61) Which of the following is true?
A) Cloud computing is a control technique for system availability.
B) Cloud computing eliminates the need for backup of applications and data.
C) Cloud computing refers to the practice of storing application files and backup data on satellites ‘in the clouds’.
D) Cloud computing eliminates the need for companies to own their own software and servers.
Answer: A
Page Ref: 288
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
62) Discuss how cloud computing could both positively and negatively affect system availability.
Answer: Cloud computing significantly reduces the risk that a single event would result in system unavailability, since the ‘cloud’ consists of banks of redundant servers, in multiple locations. However, since users don’t own the cloud, if a provider goes out of business, users may find it very difficult to access applications and data stored in the cloud. Additionally, users should evaluate the security and availability controls of the cloud provider before transacting business.
Page Ref: 288
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
63) Define and contrast a recovery point objective and a recovery time objective.
Answer: A recovery point objective is the maximum amount of time that a firm is willing to risk the possible loss of transaction data. A recovery time objective is the maximum amount of time that a firm is willing to risk losing access to its accounting information system due to disaster.
Page Ref: 285
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
Chapter 11
1) Auditing involves the
A) collection, review, and documentation of audit evidence.
B) planning and verification of economic events.
C) collection of audit evidence and approval of economic events.
D) testing, documentation, and certification of audit evidence.
Answer: A
Page Ref: 303
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
2) What is not a typical responsibility of an internal auditor?
A) helping management to improve organizational effectiveness
B) assisting in the design and implementation of an AIS
C) preparation of the company’s financial statements
D) implementing and monitoring of internal controls
Answer: C
Page Ref: 303
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
3) Which type of work listed below is not typical of internal auditors?
A) operational and management audits
B) information system audits
C) financial statement audit
D) financial audit of accounting records
Answer: C
Page Ref: 303
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
4) The ________ audit examines the reliability and integrity of accounting records.
A) financial
B) informational
C) information systems
D) operational
Answer: A
Page Ref: 303
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
5) The ________ audit reviews the general and application controls of an AIS to assess its compliance with internal control policies and procedures and its effectiveness in safeguarding assets.
A) financial
B) information systems
C) management
D) internal control
Answer: B
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
6) One type of audit that is concerned with the economical and efficient use of resources and the accomplishment of established goals and objectives is known as a(n) ________ audit.
A) financial
B) information systems
C) internal control
D) operational or management
Answer: D
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
7) The ________ audit is concerned with the economical and efficient use of resources and the accomplishment of established goals and objectives.
A) financial
B) informational
C) information systems
D) operational
Answer: D
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
8) The purpose of ________ is to determine why, how, when, and who will perform the audit.
A) audit planning
B) the collection of audit evidence
C) the communication of audit results
D) the evaluation of audit evidence
Answer: A
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
9) Organizing the audit team and the physical examination of assets are components of which two separate audit stages?
A) planning; evaluating audit evidence
B) planning; collecting audit evidence
C) collecting audit evidence; communicating audit results
D) communicating audit results; evaluating audit evidence
Answer: B
Page Ref: 304-305
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
10) With which stage in the auditing process are the consideration of risk factors and materiality most associated?
A) audit planning
B) collection of audit evidence
C) communication of audit results
D) evaluation of audit evidence
Answer: A
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
11) A system that employs various types of advanced technology has more ________ risk than traditional batch processing.
A) control
B) detection
C) inherent
D) investing
Answer: C
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
12) Control risk is defined as the
A) susceptibility to material risk in the absence of controls.
B) risk that a material misstatement will get through the internal control structure and into the financial statements.
C) risk that auditors and their audit procedures will not detect a material error or misstatement.
D) risk auditors will not be given the appropriate documents and records by management who wants to control audit activities and procedures.
Answer: B
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
13) The possibility that a material error will occur even though auditors are following audit procedures and using good judgment is referred to as
A) control risk.
B) detection risk.
C) inherent risk.
D) investigating risk.
Answer: B
Page Ref: 305
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
14) The ________ stage of the auditing process involves (among other things) the auditors observing the operating activities and having discussions with employees.
A) audit planning
B) collection of audit evidence
C) communication of audit results
D) evaluation of audit evidence
Answer: B
Page Ref: 305
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
15) Verifying the accuracy of certain information, often through communication with third parties, is known as
A) reperformance.
B) confirmation.
C) substantiation.
D) documentation.
Answer: B
Page Ref: 305
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
16) The evidence collection method that examines all supporting documents to determine the validity of a transaction is called
A) review of documentation.
B) vouching.
C) physical examination.
D) analytical review.
Answer: B
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
17) The evidence collection method that considers the relationships and trends among information to detect items that should be investigated further is called
A) review of the documentation.
B) vouching.
C) physical examination.
D) analytical review.
Answer: D
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
18) Assessing the quality of internal controls, the reliability of information, and operating performance are all part of which stage of the auditing process?
A) audit planning
B) collection of audit evidence
C) evaluation of audit evidence
D) communication of audit results
Answer: C
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
19) An auditor must be willing to accept some degree of risk that the audit conclusion is incorrect. Accordingly, the auditor’s objective is to seek ________ that no material error exists in the information audited.
A) absolute reliability
B) reasonable evidence
C) reasonable assurance
D) reasonable objectivity
Answer: C
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
20) The risk-based audit approach is
A) a four-step approach to internal control evaluation.
B) a four-step approach to financial statement review and recommendations.
C) a three-step approach to internal control evaluation.
D) a three-step approach to financial statement review and recommendations.
Answer: A
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
21) Which of the following is the first step in the risk-based audit approach?
A) Identify the control procedures that should be in place.
B) Evaluate the control procedures.
C) Determine the threats facing the AIS.
D) Evaluate weaknesses to determine their effect on the audit procedures.
Answer: C
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
22) Determining whether the necessary control procedures are in place is accomplished by conducting
A) a systems overhaul.
B) a systems review.
C) tests of controls.
D) both B and C
Answer: B
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic
23) According to the risk-based auditing approach, when a control deficiency is identified, the auditor should inquire about
A) tests of controls.
B) the feasibility of a systems review.
C) materiality and inherent risk factors.
D) compensating controls.
Answer: D
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
24) The ________ to auditing provides auditors with a clear understanding of possible errors and irregularities and the related risks and exposures.
A) risk-based approach
B) risk-adjusted approach
C) financial audit approach
D) information systems approach
Answer: A
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
25) What is the purpose of an information systems audit?
A) To determine the inherent risk factors found in the system
B) To review and evaluate the internal controls that protect the system
C) To examine the reliability and integrity of accounting records
D) To examine whether resources have been used in an economical and efficient manner in keeping with organization goals and objectives
Answer: B
Page Ref: 307
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
26) The information systems audit objective that pertains to source data being processed into some form of output is known as
A) overall security.
B) program development.
C) program modifications.
D) processing.
Answer: D
Page Ref: 307
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
27) To maintain the objectivity necessary for performing an independent evaluation function, auditors should not be involved in
A) making recommendations to management for improvement of existing internal controls.
B) examining system access logs.
C) examining logical access policies and procedures.
D) developing the information system.
Answer: D
Page Ref: 309
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
28) The auditor’s role in systems development should be as
A) an advisor and developer of internal control specifications.
B) a developer of internal controls.
C) an independent reviewer only.
D) A and B above
Answer: C
Page Ref: 309
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
29) Regarding program modifications, which statement below is incorrect?
A) Only material program changes should be thoroughly tested and documented.
B) When a program change is submitted for approval, a list of all required updates should be compiled and then approved by management and program users.
C) During the change process, the developmental version of the program must be kept separate from the production version.
D) After the modified program has received final approval, the change is implemented by replacing the developmental version with the production version.
Answer: A
Page Ref: 311
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
30) How could auditors determine if unauthorized program changes have been made?
A) By interviewing and making inquiries of the programming staff
B) By examining the systems design and programming documentation
C) By using a source code comparison program
D) By interviewing and making inquiries of recently terminated programming staff
Answer: C
Page Ref: 311
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
31) Which auditing technique will not assist in determining if unauthorized programming changes have been made?
A) Use of a source code comparison program
B) Use of the reprocessing technique to compare program output
C) Interviewing and making inquiries of the programming staff
D) Use of parallel simulation to compare program output
Answer: C
Page Ref: 311
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
32) Strong ________ controls can partially compensate for inadequate ________ controls.
A) development; processing
B) processing; development
C) operational; internal
D) internal; operational
Answer: B
Page Ref: 310
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
33) The ________ procedure for auditing computer process controls uses a hypothetical series of valid and invalid transactions.
A) concurrent audit techniques
B) test data processing
C) integrated test facility
D) dual process
Answer: B
Page Ref: 312
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
34) The auditor uses ________ to continuously monitor the system and collect audit evidence while live data are processed.
A) test data processing
B) parallel simulation
C) concurrent audit techniques
D) analysis of program logic
Answer: C
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
35) Auditors have several techniques available to them to test computer-processing controls. An audit technique that immediately alerts auditors of suspicious transactions is known as
A) a SCARF.
B) an audit hook.
C) an audit sinker.
D) the snapshot technique.
Answer: B
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
36) A type of software that auditors can use to analyze program logic and detect unexecuted program code is
A) a mapping program.
B) an audit log.
C) a scanning routine.
D) program tracing.
Answer: A
Page Ref: 314
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
37) One tool used to document the review of source data controls is
A) a flowchart generator program.
B) a mapping program.
C) an input control matrix.
D) a program algorithm matrix.
Answer: C
Page Ref: 314
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
38) An audit software program that generates programs that perform certain audit functions, based on auditor specifications, is referred to as a(n)
A) input controls matrix.
B) CAATS.
C) embedded audit module.
D) mapping program.
Answer: B
Page Ref: 317
Objective: Learning Objective 4
Difficulty : Moderate
AACSB: Analytic
39) The use of a secure file library and restrictions on physical access to data files are control procedures used together to prevent
A) an employee or outsider obtaining data about an important client.
B) a data entry clerk from introducing data entry errors into the system.
C) a computer operator from losing or corrupting files or data during transaction processing.
D) programmers making unauthorized modifications to programs.
Answer: A
Page Ref: 316
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
40) An auditor might use which of the following to convert data from several sources into a single common format?
A) computer assisted audit techniques software
B) Windows Media Converter
C) concurrent audit technique
D) Adobe Professional
Answer: A
Page Ref: 317
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
41) What is the primary purpose of computer audit software?
A) eliminate auditor judgment errors
B) assist the auditor in retrieving and reviewing information
C) detect unauthorized modifications to system program code
D) recheck all mathematical calculations, cross-foot, reprocess financial statements and compare to originals
Answer: B
Page Ref: 317
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
42) The scope of a(n) ________ audit encompasses all aspects of systems management.
A) operational
B) information systems
C) financial
D) internal control
Answer: A
Page Ref: 318
Objective: Learning Objective 5
Difficulty : Moderate
AACSB: Analytic
43) Evaluating effectiveness, efficiency, and goal achievement are objectives of ________ audits.
A) financial
B) operational
C) information systems
D) all of the above
Answer: B
Page Ref: 318
Objective: Learning Objective 5
Difficulty : Easy
AACSB: Analytic
44) In the ________ stage of an operational audit, the auditor measures the actual system against an ideal standard.
A) evidence collection
B) evidence evaluation
C) testing
D) internal control
Answer: B
Page Ref: 318
Objective: Learning Objective 5
Difficulty : Easy
AACSB: Analytic
45) An increase in the effectiveness of internal controls would have the greatest effect on
A) reducing control risk.
B) reducing detection risk.
C) reducing inherent risk.
D) reducing audit risk.
Answer: A
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic
46) An expansion of a firm’s operations to include production in Russia and China will have the effect of
A) increasing inherent risk.
B) reducing inherent risk.
C) increasing control risk.
D) reducing control risk.
Answer: A
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
47) An increase in the effectiveness of auditing software will have the effect of
A) increasing detection risk.
B) reducing detection risk.
C) increasing control risk.
D) reducing control risk.
Answer: B
Page Ref: 305
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
48) An auditor examines all documents related to the acquisition, repair history, and disposal of a firm’s delivery van. This is an example of collecting audit evidence by
A) confirmation.
B) reperformance.
C) vouching.
D) analytical review.
Answer: C
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
49) An auditor manually calculates accumulated depreciation on a delivery van and compares her calculation with accounting records. This is an example collecting audit evidence by
A) confirmation.
B) reperformance.
C) vouching.
D) analytical review.
Answer: B
Page Ref: 305
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
50) An auditor finds that employee absentee rates are significantly higher on Mondays and Fridays than on other work days. This is an example collecting audit evidence by
A) confirmation.
B) reperformance.
C) vouching.
D) analytical review.
Answer: D
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
51) An auditor creates a fictitious customer in the system and then creates several fictitious sales to the customer. The records are then tracked as they are processed by the system. The auditor is using
A) an integrated test facility.
B) the snapshot technique.
C) a system control audit review file.
D) continuous and intermittent simulation.
Answer: A
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
52) An auditor sets an embedded audit module to flag all credit transactions in excess of $1,500. The flag causes the system state to be recorded before and after each transaction is processed. The auditor is using
A) an integrated test facility.
B) the snapshot technique.
C) a system control audit review file.
D) audit hooks.
Answer: B
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
53) An auditor sets an embedded audit module to record all credit transactions in excess of $1,500 and store the data in an audit log. The auditor is using
A) the snapshot technique.
B) a system control audit review file.
C) audit hooks.
D) continuous and intermittent simulation.
Answer: B
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
54) An auditor sets an embedded audit module to flag questionable online transactions, display information about the transaction on the auditor’s computer, and send a text message to the auditor’s cell phone. The auditor is using
A) the snapshot technique.
B) a system control audit review file.
C) audit hooks.
D) continuous and intermittent simulation.
Answer: C
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
55) An auditor sets an embedded audit module to selectively monitor transactions. Selected transactions are then reprocessed independently, and the results are compared with those obtained by the normal system processing. The auditor is using
A) an integrated test facility.
B) the snapshot technique.
C) a system control audit review file.
D) continuous and intermittent simulation.
Answer: D
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
56) Which of the following is not one of the types of internal audits?
A) reviewing corporate organizational structure and reporting hierarchies
B) examining procedures for reporting and disposing of hazardous waste
C) reviewing source documents and general ledger accounts to determine integrity of recorded transactions
D) comparing estimates and analysis made before purchase of a major capital asset to actual numbers and results achieved
Answer: A
Page Ref: 304
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Reflective Thinking
57) When programmers are working with program code, they often employ utilities that are also used in auditing. For example, as program code evolves, it is often the case that blocks of code are superseded by other blocks of code. Blocks of code that are not executed by the program can be identified by
A) embedded audit modules.
B) scanning routines.
C) mapping programs.
D) automated flow charting programs.
Answer: C
Page Ref: 314
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
58) When programmers are working with program code, they often employ utilities that are also used in auditing. For example, as program code evolves, it is often the case that variables defined during the early part of development become irrelevant. The occurrences of variables that are not used by the program can be found using
A) program tracing.
B) scanning routines.
C) mapping programs.
D) embedded audit modules.
Answer: B
Page Ref: 314
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
59) Explain the differences between each type of audit risk.
Answer: Inherent risk is the threat faced just by conducting business in a chosen way. For example, a business with multiple locations in several foreign countries faces more threats than a business with a single location. Control risk is the threat that a company has inadequate, nonexistent or unenforced policies and procedures to prevent errors and fraud from getting into the system and being reflected in the financial statements. Detection risk is the threat that errors or fraud get into the system and audit procedures do not identify the errors or fraud.
Page Ref: 304-305
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
60) Explain why the auditor’s role in program development and acquisition should be limited.
Answer: The auditor’s role in any organization systems development should be limited only to an independent review of systems development activities. The key to the auditor’s role is independence; the only way auditors can maintain the objectivity necessary for performing an independent evaluation function is by avoiding any and all involvement in the development of the system itself. If auditor independence is impaired, the audit itself may be of little value and its results could easily be called into question. The auditors could be basically reviewing their own work.
Page Ref: 309
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
61) How and to whom does an auditor communicate the audit results?
Answer: The auditor prepares a written report summarizing the findings and recommendations, with references to supporting evidence in working papers. The report is presented to management, the audit committee, the board of directors, and other appropriate parties. The auditor then follows up later to determine if recommendations were implemented.
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
62) Audit tests and procedures traditionally have been performed on a sample basis. Do options exist for auditors to test significantly more (or all) transactions?
Answer: Computer assisted audit techniques (CAATS) allow auditors to automate and simplify the audit process. Large amounts of data can be examined by software, created from auditor-supplied specifications. Two popular CAATS packages are Audit Control Language (ACL) and Interactive Data Extraction and Analysis (IDEA). Auditors can also use concurrent audit techniques to identify and collect information about certain types of transactions in real-time. Examples of concurrent audit techniques are embedded audit modules, integrated test facility, system control audit review file (SCARF), snapshot technique, audit hooks and continuous and intermittent simulation (CIS).
Page Ref: 313, 317
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
63) When doing an information systems audit, auditors must review and evaluate the program development process. What errors or fraud could occur during the program development process?
Answer: There can be unintentional errors due to misunderstood systems specifications, incomplete specifications, or poor programming. Developers could insert unauthorized code instructions into the program for fraudulent purposes.
Page Ref: 309
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
64) Briefly describe tests that can be used to detect unauthorized program modifications.
Answer: Review procedures for requesting, approving, programming, and testing changes. Review or observe specific testing and implementation procedures. Compare source code from the approved and tested program with the program code currently in use. Randomly and without notice, use the source code from the approved and tested program to reprocess transactions, and compare the results with the operational system results. Write new code designed to replicate the approved and tested code and use parallel simulation to reprocess transactions, and compare the results with the operational system results.
Page Ref: 311
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
65) Define and give examples of embedded audit modules.
Answer: Embedded audit modules are segments of program code that perform audit functions, report test results and store collected evidence for later review. An Integrated Test Facility (ITF) processes fictitious records through the operational system in real-time. The snapshot technique records master file records immediately before and immediately after processing specifically selected transactions. A System Control Audit Review File (SCARF) continuously monitors transactions and collects transaction data that meet, or fall outside, predetermined criteria. Audit Hooks immediately notify auditors of suspicious transactions being processed, or submitted for processing. Continuous and Intermittent Simulation (CIS) identifies specific transactions with audit significance and processes the transactions parallel to the operational system. If discrepancies result, the CIS can store the evidence for later review or can prevent transaction processing.
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
66) How is a financial audit different from an information systems audit?
Answer: Financial audits examine the reliability and integrity of accounting records in terms of financial and operating information. An information systems (IS) audit reviews the general and application controls of an AIS to assess its compliance with internal control policies and procedures and its effectiveness in safeguarding assets. Although the AIS may generate accounting records and financial information, it is important that the AIS itself be audited to verify compliance with internal controls and procedures.
Page Ref: 303-304
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
67) Why do all audits follow a sequence of events that can be divided into four stages, and what are the four stages?
Answer: The auditor’s function generally remains the same no matter what type of audit is being conducted. The process of auditing can be broken down into the four stages of planning, collecting evidence, evaluating evidence, and communicating audit results. These stages form a working template for any type of financial, information systems, or operational or management audits.
Page Ref: 305
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
68) Name and describe the different types of audits.
Answer:
The financial audit this audit examines the reliability and integrity of accounting records (both financial and operating information).
The information systems audit this audit reviews the general and application controls of an AIS and assesses its compliance with internal control policies and procedures and effectiveness in safeguarding assets.
The operational or management audit this audit conducts an evaluation of the efficient and effective use of resources, as well as an evaluation of the accomplishment of established goals and objectives.
Page Ref: 303-304
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
69) Describe the risk-based audit approach.
Answer: The risk-based audit approach has four steps that evaluate internal controls. This approach provides a logical framework for conducting an audit of the internal control structure of a system. The first step is to determine the threats facing the AIS. Threats here can be defined as errors and irregularities in the AIS. Once the threat risk has been established, the auditor should identify the control procedures that should be in place to minimize each threat. The control procedures identified should either be able to prevent or detect errors and irregularities within the AIS. The next step is to evaluate the control procedures. This step includes a systems review of documentation and also interviewing the appropriate personnel to determine whether the needed procedures are in place within the system. The auditor can then use tests of controls to determine if the procedures are being satisfactorily followed. The fourth step is to evaluate weaknesses found in the AIS. Weaknesses here means errors and irregularities not covered by the AIS control procedures. When such deficiencies are identified, the auditor should see if there are compensating controls that may counterbalance the deficiency. A deficiency in one area may be neutralized given control strengths in other areas. The ultimate goal of the risk-based approach is to provide the auditor with a clear understanding of errors and irregularities that may be in the system along with the related risks and exposures. Once an understanding has been obtained, the auditor may provide recommendations to management as to how the AIS control system can be improved.
Page Ref: 306
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic
70) a) What is test data processing? b) How is it done? c) What are the sources that an auditor can use to generate test data?
Answer: a) Test data processing is a technique used to examine the integrity of the computer processing controls. b) Test data processing involves the creation of a series of hypothetical valid and invalid transactions and the introduction of those transactions into the system. The invalid data may include records with missing data, fields containing unreasonably large amounts, invalid account numbers, etc. If the program controls are working, then all invalid transactions should be rejected. Valid transactions should all be properly processed. c) The various ways test data can be generated are: A listing of actual transactions. The initial transactions used by the programmer to test the system. A test data generator program that generates data using program specifications.
Page Ref: 312-313
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
71) Describe the disadvantages of test data processing.
Answer: The auditor must spend considerable time developing an understanding of the system and preparing an adequate set of test transactions. Care must be taken to ensure that test data does not affect the company’s files and databases. The auditor can reverse the effects of the test transactions or process the transactions in a separate run using a copy of the file or database. However, a separate run removes some of the authenticity obtained from processing test data with regular transactions. Also, since the reversal procedures may reveal the existence and nature of the auditor’s test to key personnel, it can be less effective than a concealed test.
Page Ref: 313
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
72) Describe how audit evidence can be collected.
Answer: Since the audit effort revolves around the identification, collection, and evaluation of evidence, most audit effort is spent in the collection process. To identify, collect, and evaluate evidence, several methods have been developed to assist in the effort. These methods include: 1) the observation of the activities being audited; 2) a review of documentation to gain a better understanding of the AIS; 3) discussions with employees about their jobs and how procedures are carried out; 4) the creation and administration of questionnaires to gather data about the system; 5) physical examination of tangible assets; 6) confirmation of the accuracy of certain information; 7) reperformance of selected calculations; 8) vouching for the validity of a transaction by examination of all supporting documentation; and, 9) analytical review of relationships and trends among information to detect items that should be further investigated. It is important to remember that only a sample of evidence is collected for audit purposes, as it is not feasible to perform audit procedures on the entire set of activities, records, assets, or documents that are under the review process in an audit.
Page Ref: 305-306
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
Chapter 12
1) In organizations with at least basic segregation of duties, the credit manager reports to the ________ and the treasurer reports to the ________.
A) controller; vice president of finance
B) treasurer; controller
C) marketing manager; vice president of finance
D) treasurer; vice president of finance
Answer: D
Page Ref: 331
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
2) In the revenue cycle, before a shipping notice is prepared, the shipping department personnel should match the inventory received from the warehouse to details from
A) picking tickets.
B) sales order and bill of lading.
C) sales order.
D) picking ticket and sales order.
Answer: D
Page Ref: 345
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
3) Which is the best control to prevent invoicing customers for the quantity ordered, which was more than the quantity shipped due to items on backorder?
A) Use the information from the packing slip to prepare the sales invoice.
B) Use the information from the picking ticket to prepare the sales invoice.
C) Use the information from the bill of lading to prepare the sales invoice.
D) Use the information from the sales order to prepare the sales invoice.
Answer: A
Page Ref: 350
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Reflective Thinking
4) The cashier deposits checks in the bank for Very Large Corporation (VLC) and also prepares payments to vendors. Of the following, who is best to reconcile the bank statement to VLC’s records on a regular basis?
A) Internal audit department
B) Treasurer
C) External auditor
D) Cashier
Answer: A
Page Ref: 355
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
5) Which of the following documents normally triggers the billing process in the revenue cycle?
A) Packing slip received from the shipping department
B) Sales order received from the sales department
C) Picking ticket received from the sales department
D) Journal voucher received from the shipping department
Answer: A
Page Ref: 348
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
6) Which of the following documents would normally trigger the process to record a customer payment?
A) Remittance advice
B) Customer monthly statement
C) Deposit slip
D) Sales invoice
Answer: A
Page Ref: 353
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
7) Which document should always be included with a merchandise shipment to a customer?
A) Packing slip
B) Picking ticket
C) Remittance advice
D) Sales invoice
Answer: A
Page Ref: 345
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
8) A monthly statement sent to customers serves a control purpose by
A) providing an opportunity for customers to verify the balance owed and activity on the account.
B) triggering the process to record a customer payment.
C) summarizing invoices and amounts due for customers.
D) reminding customers of the balance due and due date.
Answer: A
Page Ref: 355
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
9) Accounting recognizes a sale when
A) inventory becomes the legal property of the customer.
B) cash is received from the customer.
C) a sales order is approved by sales, inventory control, and credit departments.
D) inventory is removed from the warehouse.
Answer: A
Page Ref: 345
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
10) Which of the following is not one of the controls for the mail room where customer payments are commingled with other mail?
A) Requiring the controller to be personally present when mail is received and opened
B) Preparing a remittance list as mail is opened
C) Restrictively endorsing checks when received
D) Requiring two mail room clerks to open mail together
Answer: A
Page Ref: 337
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
11) What is the primary objective of the revenue cycle?
A) to maximize revenue and minimize expense
B) to reduce outstanding accounts receivable balances through increased cash sales
C) to provide the right product in the right place at the right time at the right price
D) to sell as much product as possible and/or to maximize service billings
Answer: C
Page Ref: 332
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
12) Which of the decisions below is not ordinarily found as part of the revenue cycle?
A) What credit terms should be offered?
B) How often should accounts receivable be subjected to audit?
C) How can customer payments be processed to maximize cash flows?
D) What are the optimal prices for each product or service?
Answer: B
Page Ref: 332-333
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
13) Which of the following is not a basic activity of the revenue cycle?
A) sales order entry
B) shipping
C) receiving
D) billing
Answer: C
Page Ref: 333
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
14) Retail stores could send their orders directly to the manufacturer’s sales order system in a format that would eliminate the need for data entry, using
A) Vendor Managed Inventory.
B) Electronic Data Interchange.
C) Point Of Sale.
D) Electronic Funds Transfer.
Answer: B
Page Ref: 338
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
15) Matching customer account numbers and inventory item numbers to the numbers in the customer and inventory master files is an example of a
A) completeness test.
B) field check.
C) reasonableness test.
D) validity check.
Answer: D
Page Ref: 339
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
16) During the sales order entry process, a ________ is performed to compare the quantity ordered with the standard amounts normally ordered.
A) completeness test
B) redundant data check
C) field check
D) reasonableness test
Answer: D
Page Ref: 339
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
17) During the sales order entry process, a ________ is performed to verify that each transaction record contains all appropriate data items.
A) completeness test
B) redundant data check
C) field check
D) reasonableness test
Answer: A
Page Ref: 339
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
18) When a customer places an order (on account) for a certain product, what should be done before the order is checked for inventory availability?
A) The customer’s available credit should be checked.
B) The sales order should be created and written to a file.
C) Shipping should be notified of an order in process.
D) A picking list should be generated for the warehouse.
Answer: A
Page Ref: 335
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
19) How is credit approval generally handled for established customers with a documented payment history?
A) Specific authorization by the credit manager
B) General authorization by a sales clerk
C) A new credit application is requested
D) A formal credit check should be made for each sale
Answer: B
Page Ref: 340
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
20) What is a typical procedure for processing sales orders from new customers or customers making a purchase that causes their credit limit to be exceeded?
A) General authorization to approve the order is given to sales clerks.
B) Specific authorization must be granted by the credit manager.
C) The sale should be rejected.
D) The sales clerk should order a report from a credit bureau before approving the order.
Answer: B
Page Ref: 340
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
21) A company should check inventory quantities before accepting a sales order for all the following reasons except to
A) verify the accuracy of the perpetual inventory records.
B) inform the customer about availability and delivery times.
C) know which items may need to be back ordered.
D) update inventory records to reduce the quantity available by the number of items ordered.
Answer: A
Page Ref: 341-342
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
22) Responding to customer inquiries and general customer service is an important aspect in the revenue cycle. Since customer service is so important, software programs have been created to help manage this function. These special software packages are called
A) EDI systems.
B) POS systems.
C) VMI systems.
D) CRM systems.
Answer: D
Page Ref: 343
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
23) The best solution for maintaining accurate automated perpetual inventory system is to use
A) closed-loop verification when inventory is received from vendors and recorded.
B) point of sale devices integrated with inventory records.
C) periodic physical counts to reconcile with perpetual inventory records.
D) RFID tags.
Answer: D
Page Ref: 342
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
24) This document is a legal contract that defines responsibility for goods that are in transit.
A) packing slip
B) bill of lading
C) picking list
D) back order
Answer: B
Page Ref: 345
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
25) Two documents usually accompany goods shipped to a customer. What are the two documents?
A) a bill of lading and an invoice
B) a packing slip and a bill of lading
C) an invoice and a packing slip
D) an invoice and a sales order
Answer: B
Page Ref: 345
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
26) What is the basic document created in the billing process?
A) bill of lading
B) sales order
C) packing list
D) sales invoice
Answer: D
Page Ref: 349
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
27) A company uses the method for tracking accounts receivable where customers pay according to individual sales invoices. This describes the ________ method.
A) monthly statement
B) open-invoice
C) balance forward
D) cycle billing
Answer: B
Page Ref: 350
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
28) A method for tracking accounts receivable that matches specific invoices and payments from the customer is called a(n) ________ method.
A) specific identification
B) balance forward
C) cycle billing
D) open-invoice
Answer: D
Page Ref: 350
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
29) The document a customer returns with their payment and that identifies the source and the amount of the payment is called a
A) remittance advice.
B) remittance list.
C) credit memorandum.
D) debit memorandum.
Answer: A
Page Ref: 350
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
30) In the ________ method of tracking accounts receivable, customers pay according to the amount showing on their monthly statement and payments are applied against the total account balance.
A) specific identification
B) open-invoice
C) balance forward
D) remittance advice
Answer: C
Page Ref: 350
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
31) When a customer pays off the balance on an invoice, the payment is credited to the ________ file.
A) customer master
B) sales transaction
C) cash receipts master
D) All of the above are correct.
Answer: A
Page Ref: 351
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Reflective Thinking
32) A type of business document in which part of the original document is returned to the source for further processing is called a ________ document.
A) feedback
B) returnable
C) closed-loop
D) turnaround
Answer: D
Page Ref: 350
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
33) A document typically encountered in the revenue cycle that is both an output document and a source document is the
A) sales invoice.
B) customer purchase order.
C) sales order.
D) packing slip.
Answer: A
Page Ref: 349
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
34) A ________ system prepares and mails monthly statements to customers throughout the entire month, instead of just at the end of the month.
A) continuous
B) open-invoice
C) cycle billing
D) balance forward
Answer: C
Page Ref: 351
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
35) The accounts receivable department must know when customers pay their invoices, yet segregation of duties controls dictate that the collection and recording functions be kept separate from each other. What is a solution to this potential internal control problem?
A) Have customers send a remittance advice with their payment.
B) Have mailroom personnel prepare a remittance list which can be forwarded to accounts receivable.
C) Establish a lockbox arrangement with a bank.
D) all of the above
Answer: D
Page Ref: 353-354
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
36) The benefits of a lockbox arrangement with a bank are maximized when
A) the bank is located nearby to the company, so remittance advices can be delivered to the company every day.
B) several banks around the country are used, in order to minimize the time payments spend in the mail.
C) an arrangement is made with only one bank, so all remittance advices can be batched for processing.
D) the bank deposits the payments and accesses the customer’s information system to record the payments.
Answer: B
Page Ref: 354
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
37) An arrangement where a bank receives customer payments through the postal system, scans the remittance advices, and transmits payment data to the business electronically is known as
A) e-commerce.
B) an electronic lockbox.
C) electronic funds transfer (EFT).
D) electronic data interchange (EDI).
Answer: B
Page Ref: 354
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
38) Customers that send their payments electronically directly to the company’s bank are using
A) electronic data interchange (EDI).
B) electronic funds transfer (EFT).
C) procurement cards.
D) an electronic lockbox.
Answer: B
Page Ref: 354
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
39) A way to incorporate the advantages of Electronic Data Interchange with the Electronic Funds Transfer is
A) Financial Electronic Data Interchange.
B) e-commerce.
C) to use procurement cards.
D) an electronic lockbox.
Answer: A
Page Ref: 354
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
40) Key differences exist when an integrated Enterprise Resource Planning system (ERP) replaces an existing AIS or legacy system. For example, ________ are more accurate and timely, enabling sales order entry staff to provide customers more accurate information about delivery dates.
A) inventory records
B) cash receipts
C) credit approval decisions
D) exception reports
Answer: A
Page Ref: 342
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
41) When an ERP is used, it is assumed that there will be increases in efficiency and the effectiveness of the activities related to the revenue cycle. However, what must be in place and functioning well to fully realize these benefits?
A) an effective marketing staff
B) all the components of the expenditure cycle
C) adequate controls
D) adequate system flowchart documentation
Answer: C
Page Ref: 335
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
42) The activities involved in soliciting and processing customer orders within the revenue cycle are known as the ________.
A) sales order entry process
B) shipping order process
C) revenue process
D) marketing process
Answer: A
Page Ref: 337
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
43) To ensure proper segregation of duties, only the ________ has authority to issue credit memos.
A) accounts receivable supervisor
B) controller
C) credit manager
D) cashier
Answer: C
Page Ref: 352
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
44) It has been discovered that credit sales have been made to customers with a poor credit rating. If this continues, the company will face increasing uncollectible receivables and losses due to bad debts. Separation of duties between ________ and ________ should help resolve the problem.
A) shipping; billing duties
B) credit approval; marketing
C) billing; credit approval
D) marketing; accounts receivable
Answer: B
Page Ref: 340
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
45) Consider the following revenue cycle scenario: The company has been exposed to customer dissatisfaction and the suggested control procedure to be implemented is to install and use bar-code scanners. What is the threat?
A) The company may be shipping the wrong merchandise.
B) The company may be shipping the wrong quantities of merchandise.
C) The company may be shipping orders to the wrong address.
D) All of the above threats may apply to this scenario.
Answer: A
Page Ref: 345
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
46) Which of the following would be the least effective control to minimize the loss of inventory?
A) Secure the storage location of inventory.
B) Release inventory only with proper documentation.
C) Periodically back up all perpetual inventory records.
D) Reconcile the physical counts with and perpetual records.
Answer: C
Page Ref: 345
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
47) Separating the shipping and billing functions is designed to reduce the threat of
A) failure to bill customers.
B) billing customers for wrong quantities.
C) billing customers before merchandise has been shipped.
D) shipping the wrong merchandise.
Answer: A
Page Ref: 350
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
48) All of the following edit checks for online editing of accounts receivable transactions would probably be included except
A) validity checks on customer ID and invoice numbers.
B) check digit verification on the amount of the sale.
C) closed loop verification on the customer ID.
D) field checks on the values in dollar fields.
Answer: B
Page Ref: 352
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
49) When a proper segregation of duties exists in the area of handling cash receipts, the ________, who reports to the ________, actually handles the cash and is not the same person who posts cash receipts to customer accounts.
A) cashier; treasurer
B) cashier; controller
C) accountant; treasurer
D) accountant; controller
Answer: A
Page Ref: 355
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
50) In a revenue cycle with proper controls, the ________ who reports to the ________, is not involved in any cash handling activities.
A) accounts receivable clerk; treasurer
B) accounts receivable clerk; controller
C) cashier; controller
D) cashier; treasurer
Answer: B
Page Ref: 355
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
51) A serious exposure in the revenue cycle is loss of assets. What is the related threat and applicable control procedure that address this exposure?
A) shipping errors; reconciliation of sales order with picking ticket and packing slip
B) theft of cash; segregation of duties and minimization of cash handling
C) making sales that turn out to be uncollectible; force sales people to make collection calls on customers with past due balances
D) poor performance; preparation and review of performance reports
Answer: B
Page Ref: 337
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
52) Which of the following duties could be performed by the same individual and not violate segregation of duty controls?
A) handling cash and posting to customer accounts
B) issuing credit memos and maintaining customer accounts
C) handling cash and authorizing credit memos
D) handling cash receipts and mailing vendor payments
Answer: D
Page Ref: 355
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
53) To prevent the loss of valuable data in the revenue cycle, internal file labels can be used to
A) keep competitors from accessing files.
B) record off-site storage locations.
C) organize the on-site physical storage site.
D) reduce the possibility of erasing important files.
Answer: D
Page Ref: 277, 335
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
54) The manager of Callow Youth Clothing was entering an order online from Sad Clown Pajamas. He ordered 100 one-size fits all pajama bottoms, but when he ordered 1000 one-size fits all pajama tops, the following error message popped up: “Did you mean to enter a quantity of 1000 for your order?” This message is the result of a
A) reasonableness test.
B) validity check.
C) limit check.
D) closed-loop verification.
Answer: A
Page Ref: 339
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Reflective Thinking
55) The manager of Callow Youth Clothing was entering an order online from Sad Clown Pajamas. He entered all the items and quantities, completed the checkout and payment process, but the following error message popped up when he tried to exit the site: “Please enter your email address.” This message is likely the result of a
A) customer relationship management software application.
B) validity check.
C) completeness test.
D) closed-loop verification.
Answer: C
Page Ref: 339
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Reflective Thinking
56) Sad Clown Pajamas is an Internet-based wholesaler. Customers enter their orders online. The manager of Callow Youth Clothing was entering an order when the following error message popped up: “Your total order exceeds your available credit. A Credit Department representative will contact you within 24 hours.” This message is the result of a
A) validity check.
B) reasonableness test.
C) limit check.
D) sign check.
Answer: C
Page Ref: 340
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
57) In Petaluma, California, electric power is provided to consumers by the Power To The People Electrical Company, a local co-op. Each month PTTP mails bills to 70,000 households and then processes payments as they are received. The customers are provided with a remittance advice, which is a
A) warning that failure to pay by the due date will result in a late charge.
B) confirmation of the firm’s privacy policy.
C) turnaround document.
D) bill.
Answer: C
Page Ref: 350
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
58) Laz Chance wears roller blades and headphones when he is at work at the Squishy Things Toy Company. He is a product packer. The headphones give him computer-generated instructions so he knows the location of each item and quantity that should be included in the order. These instructions are the equivalent of a
A) picking ticket.
B) bill of lading.
C) packing slip.
D) sales order.
Answer: A
Page Ref: 342
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
59) The shipping department at Squishy Things Toy Company follows policies that determine which carrier will deliver orders according to the size, weight, and destination of the shipment. It maintains standing agreements with shippers that specify legal responsibility for the shipment while it is in transit. The terms of the agreements are documented on
A) picking tickets.
B) bills of lading.
C) packing slips.
D) RFID tags.
Answer: B
Page Ref: 345
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
60) Sad Clown Pajamas is an Internet-based wholesaler. The manager of Callow Youth Clothing received an order from Sad Clown and found that the wrong product had been shipped. He repackaged the order and sent it back for a refund. When Sad Clown Pajamas received the returned product, they mailed a ______ to Callow Youth Clothing’s manager.
A) packing slip
B) letter requesting an explanation
C) remittance advice
D) credit memo
Answer: D
Page Ref: 352
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
61) A customer service manager at Sad Clown Pajamas, Bob, received a call from the manager at Callow Youth Clothing, who informed Bob that Callow was entering bankruptcy liquidation and it was unlikely that they would be able to pay the outstanding balance on their account. Bob should
A) document the phone conversation and forward it to the billing department manager.
B) prepare a credit memo.
C) approve a credit memo.
D) document the phone conversation and forward it to the credit department manager.
Answer: D
Page Ref: 352
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Reflective Thinking
62) Because it is the most fungible of all assets, the management of cash has always been the most difficult of all control issues. The most important of cash controls is
A) minimization of cash handling.
B) lockbox arrangements.
C) segregation of duties.
D) frequent reconciliation of records.
Answer: C
Page Ref: 355
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
63) A sales clerk at an electronics store scanned the bar code for a low cost set of headphones and then substituted a high cost set of headphones for his friend, who paid the lower price. Which of the following controls would best help to prevent this sort of fraud?
A) Use of RFID tags
B) Physical inventory count
C) Segregation of duties
D) Limited physical access to bar codes
Answer: A
Page Ref: 342
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
64) The accounts receivable management method typically used by credit card companies is
A) balance forward.
B) postbilling.
C) monthly statement.
D) open-invoice.
Answer: A
Page Ref: 351
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
65) The accounts receivable clerk destroys all invoices for sales made to family and friends and does not record the sales in the accounts receivable subsidiary ledgers. The family and friends usually give the clerk cash as a”thank you”. Which procedure will not prevent or detect this fraud?
A) Send monthly statements to all customers with balances owed.
B) Reconcile sales invoices in the billing department to the total debits to accounts receivable subsidiary ledgers.
C) Sequentially prenumber all invoices and prepare a sequence check at the end of each day.
D) Reconcile the accounts receivable control account to the accounts receivable subsidiary ledger.
Answer: A
Page Ref: 350
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
66) Which of the following poses an internal control problem?
A) Physical inspection of inventory quantity and condition is outsourced to a firm that specializes in this service.
B) Products are released from inventory after a warehouse employee and a shipping clerk both sign the pick list.
C) Sales representatives have authority to increase customers’ credit limits in $1,000 increments.
D) When customer payments are received in the mail, checks are sent to the cashier’s office and remittance advices are sent to the accounts receivable department.
Answer: C
Page Ref: 340
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
67) For sales returns, the least effective control to prevent fraudulent processing of a credit memo is to
A) reconcile total of credit memos to total debits posted to customers’ subsidiary ledgers.
B) require approval for each credit memo by the credit manager.
C) sequentially prenumber all credit memos and perform a sequence check at the end of each day.
D) match each credit memo with a receiving report.
Answer: A
Page Ref: 352
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
68) Describe the basic revenue cycle activities.
Answer: The revenue cycle is a recurring set of business activities and related information processing operations associated with providing goods and services to customers and collecting cash in payment for those sales. The basic activities in the revenue cycle are: order entry soliciting and processing customer activities filling customer orders and shipping merchandise invoicing customers and maintaining customer accounts collections the cashier handles remittances and deposits them in the bank; accounts receivable personnel credits customer accounts for the payments received.
Page Ref: 333
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
69) Explain how validity checks, completeness tests and reasonableness tests can be implemented to ensure accuracy of customer orders.
Answer: Validity checks can be used to compare the customer and inventory information on the customer order with the information in the customer and inventory master files. A completeness test can ensure that all the necessary information is present on the customer order. A reasonableness test can compare the quantity ordered with the customer’s past order history for that item.
Page Ref: 339
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
70) Define and describe benefits of a CRM system.
Answer: CRM stands for customer relationship management. Since customer service is so important today, special CRM software packages have been created that support this vital process. CRM systems help a company to organize detailed data about customers so that more personalized service can be given to them. A CRM system may retain customer preferences and customer transaction history, which can be used to suggest other products the customer may wish to purchase. The system could also take a pro-active marketing approach in contacting customers at certain re-order points. A well-implemented CRM system can help the business achieve the goal of turning satisfied customers into loyal customers.
Page Ref: 343
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
71) How can Electronic Data Interchange (EDI) facilitate the billing and accounts receivable process?
Answer: The basic document created in the billing process is the sales invoice. Many companies still print paper invoices and send them to customers in the mail. Batch processing of invoices may create cash flow problems because of the time it takes invoices to flow through the regular mail system. Companies that use EDI can create quicker turnaround for payment, and save costs by reducing paper handling and processing. Depending on the number of invoices processed per year, these savings can be significant.
Page Ref: 349
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
72) Describe typical credit approval procedures.
Answer: Most business-to-business sales are made on credit. Key to revenue cycle success is the approval of credit sales before they are processed and goods shipped. A part of good control in this area is to establish a credit limit for customers. With new customers, or when orders exceed a customer’s credit limit, or the customer has a past due balance, specific authorization for the credit manager should specifically authorize and approve further credit. The system can also be programmed to do a limit check for each order processed to maintain further control in this area. Also, marketing personnel should not make credit decisions, as a potential conflict of interest is possible.
Page Ref: 339-340
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
73) Describe the two methods to manage accounts receivable.
Answer: Open invoice system customers pay the invoice by returning a remittance advice turnaround document and a check. Remittances are applied against specific open invoices. The open-invoice method can be used to offer discounts for prompt payments since invoices are individually tracked. However, such individual tracking adds complexity in maintaining information. Balance-forward method customers pay according to the amount shown on a monthly statement and remittances are applied against the total outstanding balance; this method is used by department stores typically where customers make a large number of smaller dollar amount purchases.
Page Ref: 350
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
74) Describe cycle billing and identify how an organization might benefit by using cycle billing.
Answer: Cycle billing is spreading out the customer base so that a portion of the billing is done each day to a group of customers. Credit card and utility companies use it extensively because of their large customer bases. The advantage of this method is that the billing load is dispersed and the cash flow of the company is evened out dramatically.
Page Ref: 351
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
75) Failure to collect cash on credit sales is a threat in the revenue cycle. What controls can be used to help neutralize this threat?
Answer: Both accounts receivable and cash flows should be monitored. Segregation of duty controls should always be implemented and monitored for compliance. Also, a control used to deal with accounts receivable (which directly impacts cash flow) is to use an accounts receivable aging schedule. This schedule lists customer account balances by length of time outstanding and provides information for estimating bad debts. It can also assist in evaluating credit policies and specific customer credit limits. Also, a cash budget can be used to provide a more precise estimate of cash inflows (cash collected from sales) and cash outflow (outstanding payables). An organization can be alerted to a pending cash flow shortage, thus enabling it to secure short-term financing at competitive rates to deal with the problem in a timely manner.
Page Ref: 341, 356
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
76) Discuss ways in which technology can be used to streamline cash collections.
Answer: Answers may include the following points: A lockbox system can reduce delays due to processing and geographical distance between customer and company. Customers send remittances to a nearby P.O. box; a local bank picks up remittances, deposits cash and sends remittance advices and copies of all checks to the company. The main disadvantage is cost; the banks charge a service fee up to 1% of the cash processed through the system. Information technology can provide additional efficiencies in the use of lockboxes. An electronic lockbox sends electronic notification of remittances to the company. This method enables the company to begin applying remittances to customer accounts before the photocopies of the checks arrive. An EFT system eliminates paper checks and uses electronic payments between banks. Integrating EFT and EDI, called the financial electronic data interchange, automates billing and cash collections. Procurement cards or credit cards can be used. These cards eliminate the risks and costs associated with creating and maintaining accounts receivable, but cost between 2% to 4% of the gross sales price.
Page Ref: 354
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic
77) Describe four threats in the revenue cycle and identify appropriate controls for each threat.
Answer: Answers can include the following information:
Threat 1: Sales to customers with poor credit Controls: Having an independent credit approval function and maintaining good customer accounting can help to prevent problems.
Threat 2: Shipping errors Controls: Reconciling shipping notices with picking tickets; bar-code scanners; and data entry application controls will help to catch these errors.
Threat 3: Theft of inventory Controls: Secure the location of inventory and document transfers; release only with valid shipping orders; have good accountability for picking and shipping; and finally, periodically reconcile records with a physical count.
Threat 4: Failure to bill customers Controls: Separating shipping and billing and pre-numbering of shipping documents helps along with reconciliation of all sales documents.
Threat 5: Billing errors Controls: Reconciliation of picking tickets and bills of lading with sales orders; data entry edit controls; and price lists may prevent billing errors.
Threat 6: Theft of cash Controls: Segregation of duties is essential to prevent this serious problem (the following duties should be separate: handling cash and posting to customer accounts; handling cash and authorizing credit memos and adjustments; issuing credit memos and maintaining customer accounts); use of lockboxes for receipts and EFT for disbursements; mailing customer statements monthly; use cash registers in retail operations where cash payments are received; deposit cash daily in the bank; and have the bank reconciliation function performed by independent third parties.
Threat 7: Posting errors in updating accounts receivable Controls: Use of editing and batch totals is essential here.
Threat 8: Loss of data Controls: Regular backups are essential with one copy stored off-site; and logical and physical access controls to prevent leakage to competitors and irregularities.
Threat 9: Poor performance Controls: Use sales and profitability analyses; accounts receivable aging; and cash budgets to track operations.
Page Ref: 336-337
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
78) Discuss the general control issue of the loss of data, as it relates to the revenue cycle.
Answer: One of the two general objectives that pertain to all revenue cycle activities is the loss of data. The primary threats related to the data availability objective are the loss of data and access controls. It is imperative that accurate customer account and inventory records be maintained for external and internal reporting purposes and for customer inquiries. Such records must be protected from loss and damage by using backup files. One backup file should be kept on-site, while a second should be kept off-site. Backup files of the most recent transactions should also be maintained. Also, all disks and tapes should have both external and internal file labels to reduce the possibility of accidental erasure of important files. Access controls are also important as a general control. Unauthorized access to information may cause leaks of the information to competitors and the risk of damage to sensitive and important data files. Employees should have certain access restrictions to help prevent this threat from occurring. Passwords and user IDs will help to limit access to files and the operations allowed to be performed on files. For example, the sales staff should not be allowed write-access to customers’ credit limit and approval information. Individual terminals should also have access controls in place. An example of this control would be to prevent someone at a shipping dock terminal from entering a sales transaction order. Another control that should be put in place is to require activity logs of any management approved transaction. Such a log should be maintained for audit trail purposes.
Page Ref: 335
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
79) Explain how to effectively segregate duties in the sales order activity.
Answer: Sales orders should be recorded by sales personnel. Credit decisions should be made by the credit manager, not sales personnel. Also, sales orders authorize release of goods to shipping. Warehouse and shipping should be separate from sales. Because a computer does recording and authorization, it is important to ensure integrity of the programs and to perform edit checks on any online entries.
Page Ref: 337-344
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
80) Discuss the revenue cycle threat of stockouts, carrying costs, and markdowns.
Answer: Stockouts, carrying costs, and markdowns are a threat in the sales order entry process. The problem with stockouts is that when goods are not available to ship to customers, the business risks losing the sale to a competitor that can provide the goods in a timely manner. The opposite problem can also occur where excess inventory increases carrying costs, with the result that markdowns may be necessary in order to sell the inventory. Two controls can be implemented to cope with this threat. One control that can be put into place is to establish accurate inventory control. An AIS with real-time online capabilities can be programmed to use the perpetual inventory method. This will ensure that accurate records are maintained about the quantity of inventory for sale. This will eliminate mistakes in placing orders for goods when a sufficient inventory amount is on hand. Periodic physical counts of inventory will also verify the perpetual amounts recorded by the AIS. Another important control in this situation is that of accurate sales forecasting. Proper marketing efforts should be made in conjunction with regularly reviewing sales forecasts for accuracy. Such forecasts should be revised as necessary. Sales force marketing efforts should be commensurate with inventory levels as well.
Page Ref: 342
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
81) You have been hired by a catalog company to computerize its sales order entry process. Approximately 70% of all orders are received over the telephone by a sales person. The other 30% of orders are received by a sales person through mail or fax. The catalog company wants the phone orders processed real-time. The mail and fax orders will be processed in batches of 50 orders. The following attributes are collected for every sales order:
Customer number (if the order is from a new customer, a new number needs to be assigned)
Customer name
Address
Payment method (credit card for phone and fax orders and check for mailed orders)
Credit card number and expiration date
Items ordered and quantity of each
Unit price of each item ordered
Identify and describe at least ten specific control policies and procedures you will implement for the sales order process. Be very specific describing the controls and number each new control you suggest.
Answer:
1. Validity check on customer number
2. Authorization controls to set up new customer records
3. Check digit on customer number
4. Modulus 11 on customer number
5. Closed-loop verification on customer number
6. Credit approval before accepting orders
7. Credit check and credit limit establishment for new customers, before accepting orders
8. Preformatting of customer state, zip code and phone number
9. On-line real-time authorization of credit card charges
10. Field check on credit card number and expiration date
11. Validity check on item number
12. Check digit on item number
13. Modulus 11 on item number
14. Closed-loop verification on item number
15. Auto fill of unit price, based on item number
16. Field check on quantity ordered
17. Batch control totals for mail and fax orders
18. Encryption of credit card data
19. Completeness check
Page Ref: 339
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
Chapter 13
1) The Squishy Things Toy Company was established in 1948. It recently signed a large contract with a chain of retail toy stores. As a condition of the contract, the Squishy will be required to track and forecast product sales by linking in to the chain’s sales database. Squishy will then be responsible for shipping products to the chain’s regional warehouses as needed. The relationship between Squishy and the chain is an example of
A) vendor-managed inventory.
B) sales force automation.
C) electronic data interchange.
D) optical character recognition.
Answer: A
Page Ref: 382
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
2) Requiring all packing slips be reconciled to purchase orders before accepting a delivery of inventory would be most likely to prevent which of the following situations?
A) A supplier delivers more inventory than ordered at the end of the year and sends an invoice for the total quantity delivered.
B) An employee mails a fake invoice to the company, which is then paid.
C) The inventory records are incorrectly updated when a receiving department employee enters the wrong product number on the receiving report.
D) Receiving department employees steal inventory and then claim the inventory was received and delivered to the warehouse.
Answer: A
Page Ref: 386
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
3) Comparing quantities on a vendor invoice to quantities on the receiving report would not prevent or detect which of the following situations?
A) Receiving and accepting inventory not ordered
B) Theft of inventory by receiving department employees
C) Update of wrong inventory items due to data entry error
D) Order for an excessive quantity of inventory
Answer: A
Page Ref: 386
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
4) Which of the following would probably be the least effective control to mitigate the risk of paying an invoice payable to a phony vendor for inventory purchases, mailed to the company by an employee attempting to commit fraud?
A) Only pay from original invoices.
B) Cancel all invoices and supporting documentation when paid.
C) Strict access and authorization controls for the approved vendor master file.
D) Require three-way match for all inventory purchase invoices.
Answer: A
Page Ref: 387
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
5) Which of the following would be the least effective control to prevent paying the same vendor invoice twice?
A) Allow only the accounts payable department to authorize payment for vendor invoices and allow only the cash disbursements department to cut and mail checks to vendors.
B) Only pay from original invoices.
C) Cancel each document in the voucher package once the check is prepared and mailed.
D) Only pay vendor invoices that have been matched and reconciled to a purchase order and a receiving report.
Answer: A
Page Ref: 391
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
6) To accomplish the objectives set forth in the expenditure cycle, a number of key management decisions must be addressed. Which of the decisions below is not ordinarily found as part of the expenditure cycle?
A) How can cash payments to vendors be managed to maximize cash flow?
B) What is the optimal level of inventory and supplies to carry on hand?
C) Where should inventories and supplies be held?
D) What are the optimal prices for each product or service?
Answer: D
Page Ref: 372
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
7) One of the basic activities in the expenditure cycle is the receiving and storage of goods, supplies, and services. What is the counterpart of this activity in the revenue cycle?
A) sales order entry process
B) shipping function
C) cash collection activity
D) cash payments activity
Answer: B
Page Ref: 373
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Reflective Thinking
8) The traditional approach to inventory management to ensure sufficient quantity on hand to maintain production is known as
A) safety stock.
B) just-in-time production.
C) economic order quantity.
D) optimal inventory quantity.
Answer: C
Page Ref: 378
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
9) Economic Order Quantity (EOQ) includes several variables that must be taken into consideration when calculating the optimal order size. One variable, the costs associated with holding inventory, is referred to as
A) ordering costs.
B) carrying costs.
C) the reorder point.
D) stockout costs.
Answer: B
Page Ref: 378
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
10) The need to place an order for inventory is specified by the
A) company inventory policies.
B) economic order quantity.
C) stockout point.
D) reorder point.
Answer: D
Page Ref: 378
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
11) When goods are being ordered from a vendor, which electronic files are either read or updated?
A) inventory, vendors, and accounts payable
B) vendors and accounts payable
C) open purchase orders and accounts payable
D) inventory, vendors, and open purchase orders
Answer: D
Page Ref: 374
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
12) What is a key feature of materials requirements planning (MRP)?
A) minimize or entirely eliminate carrying and stockout costs
B) reduce required inventory levels by scheduling production rather than estimating needs
C) determine the optimal reorder point
D) determine the optimal order size
Answer: B
Page Ref: 378
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
13) Materials requirements planning (MRP)
A) reduces the uncertainty about when materials are needed, thereby reducing the need to carry large levels of inventory.
B) is able to compute exactly the cost of purchasing by taking into account all costs associated with inventory carrying.
C) requires vendors to deliver inventory to the production site exactly when needed and in the correct quantities.
D) None of the above are correct.
Answer: A
Page Ref: 378
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
14) The inventory management approach that attempts to minimize, if not eliminate, carrying and stockout costs is
A) materials requirements planning.
B) economic order quantity.
C) just-in-time inventory.
D) evaluated receipt settlement.
Answer: C
Page Ref: 378
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic
15) What aspect below best characterizes a Just-In-Time (JIT) inventory system?
A) frequent deliveries of smaller quantities of items to the work centers
B) frequent deliveries of large quantities to be held at the work centers
C) less frequent deliveries of large quantities of goods to central receiving
D) infrequent bulk deliveries of items directly to work centers
Answer: A
Page Ref: 378-379
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
16) What is the key difference between the MRP and JIT inventory management approaches?
A) Only JIT reduces costs and improves efficiency.
B) MRP is especially useful for products such as fashion apparel.
C) JIT is more effectively used with products that have predictable patterns of demand.
D) MRP schedules production to meet estimated sales needs; JIT schedules production to meet customer demands.
Answer: D
Page Ref: 379
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
17) MRP will be a preferred method over JIT when the
A) demand for inventory is fairly predictable.
B) demand for inventory is mostly unpredictable.
C) product has a short life cycle.
D) MRP is always a preferred method over JIT.
Answer: A
Page Ref: 379
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
18) A key decision in ordering is selecting a suitable vendor. Which of the following would not be a major criterion in vendor selection?
A) prices of goods
B) quality of goods
C) credit rating of the vendor
D) ability to deliver on time
Answer: C
Page Ref: 380
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
19) Once a vendor is selected for a product, the vendor’s identity is recorded in the
A) purchase requisition transaction file.
B) purchase requisition master file.
C) inventory transaction file.
D) inventory master file.
Answer: D
Page Ref: 381
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
20) A purchase order is
A) a document formally requesting a vendor to sell a certain product at a certain price.
B) a request for delivery of certain items and quantities.
C) a contract between the buyer and vendor once accepted by the vendor.
D) All of the above are true.
Answer: D
Page Ref: 381
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
21) Stepanek Sales and Service provides free coffee to employees. Stepanek arranged with Ingebrigtson’s Joe to deliver as many coffee packages, sugar, creamer, and filters as needed each week. Ingebrigtson’s sends a monthly invoice for Stepanek to pay. This arrangement is best described as a
A) blanket purchase order.
B) set purchase order.
C) fixed purchase order.
D) standard purchase order.
Answer: A
Page Ref: 381
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
22) A major cost in the purchasing function is the number of purchase orders processed. One technique that may reduce purchasing-related expenses is to have suppliers compete with each other to meet demand at the lowest price. This name of this technique is
A) an EDI auction.
B) a trading exchange.
C) a reverse auction.
D) a supplier consortium.
Answer: C
Page Ref: 382
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
23) One of the major responsibilities of the receiving department is
A) deciding if the delivery should be accepted.
B) verifying any purchase discounts for the delivery.
C) deciding on the location where the delivery will be stored until used.
D) updating inventory subsidiary ledgers.
Answer: A
Page Ref: 384
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
24) Which of the following is generally not shown on a receiving report?
A) price of the items
B) quantity of the items
C) purchase order number
D) counted and inspected by
Answer: A
Page Ref: 384
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
25) A receiving clerk notes that a delivery of 10 units has been received, but the purchase order specified 12 units. A debit memo will need to be prepared to adjust for the difference between the quantity ordered and received. Who should prepare this document?
A) the receiving clerk
B) the controller
C) the vendor
D) the purchasing department manager
Answer: D
Page Ref: 385
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
26) Identify in which of the following scenarios a company could adjust the balance due the vendor by issuing a debit memo.
A) quantity different from that ordered
B) damage to the goods
C) goods that fail inspection for quality
D) All of the above are possible scenarios.
Answer: D
Page Ref: 385
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
27) What is one of the best ways to improve the overall efficiency and effectiveness of the receipt and storage of ordered items?
A) requiring all suppliers to have the carrier verify quantities and item numbers before shipment
B) requiring all suppliers to include RFID tags on their items
C) requiring all suppliers to use EDI to expedite the receiving department function
D) requiring all delivery trucks to have satellite data terminals to expedite the receiving department function
Answer: B
Page Ref: 385
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
28) Vendor invoices are approved by the ________, which reports to the ________.
A) purchasing department; controller
B) accounts payable department; treasurer
C) purchasing department; treasurer
D) accounts payable department; controller
Answer: D
Page Ref: 387
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
29) The disbursement voucher and supporting documents are sent to the ________ for payment prior to the due date.
A) cashier
B) treasurer
C) controller
D) accounts payable department
Answer: A
Page Ref: 390
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
30) A(n) ________ system posts an approved invoice to the vendor account and stores it in an open invoice file until payment is made by check.
A) nonvoucher
B) voucher
C) cycle
D) evaluated receipt settlement
Answer: A
Page Ref: 387
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
31) A disbursement voucher contains
A) a list of outstanding invoices.
B) the net payment amount after deducting applicable discounts and allowances.
C) the general ledger accounts to be debited.
D) All of the above are correct.
Answer: D
Page Ref: 387
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
32) One objective of accounts payable is to authorize payment only for goods or services actually ordered and received. The best way to process supplier invoices is to use
A) electronic funds transfer for small, occasional purchases from suppliers.
B) a nonvoucher system.
C) EDI for all small, occasional purchases from suppliers.
D) a disbursement voucher system.
Answer: D
Page Ref: 387
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
33) What is not an advantage of using disbursement vouchers?
A) Disbursement vouchers reduce the number of checks written.
B) Disbursement vouchers can be prenumbered which simplifies the tracking of all payables.
C) Disbursement vouchers facilitate separating the time of invoice approval from the time of invoice payment.
D) There are no disadvantages to using disbursement vouchers.
Answer: D
Page Ref: 387
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
34) Which of the following is not an advantage of a voucher system?
A) Several invoices may be included on one voucher, reducing the number of checks.
B) Disbursement vouchers may be pre-numbered and tracked through the system.
C) The time of voucher approval and payment can be kept separate.
D) It is a less expensive and easier system to administer than other systems.
Answer: D
Page Ref: 387
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
35) Duties in the expenditure cycle should be properly segregated to promote internal control. This means that the authorization function is performed by ________, the recording function is performed by ________, and cash handling is performed by the ________.
A) accounts payable; purchasing; cashier
B) purchasing; accounts payable; cashier
C) purchasing; cashier; accounts payable
D) purchasing; accounts payable; treasurer
Answer: B
Page Ref: 375
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
36) A voucher package should include
A) a purchase requisition, vendor invoice, and receiving report.
B) a purchase order, vendor invoice, and receiving report.
C) a purchase requisition, purchase order, and receiving report.
D) a bill of lading and vendor invoice.
Answer: B
Page Ref: 387
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
37) Evaluated receipt settlement (ERS) approves payment of vendor invoices after reconciling the purchase order and the
A) vendor invoice.
B) sales invoice.
C) receiving report.
D) disbursement voucher.
Answer: C
Page Ref: 388
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
38) All of the following are opportunities to improve efficiency of the accounts payable function except
A) use blanket purchase orders.
B) convert a manual AIS system to EDI and EFT.
C) streamline noninventory purchases.
D) use evaluated receipt settlement.
Answer: A
Page Ref: 387-388
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
39) When purchasing miscellaneous supplies, companies can reduce costs, improve efficiency, and combat employee fraud by
A) using procurement cards.
B) implementing a JIT inventory system.
C) requiring employees to personally purchase items then reimbursing employees at the end of each month.
D) paying amounts out of petty cash.
Answer: A
Page Ref: 389
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
40) If available, a 1% discount for payment within 10 days instead of 30 days represents an approximate savings of ________ % annually.
A) 1
B) 12
C) 18
D) 36
Answer: C
Page Ref: 390
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
41) What is the best control to mitigate the threat of paying prices that are too high for goods ordered?
A) require the receiving department to verify the existence of a valid purchase order
B) use only approved suppliers and solicit competitive bids
C) only pay invoices that are supported by the original voucher package
D) use bar-code technology to eliminate data entry errors
Answer: B
Page Ref: 382
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
42) What is probably the most effective control for the prevention of kickbacks to purchasing agents?
A) purchasing from approved vendors
B) diligent supervision in the purchasing department
C) a corporate policy to prohibit purchasing agents from accepting kickbacks
D) reviews of vendor performance
Answer: C
Page Ref: 383
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
43) One of the threats associated with the process and activity of receiving and storing goods is
A) errors in counting.
B) kickbacks.
C) requests for unnecessary items.
D) errors in vendor invoices.
Answer: A
Page Ref: 385
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
44) What is the best way to prevent the acceptance of unordered goods?
A) Order only from approved vendors.
B) Match the packing slip to a purchase order before accepting delivery.
C) Enforce an appropriate conflict of interest policy in place.
D) Require specific authorization from the purchasing manager before accepting any goods.
Answer: B
Page Ref: 386
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
45) Which of the following is not a common control for ensuring inventory is secure and inventory counts are accurate?
A) control of physical access to the inventory storage areas
B) transfers of inventory with proper documentation
C) sending “blind” copies of purchase orders to inventory control for data entry
D) making physical counts of inventory at least once per year
Answer: C
Page Ref: 376
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
46) Double-checking the accuracy of an invoice is a control that can help to neutralize a threat in the expenditure cycle. What activity would specifically be associated with this control?
A) ordering goods
B) receiving and storing goods
C) paying for goods and services
D) requesting goods be ordered
Answer: C
Page Ref: 389
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
47) What control would best mitigate the threat of paying an invoice twice?
A) never authorize payment of a photocopy of an invoice
B) double-check mathematical accuracy of invoices
C) approval of purchase orders
D) maintaining adequate perpetual inventory records
Answer: A
Page Ref: 391
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
48) Which control would best prevent payments made to fictitious vendors?
A) Allow payments only to approved vendors.
B) Restrict access to any payment or approval documents.
C) Have an independent bank reconciliation.
D) Make sure all documents are in order before approving payments.
Answer: A
Page Ref: 392
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
49) In the expenditure cycle, good control dictates that expenditures should be paid by check. This may not be feasible when minor purchases are made. To facilitate quick payment for minor purchases, a(n) ________ should be set up and maintained using ________.
A) special bank account; disbursement vouchers
B) imprest fund; vouchers
C) cash box; small denomination bills
D) petty cash fund; procurement cards
Answer: B
Page Ref: 392
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
50) A surprise count of an imprest petty cash fund should find the total of ________ equal to the amount authorized for the fund.
A) cash and credit memos
B) cash and vouchers
C) cash
D) cash and checks
Answer: B
Page Ref: 392
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
51) What control should be put in place that assigns responsibility for EFT payments made to vendors?
A) Encrypt all EFT transmissions.
B) Time stamp all EFT transactions.
C) Establish a control group to monitor EFT transactions for validity and accuracy.
D) Number all EFT transactions.
Answer: C
Page Ref: 391
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
52) Which of the following threats is not specific to the purchase requisition process of the expenditure cycle?
A) stockouts
B) purchasing from unauthorized vendors
C) requisitioning goods not needed
D) All of the above are threats in the purchase requisition process.
Answer: B
Page Ref: 380
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
53) There is a symmetrical interdependence between a firm’s expenditure cycle and its suppliers’
A) production cycle.
B) revenue cycle.
C) expenditure cycle.
D) general ledger and reporting system.
Answer: B
Page Ref: 372
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Reflective Thinking
54) The Squishy Things Toy Company was established in 1948. It recently signed a large contract with a chain of retail toy stores. As a condition of the contract, the Squishy will be required to track and forecast product sales by linking in to the chain’s sales database. Squishy will then be responsible for shipping products to the chain’s regional warehouses as needed. The technology that is used for communication between Squishy and the chain is
A) vendor-managed inventory.
B) sales force automation.
C) electronic data interchange.
D) optical character recognition.
Answer: C
Page Ref: 372
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
55) The management at Sad Clown Pajamas, an Internet-based wholesaler, is considering a new inventory control system. The current system is inadequate because it results in stockouts that interrupt production and excess stocks of some materials that result in markdowns and high carrying costs. The new system, which will focus on ensuring that the amounts purchased minimize these costs, will employ
A) a just-in-time inventory system.
B) the economic order quantity.
C) a reorder point.
D) materials requirements planning.
Answer: B
Page Ref: 378
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
56) The management at Sad Clown Pajamas, an Internet-based wholesaler, is considering a new inventory control system. The current system is inadequate because it results in stockouts that interrupt production and excess stocks of some materials that result in markdowns and high carrying costs. The new system, which will focus on ensuring that orders are placed with sufficient lead time to prevent stockouts, will employ
A) a just-in-time inventory system.
B) the economic order quantity.
C) a reorder point.
D) materials requirements planning.
Answer: C
Page Ref: 378
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
57) The management at Sad Clown Pajamas, an Internet-based wholesaler, is considering a new inventory control system. The current system is inadequate because it results in stockouts that interrupt production and excess stocks of some materials that result in markdowns and high carrying costs. The new system, which will focus on forecasting demand for Sad Clown’s products, will employ
A) a just-in-time inventory system.
B) the economic order quantity.
C) a reorder point.
D) materials requirements planning.
Answer: D
Page Ref: 378
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
58) The management at Sad Clown Pajamas, an Internet-based wholesaler, is considering a new inventory control system. The current system is inadequate because it results in stockouts that interrupt production and excess stocks of some materials that result in markdowns and high carrying costs. The new system, which will focus on reducing or completely eliminating carrying costs, will employ
A) a just-in-time inventory system.
B) the economic order quantity.
C) a reorder point.
D) materials requirements planning.
Answer: A
Page Ref: 378
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
59) Bob Chum is the sales manager at Folding Squid Technologies. At lunch with the company CEO, he proudly announced that he had negotiated a(n) ________ with a client that defined a long-term commitment to buy components from Folding Squid.
A) purchase order
B) blanket purchase order
C) evaluated receipt settlement
D) voucher
Answer: B
Page Ref: 381
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
60) Bob Chum is the sales manager at Folding Squid Technologies. At lunch with the company CEO, he proudly announced that he had received a ________ from a client to buy a large quantity of components from Folding Squid.
A) purchase order
B) blanket purchase order
C) voucher
D) purchase requisition
Answer: A
Page Ref: 381
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
61) Bob Chum is the sales manager at Folding Squid Technologies. At lunch with the company CEO, he complained that a recent shipment from a vendor had been unsatisfactory and so had to be returned. That required the purchasing manager to send a ________ to the supplier.
A) purchase order
B) blanket purchase order
C) receiving report
D) debit memo
Answer: D
Page Ref: 385
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
62) To minimize the number of checks that need to be written to pay vendor invoices a company should use a
A) voucher system.
B) just-in-time inventory system.
C) nonvoucher system.
D) evaluated receipt settlement system.
Answer: A
Page Ref: 387
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
63) Evaluated receipt settlement increases efficiency by
A) eliminating the need for receiving reports.
B) eliminating the need for vendor invoices.
C) eliminating the need for purchase orders.
D) eliminating the need to prepare and mail checks.
Answer: B
Page Ref: 388
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
64) In the expenditure cycle, Financial Electronic Data Interchange (FEDI) increases efficiency by
A) eliminating the need for receiving reports.
B) eliminating the need for vendor invoices.
C) eliminating the need for purchase orders.
D) eliminating the need to prepare and mail checks.
Answer: D
Page Ref: 390
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
65) Procurement cards differ from corporate credit cards in which of the following ways?
A) Credit limits can be set for procurement cards, but not corporate credit cards.
B) Credit cards can be used to make purchases without an explicit sign off by supervisors, but procurement cards require a sign off.
C) Procurement cards can only be used with approved vendors, but credit cards can be used anywhere.
D) Procurement card invoices are sent separately for each card, whereas corporate credit cards are consolidated into a single invoice.
Answer: C
Page Ref: 389
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
66) The purchasing manager at Folding Squid Technologies has responsibility for reviewing and authorizing purchase orders. He also reviews receiving reports, approves or corrects them, and authorizes the cashier to pay vendor invoices. Which of the following would correct control weaknesses, if any, related to these activities?
A) Vendor invoices should be reviewed by the purchasing manager to ensure that they are correct.
B) Accounts payable should reconcile purchase orders, receiving reports, and invoices.
C) Vendor invoices should be reviewed by accounts receivable and then cancelled when paid.
D) Controls are adequate under the current system.
Answer: B
Page Ref: 387
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
67) The purchasing manager at Folding Squid Technologies has responsibility for reviewing and authorizing purchase orders. Receiving reports are prepared by shipping and receiving based on the relevant purchase order(s). Purchase orders, receiving reports, and vendor invoices are reconciled by accounts payable, which authorizes payment. Which of the following would correct control weaknesses, if any, related to these activities?
A) Vendor invoices should be reviewed by the purchasing manager to ensure that they are correct.
B) Accounts payable should authorize purchase orders.
C) Receiving reports should be reviewed and corrected by the purchasing manager.
D) Controls are adequate under the current system.
Answer: D
Page Ref: 387
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
68) The receiving clerk at Folding Squid Technologies examines incoming shipments and reconciles their contents with the relevant purchase orders. A receiving report is then sent to accounts receivable and the vendor’s invoice is approved for payment. Which of the following would correct control weaknesses, if any, related to these activities?
A) The invoice should be approved for payment by the shipping clerk after the purchase order and receiving report are reconciled.
B) Accounts payable should reconcile the purchase order and the receiving report.
C) Invoices, purchase orders, and receiving reports should be reconciled by the receiving clerk.
D) Controls are adequate under the current system.
Answer: B
Page Ref: 387
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
69) The receiving clerk at Folding Squid Technologies examines incoming shipments and checks their purchase order numbers. A receiving report is then sent to accounts payable, where it is reconciled with the relevant purchase orders and invoices and payment is authorized. Which of the following would correct control weaknesses, if any, related to these activities?
A) Vendor invoices should be approved for payment by the shipping clerk after the purchase order and receiving report are reconciled.
B) Vendor invoices should be approved for payment by the purchasing manager.
C) Purchase orders and receiving reports should be reconciled by the purchasing manager.
D) Controls are adequate under the current system.
Answer: D
Page Ref: 387
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
70) Which of the controls below would be least effective to prevent ordering goods at higher than market prices?
A) Variance analysis of actual expenses to budgeted expenses
B) For high-dollar goods, solicit competitive bids from possible vendors
C) Only place orders with vendors on an approved vendor list
D) Frequent review of, and update to, vendor price lists stored in the AIS
Answer: A
Page Ref: 382
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
71) The document below would be known as what by Alpha Omega Electronics?
A) Receiving report
B) Purchase order
C) Purchase requisition
D) Packing slip
Answer: A
Page Ref: 384
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Reflective Thinking
72) Which of the following would be the best control to prevent receiving department employees from stealing inventory and claiming the ordered quantity wasn’t received from the vendor?
A) Reconcile quantity on packing slip to physical count when accepting delivery.
B) Restrict physical access to the receiving area.
C) Require all deliveries be made at the receiving area.
D) Require dual signatures on the move ticket when receiving delivers the inventory to the warehouse.
Answer: A
Page Ref: 386
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
73) Define and describe the EOQ approach to inventory management.
Answer: EOQ (economic order quantity) is the traditional inventory control method to maintain sufficient inventory levels so production can continue without interruption. EOQ should take into account a situation where inventory use is greater than expected. EOQ calculates the optimal order size to minimize the sum of ordering, carrying, and stockout costs. Ordering costs all expenses associated with processing purchasing transactions. Carrying costs costs associated with holding inventory. Stockout costs costs from inventory shortages, such as lost sales or production costs.
Page Ref: 378
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
74) Discuss the differences between EOQ, MRP, and JIT.
Answer: Economic Order Quantity (EOQ) is the traditional approach to managing inventory. EOQ is used to find the optimal order size. Ordering costs, carrying costs, and stockout costs are considered in finding the EOQ. The MRP (Materials Requirements Planning) inventory method seeks to reduce inventory levels by scheduling production, based on estimated sales, rather than by estimating needs (which EOQ does). A just-in-time inventory system (or JIT) attempts to minimize, if not totally eliminate, both carrying and stockout costs through the frequent delivery of small amounts of materials, parts, and supplies when they are needed. JIT does not attempt to estimate needs or schedule production based on estimated sales, as it is based on customer demand at a given time. A JIT system almost eliminates finished goods inventory.
Page Ref: 378
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic
75) a) What is the major cost driver in the purchasing function? b) Describe how information technology can be used to control this cost driver.
Answer: a) The major cost driver in the purchasing function is the number of purchase orders processed. b) The number of purchase orders can be reduced or streamlined by: Electronic data interchange (EDI) for transmitting purchase orders to vendors. Use procurement cards for small dollar and small quantity purchases of non-inventory items. Reduce clerical costs by using the Internet to perform certain purchasing functions. Use vendor-managed inventory programs to reduce purchasing and inventory costs. Implement reverse auctions and pre-award audits.
Page Ref: 382, 389
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
76) Explain what is meant by the expenditure cycle as a “mirror image” of the revenue cycle.
Answer: The expenditure cycle has been called a “mirror image” of the revenue cycle because the activities of the expenditure cycle are the opposite, or “reflection” of several activities found in the revenue cycle. For example, the order goods activity generates a purchase order, which serves as customer input to the sales order entry process. The receive goods activity handles the goods sent via the supplier’s shipping function. The pay for goods activity generates the payments that are processed by the supplier’s cash collection activity. This mirror image also means that major technological improvements in the expenditure cycle may bring about complementary improvements in suppliers’ revenue cycle as well.
Page Ref: 372-373
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Reflective Thinking
77) Identify possible problems associated with receiving goods and appropriate actions in response to the problems.
Answer: When a shipment of goods arrives, the quantity of goods received may not be the same as the quantity ordered; the goods may have been damaged in shipment and therefore are not suitable for use; and, goods may be received that are inferior in quality and fail an inspection. Whenever any of these problems occur, the purchasing department should deal with the vendor and issue a debit memo to record an adjustment to the order. The vendor should then issue a credit memo in acknowledgment of the problem and the pending adjustment.
Page Ref: 385
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
78) How can information technology be used to improve the vendor invoice approval process?
Answer: EDI eliminates the need to enter invoice data and the matching of payment documents all of this can be done using computers and network technologies. Technology can eliminate the need for vendor invoices by approving payment upon receipt of the goods. Imaging systems can eliminate paper flow, and universal languages such as XML can provide a paperless means of receiving and storing vendor invoices. Use of procurement cards, credit cards, and electronic expense forms can improve the efficiency of non-inventory purchases. ERS, which is invoiceless, is a means to replace the traditional three-matching process (vendor invoice, receiving report and purchase order) with a two-way match of the purchase order and receiving report.
Page Ref: 387-389
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
79) Under what conditions is MRP more suitable than JIT and vice versa?
Answer: MRP systems schedule production based on estimated sales, and JIT systems schedule production based on customer demand. The choice between these two systems is based on the types of products a company sells. For example, products that have predictable patterns of demand and a long life cycle are more suitable for MRP systems. In this case, sales can be forecast with greater accuracy. Conversely, if the product has an unpredictable pattern of demand and a shorter life cycle, then a JIT system is more suitable. JIT is able to adapt better to continuously changing production levels.
Page Ref: 379
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
80) In the expenditure cycle, the majority of payments made are by check. What are some control issues related to payment of vendors by check?
Answer: Key control problems in the area of payment by check can give rise to fraudulent activity. Fraudulent disbursements made by check to fictitious suppliers are one of the most common types of fraud. Control over checks can be strengthened in a number of ways. First, all checks should be sequentially pre-numbered and kept under lock and key until use. The internal auditor should randomly audit the supply of unused checks and verify that none are missing. Use of the voucher system will also provide control over paying a “phantom” supplier, since several supporting documents must be present in the voucher packet in order to have a check issued. The cashier and/or treasurer should be the only parties authorized to sign checks. Two signatures should be required on all checks in excess of a predetermined dollar amount to provide independent review of large expenditures. Also, signed checks should not be returned to accounts payable, but should be mailed by the cashier or treasurer. When a check is issued, all documents in the voucher package should be cancelled so that the voucher cannot be resubmitted for payment. To provide another independent review of checking account activity, someone not connected with either accounts payable or the treasurer’s office should reconcile all bank accounts. To help circumvent check alteration and forgery, check protection machines should be used to write the dollar amount of the check as well as the date. The paper the check is printed on should have some special watermark or identifying mark that is readable at a certain angle as well.
Page Ref: 392
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
81) Identify ten threats and applicable control procedures in the expenditure cycle.
Answer: Answers can include the following information:
1: Stock-outs Controls: Inventory control system; accurate perpetual inventory; and vendor performance analysis is needed to prevent this problem
2: Requesting goods not needed Controls: Review and approval by supervisors; use of pre-numbered requisition forms; and restricted access to blank purchase orders
3: Purchasing goods at inflated prices Controls: Competitive bidding and proper supervision; approved purchase orders; and price list consultations are needed to prevent this problem
4: Purchasing goods of inferior quality Controls: Use experienced buyers who know good vendors; review purchase orders; and incorporate approved vendor list into formal procedures
5: Purchasing from unauthorized vendors Control: Pre-numbered purchase orders should be approved; restrict access to approved vendor list and have procedures in place for any change to the list
6: Kickbacks paid to buyers to influence their decisions Controls: Clear conflict of interest policy prohibiting the acceptance of any gift from vendors; disclosure of financial interest policy for purchasing agents; and vendor audits
7: Receiving unordered goods Controls: Receiving department must reject any goods for which there is no approved purchase order
8: Errors in counting goods received Controls: Use “blind” P.O. copies to force receiving personnel to actually count goods; provide incentives for counting goods
9: Theft of inventory Controls: Secure inventory storage locations; make transfers of inventory with proper approval and documentation; do periodic physical count and reconciliation with recorded amounts
10: Errors in vendor invoices Controls: Invoice accuracy should be verified and compared to P.O.s and receiving report data
11: Paying for goods not received Controls: Voucher package and original invoice should be necessary for payments
12: Failure to take available purchase discounts Controls: File approved invoices by due date; track invoices by due date; use a cash budget to plan for cash needs
13: Paying same invoice twice Controls: Invoices should be approved only with a full voucher package and paid ones should be canceled so they cannot be used again; do not pay invoices marked “Duplicate” or “Copy”
14: Recording and posting errors for purchases and payments Controls: Data entry controls, and periodic reconciliation of subsidiary ledger with general ledger control account
15: Misappropriation of cash by paying fictitious vendors and alteration of checks Controls: Restrict access to cash, blank checks, and check signing machine; use check protection, pre-numbered checks, and imprinted amounts on checks to cut down on forgery and fraud; use petty cash fund for small expenditures only; have proper segregation of duties and independent bank reconciliation function
16: Theft associated with EFT use Controls: Access controls to the system; encryption of transmissions; time-stamp and number transmissions; control group should monitor all EFT activity
17: Loss of data Controls: Use file labels, back up of all data files regularly; and, use access controls
18: Poor performance Controls: Preparation and review of performance reports
Page Ref: 376-377
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
82) What types of decision-making and strategic information should the AIS provide in the expenditure cycle?
Answer: The AIS should provide decision making information to: Determine when and how much additional inventory to order. Select the appropriate vendors from whom to order. Verify the accuracy of vendor invoices. Decide whether purchase discounts should be taken. Monitor cash flow needs to pay outstanding obligations. AIS should also provide the following strategic and performance evaluation information on: Efficiency and effectiveness of the purchasing department. Analysis of vendor performance such as on-time delivery, quality, etc. Time taken to move goods from the receiving dock into production. Percentage of purchase discounts taken.
Page Ref: 372
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
83) How can using RFID tags or bar codes on goods or products provide significant benefit in the expenditure cycle?
Answer: RFID tags and bar codes can significantly improve the process of receiving goods from suppliers for several reasons. First, they can easily be scanned electronically. Electronically capturing the unique number of a product not only provides identification and quantity data about the product; it can also provide specific production information such as date and time of manufacture, production run information, etc. Electronically encoding such information into an integrated AIS provides up-to-the-minute inventory counts, as well as counts of units sold, and returns for use in a perpetual inventory system. Also, both vendor and customers can read tags and bar codes, and certain formats are universal in nature. This allows goods to be sold virtually anywhere in the world, allowing for easier global marketing efforts to be made by businesses. It also eliminates the need for human data entry and reduces the risk of stockouts.
Page Ref: 374
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
Chapter 15
1) Which activity below is not performed by the HRM?
A) compensation
B) training
C) discharge
D) recruitment and hiring
Answer: A
Page Ref: 435
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
2) The sales department administrative assistant has been assigning phone order sales to her brother-in-law, a company sales person. Company policy is to pay commissions only on orders directly received by sales people, not on orders received over the phone. The resulting fraudulent commission payments might best have been prevented by requiring that
A) sales commission statements be supported by sales order forms signed by the customer and approved by the sales manager.
B) sales order forms be prenumbered and accounted for by the sales department manager.
C) sales orders and commission statements be approved by the accounting department.
D) disbursement vouchers for commission payments be reviewed by the internal audit department and compared to sales commission statements and sales orders.
Answer: A
Page Ref: 443
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
3) Which department should have the sole ability to provide information to the AIS about hiring, terminations, and pay rate changes?
A) payroll
B) timekeeping
C) production
D) HRM
Answer: D
Page Ref: 436
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
4) Which of the following is not one of the major sources of input to the payroll system?
A) payroll rate changes
B) time and attendance data
C) checks to insurance and benefits providers
D) withholdings and deduction requests from employees
Answer: C
Page Ref: 441
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
5) In the payroll system, checks are issued to
A) employees and to banks participating in direct deposit.
B) a company payroll bank account.
C) government agencies.
D) All of the above are correct.
Answer: D
Page Ref: 441
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
6) Experts estimate that on average the costs associated with replacing an employee are about ________ that of the employee’s annual salary.
A) one-quarter
B) one-half
C) one and one-half
D) twice
Answer: C
Page Ref: 438
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
7) For recording time spent on specific work projects, manufacturing companies usually use a
A) job time ticket.
B) time card.
C) time clock.
D) labor time card.
Answer: A
Page Ref: 443
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
8) Regarding the use of incentives, commissions and bonuses in payroll, which of the following statements is false?
A) Using incentives, commissions, and bonuses requires linking the payroll system and the information systems of sales and other cycles in order to collect the data used to calculate bonuses.
B) Bonus/incentive schemes must be properly designed with realistic, attainable goals that can be objectively measured.
C) Incentive schemes can result in undesirable behavior.
D) All of the above are true.
Answer: D
Page Ref: 443
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
9) What is not a desired result of an employee bonus/incentive system?
A) Employees may recommend unnecessary services to customers in order to exceed set sales quotas and earn a bonus.
B) Employees may look for ways to improve service.
C) Employees may analyze their work environment and find ways to cut costs.
D) Employees may work harder and may be more motivated to exceed target goals to earn a bonus.
Answer: A
Page Ref: 444
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
10) These are used to transmit time and attendance data directly to the payroll processing system.
A) Badge readers
B) Electronic time clocks
C) Magnetic cards
D) none of the above
Answer: B
Page Ref: 444
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
11) Payroll deductions fall into the broad categories of ________ and ________.
A) payroll tax withholdings; voluntary deductions
B) unemployment; social security taxes
C) unemployment taxes; income taxes
D) voluntary deductions; income taxes
Answer: A
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
12) Which of the following deductions is not classified as a voluntary deduction?
A) pension plan contributions
B) social security withholdings
C) insurance premiums
D) deductions for a charity organization
Answer: B
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
13) Which type of payroll report contains information such as the employees’ gross pay, payroll deductions, and net pay in a multicolumn format?
A) payroll register
B) deduction register
C) employee earnings statement
D) federal W-4 form
Answer: A
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
14) Which type of payroll report lists the voluntary deductions for each employee?
A) payroll register
B) deduction register
C) earnings statement
D) federal W-4 form
Answer: B
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
15) Which type of payroll report includes the details of the current paycheck and deductions as well as year-to-date totals?
A) payroll register
B) deduction register
C) earnings statement
D) federal W-4 form
Answer: C
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
16) Why is a separate payroll account used to clear payroll checks?
A) for internal control purposes to help limit any exposure to loss by the company
B) to make bank reconciliation easier
C) banks don’t like to commingle payroll and expense checks
D) All of the above are correct.
Answer: A
Page Ref: 450
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
17) One good way to eliminate paper paychecks is to
A) pay in cash only.
B) pay with money orders.
C) use direct deposit.
D) use Electronic Funds Transfer.
Answer: C
Page Ref: 449
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
18) What step can be taken to reduce the distribution of fraudulent paychecks?
A) have internal audit investigate unclaimed paychecks
B) allow department managers to investigate unclaimed paychecks
C) immediately mark “void” across all unclaimed paychecks
D) match up all paychecks with time cards
Answer: A
Page Ref: 450
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
19) Companies that specialize in processing payroll are known as
A) paycheck distribution companies.
B) payroll service bureaus.
C) professional employer organizations.
D) semi-governmental organizations.
Answer: B
Page Ref: 451
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
20) This organization provides payroll processing as well as other HRM services, such as employee benefit design and administration.
A) Cashier
B) Payroll service bureau
C) Professional employer organization
D) Paycheck distribution companies
Answer: C
Page Ref: 451
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
21) Which of the following is not a benefit of using a payroll service bureau or a professional employer organization?
A) Freeing up of computer resources
B) Increased internal control
C) Reduced costs
D) Wider range of benefits
Answer: B
Page Ref: 452
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
22) Many companies offer their employees a “cafeteria” approach to voluntary benefits in which employees can pick and choose the benefits they want. This plan is normally called a(n)
A) elective plan.
B) menu options benefit plan.
C) flexible benefit plan.
D) buffet plan.
Answer: C
Page Ref: 451
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
23) Pay rate information is stored in
A) employees’ personnel files.
B) employee subsidiary ledgers.
C) the payroll master file.
D) electronic time cards.
Answer: C
Page Ref: 442
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
24) The payroll transaction file would contain
A) entries to add new hires.
B) time card data.
C) changes in tax rates.
D) All of the above are correct.
Answer: B
Page Ref: 443
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
25) The document that lists each employee’s gross pay, payroll deductions, and net pay in a multicolumn format is called
A) an employee earnings statement.
B) the payroll register.
C) a deduction register.
D) an employee time sheet summary.
Answer: B
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
26) As the payroll system processes each payroll transaction, the system should also perform which activity listed below?
A) allocate labor costs to appropriate general ledger accounts
B) use cumulative totals generated from a payroll to create a summary journal entry to be posted to the general ledger
C) both A and B above
D) The HRM system should not perform either activity A or B.
Answer: C
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
27) Direct deposit of employee paychecks is one way an organization can improve efficiency and reduce payroll-processing costs. Which statement regarding direct deposit is false?
A) The cashier does not authorize the transfer of funds from the organization’s checking account to a payroll checking account.
B) The cashier does not have to sign employee paychecks.
C) Employees who are part of a direct deposit program receive a copy of their paycheck indicating the amount deposited.
D) Employees who are part of a direct deposit program receive an earnings statement on payday rather than a paper check.
Answer: A
Page Ref: 449
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
28) The employer pays a portion of some payroll taxes and employee benefits. Both the employee and employer pay which benefit or tax listed below?
A) social security taxes
B) federal income taxes
C) state income taxes
D) none of the above
Answer: A
Page Ref: 450
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
29) When using electronic documents, ________ increase the accuracy of data entry.
A) access controls
B) separation of duties
C) general controls
D) application controls
Answer: D
Page Ref: 444
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
30) The key to preventing unauthorized changes to the payroll master file is
A) hiring totally honest people to access and make changes to this file.
B) segregation of duties between the preparation of paychecks and their distribution.
C) segregation of duties between the authorization of changes and the physical handling of paychecks.
D) having the controller closely review and then approve any changes to the master file.
Answer: C
Page Ref: 452
Objective: Learning Objective 2
Difficulty : Difficult
AACSB: Analytic
31) Which of the following is not a potential effect of inaccurate data on employee time cards?
A) increased labor expenses
B) erroneous labor expense reports
C) damaged employee morale
D) inaccurate calculation of overhead costs
Answer: D
Page Ref: 444
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
32) Which control would be most appropriate to address the problem of inaccurate payroll processing?
A) encryption
B) direct deposit
C) cross-footing of the payroll register
D) an imprest payroll checking account
Answer: C
Page Ref: 449
Objective: Learning Objective 2
Difficulty : Difficult
AACSB: Reflective Thinking
33) What is the purpose of a general ledger payroll clearing account?
A) to check the accuracy and completeness of payroll recording and its allocation to cost centers
B) to make the bank reconciliation easier
C) to make sure that all employees are paid correctly each week
D) to prevent the cashier from having complete control of the payroll cycle
Answer: A
Page Ref: 449
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
34) A “zero balance check” refers to which of the following control procedures?
A) a type of batch total
B) cross-footing the payroll register
C) the payroll clearing account shows a zero balance once all entries are posted
D) trial balance showing that debits equal credits
Answer: C
Page Ref: 449
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
35) All of the following are controls that should be implemented in a payroll process, except
A) supervisors distribute paychecks since they should know all employees in their department.
B) someone independent of the payroll process should reconcile the payroll bank account.
C) sequential numbering of paychecks and accounting for the numbers.
D) restrict access to blank payroll checks and documents.
Answer: A
Page Ref: 450
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
36) What is the best control to reduce the risk of losing payroll data?
A) passwords
B) physical security controls
C) backup and disaster recovery procedures
D) encryption
Answer: C
Page Ref: 441
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
37) The threat of violation of employment laws relates directly to which activity?
A) payroll processing
B) collecting employee time data
C) hiring and recruiting
D) all of the above
Answer: C
Page Ref: 441
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
38) What is a potential threat to the specific activity of payroll processing?
A) hiring unqualified employees
B) poor system performance
C) violations of employment laws
D) unauthorized changes to the payroll master file
Answer: D
Page Ref: 443
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
39) The results of an internal audit finds that there is a problem with inaccurate time data being entered into the payroll system. What is an applicable control that can help prevent this event from occurring in the future?
A) proper segregation of duties
B) automation of data collection
C) sound hiring procedures
D) review of appropriate performance metrics
Answer: B
Page Ref: 444
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
40) Which of the following is a control that can be implemented to help prevent paychecks being issued to a “phantom” or “ghost” employee?
A) The cashier should sign all payroll checks.
B) Sequentially prenumber all payroll checks.
C) Use an imprest account to clear payroll checks.
D) Paychecks should be physically distributed by someone who does not authorize time data or record payroll.
Answer: D
Page Ref: 450
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
41) The average annual middle-management salary at Folding Squid Technologies is $60,000. If the average turnover rate for middle management is ten employees per year, what is the approximate average annual cost of turnover?
A) $300,000
B) $600,000
C) $900,000
D) $1,200,000
Answer: C
Page Ref: 438
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
42) Which of the following will contribute to the efficiency of a payroll system?
A) Segregation of check distribution from payroll duties
B) Prompt redeposit of unclaimed paychecks
C) A separate payroll bank account
D) Direct deposit of checks
Answer: D
Page Ref: 449
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
43) Which of the following will limit a firm’s potential loss exposure from paycheck forgery?
A) Segregation of check distribution from payroll duties
B) Prompt redeposit of unclaimed paychecks
C) A separate payroll bank account
D) Direct deposit of checks
Answer: C
Page Ref: 450
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
44) Which of the following is a control that addresses the threat of unauthorized changes to the payroll master file?
A) Field checks
B) Batch totals
C) Segregation of duties
D) Sound hiring procedures
Answer: C
Page Ref: 443
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
45) Which of the following documents would be likely to yield the greatest cost saving by converting from paper to electronic?
A) Payroll register
B) Earnings statement
C) Deduction register
D) Time card
Answer: D
Page Ref: 444
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
46) For the payroll register below, all the following data entry controls would be useful except
A) Validity check on Fed. Tax
B) Sequence check on Employee No.
C) Limit check on Hours
D) Field check on Pay Rate
Answer: A
Page Ref: 449
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
47) For the payroll register below, all the following processing controls would be useful except
A) Concurrent update control
B) Cross-footing balance test
C) Mathematical accuracy test
D) Hash total on Employee No.
Answer: A
Page Ref: 449
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
48) Describe the basic activities in an HRM/payroll cycle.
Answer: The HRM/payroll cycle is a recurring set of business activities and related data processing operations associated with effectively managing the employee work force. Important activities in the HRM/payroll cycle include the following tasks: Recruitment and hiring of new employees. Training. Job assignment. Compensation (payroll). Performance evaluation. Discharge.
Page Ref: 435
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
49) Identify the two types of payroll deductions and give two examples of each type.
Answer: Payroll deductions include: Payroll tax withholdings such as federal, state, and local income taxes, social security taxes, unemployment taxes; Voluntary deductions such as contributions to a pension plan, premium for group life, etc.
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
50) Why are accurate cumulative earnings records important?
Answer: Accurate records of cumulative earnings are necessary because social security and other deductions have maximum earnings amounts upon which taxes are paid; and the appropriate amount of income and payroll taxes should be remitted to the government agencies. At the end of each calendar year, businesses must prepare and mail summary earnings statements to every employee with earnings that year.
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
51) Explain the functions of the payroll register, deduction register, and earnings statement.
Answer: The payroll register is a report that lists each employee’s gross pay, payroll deductions, and net pay for each pay period. The deduction register lists the voluntary deductions for each employee. The earnings statement lists the amount of gross pay, deductions, and net pay for the current period, as well as providing year-to-date totals.
Page Ref: 447
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
52) What is the difference between a payroll service bureau and a professional employer organization?
Answer: A payroll service bureau is a company that can be hired as an independent contractor to maintain the payroll master file and perform the payroll processing activities for an organization. A professional employer organization is a company that provides not only full payroll services but also provides HRM services such as employee benefit design and administration.
Page Ref: 451
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
53) Discuss the various types and sources of input into the HRM/payroll cycle.
Answer: An HRM/payroll system relies on input from various sources. Employees provide input when they make changes in their discretionary deductions (contributions to charities or retirement plans); various departments provide data about the actual hours employees work. The HRM department provides information about employees who have been hired or terminated, pay-rate changes, and promotions. Government agencies provide tax rates and various instructions for meeting regulatory requirements. Insurance companies and other organizations provide instructions for calculating and remitting various withholding amounts.
Page Ref: 441
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic
54) Describe benefits and threats of incentive and bonus programs.
Answer: Sales staffs are often paid either on a straight commission basis or a combination of a salary plus commissions. This is done to keep sales at a certain level or to increase sales. The HRM/payroll system will need input from the sales and other cycles to properly calculate commissions and bonuses for such employees. It is important that an incentive and bonus system sets realistic, attainable goals that are congruent with corporate objectives. It is also important that managers monitor incentive and bonus goals and ensure that the attainment of such goals is appropriate for the organization and does not lead to undesirable behavior, which can result from poorly designed incentive schemes.
Page Ref: 443
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
55) Explain benefits to companies and to employees of using electronic direct deposit for payroll.
Answer: Direct deposit of paychecks provide a savings to employers because the costs of purchasing, processing, and distributing paper checks is eliminated. Using direct deposit also reduces postage and bank fees. The cashier’s time can be better spent because paychecks do not have to be signed. Employees save time as well as they do not have to make a physical trip to the bank to cash their checks. Direct deposit is safer as it eliminates misplaced paychecks and reduces the possibility of the theft of checks.
Page Ref: 449
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Reflective Thinking
56) What factors should be considered in outsourcing payroll to a payroll service bureau? Discuss the advantages and disadvantages of using a payroll service bureau to process a payroll.
Answer: The following questions should be considered: How much does the service cost? How would the data be submittedonline or hand carried? What kind of reports and documents could be obtained from the service bureau? How would the service interface with the existing general ledger system? What resources are now being devoted to payroll and how could these resources be re-deployed into other areas? Could security and control be improved by the outsourcing? What would be the time length of a contract for outsourcing services? Could the service bureau system be integrated so that an online query could be made by the organization? What kind of track record does the service bureau have with other clients? Are there new technologies and approaches that would become available to the company via the service bureau? Advantages: No need to deal with complexity and changes in tax codes. No need to worry about what to do if equipment crashes. Less chance of employees accessing the payroll files (confidentiality). Possible efficiency and cost reductions. Wider range of benefits. Freed-up computer resources. Disadvantages: Less control over the payroll files because they are stored off-site. Extra costs for any special reports. Slower response to ad-hoc queries.
Page Ref: 451-452
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
57) Discuss the threat of unauthorized changes to the payroll master file and its consequences.
Answer: Many problems may result when there are unauthorized changes to the payroll master file. Unauthorized changes may be made to employee pay rates, resulting in the company paying too much in wages. “Ghost” or “phantom” employees may be added to the payroll master to divert funds to dishonest employees through the issuance of paychecks to such “employees.” Likewise, terminated employees may still be paid, resulting in the fraudulent diversion of payroll funds. Two controls that should be implemented and maintained to provide overall control of the payroll master file: proper segregation of duties and controlling access to the file. Good internal control dictates that only authorized HRM personnel be allowed to update the payroll master file for any hiring, termination, pay raise, and promotion. HRM personnel, who have such access to the payroll master file, should never be allowed to directly participate in actual payroll processing or paycheck distribution. This way an adequate control is created to match actual paychecks (or earnings statements when direct deposit is in place) with employees when a manager, supervisor, or other third party hand out the checks (or earnings statements). Also, a different individual should approve all changes to the payroll master file in writing other than the individual who recommends or initiates the changes. User IDs and passwords should always be used to control access to the payroll master file, and an access control matrix should be established to define what actions each authorized employee is allowed to make and confirms the files the employee may access.
Page Ref: 443
Objective: Learning Objective 2
Difficulty : Difficult
AACSB: Analytic
58) What controls are available to address the threat of payroll errors?
Answer: Three types of controls can be used to circumvent payroll errors in an HRM/payroll system. Batch totals are used to verify totals entered into the system both at the time of data entry and at each stage in the processing. Hash totals are particularly useful in this regard, since hash totals calculated at the time of original data entry and again at each stage in the process can be compared. When the comparisons match throughout the process, three conclusions can be made: 1) all payroll records have been processed; 2) the data input was accurate; and 3) no bogus time cards were entered at any point after initial input. Upon completion of a payroll, the payroll register should be cross-footed to verify that the totals of the net pay column and other deduction columns equal the total of the gross pay column. A third control is the use of a payroll clearing account. This is a general ledger account that can be used as part of a two-step accuracy and completeness process. First, the payroll control account will be debited for the amount of the gross pay for the pay period; cash and other various withholding liability accounts are credited. Second, the cost accounting process distributes labor costs to various expense categories and credits the payroll control account for the total amount of the debits made to the other accounts. The result is that the payroll control account will have a zero balance. This becomes an internal check known as a zero balance check, indicating that the proper postings have been made to all of the accounts associated with payroll for a given pay period.
Page Ref: 448-449
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
Chapter 16
1) The general ledger and reporting system consists of the ________ involved in ________ the general ledger and ________ reports.
A) business transactions; updating; processing
B) data processing; business transactions for; printing
C) information processing; updating; creating
D) business transactions; data processing; preparing
Answer: C
Page Ref: 463
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
2) Which item below is not considered a major input to the general ledger and reporting system?
A) summary entries from the major subsystems
B) reports from managers
C) adjusting entries
D) financing and investing activities
Answer: B
Page Ref: 463
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
3) Who provides the adjusting entries for a well-designed general ledger and reporting system?
A) various user departments
B) the treasurer’s area
C) the other major AIS subsystems
D) the controller’s area
Answer: D
Page Ref: 463
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
4) The general ledger and reporting system is designed to provide information for which of the following user groups?
A) internal users
B) external users
C) inquiry processing by internal or external users
D) all of the above
Answer: D
Page Ref: 465
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
5) The general ledger system of an organization should be designed to serve the information requirements of both internal and external users. This means that the system should support
A) producing expansive regular periodic reports to cover all information needs.
B) the real-time inquiry needs of all users.
C) producing regular periodic reports and respond to real-time inquiry needs.
D) access by investors and creditors of the organization to general ledger balances.
Answer: C
Page Ref: 465
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
6) How is general ledger updating accomplished by the various accounting subsystems?
A) Individual journal entries for each accounting subsystem transaction update the general ledger every 24 hours.
B) Summary journal entries that represent the results of all transactions for a certain time period are used to update the general ledger.
C) The controller or treasurer must approve accounting subsystem journal entries before any updating may occur.
D) Nonroutine transactions are entered into the system by the treasurer’s office.
Answer: B
Page Ref: 467
Objective: Learning Objective 1
Difficulty : Difficult
AACSB: Analytic
7) When updating the general ledger, sales, purchases, and production are examples of ________ entries, and issuance or retirement of debt and the purchase or sale of investment securities are examples of ________ entries.
A) adjusting; controller originated
B) accounting subsystem; treasurer originated
C) adjusting; special journal
D) controller generated; special journal
Answer: B
Page Ref: 467
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
8) Entries to update the general ledger are often documented by which of the following?
A) general journal
B) subsidiary journal
C) subsidiary ledgers
D) journal vouchers
Answer: D
Page Ref: 467
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
9) Adjusting entries that reflect events that have already occurred, but for which no cash flow has taken place are classified as
A) accruals.
B) deferrals.
C) revaluations.
D) corrections.
Answer: A
Page Ref: 470
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
10) Recording interest earned on an investment is an example of which type of adjusting journal entry?
A) accrual entry
B) deferral entry
C) revaluation entry
D) correcting entry
Answer: A
Page Ref: 470
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
11) An adjusting entry made at the end of an accounting period that reflects the exchange of cash prior to performance of a related event is classified as a(n)
A) accrual entry.
B) deferral entry.
C) revaluation entry.
D) correcting entry.
Answer: B
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
12) Depreciation expense and bad debt expense are examples of which type of adjusting journal entry?
A) deferrals
B) accruals
C) revaluations
D) estimates
Answer: D
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
13) Adjusting entries that are made to reflect differences between the actual and recorded value of an asset or a change in accounting principle are called
A) reconciliations.
B) revaluations.
C) estimates.
D) accruals.
Answer: B
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
14) Adjusting entries that are made to counteract the effects of errors found in the general ledger are called
A) accruals.
B) corrections.
C) deferrals.
D) estimates.
Answer: B
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
15) Corrections are entries made to correct errors found in ________.
A) all journals
B) special journals
C) the general ledger
D) the financial statements
Answer: C
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
16) Immediately after the adjusting entries are posted, the next step in the general ledger and reporting system is to prepare
A) an adjusted trial balance.
B) closing entries.
C) financial statements.
D) an unadjusted trial balance.
Answer: A
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
17) Financial statements are prepared in a certain sequence. Which statement is prepared last in the sequence?
A) the adjusted trial balance
B) the income statement
C) the balance sheet
D) the statement of cash flows
Answer: D
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
18) A listing of journal vouchers by numerical sequence, account number, or date is an example of
A) a general ledger control report.
B) a budget report.
C) a batch to be processed.
D) responsibility accounting.
Answer: A
Page Ref: 469
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
19) If you believe not all adjusting entries were posted in the general ledger, you should prepare a general ledger control report listing journal vouchers in
A) numerical sequence.
B) chronological order.
C) general ledger account number order.
D) any order, since you have to review them all anyway.
Answer: A
Page Ref: 469
Objective: Learning Objective 2
Difficulty : Difficult
AACSB: Reflective Thinking
20) If you believe a general ledger account was not adjusted properly or at all, you should prepare a general ledger control report listing journal vouchers in
A) numerical sequence.
B) chronological order.
C) general ledger account number order.
D) any order, since you have to review them all anyway.
Answer: C
Page Ref: 469
Objective: Learning Objective 2
Difficulty : Difficult
AACSB: Reflective Thinking
21) The managerial report that shows planned cash inflows and outflows for major investments or acquisitions is the
A) journal voucher list.
B) statement of cash flows.
C) operating budget.
D) capital expenditures budget.
Answer: D
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
22) The operating budget
A) compares estimated cash flows from operations with planned expenditures.
B) shows cash inflows and outflows for each capital project.
C) depicts planned revenues and expenditures for each organizational unit.
D) is used to plan for the purchase and retirement of property, plant, and equipment.
Answer: C
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
23) Budgets and performance reports should be developed on the basis of
A) responsibility accounting.
B) generally accepted accounting principles.
C) financial accounting standards.
D) managerial accounting standards.
Answer: A
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
24) Performance reports for cost centers should compare actual versus budget ________ costs.
A) controllable
B) uncontrollable
C) fixed
D) variable
Answer: A
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
25) Performance reports for sales deparments should compare actual versus budget
A) revenue.
B) cost.
C) return on investment.
D) profit.
Answer: A
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
26) Departments that mostly provide services to other units and charge those units for services rendered should be evaluated as ________ centers.
A) cost
B) profit
C) investment
D) revenue
Answer: B
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Moderate
AACSB: Analytic
27) As responsibility reports are rolled up into reports for higher level executives, they
A) become less detailed.
B) become more detailed.
C) become narrower in scope.
D) look about the same.
Answer: A
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Moderate
AACSB: Reflective Thinking
28) Variances for variable costs will be misleading when the planned output differs from budgeted output. A solution to this problem would be
A) calling all costs fixed.
B) to use flexible budgeting.
C) better prediction of output.
D) to eliminate the budgeting process.
Answer: B
Page Ref: 478
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
29) Concerning XBRL, which of the following statements is not true?
A) XBRL is a variant of XML.
B) XBRL is specifically designed for use in communicating the content of financial data.
C) XBRL creates unique tags for each data item.
D) XBRL’s adoption will require accountants and systems professionals tag data for their clients.
Answer: D
Page Ref: 472
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
30) The benefits of XBRL include:
A) organizations can publish financial information only once, using standard XBRL tags.
B) tagged data is readable and interpretable by computers, so users don’t need re-enter data into order to work with it.
C) Both are benefits of XBRL.
D) Neither are benefits of XBRL.
Answer: C
Page Ref: 472
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
31) Communications technology and the Internet can be used to reduce the time and costs involved in disseminating financial statement information. Users of such financial information still struggle in that many recipients have different information delivery requirements and may have to manually reenter the information into their own decision analysis tools. The ideal solution to solve these problems and efficiently transmit financial information via the Internet is to use
A) HTML code.
B) XML.
C) pdf file.
D) XBRL.
Answer: D
Page Ref: 472
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
32) Which of the following statements is not true about an XBRL instance document?
A) An instance document includes instruction code as to how the document should be physically arranged and displayed.
B) An instance document contains facts about specific financial statement line items.
C) An instance document uses separate tags for each specific element.
D) An instance document can be used to tag financial and nonfinancial elements.
Answer: A
Page Ref: 472
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
33) Which of the following are appropriate controls for the general ledger and reporting system?
A) using well-designed documents and records
B) online data entry with the use of appropriate edit checks
C) prenumbering documents and accounting for the sequence numbers
D) All of the above are appropriate.
Answer: D
Page Ref: 468
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
34) A type of data entry control that would ensure that adjusting entries are posted to existing general ledger accounts is called a(n) ________ check.
A) validity
B) existence
C) closed loop verification
D) reasonableness
Answer: A
Page Ref: 468
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
35) One way of ensuring that recurring adjusting journal entries are made each month would be to
A) make all the entries a month in advance.
B) rotate the responsibility among the accounting staff.
C) program the entries to be made automatically.
D) create a standard adjusting journal entry file.
Answer: D
Page Ref: 471
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
36) Which of the following tasks are facilitated by maintaining a strong and secure audit trail?
A) tracing a transaction from original source document to the general ledger to a report
B) tracing an item in a report back through the general ledger to the original source document
C) tracing changes in general ledger accounts from beginning to ending balances
D) All of the above are facilitated by the audit trail.
Answer: D
Page Ref: 469-470
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
37) Which of the following balanced scorecard dimensions provides measures on how efficiently and effectively the organization is performing key business processes?
A) financial
B) internal operations
C) innovation and learning
D) customer
Answer: B
Page Ref: 479
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
38) Which of the following is not one of the principles of proper graph design for bar charts?
A) Include data values with each element.
B) Use 3-D rather than 2-D bars to make reading easier.
C) Use colors or shades instead of patterns to represent different variables.
D) Use titles that summarize the basic message.
Answer: B
Page Ref: 481
Objective: Learning Objective 4
Difficulty : Easy
AACSB: Analytic
39) Information about financing and investing activities for use in making general ledger entries is typically provided by the
A) budget department.
B) controller.
C) treasurer.
D) chief executive officer.
Answer: C
Page Ref: 463
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
40) Adjusting entries that are made to recognize revenue that has been received but not yet earned are classified as
A) estimates.
B) deferrals.
C) accruals.
D) revaluations.
Answer: B
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
41) Adjusting entries that reflect a change in accounting principle used to value inventories are classified as
A) corrections.
B) estimates.
C) deferrals.
D) revaluations.
Answer: D
Page Ref: 471
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
42) Cheryl Liao is an accountant at Folding Squid Technologies. While making an adjusting entry to the general ledger, she received the following error message, “The account number referenced in your journal entry does not exist. Do you want to create a new account?” This message was the result of a
A) validity check.
B) closed loop verification.
C) zero-balance check.
D) completeness test.
Answer: A
Page Ref: 468
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
43) Cheryl Liao is an accountant at Folding Squid Technologies. While making an adjusting entry to the general ledger, she received the following error message, “Your journal entry must be a numeric value. Please reenter.” This message was the result of a
A) validity check.
B) field check.
C) zero-balance check.
D) completeness test.
Answer: B
Page Ref: 468
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
44) Cheryl Liao is an accountant at Folding Squid Technologies. While making an adjusting entry to the general ledger, she received the following error message when she tried to save her entry, “The amounts debited and credited are not equal. Please correct and try again.” This message was the result of a
A) validity check.
B) field check.
C) zero-balance check.
D) completeness test.
Answer: C
Page Ref: 468
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
45) Cheryl Liao is an accountant at Folding Squid Technologies. While making an adjusting entry to the general ledger, she received the following error message when she tried to save her entry, “The data you have entered does not include a source reference code. Please enter this data before saving.” This message was the result of a
A) validity check.
B) field check.
C) zero-balance check.
D) completeness test.
Answer: D
Page Ref: 468
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
46) IFRS is an acronym for what?
A) International Financial Reporting Standards
B) Internal Forensic Response System
C) Input and Financial Reporting Standards
D) Internal Fault Recovery System
Answer: A
Page Ref: 471
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
47) Which of the following is true about IFRS?
A) Financial statements likely must be prepared using IFRS beginning in 2015.
B) The switch to IFRS is required by the Sarbanes-Oxley Act.
C) IFRS is only slightly different than US GAAP.
D) The switch to IFRS is cosmetic onlythere isn’t any real impact on AIS.
Answer: A
Page Ref: 471
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
48) Which of the following scenarios will not be allowed under IFRS?
A) A landscaping and garden retail store keeps piles of river rock, gravel, paving stones, and small decorative rocks in a fenced area on the side of the store. The store uses the most recent inventory costs when calculating cost of goods sold, since new inventory is piled on top of the older inventory.
B) A grocery store strictly enforces a shelf rotation policy, so that older inventory is always at the front and sold first. The store uses the oldest inventory costs to calculate cost of goods sold.
C) A farm chemical supplier maintains a large holding tank of chemicals, into which deliveries are periodically combined with the older chemicals. The supplier averages the cost of all inventory to calculate cost of goods sold.
D) All of the above are acceptable under IFRS.
Answer: A
Page Ref: 472
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Reflective Thinking
49) Which of the following is true about accounting for fixed assets?
A) Depreciation expense under IFRS will likely be higher than under GAAP, because acquisitions of assets with multiple components must be separately depreciated under IFRS, whereas under GAAP assets could be bundled and depreciated over the longest of the useful life for any of the components.
B) IFRS doesn’t allow capitalization of any asset that separately accounts for less than 20% of total assets.
C) Depreciation expense under IFRS will likely be less than under GAAP, because standards for depreciable lives on asset classes are much longer than under GAAP.
D) IFRS and GAAP account for fixed assets in much the same way.
Answer: A
Page Ref: 472
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Reflective Thinking
50) Which of the following statements is true about the chart below?
A) The x-axis is in reverse chronological order, which violates a principle of proper graph design.
B) The chart appears to conform to the principles of proper graph design.
C) The vertical axis doesn’t appear to start at the origin (zero).
D) The chart used 2-D bars instead of 3-D, which violates a principle of proper graph design.
Answer: A
Page Ref: 481
Objective: Learning Objective 4
Difficulty : Moderate
AACSB: Analytic
51) Explain the purpose of a journal voucher file.
Answer: A journal voucher is a form on which journal entries to update the general ledger are documented. The individual entries are stored in the journal voucher file. This file is equivalent to the general journal in a manual AIS. The journal voucher file forms an important part of the audit trail as well. Various internal controls must be implemented in order to maintain adequate security and access control over the file, because it provides a way to alter and change the data contained in the general ledger.
Page Ref: 467
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
52) What is responsibility accounting?
Answer: Responsibility accounting involves the reporting of financial results on the basis of managerial responsibilities within an organization. Reports show actual amounts and variances to budget for the current month and year to date for items controllable at that level.
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Moderate
AACSB: Analytic
53) How is a balanced scorecard used to assess organizational performance?
Answer: The balanced scorecard contains four perspectives of measurement of the organization. The perspectives are financial, internal operations, innovation and learning, and customer. Together these different perspectives provide a dimensional overview of organizational performance that is greater than financial measures alone. A scorecard that has been properly designed will measure key aspects of the organization’s strategy as well as show important links across the perspectives or dimensions.
Page Ref: 479
Objective: Learning Objective 4
Difficulty : Moderate
AACSB: Analytic
54) How is an audit trail used in the general ledger and reporting system?
Answer: An audit trail shows the path of a transaction through the accounting system. It can provide information needed to trace any changes made to the general ledger by tracing either to or from an original source document to the general ledger. It helps in tracing all changes in general ledger accounts from beginning balances to ending balances as well as any adjustments made to the accounts.
Page Ref: 469-470
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
55) Explain the benefits of XBRL.
Answer: XBRL (Extensible Business Reporting Language) is a variation of XML, which is designed to communicate the content of data. XML improves upon HTML by being able to describe the content of the data presented. However, XML is limited when communicating financial information. For financial purposes, XBRL identifies each piece of data, along with how the data should be processed and how the data relate to other data items. XBRL may soon become the universal standard computer language for communicating financial data. XBRL enables organizations to publish financial information only once, using standard XBRL tags. XBRL tagged information is interpretable and doesn’t need to be re-entered by users.
Page Ref: 472
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Analytic
56) Discuss the value and role of budgets as managerial reports.
Answer: Budgets are managerial reports that can be extracted from the general ledger and reporting system. Budgets are used for planning and evaluating the organization’s performance. There are several different types of budgets that an organization may use in this regard. The operating budget shows the planned revenues and expenditures for each organizational unit. Cash flow budgets compare the estimated cash inflows from operations with planned expenditures, and they are particularly useful to determine the borrowing needs of the organization. A capital expenditure budget shows the projected cash inflows and outflows for a given project. Budgetary reports should be tailored to the nature of the unit or department being evaluated, and they should show actual versus projected budget amounts. Unfortunately, many budget amounts are viewed as fixed targets, and they are therefore static and inflexible. Such an approach may either reward or penalize managers for factors that are beyond their control. A solution to this problem is to develop a flexible budget, in which variable budgeted amounts change in relation to some measure of organizational activity, such as labor hours, or a percentage of sales. A flexible budget may also break amounts into their respective fixed and variable components. Variable amounts can then be adjusted for fluctuations in sales or production.
Page Ref: 477
Objective: Learning Objective 4
Difficulty : Moderate
AACSB: Reflective Thinking
57) Describe three threats in the general ledger and reporting system and identify corresponding controls for each threat.
Answer:
THREAT 1: Errors in updating the general ledger because of inaccurate/incomplete journal entries or posting of journal entries Controls: (1) Input, edit, and processing controls over summary entries from subsystems. (a) Validity check over existence of general ledger accounts. (b) Field check over numeric data in amount field. (c) Zero-balance check ensures equality of debits and credits (d) Completeness test all pertinent data are entered (e) Redundant data check closed loop verification to see if on account numbers and descriptions, to ensure that the correct general ledger account is being accessed (f) Standard adjusting entry file for recurring entries improves accuracy of the process (g) Sign check on debit and credit entries (h) Calculation of run-to-run totals can verify the accuracy of journal voucher batch processing (2) Reconciliation and control reports can detect errors made during updating and processing; trial balances, clearing, and suspense accounts are examples (a) Balancing of control and subsidiary accounts (b) Control reports can help identify the source of errors in the general ledger update process listings of journal vouchers and general journal entries will show entries posted to the general ledger and ensures equality of debits and credits (3) The audit trail the path of transactions through the system-should be able to perform the following tasks: (a) Trace any transaction from its original source document to the general ledger; any other document or report using that data (b) Trace any item from a report or an output document to the general ledger and thence to the source document (c) Trace all changes in the general ledger balances from their beginning balance to their ending balance.
THREAT 2: Loss or unauthorized disclosure or alteration of financial data Controls: (1) User IDs, passwords, and access controls should be used (2) Enforce segregation of duties (3) Adjusting entries only from the controller’s area (4) Valid authorization for journal voucher submission.
THREAT 3: Loss or destruction of the general ledger Controls: (1) Use of internal and external file labels to protect from accidental data loss (2) Make regular backup copies of the general ledger, one copy stored off-site (3) A good disaster recovery plan and (4) access and processing integrity controls to ensure confidentiality and accuracy of data transmitted to branch offices or externally.
THREAT 4: Poor performance Controls: (1) XBRL, (2) redesign business processes, and (3) redesign metrics used to report results of business activities.
Page Ref: 465-466
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
Chapter 17
1) Which of the following statements about REA modeling and REA diagrams is false?
A) REA is an acronym for Resources, Entities, and Agents.
B) REA data modeling does not include traditional accounting elements such as ledgers, chart of accounts, debits and credits.
C) REA data modeling could be referred to as an events-based model.
D) REA diagrams must include at least two activities, which together represent a give-get economic exchange.
Answer: A
Page Ref: 496
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
2) What is the standard cardinality pattern for a relationship between an event and an agent?
A) 1:1
B) 0:1
C) 0:N
D) 1:N
Answer: D
Page Ref: 506
Objective: Learning Objective 3
Difficulty : Difficult
AACSB: Reflective Thinking
3) The REA data model approach facilitates efficient operations by all the following except
A) standardizing source document format.
B) identifying non-value added activities.
C) storing financial and nonfinancial data in the same database.
D) organizing data to simplify data retrieval and analysis.
Answer: A
Page Ref: 496
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
4) The process of defining a database so that it faithfully represents all aspects of the organization including its interactions with the external environment is called
A) data modeling.
B) data designing.
C) data development.
D) data definition.
Answer: A
Page Ref: 494
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
5) In which stage(s) of the database design process does data modeling occur?
A) only in the systems analysis stage
B) only in the design stage
C) in both the systems analysis and design stages
D) neither the systems analysis nor the design stages
Answer: C
Page Ref: 494
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
6) A(n) ________ diagram graphically depicts a database’s contents by showing entities and relationships.
A) data flow
B) flowchart
C) entity-relationship
D) REA
Answer: C
Page Ref: 494
Objective: Learning Objective 1
Difficulty : Moderate
AACSB: Analytic
7) On an entity-relationship (E-R) diagram, anything about which an organization wants to collect and store information is called
A) a data model.
B) an entity.
C) a schema.
D) a tuple.
Answer: B
Page Ref: 494
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
8) An entity-relationship (E-R) diagram represents entities as ________ and the relationships between them as lines and ________.
A) circles; squares
B) squares; diamonds
C) rectangles; diamonds
D) rectangles; circles
Answer: C
Page Ref: 495
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
9) An entity-relationship (E-R) diagram
A) can represent the contents of any database.
B) are only used in conjunction with REA models.
C) can show a limited number of entities and relationships.
D) are used only to design new databases.
Answer: A
Page Ref: 495
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
10) The REA data model
A) is used in many areas of business and science.
B) was developed solely for use in designing accounting information systems.
C) classifies data into relationships, entities and accounts.
D) all of the above
Answer: B
Page Ref: 496
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
11) Which of the following is not one of the rules in creating an REA data model?
A) Each event is linked to at least one resource that it affects.
B) Each event is linked to at least one other event.
C) Each event is linked to at least two participating agents.
D) All of the above are important rules.
Answer: D
Page Ref: 497
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
12) Which is a true statement about the REA data model?
A) The REA data model classifies entities into three distinct categories.
B) The term REA is an acronym that stands for resources, entities, and agents.
C) Using an REA data model is not helpful when creating an R-E diagram.
D) The “E” in the REA data model stands for things that have an economic value to the organization.
Answer: A
Page Ref: 496
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
13) An REA diagram must link every event to at least one ________ and two ________.
A) resource; agents
B) agent; resources
C) transaction; entities
D) resource; relationships
Answer: A
Page Ref: 497
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
14) Each event in an REA model will in most cases have at least one ________ agent and one ________ agent involved with the event.
A) internal; resource
B) external; entity
C) internal; employee
D) internal; external
Answer: D
Page Ref: 501
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
15) Relationships that affect the quantity of a resource are sometimes referred to as ________ relationships.
A) commitment
B) exchange
C) stockflow
D) duality
Answer: C
Page Ref: 497
Objective: Learning Objective 2
Difficulty : Moderate
AACSB: Analytic
16) The “give” event represents an activity which
A) includes a promise to engage in future economic exchanges.
B) increases the organization’s stock of an economic resource.
C) reduces the organization’s stock of a resource that has economic value.
D) none of the above
Answer: C
Page Ref: 497
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
17) The “get” event represents an activity which
A) includes a promise to engage in future economic exchanges.
B) increases the organization’s stock of an economic resource.
C) reduces the organization’s stock of a resource that has economic value.
D) none of the above
Answer: B
Page Ref: 497
Objective: Learning Objective 2
Difficulty : Easy
AACSB: Analytic
18) Which of the following statements is true about the development of an REA model?
A) Events that pertain to the entry of data are included in the REA model.
B) The objective is to model basic value-chain activities.
C) REA diagrams model individual transactions and data collections.
D) Information retrieval events are modeled as events in the REA model.
Answer: B
Page Ref: 501
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
19) Developing an REA diagram for a specific transaction cycle begins by identifying
A) relevant events.
B) agents involved.
C) resources affected.
D) relationship cardinalities.
Answer: A
Page Ref: 499
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
20) Which of the following is false about cardinalities?
A) Cardinalities describe the nature of the relationship between two entities.
B) No universal standard exists for representing information about cardinalities in REA diagrams.
C) The minimum cardinality can be zero or one.
D) The maximum cardinality can be zero, one, or many.
Answer: D
Page Ref: 502-503
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
21) The minimum cardinality of a relationship in an REA diagram can be either
A) 0 or 1.
B) 0 or N.
C) 1 or N.
D) none of the above
Answer: A
Page Ref: 503
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
22) The maximum cardinality of a relationship in an REA diagram can be either
A) zero or one.
B) one or many.
C) zero or many.
D) none of the above
Answer: B
Page Ref: 503
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
23) How many types of relationships are possible between entities?
A) one
B) two
C) three
D) an infinite number
Answer: C
Page Ref: 504
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
24) A relationship in which cardinalities have zero minimums and N maximums would most likely be an
A) agent-event relationship.
B) resource-event relationship.
C) event-event relationship.
D) All of the above are equally likely.
Answer: B
Page Ref: 504
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking
25) Concerning REA diagrams, which of the following is false?
A) Each organization will have its own unique REA diagram.
B) An REA diagram for a given organization will change over time.
C) Data modeling and REA diagram development involve complex and repetitive processes.
D) Redrawing an REA diagram several times during development is uncommon.
Answer: D
Page Ref: 508
Objective: Learning Objective 3
Difficulty : Easy
AACSB: Analytic
26) Data modeling is an element of
A) systems analysis.
B) conceptual design.
C) both A and B
D) none of the above
Answer: C
Page Ref: 494
Objective: Learning Objective 1
Difficulty : Easy
AACSB: Analytic
27) Which of the following graphical symbols represents a minimum cardinality of zero and a maximum cardinality of one?
A)
B)
C)
D)
Answer: A
Page Ref: 502
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
28) Which of the following graphical symbols represents a minimum cardinality of zero and a maximum cardinality of many?
A)
B)
C)
D)
Answer: C
Page Ref: 502
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
29) Which of the following graphical symbols represents a minimum cardinality of one and a maximum cardinality of one?
A)
B)
C)
D)
Answer: B
Page Ref: 502
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
30) Which of the following graphical symbols represents a minimum cardinality of one and a maximum cardinality of many?
A)
B)
C)
D)
Answer: D
Page Ref: 502
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic
31) Which of the following transactions is represented by the diagram below?
A) An automobile salvage business holds weekly auctions at which it sells its entire inventory.
B) A grocery store sells products to consumers.
C) A hobbyist restores antique cars. When a car is finished, she sells it on eBay.
D) A firm sells movies to consumers through an online downloading service.
Answer: B
Page Ref: 506-507
Objective: Learning Objective 4
Difficulty : Difficult
AACSB: Reflective Thinking
32) Which of the following transactions is represented by the diagram below?
A) An automobile salvage business holds weekly auctions at which it sells its entire inventory.
B) A grocery store sells products to consumers.
C) A hobbyist restores antique cars. When a car is finished, she sells it on eBay.
D) A firm sells movies to consumers through an online downloading service.
Answer: A
Page Ref: 506-507
Objective: Learning Objective 4
Difficulty : Difficult
AACSB: Reflective Thinking
33) Which of the following transactions is represented by the diagram below?
A) An automobile salvage business holds weekly auctions at which it sells its entire inventory.
B) A grocery store sells products to consumers.
C) A hobbyist restores antique cars. When a car is finished, she sells it on eBay.
D) A firm sells movies to consumers through an online downloading service.
Answer: C
Page Ref: 506-507
Objective: Learning Objective 4
Difficulty : Difficult
AACSB: Analytic
