Chapter 10  

1) The best example of a hash total for a payroll transaction file could be

A) total of employees’ social security numbers.

B) sum of net pay.

C) total number of employees.

D) sum of hours worked.

Answer:  A

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

2) Error logs and review are an example of

A) data entry controls.

B) data transmission controls.

C) output controls.

D) processing controls.

Answer:  A

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

3) Following is the result of batch control totals on employee Social Security Numbers in a payroll processing transaction:

Correct Values From MasterfileValues Entered During Processing
487358796487358796
534916487534916487
498374526498374526
514873420514873420
534196487534916487
678487853678487853
471230589471230589
37194381583720158158

The difference in the control totals is 720,000. Which data entry control would best prevent similar data entry errors in the future?

A) Modulus 11

B) Validity check

C) Check digit

D) Sequence check

Answer:  C

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

4) Which of the following data entry controls would not be useful if you are recording the checkout of library books by members?

A) Sequence check

B) Prompting

C) Validity check

D) Concurrent update control

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

5) A customer failed to include her account number on her check, and the accounts receivable clerk credited her payment to a different customer with the same last name. Which control could have been used to most effectively to prevent this error?

A) Closed-loop verification

B) Duplicate values check

C) Validity check

D) Reconciliation of a batch control total

Answer:  A

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

6) If invoices are processed in groups of fifty, which fields from the document shown below would not be used to create a hash control total?

A) Amount

B) Item Number

C) Quantity Ordered

D) Sales Order number

Answer:  A

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Reflective Thinking

7) A data entry input control in which the application software sums the first four digits of a customer number to calculate the value of the fifth digit and then compares the calculated number to the number typed in during data entry is an example of a

A) check digit verification.

B) validity check.

C) closed-loop verification.

D) duplicate data check.

Answer:  A

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

8) All of the following controls for online entry of a sales order would be useful except

A) check digit verification on the dollar amount of the order.

B) validity check on the inventory item numbers.

C) field check on the customer ID and dollar amount of the order.

D) concurrent update control.

Answer:  A

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Difficult

AACSB:  Analytic

9) A specific inventory record indicates that there were 12 items on hand before a customer brings two of the items to the check stand to be purchased. The cashier accidentally entered quantity 20 instead of 2. Which data entry control would best have prevented this error?

A) sign check

B) limit check

C) validity check

D) field check

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

10) When processing weekly payroll, an employee accidentally entered 400 for hours worked. The best data entry control for this error would be

A) a limit check.

B) a check digit.

C) batch total reconciliation.

D) a field check.

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

11) The data entry control that would best prevent entering an invoice received from a vendor who is not on an authorized supplier list is

A) a validity check.

B) an authorization check.

C) a check digit.

D) closed-loop verification.

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

12) Forms design is an example of this type of control.

A) Data entry control

B) Processing control

C) Output control

D) Input control

Answer:  D

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

13) Sequentially prenumbered forms is an example of a(n)

A) data entry control.

B) data transmission control.

C) processing control.

D) input control.

Answer:  D

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

14) Turnaround documents are an example of a(n)

A) data entry control.

B) output control.

C) processing control.

D) input control.

Answer:  D

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

15) A validity check is an example of a(n)

A) data entry control.

B) data transmission control.

C) output control.

D) input control.

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

16) Parity checks are an example of a(n)

A) data entry control.

B) data transmission control.

C) output control.

D) processing control.

Answer:  B

Page Ref: 279

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

17) User reviews are an example of a(n)

A) data entry control.

B) data transmission control.

C) output control.

D) processing control.

Answer:  C

Page Ref: 278

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

18) Data matching is an example of a(n)

A) data entry control.

B) data transmission control.

C) processing control.

D) input control.

Answer:  C

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

19) Batch totals are an example of a(n)

A) data entry control.

B) data transmission control.

C) output control.

D) processing control.

Answer:  A

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

20) Cancellation and storage of documents means that

A) data are copied from a document and stored, after which the document is shredded.

B) documents are defaced before being shredded.

C) documents are defaced and stored.

D) cancellation data are copied from documents before they are stored.

Answer:  C

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

21) Check digit verification is an example of a(n)

A) data transmission control.

B) output control.

C) processing control.

D) input control.

Answer:  D

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

22) This ensures that the input data will fit into the assigned field.

A) Limit check

B) Range check

C) Size check

D) Validity check

Answer:  C

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

23) This tests a numerical amount to ensure that it does not exceed a predetermined value nor fall below another predetermined value.

A) Completeness check

B) Field check

C) Limit check

D) Range check

Answer:  D

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

24) This determines if all required data items have been entered.

A) Completeness check

B) Field check

C) Limit check

D) Range check

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

25) This determines the correctness of the logical relationship between two data items.

A) Range check

B) Reasonableness test

C) Sign check

D) Size check

Answer:  B

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

26) This determines if characters are of the proper type.

A) Field check

B) Alpha-numeric check

C) Range check

D) Reasonableness test

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

27) This tests a numerical amount to ensure that it does not exceed a predetermined value.

A) Completeness check

B) Limit check

C) Range check

D) Sign check

Answer:  B

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

28) This batch processing data entry control sums a field that contains dollar values.

A) Record count

B) Financial total

C) Hash total

D) Sequence check

Answer:  B

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

29) This batch processing data entry control sums a non-financial numeric field.

A) Record count

B) Financial total

C) Hash total

D) Sequence check

Answer:  C

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

30) When I enter a correct customer number, the data entry screen displays the customer name and address. This is an example of

A) prompting.

B) preformatting.

C) closed-loop verification.

D) error checking.

Answer:  C

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

31) This control ensures that the correct and most current files are being updated.

A) Cross-footing balance test

B) Data matching

C) File labels

D) Write-protect mechanism

Answer:  C

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

32) This batch processing data entry control sums the number of items in a batch.

A) Financial total

B) Hash total

C) Record count

D) Sequence check

Answer:  C

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

33) This data entry control compares the ID number in transaction data to a master file to verify that the ID number exists.

A) Reasonableness test

B) User review

C) Data matching

D) Validity check

Answer:  D

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

34) File labels are an example of

A) data entry controls.

B) output controls.

C) processing controls.

D) source data controls.

Answer:  C

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

35) A computer operator accidentally used the wrong master file when updating a transaction file. As a result, the master file data is now unreadable. Which control could best have prevented this from happening?

A) Internal header label

B) Validity check

C) Check digit

D) Parity check

Answer:  A

Page Ref: 277

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

36) Chaz Finnerty called the IT Help Desk in a huff. “I’m trying to open an Excel file and I get a message that says that the file is locked for editing. What’s going on?” The answer is likely that

A) the file is corrupted due to a computer virus.

B) there is no problem. Chaz is editing the file, so it is locked.

C) concurrent update controls have locked the file.

D) Chaz probably opened the file as read-only.

Answer:  C

Page Ref: 278

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

37) This control protects records from errors that occur when two or more users attempt to update the same record simultaneously.

A) Concurrent update controls

B) Cross-footing balance test

C) Data conversion controls

D) Recalculation of batch totals

Answer:  A

Page Ref: 278

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

38) Modest Expectations Investment Services (MEIS) allows customers to manage their investments over the Internet. If customers attempt to sell more shares of a stock than they have in their account, an error message is displayed. This is an example of a

A) reasonableness test.

B) field check.

C) validity check.

D) limit check.

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

39) Modest Expectations Investment Services (MEIS) allows customers to manage their investments over the Internet. If customers attempt to spend more money than they have in their account, an error message is displayed. This is an example of a

A) reasonableness test.

B) field check.

C) validity check.

D) limit check.

Answer:  A

Page Ref: 276

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

40) The Spontaneous Combustion Rocket Shoppe in downtown Fargo, North Dakota, generates three quarters of its revenue from orders taken over the Internet. The revenue clearing account is debited by the total of cash and credit receipts and credited by the total of storefront and Internet sales. This is an example of a

A) data integrity test.

B) zero-balance test.

C) trial balance audit.

D) cross-footing balance test.

Answer:  B

Page Ref: 278

Objective:  Learning Objective 1

Difficulty :  Moderate

AACSB:  Analytic

41) What is the most effective way to ensure information system availability?

A) High bandwidth

B) Maintain a hot site

C) Maintain a cold site

D) Frequent backups

Answer:  B

Page Ref: 287

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

42) Concerning system availability, which of the following statements is true?

A) Human error does not threaten system availability.

B) Proper controls can maximize the risk of threats causing significant system downtime.

C) Threats to system availability can be completely eliminated.

D) Threats to system availability include hardware and software failures as well as natural and man-made disasters.

Answer:  D

Page Ref: 284

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

43) Which of the following is not an objective of a disaster recovery plan?

A) Minimize the extent of the disruption, damage or loss.

B) Permanently establish an alternative means of processing information.

C) Resume normal operations as soon as possible.

D) Train employees for emergency operations.

Answer:  B

Page Ref: 287

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

44) Which item below would not typically be part of an adequate disaster recovery plan?

A) a system upgrade due to operating system software changes

B) uninterruptible power systems installed for key system components

C) scheduled electronic vaulting of files

D) backup computer and telecommunication facilities

Answer:  A

Page Ref: 287

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

45) A facility that contains all the computing equipment the organization needs to perform its essential business activities is known as a

A) cold site.

B) hot site.

C) remote site.

D) subsidiary location.

Answer:  B

Page Ref: 287

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

46) A facility that is pre-wired for necessary telecommunications and computer equipment, but doesn’t have equipment installed, is known as a

A) cold site.

B) hot site.

C) remote site.

D) subsidiary location.

Answer:  A

Page Ref: 287

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

47) When a computer system’s files are automatically duplicated on a second data storage system as they are changed, the process is referred to as

A) real-time mirroring.

B) batch updating.

C) consistency control.

D) double-secure storage.

Answer:  A

Page Ref: 287

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

48) ________ enables a system to continue functioning in the event that a particular component fails.

A) An incremental backup procedure

B) Fault tolerance

C) Preventive maintenance

D) A concurrent update control

Answer:  B

Page Ref: 284

Objective:  Learning Objective 2

Difficulty :  Moderate

AACSB:  Analytic

49) A copy of a database, master file, or software that will be retained indefinitely as a historical record is known as a(n)

A) archive.

B) cloud computing.

C) differential backup.

D) incremental backup.

Answer:  A

Page Ref: 286

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

50) While this type of backup process takes longer than the alternative, restoration is easier and faster.

A) Archive

B) Cloud computing

C) Differential backup

D) Incremental backup

Answer:  C

Page Ref: 286

Objective:  Learning Objective 2

Difficulty :  Moderate

AACSB:  Analytic

51) ________ involves copying only the data items that have changed since the last partial backup.

A) Archive

B) Cloud computing

C) Differential backup

D) Incremental backup

Answer:  D

Page Ref: 285

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

52) ________ copies all changes made since the last full backup.

A) Archive

B) Cloud computing

C) Differential backup

D) Incremental backup

Answer:  C

Page Ref: 286

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

53) The maximum amount of time between backups is determined by a company’s

A) recovery time objective.

B) recovery point objective.

C) recovery objective.

D) maximum time recovery objective.

Answer:  B

Page Ref: 285

Objective:  Learning Objective 2

Difficulty :  Moderate

AACSB:  Analytic

54) The maximum acceptable down time after a computer system failure is determined by a company’s

A) recovery time objective.

B) recovery point objective.

C) recovery objective.

D) maximum time recovery objective.

Answer:  A

Page Ref: 285

Objective:  Learning Objective 2

Difficulty :  Moderate

AACSB:  Analytic

55) The accounting department at Synergy Hydroelectric records an average of 12,500 transactions per hour. By cost-benefit analysis, managers have concluded that the maximum acceptable loss of data in the event of a system failure is 25,000 transactions. If the firm’s recovery time objective is 120 minutes, then the worst case recovery time objective is

A) 1 hour

B) 2 hours

C) 3 hours

D) 4 hours

Answer:  D

Page Ref: 285

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

56) The accounting department at Synergy Hydroelectric records an average of 10,000 transactions per hour. By cost-benefit analysis, managers have concluded that the maximum acceptable loss of data in the event of a system failure is 20,000 transactions. If the firm’s recovery time objective is 60 minutes, then the worst case recovery time objective is

A) 1 hour

B) 2 hours

C) 3 hours

D) 4 hours

Answer:  C

Page Ref: 285

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

57) The accounting department at Synergy Hydroelectric records an average of 10,000 transactions per hour. By cost-benefit analysis, managers have concluded that the maximum acceptable loss of data in the event of a system failure is 40,000 transactions. The firm’s recovery point objective is therefore

A) 40,000 transactions

B) 10,000 transactions

C) 10 hours

D) 4 hours

Answer:  D

Page Ref: 285

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

58) The accounting department at Synergy Hydroelectric records an average of 12,500 transactions per hour. By cost-benefit analysis, managers have concluded that the maximum acceptable loss of data in the event of a system failure is 25,000 transactions. The firm’s recovery point objective is therefore

A) 25,000 transactions

B) 12,500 transactions

C) 1 hour

D) 2 hours

Answer:  D

Page Ref: 285

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

59) This control entails verifying that the proper number of bits are set to the value 1 in each character received.

A) Echo check

B) Field check

C) Parity check

D) Trailer record

Answer:  C

Page Ref: 279

Objective:  Learning Objective 1

Difficulty :  Easy

AACSB:  Analytic

60) Probably the most important change management control is

A) monitoring user rights and privileges during the change process.

B) testing all changes thoroughly prior to implementation on a stand-alone computer.

C) updating all documentation to reflect changes made to the system.

D) management’s careful monitoring and review.

Answer:  D

Page Ref: 289

Objective:  Learning Objective 2

Difficulty :  Easy

AACSB:  Analytic

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