REVIEW QUESTIONS 1. What three transaction cycles exist in all businesses? The expenditure cycle, the conversion cycle, and the revenue cycle are the three transaction cycles that exist in most of the firm’s economic activities. 2. Name the major subsystems of the expenditure cycle. The four major subsystems of the expenditure cycle: • • • • Purchases / Accounts Payable System – It records purchases by increasing inventory along with accounts payable. Cash Disbursement Systems – It authorizes the payment when the amounts in purchases / accounts payable system are due. This transaction decreases cash and accounts payable. Payroll System – It collects labour usage data for each employee, computes the payroll and disburses pay checks to employees. Fixed Asset System – It processes transactions pertaining to the acquisition, maintenance, and disposal of fixed assets such as land, buildings, machinery and equipment. 3. Identify and distinguish between the physical and financial components of the expenditure cycle. The physical component refers to the acquisition of goods while the financial component pertains to the cash disbursement or payment to the supplier. 4. Name the major subsystems of the conversion cycle. The two major subsystem of the conversion cycle are: • • Production system – This involves the happenings in a manufacturing process like planning, scheduling, raw materials requirements, movement of materials to the work-in-process, etc. Cost accounting system – It monitors the flow of cost information related to production. 5. Name the major subsystems of the revenue cycle. The two major subsystems of the revenue cycle are: • • Sales order processing – This processes credit sales which involves tasks such as preparing sales orders, granting credit, billing customers etc. Cash receipts – This processes cash sales wherein there is a collection of cash, depositing cash in the bank, and recording these events in the book of accounts. 6. Name the three types of documents. The three types of documents are: • • • Source Documents – These are economic events that happen at the beginning of a transaction which created a document. Product Documents – These are the result of transaction processing. Turnaround Documents – These are product documents of one system that become source documents for another system. 7. Name the two types of journals. The two types of journals are: • • Special Journals – These are used to record specific classes of transactions that normally occur in high volume such as cash receipts journal, cash disbursement journal, purchases journal and the payroll journal. General Journals – These are used to record occasional, unusual and unlike transactions such as depreciation. 8. Distinguish between a general journal and journal vouchers. A general journal is used to record occasional and infrequent transactions while the journal voucher is also used to record a single nonrecurring and infrequent transaction, but it is used as a special source document for the transaction. The total of journal vouchers processed is equivalent to the general journal. 9. Name the two types of ledgers. The two types of ledgers are: • • General Ledger – This contains information in a summarized form. Subsidiary Ledger – This contains information of an individual account in a detailed form. This includes inventory, accounts payable, payroll, etc. 10. What is an audit trail? An audit trail allows the auditor to have a summarized total in the financial statements and be able to track the individual transactions or events that make up the total amount. The review of selected accounts and transactions determine the validity, accuracy and completeness of financial statements. 11. What is the confirmation process? The confirmation process is made to validate the transaction/s made by a customer whether he/she really transacted with the company and if it is valid. This process helps the auditor form an opinion about the accuracy of accounts receivable in the balance sheet. 12. Computer-based systems employ four types of files. Name them. The four types of files that computer-based systems employ are: • • • • Master Files – It contains account data such as general ledger and subsidiary ledger. Data values in master files are updated from transactions. Transaction Files – These are considered temporary files because these are only used to update data in master files. Example of transaction files are sales order, inventory receipts, and cash receipts. Reference Files – It stores data that are used as standards for processing transactions like tax table for reference in calculating the proper amount of withholding tax for payroll transactions. Archive Files – It contains records of past transactions that are retained for future reference. 13. Give an example of a record that might comprise each of the four file types found in a computer-based systems. As mentioned above, master files correspond to general ledger accounts and subsidiary ledgers such as accounts receivable and customer subsidiary accounts, accounts payable and vendor subsidiary accounts, inventory, etc. Transaction files correspond to general and special journals. Examples include the general journal, sales journals, cash receipts journals, payroll journals, etc. Reference files include lists of vendors, delinquent customers, tax tables, sales tax rates, discount rates, lists of customers granted specific discounts, etc. Archive files are typically composed of records that have been processed but are retained for their history. Examples include payroll transactions, sales transactions, etc. 14. What is the purpose of a digital audit trail? The digital audit trail, just like the paper trail, allows us to trace and track transactions from the financial statement balance back to the actual transaction to be able to: • • • • Compare balances Perform reconciliations Select and trace samples of entries Identify, pull, and verify specific transactions. 15. Give an example of how cardinality relates to business policy. Cardinality reflects normal business rules as well as organizational policy. For instance, the 1:1 cardinality suggests that each employee in the organization is assigned one desktop or laptop. If instead the organization’s policy were to assign a single desktop or laptop to one or more employee that share it, this policy would be reflected by a 1:M relationship. Conversely, M:M example is supply or purchases of a business wherein there are many suppliers and inventory. 16. Distinguish between entity relationship diagrams, data flow diagrams, and system flowcharts. Entity relationship diagrams represent the relationship between entities resources (cash, equipment, inventory), events (purchasing, shipping of goods, returns and allowances), and agents (salesperson, suppliers, customers) in a system. Meanwhile, dataflow diagrams represent the logical elements (what is being done) of a system by illustrating processes, data sources, data flows, and entities. System flowcharts represent the physical elements being used like how the tasks are being conducted by illustrating the relationship between input sources, program, and output products. It can also represent both the logical and physical elements of manual systems and illustrate the preparation and handling of documents. 17. What is meant by cardinality in entity relationship diagrams? Cardinality refers to the numerical mapping between entity instances, and it is a matter of organization policy. The relationship can be one-to-one (1:1), one-to-many (1:M), or many-to-many (M:M). 18. For what purpose are entity relationship diagrams are used? An entity relationship (ER) diagram is a documentation technique used to represent the relationship between entities (resources, events and agents). One common use for ER diagrams is to model an organization’s database. 19. What is an entity? The three entities under entity relationship diagrams are: • • • Physical resources – cash, machinery and equipment, inventory, etc. Events – purchasing, collection of cash, sales of goods, etc. Agents – salesperson, suppliers, customers, etc. 20. Distinguish between batch and real-time processing. Batch processing occurs when similar transactions are accumulated over time and processed together such as daily cash receipts which are independent of one another. Meanwhile, real-time processing captures each event or transaction and processes it before engaging in another transaction such as credit sales, ticket sales, etc. wherein transactions are dependent on one another, 21. Distinguish between the sequential file and data-base approaches to data backup. When updating, sequential master files are completely reproduced in the form of a physically new file, thus creating a duplicate or backup copy automatically while database uses destructive update procedures and require separate backup procedures. 22. Is a data flow diagram an effective documentation technique for identifying who or what performs a particular task? Explain. No. A data flow diagrams only shows which tasks are being performed, and not who performs them. It depicts the logical system. 23. Is a flowchart an effective documentation technique for identifying who or what performs a particular task? Explain. Yes, a flowchart depicts the physical system and illustrates what type of and where a task is performed and who is performing it. 24. How may batch processing be used to improve operational efficiency? A single transaction may affect several different accounts. Some of these accounts may not need to be updated in real time. In fact, the task of doing so takes time which, when multiplied by hundreds or thousands of transactions, can cause significant processing delays. Thus, batch processing of noncritical accounts improves operational efficiency by eliminating unnecessary activities at critical points in the process. 25. Why might an auditor use a program flowchart? The auditor needs detail about its internal logic so he/she uses program flowcharts to verify the correctness of program logic. They compare flowcharts to the actual program code to determine whether the program is actually doing what the documentation describes. 26. How are system flowcharts and program flowcharts related? The system flowchart shows the relationship between two computer programs, the files that they use, and the outputs that they produce. This flowchart is in a summarized form while a program flowchart provides this details on system flowchart. Every program represented in a system flowchart should have a supporting program flowchart that describes its logic. 27. What are the distinguishing features of a legacy system? Legacy systems tend to have the following distinguishing features: • • • They are mainframe-based applications They tend to be batch-oriented Early legacy systems use flat files for data storage. However, hierarchical and network databases are often associated with later-era legacy systems. These highly structured and inflexible storage systems promote a single-user environment that discourages information integration within business organizations. 28. What are the two data processing approaches used in modern systems? The two data processing approaches used in modern systems are: • • Batch Processing – It occurs when similar transactions are accumulated over time and processed together such as daily cash receipts which are independent of one another. Real-time Processing – It captures each event or transaction and processes it before engaging in another transaction such as credit sales, ticket sales, etc. wherein transactions are dependent on one another. 29. How is backup of database files accomplished? Prior to each batch update or periodically, the master file being updated is copied to create a backup version of the original file. Should the current master be destroyed after the update process, reconstruction is possible in two stages: • First, a special recovery program uses the backup file to create a preupdate version of the master file. • Second, the file update process is repeated using the previous batch of transactions to restore the master to its current condition. 30. What information is provided by a record layout diagram? Record layout diagrams are used to reveal the internal structure of the records that constitute a file or database table. The layout diagram usually shows the name, data type, and length of each attribute in the record. 31. In one sentence, what does updating a master file record involve? Updating a master file record involves changing the value of one or more of its variable fields to reflect the effects of a transaction. 32. Comment on the following statement: ‘‘Legacy systems always use flat-file structures.’’ A flat-file structure is a single-view model that characterizes legacy systems in which data files are structured, formatted, and arranged to suit the specific needs of the owner or primary user of the system. However, such structuring may omit or corrupt data attributes that are essential to other users, thus preventing successful integration of systems across the organization. 33. Explain the technique known as destructive update. Destructive update involves replacing an old data value with a new value and destroying the original. 34. What factor influences the decision to employ real-time data collection with batch updating rather that purely real-time processing? Explain. Realtime processing is better suited to systems that process lower transaction volumes and those that do not share common records. Meanwhile, batch updating is recommended for high volume transactions. The key factor is transaction volume. Largescale systems that process high volumes of transactions often use real-time data collection and batch updating. Master file records that are unique to a transaction such as customer accounts and individual inventory records can be updated in real time without causing operational delays. Common accounts should be updated in batch mode. 35. What are the advantages of real-time data processing? The advantages of real-time data processing are: • • • • The master files are updated as soon as the transaction is submitted and accepted into the system. Reports are more accurate in the sense that the information is as current as possible. Faster operational response time to customer requests such as the shipping of an order. Reduction of paper and storage space of physical source documents. 36. What are the advantages of real-time data collection? By collecting data in real time, certain transaction errors can be prevented or detected and corrected as soon as possible at their source. 37. What are some of the more common uses of data codes in accounting information systems? Some of the common uses of data codes in accounting information systems are: • • • Block codes – for the general ledger accounts Sequential codes – for documents Group codes – for coding transactions 38. Compare and contrast the relative advantages and disadvantages of sequential, block, group, alphabetic, and mnemonic codes. • • • Sequential codes are appropriate for items in either an ascending or descending sequence, such as the numbering of checks or source documents. o Advantage: During batch processing, any gaps detected in the sequence are a signal that a transaction may be missing. o Disadvantage: Codes carry little information other than the sequence order. Also, sequential codes are difficult to manage when items need to be added; the sequence needs either to be reordered or the items must be added to the end of the list. Block codes provide some restricting to each class into a pre-specified range. The first digit typically represents a class, whereas the following digits are sequential items which may be spaced in intervals in case of future additions. An example of block coding is a chart of accounts. o Advantage: It provides some remedies to sequential codes. o Disadvantage: The information content does not provide much meaning such as an account number only means something if the chart of accounts is known. Group codes may be used to represent complex items or events involving two or more pieces of related data. The code is comprised of fields which possess specific meaning. o • • Advantage: They facilitate the representation of large amounts of diverse data. Also, they allow complex data structures to be represented in a hierarchical form that is logical and thus more easily remembered by humans. Moreover, they permit detailed analysis and reporting both within an item class and across different classes of items. o Disadvantage: The codes may be overused to link classes which do not need to be linked, and thus create a more complex coding system than is necessary. Alphabetic codes may be used sequentially or in block or group codes. o Advantage: A system which uses alphabetic codes can represent far more situations than a system with numeric codes given a specific field size. o Disadvantage: Sequentially assigned codes mostly have little meaning. Also, humans typically find alphabetic codes more difficult to sort than numeric data. Mnemonic codes are alphabetic characters in the form of acronyms, abbreviations or other combinations that convey meaning. o Advantage: The meaning aspect is its advantage. o Disadvantage: They are limited in their ability to represents items within a class.
