIS
Accountancy
Chapter 3—Ethics, Fraud, and Internal Control
TRUE/FALSE
1. The ethical principle of justice asserts that the benefits of the decision should be distributed fairly to
those who share the risks.
ANS: T
2. The ethical principle of informed consent suggests that the decision should be implemented so as to
minimize all of the risks and to avoid any unnecessary risks.
ANS: F
3. Employees should be made aware of the firm’s commitment to ethics.
ANS: T
4. Business ethics is the analysis of the nature and social impact of computer technology, and the
corresponding formulation and justification of policies for the ethical use of such technology.
ANS: F
5. Para computer ethics is the exposure to stories and reports found in the popular media regarding the
good or bad ramifications of computer technology.
ANS: F
6. Source code is an example of intellectual property.
ANS: T
7. Copyright laws and computer industry standards have been developed jointly and rarely conflict.
ANS: F
8. Business bankruptcy cases always involve fraudulent behavior.
ANS: F
9. Defalcation is another word for financial fraud.
ANS: T
10. The trend toward distributed data processing increases the exposure to fraud from remote locations.
ANS: T
11. The external auditor is responsible for establishing and maintaining the internal control system.
ANS: F
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12. Segregation of duties is an example of an internal control procedure.
ANS: T
13. Controls in a computer-based information system are identical to controls in a manual system.
ANS: F
14. Preventive controls are passive techniques designed to reduce fraud.
ANS: T
15. Ethical issues and legal issues are essentially the same.
ANS: F
16. Internal control systems are recommended but not required of firms subject to the Foreign Corrupt
Practices Act.
ANS: F
17. Operations fraud is the misuse or theft of the firm’s computer resources.
ANS: T
18. The Foreign Corrupt Practices Act requires only that a firm keep good records.
ANS: F
19. A key modifying assumption in internal control is that the internal control system is the responsibility
of management.
ANS: T
20. Database management fraud includes altering, updating, and deleting an organization’s data.
ANS: F
21. While the Sarbanes-Oxley Act prohibits auditors from providing non-accounting services to their audit
clients, they are not prohibited from performing such services for non-audit clients or privately held
companies.
ANS: T
22. The Sarbanes-Oxley Act requires the audit committee to hire and oversee the external auditors.
ANS: T
23. Section 404 requires that corporate management (including the CEO) certify their organization’s
internal controls on a quarterly and annual basis.
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ANS: F
24. Section 302 requires the management of public companies to assess and formally report on the
effectiveness of their organization’s internal controls.
ANS: F
25. The objective of SAS 99 is to seamlessly blend the auditor’s consideration of fraud into all phases of
the audit process.
ANS: T
MULTIPLE CHOICE
1. Which ethical principle states that the benefit from a decision must outweigh the risks, and that there is
no alternative decision that provides the same or greater benefit with less risk?
a minimize risk
.
b justice
.
c informed consent
.
d proportionality
.
ANS: D
2. Individuals who acquire some level of skill and knowledge in the field of computer ethics are involved
in which level of computer ethics?
a para computer ethics
.
b pop computer ethics
.
c theoretical computer ethics
.
d practical computer ethics
.
ANS: A
3. All of the following are issues of computer security except
a releasing incorrect data to authorized individuals
.
b permitting computer operators unlimited access to the computer room
.
c permitting access to data by unauthorized individuals
.
d providing correct data to unauthorized individuals
.
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ANS: B
4. Which characteristic is not associated with software as intellectual property?
a uniqueness of the product
.
b possibility of exact replication
.
c automated monitoring to detect intruders
.
d ease of dissemination
.
ANS: C
5. For an action to be called fraudulent, all of the following conditions are required except
a poor judgment
.
b false representation
.
c intent to deceive
.
d injury or loss
.
ANS: A
6. One characteristic of employee fraud is that the fraud
a is perpetrated at a level to which internal controls do not apply
.
b involves misstating financial statements
.
c involves the direct conversion of cash or other assets to the employee’s personal benefit
.
d involves misappropriating assets in a series of complex transactions involving third
. parties
ANS: C
7. Forces which may permit fraud to occur do not include
a a gambling addiction
.
b lack of segregation of duties
.
c centralized decision making environment
.
d questionable integrity of employees
.
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ANS: C
8. Which of the following best describes lapping?
a applying cash receipts to a different customer’s account in an attempt to conceal previous
. thefts of funds
b inflating bank balances by transferring money among different bank accounts
.
c expensing an asset that has been stolen
.
d creating a false transaction
.
ANS: A
9. Operations fraud includes
a altering program logic to cause the application to process data incorrectly
.
b misusing the firm’s computer resources
.
c destroying or corrupting a program’s logic using a computer virus
.
d creating illegal programs that can access data files to alter, delete, or insert values
.
ANS: B
10. Who is responsible for establishing and maintaining the internal control system?
a the internal auditor
.
b the accountant
.
c management
.
d the external auditor
.
ANS: C
11. The concept of reasonable assurance suggests that
a the cost of an internal control should be less than the benefit it provides
.
b a well-designed system of internal controls will detect all fraudulent activity
.
c the objectives achieved by an internal control system vary depending on the data
. processing method
d the effectiveness of internal controls is a function of the industry environment
.
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ANS: A
12. Which of the following is not a limitation of the internal control system?
a errors are made due to employee fatigue
.
b fraud occurs because of collusion between two employees
.
c the industry is inherently risky
.
d management instructs the bookkeeper to make fraudulent journal entries
.
ANS: C
13. The most cost-effective type of internal control is
a preventive control
.
b accounting control
.
c detective control
.
d corrective control
.
ANS: A
14. Which of the following is a preventive control?
a credit check before approving a sale on account
.
b bank reconciliation
.
c physical inventory count
.
d comparing the accounts receivable subsidiary ledger to the control account
.
ANS: A
15. A well-designed purchase order is an example of a
a preventive control
.
b detective control
.
c corrective control
.
d none of the above
.
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ANS: A
16. A physical inventory count is an example of a
a preventive control
.
b detective control
.
c corrective control
.
d feedforward control
.
ANS: B
17. The bank reconciliation uncovered a transposition error in the books. This is an example of a
a preventive control
.
b detective control
.
c corrective control
.
d none of the above
.
ANS: B
18. In balancing the risks and benefits that are part of every ethical decision, managers receive guidance
from each of the following except
a justice
.
b self interest
.
c risk minimization
.
d proportionality
.
ANS: B
19. Which of the following is not an element of the internal control environment?
a management philosophy and operating style
.
b organizational structure of the firm
.
c well-designed documents and records
.
d the functioning of the board of directors and the audit committee
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.
ANS: C
20. Which of the following suggests a weakness in the internal control environment?
a the firm has an up-to-date organizational chart
.
b monthly reports comparing actual performance to budget are distributed to managers
.
c performance evaluations are prepared every three years
.
d the audit committee meets quarterly with the external auditors
.
ANS: C
21. Which of the following indicates a strong internal control environment?
a the internal audit group reports to the audit committee of the board of directors
.
b there is no segregation of duties between organization functions
.
c there are questions about the integrity of management
.
d adverse business conditions exist in the industry
.
ANS: A
22. According to SAS 78, an effective accounting system performs all of the following except
a identifies and records all valid financial transactions
.
b records financial transactions in the appropriate accounting period
.
c separates the duties of data entry and report generation
.
d records all financial transactions promptly
.
ANS: C
23. Which of the following is the best reason to separate duties in a manual system?
a to avoid collusion between the programmer and the computer operator
.
b to ensure that supervision is not required
.
c to prevent the record keeper from authorizing transactions
.
d to enable the firm to function more efficiently
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.
ANS: C
24. Segregation of duties in the computer-based information system includes
a separating the programmer from the computer operator
.
b preventing management override
.
c separating the inventory process from the billing process
.
d performing independent verifications by the computer operator
.
ANS: A
25. Which of the following is not an internal control procedure?
a authorization
.
b management’s operating style
.
c independent verification
.
d accounting records
.
ANS: B
26. The decision to extend credit beyond the normal credit limit is an example of
a independent verification
.
b authorization
.
c segregation of functions
.
d supervision
.
ANS: B
27. When duties cannot be segregated, the most important internal control procedure is
a supervision
.
b independent verification
.
c access controls
.
d accounting records
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.
ANS: A
28. An accounting system that maintains an adequate audit trail is implementing which internal control
procedure?
a access controls
.
b segregation of functions
.
c independent verification
.
d accounting records
.
ANS: D
29. Employee fraud involves three steps. Of the following, which is not involved?
a concealing the crime to avoid detection
.
b stealing something of value
.
c misstating financial statements
.
d converting the asset to a usable form
.
ANS: C
30. Which of the following is not an example of independent verification?
a comparing fixed assets on hand to the accounting records
.
b performing a bank reconciliation
.
c comparing the accounts payable subsidiary ledger to the control account
.
d permitting authorized users only to access the accounting system
.
ANS: D
31. The importance to the accounting profession of the Foreign Corrupt Practices Act of 1977 is that
a bribery will be eliminated
.
b management will not override the company’s internal controls
.
c firms are required to have an effective internal control system
.
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d firms will not be exposed to lawsuits
.
ANS: C
32. The board of directors consists entirely of personal friends of the chief executive officer. This indicates
a weakness in
a the accounting system
.
b the control environment
.
c control procedures
.
d this is not a weakness
.
ANS: B
33. Computer fraud can take on many forms, including each of the following except
a theft or illegal use of computer-readable information
.
b theft, misuse, or misappropriation of computer equipment
.
c theft, misuse, or misappropriation of assets by altering computer-readable records and
. files
d theft, misuse, or misappropriation of printer supplies
.
ANS: D
34. When certain customers made cash payments to reduce their accounts receivable, the bookkeeper
embezzled the cash and wrote off the accounts as uncollectible. Which control procedure would most
likely prevent this irregularity?
a segregation of duties
.
b accounting records
.
c accounting system
.
d access controls
.
ANS: A
35. The office manager forgot to record in the accounting records the daily bank deposit. Which control
procedure would most likely prevent or detect this error?
a segregation of duties
.
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b independent verification
.
c accounting records
.
d supervision
.
ANS: B
36. Business ethics involves
a how managers decide on what is right in conducting business
.
b how managers achieve what they decide is right for the business
.
c both a and b
.
d none of the above
.
ANS: C
37. All of the following are conditions for fraud except
a false representation
.
b injury or loss
.
c intent
.
d material reliance
.
ANS: D
38. The four principal types of fraud include all of the following except
a bribery
.
b gratuities
.
c conflict of interest
.
d economic extortion
.
ANS: B
39. The characteristics of useful information include
a summarization, relevance, timeliness, accuracy, and completeness
.
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b relevance, summarization, accuracy, timelessness, and completeness
.
c timeliness, relevance, summarization, accuracy, and conciseness
.
d disaggregation, relevance, timeliness, accuracy, and completeness
.
ANS: A
40. Internal control system have limitations. These include
a possibility of honest error
.
b circumvention
.
c management override
.
d stability of systems
.
ANS: D
41. Management can expect various benefits to follow from implementing a system of strong internal
control. Which of the following benefits is least likely to occur?
a reduced cost of an external audit.
.
b prevents employee collusion to commit fraud.
.
c availability of reliable data for decision-making purposes.
.
d some assurance of compliance with the Foreign Corrupt Practices Act of 1977.
.
e some assurance that important documents and records are protected.
.
ANS: B
42. Which of the following situations is not a segregation of duties violation?
a The treasurer has the authority to sign checks but gives the signature block to the
. assistant treasurer to run the check-signing machine.
b The warehouse clerk, who has the custodial responsibility over inventory in the
. warehouse, selects the vendor and authorizes purchases when inventories are low.
c The sales manager has the responsibility to approve credit and the authority to write off
. accounts.
d The department time clerk is given the undistributed payroll checks to mail to absent
. employees.
e The accounting clerk who shares the record keeping responsibility for the accounts
. receivable subsidiary ledger performs the monthly reconciliation of the subsidiary ledger
and the control account.
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ANS: B
43. Which of the following is not an issue to be addressed in a business code of ethics required by the
SEC?
a Conflicts of interest
.
b Full and Fair Disclosures
.
c Legal Compliance
.
d Internal Reporting of Code Violations
.
e All of the above are issues to be addressed
.
ANS: E
SHORT ANSWER
1. What are the main issues to be addressed in a business code of ethics required by the SEC?
ANS:
Conflicts of interest, Full and Fair Disclosures, Legal Compliance, Internal Reporting of Code
Violations, Accountability
2. List the four broad objectives of the internal control system.
ANS:
safeguard assets,
ensure the accuracy and reliability of accounting records,
promote organizational efficiency,
comply with management’s policies and procedures
3. Explain the purpose of the PCAOB
ANS:
The PCAOB is empowered to set auditing, quality control, and ethics standards; to inspect registered
accounting firms; to conduct investigations; and to take disciplinary actions.
4. What are the five internal control components described in the SAS 78 / COSO framework
ANS:
the control environment, risk assessment, information and communication, monitoring, and control
activities
5. What are management responsibilities under section 302 and 404?
ANS:
Section 302 requires that corporate management (including the CEO) certify their organization’s
internal controls on a quarterly and annual basis. Section 404 requires the management of public
companies to assess and formally report on the effectiveness of their organization’s internal controls.
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6. Identify to indicate whether each procedure is a preventive or detective control.
a authorizing a credit sale
.
b preparing a bank reconciliation
.
Preventive
Detective
Preventive
Detective
c locking the warehouse
.
Preventive
Detective
d preparing a trial balance
.
e counting inventory
.
Preventive
Detective
Preventive
Detective
ANS:
A. preventive; B. detective; C. preventive; D. detective; E. detective
Use the internal control procedures listed below to complete the statements.
segregation of duties
general authorization
access controls
supervision
specific authorization
accounting records
independent verification
7. A clerk reorders 250 items when the inventory falls below 25 items. This is an example of
__________________________.
ANS:
general authorization
8. The internal audit department recalculates payroll for several employees each pay period. This is an
example of __________________________.
ANS:
independent verification
9. Locking petty cash in a safe is an example of __________________________.
ANS:
access controls
10. Approving a price reduction because goods are damaged is an example of
__________________________.
ANS:
specific authorization
11. Using cameras to monitor the activities of cashiers is an example of __________________________.
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ANS:
supervision
12. Not permitting the computer programmer to enter the computer room is an example of
_______________________________.
ANS:
segregation of duties
13. Sequentially numbering all sales invoices is an example of __________________________.
ANS:
accounting records
14. What are the five conditions necessary for an act to be considered fraudulent?
ANS:
false representation, material fact, intent, justifiable reliance, and injury or loss
15. What is the objective of SAS 99?
ANS:
The objective of SAS 99 is to seamlessly blend the auditor’s consideration of fraud into all phases of
the audit process.
16. Distinguish between exposure and risk.
ANS:
Exposure is the absence or weakness of a control which increases the firm’s risk of financial loss or
injury. Risk is the probability of incurring such a loss or injury.
17. Explain the characteristics of management fraud.
ANS:
Management fraud typically occurs at levels above where the internal control system is effective.
Financial statements are frequently modified to make the firm appear more healthy than it actually is.
If any misappropriation of assets occurs, it is usually well hidden.
18. The text discusses many questions about personal traits of employees which might help uncover
fraudulent activity. What are three?
ANS:
executives: with high personal debt, living beyond their means, engaged in habitual gambling, appear
to abuse alcohol or drugs, appear to lack personal codes of ethics, appear to be unstable
19. Give two examples of employee fraud and explain how the theft might occur.
ANS:
Charges to expense accounts: Cash could be stolen and charged to a miscellaneous expense account.
Once the account is closed, detection would be more difficult.
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0
Lapping: This involves converting cash receipts to personal use. If a customer’s check is taken, his/her
balance will not reflect a payment and will be detected when a statement is sent. In order to conceal
this fraud, a later payment is used to cover the stolen check. This is in effect a small scale Ponzi
scheme.
20. What are the six broad classes of physical control activities defined by SAS 78?
ANS:
Transaction authorization, segregation of duties, supervision, access controls, accounting records,
independent verification
ESSAY
1. The text describes six internal control activities. List four of them and provide a specific example of
each one.
ANS:
Control Activity
Authorization
Example
general (purchase of inventory when level drops) or specific
(credit approval beyond normal limit)
Segregation of functions
separate authorization from processing separate custody of
assets from record keeping
Supervision
required when separation of duties is not possible, such as
opening the mail (cash receipts)
Accounting records
maintain an adequate audit trail
Access controls
Independent verification
maintain physical security
bank reconciliation, physical inventory count
2. Contrast management fraud with employee fraud.
ANS:
Employee fraud is usually designed to directly convert cash or other assets to the employee’s personal
benefit.
Management fraud involves less of a direct benefit to the perpetrator. Management fraud may involve
an attempt to misstate financial performance in order to gain additional compensation or to earn a
promotion. Management fraud may also involve an attempt to misstate financial performance in order
to increase the price of the company’s stock or to reduce the cost of debt.
3. Discuss the importance of the Foreign Corrupt Practices Act of 1977 to the accounting profession.
ANS:
The Foreign Corrupt Practices Act of 1977 (FCPA) is a law that requires all companies registered with
the Securities and Exchange Commission to:
keep records that fairly and reasonably reflect the transactions of the firm and its financial position
1
0
maintain a system of internal control that provides reasonable assurance that the organization’s
objectives are met
As a result of the Foreign Corrupt Practices Act of 1977, management devotes substantial time to
developing and maintaining the internal control structure because failure to do so violates the FCPA
and could lead to heavy fines and imprisonment.
Accountants are key participants in establishing and maintaining the internal control structure.
Therefore, it is accountants who are instrumental in ensuring that the firm is in compliance with the
Foreign Corrupt Practices Act of 1977.
4. Why are the computer ethics issues of privacy, security, and property ownership of interest to
accountants?
ANS:
Privacy is a concern because the nature of computer data files makes it possible for unauthorized
individuals to obtain information without it being recognized as “missing” from its original location.
Security is a concern because its absence makes control from a privacy viewpoint questionable. In
addition lack of security may permit unauthorized changes to data, therefore distorting information
that is reported.
Property ownership raises issues of legitimacy of organizational software, valuation of assets, and
questions of lost revenues.
5. According to common law, there are five conditions that must be present for an act to be deemed
fraudulent. Name and explain each.
ANS:
In order for an act to be deemed fraudulent under common law, it must possess the following
characteristics:
false representation, meaning some misrepresentation or omission must have occurred,
material facts, meaning that the facts must influence someone’s actions,
intent, meaning there must have been the intention to deceive others,
justifiable reliance, meaning it did affect someone’s decision, and
injury or loss must have occurred.
6. Management fraud is regarded as more serious than employee fraud. Three special characteristics have
been discussed for management fraud. What are they? Explain.
ANS:
It usually occurs at levels above the normal internal control system.
There is typically an intent to present a better picture of the business than is valid, often to deceive
creditors and/or shareholders.
If assets are misappropriated, the route is quite devious involving a maze of business transactions.
7. Four principal types of corruption are discussed. Name all four and explain at least two.
ANS:
Corruption involves an executive, manager, or employee of a business working in collusion with an
outsider. The four principal types of corruption are: bribery, illegal gratuities, conflicts of interest, and
economic extortion.
1
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Bribery involves giving, offering, soliciting, or receiving things of value to influence an official in the
performance of his or her lawful duties.
An illegal gratuity involves giving. receiving, offering, or soliciting something of value because of an
official act that has been taken.
A conflict of interest occurs when an employee acts on behalf of a third party during the discharge of
his or her duties or has self-interest in the activity being performed.
Economic extortion is the use (or threat) of force (including economic sanctions) by an individual or
organization to obtain something of value.
8. Misappropriation of assets can involve various schemes: charges to expense accounts, lapping, and
transaction fraud. Explain each and give an example.
ANS:
Charges to expense accounts involve fictitious charges to such accounts as miscellaneous expense to
offset theft of an asset. Because the expense account is closed to revenue at the end of the period, the
period in which it could be detected is short.
Lapping is a technique whereby an early theft is covered up by a later one, i.e., with the moves
“lapping” over each other. The simplest example involves taking a customer’s payment. A later
payment is then credited to the first customer’s account, not the second. And on it goes. This requires
some control over billing to avoid tipping off the last customer.
Transaction fraud involves deleting, altering, or adding false transactions to divert assets to the
perpetrator. For example, if an employee leaves the business and the supervisor fails to notify payroll
and continues to clock the employee in and out, a fraudulent paycheck would be produced. If, in
addition, the supervisor distributes the paycheck, it can be kept, and cashed.
9. Computer fraud is easiest at the data collection stage. Why?
ANS:
Computer fraud is easiest at the data collection stage because much of what occurs after the data
collection or input stage is not visible to human eyes. Once entered, the system will presume that the
input is legitimate and will process it as all others.
10. Explain why collusion between employees and management in the commission of a fraud is difficult to
both prevent and detect.
ANS:
Collusion among employees in the commission of a fraud is difficult to both prevent and detect. This is
particularly true when the collusion is between managers and their subordinate employees.
Management plays a key role in the internal control structure of an organization. They are relied upon
to prevent and detect fraud among their subordinates. When they participate in fraud with the
employees over whom they are supposed to provide oversight, the organization’s control structure is
weakened, or completely circumvented, and the company becomes more vulnerable to losses.
11. Since all fraud involves some form of financial misstatement, how is Fraudulent Statement fraud
different?
1
0
ANS:
Fraudulent statements are associated with management fraud. While all fraud involves some form of
financial misstatement, to meet the definition under this class of fraud scheme, the statement itself
must bring direct or indirect financial benefit to the perpetrator. In other words, the statement is not
simply a vehicle for obscuring or covering a fraudulent act. For example, misstating the cash account
balance to cover the theft of cash does not fall under this class of fraud scheme. On the other hand,
understating liabilities to present a more favorable financial picture of the organization to drive up
stock prices does qualify.
12. Explain the problems associated with lack of auditor independence.
ANS:
Auditing firms who are also engaged by their clients to perform non-accounting activities such as
actuarial services, internal audit outsourcing services, and consulting lack independence. They are
essentially auditing their own work. This risk is that as auditors they will not bring to management’s
attention detected problems that may adversely affect their consulting fees. For example, Enron’s
auditors – Arthur Andersen – were also their internal auditor’s and their management consultants.
13. Explain the problems associated with lack of director independence
ANS:
Many boards of directors are comprised of individuals who are not independent. Examples of lack of
independence are directors who: have a personal relationship by serving on the boards of other
directors companies; have a business trading relationship as key customers or suppliers of the
company; have a financial relationship as primary stockholders or have received personal loans from
the company; have an operational relationship as employees of the company.
14. Explain the problems associated with Questionable Executive Compensation Schemes
ANS:
A survey by Thompson Financial revealed the strong belief that executives have abused stock-based
compensation. The consensus is that fewer stock options should be offered than currently is the
practice. Excessive use of short-term stock options to compensate directors and executives may result
in short term thinking and strategies aimed at driving up stock prices at the expense of the firm’s longterm health. In extreme cases, financial statement misrepresentation has been the vehicle to achieve the
stock price needed to exercise the option.
15. Explain the problems associated with inappropriate accounting practices.
ANS:
The use of inappropriate accounting techniques is a characteristic common to many financial statement
fraud schemes. Enron made elaborate use of Special Purpose Entities (SPE) to hide liabilities through
off balance sheet accounting. WorldCom management transferred transmission line costs from current
expense accounts to capital accounts. This allowed them to defer some operating expenses and report
higher earnings. Also, they reduced the book value of hard assets of MCI by $3.4 billion and increased
goodwill by the same amount. Had the assets been left at book value, they would have been charged
against earnings over four years. Goodwill, on the other hand, was amortized over much longer period.
16. Explain the purpose of the PCAOB.
ANS:
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0
b relevance, summarization, accuracy, timelessness, and completeness
.
c timeliness, relevance, summarization, accuracy, and conciseness
.
d disaggregation, relevance, timeliness, accuracy, and completeness
.
ANS: A
40. Internal control system have limitations. These include
a possibility of honest error
.
b circumvention
.
c management override
.
d stability of systems
.
ANS: D
41. Management can expect various benefits to follow from implementing a system of strong internal
control. Which of the following benefits is least likely to occur?
a reduced cost of an external audit.
.
b prevents employee collusion to commit fraud.
.
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c availability of reliable data for decision-making
purposes.
.
d some assurance of compliance with the Foreign Corrupt Practices Act of 1977.
.
e some assurance that important documents and records are protected.
.
ANS: B
42. Which of the following situations is not a segregation of duties violation?
a The treasurer has the authority to sign checks but gives the signature block to the
. assistant treasurer to run the check-signing machine.
b The warehouse clerk, who has the custodial responsibility over inventory in the
. warehouse, selects the vendor and authorizes purchases when inventories are low.
c The sales manager has the responsibility to approve credit and the authority to write off
. accounts.
d The department time clerk is given the undistributed payroll checks to mail to absent
. employees.
e The accounting clerk who shares the record keeping responsibility for the accounts
. receivable subsidiary ledger performs the monthly reconciliation of the subsidiary ledger
and the control account.
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0
Chapter 9
Interim Financial Reporting
PROBLEM 1: TRUE OR FALSE
1
FALSE
6. FALSE
.
2
TRUE
7. FALSE
.
3
FALSE
8. TRUE
.
4
TRUE
9. FALSE
.
5
FALSE 10. TRUE
.
PROBLEM 2: FOR CLASSROOM DISCUSSION
1.
D
2.
A
3.
B
4.
B
5.
B
6.
C
7.
A
8.
Solution:
Revenue
Cost of goods sold
Gross profit
Other operating expenses
Loss on inventory write-down (2.2M – 2.8M)
Interest income (2M x 12% x 3/12)
Profit
9,000,000
(5,000,000)
4,000,000
(2,800,000)
(600,000)
60,000
660,000
Other comprehensive income:
Unrealized loss on FVOCI [450K – (500K + 60K)]
Comprehensive income
0
(110,000)
550,000
0
9. Solution:
Revenue
Cost of goods sold
Gross profit
Other operating expenses
Property tax expense (1.2M x 1/4)
Depreciation expense [(1.2M / 5) x
3/12]
Insurance expense
Profit
7,000,000
(3,000,000)
4,000,000
(2,800,000)
(300,000)
(60,000)
(15,000)
825,000
Other comprehensive income:
Revaluation increase (4.4M - 3.8M)
Comprehensive income
600,000
1,425,000
10. Solution:
Revenue
Cost of goods sold
Gross profit
Other operating expenses
Salaries expense (2.8M x 3/12)
Impairment loss
Profit from continuing
operations
Discontinued operations
Profit for the year
9,000,000
(3,000,000)
6,000,000
(2,800,000)
(700,000)
(500,000)
2,000,000
(700,000)
1,300,000
11. Solution:
1,200,000
(300,000)
900,000
30%
270,000
Estimated annual profit before tax
Less: Operating loss carryforward
Total
Multiply by:
Estimated annual income tax expense
Divide by: Estimated annual profit before
tax
Weighted average income tax rate
1,200,000
22.50%
Profit before tax - 1st quarter
Multiply by: Weighted ave. tax rate
Income tax expense
350,000
22.50%
78,750
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0
PROBLEM 3: EXERCISES
1.
Solution:
Revenue
Cost of goods sold
Gross profit
Other operating
expenses
Property tax expense
Impairment loss
Loss
9,000,000
(5,000,000)
4,000,000
(2,800,000)
(250,000)
(600,000)
350,000
The write-up is not recognized because there are no write-downs in the past.
2.
Solution:
Revenue
Cost of goods sold
Gross profit
Other operating expenses
Insurance expense (60K x 3/24)
Commission expense
Unrealized gain (1.45M - 1.5M)
Profit from continuing operations
Discontinued operations (2.8M - 3M) +
800K
Profit for the year
Other comprehensive income:
Comprehensive income
3.
9,000,000
(5,000,000)
4,000,000
(2,800,000)
(7,500)
(80,000)
(50,000)
1,062,500
(1,000,000)
62,500
62,500
Solution:
Revenue
Cost of goods sold
Gross profit
Other operating expenses
Employee benefits
Depreciation expense (see solution
below)
Interest income (1.2M x 10% x 3/12)
Profit for the year
9,000,000
(5,000,000)
4,000,000
(2,800,000)
(450,000)
(45,000)
30,000
735,000
By trial and error, the depreciation method used by Puppy is determined to be the SYD method.
Trial and error:
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0
Historical cost (squeeze)
Accumulated depreciation
Carrying amount - 1/1/x1
1,000,000
(540,000)
460,000
Historical cost
Residual value
Depreciable amount
1,000,000
(100,000)
900,000
Depreciation - 1st yr. (900K x 5/15)
Depreciation - 2nd yr. (900K x 4/15)
Accumulated depreciation - 1/1/x1
300,000
240,000
540,000
Depreciation - 20x1 (900K x 3/15)
Multiply by:
Depreciation - 1st qtr.
180,000
3/12
45,000
4. Solution:
Estimated annual profit before tax
Less: Operating loss carryforward (300K /
30%)
1,200,000
(1,000,000
)
200,000
30%
60,000
1,200,000
5.00%
Total
Multiply by:
Estimated annual income tax expense
Divide by: Estimated annual profit before tax
Weighted average income tax rate
Profit before tax - 1st quarter
Multiply by: Weighted ave. tax rate
Income tax expense
350,000
5.00%
17,500
5. Solution:
Estimated annual profit before tax
Less: Operating loss carryforward
Total
Multiply by:
Estimated annual income tax expense
Divide by: Estimated annual profit before
tax
Weighted average income tax rate
800,000
(100,000)
700,000
30%
210,000
800,000
26.25%
Profit before tax - 1st quarter
Multiply by: Weighted ave. tax rate
Income tax expense
280,000
26.25%
73,500
PROBLEM 4: MULTIPLE CHOICE – THEORY
1
6. C
D
.
2
7. B
C
.
8. C
3 A
0
0
.
4
.
5
.
D
D
9.
C
10.
A
PROBLEM 5: MULTIPLE CHOICE – COMPUTATIONAL
1.
B 70,000 loss recognized immediately; (100,000 x ¼) = 25,000 insurance expense allocated to
the quarter
2. C
Solution:
Depreciation expense (60,000 x 6/12)
30,000
Salaries expense - bonus (120,000 x 6/12)
60,000
Total expense for the semi-annual period
90,000
3. B
Solution:
Property tax (180,000 x 1/4)
Costs benefitting the remainder of the year (300,000 x 1/3)
Total expense for the 2nd quarter
4. C
45,000
100,000
145,00
0
5. B (-20,000 - 30,000 + 90,000) = 40,000
6. C (200,000 x 25%) = 50,000
7. C – The entire write-down of 900,000 is recognized in the 2 quarter.
nd
8. D
9. C
10. B
Solution:
1,200,000
Estimated annual profit before tax
Less: Operating loss carryforward (120K /
30%)
Total
(400,000)
800,000
0
0
30%
240,000
1,200,000
20.00%
Multiply by:
Estimated annual income tax expense
Divide by: Estimated annual profit before tax
Weighted average income tax rate
1st Qtr.
Profits before taxes
Multiply by: Weighted ave. tax rate
Income tax expense
350,00
0
20.00%
70,000
2nd
Qtr.
3rd
Qtr.
200,000
400,000
20.00%
40,000
20.00%
80,000
0
0
Accounting Information Systems, 7e—Test Bank, Chapter 4
Chapter 4—The Revenue Cycle
TRUE/FALSE
1. The packing slip is also known as the shipping notice.
ANS: F
PTS: 1
2. The bill of lading is a legal contract between the buyer and the seller.
ANS: F
PTS: 1
3. Another name for the stock release form is the picking ticket.
ANS: T
PTS: 1
4. Warehouse stock records are the formal accounting records for inventory.
ANS: F
PTS: 1
5. The purpose of the invoice is to bill the customer.
ANS: T
PTS: 1
6. In most large organizations, the journal voucher file has replaced the formal general journal.
ANS: T
PTS: 1
7. The cash receipts journal is a special journal.
ANS: T
PTS: 1
8. In the revenue cycle, the internal control “limit access” applies to physical assets only.
ANS: F
PTS: 1
9. In real-time processing systems, routine credit authorizations are automated.
ANS: T
PTS: 1
10. In a computerized accounting system, segregation of functions refers to inventory control, accounts
receivable, billing, and general ledger tasks.
ANS: F
PTS: 1
11. A written customer purchase order is required to trigger the sales order system.
1
ANS: F
PTS: 1
12. Inventory control has physical custody of inventory.
ANS: F
PTS: 1
13. The principal source document in the sales order system is the sales order.
ANS: T
PTS: 1
14. Sales orders should be prenumbered documents.
ANS: T
PTS: 1
15. Integrated accounting systems automatically transfer data between modules.
ANS: T
PTS: 1
16. If a customer submits a written purchase order, there is no need to prepare a sales order.
ANS: F
PTS: 1
17. Sales return involves receiving, sales, credit, and billing departments, but not accounts receivable.
ANS: F
PTS: 1
18. A remittance advice is a form of turn-around document.
ANS: T
PTS: 1
19. A bill of lading is a request for payment for shipping charges.
ANS: F
PTS: 1
20. In point of sale systems, authorization takes the form of validation of credit card charges.
ANS: T
PTS: 1
21. The warehouse is responsible for updating the inventory subsidiary ledger.
ANS: F
PTS: 1
22. In a manual system, the billing department is responsible for recording the sale in the sales journal.
ANS: T
PTS: 1
23. The stock release document is prepared by the shipping department to provide evidence that the
goods have been released to the customer.
ANS: F
PTS: 1
24. The accounts receivable clerk is responsible for updating the AR Control accounts to reflect each
customer sale.
ANS: F
PTS: 1
25. When customer payments are received, the mailroom clerk sends the checks to the cash receipts clerk
and the remittance advices to the AR clerk.
ANS: T
PTS: 1
26. Physical controls are imbedded in computer systems to control access to data.
ANS: F
PTS: 1
27. Process controls are controls over the logic of the application.
ANS: T
PTS: 1
28. In a basic technology revenue cycle system, a robust passwold control policy should be implemented.
ANS: T
PTS: 1
29. In an integrated cash receipts system, the cash receipts clerk reconciles the checks and the
remittance advices and prepares deposit slips.
ANS: T
PTS: 1
30. Multilevel security employs programmed techniques that permit simultaneous access to a central
system by many users with different access privileges but allows them to obtaining information for
which they lack authorization.
ANS: F
PTS: 1
31. Application integrity is achieved through the systems development and program change processes.
ANS: T
MULTIPLE CHOICE
PTS: 1
1. The revenue cycle consists of
a. one subsystem–order entry
b. two subsystems–sales order processing and cash receipts
c. two subsystems–order entry and inventory control
d. three subsystems–sales order processing, credit authorization, and cash receipts
ANS: B
PTS: 1
2. The reconciliation that occurs in the shipping department is intended to ensure that
a. credit has been approved
b. the customer is billed for the exact quantity shipped
c. the goods shipped match the goods ordered
d. inventory records are reduced for the goods shipped
ANS: C
PTS: 1
3. The adjustment to accounting records to reflect the decrease in inventory due to a sale occurs in the
a. warehouse
b. shipping department
c. billing department
d. inventory control department
ANS: D
PTS: 1
4. Which document triggers the revenue cycle?
a. the sales order
b. the customer purchase order
c. the sales invoice
d. the journal voucher
ANS: B
PTS: 1
5. Copies of the sales order can be used for all of the following except
a. purchase order
b. credit authorization
c. shipping notice
d. packing slip
ANS: A
PTS: 1
6. The purpose of the sales invoice is to
a. record reduction of inventory
b. transfer goods from seller to shipper
c. bill the customer
d. select items from inventory for shipment
ANS: C
PTS: 1
7. The customer open order file is used to
a. respond to customer queries
b. fill the customer order
c. ship the customer order
d. authorize customer credit
ANS: A
PTS: 1
8. The stock release copy of the sales order is not used to
a. locate and pick the items from the warehouse shelves
b. record any out-of-stock items
c. authorize the warehouse clerk to release custody of the inventory to shipping
d. record the reduction of inventory
ANS: D
PTS: 1
9. The shipping notice
a. is mailed to the customer
b. is a formal contract between the seller and the shipping company
c. is always prepared by the shipping clerk
d. informs the billing department of the quantities shipped
ANS: D
PTS: 1
10. The billing department is not responsible for
a. updating the inventory subsidiary records
b. recording the sale in the sales journal
c. notifying accounts receivable of the sale
d. sending the invoice to the customer
ANS: A
PTS: 1
11. Customers should be billed for back-orders when
a. the customer purchase order is received
b. the backordered goods are shipped
c. the original goods are shipped
d. customers are not billed for backorders because a backorder is a lost sale
ANS: B
PTS: 1
12. Usually specific authorization is required for all of the following except
a. sales on account which exceed the credit limit
b. sales of goods at the list price
c. a cash refund for goods returned without a receipt
d. write off of an uncollectible account receivable
ANS: B
PTS: 1
13. Which of following functions should be segregated?
a. opening the mail and making the journal entry to record cash receipts
b. authorizing credit and determining reorder quantities
c. maintaining the subsidiary ledgers and handling customer queries
d. providing information on inventory levels and reconciling the bank statement
ANS: A
PTS: 1
14. Which situation indicates a weak internal control structure?
a. the mailroom clerk authorizes credit memos
b. the record keeping clerk maintains both accounts receivable and accounts payable
subsidiary ledgers
c. the warehouse clerk obtains a signature before releasing goods for shipment
d. the accounts receivable clerk prepares customer statements every month
ANS: A
PTS: 1
15. The most effective internal control procedure to prevent or detect the creation of fictitious credit
memoranda for sales returns is to
a. supervise the accounts receivable department
b. limit access to credit memoranda
c. prenumber and sequence check all credit memoranda
d. require management approval for all credit memoranda
ANS: D
PTS: 1
16. The accounts receivable clerk destroys all invoices for sales made to members of her family and
does not record the sale in the accounts receivable subsidiary ledger. Which procedure will not detect
this fraud?
a. prenumber and sequence check all invoices
b. reconcile the accounts receivable control to the accounts receivable subsidiary ledger
c. prepare monthly customer statements
d. reconcile total sales on account to the debits in the accounts receivable subsidiary ledger
ANS: C
PTS: 1
17. Which department is least likely to be involved in the revenue cycle?
a. credit
b. accounts payable
c. billing
d. shipping
ANS: B
PTS: 1
18. Which document is included with a shipment sent to a customer?
a. sales invoice
b. stock release form
c. packing slip
d. shipping notice
ANS: C
PTS: 1
19. Good internal controls in the revenue cycle should ensure all of the following except
a. all sales are profitable
b. all sales are recorded
c. credit is authorized
d. inventory to be shipped is not stolen
ANS: A
PTS: 1
20. Which control does not help to ensure that accurate records are kept of customer accounts
and inventory?
a. reconcile accounts receivable control to accounts receivable subsidiary
b. authorize credit
c. segregate custody of inventory from record keeping
d. segregate record keeping duties of general ledger from accounts receivable
ANS: B
PTS: 1
21. Internal controls for handling sales returns and allowances do not include
a. computing bad debt expense using the percentage of credit sales
b. verifying that the goods have been returned
c. authorizing the credit memo by management
d. using the original sales invoice to prepare the sales returns slip
ANS: A
PTS: 1
22. The printer ran out of preprinted sales invoice forms and several sales invoices were not printed.
The best internal control to detect this error is
a. a batch total of sales invoices to be prepared compared to the actual number of sales
invoices prepared
b. sequentially numbered sales invoices
c. visual verification that all sales invoices were prepared
d. none of the above will detect this error
ANS: A
PTS: 1
23. Which department prepares the bill of lading?
a. sales
b. warehouse
c. shipping
d. credit
ANS: C
PTS: 1
24. A remittance advice is
a. used to increase (debit) an account receivable by the cash received
b. is a turn-around document
c. is retained by the customer to show proof of payment
d. none of the above
ANS: B
PTS: 1
25. A weekly reconciliation of cash receipts would include comparing
a. the cash prelist with bank deposit slips
b. the cash prelist with remittance advices
c. bank deposit slips with remittance advices
d. journal vouchers from accounts receivable and general ledger
ANS: A
PTS: 1
26. At which point is supervision most critical in the cash receipts system?
a. accounts receivable
b. general ledger
c. mail room
d. cash receipts
ANS: C
PTS: 1
27. EDI trading partner agreements specify all of the following except
a. selling price
b. quantities to be sold
c. payment terms
d. person to authorize transactions
ANS: D
PTS: 1
28. A cash prelist is
a. a document that records sales returns and allowances
b. a document returned by customers with their payments
c. the source of information used to prepare monthly statements
d. none of the above
ANS: D
PTS: 1
29. An advantage of real-time processing of sales is
a. the cash cycle is lengthened
b. current inventory information is available
c. hard copy documents provide a permanent record of the transaction
d. data entry errors are corrected at the end of each batch
ANS: B
PTS: 1
30. Commercial accounting systems have fully integrated modules. The word “integrated” means that
a. segregation of duties is not possible
b. transfer of information among modules occurs automatically
c. batch processing is not an option
d. separate entries are made in the general ledger accounts and the subsidiary ledgers
ANS: B
PTS: 1
31. The data processing method that can shorten the cash cycle is
a. batch, sequential file processing
b. batch, direct access file processing
c. real-time file processing
d. none of the above
ANS: C
PTS: 1
32. Which of the following is not a risk exposure in a PC accounting system?
a. reliance on paper documentation is increased
b. functions that are segregated in a manual environment may be combined in a
microcomputer accounting system
c. backup procedures require human intervention
d. data are easily accessible
ANS: A
PTS: 1
33. Which journal is not used in the revenue cycle?
a. cash receipts journal
b. sales journal
c. purchases journal
d. general journal
ANS: C
PTS: 1
34. Periodically, the general ledger department receives all of the following except
a. total increases to accounts receivable
b. total of all sales backorders
c. total of all sales
d. total decreases in inventory
ANS: B
PTS: 1
35. The credit department
a. prepares credit memos when goods are returned
b. approves credits to accounts receivable when payments are received
c. authorizes the granting of credit to customers
d. none of the above
ANS: C
PTS: 1
36. Adjustments to accounts receivable for payments received from customers is based upon
a. the customer’s check
b. the cash prelist
c. the remittance advice that accompanies payment
d. a memo prepared in the mailroom
ANS: C
PTS: 1
37. The revenue cycle utilizes all of the following files except
a. credit memo file
b. sales history file
c. shipping report file
d. cost data reference file
ANS: D
PTS: 1
38. All of the following are advantages of real-time processing of sales except
a. The cash cycle is shortened
b. Paper work is reduced
c. Incorrect data entry is difficult to detect
d. Up-to-date information can provide a competitive advantage in the marketplace
ANS: C
PTS: 1
39. Which document is NOT prepared by the sales department?
a. packing slip
b. shipping notice
c. bill of lading
d. stock release
ANS: C
PTS: 1
40. Which type of control is considered a compensating control?
a. segregation of duties
b. access control
c. supervision
d. accounting records
ANS: C
PTS: 1
41. Which of the following is NOT a common method for achieving multilevel security?
a. Access control list
b. Application integrity
c. Role based access control
d. All of the above
ANS: B
PTS: 1
42. In an integrated cash receipts system, which of the following is not a task of the mail room clerk?
a. Prepare deposit slips
b. Open envelopes
c. Prepare remittance list
d. Make bank deposit
ANS: D
PTS: 1
SHORT ANSWER
1. Distinguish between a packing slip, shipping notice, and a bill of lading.
ANS:
The packing slip travels with the goods to the customer, and it describes the contents on the order. Upon filling
the order, the shipping department sends the shipping notice to the billing department to notify them that the
order has been filled and shipped. The shipping notice contains additional information that the packing slip may
not contain, such as shipment date, carrier and freight charges. The bill of lading is a formal contract between
the seller and the transportation carrier; it shows legal ownership and responsibility for assets in transit.
PTS: 1
2. State two specific functions or jobs that should be segregated in the sales processing system.
ANS:
sales order processing and credit approval; inventory control (record keeping) from warehouse
(custody); and general ledger from accounts receivable subsidiary ledger
PTS: 1
3. State two specific functions or jobs that should be segregated in the cash receipts system.
ANS:
cash receipts (custody) from accounts receivable (record keeping); and general ledger from accounts
receivable subsidiary ledger; mail room (receiving cash) and accounts receivable subsidiary ledger
PTS: 1
4. List two points in the sales processing system when authorization is required.
ANS:
credit check, sales returns policy, preparation of cash prelist PTS: 1
5. For the revenue cycle, state two specific independent verifications that should be performed.
ANS:
Shipping verifies that the goods sent from the warehouse are correct in type and quantity.
Billing reconciles the shipping notice with the sales order to ensure that customers are billed only for the
quantities shipped.
General ledger reconciles journal vouchers submitted by the billing department (sales journal),
inventory control (inventory subsidiary ledger), and cash receipts (cash receipts journal).
Treasurer determines that all cash received got to the bank. PTS: 1
6. What task can the accounts receivable department engage in to verify that all checks sent by
customers have been appropriately deposited and recorded?
ANS:
The company should periodically, perhaps monthly, send an account summary to each customer listing invoices
and amounts paid by check number and date. This form allows the customer to verify the accuracy of the
records. If any payments are not recorded, they will notify the company of the discrepancy. These reports
should not be handled by the accounts receivable clerk or the cashier.
PTS: 1
7. What specific internal control procedure would prevent the sale of goods on account to a fictitious
customer?
ANS:
credit check PTS: 1
8. The clerk who opens the mail routinely steals remittances and checks. Describe a specific internal
control procedure that would prevent or detect this fraud.
ANS:
supervision (two people) when opening the mail; customer
complaints when monthly statements mailed
PTS: 1
9. A customer payment of $247 was correctly posted in the general ledger but was recorded as $274 in
the customer’s account receivable. Describe a specific internal control procedure that would detect this
error.
ANS:
Reconcile the accounts receivable control account to the accounts receivable subsidiary ledger;
compare control totals of cash received with total credits to A/R subsidiary ledger.
PTS: 1
10. Goods are shipped to a customer, but the shipping department does not notify billing and the customer
never receives an invoice. Describe a specific internal control procedure that would detect this error.
ANS:
Billing department matches the stock release copy of the sales order (from shipping) to the invoice,
ledger, and file copies of the sales order (sent directly to billing), and then mails the invoice to the
customer. After a certain amount of time has passed, the billing department should investigate any
unmatched invoice, ledger, and file copies of the sales order.
PTS: 1
11. A clerk embezzles customer payments on account and covers up the theft by making an adjustment to
the accounts receivable ledger. Describe a specific internal control procedure that would prevent this
fraud.
ANS:
segregation of duties; do not let one person have custody of payments and the ability to make
adjustments to the records; all adjustments to accounts receivable records must be authorized
PTS: 1
12. A credit sale is made to a customer, even though the customer’s account is four months overdue.
Describe a specific internal control procedure that would prevent this from happening.
ANS:
Perform a credit check and require management approval for all sales to accounts that are overdue. PTS: 1
13. What specific internal control procedure would prevent a customer from being billed for all 50
items ordered although only 40 items were shipped?
ANS:
Billing should reconcile the shipping report with the sales order. PTS: 1
14. What specific internal control procedure would prevent the shipping clerk from taking goods from the
storeroom and sending them to someone who had not placed an order?
ANS:
Shipping clerk should not have access to the storeroom. PTS: 1
15. What specific internal control procedure would prevent an accounts receivable clerk from issuing a
fictitious credit memo to a customer (who is also a relative) for goods that were “supposedly”
returned from previous sales?
ANS:
Credit memo should be authorized after verifying the return of goods based on evidence from the person
who received the goods.
PTS: 1
16. What specific internal control procedure would prevent an increase in sales returns since
salesmen were placed on commission?
ANS:
Customer credit should be verified by the credit department; reduce commissions for sales returns. PTS: 1
17. What specific internal control procedure would detect the misplacement of a sales invoice after
preparation and not mailed to the customer? The invoice was never found.
ANS:
All documents should be prenumbered. PTS: 1
18. What function does the receiving department serve in the revenue cycle?
ANS:
The receiving department counts and inspects items which are returned by customers. The receiving
department prepares a return slip of which a copy goes to the warehouse for restocking, and a copy goes to
the sales order department so that a credit memo can be issued to the customer.
PTS: 1
19. What are the three rules that ensure that no single employee or department processes a transaction
in its entirety.
ANS:
The three rules that ensure segregation of functions are:
1. Transaction authorization should be separate from transaction processing.
2. Asset custody should be separate from asset record keeping.
3. The organization structure should be such that the perpetration of a fraud requires collusion
between 2 or more individuals.
PTS: 1
20. What is automation and why is it used?
ANS:
Automation involves using technology to improve the efficiency and effectiveness of a task. Automation of the
revenue cycle is typically used to reduce overhead costs, make better credit granting decisions, and better collect
outstanding accounts receivable.
PTS: 1
21. What is the objective of re-engineering?
ANS:
The objective of re-engineering is to greatly reduce costs by identifying and eliminating non value- added
tasks and also by streamlining necessary existing processes.
PTS: 1
22. What are the key segregation of duties related to computer programs that process accounting
transactions?
ANS:
The tasks of design, maintenance, and operation of computer programs need to be segregated. The
programmers who write the original computer programs should not also be responsible for making program
changes. Both of these functions must also be separate from the daily task of operating the system.
PTS: 1
23. How is EDI more than technology? What unique control problems may it pose?
ANS:
EDI represents a unique business arrangement between the buyer and seller in which they agree, in advance, to
the terms of their relationship on such items as selling price, quantities, delivery times, payment terms and
methods of handling disputes. The terms of agreement are binding. One problem is ensuring that only valid
transactions are processed. Another risk is that a non-trading partner will masquerade as a trading partner and
access the firm's processing systems.
PTS: 1
24. What makes point-of-sale systems different from revenue cycles of manufacturing firms?
ANS:
In point-of-sale systems, the customer literally has possession of the items purchased, thus the inventory is in
hand. Typically, for manufacturing firms, the order is placed and the good is shipped to the customer at some
later time period. Thus, updating inventory at the time of sale is necessary in point-of-sale systems since the
inventory is changing hands, while it is not necessary in manufacturing firms until the goods are actually
shipped to the customer.
Also, POS systems are used extensively in grocery stores, department stores, and other types of retail
organizations. Generally, only cash, checks, and bank credit card sales are valid. Unlike manufacturing firms,
the organization maintains no customer accounts receivable. Unlike some manufacturing firms, inventory is
kept on the store’s shelves, not in a separate warehouse. The customers personally pick the items they wish to
buy and carry them to the checkout location, where the transaction begins.
Shipping, packing, bills of lading, etc. are not relevant to POS systems. PTS: 1
25. Give three examples of Access Control in a Point-of-Sale (POS) system.
ANS:
 Lock on the cash drawer
 Internal cash register tape that can be accessed only by the manager
 Physical security over the inventory, for example: steel cables to secure expensive leather coats to
the clothing rack; locked showcases to display jewelry and costly electronic equipment; magnetic
tags attached to merchandise that will sound an alarm when removed from the store.
Note to Instructor: Some physical security devices could also be classified as supervision. PTS: 1
26. Describe the key tasks in the sales order process.
ANS:
Sales order procedures include the tasks involved in receiving and processing a customer order, filling the
order and shipping products to the customer, billing the customer at the proper time, and correctly accounting
for the transaction.
PTS: 1
27. What is the purpose(s) of the stock release document?
ANS:
The stock release document (also called the picking ticket) is sent to the warehouse to identify
the items of inventory that have been sold and must be located and picked from the warehouse shelves. It also
provides formal authorization for warehouse personnel to release the specified items.
PTS: 1
28. What is the role of the shipping notice?
ANS:
The shipping notice triggers the billing process. When the goods are shipped the shipping notice is forwarded
to the billing function as evidence that the customer’s order was filled and shipped. This document conveys
pertinent new facts such as the date of shipment, the items and quantities actually shipped, the name of the
carrier, and freight charges.
PTS: 1
29. What is a bill of lading?
ANS:
The bill of lading is a formal contract between the seller and the shipping company (carrier) to transport the
goods to the customer. This document establishes legal ownership and responsibility for assets in transit.
PTS: 1
30. What is the purpose of the credit memo?
ANS:
This document is the authorization for the customer to receive credit for the merchandise returned. A credit
memo may be similar in appearance to a sales order. Some systems may actually use a copy of the sales order
marked credit memo.
PTS: 1
31. How is application integrity achieved?
ANS:
Application integrity is achieved through the systems development and program change processes. PTS: 1
32. What is multilevel security?
ANS:
Multilevel security employs programmed techniques that permit simultaneous access to a central system by
many users with different access privileges but prevents them from obtaining information for which they
lack authorization.
PTS: 1
33. What does EDI technology do?
ANS:
EDI technology was devised to expedite routine transactions between manufacturers and wholesalers,
and between wholesalers and retailers. PTS: 1
ESSAY
1. When Clipper Mail Order Co. receives telephone and fax orders, the billing department prepares an
invoice. The invoice is mailed immediately. A copy of the invoice serves as a shipping notice. The
shipping department removes inventory from the warehouse and prepares the shipment. When the
order is complete, the goods are shipped. The clerk checks the customer’s credit before recording the
sale in the general journal and the account receivable subsidiary ledger.
The receptionist opens the mail and lists all payments. The receptionist also handles all customer
complaints and prepares sales return forms for defective merchandise. The cashier records all cash
receipts in the general journal and makes the appropriate entry in the accounts receivable subsidiary
ledger. The cashier prepares the daily bank deposit.
Describe at least four internal control weaknesses at Clipper Mail Order Co. ANS:
no sales order is prepared;
credit should be checked before shipping the items; invoices
are mailed before the goods are shipped; shipping has
access to the warehouse;
record keeping duties are not segregated (general ledger from subsidiary ledger); only
one person opens the mail;
sales return forms are not authorized by management; custody and
record keeping duties are not separated;
the cashier has custody of cash, makes journal entries, and maintains A/R ledger;
Cashier has custody of cash and handles customer complaints (e.g., about unrecorded payments). PTS: 1
2. How may an employee embezzle funds by issuing an unauthorized sales credit memo if the
appropriate segregation of functions and authorization controls were not in place?
ANS:
An employee who has access to incoming payments, either cash or check, as well as the authorization to issue
credit memos may pocket the cash or check of a payment for goods received. This employee could then issue
a credit memo to this person’s account so that the customer does not show a balance due.
PTS: 1
3. For each of the following documents, describe its purpose, the functional area preparing it, and the key
data included: sales order, bill of lading, credit memo.
ANS:
A sales order is used to collect information needed to initiate the sales process. It can be a copy of the
customer’s purchase order prepared by the customer or a document prepared by a member of the sales staff in
response to mail, phone or personal contact with the customer. It contains information about the customer, the
type and quantity of merchandise being requested, price information, shipping information, etc.
The bill of lading is prepared by the shipping clerk. It is a formal contract between the seller and the carrier
who will transport the goods to the customer. It contains information about the carrier, the customer,
descriptions of the package(s) being shipped, declared value of the goods, and information on freight charges,
including how much and who will pay.
A credit memo is a document authorizing issuance of credit to a customer for returned goods. It is prepared in
the sales department after receipt of a return slip from receiving. It shows the customer’s name, reason for the
return, a list of items and prices, and the total amount of credit. Many credit memos require additional
authorization.
PTS: 1
4. What features of a reengineered cash receipts system contribute to improved control and reduced
costs? What complicates the process?
ANS:
A reengineered cash receipts system can include automated mail processing that opens envelopes and separates
checks and remittance advices in a manner that limits access of the mail room clerk to the checks. Software can
be used to read the amount of payment and compare to the amount due, verify that the check has been signed,
etc. “Good” transactions continue through processing, exceptions are handled separately. Checks are sent to the
cash receipts department for deposit, listings of transactions are sent to accounts receivable, cash receipts, and
general ledger departments.
This process is complicated when the organization receives many partial payments, single payments
covering multiple invoices, or encounters many clerical errors on the part of customers.
PTS: 1
5. What role does each of the following departments play in the sales order processing subsystem: sales,
credit, and shipping? Be complete.
ANS:
The sales department receives the order information from the customer, either by mail, phone, or in person.
Information is captured on a sales order form which includes customer name, account number, name, number
and description of items ordered, quantities and unit prices plus taxes, shipping info, discounts, freight terms.
This form is usually prepared in multiple copies that are used for credit approval, packing, stock release,
shipping, and billing.
The credit department provides transaction authorization by approving the customer for a credit sale and
returns and allowances.
The shipping department receives information from the sales department in the form of packing slip and
shipping notice. When the goods arrive from the warehouse, the documents are reconciled with the stock
release papers. The goods are packed and labeled. The packing slip is included. The shipping notice is sent to
billing. A bill of lading is prepared to accompany the shipment.
PTS: 1
6. With regard to segregation of duties, rule one is that transaction authorization and transaction
processing should be separated. What does this require in the revenue cycle?
ANS:
Within the revenue cycle, the credit department is separate from the rest of the process. Hence, the
authorization of the transaction (granting of credit) is independent. If other people, e.g., sales staff, were
able to authorize credit sales, there would be the temptation to approve sales to any customer, even those
known to not be credit worthy.
PTS: 1
7. With regard to segregation of duties, rule two is that asset custody and record keeping should be
separated. What does this require in the revenue cycle?
ANS:
In the revenue cycle, the warehouse has custody of physical assets while accounting (especially general ledger
and inventory control) maintains the records. Also, in the cash receipts subsystem, cash receipts has custody of
the asset (cash) while general ledger and accounts receivable keep the records.
PTS: 1
8. What role does each of the following departments play in the cash receipts subsystem: mail room,
cash receipts, accounts receivable, and general ledger? Be complete.
ANS:
The mail room receives the customer’s payment–usually a check accompanied by a document called a
remittance advice (which may be a copy of the invoice sent to the customer). Mail clerks separate the two,
prepare a cash prelist or remittance list which lists all the payments received and sends the checks to the cashier
and remittance advices to accounts receivable.
In cash receipts someone (e.g., cashier) restrictively endorses the checks and records the payments in the cash
receipts journal. A deposit slip is prepared which accompanies the checks to the bank.
The accounts receivable department posts from the remittance advices to the customer accounts in the AR
subsidiary ledger.
The general ledger department records cash receipts to the cash and AR control accounts based on the list
from the mailroom and the summary report of posting from A/R.
PTS: 1
PTS: 1
9. A customer payment of $247 was correctly posted in the general ledger but was recorded as $274 in
the customer’s account receivable. Describe a specific internal control procedure that would detect this
error.
ANS:
Reconcile the accounts receivable control account to the accounts receivable subsidiary ledger;
compare control totals of cash received with total credits to A/R subsidiary ledger.
PTS: 1
10. Goods are shipped to a customer, but the shipping department does not notify billing and the customer
never receives an invoice. Describe a specific internal control procedure that would detect this error.
ANS:
Billing department matches the stock release copy of the sales order (from shipping) to the invoice,
ledger, and file copies of the sales order (sent directly to billing), and then mails the invoice to the
customer. After a certain amount of time has passed, the billing department should investigate any
unmatched invoice, ledger, and file copies of the sales order.
PTS: 1
11. A clerk embezzles customer payments on account and covers up the theft by making an adjustment to
the accounts receivable ledger. Describe a specific internal control procedure that would prevent this
fraud.
ANS:
segregation of duties; do not let one person have custody of payments and the ability to make
adjustments to the records; all adjustments to accounts receivable records must be authorized
PTS: 1
12. A credit sale is made to a customer, even though the customer’s account is four months overdue.
Describe a specific internal control procedure that would prevent this from happening.
ANS:
Perform a credit check and require management approval for all sales to accounts that are overdue. PTS: 1
13. What specific internal control procedure would prevent a customer from being billed for all 50
items ordered although only 40 items were shipped?
ANS:
Billing should reconcile the shipping report with the sales order. PTS: 1
Chapter 5—The Expenditure Cycle Part I: Purchases and Cash Disbursements Procedures
TRUE/FALSE
1. Purchasing decisions are authorized by inventory control.
ANS: T
2. The blind copy of the purchase order that goes to the receiving department contains no item
descriptions.
ANS: F
3. Firms that wish to improve control over cash disbursements use a voucher system.
ANS: T
4. In a voucher system, the sum of all unpaid vouchers in the voucher register equals the firm’s
total
voucher payable balance.
ANS: T
5. The accounts payable department reconciles the accounts payable subsidiary ledger to the
control
account.
ANS: F
6. The use of inventory reorder points suggests the need to obtain specific authorization.
ANS: F
7. Proper segregation of duties requires that the responsibility approving a payment be separated
from
posting to the cash disbursements journal.
ANS: T
8. A major risk exposure in the expenditure cycle is that accounts payable may be overstated at
the end of
the accounting year.
ANS: F
9. When a trading partner agreement is in place, the traditional three way match may be
eliminated.
ANS: T
10. Authorization of purchases in a merchandising firm occurs in the inventory control
department.
ANS: T
11. A three way match involves a purchase order, a purchase requisition, and an invoice.
12.
13.
14.
15.
16.
17.
18.
19.
20. ANS: F Authorization for a cash disbursement occurs in the cash disbursement department
upon receipt of the supplier’s invoice. ANS: F An automated cash disbursements system can
yield better cash management since payments are made on time. ANS: T Permitting warehouse
staff to maintain the only inventory records violates separation of duties. ANS: T A purchasing
system that employs electronic data interchange does not use a purchase order. ANS: F Inventory
control should be located in the warehouse. ANS: F Inspection of shipments in the receiving
department would be improved if the documentation showed the value of the inventory. ANS: F
One reason for authorizing purchases is to enable efficient inventory management. ANS: T If
accounts payable receives an invoice directly from the supplier it needs to be reconciled with the
purchase order and receiving report. ANS: T Supervision in receiving is intended to reduce the
theft of assets.
ANS: T
MULTIPLE CHOICE
1. The purpose of the purchase requisition is to
a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. bill for goods delivered
ANS: C
2. The purpose of the receiving report is to
d. bill for goods delivered
ANS: B
3. All of the following departments have a copy of the purchase order except
a. the purchasing department
b. the receiving department
c. accounts payable
d. general ledger
ANS: D
4. The purpose of the purchase order is to
a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. approve payment for goods received
ANS: A
5. The open purchase order file in the purchasing department is used to determine
a. the quality of items a vendor ships
b. the best vendor for a specific item
c. the orders that have not been received
d. the quantity of items received
ANS: C
6. The purchase order
a. is the source document to make an entry into the accounting records
b. indicates item description, quantity, and price
c. is prepared by the inventory control department
d. is approved by the end-user department
ANS: B
7. The reason that a blind copy of the purchase order is sent to receiving is to
a. inform receiving when a shipment is due
b. force a count of the items delivered
c. inform receiving of the type, quantity, and price of items to be delivered
d. require that the goods delivered are inspected
ANS: B
8. The receiving report is used to
a. accompany physical inventories to the storeroom or warehouse
b. advise the purchasing department of the dollar value of the goods delivered
c. advise general ledger of the accounting entry to be made
d. advise the vendor that the goods arrived safely
ANS: A
9. When a copy of the receiving report arrives in the purchasing department, it is used to
d. recognize the purchase order as closed
ANS: D
10. The financial value of a purchase is determined by reviewing the
a. packing slip
b. purchase requisition
c. receiving report
d. supplier’s invoice
ANS: D
11. Which document is least important in determining the financial value of a purchase?
a. purchase requisition
b. purchase order
c. receiving report
d. supplier’s invoice
ANS: A
12. In a merchandising firm, authorization for the payment of inventory is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements
ANS: C
13. In a merchandising firm, authorization for the purchase of inventory is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements
ANS: A
14. When purchasing inventory, which document usually triggers the recording of a liability?
a. purchase requisition
b. purchase order
c. receiving report
d. supplier’s invoice
ANS: D
15. Because of time delays between receiving inventory and making the journal entry
a. liabilities are usually understated
b. liabilities are usually overstated
c. liabilities are usually correctly stated
d. none of the above
ANS: A
16. Usually the open voucher payable file is organized by
d. transaction date
ANS: B
17. Which of the following statements is not correct?
a. the voucher system is used to improve control over cash disbursements
b. the sum of the paid vouchers represents the voucher payable liability of the firm
c. the voucher system permits the firm to consolidate payments of several invoices on one
voucher
d. many firms replace accounts payable with a voucher payable system
ANS: B
18. In the expenditure cycle, general ledger does not
a. post the journal voucher from the accounts payable department
b. post the account summary from inventory control
c. post the journal voucher from the purchasing department
d. reconcile the inventory control account with the inventory subsidiary summary
ANS: C
19. The documents in a voucher packet include all of the following except
a. a check
b. a purchase order
c. a receiving report
d. a supplier’s invoice
ANS: A
20. To maintain a good credit rating and to optimize cash management, cash disbursements
should arrive
at the vendor’s place of business
a. as soon as possible
b. on the due date
c. on the discount date
d. by the end of the month
ANS: C
21. The cash disbursement clerk performs all of the following tasks except
a. reviews the supporting documents for completeness and accuracy
b. prepares checks
c. signs checks
d. marks the supporting documents paid
ANS: C
22. When a cash disbursement in payment of an accounts payable is recorded
a. the liability account is increased
b. the income statement is changed
c. the cash account is unchanged
d. the liability account is decreased
ANS: D
Chapter 6—The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures
TRUE/FALSE
1. Time cards are used by cost accounting to allocate direct labor charges to work in process.
ANS: F
2. The personnel department authorizes changes in employee pay rates.
ANS: T
3. Most payroll systems for mid-size firms use real-time data processing.
ANS: F
4. To improve internal control, paychecks should be distributed by the employee's supervisor.
ANS: F
5. Employee paychecks should be drawn against a special checking account.
ANS: T
6. Because a time clock is used, no supervision is required when employees enter and leave the work
place.
ANS: F
7. Inventory control performs the formal record keeping function for fixed assets.
ANS: F
8. The depreciation schedule shows when assets are fully depreciated.
ANS: T
9. Authorization to dispose of fixed assets should be issued by the user of the asset.
ANS: F
10. Work-in-process records are updated by payroll personnel.
ANS: F
11. Ideally, payroll checks are written on a special bank account used only for payroll.
ANS: T
12. The supervisor is the best person to determine the existence of a “phantom employee” and should
distribute paychecks.
ANS: F
13. Payroll processing can be automated easily because accounting for payroll is very simple.
ANS: F
14. Timekeeping is part of the personnel function.
ANS: F
15. Fixed asset accounting systems include cost allocation and matching procedures that are not part of
routine expenditure systems.
ANS: T
16. Asset maintenance involves only the recording of depreciation charges. Physical improvements are
always expensed.
ANS: F
17. Fixed Asset Systems must keep track of the physical location of each asset to promote accountability.
ANS: T
18. Time cards capture the total time an individual worker spends on each production job.
ANS: F
19. Accounting conventions and IRS rules sometime specify the depreciation parameters to be used.
ANS: T
20. The fixed asset disposal report authorizes the user department to dispose of a fixed asset.
ANS: F
MULTIPLE CHOICE
1. The document that captures the total amount of time that individual workers spend on each production
job is called a
a time card
.
b job ticket
.
c personnel action form
.
d labor distribution form
.
ANS: B
2. An important reconciliation in the payroll system is
a general ledger compares the labor distribution summary from cost accounting to the
. disbursement voucher from accounts payable
b personnel compares the number of employees authorized to receive a paycheck to the
. number of paychecks prepared
c production compares the number of hours reported on job tickets to the number of hours
. reported on time cards
d payroll compares the labor distribution summary to the hours reported on time cards
.
ANS: A
3. Which internal control is not an important part of the payroll system?
a Supervisors verify the accuracy of employee time cards.
.
b Paychecks are distributed by an independent paymaster.
.
c Accounts payable verifies the accuracy of the payroll register before transferring payroll
. funds to the general checking accounting.
d General ledger reconciles the labor distribution summary and the payroll disbursement
. voucher.
ANS: C
4. Which transaction is not processed in the Fixed Asset System?
a purchase of building
.
b improvement of equipment
.
c purchase of raw materials
.
d sale of company van
.
ANS: C
5. Depreciation
a is calculated by the department that uses the fixed asset
.
b allocates the cost of the asset over its useful life
.
c is recorded weekly
.
d results in book value approximating fair market value
.
ANS: B
6. Depreciation records include all of the following information about fixed assets except
a the economic benefit of purchasing the asset
.
b the cost of the asset
.
c the depreciation method being used
.
d the location of the asset
.
ANS: A
7. Which control is not a part of the Fixed Asset System?
a formal analysis of the purchase request
.
b review of the assumptions used in the capital budgeting model
.
c development of an economic order quantity model
.
d estimates of anticipated cost savings
.
ANS: C
8. Objectives of the Fixed Asset System do not include
a authorizing the acquisition of fixed assets
.
b recording depreciation expense
.
c computing gain and/or loss on disposal of fixed assets
.
d maintaining a record of the fair market value of all fixed assets
.
ANS: D
9. Which of the following is not a characteristic of the Fixed Asset System?
a Acquisitions are routine transactions requiring general authorization.
.
b Retirements are reported on an authorized disposal report form.
.
c Acquisition cost is allocated over the expected life of the asset.
.
d Transfer of fixed assets among departments is recorded in the fixed asset subsidiary
. ledger.
ANS: A
10. In the payroll subsystem, which function should distribute paychecks?
a personnel
.
b timekeeping
.
c paymaster
.
d payroll
.
ANS: C
11. Where does the responsibility lie for reconciling the labor distribution summary and the payroll
disbursement voucher?
a cash disbursements
.
b cost accounting
.
c personnel
.
d general ledger
.
ANS: D
12. Which of the following statements is not true?
a Routine payroll processing begins with the submission of time cards.
.
b Payroll clerks must verify the hours reported on the time cards.
.
c Payroll reconciles personnel action forms with time cards and prepares paychecks.
.
d Cash disbursements signs paychecks and forwards them to the paymaster for distribution.
.
ANS: B
13. In a manufacturing firm, employees use time cards and job tickets. Which of the following statements
is not correct?
a Job tickets are prepared by employees for each job worked on, so an employee may have
. more that one job ticket on a given day.
b An individual employee will have only one time card.
.
c The time reported on job tickets should reconcile with the time reported on time cards.
.
d Paychecks should be prepared from the job tickets.
.
ANS: D
14. Which department is responsible for approving changes in pay rates for employees?
a payroll
.
b treasurer
.
c personnel
.
d cash disbursements
.
ANS: C
15. Which of the following situations represents a serious control weakness?
a Timekeeping is independent of the payroll department.
.
b Paychecks are distributed by the employees immediate supervisor.
.
c Time cards are reconciled with job tickets.
.
d Personnel is responsible for updating employee records, including creation of records for
. new hires.
ANS: B
16. Why would an organization require the paymaster to deliver all unclaimed paychecks to the internal
audit department?
a to detect a “phantom employee” for whom a check was produced
.
b to prevent an absent employee’s check from being lost
.
c to avoid paying absent employees for payday
.
d to prevent the paymaster from cashing unclaimed checks
.
ANS: A
17. Which of the following is not a reasonable control for fixed assets?
a Proper authorization is required for acquisition and disposal of fixed assets.
.
b Fixed asset records show the location of each asset.
.
c Fully depreciated assets are immediately disposed of.
.
d Depreciation policies are in writing.
.
ANS: C
18. Cost accounting updates work-in-process accounts from
a time cards
.
b the labor distribution summary
.
c job tickets
.
d personnel action forms
.
ANS: C
19. Payroll uses time card data to do all of the following except
a prepare the payroll register
.
b update employee payroll records
.
c prepare the labor distribution summary
.
d prepare paychecks
.
ANS: C
20. Payroll checks are typically drawn on
a the regular checking account
.
b a payroll imprest account
.
c a wages payable account
.
d petty cash
.
ANS: B
21. The personnel action form provides authorization control by
a preventing paychecks for terminated employees
.
b verifying pay rates for employees
.
c informing payroll of new hires
.
d all of the above
.
ANS: D
22. Accounting records that provide the audit trail for payroll include all of the following except
a time cards
.
b job tickets
.
c payroll register
.
d accounts payable register
.
ANS: D
23. Personnel actions forms are used to do all of the following except
a activate new employees
.
b terminate employees
.
c record hours worked
.
d change pay rates
.
ANS: C
24. The payroll department performs all of the following except
a prepares the payroll register
.
b distributes paychecks
.
c updates employee payroll records
.
d prepares paychecks
.
ANS: B
25. The document that records the total amount of time spent on a production job is the
a time card
.
b job ticket
.
c labor distribution summary
.
d personnel action form
.
ANS: C
26. A control technique that can reduce the risk of a terminated employee being paid is
a a security camera viewing the time clock
.
b the supervisor taking role during the shift
.
c paychecks being distributed by an independent paymaster
.
d reconciliation of time cards and job tickets
.
ANS: C
27. Accounts payable
a signs paychecks
.
b prepares the payroll voucher
.
c reconciles time cards and employee records
.
d distributes paychecks to employees
.
ANS: B
28. All of the following are processed by the Fixed Asset System except
a sale of unneeded equipment
.
b purchase of raw materials
.
c repair of production equipment
.
d purchase of a new plant
.
ANS: B
29. The Fixed Asset System performs all of the following except
a determines the need for new assets
.
b maintains depreciation records
.
c records retirement and disposal of assets
.
d tracks the physical location of fixed assets
.
ANS: A
30. The payroll department performs all of the following except
a prepares paychecks
.
b transfers adequate funds to the payroll imprest account
.
c updates employee payroll records
.
d prepares the payroll register
.
ANS: B
31. Depreciation
a assures that assets are reported at fair market value
.
b is discretionary for many firms
.
c allocates the cost of an asset over its useful life
.
d is the responsibility of the department using the asset
.
ANS: C
32. The Fixed Asset System is similar to the expenditure cycle except
a fixed asset transactions are non-routine and require special authorization and controls
.
b fixed assets are capitalized, not expensed
.
c both a and b
.
d none of the above
.
ANS: C
33. Asset maintenance involves
a the recording of periodic depreciation
.
b adjusting the asset records to reflect the cost of physical improvements
.
c keeping track of the physical location of the assets
.
d all of the above
.
ANS: D
34. The Fixed Asset Systems does all of the following except
a records acquisition of assets
.
b records improvements to assets
.
c estimates the fair market value of assets in service
.
d records the disposal of assets
.
ANS: C
35. Asset disposal
a occurs as soon as an asset is fully depreciated
.
b requires no special authorization
.
c automatically initiates the purchase of a replacement asset
.
d must follow formal authorization procedures
.
ANS: D
SHORT ANSWER
1. Describe an internal control procedure that would prevent an employee from punching the time clock
for another, absent employee.
ANS:
supervision of the time clock at the start of the shift
2. Why should the employee’s supervisor not distribute paychecks?
ANS:
A form of payroll fraud involves a supervisor submitting fraudulent time cards for nonexistent
employees. The resulting paychecks, when returned to the supervisor are then cashed by the
supervisor.
3. Describe an internal control procedure that would prevent a supervisor from stealing the unclaimed
paychecks of employees who have been terminated.
ANS:
This type of fraud can be reduced or eliminated by using a paymaster to distribute paychecks to
employees in person. Any uncollected paychecks are then returned to payroll. Also, mail final
paychecks to terminated employees.
4. Why should employee paychecks be drawn against a special checking account?
ANS:
A separate imprest account is established for the exact amount of the payroll based on the payroll
summary. When the paychecks are cashed, this account should clear leaving a zero balance. Any errors
in checks (additional checks or abnormal amounts) would result in a non-zero balance in the imprest
account and/or some paycheck would not clear. This will alert management to the problem so
corrective action can be taken.
5. Why should employees clocking on and off the job be supervised.
ANS:
A form of payroll fraud involves employees clocking the time cards of absent employees. By
supervising the clocking in and out process, this fraud can be reduced or eliminated.
6. What is a personnel action form?
ANS:
The personnel action form provides the payroll department with a list of currently active employees, so
that any submission of time cards by supervisors for fictitious or ex-employees will not be processed.
7. In a manufacturing firm, employees typically fill out two different documents regarding their time
worked. What are they? Why are there two?
ANS:
The two documents are the time card and the job ticket. Two are required because the time card
records all the time worked by an employee during the period while the job ticket details the time by
project.
8. List two types of authorization required in the Fixed Asset System.
ANS:
authorization to purchase the asset and to dispose of the asset
9. List four types of data that appear on a depreciation schedule.
ANS:
item description, depreciation method, useful life, date acquired, cost, salvage value, accumulated
depreciation, depreciation expense per period, book value
10. Which documents prompt the fixed asset department to create a fixed asset record?
ANS:
the receiving report and the disbursement voucher
11. Describe an internal control that would prevent an employee from stealing a computer and then
reporting it as scrapped.
ANS:
Supervisors must authorize the disposal of the computer. Unless so authorized, the record will continue
to show that the employee is responsible for the computer.
12. Describe an internal control that would prevent the payment of insurance premiums on an automobile
that is no longer owned by the company.
ANS:
Perform an annual physical inventory of fixed assets and adjust the records to reflect assets no longer
on hand. Prepare reports about the disposal of assets.
13. Describe an internal control that would prevent the charging of depreciation expense to the
maintenance department for a sweeper that is now located in and used by the engineering department.
ANS:
Prepare reports about the transfer of fixed assets. Perform an annual physical inventory and note the
location of assets. Budget and then hold each department accountable for depreciation expense for
assets located in each department.
14. Describe an internal control that would prevent the acquisition of office equipment which is not
needed by the firm.
ANS:
A higher organizational level or other appropriate person authorizes fixed asset acquisitions; part of the
authorization is showing that a need for the asset exists.
15. What negative consequences result when fixed asset records include assets that are no longer owned
by the firm?
ANS:
On the financial statements, assets will be overstated and depreciation expense could be overstated.
Assets on property tax returns will be overstated and too much tax will be paid. Insurance premiums
will be paid on nonexistent assets.
16. Explain the purpose of each of the following documents used in the payroll system:
the personnel action form, the job ticket, the time card.
ANS:
The personnel action form is a document which identifies employees who should receive a paycheck;
reflects changes in pay rates, payroll deductions, and job classifications.
The job ticket collects information on the time individual workers spend on each production job.
The time card captures the total time that an employee is at work.
17. How do fixed asset systems differ from the expenditure cycle?
ANS:
The fixed asset system processes nonroutine transactions for a wider group of users in the organization
than the expenditure cycle. Further, the expenditure cycle processes routine acquisitions of raw
materials inventories for the production function and finished goods inventories for the sales function.
The expenditure cycle transactions are oftentimes automatically approved by the system, while fixed
asset transaction approvals typically demand individual attention due to the uniqueness of the
transactions.
18. What is recorded by the asset maintenance part of the Fixed Asset System?
ANS:
periodic depreciation following an approved depreciation schedule and physical improvements to the
asset to increase the subsidiary account and to adjust the depreciation schedule
19. How are the following carried out in the Fixed Asset System: authorization, supervision, independent
verification?
ANS:
Independent authorization is required to acquire an asset and to formalize the depreciation schedule.
Supervision must be exercised over the physical assets.
Independent verification must confirm the location, existence, and condition of the assets.
20. Which department authorizes changes to employee pay rates?
ANS:
The personnel department via the personnel action form
ESSAY
1. The Golf Club Company makes custom golf clubs. The manufacturing supervisor interviews people
who have specialized manufacturing skills, and he informs payroll when an employee is hired. The
employees use a time clock to record the hours they work. The employees are also required to keep a
record of the time they spend working on each order. The supervisor approves all time cards.
The accountant analyzes the job tickets and prepares a labor distribution summary. Payroll prepares the
payroll register and paychecks. The supervisor distributes the paychecks to the employees. Payroll
informs cash disbursement of the funds required to cover the entire payroll amount. The cash
disbursements clerk ensures that there are adequate funds in the company's regular checking account to
cover the payroll.
Describe at least three internal control weaknesses; for each weakness suggest an improvement to
internal control.
ANS:
WEAKNESS: The supervisor could be creating fictitious employees. The supervisor has too many
incompatible duties; he hires workers, approves the time cards, and distributes the paychecks.
IMPROVEMENT: Segregate duties. Personnel should hire employees and a paymaster should
distribute paychecks.
WEAKNESS: Employees could be paid for time they do not work; a co-worker could record an
absent worker as present (punch the time clock).
IMPROVEMENT: Supervise the time clock. Reconcile time cards and job time tickets.
WEAKNESS: Payroll has authorization and transaction processing responsibilities. Payroll is
authorizing the disbursement to fund the entire payroll. Accounts payable is not part of the system.
IMPROVEMENT: Segregate duties; accounts payable should verify the accuracy of the payroll
register and create a disbursement voucher.
WEAKNESS: Payroll is funded through the general checking account.
IMPROVEMENT: Paychecks should be written on a separate payroll account.
2. Describe how the Fixed Asset System differs from the expenditure cycle.
ANS:
The Fixed Asset System processes nonroutine transactions which are recorded as capital assets. The
receiving department delivers fixed assets to the user/manager. The fixed asset department performs
the record keeping function.
The expenditure cycle processes routine transactions which are often debited to inventory or expensed.
The receiving department delivers routine purchases to a central store or warehouse. Inventory Control
performs the record keeping function for inventory purchases.
3. Three major tasks are handled by the Fixed Asset System. What is the purpose of each? What special
control issues affect each?
ANS:
Asset acquisition handles the steps leading to the acquisition of new fixed assets: recognition of need,
authorization and approval, possible capital investment analysis, and selection of supplier. Because of
the value of fixed assets, special approvals are needed.
Asset maintenance involves adjusting the subsidiary account balances for depreciation, and
improvements and tracking location. Control involves accountability by keeping track of the physical
location of each asset.
Asset disposal handles the removal of assets from the subsidiary ledger when the asset is taken out of
service. This requires special approval and preparation of a disposal report.
4. The Baccus Corp. manufactures medical equipment. This is a capital intensive industry and
investments in fixed assets exceed $5 million a year. The minimum cost for production equipment is
$75,000. When supervisors want new production machinery, they contact the plant manager. The plant
manager approves or denies the request based on discussions with the production supervisor, the repair
and maintenance supervisor, and the quality control supervisor.
A purchase order is prepared by the purchasing department and sent to one of the three major suppliers
of production machinery for medical equipment. The equipment is delivered immediately to the
production floor and put into service. At the end of the month, the production supervisor informs the
general ledger clerk about the receipt of the machinery. The general ledger clerk establishes an asset
record for the machine. At the end of the year, the general ledger clerk computes straight-line
depreciation based on a 10-year life with a 10 percent salvage value. Depreciation expense is recorded
as a direct reduction of the asset cost.
The repair department performs routine maintenance on all of the production equipment. Occasionally
the repair department rebuilds a machine to extend its useful life. All of the costs associated with the
repair department are charged to manufacturing overhead. When a machine becomes obsolete,
production employees move it to a corner of the factory floor and break it down so that parts can be
used in other machines. Production employees routinely remove parts for personal use. Some smaller
machines have disappeared completely from the factory floor.
The general ledger clerk takes a physical inventory every three years. About 75 percent of the fixed
assets can be located and identified. Other assets have serial numbers that are inaccessible, so the item
cannot be matched to a fixed asset record. Some fixed asset records cannot be traced to an actual item.
Several machines that have been scrapped and are being used for spare parts were matched to fixed
asset records. At the last inventory, the general ledger clerk did not make any adjustments to the fixed
asset records explaining that 75 percent accuracy in the fixed asset physical inventory was excellent.
Describe five internal control weaknesses and explain how to correct them.
ANS:
WEAKNESS: There is no written documentation of the approval for purchase.
IMPROVEMENT: A formal capital investment analysis should be performed for purchases of fixed
assets; the analysis should evaluate cost and benefits of the request.
WEAKNESS: There is no process for obtaining competitive bids.
IMPROVEMENT: Price bids should be obtained from the three suppliers before a purchase order is
issued.
WEAKNESS: Fixed assets are delivered directly to the factory floor.
IMPROVEMENT: All purchases should go through the receiving department; the equipment should
be inspected and a receiving report should be prepared.
WEAKNESS: The production supervisor notifies the general ledger clerk about the receipt of fixed
assets.
IMPROVEMENT: The receiving department should send a copy of the receiving report to the fixed
asset department so that fixed asset records can be updated and accountability for the asset established.
WEAKNESS: The general ledger clerk is maintaining fixed asset records.
IMPROVEMENT: The fixed asset department should maintain fixed asset records.
WEAKNESS: Depreciation is computed using a standard method, asset life, and salvage value.
IMPROVEMENT: Management should ensure that the depreciation method is appropriate. The asset
life and salvage value should be determined individually for each fixed asset acquisition.
WEAKNESS: Depreciation is recorded as a direct reduction of the asset cost.
IMPROVEMENT: Depreciation should be recorded in an Accumulated Depreciation account for each
asset.
WEAKNESS: Costs to rebuild a machine is charged to manufacturing overhead.
IMPROVEMENT: Costs to rebuild machines should be recorded as an increase to the cost of the
asset.
WEAKNESS: There is no authorization to scrap an obsolete machine.
IMPROVEMENT: Obtain written authorization from management before a machine is scrapped.
WEAKNESS: Employees remove equipment and equipment parts from the premises without
authorization.
IMPROVEMENT: Employees should receive written authorization before removing parts or
equipment from the factory.
WEAKNESS: The general ledger clerk is conducting the physical inventory and maintaining the
record keeping.
IMPROVEMENT: The general ledger clerk should not be taking the physical inventory count. Also,
the physical count should occur more frequently.
WEAKNESS: Fixed assets cannot be matched with records.
IMPROVEMENT: Apply easily accessible labels to identify fixed assets.
WEAKNESS: Fixed assets cannot be located and are not removed from the books.
IMPROVEMENT: Fixed assets that cannot be located must be removed from the fixed asset records.
WEAKNESS: Fixed assets that are scrapped remain on the books.
IMPROVEMENT: Assets that are scrapped should be removed from the fixed asset records.
WEAKNESS: The clerk regards 75% accuracy as excellent.
IMPROVEMENT: Acceptance of 75% accuracy is poor. Any variation should be investigated and
records updated.
5. Why does the payroll process lend itself to batch processing?
ANS:
Payroll lends itself to batch computerization because it is processed at fixed time intervals which
permits some time lag. Processing the payroll file usually involves most employees each time it is
processed, which is an efficient use of computer resources and can be accomplished with a single pass
through the file.
6. Discuss the fundamental risk and control issues associated with fixed assets that are different from raw
materials and finished goods.
ANS:
AUTHORIZATION CONTROLS. Because fixed assets are requested and employed by end-users
asset acquisitions should be formal and explicitly authorized. Each material transaction should be
initiated by a written request from the user or department. In the case of high-value items, there should
be an independent approval process that evaluates the merits of the request on a cost-benefit basis.
SUPERVISION CONTROLS. Because capital assets are widely distributed around the organization,
they are more susceptible to theft and misappropriation than inventories that are secured in a
warehouse. Therefore, management supervision is an important element in the physical security of
fixed assets. Supervisors must ensure that fixed assets are being used in accordance with the
organization’s policies and business practices.
INDEPENDENT VERIFICATION CONTROLS.
1. Periodically, the internal auditor should review the asset acquisition and approval procedures to
determine the reasonableness of key factors including: the useful life of the asset, the original
financial cost, proposed cost savings as a result of acquiring the asset, the discount rate used, and
the capital budgeting method used in justifying decisions to buy or dispose of assets.
2. The internal auditor should verify the location, condition, and fair value of the organization’s fixed
assets against the fixed asset records in the subsidiary ledger.
3. The automatic depreciation charges calculated by the fixed asset system should be reviewed and
verified for accuracy and completeness. System errors that miscalculate depreciation can result in
the material misstatement of operating expenses, reported earnings, and asset values.