Chapter 1 Accounting Information Systems: An Overview underlying events or activities that it measures is

A) complete.
1.1 Distinguish data from information, discuss the B) accessible.
characteristics of useful information, and explain how to C) relevant.
determine the value of information. D) timely.
Answer: A
1) Which of the following statements below shows the
contrast between data and information? 8) Information is ________ when two knowledgeable people
A) Data is the output of an AIS. independently produce the same information.
B) Information is the primary output of an AIS. A) verifiable
C) Data is more useful in decision making than information. B) relevant
D) Data and information are the same. C) reliable
Answer: B D) complete
Answer: A
2) Information is best described as
A) raw facts about transactions. 9) Data must be converted into information to be considered
B) data that has been organized and processed so that it is useful and meaningful for decision making. There are six
meaningful to the user. characteristics that make information both useful and
C) facts that are useful when processed in a timely manner. meaningful. If information is free from error or bias and
D) the same thing as data. accurately represents the events or activities of the
Answer: B organization, it is representative of the characteristic of
A) relevancy.
3) The value of information can best be determined by B) timeliness.
A) its usefulness to decision makers. C) understandability.
B) its relevance to decision makers. D) reliability.
C) the benefits associated with obtaining the information Answer: D
minus the cost of producing it.
D) the extent to which it optimizes the value chain. 10) Inventory information is provided in real time by a firm's
Answer: C accounting information system. The accuracy of this
information is questionable, however, since the production
4) An accounting information system (AIS) processes manager often reports stock outs of components that the
________ to provide users with ________. system indicates are in stock. Which of the following
A) data; information characteristics of useful information is absent in the situation
B) data; transactions described above?
C) information; data A) relevant
D) data; benefits B) reliable
Answer: A C) complete
D) timely
5) ________ information reduces uncertainty, improves E) understandable
decision makers' ability to make predictions, or confirms F) verifiable
expectations. G) accessible
A) Timely Answer: B
B) Reliable
C) Relevant 11) Cheryl Metrejean has been the controller of Downtown
D) Complete Tires for 25 years. Ownership of the firm recently changed
Answer: C hands and the new owners are conducting an audit of the
financial records. The audit has been unable to reproduce
6) Information that is free from error or bias and accurately financial reports that were prepared by Ms. Metrejean. While
represents the events or activities of the organization is there is no evidence of wrongdoing, the auditors are
A) relevant. concerned that the discrepancies might contribute to poor
B) reliable. decisions. Which of the following characteristics of useful
C) verifiable. information is absent in the situation described above?
D) timely. A) relevant
Answer: B B) reliable
C) complete
7) Information that does not omit important aspects of the D) timely

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E) understandable 14) A frantic Barney Rubble lost a large sale because he could
F) verifiable not access the system to verify the inventory was in stock and
G) accessible ready to be shipped. Which of the following characteristics of
Answer: F useful information is absent in the situation described above?
A) relevant
12) In 2003, Singh Manufacturing implemented a Web-based B) reliable
information system that allows all employees to access C) complete
mission-critical information. The intention was to increase D) timely
production efficiency. Unfortunately, it had the opposite E) understandable
effect, as deliveries fell behind schedule and costs increased. F) verifiable
Shaman Gupta, the director of information technology G) accessible
services, asked Ashlee Wells to come in and talk with him Answer: G
about the system. Ashlee is a long-time employee of Singh,
and her opinion is valued by her peers and by her supervisor. 15) Message left on voicemail: "Hi Nikki! Just landed at the
"So Ashlee, how's it going down there in the shop?" airport. How about dinner this evening if you're available. Call
"Not so good, Shaman. Used to be we got a weekly pick list so me!" Which of the following characteristics of useful
we knew how to plan production. Now, we got that computer information is absent in the situation described above?
system. Most of us can't figure out how to use it to do our A) relevant
jobs. Is there some way to print out a pick list?" B) reliable
Shaman thought for a while before responding. "Well, Ashlee, C) complete
to tell you the truth, I'm not so sure how to do it myself, but D) timely
there must be a way. We'll bring in the consultants that E) understandable
helped us build the system. Maybe they can help." F) verifiable
Which of the following characteristics of useful information is G) accessible
absent in the situation described above? Answer: C
A) relevant
B) reliable 16) Chopra, Limited, is an Indian company operating in New
C) complete York state. It offers stylized, boutique public relations services
D) timely to upscale retailers in quaint New England towns. A major
E) understandable source of revenue is a weekly newsletter that reports on
F) verifiable current and projected tourist travel and spending patterns.
G) accessible Preparation of the newsletter requires study and analysis of
Answer: E weather conditions, economic activity, and travel costs. It is
available at an annual subscription rate of $299.99. There are
13) Wisconsin Dells, Wisconsin, is a popular tourist currently 190 subscribers. Preparation and distribution of the
destination. During the winter months, the population newsletter costs $12,000 annually. The value of information
dwindles to a meager few, but when summer comes, the size to subscribers is
of the town surges. Hunter Jackson is the town sanitation A) $236.83.
engineer. When the size of the town surges, so do his B) $44,998.10.
responsibilities. Among them is management of the sewage C) less than $63.16.
processing volume. D) at least $300.00.
In an interview with the local paper, Hunter complained that Answer: D
a report on tourist population that he uses to adjust
processing volume refers to data that was collected four days 17) Baggins Incorporated identifies new product
ago and it takes him a week to make adjustments. Which of development and product improvement as the top corporate
the following characteristics of useful information is absent in goals. An employee developed an innovation that will correct
the situation described above? a shortcoming in one of the company's products. Although
A) relevant Baggins current Return on Investment (ROI) is 15%, the
B) reliable product innovation is expected to generate ROI of only 12%.
C) complete As a result, the employee fails to follow up. As a result,
D) timely awarding bonuses to employees based on ROI resulted in
E) understandable A) goal conflict.
F) verifiable B) information overload.
G) accessible C) goal congruence.
Answer: D D) decreased value of information.
Answer: A

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 needed to hire and train employees.
18) Which of the following tradeoffs between characteristics A) job descriptions
of useful information is least objectionable? B) vendor performance
A) incomplete information received on a timely basis C) market coverage
B) irrelevant information received in an understandable D) capacity needs
format Answer: A
C) unreliable information easily accessible
D) verifiable information received in unreadable format 6) How can query languages be used to help make better
Answer: A decisions?
A) They can suggest a course of action.
19) Which of the following is not one of the three basic types B) They can gather relevant data for decision making.
of data about a specific sales transaction that should be C) They can help the decision maker to interpret results.
captured by an Accounting Information System? D) They can model choose among alternative courses of
A) name of the employee who completed the sale action.
B) daily sales quota Answer: B
C) product sold
D) date 7) What is a key decision that needs to be made with regards
Answer: B to selling merchandise?
A) which credit cards to accept
1.2 Explain the decisions an organization makes and the B) which employees to hire
information needed to make them. C) which public accounting firm to employ
D) how much capital to acquire
1) Paid time-off policies, job descriptions, and procedures Answer: A
manuals are examples of information needed to support key
decisions in what business process? 8) What is a key decision that needs to be made with regards
A) hire and train employees to acquiring inventory?
B) acquire inventory A) which credit cards to accept
C) sell merchandise B) which employees to hire
D) collect payment from customers C) which vendors to use
Answer: A D) how much capital to acquire
Answer: C
2) Before a firm can identify the information needed to
effectively manage a process, the firm must 9) What is a key decision that needs to be made with regards
A) understand the process . to acquiring equipment?
B) hire programmers. A) the location
C) purchase computers and/or workstations. B) pro forma income statement
D) obtain internet access. C) how much capital to acquire
Answer: A D) job descriptions
Answer: A
3) Identify the piece of information below that is typically
needed to acquire a building. 1.3 Identify the information that passes between internal
A) job descriptions and external parties and an AIS.
B) vendor performance
C) market coverage 1) One group that relies on both the adequate collection and
D) capacity needs transformation of data for decision-making purposes for an
Answer: D organization is
A) management.
4) Identify the piece of information below that is typically B) interested outsiders.
needed to acquire inventory. C) competitors.
A) job descriptions D) the government.
B) vendor performance Answer: A
C) market coverage
D) capacity needs 2) Who of the following is not a stakeholder with whom an
Answer: B accounting information system typically communicates
directly?
A) Wall Street industry analyst
5) Identify the piece of information below that is typically
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B) venture capitalist B) the expenditure cycle
C) company that supplies raw materials C) the human resources / payroll cycle
D) company that purchases finished goods for resale to D) the financing cycle
consumers Answer: C
Answer: A
9) Identify the party below that is not external to the firm.
3) In which transaction cycle would customer sales A) customer
transaction information be most likely to pass between B) vendor
internal and external accounting information systems? C) government agencies
A) the revenue cycle D) CEO
B) the expenditure cycle Answer: D
C) the human resources / payroll cycle
D) the financing cycle 10) Identify the party below that is not internal to the firm.
Answer: A A) customer
B) management
4) In which transaction cycle would information for inventory C) employees
purchases be most likely to pass between internal and D) CEO
external accounting information systems? Answer: A
A) the revenue cycle
B) the expenditure cycle 1.4 Describe the major business processes present in most
C) the human resources / payroll cycle companies.
D) the financing cycle
Answer: B 1) Obtaining financing from outside investors is part of which
cycle?
5) In which transaction cycle would information for paying A) the revenue cycle
employees be most likely to pass between internal and B) the financing cycle
external accounting information systems? C) the production cycle
A) the revenue cycle D) the payroll cycle
B) the expenditure cycle Answer: B
C) the human resources / payroll cycle
D) the financing cycle
Answer: C 2) The ________ is not a transaction cycle.
A) general ledger and reporting cycle
B) expenditure cycle
6) In which transaction cycle would information for paying C) revenue cycle
interest be most likely to pass between internal and external D) human resources cycle
accounting information systems? Answer: A
A) the revenue cycle Objective: Learning Objective 4
B) the expenditure cycle Difficulty: Moderate
C) the human resources / payroll cycle AACSB: Analytic
D) the financing cycle
Answer: D 3) Identify the false statement below.
A) Retail stores do not have a production cycle.
7) In which transaction cycle would information for borrowing B) Financial institutions have installment-loan cycles.
money be most likely to pass between internal and external C) Every organization should implement every transaction
accounting information systems? cycle module.
A) the revenue cycle D) A service company does not have an inventory system.
B) the expenditure cycle Answer: C
C) the human resources / payroll cycle Objective: Learning Objective 4
D) the financing cycle Difficulty: Easy
Answer: D AACSB: Analytic

8) In which transaction cycle would information for hiring 4) Transaction cycles can be summarized on a high level as
employees be most likely to pass between internal and "give-get" transactions. An example of "give-get" in the
external accounting information systems? revenue cycle would be
A) the revenue cycle A) give cash, get goods.

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B) give goods, get cash. B) customer
C) give cash, get labor. C) cashier
D) give cash, get cash. D) credit manager
Answer: B Answer: A
Objective: Learning Objective 4 Objective: Learning Objective 4
Difficulty: Easy Difficulty: Easy
AACSB: Analytic AACSB: Analytic

5) Groups of related business activities such as the acquisition 1.5 Explain what an accounting information system (AIS) is
of merchandise and payment of vendors are called and describe its basic functions.
A) transaction cycles.
B) economic cycles. 1) An accounting information system must be able to perform
C) business events. which of the following tasks?
D) transactions. A) collect transaction data
Answer: A B) process transaction data
Objective: Learning Objective 4 C) provide adequate controls
Difficulty: Easy D) all of the above
AACSB: Analytic Answer: D

6) The transaction cycle that includes the events of hiring 2) Which of the following is not an example of a common
employees and paying them is known as the activity in an AIS?
A) revenue cycle. A) buy and pay for goods and services
B) expenditure cycle. B) sell goods and services and collect cash
C) human resources cycle. C) summarize and report results to interested parties
D) financing cycle. D) record sales calls for marketing purposes
Answer: C Answer: D
Objective: Learning Objective 4
Difficulty: Easy 3) Which of the following is not one of the components of an
AACSB: Analytic AIS?
A) internal controls and security measures
7) The transaction cycle approach yields efficiencies when B) people
processing of a large number of transactions because C) procedures and instructions
A) a large number of transactions within a given cycle can be D) hardware
categorized into a relatively small number of distinct types. Answer: D
B) transaction cycles are easier to computerize.
C) the transaction cycle approach represents the natural 4) The primary objective of accounting is to
order of business. A) implement strong internal controls.
D) transaction cycles are easy to understand. B) provide useful information to decision makers.
Answer: A C) prepare financial statements.
Objective: Learning Objective 4 D) ensure the profitability of an organization.
Difficulty: Moderate Answer: B
AACSB: Analytic
5) Many modern accounting software packages offer separate
8) Paying state payroll taxes is part of which transaction transaction cycle modules. What is the reason for this?
cycle? A) Every organization does not need to implement all of the
A) human resources/payroll available transaction cycle modules.
B) expenditure B) Most businesses do not need the revenue cycle module as
C) financing part of their AIS.
D) revenue C) The nature of a given transaction cycle is the same
Answer: A irrespective of the type of organization.
Objective: Learning Objective 4 D) A properly designed AIS does not use the concept of
Difficulty: Moderate separate business transaction cycles to process transactions.
AACSB: Analytic Answer: A

9) Who of the following would not be involved in the revenue 1.6 Discuss how an AIS can add value to an organization.
cycle?
A) accounts payable clerk 1) The American Institute of Certified Public Accountants
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(AICPA) has recognized the importance of AIS and the major 7) A well-designed AIS can improve the decision making in an
impact information technology has on the area of accounting. organization. Identify the statement below that describes a
To recognize individual CPAs who have met educational and situation where an AIS may actually inhibit effective decision
experiential requirements in this area, the group formally making.
created the designation known as A) An AIS provides to its users an abundance of information
A) the Certified Information Auditor. without any filtering or condensing of such information.
B) the Certified Internal Auditor. B) An AIS identifies situations requiring management action.
C) the Certified Information Technology Professional. C) An AIS reduces uncertainty, and therefore accounting
D) the Certified Data Processing Professional. information can provide a basis for choosing among
Answer: C alternative courses of action.
D) An AIS provides information about the results of previous
2) The AIS must include controls to ensure decisions which provides decision makers with feedback that
A) safety and availability of data. can be used in future decision making.
B) marketing initiatives match corporate goals. Answer: A
C) information produced from data is accurate.
D) both A and C 8) Which of the following is not an example of how an AIS
Answer: D adds value to an organization?
A) All employees at a hospital can access and update patient
3) An AIS provides value by records from any computer terminal in the hospital.
A) improving products or services through information that B) A customer service representative can find a customer's
increases quality and reduces costs. account data, purchase history, payment history, and
B) providing timely and reliable information to decision salesperson's name while on the phone with the customer, to
makers. resolve issues quickly.
C) creating new products. C) Suppliers are able to access sales data directly from the
D) both A and B point-of-sale system of a retailer and deliver inventory
Answer: D automatically when needed.
D) Client tax files are encrypted and made available on the
4) A good example of how an AIS is used to share knowledge CPA firm's network to any employee with an access code.
within an organization is Answer: A
A) the use of a corporate database to help staff identify the
relevant experts who can help with a particular client. 1.7 Explain how an AIS and corporate strategy affect each
B) the use of tablets to access a network for messaging other.
worldwide.
C) the monitoring of production equipment to watch for 1) A change in the AIS that makes information more easily
defects. accessible and widely available within an organization is most
D) the use of point-of-sale data to determine hot-selling likely to first influence the
items. A) organizational culture.
Answer: A B) customer base.
C) external financial statement users.
5) When the AIS provides information in a timely and D) production activity.
accurate manner, it stands as an example of Answer: A
A) improved decision making.
B) improving the quality and reducing the costs of products or 2) In Chapter 1, Figure 1-4 shows the factors that influence
services. the design of AIS. The diagram shows a bi-directional arrow
C) improving efficiency. between the organizational culture and the AIS. The reason
D) all of the above for this two-way interchange between organizational culture
Answer: D and AIS is
A) that the AIS should not influence the values of the
6) Accounting information plays major roles in managerial organizational culture.
decision making by B) because the organization's culture influences the AIS, and
A) identifying situations requiring management action. likewise the AIS influences the organization's culture by
B) reducing uncertainty. controlling the flow of information within the organization.
C) providing a basis for choosing among alternative actions. C) due to the transfer of managers between the two
D) all of the above corporate elements.
Answer: D D) the AIS impacts the organization's key strategies.
Answer: B

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 Objective: Learning Objective 7
3) Which of the following is a true statement? Difficulty: Easy
A) Business strategy directly influences AIS, but not AACSB: Analytic
information technology.
B) Information technology directly influences organizational 10) True or False: When properly deployed, accounting
culture, but not business strategy. information systems can provide firms with a competitive
C) Organizational culture directly influences business strategy, advantage.
but not AIS. Answer: TRUE
D) AIS directly influences information technology, but not Objective: Learning Objective 7
business strategy. Difficulty: Easy
Answer: A AACSB: Analytic

1.8 Explain the role an AIS plays in a company's value chain.

5) Identify the primary reason that it is important for a firm to
identify the AIS improvements likely to yield the greatest 1) The process of creating value for customers is the result of
return. nine activities that form a
A) because business strategy directly influences AIS, but not A) value chain.
information technology B) capitalist operation.
B) because most organizations have limited resources C) profitable business.
C) because a firm never wants to waste time addressing D) information system.
issues that are not urgent Answer: A
D) because it is expensive to improve accounting information Objective: Learning Objective 8
systems Difficulty: Easy
Answer: B AACSB: Analytic

6) An AIS that makes information more easily accessible and 2) The value chain concept is composed of two types of
more widely available is likely to increase pressure for activities known as
A) centralization and defined procedures. A) primary and support.
B) centralization and autonomy. B) primary and secondary.
C) decentralization and defined procedures. C) support and value.
D) decentralization and autonomy. D) technology and support.
Answer: D Answer: A
Objective: Learning Objective 8
7) Identify how firms use predictive analysis. Difficulty: Moderate
A) to provide an educated guess regarding what is expected AACSB: Analytic
to occur in the near future
B) to engage in data warehousing 3) Which of the following is a primary activity in the value
C) to engage in a low-cost strategy chain?
D) to design the most effective accounting information A) infrastructure
system B) technology
Answer: A C) purchasing
D) marketing and sales
8) Identify a recent technological advance that provides an Answer: D
opportunity to gain a competitive advantage. Objective: Learning Objective 8
A) CVVP analysis Difficulty: Easy
B) discounted cash flows AACSB: Analytic
C) predictive analysis
D) economic order quantity (EOQ) 4) Arranging delivery of products to customers constitutes
Answer: C ________ in value chain analysis.
A) shipping
B) inbound logistics
9) True or False: It is important that a firm's AIS collect and C) outbound logistics
integrate financial and non-financial information about the D) delivery
organization's activities if the firm seeks use its AIS to gain a Answer: C
competitive advantage. Objective: Learning Objective 8
Answer: TRUE Difficulty: Moderate
AACSB: Analytic
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 A) Inbound logistics
5) ________ are examples of activities that constitute B) Operations
inbound logistics C) Outbound logistics
A) Activities that transform inputs into final products or D) Marketing and sales
services E) Service
B) Activities that consist of receiving, storing, and distributing Answer: B
the materials used as inputs by the organization to create Objective: Learning Objective 8
goods and/or services it sells Difficulty: Moderate
C) Activities that provide post-sale support to customers AACSB: Analytic
D) Activities that help customers to buy the organization's
products or services 9) Clemente Santiago has formed a business that sells carved
Answer: B gourmet coconuts. He has hired five employees. The most
Objective: Learning Objective 8 senior is Friday, who manages the carving process. Monday is
Difficulty: Easy the newest employee. She collects the coconuts. Tuesday
AACSB: Analytic takes calls from unhappy customers. Wednesday tosses
finished coconuts into the sea, sending them to the
6) One activity within the value chain is research and wholesaler. Thursday sends smoke signals to the wholesaler
development. This activity can be identified as a extolling the virtues of the latest production run of nuts that
A) firm infrastructure activity. are drifting across the bay. Which of the following functions
B) human resources activity. in the value chain is Wednesday performing?
C) technology activity. A) Inbound logistics
D) purchasing activity. B) Operations
Answer: C C) Outbound logistics
Objective: Learning Objective 8 D) Marketing and sales
Difficulty: Moderate E) Service
AACSB: Analytic Answer: C
Objective: Learning Objective 8
7) Clemente Santiago has formed a business that sells carved Difficulty: Moderate
gourmet coconuts. He has hired five employees. The most AACSB: Analytic
senior is Friday, who manages the carving process. Monday is
the newest employee. She collects the coconuts. Tuesday 10) Clemente Santiago has formed a business that sells
takes calls from unhappy customers. Wednesday tosses carved gourmet coconuts. He has hired five employees. The
finished coconuts into the sea, sending them to the most senior is Friday, who manages the carving process.
wholesaler. Thursday sends smoke signals to the wholesaler Monday is the newest employee. She collects the coconuts.
extolling the virtues of the latest production run of nuts that Tuesday takes calls from unhappy customers. Wednesday
are drifting across the bay. Which of the following functions tosses finished coconuts into the sea, sending them to the
in the value chain is Monday performing? wholesaler. Thursday sends smoke signals to the wholesaler
A) Inbound logistics extolling the virtues of the latest production run of nuts that
B) Operations are drifting across the bay. Which of the following functions
C) Outbound logistics in the value chain is Thursday performing?
D) Marketing and sales A) Inbound logistics
E) Service B) Operations
Answer: A C) Outbound logistics
Objective: Learning Objective 8 D) Marketing and sales
Difficulty: Moderate E) Service
AACSB: Analytic Answer: D
Objective: Learning Objective 8
8) Clemente Santiago has formed a business that sells carved Difficulty: Easy
gourmet coconuts. He has hired five employees. The most AACSB: Analytic
senior is Friday, who manages the carving process. Monday is
the newest employee. She collects the coconuts. Tuesday
takes calls from unhappy customers. Wednesday tosses
finished coconuts into the sea, sending them to the
wholesaler. Thursday sends smoke signals to the wholesaler
extolling the virtues of the latest production run of nuts that
are drifting across the bay. Which of the following functions
in the value chain is Friday performing?
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11) Clemente Santiago has formed a business that sells C) financing cycle.
carved gourmet coconuts. He has hired five employees. The D) production cycle.
most senior is Friday, who manages the carving process. Answer: A
Monday is the newest employee. She collects the coconuts.
Tuesday takes calls from unhappy customers. Wednesday 5) John Pablo works in the accounting department of a
tosses finished coconuts into the sea, sending them to the multinational manufacturing company. His job includes
wholesaler. Thursday sends smoke signals to the wholesaler updating accounts payable based on purchase orders and
extolling the virtues of the latest production run of nuts that checks. His responsibilities are part of the company's
are drifting across the bay. Which of the following functions A) revenue cycle.
in the value chain is Tuesday performing? B) expenditure cycle.
A) Inbound logistics C) financing cycle.
B) Operations D) production cycle.
C) Outbound logistics Answer: B
D) Marketing and sales
E) Service 6) Many small businesses choose to outsource their payroll
Answer: E activities to firms that specialize in providing payroll services.
Objective: Learning Objective 8 Dolores Yu operates a payroll processing business in
Difficulty: Moderate Calabasas, California. When she sends bills out to her clients,
AACSB: Analytic her work is part of her firm's
A) revenue cycle.
Chapter 2 Overview of Transaction Processing and B) expenditure cycle.
Enterprise Resource Planning Systems C) financing cycle.
D) production cycle.
2.1 Describe the four parts of the data processing cycle and Answer: A
the major activities in each. 7) A delivery of inventory from a vendor, with whom a credit
line is already established, would be initially recorded in
1) Which of the following commonly initiates the data input which type of accounting record and as part of what
process? transaction cycle?
A) a business activity A) purchases journal; expenditure cycle
B) automatic batch processing B) general journal; expenditure cycle
C) an accounting department source document C) general ledger; expenditure cycle
D) a trial balance query D) cash disbursements journal; production cycle
Answer: A Answer: A

2) A typical source document could be 8) Describe the basic cycles and business activities for a
A) some type of paper document. typical merchandising company.
B) a computer data entry screen.
C) the company's financial statements. Answer: Revenue cycle — deliver inventory to customers and
D) both A and B collect cash. Expenditure cycle — receive goods and services
Answer: D from vendors and pay cash. Human resources cycle — track
hours worked by employees and record withholding data.
3) Which step below is not considered to be part of the data
processing cycle? 9) Identify the four parts of the transaction processing cycle.
A) data input A) data input, data storage, data processing, information
B) feedback from external sources output
C) data storage B) data input, data recall, data processing, information output
D) data processing C) data input, data recall, data transmission, information
Answer: B output
D) data input, data recall, data transmission, data storage
4) John Pablo works in the accounting department of a Answer: A
multinational manufacturing company. His job includes
updating accounts receivable based on sales orders and 10) What is the most frequent revenue cycle transaction?
remittance advices. His responsibilities are part of the A) purchase of inventory
company's B) receipt of cash
A) revenue cycle. C) sale to customer
B) expenditure cycle. D) billing

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Answer: C A) the revenue cycle
B) the production cycle
11) True or False: The existence of relevant data guarantees C) the human resources cycle
the data are useful. D) the expenditure cycle
Answer: FALSE Answer: C

12) Identify the item below that is not one of the four 6) Common source documents for the revenue cycle include
different types of data processing activities. all of the following except
A) creating A) sales order.
B) reading B) receiving report.
C) using C) delivery ticket.
D) deleting D) credit memo.
Answer: C Answer: B

13) What is the final step in the data processing cycle? 7) Which of the following documents would be found in the
A) output expenditure cycle?
B) storage A) delivery ticket
C) processing B) time card
D) input C) credit memo
Answer: A D) purchase order
2.2 Describe documents and procedures used to collect and Answer: D
process transaction data.
1) The general ledger 8) Documents that are sent to customers or suppliers and
A) is the initial place to record general expenses. then sent back to the company in the course of a business
B) is posted in total to the general journal. transaction are known as
C) only includes balance sheet accounts. A) turnaround documents.
D) summarizes the transactions in journals. B) source documents.
2) For a retail business, a delivery of inventory, from a vendor C) input documents.
(with whom there is an established credit relationship) would D) transaction documents.
be initially recorded in which type of accounting record as Answer: A
part of which transaction cycle? 9) Which of the following is an example of source data
A) purchases journal; expenditure cycle automation?
B) general journal; expenditure cycle A) a utility bill
C) general ledger; expenditure cycle B) POS (point-of-sale) scanners in retail stores
D) cash disbursements journal; production cycle C) a bill of lading
Answer: A D) a subsidiary ledger
Answer: B
3) Data must be collected about three facets of each business
activity. What are they? 10) Pre-numbering of source documents helps to verify that
A) the business activity, the resources it affects, the people A) documents have been used in order.
who participate B) company policies were followed.
B) the business activity, the transactions it creates, the impact C) all transactions have been recorded.
on the financial statements D) source data automation was used to capture data.
C) the inputs, outputs and processes used Answer: C
D) who is involved, what was sold, how much was paid
Answer: A 11) Source documents generally help to improve accuracy in
transaction processing because
4) Issuing a purchase order is part of which transaction cycle? A) they specify which information to collect.
A) the revenue cycle B) logically related data can be grouped in the same area of
B) the expenditure cycle the document.
C) the human resources cycle C) they provide directions and steps for completing the form.
D) the production cycle D) All of the above are correct.
Answer: B Answer: D

5) The collection of employee time sheets is part of which 12) In transaction processing, generally which activity comes
transaction cycle? first?

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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
A) recording data in a journal 18) The Cape Fear Rocket Club heads out to the dunes of
B) posting items to special journals Cape Fear, Oregon every August to pierce the sky with their
C) capturing data on source documents fiery projectiles. An enterprising seller of t-shirts has devised
D) recording data in a general ledger a series of designs that capture the spirit of the event in silk-
Answer: C screened splendor. His employees can be found on many of
the major intersections selling his products out of the backs
13) Which of the following statements is true? of pickup trucks. What is the best way for this business to
A) Batch processing ensures that stored information is always ensure that sales data entry is efficient and accurate?
current. A) well-designed paper forms
B) Batch input is more accurate than on-line data entry. B) source data automation
C) On-line batch processing is a combination of real-time and C) turnaround documents
batch processing. D) sequentially numbered forms
D) Batch processing is not frequently used. Answer: D
Answer: C
19) Which of the following statements about data processing
14) The data processing method used by FedEx to track methods is true?
packages is an example of A) Online real-time processing does not store data in a
A) real-time processing. temporary file.
B) batch processing. B) Batch processing cannot be used to update a master file.
C) online batch processing. C) Control totals are used to verify accurate processing in
D) real-time batch processing. both batch and online batch processing.
Answer: A D) Online real-time processing is only possible with source
data automation.
15) Street Smarts (SS) is a retailer located in Naperville, Answer: A
Illinois. During the peak tourist season, it has average daily
cash and credit card sales in excess of $7,000. What is the 22) Source data automation refers to
best way for SS to ensure that sales data entry is efficient and A) using devices to capture transaction data in machine-
accurate? readable form at the time the transaction is initiated.
A) well-designed paper forms B) using the internet as the operating platform of an
B) source data automation accounting information system.
C) turnaround documents C) using an accounting information system to electronically
D) sequentially numbered sales invoices bill customers.
Answer: B D) using an accounting information system to automate a
16) In Petaluma, California, electric power is provided to previously manual transaction process.
consumers by Pacific Power. Each month Pacific Power mails Answer: A
bills to 86,000 households and then processes payments as
they are received. What is the best way for this business to 23) What is the first step in the data processing cycle?
ensure that payment data entry is efficient and accurate? A) input
A) well-designed paper forms B) output
B) source data automation C) storage
C) turnaround documents D) purchasing
D) sequentially numbered bills Answer: A
Answer: C
24) A purchase requisition is a common source document
17) Data processing includes all of the following except used to facilitate which business activity?
A) verifying subsidiary ledger balances. A) customer sale
B) changing customer addresses. B) receipt of goods
C) removing inventory items no longer offered. C) inventory purchase
D) adding the name of a new vendor. D) purchase request
Answer: A Answer: D

2.3 Describe the ways information is stored in computer-

based information systems.

1) Identify the statement below that is not true with regards

to the accounts receivable subsidiary ledger.

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A) Every credit sale is entered individually into the subsidiary AACSB: Analytic
ledger.
B) Debits and credits in the subsidiary ledger must always 6) The general ledger account that corresponds to a
equal. subsidiary ledger account is known as a(n)
C) The subsidiary ledgers play an important role in A) dependent account.
maintaining the accuracy of the data stored in the AIS. B) control account.
D) The total of the subsidiary ledgers must equal the control C) credit account.
account. D) attribute account.
Answer: B Answer: B

2) Which of the following is not usually a consideration when 7) Pre-numbered invoices and pre-numbered purchase orders
designing a coding system? are examples of
A) government coding regulations A) sequence codes.
B) standardization B) block codes.
C) future expansion needs C) group codes.
D) ease of reporting D) mnemonic codes.
Answer: A Answer: A
Objective: Learning Objective 3
Difficulty: Easy 8) A chart of accounts is an example of (select all that apply)
AACSB: Analytic A) sequence codes.
B) block codes.
3) Which of the following statements regarding special C) group codes.
journals is not true? D) mnemonic codes.
A) The balances in a special journal must always reconcile to Answer: B, C
the general ledger.
B) Special journals are used to record large numbers of 9) Product items are often coded with (select all that apply)
repetitive transactions. A) sequence codes.
C) Special journals are periodically summarized and posted to B) block codes.
the general ledger. C) group codes.
D) Special journals provide a specialized format for recording D) mnemonic codes.
similar transactions. Answer: C, D
Answer: A
Objective: Learning Objective 3 10) Identify the statement below that is false with regards to
Difficulty: Easy effective coding practices.
AACSB: Analytic A) Codes should allow for growth.
B) Codes should be consistent with intended use.
4) A change in an employee's hourly pay would be recorded C) Codes should be customized for each division of an
in organization.
A) the payroll master file. D) Codes should be as simple as possible.
B) a payroll transaction file. Answer: C
C) the employee master file.
D) the employee transaction file. 11) To be effective, the chart of accounts must
Answer: C A) not use alpha-numeric characters.
Objective: Learning Objective 3 B) contain sufficient detail.
Difficulty: Moderate C) utilize only one coding technique.
AACSB: Reflective Thinking D) begin with account 001.
Answer: B
5) When the sum of all entries in the subsidiary ledger equals
the balance in the corresponding general ledger account, it is 12) The chart of accounts of a movie theater would probably
assumed that include
A) the recording processes were accurate. A) retained earnings.
B) all source documents were recorded. B) a drawing account.
C) adjusting entries are not required. C) work-in-process.
D) no errors exist in the subsidiary ledger. D) both A and C
Answer: A Answer: A
Objective: Learning Objective 3
Difficulty: Moderate
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13) The efficiency of recording numerous business
transactions can be best improved by the use of 19) Which of the following statements about a master file is
A) prenumbered source documents. false?
B) specialized journals. A) A master file is conceptually similar to a ledger in a manual
C) posting references. AIS.
D) subsidiary ledgers. B) A master file's individual records are rarely, if ever,
Answer: B changed.
C) A master file exists across fiscal periods.
14) A general journal D) A master file stores cumulative information.
A) would be used to record monthly depreciation entries. Answer: B
B) simplifies the process of recording large numbers of
repetitive transactions. 20) Which of the following is conceptually similar to a journal
C) records all detailed data for any general ledger account in a manual AIS?
that has individual sub-accounts. A) database
D) contains summary-level data for every account of the B) master file
organization. C) record
Answer: A D) transaction file
Answer: D
15) The general ledger
A) is used to record infrequent or non-routine transactions. 21) Catarina Boards is a skateboard retailer located in Pueblo,
B) simplifies the process of recording large numbers of New Mexico. Catarina Boards is a sole proprietorship that
repetitive transactions. stocks an inventory of between 30 and 50 different
C) records all detailed data for any general ledger account skateboards. Inventory is updated in real time by the AIS. If
that has individual sub-accounts. Catarina wishes to keep detailed information about the
D) contains summary-level data for every account of the purchase price of each skateboard in a place outside of the
organization. general ledger, it might use a
Answer: D A) relational ledger.
B) transaction file.
16) A subsidiary ledger C) master file.
A) is used to record infrequent or non-routine transactions. D) specific ledger.
B) simplifies the process of recording large numbers of Answer: B
repetitive transactions.
C) records all detailed data for any general ledger account 22) Antia Carmie is the largest collector and retailer of
that has individual sub-accounts. Japanese fans in the St. Louis area. Antia uses computer
D) contains summary-level data for every account of the technology to provide superior customer service. The store's
organization. database system was designed to make detailed information
Answer: C about each Japanese fan easily accessible to her customers.
Accordingly, the fan price and condition are provided for each
17) A specialized journal fan, along with many pictures of each fan. In Antia's database,
A) is used to record infrequent or non-routine transactions. the price of the Japanese fans is a(n)
B) simplifies the process of recording large numbers of A) entity.
repetitive transactions. B) attribute.
C) records all detailed data for any general ledger account C) field.
that has individual sub-accounts. D) record.
D) contains summary-level data for every account of the Answer: B
organization.
Answer: B 23) Antia Carmie is the largest collector and retailer of
18) Which statement below is true with regards to an audit Japanese fans in the St. Louis area. Antia uses computer
trail? technology to provide superior customer service. The store's
A) An audit trail begins with the general journal. database system was designed to make detailed information
B) An audit trail provides the means to check the accuracy about each Japanese fan easily accessible to her customers.
and validity of ledger postings. Accordingly, the fan price and condition are provided for each
C) An audit trail is a summary of recorded transactions. fan, along with many pictures of each fan. In Antia's database,
D) An audit trail is automatically created in every computer- the data about each Japanese fan represents a(n)
based information system. A) entity.
Answer: B B) attribute.

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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
C) field. C) The audit trail provides the means for locating and
D) record. examining source documents.
Answer: D D) The audit trail is created with document numbers and
posting references.
24) Antia Carmie is the largest collector and retailer of Answer: B
Japanese fans in the St. Louis area. Antia uses computer
technology to provide superior customer service. The store's 30) Data about which of the following facets of a business
database system was designed to make detailed information activity is most likely to be recorded in a transaction file?
about each Japanese fan easily accessible to her customers. A) business activity
Accordingly, the fan price and condition are provided for each B) resources affected by the business activity
fan, along with many pictures of each fan. In Antia's database, C) people who participate in the business activity
the Japanese fans (as a whole) represent a(n) D) place the business activity occurs
A) entity. Answer: A
B) attribute.
C) field. 31) Data about all of the following facets of a business activity
D) record. are most likely to be recorded in a master file except the
Answer: A A) business activity.
25) Antia Carmie is the largest collector and retailer of B) resources affected by the business activity.
Japanese fans in the St. Louis area. Antia uses computer C) people who participate in the business activity.
technology to provide superior customer service. The store's D) place the business activity occurs.
database system was designed to make detailed information Answer: A
about each Japanese fan easily accessible to her customers.
Accordingly, the fan price and condition are provided for each 2.4 Discuss the types of information that an AIS can
fan, along with many pictures of each fan. In Antia's database, provide.
the data about each Japanese fan's price is stored in a(n)
A) entity. 1) Which statement below regarding the AIS is false?
B) attribute. A) The AIS must be able to provide managers with detailed
C) field. and operational information about the organization's
26) The coding technique most likely used for sales orders is performance.
A) block code. B) Both traditional financial measures and operational data
B) group code. are required for proper and complete evaluation of
C) sequence code. performance.
D) data code. C) The AIS was often just one of the information systems used
Answer: C by an organization to collect and process financial and
nonfinancial data.
27) A specialized journal would be most likely to be used to D) Traditionally, most AIS have been designed so that both
enter financial and operational data are stored in a manner that
A) sales transactions. facilitates their integration in reports.
B) monthly depreciation adjustments. Answer: D
C) annual closing entries.
D) stock issuance transactions. 2) The quality assurance department at a large manufacturing
Answer: A business enters data into the AIS that is used to produce a
weekly report that summarizes the proportion of defective
28) Changing an employee's hourly wage rate would be units in each product line. This is an example of
recorded where? A) internal financial information.B) internal nonfinancial
A) employee master file information.
B) employee transaction file C) external financial information.
C) special journal D) external nonfinancial information.
D) employee update file Answer: B
Answer: A 3) Which of the following information would most likely be
reviewed by management on an exception report?
29) Which of the following statements is not correct? A) monthly cash budget
A) The audit trail is intended to verify the validity and B) quality control system failures
accuracy of transaction recording. C) unit sales by territory and salesperson
B) The audit trail consists of records stored sequentially in an D) income statement
audit file. Answer: B

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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
 C) exception reports
4) All of the following situations would likely be D) all of the above
communicated in an exception report except Answer: D
A) production stoppages.
B) weekly credit and cash sales comparison. 2.5 Discuss how organizations use enterprise resource
C) low inventory level. planning (ERP) systems to process transactions and provide
D) expense variances outside acceptable range. information.
Answer: B
1) Which of the following is an example of an ERP system?
5) Which statement below regarding the AIS and managerial A) Alexis uses a computerized information system to keep
reports is false? track of all the financial data generated by her bakery. She is
A) The AIS is best utilized for financial data while the considering opening a new bakery on the east side of town.
management information system is best utilized for B) Betty has a system that keeps track of the accounts
operational data. payable and receivable for her plumbing business. At the end
B) The AIS must be able to provide managers with detailed of the year, the system helps her to prepare her taxes in just
operational information about the organization's two hours.
performance. C) Charlie keeps records of all his business records in a shoe
C) Both financial and nonfinancial data are required for box. Each week he enters all of the data into spreadsheets
proper and complete evaluation of organizational that automatically generate purchase orders, based on
performance. predetermined inventory reorder points. Production quotas
D) Most source documents capture both financial and for the coming week are also automatically generated based
nonfinancial data about business transactions. on customer orders.
Answer: A D) Doug is a freelance photographer. He keeps records of all
expenses and revenues on his cell phone and then e-mails
6) True or False: Traditionally, accounting information them to himself every month. The files are stored on his
systems have been used to collect, process, store and report personal computer and backed up to CD quarterly.
non-financial information. Answer: C
Answer: FALSE
Objective: Learning Objective 4 2) In an ERP system, the module used to record data about
Difficulty: Easy transactions in the revenue cycle is called
AACSB: Analytic A) order to cash.
B) purchase to pay.
7) The existence of multiple systems which provide C) financial.
information can result in all of the following except D) customer relationship management.
A) redundancies. Answer: A
B) discrepancies.
C) integration issues. 3) Implementation of an ERP system requires increased focus
D) efficiency. on all except which of the following controls?
Answer: D A) segregation of duties between custody, authorization, and
recording
8) When printed on paper, data output is referred to as B) data entry controls on validity and accuracy
A) reports. C) controls over access to data
B) hard copy. D) appropriate disposal of hard copy reports
C) soft copy. Answer: D
D) financials.
Answer: B 5) ERP stands for
9) When displayed on a monitor, data output is referred to as A) enterprise resource planning.
A) reports. B) enterprise resource program.
B) hard copy. C) enterprise reporting program.
C) soft copy. D) none of the above
D) financials. Answer: A
Answer: C
10) Identify the output below that an accounting information 6) In an ERP system, the module used to record data about
system can provide. transactions in the disbursement cycle is called
A) income statement A) order to cash.
B) list of sales returns B) purchase to pay.

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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
C) financial. C) Oracle.
D) customer relationship management. D) Microsoft.
Answer: B Answer: A

7) In an ERP system, the module used to record data about 13) An ERP system might facilitate the purchase of direct
transactions in the production cycle is called materials by all of the following except
A) order to cash. A) selecting the best supplier by comparing bids.
B) purchase to pay. B) preparing a purchase order when inventory falls to reorder
C) manufacturing. point.
D) logistics. C) routing a purchase order to a purchasing agent for
Answer: C approval.
D) communicating a purchase order to a supplier.
8) In an ERP system, the module used to record marketing Answer: A
data is called
A) marketing.
B) advertising. Accounting Information Systems, 13e (Romney/Steinbart)
C) customer relationship management. Chapter 3 Systems Documentation Techniques
D) customer service.
Answer: C 3.1 Prepare and use data flow diagrams to understand,
evaluate, and document information systems.
9) All of the following are disadvantages of an ERP system
except 1) Graphical representations of information are often
A) an ERP provides an integrated view of the organization's supplemented by
data. A) narrative descriptions.
B) ERP software and hardware can cost midsized companies B) relevant e-mail communications.
between $10 million and $20 million dollars. C) logic charts.
C) ERPs frequently cause organizations to change their D) oral descriptions from management.
business processes to standardized ones. Answer: A
D) ERPs are relatively complex. Objective: Learning Objective 1
Answer: A Difficulty: Easy
AACSB: Analytic
10) All of the following are advantages of an ERP system
except 2) All of the following are guidelines for preparing data flow
A) in an ERP, data input is captured or keyed once. diagrams except
B) ERPs permit management to gain greater visibility into A) show the most detail in the highest-level DFD.
every area of the enterprise. B) include all storage files, even if they are only temporary.
C) it takes considerable experience and training to use an ERP C) uniquely name all data flows.
system effectively. D) sequentially number process bubbles.
D) ERPs permit manufacturing plants to receive new orders in Answer: A
real time. Objective: Learning Objective 1
Answer: C Difficulty: Moderate
AACSB: Analytic

11) All of the following are reasons that implementing a new 3) The Sarbanes-Oxley Act requires independent auditors to
ERP may fail except A) create flowcharts to document business processes.
A) employees may resist using the ERP system. B) understand a client's system of internal controls.
B) ERPs can take years to fully implement. C) establish effective internal controls.
C) employees may refuse to share sensitive information with D) prepare and understand all types of system
different departments. documentation.
D) ERPs may require procedures and reports to be Answer: B
standardized across business units. Objective: Learning Objective 1
Answer: D Difficulty: Moderate
AACSB: Analytic
12) All of the following are ERP vendors except
A) Dell. 4) The passage of the Sarbanes Oxley Act
B) SAP. A) made documentation skills even more important.
B) requires public companies to prepare an annual internal
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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
control report. AACSB: Analytic
C) mandates that auditors must be able to prepare, evaluate
and read documentation tools such as flowcharts. 9) In general, a data destination will be shown by
D) all of the above A) an arrow pointing away.
Answer: D B) an arrow pointing in.
Objective: Learning Objective 1 C) arrows pointing both ways.
Difficulty: Easy D) no arrows, only two horizontal lines.
AACSB: Analytic Answer: B
Objective: Learning Objective 1
5) Which of the following is not a true statement? Difficulty: Easy
A) Documentation tools save an organization both time and AACSB: Analytic
money.
B) Documentation tools are used extensively in the systems 10) In a data flow diagram of the customer payment process,
development process. "update receivables" will appear above or in
C) Data flow diagrams and flowcharts are the two most A) a square.
frequently used systems development documentation tools. B) a circle.
D) Data flow diagrams and flowcharts are difficult to prepare C) two horizontal lines.
and revise using software packages. D) none of the above
Answer: D Answer: B
Objective: Learning Objective 1 Objective: Learning Objective 1
Difficulty: Easy Difficulty: Easy
AACSB: Analytic AACSB: Analytic

6) A data flow diagram 11) In a data flow diagram of the customer payment process,
A) is a graphical description of the source and destination of "Customer" will appear above or in
data that shows how data flow within an organization. A) a square.
B) is a graphical description of the flow of documents and B) a circle.
information between departments or areas of responsibility. C) two horizontal lines.
C) is a graphical description of the relationship among the D) none of the above
input, processing, and output in an information system. Answer: A
D) is a graphical description of the sequence of logical Objective: Learning Objective 1
operations that a computer performs as it executes a Difficulty: Easy
program. AACSB: Analytic
Answer: A
Objective: Learning Objective 1 12) In a data flow diagram of the customer payment process,
Difficulty: Easy "Customer payment" will appear above or in
AACSB: Analytic A) a square.
B) a circle.
7) In a DFD, a "data sink" is also known as a C) two horizontal lines.
A) data store. D) an arrow.
B) transformation process. Answer: D
C) data flow. Objective: Learning Objective 1
D) data destination. Difficulty: Easy
Answer: D AACSB: Analytic
Objective: Learning Objective 1
Difficulty: Easy 13) Most processes on a DFD can be identified by
AACSB: Analytic A) data in-flows only.
B) data out-flows only.
8) In preparing a DFD, when data are transformed through a C) data flows both into or out of a process.
process, the symbol used should be D) always being followed by a data store.
A) a circle. Answer: C
B) an arrow. Objective: Learning Objective 1
C) a square. Difficulty: Easy
D) two horizontal lines. AACSB: Analytic
Answer: A
Objective: Learning Objective 1 14) More than one arrow is needed between symbols on a
Difficulty: Easy DFD if
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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
A) data elements always flow together. AACSB: Analytic
B) data elements flow at different times.
C) data elements flow to different locations. 18) The American Bread Company is a small restaurant that
D) there is no guideline on use of single or multiple arrows. collects, stores, prepares and provides meals to customers in
Answer: B Miami, Florida. When food is received, it is recorded in a
Objective: Learning Objective 1 database and a receiving ticket is provided to the vendor.
Difficulty: Easy When food is used, the database is updated so that it always
AACSB: Analytic reflects the amount and type of food available to customers.
In a data flow diagram, which type of symbol would be used
15) A DFD created at the highest-level or summary view is to represent the system processing food received from the
referred to as a vendor?
A) process diagram. A)
B) overview diagram.
C) content diagram.
D) context diagram. B)
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic C)

16) In a payroll processing DFD, the "prepare reports" activity

will be represented by ________, the "employee payroll file" D)
will be represented by ________, and the "management" will
be represented by ________.
A) a circle; two horizontal lines; a square Answer: B
B) a circle; two horizontal lines; two horizontal lines Objective: Learning Objective 1
C) a rectangle; a square; a circle Difficulty: Easy
D) a square; two horizontal lines; a circle AACSB: Analytic
Answer: A
Objective: Learning Objective 1 19) The American Bread Company is a small restaurant that
Difficulty: Moderate collects, stores, prepares and provides meals to customers in
AACSB: Analytic Miami, Florida. When food is received, it is recorded in a
database and a receiving ticket is provided to the vendor.
17) The American Bread Company is a small restaurant that When food is used, the database is updated so that it always
collects, stores, prepares and provides meals to customers in reflects the amount and type of food available to customers.
Miami, Florida. When food is received, it is recorded in a In a data flow diagram, which type of symbol would be used
database and a receiving ticket is provided to the vendor. to represent the storage location of data in the system?
When food is used, the database is updated so that it always A)
reflects the amount and type of food available to customers.
In a data flow diagram, which type of symbol would be used
to represent vendors? B)
A)

C)
B)

D)
C)

Answer: D
D) Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic
Answer: A
Objective: Learning Objective 1
Difficulty: Easy
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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
20) The American Bread Company is a small restaurant that 22) Terrell and Monique Anderson run an antique store in
collects, stores, prepares and provides meals to customers in their hometown of Dayton, Ohio. To find items to sell in their
Miami, Florida. When food is received, it is recorded in a shop, they travel around the United States and Europe buying
database and a receiving ticket is provided to the vendor. unique artifacts. Within an hour of making a purchase, they
When food is used, the database is updated so that it always use their smartphone to take a picture of the item and post a
reflects the amount and type of food available to customers. short tweet about the item on Twitter. Then, they ship the
In a data flow diagram, which type of symbol would be used item back to Dayton for sale in their shop. Which symbol
to represent the process of updating the company's inventory should be used to represent Twitter in a context diagram of
records in the system? this process?
A) A)

B) B)

C) C)

D) D)

Answer: B Answer: A
Objective: Learning Objective 1 Objective: Learning Objective 1
Difficulty: Easy Difficulty: Moderate
AACSB: Analytic AACSB: Analytic

21) The American Bread Company is a small restaurant that 23) Terrell and Monique Anderson run an antique store in
collects, stores, prepares and provides meals to customers in their hometown of Dayton, Ohio. To find items to sell in their
Miami, Florida. When food is received, it is recorded in a shop, they travel around the United States and Europe buying
database and a receiving ticket is provided to the vendor. unique artifacts. Within an hour of making a purchase, they
When food is used, the database is updated so that it always use their smartphone to take a picture of the item and post a
reflects the amount and type of food available to customers. short tweet about the item on Twitter. Which symbol should
In a data flow diagram, which type of symbol would be used be used to represent the preparation of data for their tweet
to represent the flow of data provided by the vendors into in a context diagram of this process?
the system? A)
A)

B)
B)

C)
C)

D)
D)

Answer: B
Answer: C Objective: Learning Objective 1
Objective: Learning Objective 1 Difficulty: Moderate
Difficulty: Easy AACSB: Analytic
AACSB: Analytic

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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
24) Terrell and Monique Anderson run an antique store in 26) Chas Mulligan has been hired by Yardley Security as an
their hometown of Dayton, Ohio. To find items to sell in their assistant to the internal auditor. He has been asked to
shop, they travel around the United States and Europe buying document the existing accounting information system, and
unique artifacts. Within an hour of making a purchase, they focus on the activities and flow of data between activities. He
use their smartphone to take a picture of the item and post a decides to begin with a summary description of the sources
short tweet about the item on Twitter. Which symbol should and uses of data in the organization and how they are
be used to represent the transfer of data to Twitter in a processed by the system. The documentation tool that he
context diagram of this process? should employ for this purpose is a
A) A) data flow diagram.
B) document flowchart.
C) system flowchart.
B) D) program flowchart.
Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
C) AACSB: Reflective Thinking

27) A well-planned and drawn level 0 data flow diagram for

D) the expenditure cycle would show which of the following
processes?
A) 1.0 Order Goods; 2.0 Receive and Store Goods; 3.0 Pay for
Answer: C Goods
Objective: Learning Objective 1 B) 1.0 Order Goods; 1.1 Receive and Store Goods; 1.2 Pay for
Difficulty: Easy Goods
AACSB: Analytic
C) 0.1 Order Goods; 0.2 Receive and Store Goods; 0.3 Pay for
25) Terrell and Monique Anderson run an antique store in Goods
their hometown of Dayton, Ohio. To find items to sell in their D) 0.1 Order Goods; 0.12 Receive and Store Goods; 0.13 Pay
shop, they travel around the United States and Europe buying for Goods
unique artifacts. Within an hour of making a purchase, they Answer: A
use their smartphone to take a picture of the item and post a Objective: Learning Objective 1
short tweet about the item on Twitter. Which symbol should Difficulty: Moderate
be used to represent the remote server that stores the AACSB: Reflective Thinking
tweets (i.e., the Twitter posts) data?
28) A well-planned and drawn context data flow diagram will
A)
include how many processes?
A) one
B) B) between 5 and 7
C) between 2 and 7, but no more than 7
D) as many as are needed to accurately depict the process
being documented
C) Answer: A
Objective: Learning Objective 1
Difficulty: Moderate
D) AACSB: Analytic

29) Data flow diagrams depict

Answer: D A) processes, but not who is performing the processes.
Objective: Learning Objective 1 B) processes, but not the data that flows between processes.
Difficulty: Easy C) who is performing processes, but not how they perform
AACSB: Analytic the process.
D) who is performing processes, but not the data that flows
between processes.
Answer: A
Objective: Learning Objective 1
Difficulty: Difficult
AACSB: Reflective Thinking

20
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30) Which is the correct label for the blank transformation
process circle in the data flow diagram below?

A) data store.
B) data source.
C) data flow.
A) 1.2 Check Credit
D) data source and destination.
B) 1.2 Enter Order in Sales Journal
Answer: A
C) 1.2 Does Customer Have Credit?
Objective: Learning Objective 1
D) 1.2 Salesperson Approves
Difficulty: Moderate
Answer: A
AACSB: Analytic
Objective: Learning Objective 1
Difficulty: Moderate
32) Discuss the ways in which information professionals
AACSB: Analytic
interact with documentation tools and the various levels of
understanding necessary.
31) In the data flow diagram below, inventory is a
Answer: At a minimum, a professional should be able to read
documentation. A professional may also be called upon to
evaluate internal control system documentation in order to
identify control strengths and weaknesses or recommend
improvements. A professional may be engaged to prepare
documentation, which requires the greatest amount of skill
and understanding of a particular system.
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

33) Explain two reasons why it is important to have a working

knowledge of DFDs and flowcharting.
Answer: First, SOX requires auditors to evaluate internal
control systems. Data flow diagrams and flowcharts are the
two most frequently used development and documentation
tools used in practice. Second, since systems development is
extremely complex, DFDs and flowcharts are tools that are
used to create order from chaos and complexity. Third,
documentation tools and concepts are covered on the CPA
exam.
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Objective: Learning Objective 1 38) Explain the relevance of the Sarbanes Oxley Act to the
Difficulty: Moderate documentation tools presented in this chapter.
AACSB: Analytic Answer: The Sarbanes Oxley Act of 2002 requires executives
of public companies to document and evaluate internal
34) What does the Sarbanes-Oxley Act require that is relevant controls. External auditors must evaluate management's
to documentation tools? assessment of internal control and attest to its accuracy.
Answer: The Sarbanes-Oxley Act requires that independent Therefore, company executives and the auditors must
auditors understand the automated and manual procedures document and test the internal controls — documentation
an entity uses. One of the best ways to gain this tools, such as flowcharts, are used to do this.
understanding is to use the flowcharts to document the Objective: Learning Objective 1
internal control system, as weaknesses and strengths are Difficulty: Easy
more easily spotted from such graphic portrayals. AACSB: Analytic
Objective: Learning Objective 1
Difficulty: Easy 39) Discuss the idea of a data flow.
AACSB: Analytic Answer: A data flow is a graphic representation of the flow of
data between processes, data stores, and data sources and
35) Describe a situation in which data flow should be shown destinations. A data flow is really a form of communication.
with two data flow lines instead of one. When the analyst draws a curved or straight line with an
Answer: A data flow may consist of one or more pieces of arrow at one end, what is represented is a form of
datum. The determining factor is whether the data elements communication among the other elements of the data flow
always flow together at the same time. For example, process. Consider for example a data source being depicted
"customer payment" have both payment and remittance by a box. The box represents a data source. Data then is sent
data. Since these elements always flow together, only one from the source to a circle, which represents a
data flow line is required. However, data flows between the transformation process. The source of data sends the flow to
customer and the payment processes have customer the transformation process, which will process the data and
inquiries and cash receipts; these data items do not always somehow use the data or turn it into useful information. Note
flow together at the same time. In such a case, two data flow that data flows can represent one or more pieces of datum.
lines will be shown. Because data flows may have more than one data element,
Objective: Learning Objective 1 the analyst must determine whether to show one or more
Difficulty: Moderate lines. Good DFDs and data flow lines in such diagrams
AACSB: Reflective Thinking eliminate the need for users and analysts to "infer" what type
of information is flowing.
36) Describe the different levels of DFDs. Objective: Learning Objective 1
Answer: The highest-level or summary view DFD, which Difficulty: Moderate
shows major inputs/outputs and a single process is called a AACSB: Analytic
context diagram. The DFD itself shows inputs, major
processes, and outputs; each process in the DFD can be 40) What is the value of using a context diagram when
"exploded" or shown in greater level of detail with the sub- working with DFDs?
processes and related data flows. Answer: In order to create a useful DFD, the analyst must
Objective: Learning Objective 1 determine system boundaries—what is to be included or
Difficulty: Moderate excluded from the system. A context diagram will help to
AACSB: Analytic achieve this goal, since it is a good way to depict the
boundaries of the system. The analyst first creates a context
37) How is a DFD different from a flowchart? diagram by placing a circle in the middle of the diagram. The
Answer: The purpose of a DFD is to diagram the origins, flow, circle represents the system under consideration. On either
transformation, storage, and destination of data. The purpose side of the circle, boxes are created which represent outside
a flowchart is to present a graphical description of the flow of entities the system interacts with directly. Data flow lines are
documents, relationships among input, processing, and drawn to show the direction of the flow of data. After this
output, or the sequence of logical operations in an pictorial representation has been completed, the analyst can
information system or program. A DFD is limited to basic then better assess the boundaries of the system and amount
symbols and lines, and focuses on the flow and use of data. A of interaction between the system and outside entities.
flowchart will generally be more complex, and more focused Objective: Learning Objective 1
on the managerial, AIS, or IS aspects of the organization. Difficulty: Moderate
Objective: Learning Objective 1 AACSB: Reflective Thinking
Difficulty: Difficult
AACSB: Reflective Thinking 41) Identify five important guidelines for drawing a DFD.
Select one from your list and describe why it could be the
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most important one to consider when preparing a DFD. AACSB: Reflective Thinking
Support your choice with an example.
Answer: Understand the system. Ignore certain aspects of 44) In the data flow diagram below, Shipping is a
the system (such as control processes and control actions).
Determine system boundaries. Develop a context diagram.
Identify data flows. Group data flows. Identify transformation
processes. Group transformation processes. Identify all files
or data stores. Identify all data sources and destinations. All
DFD elements are named. Subdivide the DFD. Give each
process a sequential number. Repeat the process. Prepare a
final copy. (Student answers will vary depending on the items
chosen and the quality of their argument. The text provides
various items that could be used to answer this question.)
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Reflective Thinking

42) Following is a context diagram for a current Payroll

Processing System. a) Identify the data sources and
destinations, data flows, and transformation process marked
by question marks. b) What would you need to do to explode
this diagram?

A) data store.
B) data flow.
C) data source.
D) data destination.
Answer: D
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

45) In the data flow diagram below, which process happens

first?

Answer: 1 - Human resources, 2 - Time cards, 3 - Payroll

processing system, 4 - Employee paychecks or pay-stubs, 5-
Payroll report, 6 - Government agencies, 7- Banks. To explode
this diagram, additional information is needed to identify
detailed procedures within the payroll processing activity as
well as additional inputs and outputs. It would be useful to
obtain a comprehensive narrative of the payroll processing
procedures for review and identification of these items. If
there is no narrative available, interviews are another source
of information.
Objective: Learning Objective 1
Difficulty: Difficult
AACSB: Reflective Thinking

43) True or False: The Sarbanes-Oxley Act requires auditors

to create flowcharts to document business processes.
Answer: FALSE
Objective: Learning Objective 1
Difficulty: Moderate
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 Difficulty: Moderate
AACSB: Analytic

47) In a data flow diagram of the vendor payment process,

what symbol would most appropriately reflect an update of
the payables account?
A) a square
B) a circle
C) two horizontal lines
D) none of the above
Answer: B
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

48) In a data flow diagram of the vendor payment process,

"Vendor" will appear above or in
A) a square.
B) a circle.
C) two horizontal lines.
D) none of the above
Answer: A
Objective: Learning Objective 1
A) Respond to customer inquiries Difficulty: Easy
B) Take order AACSB: Analytic
C) Check inventory availability
D) Approve order 49) In a data flow diagram, an inverted triangle represents
Answer: B A) an internal control.
Objective: Learning Objective 1 B) document filing.
Difficulty: Moderate C) on page connection.
AACSB: Analytic D) document processing.
Answer: A
46) True or False: In the data flow diagram below, a Objective: Learning Objective 1
customer order must be approved before the company Difficulty: Easy
checks to make sure the inventory is available. AACSB: Analytic

50) In a data flow diagram that depicts a company's internal

controls, where is each internal control typically explained in
detail?
A) in an annotation on the same page as the internal control
B) inside the symbol used to represent the internal control
C) on a table that accompanies the internal control data flow
diagram
D) Internal controls are not typically explained in detail in an
internal control data flow diagram.
Answer: C
Objective: Learning Objective 1
Difficulty: Moderate
AACSB: Analytic

51) Which documentation technique would not depict the

type of storage medium used (such as a flash drive or a hard
drive) to physically store data?
A) system flowchart
B) data flow diagram
Answer: FALSE C) business process diagram
Objective: Learning Objective 1 D) internal control flowchart
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Answer: B C) Accounts Payable Trial Balance
Objective: Learning Objective 1 D) Purchase Order 2
Difficulty: Moderate Answer: D
AACSB: Analytic Objective: Learning Objective 2
Difficulty: Easy
52) In a data flow diagram of the order shipping process, AACSB: Analytic
what symbol would most appropriately denote a "Bill of
Lading" used in the process? 2) The correct label for Shape 2 in the flowchart below is
A) a square
B) a circle
C) two horizontal lines
D) an arrow
Answer: D
Objective: Learning Objective 1
Difficulty: Easy
AACSB: Analytic

3.2 Prepare and use flow diagrams to understand, evaluate, A) 1

and document information systems. B) Purchase Requisition 1
C) Receiving Report 1
1) The correct label for Shape 1 in the flowchart below is D) 2
Answer: A
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic

3) The correct label for Shape 3 in the flowchart below is

A) Purchase Order 3
B) Purchase Requisition 1

25
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 B) terminal.
C) manual process.
D) off-page connector.
Answer: B
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Analytic

5) When preparing a document flowchart, the names of

organizational departments or job functions should appear in
the
A) column headings.
B) right-hand margin.
C) written narrative accompanying the flowchart.
D) title of the flowchart.
Answer: A
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic

6) Flowchart symbols
A) are divided into four categories.
B) are unique to the organization creating the flowchart.
A) Purchase Order 1. C) are normally drawn using a flowcharting template.
B) Purchase Requisition 1. D) eliminate the need for narrative descriptions or
C) Receiving Report 1. explanations.
D) 4. Answer: A
Answer: B Objective: Learning Objective 2
Objective: Learning Objective 2 Difficulty: Easy
Difficulty: Difficult AACSB: Analytic
AACSB: Analytic
7) Which is a true statement regarding the use of the manual
4) The correct shape for the triangle labeled "Supplier" in the processing symbol in a flowchart?
flowchart below should be a A) If a document is moved from one column to another, show
the document only in the last column.
B) Each manual processing symbol should have an input and
an output.
C) Do not connect two documents when moving from one
column to another.
D) Use a manual processing symbol to indicate a document
being filed.
Answer: B
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic

8) Which is a true statement regarding a document

flowchart?
A) A document flowchart illustrates the sequence of logical
operations performed by a computer.
B) A document flowchart is particularly useful in analyzing the
adequacy of internal control procedures.
C) A document flowchart is more useful than a data flow
diagram.
D) A document flowchart is not normally used in evaluating
internal control procedures.
A) magnetic disk.
Answer: B
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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
Objective: Learning Objective 2 D) #5
Difficulty: Easy Answer: A
AACSB: Analytic Objective: Learning Objective 2
Difficulty: Easy
Use the chart below to answer the following questions AACSB: Analytic
regarding flow chart symbols.
13) Which symbol would be used in a flowchart to represent
a manual process?
A) #5
B) #6
C) #10
D) #11
Answer: B
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic

14) Which symbol would be used in a flowchart to represent

9) Which symbol would be used in a flowchart to represent a a connection to another part of the flowchart on the same
computer process? page?
A) #1 A) #4
B) #2 B) #13
C) #5 C) #14
D) #15 D) #15
Answer: C Answer: C
Objective: Learning Objective 2 Objective: Learning Objective 2
Difficulty: Easy Difficulty: Easy
AACSB: Analytic AACSB: Analytic

10) Which symbol would be used in a flowchart to represent 15) Which symbol would be used in a flowchart to represent
a decision? a connection to another part of the flowchart on a different
A) #10 page?
B) #16 A) #4
C) #9 B) #13
D) #6 C) #14
Answer: A D) #15
Objective: Learning Objective 2 Answer: D
Difficulty: Easy Objective: Learning Objective 2
AACSB: Analytic Difficulty: Easy
AACSB: Analytic
11) Which symbol would be used in a flowchart to represent
an invoice sent to a customer? 16) Which symbol would be used in a flowchart to represent
A) #2 a file of paper documents?
B) #6 A) #7
C) #1 B) #8
D) #15 C) #9
Answer: C D) #15
Objective: Learning Objective 2 Answer: C
Difficulty: Easy Objective: Learning Objective 2
AACSB: Analytic Difficulty: Easy
AACSB: Analytic
12) Which symbol would be used in a flowchart to represent
a general ledger? 17) Which symbol would be used in a flowchart to represent
A) #2 a general ledger master file kept on magnetic disk?
B) #1 A) #2
C) #3 B) #5
C) #7
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D) #8 C) #15
Answer: C D) #16
Objective: Learning Objective 2 Answer: D
Difficulty: Easy Objective: Learning Objective 2
AACSB: Analytic Difficulty: Moderate
AACSB: Analytic
18) Which symbol would be used in a flowchart to represent
employee time cards sent by department managers to the 23) Which symbol would be used in a flowchart to represent
payroll department? a flow of data or documents?
A) #1 A) #12
B) #4 B) #13
C) #11 C) #14
D) #16 D) #15
Answer: A Answer: A
Objective: Learning Objective 2 Objective: Learning Objective 2
Difficulty: Easy Difficulty: Easy
AACSB: Analytic AACSB: Analytic

19) Which symbol would be used in a flowchart to represent 24) Which symbol would be used in a flowchart to represent
the display of a report on a computer screen? a communication link?
A) #1 A) #12
B) #2 B) #13
C) #3 C) #14
D) #11 D) #15
Answer: C Answer: B
Objective: Learning Objective 2 Objective: Learning Objective 2
Difficulty: Easy Difficulty: Easy
AACSB: Analytic AACSB: Analytic

20) Which symbol would be used in a flowchart to represent 25) In a document flowchart of a manual payroll processing
the addition of information about a step represented in system, "update customer file" will be shown by a(n)
another symbol on the flowchart? ________ symbol, and "prepare vendor check" will be shown
A) #1 by a(n) ________ symbol.
B) #5 A) input; output
C) #11 B) input; manual operation
D) #15 C) manual operation; output
Answer: C D) manual operation; manual operation
Objective: Learning Objective 2 Answer: D
Difficulty: Easy Objective: Learning Objective 2
AACSB: Analytic Difficulty: Easy
AACSB: Analytic
21) Which symbol would be used in a flowchart to represent
a payroll master file kept on magnetic tape? 26) A flowchart that depicts the relationships among the
A) #4 input, processing, and output of an AIS is
B) #7 A) an internal control flowchart.
C) #8 B) a document flowchart.
D) #9 C) a system flowchart.
Answer: C D) a program flowchart.
Objective: Learning Objective 2 Answer: C
Difficulty: Easy Objective: Learning Objective 2
AACSB: Analytic Difficulty: Easy
AACSB: Analytic
22) Which symbol would be used in a flowchart to represent
a beginning, an ending, or a connection to another 27) In a program flowchart, branching to alternative paths is
procedure? represented by
A) #9 A) a terminal.
B) #14 B) data/information flow.
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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
C) computer operation. Answer: C
D) decision diamond. Objective: Learning Objective 2
Answer: D Difficulty: Moderate
Objective: Learning Objective 2 AACSB: Reflective Thinking
Difficulty: Easy
AACSB: Analytic 31) A materials requisition order document is prepared from
the inventory file and the materials file, both of which are
28) Nishant Kumar has been hired by American stored on a hard drive. Which one of the following diagrams
Manufacturing as a staff accountant in the internal audit represents this activity?
department. He has been asked to thoroughly document the A)
existing accounting information system in preparation for
making recommendations for improvements to internal
controls. He decides to begin with a description of the
information stored in paper records, their sources, and their
destinations. The documentation tool that he should employ
for this purpose is a
A) data flow diagram.
B) document flowchart.
C) system flowchart. B)
D) program flowchart.
Answer: B
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking

29) Nishant Kumar has been hired by American

Manufacturing as a staff accountant in the internal audit
department. He has been asked to thoroughly document the C)
existing accounting information system in preparation for
making recommendations for improvements. He decides to
begin by meeting with the information technology staff in
order to develop an understanding of the computer programs
used by the system. The documentation tool that he should
employ for this purpose is a
A) data flow diagram.
B) document flowchart.
C) system flowchart. D)
D) program flowchart.
Answer: D
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Reflective Thinking

30) Nishant Kumar has been hired by American

Manufacturing as a staff accountant in the internal audit
department. He has been asked to thoroughly document the
Answer: D
existing accounting information system in preparation for
Objective: Learning Objective 2
making recommendations for improvements. He decides to
Difficulty: Moderate
begin by meeting with the information technology staff in
AACSB: Reflective Thinking
order to develop an understanding of the overall operation of
the AIS, including data entry, storage, and output. The
32) A customer's check is returned for insufficient funds and
documentation tool that he should employ for this purpose is
Which of the following is an example of a strategic planning
a
decisioWhich of the following is an example of a strategic
A) data flow diagram.
planning decisioWhich of the following is an example of a
B) document flowchart.
strategic planning decisioWhich of the following transactions
C) system flowchart.
is represented by the diagram below?
D) program flowchart.
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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
file, stored on a hard drive, is updated. Which one of the 34) A report is generated from data stored on a hard drive.
following diagrams represents this activity? Which one of the following diagrams represents this activity?
A) A)

B) B)

C) C)

D) D)

Answer: C
Answer: C
Objective: Learning Objective 2
Objective: Learning Objective 2
Difficulty: Moderate
Difficulty: Moderate
AACSB: Reflective Thinking
AACSB: Reflective Thinking
33) A business simulation game that is used by colleges and
35) An employee receives a paycheck prepared in the payroll
universities all over the world has students submit decisions
process. Which one of the following diagrams represents this
over the Internet. Decisions are stored online, processed on
activity?
the server, and then the results are stored online. They are
A)
then downloaded by students in preparation for the next
round. Which one of the following diagrams represents this
activity?
A)
B)

B)
C)

D)

C)
Answer: B
Objective: Learning Objective 2
Difficulty: Moderate
D) AACSB: Reflective Thinking

36) A student manually prepares a homework assignment

and then turns it in to her teacher. Which one of the
Answer: C following diagrams represents this activity?
Objective: Learning Objective 2 A)
Difficulty: Moderate
AACSB: Reflective Thinking
30
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B)

C)

D)

Answer: A
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking

37) Which of the following is not true about program

flowcharts?
A) Program flowcharts are a high-level overview of all
business processes.
B) Program flowcharts document the processing logic of
computer programs.
C) A program flowchart will exist for every computer process
symbol on a system flowchart.
D) Program flowcharts increase computer programmer
productivity.
Answer: A
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking

38) Describe a system flowchart. Describe a program

flowchart. How are the two interrelated?
Answer: Systems flowcharts depict the relationships among
the input, processing, and output of an AIS. The program
flowchart illustrates the sequence of logical operations
performed by a computer in executing a program. System
flowcharts identify processing areas but do not show how the
processing is done. The detailed logic used by the computer
to perform the processing is shown on a separate program
flowchart.
Objective: Learning Objective 2
Difficulty: Moderate
AACSB: Reflective Thinking

31
Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
39) Identify five important guidelines for drawing a flowchart.
Select one from your list and describe why it could be the
most important one to consider when preparing a flowchart.
Support your choice with an example.
Answer: Use interviews, questionnaires, or narrative
descriptions to understand the system before flowcharting it.
Identify the different entities to be flowcharted such as
departments, job functions, or external parties. Also identify
documents and information flows along with the activities or
processes performed on the data. Organize the flowchart
using columns when several entities are involved in the
process. Focus on the normal operations and include all
relevant procedures and processes. Flowcharts should flow
from top to bottom and from left to right. The origin and
disposition of documents should be clearly identified by a
clear beginning and end in the flowcharts. Use standard
flowchart symbols. Multiple documents should be identified
by numbers shown in the top right-hand corner of the
document symbol. Documents do not directly connect with
each other, except when moving from one column to
another. Use on-page and off-page connectors to organize
flowcharts. Use arrowheads to direct the flow of documents.
Clearly label the pages, such as 1 of 3, 2 of 3, and 3 of 3.
Documents or reports should be first shown in the column in
which they originate and then moved to other columns. Use
computer processing symbols to show movement of data in
and out of the computer system. Filing operations can be Answer:
directly shown with one line, no manual processing symbol a. Figure a - the sort symbol should be a manual operation
required. Flowcharting is an iterative process. The first symbol.
attempt should be a rough draft that is refined with each b. Figure b - the file update symbol should be a computer
successive pass. Do not clutter flowcharts; redesign the operation symbol, and the arrow from transaction file should
flowchart as necessary. Review the flowchart for accuracy. On flow into file update.
the final copy of the flowchart, the name of the flowchart, c. Figure c - the arrows should point from left to right and a
date, and the preparer's name should be shown. (Student computer operation symbol is needed between the source
answers will vary depending on the items chosen and the data and the master file symbols.
quality of their argument. The text provides various items d. Figure d - the symbol for Endorsed should be a manual
that could be used to answer this question.) operation symbol, and endorsed checks are sent to the bank,
Objective: Learning Objective 2 so the file symbol should be replaced with a terminal symbol.
Difficulty: Moderate Objective: Learning Objective 2
AACSB: Analytic Difficulty: Difficult
AACSB: Reflective Thinking
40) Identify the mistake(s) in each flowchart segment.

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Use the chart below to answer the following questions Difficulty: Easy
regarding flow chart symbols. AACSB: Analytic

45) Which symbol would be used in a flowchart to indicate a

wireless connection between a laptop and the mainframe?
A) #13
B) #12
C) #11
D) #14
Answer: A
Objective: Learning Objective 2
Difficulty: Easy
AACSB: Analytic

41) Which symbol would be used in a flowchart to represent 46) Which symbol would be used in a flowchart to indicate
the symbol for a file? flight information was displayed to customers via a large
A) #9 electronic screen in the airport terminal?
B) #5 A) #1
C) #6 B) #2
D) #11 C) #3
Answer: A D) #4
Objective: Learning Objective 2 Answer: C
Difficulty: Easy Objective: Learning Objective 2
AACSB: Analytic Difficulty: Easy
AACSB: Analytic
42) Which symbol would be used in a flowchart to represent
manually prepared control totals? 47) Which symbol would be used in a flowchart to indicate
A) #9 the process started with the Human Resources department?
B) #8 A) #1
C) #4 B) #10
D) #7 C) #12
Answer: C D) #16
Objective: Learning Objective 2 Answer: D
Difficulty: Easy Objective: Learning Objective 2
AACSB: Analytic Difficulty: Easy
AACSB: Analytic
43) Which symbol would be used in a flowchart to represent
a customer sales order? 48) Carly Jackson is a staff auditor for KPMG. She has been
A) #2 asked to document the client's existing accounting
B) #1 information system so the engagement team can assess the
C) #5 client's adequacy of controls around financial reporting. She
D) #15 decides to begin by creating a flowchart to describe, analyze,
Answer: B and evaluate internal controls. What documentation tool
Objective: Learning Objective 2 should she use for this purpose?
Difficulty: Easy A) internal control flowchart
AACSB: Analytic B) document flowchart
C) system flowchart
44) Which symbol would be used in a flowchart to note that D) dataflow diagram
every sales order contains the customer name, address, Answer: A
product number, quantity ordered, item cost, and credit Objective: Learning Objective 2
terms? Difficulty: Difficult
A) #5 AACSB: Reflective Thinking
B) #8
C) #11
D) #16
Answer: C
Objective: Learning Objective 2
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49) Carly Jackson is a staff auditor for KPMG. She has been 2) Which of the following is not one of the risk responses
asked to document the client's existing accounting identified in the COSO Enterprise Risk Management
information system so the engagement team can assess the Framework?
client's adequacy of controls around financial reporting. She A) Monitoring
decides to begin by examining the client's key software B) Avoidance
applications, examining a flowchart that illustrates the C) Acceptance
sequence of logical operations performed by the system in D) Sharing
executing the application. To do this, Carly should ask the Answer: A
client for what type of flowchart? Page Ref: 193
A) internal control flowchart Objective: Learning Objective 6
B) document flowchart Difficulty : Easy
C) system flowchart AACSB: Analytic
D) program flowchart
Answer: D 3) A control procedure designed so that the employee that
Objective: Learning Objective 2 records cash received from customers does not also have
Difficulty: Difficult access to the cash itself is an example of a(n)
AACSB: Reflective Thinking A) preventive control.
B) detective control.
50) To create a good business process flowchart, one should C) corrective control.
emphasize ________ and put less emphasis on ________. D) authorization control.
A) meeting with top management; meeting with staff Answer: A
employees Page Ref: 185
B) following rigid rules on how to prepare a business process Objective: Learning Objective 1
flowchart; clearly communicating the activities involved in the Difficulty : Moderate
process AACSB: Reflective Thinking
C) clearly communicating the activities involved in the
process; following rigid rules on how to prepare a business 4) At a movie theater box office, all tickets are sequentially
process flowchart prenumbered. At the end of each day, the beginning ticket
D) meeting with staff employees; meeting with top number is subtracted from the ending number to calculate
management the number of tickets sold. Then, ticket stubs collected at the
Answer: C theater entrance are counted and compared with the number
Objective: Learning Objective 2 of tickets sold. Which of the following situations does this
Difficulty: Difficult control detect?
AACSB: Reflective Thinking A) Some customers presented tickets purchased on a
previous day when there wasn't a ticket taker at the theater
entrance (so the tickets didn't get torn.)
B) A group of kids snuck into the theater through a back door
when customers left after a show.
Accounting Information Systems, 12e (Romney/Steinbart) C) The box office cashier accidentally gives too much change
Chapter 7 (chap 4 theo thầy) Control and Accounting to a customer.
Information Systems D) The ticket taker admits his friends without tickets.
Answer: A
1) What is one reason why AIS threats are increasing? Page Ref: 199-200
A) LANs and client/server systems are easier to control than Objective: Learning Objective 7
centralized, mainframe systems. Difficulty : Moderate
B) Many companies do not realize that data security is crucial AACSB: Reflective Thinking
to their survival.
C) Computer control problems are often overestimated and 5) At a movie theater box office, all tickets are sequentially
overly emphasized by management. prenumbered. At the end of each day, the beginning ticket
D) Many companies believe that protecting information is a number is subtracted from the ending number to calculate
strategic requirement. the number of tickets sold. Cash is counted and compared
Answer: B with the number of tickets sold. Which of the following
Page Ref: 184 situations does this control detect?
Objective: Learning Objective 1 A) Some customers presented tickets purchased on a
Difficulty : Easy previous day when there wasn't a ticket taker at the theater
AACSB: Analytic entrance (so the tickets didn't get torn.)
B) A group of kids snuck into the theater through a back door
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when customers left after a show. the same transaction.
C) The box office cashier accidentally gives too much change B) ensure that no collusion will occur.
to a customer. C) make sure that different people handle different
D) The ticket taker admits his friends without tickets. transactions.
Answer: C D) achieve an optimal division of labor for efficient
Page Ref: 199-200 operations.
Objective: Learning Objective 7 Answer: A
Difficulty : Moderate Page Ref: 196
AACSB: Reflective Thinking Objective: Learning Objective 7
Difficulty : Moderate
6) Which of the following is an example of a preventive AACSB: Analytic
control?
A) approving customer credit prior to approving a sales order 10) Pam is a receptionist for Dunderhead Paper Co., which
B) reconciling the bank statement to the cash control account has strict corporate policies on appropriate use of corporate
C) counting inventory on hand and comparing counts to the resources. The first week of August, Pam saw Michael, the
perpetual inventory records branch manager, putting pencils, pens, erasers, paper and
D) maintaining frequent backup records to prevent loss of other supplies into his briefcase on his way out the door. This
data situation best reflects a weakness in which aspect of internal
Answer: A environment, as discussed in the COSO Enterprise Risk
Page Ref: 185 Management Framework?
Objective: Learning Objective 1 A) Integrity and ethical values
Difficulty : Moderate B) Risk management philosophy
AACSB: Analytic C) Restrict access to assets
D) Methods of assigning authority and responsibility
7) Independent checks on performance include all the Answer: A
following except Page Ref: 189
A) data input validation checks. Objective: Learning Objective 3
B) reconciling hash totals. Difficulty : Easy
C) preparing a trial balance report. AACSB: Analytic
D) supervisor review of journal entries and supporting
documentation. 11) Which of the following statements is true?
Answer: A A) Internal auditors, rather than external auditors, can
Page Ref: 200 conduct evaluations of effectiveness of Enterprise Risk
Objective: Learning Objective 7 Management processes.
Difficulty : Easy B) Re-adding the total of a batch of invoices and comparing
AACSB: Analytic the total with the first total you calculated is an example of
an independent check.
8) A computer operator is allowed to work as a programmer C) Requiring two signatures on checks over $20,000 is an
on a new payroll software project. Does this create a example of segregation of duties.
potential internal control problem? D) Although forensic specialists utilize computers, only people
A) Yes, the computer operator could alter the payroll can accurately identify fraud.
program to increase her salary. Answer: A
B) Yes, this is a potential problem unless the computer Page Ref: 201
operator is supervised by the payroll manager. Objective: Learning Objective 7
C) No, ideal segregation of duties is not usually possible, and Difficulty : Difficult
operators are often the best at programming changes and AACSB: Reflective Thinking
updates.
D) No, as long as the computer operator separately accounts 12) Of the following examples of fraud, which will be the
for hours worked in programming and in operations. most difficult to prevent and detect? Assume the company
Answer: A enforces adequate segregation of duties.
Page Ref: 198 A) Jim issues credit cards to him and Marie, and when the
Objective: Learning Objective 7 credit card balances are just under $1,000, Marie writes off
Difficulty : Moderate the accounts as bad debt. Jim then issues new cards.
AACSB: Analytic B) An employee puts inventory behind the dumpster while
unloading a vendor's delivery truck, then picks up the
9) One of the objectives of the segregation of duties is to inventory later in the day and puts it in her car.
A) make sure that different people handle different parts of C) A mail room employee steals a check received from a
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customer and destroys the documentation. testing accounting software upgrades
D) The accounts receivable clerk does not record sales C) Approving software changes and implementing the
invoices for friends or family, so they can receive free goods. upgraded software
Answer: A D) Managing accounts payable function and revising code for
Page Ref: 197 accounting software to more efficiently process discount due
Objective: Learning Objective 7 dates on vendor invoices
Difficulty : Difficult Answer: A
AACSB: Reflective Thinking Page Ref: 198
Objective: Learning Objective 7
13) According to The Sarbanes-Oxley Act of 2002, the audit Difficulty : Moderate
committee of the board of directors is directly responsible for AACSB: Reflective Thinking
A) hiring and firing the external auditors.
B) performing tests of the company's internal control 17) With a limited work force and a desire to maintain strong
structure. internal control, which combination of duties would result in
C) certifying the accuracy of the company's financial reporting the lowest risk exposure?
process. A) Updating the inventory subsidiary ledgers and recording
D) overseeing day-to-day operations of the internal audit purchases in the purchases journal
department. B) Approving a sales return on a customer's account and
Answer: A depositing customers' checks in the bank
Page Ref: 186 C) Updating the general ledger and working in the inventory
Objective: Learning Objective 1 warehouse
Difficulty : Moderate D) Entering payments to vendors in the cash disbursements
AACSB: Analytic journal and entering cash received from customers in the
cash receipts journal
14) Go-Go Corporation, a publicly traded company, has three Answer: D
brothers who serve as President, Vice President of Finance Page Ref: 196-197
and CEO. This situation Objective: Learning Objective 7
A) increases the risk associated with an audit. Difficulty : Moderate
B) must be changed before your audit firm could accept the AACSB: Reflective Thinking
audit engagement.
C) is a violation of the Sarbanes-Oxley Act. 18) Which of the following is not a factor of internal
D) violates the Securities and Exchange Act. environment according to the COSO Enterprise Risk
Answer: A Management Framework?
Page Ref: 193 A) Analyzing past financial performance and reporting
Objective: Learning Objective 6 B) Providing sufficient resources to knowledgeable employees
Difficulty : Easy to carry out duties
AACSB: Analytic C) Disciplining employees for violations of expected behavior
D) Setting realistic targets for long-term performance
15) Which of the following is a control related to design and Answer: A
use of documents and records? Page Ref: 188
A) Sequentially prenumbering sales invoices Objective: Learning Objective 3
B) Comparing physical inventory counts with perpetual Difficulty : Moderate
inventory records AACSB: Analytic
C) Reconciling the bank statement to the general ledger
D) Locking blank checks in a drawer or safe 19) Which of the following suggests a weakness in a
Answer: A company's internal environment?
Page Ref: 199 A) The audit committee regularly meets with the external
Objective: Learning Objective 7 auditors.
Difficulty : Easy B) The Board of Directors is primarily independent directors.
AACSB: Analytic C) The company has an up-to-date organizational chart.
D) Formal employee performance evaluations are prepared
16) Which of the following duties could be performed by the every three years.
same individual without violating segregation of duties Answer: D
controls? Page Ref: 191
A) Approving accounting software change requests and Objective: Learning Objective 3
testing production scheduling software changes Difficulty : Moderate
B) Programming new code for accounting software and AACSB: Analytic
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 Difficulty : Easy
20) Which of the following statements about internal AACSB: Analytic
environment is false?
A) Management's attitudes toward internal control and 24) The process that a business uses to safeguard assets,
ethical behavior have only minimal impact on employee provide accurate and reliable information, and promote and
beliefs or actions. improve operational efficiency is known as
B) Supervision is especially important in organizations that A) a phenomenon.
cannot afford elaborate responsibility reporting or are too B) internal control.
small to have adequate segregation of duties. C) an AIS threat.
C) An overly complex or unclear organizational structure may D) a preventive control.
be indicative of more serious problems. Answer: B
D) A written policy and procedures manual is an important Page Ref: 184
tool for assigning authority and responsibility. Objective: Learning Objective 1
Answer: A Difficulty : Easy
Page Ref: 189 AACSB: Analytic
Objective: Learning Objective 3
Difficulty : Easy 25) Safeguarding assets is one of the control objectives of
AACSB: Reflective Thinking internal control. Which of the following is not one of the
other control objectives?
21) Which of the following is not a reason for the increase in A) providing accurate and reliable information
security problems for AIS? B) promoting operational efficiency
A) Confidentiality issues caused by interlinked inter-company C) ensuring that no fraud has occurred
networks D) encouraging adherence to management policies
B) Difficult to control distributed computing networks Answer: C
C) Increasing efficiency resulting from more automation Page Ref: 184
D) Increasing numbers of information systems and users Objective: Learning Objective 1
Answer: C Difficulty : Easy
Page Ref: 184 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 26) Internal control is often referred to as a(n) ________,
AACSB: Analytic because it permeates an organization's operating activities
and is an integral part of management activities.
22) One reason why many organizations do not adequately A) event
protect their systems is because B) activity
A) control problems may be overestimated by many C) process
companies. D) system
B) productivity and cost cutting cause management to forgo Answer: C
implementing and maintaining internal controls. Page Ref: 184
C) control technology has not yet been developed. Objective: Learning Objective 1
D) all of the above Difficulty : Easy
Answer: B AACSB: Analytic
Page Ref: 184
Objective: Learning Objective 1 27) Which of the following is accomplished by corrective
Difficulty : Easy controls?
AACSB: Analytic A) Identify the cause of the problem.
B) Correct the resulting errors.
23) Accountants must try to protect the AIS from threats. C) Modify the system to prevent future occurrences of the
Which of the following would be a measure that should be problem.
taken? D) All of the above are accomplished by corrective controls.
A) Take a proactive approach to eliminate threats. Answer: D
B) Detect threats that do occur. Page Ref: 185
C) Correct and recover from threats that do occur. Objective: Learning Objective 1
D) All of the above are proper measures for the accountant to Difficulty : Easy
take. AACSB: Analytic
Answer: D
Page Ref: 185 28) Duplicate checking of calculations is an example of a
Objective: Learning Objective 1 ________ control, and procedures to resubmit rejected
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transactions is an example of a ________ control. Answer: B
A) corrective; detective Page Ref: 185
B) detective; corrective Objective: Learning Objective 1
C) preventive; corrective Difficulty : Easy
D) detective; preventive AACSB: Analytic
Answer: B
Page Ref: 185 33) Congress passed this federal law for the purpose of
Objective: Learning Objective 1 preventing financial statement fraud, to make financial
Difficulty : Easy reports more transparent and to strengthen the internal
AACSB: Analytic control of public companies.
A) Foreign Corrupt Practices Act of 1977
29) What is not a corrective control procedure? B) The Securities Exchange Act of 1934
A) Identify the cause of a problem. C) The Sarbanes-Oxley Act of 2002
B) Deter problems before they arise. D) The Control Provision of 1998
C) Correct resulting errors or difficulties. Answer: C
D) Modify the system so that future problems are minimized Page Ref: 185
or eliminated. Objective: Learning Objective 1
Answer: B Difficulty : Easy
Page Ref: 185 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 34) Which of the following is not one of the important
AACSB: Analytic aspects of the Sarbanes-Oxley Act?
A) The creation of the Public Company Accounting Oversight
30) ________ controls are designed to make sure an Board
organization's control environment is stable and well B) New rules for auditors and management
managed. C) New roles for audit committees
A) Application D) New rules for information systems development
B) Detective Answer: D
C) General Page Ref: 186
D) Preventive Objective: Learning Objective 1
Answer: C Difficulty : Easy
Page Ref: 185 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 35) A(n) ________ helps employees act ethically by setting
AACSB: Analytic limits beyond which an employee must not pass.
A) boundary system
31) ________ controls prevent, detect and correct B) diagnostic control system
transaction errors and fraud. C) interactive control system
A) Application D) internal control system
B) Detective Answer: A
C) General Page Ref: 185
D) Preventive Objective: Learning Objective 1
Answer: A Difficulty : Easy
Page Ref: 185 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 36) A(n) ________ measures company progress by comparing
AACSB: Analytic actual performance to planned performance.
A) boundary system
32) The primary purpose of the Foreign Corrupt Practices Act B) diagnostic control system
of 1977 was C) interactive control system
A) to require corporations to maintain a good system of D) internal control system
internal control. Answer: B
B) to prevent the bribery of foreign officials by American Page Ref: 185
companies. Objective: Learning Objective 1
C) to require the reporting of any material fraud by a Difficulty : Easy
business. AACSB: Analytic
D) All of the above are required by the act.
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37) A(n) ________ helps top-level managers with high-level Management Framework?
activities that demand frequent and regular attention. A) Internal environment
A) boundary system B) Monitoring
B) diagnostic control system C) Risk response
C) interactive control system D) Event assessment
D) internal control system Answer: D
Answer: C Page Ref: 188
Page Ref: 185 Objective: Learning Objective 2
Objective: Learning Objective 1 Difficulty : Moderate
Difficulty : Easy AACSB: Analytic
AACSB: Analytic
42) The COSO Enterprise Risk Management Integrated
38) This control framework addresses the issue of control Framework stresses that
from three vantage points: business objectives, information A) risk management activities are an inherent part of all
technology resources, and information technology processes. business operations and should be considered during strategy
A) ISACA's control objectives for information and related setting.
technology B) effective risk management is comprised of just three
B) COSO's internal control framework interrelated components; internal environment, risk
C) COSO's enterprise risk management framework assessment, and control activities.
D) none of the above C) risk management is the sole responsibility of top
Answer: A management.
Page Ref: 186 D) risk management policies, if enforced, guarantee
Objective: Learning Objective 2 achievement of corporate objectives.
Difficulty : Easy Answer: A
AACSB: Analytic Page Ref: 187
Objective: Learning Objective 2
39) This control framework's intent includes helping the Difficulty : Moderate
organization to provide reasonable assurance that objectives AACSB: Analytic
are achieved and problems are minimized, and to avoid
adverse publicity and damage to the organization's 43) Which of the following would be considered a "red flag"
reputation. for problems with management operating style if the
A) ISACA's control objectives for information and related question were answered "yes"?
technology A) Does management take undue business risks to achieve its
B) COSO's internal control framework objectives?
C) COSO's enterprise risk management framework B) Does management attempt to manipulate performance
D) none of the above measures such as net income?
Answer: C C) Does management pressure employees to achieve results
Page Ref: 187 regardless of the methods?
Objective: Learning Objective 2 D) All of the above statements would raise "red flags" if
Difficulty : Easy answered "yes."
AACSB: Analytic Answer: D
Page Ref: 189
40) The COSO Enterprise Risk Management Framework Objective: Learning Objective 3
includes eight components. Which of the following is not one Difficulty : Easy
of them? AACSB: Analytic
A) control environment
B) risk assessment 44) Which component of the COSO Enterprise Risk
C) compliance with federal, state, or local laws Management Integrated Framework is concerned with
D) monitoring understanding how transactions are initiated, data are
Answer: C captured and processed, and information is reported?
Page Ref: 188 A) Information and communication
Objective: Learning Objective 2 B) Internal environment
Difficulty : Easy C) Event identification
AACSB: Analytic D) Objective setting
Answer: A
41) Which of the following is not one of the eight interrelated Page Ref: 201
risk and control components of COSO Enterprise Risk Objective: Learning Objective 8
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Difficulty : Easy B) Methods of assigning authority and responsibility
AACSB: Analytic C) Management philosophy and operating style
D) Commitment to competence
45) The COSO Enterprise Risk Management Integrated Answer: A
Framework identifies four objectives necessary to achieve Page Ref: 190
corporate goals. Objectives specifically identified include all Objective: Learning Objective 3
of the following except Difficulty : Moderate
A) implementation of newest technologies. AACSB: Analytic
B) compliance with laws and regulations.
C) effective and efficient operations. 50) Personnel policies such as background checks, mandatory
D) reliable reporting. vacations, and rotation of duties tend to deter
Answer: A A) unintentional errors.
Page Ref: 192 B) employee fraud or embezzlement.
Objective: Learning Objective 4 C) fraud by outsiders.
Difficulty : Easy D) disgruntled employees.
AACSB: Analytic Answer: B
Page Ref: 190-191
46) The audit committee of the board of directors Objective: Learning Objective 3
A) is usually chaired by the CFO. Difficulty : Easy
B) conducts testing of controls on behalf of the external AACSB: Analytic
auditors.
C) provides a check and balance on management. 51) The SEC and FASB are best described as external
D) does all of the above. influences that directly affect an organization's
Answer: C A) hiring practices.
Page Ref: 189 B) philosophy and operating style.
Objective: Learning Objective 3 C) internal environment.
Difficulty : Moderate D) methods of assigning authority.
AACSB: Analytic Answer: C
Page Ref: 192
47) The audit committee is responsible for Objective: Learning Objective 3
A) overseeing the internal control structure. Difficulty : Easy
B) overseeing the financial reporting process. AACSB: Analytic
C) working with the internal and external auditors.
D) All of the above are responsibilities. 52) Which attribute below is not an aspect of the COSO ERM
Answer: D Framework internal environment?
Page Ref: 189 A) Enforcing a written code of conduct
Objective: Learning Objective 3 B) Holding employees accountable for achieving objectives
Difficulty : Easy C) Restricting access to assets
AACSB: Analytic D) Avoiding unrealistic expectations
Answer: C
48) The definition of the lines of authority and responsibility Page Ref: 188
and the overall framework for planning, directing, and Objective: Learning Objective 3
controlling is laid out by the Difficulty : Moderate
A) control activities AACSB: Analytic
B) organizational structure
C) budget framework 53) The amount of risk a company is willing to accept in order
D) internal environment to achieve its goals and objectives is
Answer: B A) Inherent risk
Page Ref: 190 B) Residual risk
Objective: Learning Objective 3 C) Risk appetite
Difficulty : Easy D) Risk assessment
AACSB: Analytic Answer: C
Page Ref: 189
49) Reducing management layers, creating self-directed work Objective: Learning Objective 3
teams, and emphasizing continuous improvement are all Difficulty : Easy
related to which aspect of internal environment? AACSB: Analytic
A) Organizational structure
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54) The risk that remains after management implements Difficulty : Easy
internal controls is AACSB: Reflective Thinking
A) Inherent risk
B) Residual risk 59) Corporate policy that requires a purchasing agent and
C) Risk appetite purchasing department manager to sign off on asset
D) Risk assessment purchases over $1,500 is an example of
Answer: B A) general authorization.
Page Ref: 193 B) specific authorization.
Objective: Learning Objective 6 C) special authorization.
Difficulty : Easy D) generic authorization.
AACSB: Analytic Answer: B
Page Ref: 196
55) The risk that exists before management takes any steps to Objective: Learning Objective 7
control the likelihood or impact of a risk is Difficulty : Easy
A) Inherent risk AACSB: Reflective Thinking
B) Residual risk
C) Risk appetite 60) A document that shows all projects that must be
D) Risk assessment completed and the related IT needs in order to achieve long-
Answer: A range company goals is known as a
Page Ref: 193 A) performance evaluation.
Objective: Learning Objective 6 B) project development plan.
Difficulty : Easy C) data processing schedule.
AACSB: Analytic D) strategic master plan.
Answer: D
56) When undertaking risk assessment, the expected loss is Page Ref: 198
calculated like this. Objective: Learning Objective 7
A) Impact times expected loss Difficulty : Moderate
B) Impact times likelihood AACSB: Analytic
C) Inherent risk times likelihood
D) Residual risk times likelihood 61) A ________ is created to guide and oversee systems
Answer: B development and acquisition.
Page Ref: 194 A) performance evaluation
Objective: Learning Objective 6 B) project development plan
Difficulty : Easy C) steering committee
AACSB: Analytic D) strategic master plan
Answer: C
57) Generally in a risk assessment process, the first step is to Page Ref: 198
A) identify the threats that the company currently faces. Objective: Learning Objective 7
B) estimate the risk probability of negative events occurring. Difficulty : Easy
C) estimate the exposure from negative events. AACSB: Analytic
D) identify controls to reduce all risk to zero.
Answer: A 62) A ________ shows how a project will be completed,
Page Ref: 194 including tasks and who will perform them as well as a
Objective: Learning Objective 6 timeline and cost estimates.
Difficulty : Easy A) performance evaluation
AACSB: Analytic B) project development plan
C) steering committee
58) Store policy that allows retail clerks to process sales D) strategic master plan
returns for $300 or less, with a receipt dated within the past Answer: B
60 days, is an example of Page Ref: 198
A) general authorization. Objective: Learning Objective 7
B) specific authorization. Difficulty : Easy
C) special authorization. AACSB: Analytic
D) generic authorization.
Answer: A 63) Which of the following is not a violation of the Sarbanes-
Page Ref: 196 Oxley Act (SOX)? The management at Folding Squid
Objective: Learning Objective 7 Technologies
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A) asked their auditors to make recommendations for the A) boundary system.
redesign of their information technology system and to aid in B) belief system.
the implementation process. C) interactive control system.
B) hired the manager from the external audit team as D) diagnostic control system.
company CFO twelve months after the manager had worked Answer: A
on the audit. Page Ref: 185
C) selected the company's Chief Financial Officer to chair the Objective: Learning Objective 1
audit committee. Difficulty : Moderate
D) did not mention to auditors that the company had AACSB: Analytic
experienced significant losses due to fraud during the past
year. 67) River Rafting Adventures of Iowa provides rafts and tour
Answer: B guides to tourists eager to ride the wild rivers of Iowa.
Page Ref: 186 Management has determined that there is one chance in a
Objective: Learning Objective 1 thousand of a client being injured or killed. Settlement of
Difficulty : Moderate resulting lawsuits has an average cost of $650,000. Insurance
AACSB: Analytic with a $50,000 deductible is available. It covers the costs of
lawsuits, unless there is evidence of criminal negligence.
64) The Sarbanes-Oxley Act (SOX) applies to What is the impact of this risk without insurance?
A) all companies with gross annual revenues exceeding $500 A) $50,000
million. B) $650,000
B) publicly held companies with gross annual revenues C) $650
exceeding $500 million. D) $50
C) all private and publicly held companies incorporated in the Answer: B
United States. Page Ref: 194
D) all publicly held companies. Objective: Learning Objective 6
Answer: D Difficulty : Easy
Page Ref: 185 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Moderate 68) River Rafting Adventures of Iowa provides rafts and tour
AACSB: Analytic guides to tourists eager to ride the wild rivers of Iowa.
Management has determined that there is one chance in a
65) Chuck Hewitt was relaxing after work with a colleague at a thousand of a client being injured or killed. Settlement of
local watering hole. Well into his second martini, he began resulting lawsuits has an average cost of $650,000. Insurance
expressing his opinions about his company's budgeting with a $50,000 deductible is available. It covers the costs of
practices. It seems that, as a result of "budget handcuffs" that lawsuits, unless there is evidence of criminal negligence.
require managers to explain material deviations from What is the expected loss without insurance?
budgeted expenditures, his ability to creatively manage his A) $50,000
department's activities have been curtailed. The level of B) $650,000
control that the company is using in this case is a C) $650
A) boundary system. D) $50
B) belief system. Answer: C
C) interactive control system. Page Ref: 194
D) diagnostic control system. Objective: Learning Objective 6
Answer: D Difficulty : Easy
Page Ref: 185 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 69) River Rafting Adventures of Iowa provides rafts and tour
AACSB: Analytic guides to tourists eager to ride the wild rivers of Iowa.
Management has determined that there is one chance in a
66) Chuck Hewitt was relaxing after work with a colleague at a thousand of a client being injured or killed. Settlement of
local watering hole. Well into his second martini, he began resulting lawsuits has an average cost of $650,000. Insurance
expressing his opinions about his work environment. It seems with a $50,000 deductible is available. It covers the costs of
that, as a result of "feminazi" interference, the suggestive lawsuits, unless there is evidence of criminal negligence.
banter that had been prevalent in the workplace during his What is the expected loss with insurance?
youth was no longer acceptable. He even had to sit through a A) $50,000
sexual harassment workshop! The level of control that the B) $650,000
company is using in this case is a C) $650
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D) $50 system to an independent control group which reports to the
Answer: D controller
Page Ref: 194 B) Providing for maintenance of input data controls by an
Objective: Learning Objective 6 independent control group which reports to the controller
Difficulty : Easy C) Periodically rotating assignment of application processing
AACSB: Analytic among machine operators, who all report to the information
processing manager
70) River Rafting Adventures of Iowa provides rafts and tour D) Providing for review and distribution of system-generated
guides to tourists eager to ride the wild rivers of Iowa. reports by an independent control group which reports to the
Management has determined that there is one chance in a controller
thousand of a client being injured or killed. Settlement of Answer: A
resulting lawsuits have an average cost of $650,000. Page Ref: 198
Insurance with a $50,000 deductible is available. It covers the Objective: Learning Objective 7
costs of lawsuits, unless there is evidence of criminal Difficulty : Moderate
negligence. Based on cost-benefit analysis, what is the most AACSB: Reflective Thinking
that the business should pay for the insurance?
A) $500 73) Global Economic Strategies, L.L.D., has been diligent in
B) $650 ensuring that their operations meet modern control
C) $600 standards. Recently, they have extended their control
D) $50 compliance system by incorporating policies and procedures
Answer: C that require the specification of company objectives,
Page Ref: 194 uncertainties associated with objectives, and contingency
Objective: Learning Objective 6 plans. They are transitioning from a ________ to a ________
Difficulty : Easy control framework.
AACSB: Analytic A) COSO-Integrated Framework; COBIT
B) COBIT; COSO-Integrated Framework
71) Due to data errors occurring from time to time in C) COBIT; COSO-ERM
processing the Albert Company's payroll, the company's D) COSO-Integrated Framework; COSO-ERM
management is considering the addition of a data validation E) COSO-ERM; COBIT
control procedure that is projected to reduce the risk of these Answer: D
data errors from 13% to 2%. The cost of the payroll Page Ref: 187-188
reprocessing is estimated to be $11,000. The cost of Objective: Learning Objective 2
implementing the data validation control procedure is Difficulty : Moderate
expected to be $700. Which of the following statements is AACSB: Reflective Thinking
true?
A) The data validation control procedure should be 74) FranticHouse Partners, L.L.C., does home remodeling and
implemented because its net estimated benefit is $510. repair. All employees are bonded, so the firm's risk exposure
B) The data validation control procedure should be to employee fraud is
implemented because its cost of $700 is less than the payroll A) reduced.
reprocessing cost of $1,430. B) shared.
C) The data validation control procedure should not be C) avoided.
implemented because its cost of $700 exceeds the expected D) accepted.
benefit by $480. Answer: B
D) The data validation control procedure should not be Page Ref: 193
implemented because its net estimated benefit is a negative Objective: Learning Objective 6
$1,210. Difficulty : Easy
Answer: A AACSB: Analytic
Page Ref: 194
Objective: Learning Objective 6 75) FranticHouse Partners, L.L.C., does home remodeling and
Difficulty : Moderate repair. The firm does not accept jobs that require the
AACSB: Analytic installation of slate or copper roofing because these materials
often require costly post-installation services. The firm's risk
72) The organization chart for Geerts Corporation includes a exposure to costly post-installation services is
controller and an information processing manager, both of A) reduced.
whom report to the vice president of finance. Which of the B) shared.
following would be a control weakness? C) avoided.
A) Assigning the programming and operating of the computer D) accepted.
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Answer: C 79) Petty cash is disbursed by the Fred Haynes in the Cashier's
Page Ref: 193 Office. He also maintains records of disbursements, places
Objective: Learning Objective 6 requests to the Finance Department to replace expended
Difficulty : Easy funds, and periodically reconciles the petty cash balance. This
AACSB: Analytic represents a(an) ________ segregation of duties.
A) effective
76) According to the COSO Enterprise Risk Management B) ideal
Framework, the risk assessment process incorporates all of C) ineffective
the following components except D) limited
A) reporting potential risks to auditors. Answer: C
B) identifying events that could impact the enterprise. Page Ref: 196
C) evaluating the impact of potential events on achievement Objective: Learning Objective 7
of objectives. Difficulty : Easy
D) establishing objectives for the enterprise. AACSB: Analytic
Answer: A
Page Ref: 193 80) Hiring decisions at Frazier's Razors are made by Sheila
Objective: Learning Objective 6 Frazier, the Director of Human Resources. Pay rates are
Difficulty : Moderate approved by the Vice President for Operations. At the end of
AACSB: Analytic each pay period, supervisors submit time cards to Sheila, who
prepares paycheck requisitions. Paychecks are then
77) Ferdinand Waldo Demara was known as the great distributed through the company's mail room. This represents
imposter. He had an astounding ability to convince people a(an) ________ segregation of duties.
that he was who he truly was not. He worked as a naval A) effective
officer, physician, college teacher, prison warden, and other B) partial
jobs without any of the prerequisite qualifications. By not C) ineffective
diligently checking references, the organizations fooled by D) limited
Demara (including the Canadian Navy) apparently chose to Answer: A
________ the risk of fraud. Page Ref: 196
A) reduce Objective: Learning Objective 7
B) share Difficulty : Moderate
C) avoid AACSB: Reflective Thinking
D) accept
Answer: D 81) Change management refers to
Page Ref: 193 A) disbursement controls on petty cash.
Objective: Learning Objective 6 B) operational controls applied to companies after mergers or
Difficulty : Easy acquisitions.
AACSB: Analytic C) replacement of upper management and their introduction
to the organization.
78) Which of the following is an independent check on D) controls designed to ensure that updates in information
performance? technology do not have negative consequences.
A) The Purchasing Agent physically reviews the contents of Answer: D
shipments and compares them with the purchase orders he Page Ref: 199
has placed. Objective: Learning Objective 7
B) Production teams perform quality evaluations of the Difficulty : Easy
products that they produce. AACSB: Analytic
C) The General Manager compares budgeted amounts with
expenditure records from all departments. 82) The Director of Information Technology for the city of
D) Petty cash is disbursed by Fred Haynes. He also maintains Bumpkiss, Minnesota, formed a company to sell computer
records of disbursements, places requests to finance to supplies and software. All purchases made on behalf of the
replace expended funds, and periodically reconciles the petty City were made from his company. He was later charged with
cash balance. fraud for overcharging the City, but was not convicted. The
Answer: C control issue in this case arose because the Director had both
Page Ref: 200 ________ and ________ duties.
Objective: Learning Objective 7 A) custody; authorization
Difficulty : Easy B) custody; recording
AACSB: Analytic C) recording; authorization
D) management; custody
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Answer: C disaster recovery plan?
Page Ref: 196 A) Identification of alternate work site
Objective: Learning Objective 7 B) Off-site storage of backup files and programs
Difficulty : Moderate C) Documentation of procedures and responsibilitie
AACSB: Reflective Thinking D) Adequate casualty insurance
Answer: D
83) According to the ERM, these help the company address all Page Ref: 193
applicable laws and regulations. Objective: Learning Objective 6
A) Compliance objectives Difficulty : Difficult
B) Operations objectives AACSB: Reflective Thinking
C) Reporting objectives
D) Strategic objectives 88) Describe the differences between general and specific
Answer: A authorization.
Page Ref: 192 Answer: Authorizations are often documented by signing,
Objective: Learning Objective 4 initializing, or entering an authorization code on a transaction
Difficulty : Easy document or record. Management may deem that certain
AACSB: Analytic transactions are of a routine nature and as such may
authorize employees to handle such transactions without
84) According to the ERM, high level goals that are aligned special approval. This is known as general authorization.
with and support the company's mission are Other transactions may be of such consequence that
A) compliance objectives. management grants specific authorization for them to occur.
B) operations objectives. Usually management must approve of such transactions and
C) reporting objectives. oversee them to completion, requiring an additional
D) strategic objectives. signature required on checks exceeding a given dollar
Answer: D amount. Management should have written policies on both
Page Ref: 192 specific and general authorization for all type of transactions.
Objective: Learning Objective 4 Page Ref: 196
Difficulty : Easy Objective: Learning Objective 7
AACSB: Analytic Difficulty : Moderate
AACSB: Analytic
85) According to the ERM, these deal with the effectiveness
and efficiency of company operations, such as performance 89) Explain how a company could be the victim of fraud, even
and profitability goals. if ideal segregation of duties is enforced.
A) Compliance objectives Answer: When a system effectively incorporates a separation
B) Operations objectives of duties, it should be difficult for any one employee to defeat
C) Reporting objectives the system and commit fraud. Fraud is possible when two or
D) Strategic objectives more employees agree to defeat the system for their own
Answer: B dishonest ends. This problem is known as collusion. When
Page Ref: 192 two or more employees act together to defeat the internal
Objective: Learning Objective 4 controls of the system, they may likely succeed. It is more
Difficulty : Easy difficult to detect such activity because the employees may
AACSB: Analytic have planned to "cover their tracks." This is why independent
review of transaction activity by third parties is important to
86) According to the ERM, these objectives help ensure the monitor that internal controls are in place and working as
accuracy, completeness and reliability of internal and designed.
external company reports. Page Ref: 197
A) Compliance objectives Objective: Learning Objective 7
B) Operations objectives Difficulty : Moderate
C) Reporting objectives AACSB: Reflective Thinking
D) Strategic objectives
Answer: C 90) Classify each of the following controls as preventive,
Page Ref: 192 detective, or corrective.
Objective: Learning Objective 4 Periodic bank reconciliation
Difficulty : Easy Separation of cash and accounting records
AACSB: Analytic Maintaining backup copies of master and transaction
files
87) Which of the following is not a risk reduction element of a Pre-numbering of sales invoices
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 Chart of accounts Page Ref: 185
Retina scan before entering a sensitive R & D facility Objective: Learning Objective 1
Resubmission of error transactions for subsequent Difficulty : Moderate
processing AACSB: Analytic
Internal auditor rechecking the debits and credits on
the payment voucher 93) Discuss the internal environment and identify the
Depositing all cash receipts intact elements that comprise the internal environment.
Hiring qualified accounting personnel Answer: The internal environment embraces individuals and
Answer: Detective. Preventive. Corrective. Preventive. the environment in which they operate in an organization.
Preventive. Preventive. Corrective. Detective. Preventive. Individual employees are "the engine" that drive the
Preventive organization and form the foundation upon which everything
Page Ref: 185 in the organization rests. Elements of the internal
Objective: Learning Objective 1 environment are: 1) a commitment to integrity and ethical
Difficulty : Moderate values; 2) the philosophy and operating style of management;
AACSB: Analytic 3) organizational structure; 4) the audit committee of the
board of directors; 5) methods of assigning authority and
91) Discuss four reasons why AIS threats are increasing. responsibility; 6) human resources policies and practices; and
Answer: 7) various external influences. Each of these elements
1. Client/server systems have proliferated and have enabled influences the internal control structure of the organization.
large numbers of employees to have access to the Likewise, these elements should be examined and analyzed in
information. detail when implementing or evaluating a system of internal
2. LANs and client/server systems distribute data to various controls.
users and are more difficult to control than centralized Page Ref: 188
systems. Objective: Learning Objective 3
3. EDI and e-commerce have enabled customers and Difficulty : Moderate
suppliers to access each other's systems and data, making AACSB: Analytic
confidentiality a major concern.
4. Organizations are not aggressively protecting their data for 94) Explain why management's philosophy and operating
various reasons. style are considered to be the most important element of the
5. Computer control problems are often underestimated and internal environment.
downplayed. Answer: Management truly sets the tone for the control
6. Control implications of networked systems are not properly environment of a business. If top management takes good
reasoned out. control seriously and makes this known to everyone in the
7. Top management does not grasp the effect of security of organization, then employees down the line will tend to do
data and information on survival and profitability of the likewise. Management's attitude toward risk taking and the
company. assessment of risk before acting are indications. Willingness
8. Internal controls become a casualty in cost cutting and to manipulate performance measures or to encourage
productivity measures undertaken by the management. employees to do likewise is another indication of attitude.
Page Ref: 184 Finally, pressure on subordinates to achieve certain results
Objective: Learning Objective 1 regardless of the methods used can be a very persuasive
Difficulty : Moderate indicator of problems. Management concerned about control
AACSB: Analytic will assess risk and act prudently, manipulation of
performance measures will not be tolerated, and ethical
92) Explain why the Foreign Corrupt Practices Act was behavior will be instilled in and required of employees.
important to accountants. Page Ref: 189
Answer: The act is important to accountants because it Objective: Learning Objective 3
incorporates the language of the AICPA pronouncement on Difficulty : Moderate
internal controls. The Act mandates that corporations should AACSB: Reflective Thinking
keep records that accurately and fairly reflect their
transactions and assets in reasonable detail. The internal 95) What are some of the ways to assign authority and
control system of these organizations should be able to responsibility within an organization?
provide reasonable assurance that: a) transactions are Answer: It is incumbent on management to identify specific
properly authorized and recorded; b) assets are safeguarded business objectives and assign such objectives to certain
and protected from unauthorized access; and c) recorded departments and individuals. Management must also hold
asset values are periodically compared with actual assets and such departments and individuals responsible and
any differences are corrected. The act requires corporations accountable for achieving the assigned business objectives.
to maintain good systems of internal accounting control. Ways in which management may assign authority and
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responsibility is through formal job descriptions, employee
training, budgets, operating plans, and scheduling. A formal
code of conduct also sets the stage for responsible behavior
on the part of employees by defining ethical behavior,
acceptable business practices, regulatory requirements, and
conflicts of interest. Another useful and important tool is a
written policy and procedures manual.
Page Ref: 190
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic

96) Discuss the weaknesses in COSO's internal control

framework that led to the development of the COSO
Enterprise Risk Management framework.
Answer: COSO's internal control framework 1. had too
narrow a focus. 2. examined controls without first addressing
purposes and risks of business processes 3. existing internal
control systems often have controls that protect against
items that are no longer risks or are no longer important. 4.
focusing on controls first has an inherent bias toward past
problems and concerns.
Page Ref: 187-188
Objective: Learning Objective 2
Difficulty : Moderate

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Chapter 8 (chap 5) Information Systems Controls for Page Ref: 222-224
System ReliabilityPart 1: Information Security Objective: Learning Objective 2
Difficulty : Easy
1) The Trust Services Framework reliability principle that AACSB: Analytic
states that users must be able to enter, update, and retrieve
data during agreed-upon times is known as 5) Which of the following is not one of the essential criteria
A) availability. for successfully implementing each of the principles that
B) security. contribute to systems reliability, as discussed in the Trust
C) maintainability. Services Framework?
D) integrity. A) Developing and documenting policies
Answer: A B) Effectively communicating policies to all outsiders
Page Ref: 221 C) Designing and employing appropriate control procedures
Objective: Learning Objective 1 to implement policies
Difficulty : Easy D) Monitoring the system and taking corrective action to
AACSB: Analytic maintain compliance with policies
Answer: B
2) Which of the following is not a useful control procedure to Page Ref: 223
control access to system outputs? Objective: Learning Objective 2
A) Allowing visitors to move through the building without Difficulty : Easy
supervision AACSB: Analytic
B) Coding reports to reflect their importance
C) Requiring employees to log out of applications when 6) If the time an attacker takes to break through the
leaving their desk organization's preventive controls is greater than the sum of
D) Restricting access to rooms with printers the time required to detect the attack and the time required
Answer: A to respond to the attack, then security is
Page Ref: 229 A) effective.
Objective: Learning Objective 3 B) ineffective.
Difficulty : Easy C) overdone.
AACSB: Analytic D) undermanaged.
Answer: A
3) According to the Trust Services Framework, the reliability Page Ref: 224
principle of integrity is achieved when the system produces Objective: Learning Objective 2
data that Difficulty : Moderate
A) is available for operation and use at times set forth by AACSB: Analytic
agreement.
B) is protected against unauthorized physical and logical 7) Verifying the identity of the person or device attempting to
access. access the system is
C) can be maintained as required without affecting system A) authentication.
availability, security, and integrity. B) authorization.
D) is complete, accurate, and valid. C) identification.
Answer: D D) threat monitoring.
Page Ref: 221 Answer: A
Objective: Learning Objective 1 Page Ref: 226
Difficulty : Easy Objective: Learning Objective 3
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
4) Which of the following is not one of the three fundamental
information security concepts? 8) Restricting access of users to specific portions of the
A) Information security is a technology issue based on system as well as specific tasks, is
prevention. A) authentication.
B) Security is a management issue, not a technology issue. B) authorization.
C) The idea of defense-in-depth employs multiple layers of C) identification.
controls. D) threat monitoring.
D) The time-based model of security focuses on the Answer: B
relationship between preventive, detective and corrective Page Ref: 228
controls. Objective: Learning Objective 3
Answer: A Difficulty : Easy
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AACSB: Analytic passwords.
D) requires the use of more than one effective password.
9) Which of the following is an example of a preventive Answer: A
control? Page Ref: 228
A) Encryption Objective: Learning Objective 3
B) Log analysis Difficulty : Moderate
C) Intrusion detection AACSB: Analytic
D) Emergency response teams
Answer: A 14) An access control matrix
Page Ref: 228 A) does not have to be updated.
Objective: Learning Objective 3 B) is a table specifying which portions of the system users are
Difficulty : Easy permitted to access.
AACSB: Analytic C) is used to implement authentication controls.
D) matches the user's authentication credentials to his
10) Which of the following is an example of a detective authorization.
control? Answer: B
A) Physical access controls Page Ref: 228
B) Encryption Objective: Learning Objective 3
C) Log analysis Difficulty : Easy
D) Emergency response teams AACSB: Analytic
Answer: C
Page Ref: 237 15) Perimeter defense is an example of which of the following
Objective: Learning Objective 3 preventive controls that are necessary to provide adequate
Difficulty : Easy security?
AACSB: Analytic A) Training
B) Controlling physical access
11) Which of the following is an example of a corrective C) Controlling remote access
control? D) Host and application hardening
A) Physical access controls Answer: C
B) Encryption Page Ref: 230
C) Intrusion detection Objective: Learning Objective 3
D) Incident response teams Difficulty : Easy
Answer: D AACSB: Analytic
Page Ref: 239
Objective: Learning Objective 3 16) Which of the following preventive controls are necessary
Difficulty : Easy to provide adequate security for social engineering threats?
AACSB: Analytic A) Controlling remote access
B) Encryption
12) Which of the following is not a requirement of effective C) Host and application hardening
passwords? D) Awareness training
A) Passwords should be changed at regular intervals. Answer: D
B) Passwords should be no more than 8 characters in length. Page Ref: 226
C) Passwords should contain a mixture of upper and Objective: Learning Objective 3
lowercase letters, numbers and characters. Difficulty : Easy
D) Passwords should not be words found in dictionaries. AACSB: Analytic
Answer: B
Page Ref: 227 17) A special purpose hardware device or software running
Objective: Learning Objective 3 on a general purpose computer, which filters information that
Difficulty : Easy is allowed to enter and leave the organization's information
AACSB: Analytic system, is known as a(n)
A) demilitarized zone.
13) Multi-factor authentication B) intrusion detection system.
A) involves the use of two or more basic authentication C) intrusion prevention system.
methods. D) firewall.
B) is a table specifying which portions of the systems users Answer: D
are permitted to access. Page Ref: 230
C) provides weaker authentication than the use of effective Objective: Learning Objective 3
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Difficulty : Easy B) deep packet inspection.
AACSB: Analytic C) stateful packet filtering.
D) static packet filtering.
18) This protocol specifies the procedures for dividing files Answer: D
and documents into packets to be sent over the Internet. Page Ref: 233
A) Access control list Objective: Learning Objective 3
B) Internet protocol Difficulty : Moderate
C) Packet switching protocol AACSB: Analytic
D) Transmission control protocol
Answer: D 23) The process that maintains a table that lists all
Page Ref: 231 established connections between the organization's
Objective: Learning Objective 3 computers and the Internet, to determine whether an
Difficulty : Easy incoming packet is part of an ongoing communication
AACSB: Analytic initiated by an internal computer is known as
A) access control list.
19) This protocol specifies the structure of packets sent over B) deep packet inspection.
the internet and the route to get them to the proper C) stateful packet filtering.
destination. D) static packet filtering.
A) Access control list Answer: C
B) Internet protocol Page Ref: 233
C) Packet switching protocol Objective: Learning Objective 3
D) Transmission control protocol Difficulty : Moderate
Answer: B AACSB: Analytic
Page Ref: 231
Objective: Learning Objective 3 24) The process that allows a firewall to be more effective by
Difficulty : Easy examining the data in the body of an IP packet, instead of just
AACSB: Analytic the header, is known as
A) deep packet inspection.
20) This network access control determines which IP packets B) stateful packet filtering.
are allowed entry to a network and which are dropped. C) static packet filtering.
A) Access control list D) an intrusion prevention system.
B) Deep packet inspection Answer: A
C) Stateful packet filtering Page Ref: 233
D) Static packet filtering Objective: Learning Objective 3
Answer: A Difficulty : Moderate
Page Ref: 233 AACSB: Analytic
Objective: Learning Objective 3
Difficulty : Moderate 25) The security technology that evaluates IP packet traffic
AACSB: Analytic patterns in order to identify attacks against a system is known
as
21) Compatibility tests utilize a(n) ________, which is a list of A) an intrusion prevention system.
authorized users, programs, and data files the users are B) stateful packet filtering.
authorized to access or manipulate. C) static packet filtering.
A) validity test D) deep packet inspection.
B) biometric matrix Answer: A
C) logical control matrix Page Ref: 234
D) access control matrix Objective: Learning Objective 3
Answer: D Difficulty : Moderate
Page Ref: 228 AACSB: Analytic
Objective: Learning Objective 3
Difficulty : Easy 26) This is used to identify rogue modems (or by hackers to
AACSB: Analytic identify targets).
A) War chalking
22) The process that screens individual IP packets based B) War dialing
solely on the contents of the source and/or destination fields C) War driving
in the packet header is known as D) none of the above
A) access control list. Answer: B
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Page Ref: 235 B) Log analysis
Objective: Learning Objective 3 C) Penetration test
Difficulty : Easy D) Vulnerability scan
AACSB: Analytic Answer: C
Page Ref: 238
27) The process of turning off unnecessary features in the Objective: Learning Objective 3
system is known as Difficulty : Moderate
A) deep packet inspection. AACSB: Analytic
B) hardening.
C) intrusion detection. 32) A well-known hacker started his own computer security
D) war dialing. consulting business shortly after being released from prison.
Answer: B Many companies pay him to attempt to gain unauthorized
Page Ref: 236 access to their network. If he is successful, he offers advice as
Objective: Learning Objective 3 to how to design and implement better controls. What is the
Difficulty : Easy name of the testing for which the hacker is being paid?
AACSB: Analytic A) Penetration test
B) Vulnerability scan
28) The most common input-related vulnerability is C) Deep packet inspection
A) buffer overflow attack. D) Buffer overflow test
B) hardening. Answer: A
C) war dialing. Page Ref: 238
D) encryption. Objective: Learning Objective 3
Answer: A Difficulty : Moderate
Page Ref: 237 AACSB: Analytic
Objective: Learning Objective 3
Difficulty : Easy 33) The ________ disseminates information about fraud,
AACSB: Analytic errors, breaches and other improper system uses and their
consequences.
29) This creates logs of network traffic that was permitted to A) chief information officer
pass the firewall. B) chief operations officer
A) Intrusion detection system C) chief security officer
B) Log analysis D) computer emergency response team
C) Penetration test Answer: C
D) Vulnerability scan Page Ref: 240
Answer: A Objective: Learning Objective 3
Page Ref: 238 Difficulty : Moderate
Objective: Learning Objective 3 AACSB: Analytic
Difficulty : Moderate
AACSB: Analytic 34) In 2007, a major U.S. financial institution hired a security
firm to attempt to compromise its computer network. A week
30) The process that uses automated tools to identify later, the firm reported that it had successfully entered the
whether a system possesses any well-known security system without apparent detection and presented an analysis
problems is known as a(n) of the vulnerabilities that had been found. This is an example
A) intrusion detection system. of a
B) log analysis. A) preventive control.
C) penetration test. B) detective control.
D) vulnerability scan. C) corrective control.
Answer: D D) standard control.
Page Ref: 236 Answer: B
Objective: Learning Objective 3 Page Ref: 238
Difficulty : Moderate Objective: Learning Objective 3
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
31) This is an authorized attempt by an internal audit team or
an external security consultant to attempt to break into the
organization's information system.
A) Intrusion detection system
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35) It was 9:08 A.M. when Jiao Jan, the Network B) biometric device.
Administrator for Folding Squid Technologies, was informed C) remote access control.
that the intrusion detection system had identified an ongoing D) authorization control.
attempt to breach network security. By the time that Jiao had Answer: A
identified and blocked the attack, the hacker had accessed Page Ref: 226
and downloaded several files from the company's server. Objective: Learning Objective 3
Using the notation for the time-based model of security, in Difficulty : Easy
this case AACSB: Analytic
A) P > D
B) D > P 39) When new employees are hired by Folding Squid
C) C > P Technologies, they are assigned user names and appropriate
D) P > C permissions are entered into the information system's access
Answer: B control matrix. This is an example of a(an)
Page Ref: 224 A) authentication control.
Objective: Learning Objective 2 B) biometric device.
Difficulty : Difficult C) remote access control.
AACSB: Analytic D) authorization control.
Answer: D
36) Which of the following is commonly true of the default Page Ref: 228
settings for most commercially available wireless access Objective: Learning Objective 3
points? Difficulty : Easy
A) The security level is set at the factory and cannot be AACSB: Analytic
changed.
B) Wireless access points present little danger of vulnerability 40) When new employees are hired by Folding Squid
so security is not a concern. Technologies, they are assigned user names and passwords
C) Security is set to the lowest level that the device is capable and provided with laptop computers that have an integrated
of. fingerprint reader. In order to log in, the user's fingerprint
D) Security is set to the highest level that the device is must be recognized by the reader. This is an example of a(an)
capable of. A) authorization control.
Answer: C B) biometric device.
Page Ref: 235 C) remote access control.
Objective: Learning Objective 3 D) defense in depth.
Difficulty : Moderate Answer: B
AACSB: Analytic Page Ref: 227
Objective: Learning Objective 3
37) In recent years, many of the attacks carried out by Difficulty : Easy
hackers have relied on this type of vulnerability in computer AACSB: Analytic
software.
A) Code mastication 41) Information technology managers are often in a bind
B) Boot sector corruption when a new exploit is discovered in the wild. They can
C) Weak authentication respond by updating the affected software or hardware with
D) Buffer overflow new code provided by the manufacturer, which runs the risk
Answer: D that a flaw in the update will break the system. Or they can
Page Ref: 236 wait until the new code has been extensively tested, but that
Objective: Learning Objective 3 runs the risk that they will be compromised by the exploit
Difficulty : Easy during the testing period. Dealing with these issues is
AACSB: Analytic referred to as
A) change management.
38) Meaningful Discussions is a social networking site that B) hardening.
boasts over a million registered users and a quarterly C) patch management.
membership growth rate in the double digits. As a D) defense in depth.
consequence, the size of the information technology Answer: C
department has been growing very rapidly, with many new Page Ref: 240
hires. Each employee is provided with a name badge with a Objective: Learning Objective 3
photo and embedded computer chip that is used to gain Difficulty : Moderate
entry to the facility. This is an example of a(an) AACSB: Analytic
A) authentication control.
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42) Murray Snitzel called a meeting of the top management Difficulty : Easy
at Snitzel Capital Management. Number one on the agenda AACSB: Analytic
was computer system security. "The risk of security breach
incidents has become unacceptable," he said, and turned to 46) On February 14, 2008, students enrolled in an economics
the Chief Information Officer. "This is your responsibility! course at Swingline College received an email stating that
What do you intend to do?" Which of the following is the best class would be cancelled. The email claimed to be from the
answer? professor, but it wasn't. Computer forensic experts
A) Evaluate and modify the system using the Trust Services determined that the email was sent from a computer in one
framework of the campus labs at 9:14 A.M. They were then able to
B) Evaluate and modify the system using the COSO Internal uniquely identify the computer that was used by means of its
Control Framework. network interface card's ________ address. Security cameras
C) Evaluate and modify the system using the CTC checklist. revealed the identity of the student responsible for spoofing
D) Evaluate and modify the system using COBOL. the class.
Answer: A A) TCP/IP
Page Ref: 221 B) MAC
Objective: Learning Objective 1 C) DMZ
Difficulty : Moderate D) IDS
AACSB: Analytic Answer: B
Page Ref: 228
43) Which of the following is the most effective method of Objective: Learning Objective 3
protecting against social engineering attacks on a computer Difficulty : Difficult
system? AACSB: Analytic
A) stateful packet filtering
B) employee awareness training 47) There are "white hat" hackers and "black hat" hackers.
C) a firewall Cowboy451 was one of the "black hat" hackers. He had
D) a demilitarized zone researched an exploit and determined that he could
Answer: B penetrate the target system, download a file containing
Page Ref: 226 valuable data, and cover his tracks in eight minutes. Six
Objective: Learning Objective 3 minutes into the attack he was locked out of the system.
Difficulty : Moderate Using the notation of the time-based model of security, which
AACSB: Analytic of the following must be true?
A) P < 6
44) The most effective way to protect network resources, like B) D = 6
email servers, that are outside of the network and are C) P = 6
exposed to the Internet is D) P > 6
A) stateful packet filtering. Answer: D
B) employee training. Page Ref: 224
C) a firewall. Objective: Learning Objective 2
D) a demilitarized zone. Difficulty : Difficult
Answer: D AACSB: Analytic
Page Ref: 230
Objective: Learning Objective 3 48) Identify three ways users can be authenticated and give
Difficulty : Moderate an example of each.
AACSB: Analytic Answer: Users can be authenticated by verifying: 1.
something they know (password). 2. something they have
45) All employees of E.C. Hoxy are required to pass through a (smart card or ID badge). 3. Something they are (biometric
gate and present their photo identification cards to the guard identification of fingerprint).
before they are admitted. Entry to secure areas, such as the Page Ref: 226
Information Technology Department offices, requires further Objective: Learning Objective 3
procedures. This is an example of a(an) Difficulty : Moderate
A) authentication control. AACSB: Analytic
B) authorization control.
C) physical access control. 49) Describe four requirements of effective passwords .
D) hardening procedure. Answer: 1. Strong passwords should be at least 8 characters.
Answer: C 2. Passwords should use a mixture of upper and lowercase
Page Ref: 229 letters, numbers and characters. 3. Passwords should be
Objective: Learning Objective 3 random and not words found in dictionaries. 4. Passwords
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Copyright © 2012 Pearson Education, Inc. publishing as Prentice Hall
should be changes frequently. Answer: Require visitors to sign in and receive a visitor badge
Page Ref: 227 before being escorted by an employee; require employees to
Objective: Learning Objective 3 wear photo ID badges that are checked by security guards;
Difficulty : Easy physical locks and keys; storing documents and electronic
AACSB: Analytic media in a fire-proof safe or cabinet; restrict or prohibit cell
phones, iPods and other portable devices; set screen savers
50) Explain social engineering. to start after a few minutes of inactivity; set computers to
Answer: Social engineering attacks use deception to obtain lock keyboards after a few minutes of inactivity; utilize screen
unauthorized access to information resources, such as protection devices; use biometric devices to authorize access
attackers who post as a janitor or as a legitimate system user. to spaces and equipment; attach and lock laptops to
Employees must be trained not to divulge passwords or other immobile objects; utilize magnetic or chip cards to authorize
information about their accounts to anyone who contacts access to spaces and equipment; limit or prohibit windows
them and claims to be part of the organization's security and glass walls in sensitive areas.
team. Page Ref: 229-230
Page Ref: 226 Objective: Learning Objective 3
Objective: Learning Objective 3 Difficulty : Moderate
Difficulty : Moderate AACSB: Analyti
AACSB: Analytic

51) Explain the value of penetration testing.

Answer: Penetration testing involves an authorized attempt
by an internal audit team or an external security consultant to
break into the organization's information system. This type of
service is provided by risk management specialists in all the
Big Four accounting firms. These specialists spend more than
half of their time on security matters. The team attempts to
compromise the system using every means possible. With a
combination of systems technology skills and social
engineering, these teams often find weaknesses in systems
that were believed to be secure.
Page Ref: 238
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Reflective Thinking

52) Describe the function of a computer incident response

team (CIRT) and the steps that a CIRT should perform
following a security incident.
Answer: A CIRT is responsible for dealing with major security
incidents and breaches. The team should include technical
specialists and senior operations management. In response to
a security incident, first the CIRT must recognize that a
problem exists. Log analysis, intrusion detection systems can
be used to detect problems and alert the CIRT. Second, the
problem must be contained, perhaps by shutting down a
server or curtailing traffic on the network. Third, the CIRT
must focus on recovery. Corrupt programs may need to be
reinstalled and data restored from backups. Finally, the CIRT
must follow-up to discover how the incident occurred and to
design corrective controls to prevent similar incidents in the
future.
Page Ref: 239
Objective: Learning Objective 3
Difficulty : Moderate
AACSB: Analytic

53) Identify six physical access controls.

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Chapter 9 Information Systems Controls for Systems B) Encryption protects the confidentiality of information
ReliabilityPart 2: Confidentiality and Privacy while in storage.
C) Encryption protects the privacy of information during
1) Concerning virtual private networks (VPN), which of the transmission.
following is not true? D) Encryption provides for both authentication and non-
A) VPNs provide the functionality of a privately owned repudiation.
network using the Internet. Answer: A
B) Using VPN software to encrypt information while it is in Page Ref: 264
transit over the Internet in effect creates private Objective: Learning Objective 3
communication channels, often referred to as tunnels, which Difficulty : Moderate
are accessible only to those parties possessing the AACSB: Analytic
appropriate encryption and decryption keys.
C) The cost of the VPN software is much less than the cost of 5) Using a combination of symmetric and asymmetric key
leasing or buying the infrastructure (telephone lines, satellite encryption, Chris Kai sent a report to her home office in
links, communications equipment, etc.) needed to create a Syracuse, New York. She received an email acknowledgement
privately owned secure communications network. that the document had been received and then, a few
D) It is more expensive to reconfigure VPNs to include new minutes later, she received a second email that indicated that
sites than it is to add or remove the corresponding physical the hash calculated from the report differed from that sent
connections in a privately owned network. with the report. This most likely explanation for this result is
Answer: D that
Page Ref: 264 A) the public key had been compromised.
Objective: Learning Objective 3 B) the private key had been compromised.
Difficulty : Moderate C) the symmetric encryption key had been compromised.
AACSB: Analytic D) the asymmetric encryption key had been compromised.
Answer: C
2) Which of the following is not associated with asymmetric Page Ref: 261
encryption? Objective: Learning Objective 3
A) No need for key exchange Difficulty : Difficult
B) Public keys AACSB: Analytic
C) Private keys
D) Speed 6) Encryption has a remarkably long and varied history. The
Answer: D invention of writing was apparently soon followed by a desire
Page Ref: 260 to conceal messages. One of the earliest methods, attributed
Objective: Learning Objective 3 to an ancient Roman emperor, was the simple substitution of
Difficulty : Easy numbers for letters, for example A = 1, B = 2, etc. This is an
AACSB: Analytic example of
A) a hashing algorithm.
3) The system and processes used to issue and manage B) symmetric key encryption.
asymmetric keys and digital certificates are known as C) asymmetric key encryption.
A) asymmetric encryption. D) a public key.
B) certificate authority. Answer: B
C) digital signature. Page Ref: 260
D) public key infrastructure. Objective: Learning Objective 3
Answer: D Difficulty : Moderate
Page Ref: 262 AACSB: Analytic
Objective: Learning Objective 3
Difficulty : Moderate 7) An electronic document that certifies the identity of the
AACSB: Analytic owner of a particular public key.
A) Asymmetric encryption
4) Which of the following describes one weakness of B) Digital certificate
encryption? C) Digital signature
A) Encrypted packets cannot be examined by a firewall. D) Public key

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Answer: B 12) A process that takes plaintext of any length and
Page Ref: 262 transforms it into a short code.
Objective: Learning Objective 3 A) Asymmetric encryption
Difficulty : Moderate B) Encryption
AACSB: Analytic C) Hashing
D) Symmetric encryption
8) These systems use the same key to encrypt and to decrypt. Answer: C
A) Asymmetric encryption Page Ref: 260
B) Hashing encryption Objective: Learning Objective 3
C) Public key encryption Difficulty : Moderate
D) Symmetric encryption AACSB: Analytic
Answer: D
Page Ref: 260 13) Which of the following descriptions is not associated with
Objective: Learning Objective 3 symmetric encryption?
Difficulty : Easy A) A shared secret key
AACSB: Analytic B) Faster encryption
C) Lack of authentication
9) These are used to create digital signatures. D) Separate keys for each communication party
A) Asymmetric encryption and hashing Answer: C
B) Hashing and packet filtering Page Ref: 260
C) Packet filtering and encryption Objective: Learning Objective 3
D) Symmetric encryption and hashing Difficulty : Moderate
Answer: A AACSB: Analytic
Page Ref: 261
Objective: Learning Objective 3 14) Encryption has a remarkably long and varied history. Spies
Difficulty : Moderate have been using it to convey secret messages ever since there
AACSB: Analytic were secret messages to convey. One powerful method of
encryption uses random digits. Two documents are prepared
10) Information encrypted with the creator's private key that with the same random sequence of numbers. The spy is sent
is used to authenticate the sender is out with one and the spy master retains the other. The digits
A) asymmetric encryption. are used as follows. Suppose that the word to be encrypted is
B) digital certificate. SPY and the random digits are 352. Then S becomes V (three
C) digital signature. letters after S), P becomes U (five letters after P), and Y
D) public key. becomes A (two letters after Y, restarting at A after Z). The
Answer: C spy would encrypt a message and then destroy the document
Page Ref: 261 used to encrypt it. This is an early example of
Objective: Learning Objective 3 A) a hashing algorithm.
Difficulty : Moderate B) asymmetric key encryption.
AACSB: Analytic C) symmetric key encryption.
D) public key encryption.
11) Which of the following is not one of the three important Answer: C
factors determining the strength of any encryption system? Page Ref: 260
A) Key length Objective: Learning Objective 3
B) Key management policies Difficulty : Moderate
C) Encryption algorithm AACSB: Analytic
D) Privacy
Answer: D 15) One way to circumvent the counterfeiting of public keys is
Page Ref: 259 by using
Objective: Learning Objective 3 A) a digital certificate.
Difficulty : Easy B) digital authority.
AACSB: Analytic C) encryption.
D) cryptography.

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Answer: A A) the computer was protected by a password.
Page Ref: 262 B) the computer was insured against theft.
Objective: Learning Objective 3 C) it was unlikely that the thief would know how to access the
Difficulty : Easy company data stored on the computer.
AACSB: Analytic D) the data stored on the computer was encrypted.
Answer: D
16) In a private key system the sender and the receiver have Page Ref: 258
________, and in the public key system they have ________. Objective: Learning Objective 3
A) different keys; the same key Difficulty : Easy
B) a decrypting algorithm; an encrypting algorithm AACSB: Analytic
C) the same key; two separate keys
D) an encrypting algorithm; a decrypting algorithm 20) Jeff Davis took a call from a client. "Jeff, I need to interact
Answer: C online and real time with our affiliate in India, and I want to
Page Ref: 260 make sure that our communications aren't intercepted. What
Objective: Learning Objective 3 do you suggest?" Jeff responded "The best solution will be to
Difficulty : Easy implement
AACSB: Analytic A) a virtual private network."
B) a private cloud environment."
17) Asymmetric key encryption combined with the C) an asymmetric encryption system with digital signatures."
information provided by a certificate authority allows unique D) multifactor authentication."
identification of Answer: A
A) the user of encrypted data. Page Ref: 264
B) the provider of encrypted data. Objective: Learning Objective 3
C) both the user and the provider of encrypted data. Difficulty : Moderate
D) either the user or the provider of encrypted data. AACSB: Analytic
Answer: D
Page Ref: 262 21) In developing policies related to personal information
Objective: Learning Objective 3 about customers, Folding Squid Technologies adhered to the
Difficulty : Moderate Trust Services framework. The standard applicable to these
AACSB: Analytic policies is
A) security.
18) Which of the following is not one of the 10 internationally B) confidentiality.
recognized best practices for protecting the privacy of C) privacy.
customers' personal information? D) availability.
A) Providing free credit report monitoring for customers Answer: C
B) Inform customers of the option to opt-out of data Page Ref: 254
collection and use of their personal information Objective: Learning Objective 2
C) Allow customers' browsers to decline to accept cookies Difficulty : Easy
D) Utilize controls to prevent unauthorized access to, and AACSB: Analytic
disclosure of, customers' information
Answer: A 22) Jeff Davis took a call from a client. "Jeff, I need for my
Page Ref: 256-257 customers to make payments online using credit cards, but I
Objective: Learning Objective 2 want to make sure that the credit card data isn't intercepted.
Difficulty : Moderate What do you suggest?" Jeff responded "The best solution will
AACSB: Analytic be to implement
A) a virtual private network."
19) On March 3, 2008, a laptop computer belonging to B) a private cloud environment."
Folding Squid Technology was stolen from the trunk of Jiao C) an encryption system with digital signatures."
Jan's car while he was attending a conference in Cleveland, D) a data masking program."
Ohio. After reporting the theft, Jiao considered the Answer: C
implications of the theft for the company's network security Page Ref: 261
and concluded there was nothing to worry about because Objective: Learning Objective 2

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Copyright © 2015 Pearson Education, Inc.
Difficulty : Moderate Objective: Learning Objective 1
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
23) Describe some steps you can take to minimize your risk of
identify theft. 2) Error logs and review are an example of
Answer: Shred documents containing personal information. A) data entry controls.
Never send personally identifying information in unencrypted B) data transmission controls.
email. Beware of email/phone/print requests to verify C) output controls.
personal information that the requesting party should already D) processing controls.
possess. Do not carry your social security card with you. Print Answer: A
only your initials and last name on checks. Limit the amount Page Ref: 277
of other information preprinted on checks. Do not use your Objective: Learning Objective 1
mailbox for outgoing mail. Do not carry more than a few Difficulty : Easy
blank checks with you. Use special software to digitally clean AACSB: Analytic
any digital media prior to disposal. Monitor your credit cards
regularly. File a police report as soon as you discover a purse 3) Following is the result of batch control totals on employee
or wallet missing. Make photocopies of driver's license, Social Security Numbers in a payroll processing transaction:
passports and credit cards and keep in a safe location.
Immediately cancel any stolen or lost credit cards. Values Entered
Page Ref: 256 Correct Values During
Objective: Learning Objective 2 From Masterfile Processing
Difficulty : Moderate 487358796 487358796
AACSB: Analytic 534916487 534916487
498374526 498374526
24) Describe symmetric encryption and identify three 514873420 514873420
limitations. 534196487 534916487
Answer: Symmetric encryption systems use the same key to 678487853 678487853
encrypt and decrypt data. Symmetric encryption is much 471230589 471230589
faster than asymmetric encryption, but the sender and 3719438158 3720158158
receiver need to know the shared secret key, which requires
a different secure method of exchanging the key. Also, The difference in the control totals is 720,000. Which data
different secret keys must be used with each different entry control would best prevent similar data entry errors in
communication party. Finally, there is no way to prove who the future?
created a specific document. A) Modulus 11
Page Ref: 260 B) Validity check
Objective: Learning Objective 3 C) Check digit
Difficulty : Moderate D) Sequence check
AACSB: Analytic Answer: C
Page Ref: 277
Objective: Learning Objective 1
Accounting Information Systems, 12e (Romney/Steinbart) Difficulty : Moderate
Chapter 10 Information Systems Controls for Systems AACSB: Analytic
ReliabilityPart 3: Processing Integrity and Availability
4) Which of the following data entry controls would not be
1) The best example of a hash total for a payroll transaction useful if you are recording the checkout of library books by
file could be members?
A) total of employees' social security numbers. A) Sequence check
B) sum of net pay. B) Prompting
C) total number of employees. C) Validity check
D) sum of hours worked. D) Concurrent update control
Answer: A Answer: A
Page Ref: 277 Page Ref: 276

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Objective: Learning Objective 1 7) A data entry input control in which the application
Difficulty : Moderate software sums the first four digits of a customer number to
AACSB: Analytic calculate the value of the fifth digit and then compares the
calculated number to the number typed in during data entry
5) A customer failed to include her account number on her is an example of a
check, and the accounts receivable clerk credited her A) check digit verification.
payment to a different customer with the same last name. B) validity check.
Which control could have been used to most effectively to C) closed-loop verification.
prevent this error? D) duplicate data check.
A) Closed-loop verification Answer: A
B) Duplicate values check Page Ref: 277
C) Validity check Objective: Learning Objective 1
D) Reconciliation of a batch control total Difficulty : Easy
Answer: A AACSB: Analytic
Page Ref: 277
Objective: Learning Objective 1 8) All of the following controls for online entry of a sales
Difficulty : Easy order would be useful except
AACSB: Analytic A) check digit verification on the dollar amount of the order.
B) validity check on the inventory item numbers.
6) If invoices are processed in groups of fifty, which fields C) field check on the customer ID and dollar amount of the
from the document shown below would not be used to order.
create a hash control total? 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

A) Amount 10) When processing weekly payroll, an employee

B) Item Number accidentally entered 400 for hours worked. The best data
C) Quantity Ordered entry control for this error would be
D) Sales Order number A) a limit check.
Answer: A B) a check digit.
Page Ref: 277 C) batch total reconciliation.
Objective: Learning Objective 1 D) a field check.
Difficulty : Easy Answer: A
AACSB: Reflective Thinking Page Ref: 276

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Objective: Learning Objective 1 B) data transmission control.
Difficulty : Easy C) output control.
AACSB: Analytic D) input control.
Answer: A
11) The data entry control that would best prevent entering Page Ref: 276
an invoice received from a vendor who is not on an Objective: Learning Objective 1
authorized supplier list is Difficulty : Easy
A) a validity check. AACSB: Analytic
B) an authorization check.
C) a check digit. 16) Parity checks are an example of a(n)
D) closed-loop verification. A) data entry control.
Answer: A B) data transmission control.
Page Ref: 276 C) output control.
Objective: Learning Objective 1 D) processing control.
Difficulty : Easy Answer: B
AACSB: Analytic Page Ref: 279
Objective: Learning Objective 1
12) Forms design is an example of this type of control. Difficulty : Easy
A) Data entry control AACSB: Analytic
B) Processing control
C) Output control 17) User reviews are an example of a(n)
D) Input control A) data entry control.
Answer: D B) data transmission control.
Page Ref: 276 C) output control.
Objective: Learning Objective 1 D) processing control.
Difficulty : Easy Answer: C
AACSB: Analytic Page Ref: 278
Objective: Learning Objective 1
13) Sequentially prenumbered forms is an example of a(n) Difficulty : Easy
A) data entry control. AACSB: Analytic
B) data transmission control.
C) processing control. 18) Data matching is an example of a(n)
D) input control. A) data entry control.
Answer: D B) data transmission control.
Page Ref: 276 C) processing control.
Objective: Learning Objective 1 D) input control.
Difficulty : Easy Answer: C
AACSB: Analytic Page Ref: 277
Objective: Learning Objective 1
14) Turnaround documents are an example of a(n) Difficulty : Easy
A) data entry control. AACSB: Analytic
B) output control.
C) processing control. 19) Batch totals are an example of a(n)
D) input control. A) data entry control.
Answer: D B) data transmission control.
Page Ref: 276 C) output control.
Objective: Learning Objective 1 D) processing control.
Difficulty : Easy Answer: A
AACSB: Analytic Page Ref: 277
Objective: Learning Objective 1
15) A validity check is an example of a(n) Difficulty : Moderate
A) data entry control. AACSB: Analytic

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 A) Completeness check
20) Cancellation and storage of documents means that B) Field check
A) data are copied from a document and stored, after which C) Limit check
the document is shredded. D) Range check
B) documents are defaced before being shredded. Answer: A
C) documents are defaced and stored. Page Ref: 276
D) cancellation data are copied from documents before they Objective: Learning Objective 1
are stored. Difficulty : Easy
Answer: C AACSB: Analytic
Page Ref: 276
Objective: Learning Objective 1 25) This determines the correctness of the logical relationship
Difficulty : Moderate between two data items.
AACSB: Analytic A) Range check
B) Reasonableness test
21) Check digit verification is an example of a(n) C) Sign check
A) data transmission control. D) Size check
B) output control. Answer: B
C) processing control. Page Ref: 276
D) input control. Objective: Learning Objective 1
Answer: D Difficulty : Easy
Page Ref: 277 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 26) This determines if characters are of the proper type.
AACSB: Analytic A) Field check
B) Alpha-numeric check
22) This ensures that the input data will fit into the assigned C) Range check
field. D) Reasonableness test
A) Limit check Answer: A
B) Range check Page Ref: 276
C) Size check Objective: Learning Objective 1
D) Validity check Difficulty : Easy
Answer: C AACSB: Analytic
Page Ref: 276
Objective: Learning Objective 1 27) This tests a numerical amount to ensure that it does not
Difficulty : Easy exceed a predetermined value.
AACSB: Analytic A) Completeness check
B) Limit check
23) This tests a numerical amount to ensure that it does not C) Range check
exceed a predetermined value nor fall below another D) Sign check
predetermined value. Answer: B
A) Completeness check Page Ref: 276
B) Field check Objective: Learning Objective 1
C) Limit check Difficulty : Easy
D) Range check AACSB: Analytic
Answer: D
Page Ref: 276 28) This batch processing data entry control sums a field that
Objective: Learning Objective 1 contains dollar values.
Difficulty : Easy A) Record count
AACSB: Analytic B) Financial total
C) Hash total
24) This determines if all required data items have been D) Sequence check
entered. Answer: B

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Page Ref: 277 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 33) This data entry control compares the ID number in
AACSB: Analytic transaction data to a master file to verify that the ID number
exists.
29) This batch processing data entry control sums a non- A) Reasonableness test
financial numeric field. B) User review
A) Record count C) Data matching
B) Financial total D) Validity check
C) Hash total Answer: D
D) Sequence check Page Ref: 276
Answer: C Objective: Learning Objective 1
Page Ref: 277 Difficulty : Easy
Objective: Learning Objective 1 AACSB: Analytic
Difficulty : Easy
AACSB: Analytic 34) File labels are an example of
A) data entry controls.
30) When I enter a correct customer number, the data entry B) output controls.
screen displays the customer name and address. This is an C) processing controls.
example of D) source data controls.
A) prompting. Answer: C
B) preformatting. Page Ref: 277
C) closed-loop verification. Objective: Learning Objective 1
D) error checking. Difficulty : Easy
Answer: C AACSB: Analytic
Page Ref: 277
Objective: Learning Objective 1 35) A computer operator accidentally used the wrong master
Difficulty : Easy file when updating a transaction file. As a result, the master
AACSB: Analytic file data is now unreadable. Which control could best have
prevented this from happening?
31) This control ensures that the correct and most current A) Internal header label
files are being updated. B) Validity check
A) Cross-footing balance test C) Check digit
B) Data matching D) Parity check
C) File labels Answer: A
D) Write-protect mechanism Page Ref: 277
Answer: C Objective: Learning Objective 1
Page Ref: 277 Difficulty : Easy
Objective: Learning Objective 1 AACSB: Analytic
Difficulty : Moderate
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
32) This batch processing data entry control sums the number is locked for editing. What's going on?" The answer is likely
of items in a batch. that
A) Financial total A) the file is corrupted due to a computer virus.
B) Hash total B) there is no problem. Chaz is editing the file, so it is locked.
C) Record count C) concurrent update controls have locked the file.
D) Sequence check D) Chaz probably opened the file as read-only.
Answer: C Answer: C
Page Ref: 277 Page Ref: 278
Objective: Learning Objective 1 Objective: Learning Objective 1
Difficulty : Easy Difficulty : Moderate

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AACSB: Analytic B) zero-balance test.
C) trial balance audit.
37) This control protects records from errors that occur when D) cross-footing balance test.
two or more users attempt to update the same record Answer: B
simultaneously. Page Ref: 278
A) Concurrent update controls Objective: Learning Objective 1
B) Cross-footing balance test Difficulty : Moderate
C) Data conversion controls AACSB: Analytic
D) Recalculation of batch totals
Answer: A 41) What is the most effective way to ensure information
Page Ref: 278 system availability?
Objective: Learning Objective 1 A) High bandwidth
Difficulty : Easy B) Maintain a hot site
AACSB: Analytic C) Maintain a cold site
D) Frequent backups
38) Modest Expectations Investment Services (MEIS) allows Answer: B
customers to manage their investments over the Internet. If Page Ref: 287
customers attempt to sell more shares of a stock than they Objective: Learning Objective 2
have in their account, an error message is displayed. This is an Difficulty : Easy
example of a AACSB: Analytic
A) reasonableness test.
B) field check. 42) Concerning system availability, which of the following
C) validity check. statements is true?
D) limit check. A) Human error does not threaten system availability.
Answer: A B) Proper controls can maximize the risk of threats causing
Page Ref: 276 significant system downtime.
Objective: Learning Objective 1 C) Threats to system availability can be completely
Difficulty : Moderate eliminated.
AACSB: Analytic D) Threats to system availability include hardware and
software failures as well as natural and man-made disasters.
39) Modest Expectations Investment Services (MEIS) allows Answer: D
customers to manage their investments over the Internet. If Page Ref: 284
customers attempt to spend more money than they have in Objective: Learning Objective 2
their account, an error message is displayed. This is an Difficulty : Easy
example of a AACSB: Analytic
A) reasonableness test.
B) field check. 43) Which of the following is not an objective of a disaster
C) validity check. recovery plan?
D) limit check. A) Minimize the extent of the disruption, damage or loss.
Answer: A B) Permanently establish an alternative means of processing
Page Ref: 276 information.
Objective: Learning Objective 1 C) Resume normal operations as soon as possible.
Difficulty : Moderate D) Train employees for emergency operations.
AACSB: Analytic Answer: B
Page Ref: 287
40) The Spontaneous Combustion Rocket Shoppe in Objective: Learning Objective 2
downtown Fargo, North Dakota, generates three quarters of Difficulty : Easy
its revenue from orders taken over the Internet. The revenue AACSB: Analytic
clearing account is debited by the total of cash and credit
receipts and credited by the total of storefront and Internet 44) Which item below would not typically be part of an
sales. This is an example of a adequate disaster recovery plan?
A) data integrity test. A) a system upgrade due to operating system software

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changes A) An incremental backup procedure
B) uninterruptible power systems installed for key system B) Fault tolerance
components C) Preventive maintenance
C) scheduled electronic vaulting of files D) A concurrent update control
D) backup computer and telecommunication facilities Answer: B
Answer: A Page Ref: 284
Page Ref: 287 Objective: Learning Objective 2
Objective: Learning Objective 2 Difficulty : Moderate
Difficulty : Easy AACSB: Analytic
AACSB: Analytic
49) A copy of a database, master file, or software that will be
45) A facility that contains all the computing equipment the retained indefinitely as a historical record is known as a(n)
organization needs to perform its essential business activities A) archive.
is known as a B) cloud computing.
A) cold site. C) differential backup.
B) hot site. D) incremental backup.
C) remote site. Answer: A
D) subsidiary location. Page Ref: 286
Answer: B Objective: Learning Objective 2
Page Ref: 287 Difficulty : Easy
Objective: Learning Objective 2 AACSB: Analytic
Difficulty : Easy
AACSB: Analytic 50) While this type of backup process takes longer than the
alternative, restoration is easier and faster.
46) A facility that is pre-wired for necessary A) Archive
telecommunications and computer equipment, but doesn't B) Cloud computing
have equipment installed, is known as a C) Differential backup
A) cold site. D) Incremental backup
B) hot site. Answer: C
C) remote site. Page Ref: 286
D) subsidiary location. Objective: Learning Objective 2
Answer: A Difficulty : Moderate
Page Ref: 287 AACSB: Analytic
Objective: Learning Objective 2
Difficulty : Easy 51) ________ involves copying only the data items that have
AACSB: Analytic changed since the last partial backup.
A) Archive
47) When a computer system's files are automatically B) Cloud computing
duplicated on a second data storage system as they are C) Differential backup
changed, the process is referred to as D) Incremental backup
A) real-time mirroring. Answer: D
B) batch updating. Page Ref: 285
C) consistency control. Objective: Learning Objective 2
D) double-secure storage. Difficulty : Easy
Answer: A AACSB: Analytic
Page Ref: 287
Objective: Learning Objective 2 52) ________ copies all changes made since the last full
Difficulty : Easy backup.
AACSB: Analytic A) Archive
B) Cloud computing
48) ________ enables a system to continue functioning in the C) Differential backup
event that a particular component fails. D) Incremental backup

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Answer: C A) 1 hour
Page Ref: 286 B) 2 hours
Objective: Learning Objective 2 C) 3 hours
Difficulty : Easy D) 4 hours
AACSB: Analytic Answer: C
Page Ref: 285
53) The maximum amount of time between backups is Objective: Learning Objective 2
determined by a company's Difficulty : Easy
A) recovery time objective. AACSB: Analytic
B) recovery point objective.
C) recovery objective. 57) The accounting department at Synergy Hydroelectric
D) maximum time recovery objective. records an average of 10,000 transactions per hour. By cost-
Answer: B benefit analysis, managers have concluded that the maximum
Page Ref: 285 acceptable loss of data in the event of a system failure is
Objective: Learning Objective 2 40,000 transactions. The firm's recovery point objective is
Difficulty : Moderate therefore
AACSB: Analytic A) 40,000 transactions
B) 10,000 transactions
54) The maximum acceptable down time after a computer C) 10 hours
system failure is determined by a company's D) 4 hours
A) recovery time objective. Answer: D
B) recovery point objective. Page Ref: 285
C) recovery objective. Objective: Learning Objective 2
D) maximum time recovery objective. Difficulty : Easy
Answer: A AACSB: Analytic
Page Ref: 285
Objective: Learning Objective 2 58) The accounting department at Synergy Hydroelectric
Difficulty : Moderate records an average of 12,500 transactions per hour. By cost-
AACSB: Analytic benefit analysis, managers have concluded that the maximum
acceptable loss of data in the event of a system failure is
55) The accounting department at Synergy Hydroelectric 25,000 transactions. The firm's recovery point objective is
records an average of 12,500 transactions per hour. By cost- therefore
benefit analysis, managers have concluded that the maximum A) 25,000 transactions
acceptable loss of data in the event of a system failure is B) 12,500 transactions
25,000 transactions. If the firm's recovery time objective is C) 1 hour
120 minutes, then the worst case recovery time objective is D) 2 hours
A) 1 hour Answer: D
B) 2 hours Page Ref: 285
C) 3 hours Objective: Learning Objective 2
D) 4 hours Difficulty : Easy
Answer: D AACSB: Analytic
Page Ref: 285
Objective: Learning Objective 2 59) This control entails verifying that the proper number of
Difficulty : Easy bits are set to the value 1 in each character received.
AACSB: Analytic A) Echo check
B) Field check
56) The accounting department at Synergy Hydroelectric C) Parity check
records an average of 10,000 transactions per hour. By cost- D) Trailer record
benefit analysis, managers have concluded that the maximum Answer: C
acceptable loss of data in the event of a system failure is Page Ref: 279
20,000 transactions. If the firm's recovery time objective is 60 Objective: Learning Objective 1
minutes, then the worst case recovery time objective is Difficulty : Easy

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AACSB: Analytic transaction data. A recovery time objective is the maximum
amount of time that a firm is willing to risk losing access to its
60) Probably the most important change management accounting information system due to disaster.
control is Page Ref: 285
A) monitoring user rights and privileges during the change Objective: Learning Objective 2
process. Difficulty : Moderate
B) testing all changes thoroughly prior to implementation on AACSB: Analytic
a stand-alone computer.
C) updating all documentation to reflect changes made to the
system. Accounting Information Systems, 12e (Romney/Steinbart)
D) management's careful monitoring and review. Chapter 12 (CHAP 6) The Revenue Cycle: Sales to Cash
Answer: D Collections
Page Ref: 289
Objective: Learning Objective 2 1) In organizations with at least basic segregation of duties,
Difficulty : Easy the credit manager reports to the ________ and the treasurer
AACSB: Analytic reports to the ________.
A) controller; vice president of finance
61) Which of the following is true? B) treasurer; controller
A) Cloud computing is a control technique for system C) marketing manager; vice president of finance
availability. D) treasurer; vice president of finance
B) Cloud computing eliminates the need for backup of Answer: D
applications and data. Page Ref: 331
C) Cloud computing refers to the practice of storing Objective: Learning Objective 1
application files and backup data on satellites 'in the clouds'. Difficulty : Moderate
D) Cloud computing eliminates the need for companies to AACSB: Analytic
own their own software and servers.
Answer: A 2) In the revenue cycle, before a shipping notice is prepared,
Page Ref: 288 the shipping department personnel should match the
Objective: Learning Objective 2 inventory received from the warehouse to details from
Difficulty : Easy A) picking tickets.
AACSB: Analytic B) sales order and bill of lading.
C) sales order.
62) Discuss how cloud computing could both positively and D) picking ticket and sales order.
negatively affect system availability. Answer: D
Answer: Cloud computing significantly reduces the risk that a Page Ref: 345
single event would result in system unavailability, since the Objective: Learning Objective 3
'cloud' consists of banks of redundant servers, in multiple Difficulty : Moderate
locations. However, since users don't own the cloud, if a AACSB: Analytic
provider goes out of business, users may find it very difficult
to access applications and data stored in the cloud. 3) Which is the best control to prevent invoicing customers
Additionally, users should evaluate the security and for the quantity ordered, which was more than the quantity
availability controls of the cloud provider before transacting shipped due to items on backorder?
business. A) Use the information from the packing slip to prepare the
Page Ref: 288 sales invoice.
Objective: Learning Objective 2 B) Use the information from the picking ticket to prepare the
Difficulty : Easy sales invoice.
AACSB: Analytic C) Use the information from the bill of lading to prepare the
sales invoice.
63) Define and contrast a recovery point objective and a D) Use the information from the sales order to prepare the
recovery time objective. sales invoice.
Answer: A recovery point objective is the maximum amount Answer: A
of time that a firm is willing to risk the possible loss of Page Ref: 350

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Objective: Learning Objective 3 AACSB: Analytic
Difficulty : Easy
AACSB: Reflective Thinking 8) A monthly statement sent to customers serves a control
purpose by
4) The cashier deposits checks in the bank for Very Large A) providing an opportunity for customers to verify the
Corporation (VLC) and also prepares payments to vendors. Of balance owed and activity on the account.
the following, who is best to reconcile the bank statement to B) triggering the process to record a customer payment.
VLC's records on a regular basis? C) summarizing invoices and amounts due for customers.
A) Internal audit department D) reminding customers of the balance due and due date.
B) Treasurer Answer: A
C) External auditor Page Ref: 355
D) Cashier Objective: Learning Objective 3
Answer: A Difficulty : Moderate
Page Ref: 355 AACSB: Reflective Thinking
Objective: Learning Objective 3
Difficulty : Moderate 9) Accounting recognizes a sale when
AACSB: Analytic A) inventory becomes the legal property of the customer.
B) cash is received from the customer.
5) Which of the following documents normally triggers the C) a sales order is approved by sales, inventory control, and
billing process in the revenue cycle? credit departments.
A) Packing slip received from the shipping department D) inventory is removed from the warehouse.
B) Sales order received from the sales department Answer: A
C) Picking ticket received from the sales department Page Ref: 345
D) Journal voucher received from the shipping department Objective: Learning Objective 1
Answer: A Difficulty : Moderate
Page Ref: 348 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 10) Which of the following is not one of the controls for the
AACSB: Analytic mail room where customer payments are commingled with
other mail?
6) Which of the following documents would normally trigger A) Requiring the controller to be personally present when
the process to record a customer payment? mail is received and opened
A) Remittance advice B) Preparing a remittance list as mail is opened
B) Customer monthly statement C) Restrictively endorsing checks when received
C) Deposit slip D) Requiring two mail room clerks to open mail together
D) Sales invoice Answer: A
Answer: A Page Ref: 337
Page Ref: 353 Objective: Learning Objective 3
Objective: Learning Objective 1 Difficulty : Easy
Difficulty : Easy AACSB: Analytic
AACSB: Analytic
11) What is the primary objective of the revenue cycle?
7) Which document should always be included with a A) to maximize revenue and minimize expense
merchandise shipment to a customer? B) to reduce outstanding accounts receivable balances
A) Packing slip through increased cash sales
B) Picking ticket C) to provide the right product in the right place at the right
C) Remittance advice time at the right price
D) Sales invoice D) to sell as much product as possible and/or to maximize
Answer: A service billings
Page Ref: 345 Answer: C
Objective: Learning Objective 1 Page Ref: 332
Difficulty : Easy Objective: Learning Objective 1

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Difficulty : Easy Difficulty : Easy
AACSB: Analytic AACSB: Analytic

12) Which of the decisions below is not ordinarily found as 16) During the sales order entry process, a ________ is
part of the revenue cycle? performed to compare the quantity ordered with the
A) What credit terms should be offered? standard amounts normally ordered.
B) How often should accounts receivable be subjected to A) completeness test
audit? B) redundant data check
C) How can customer payments be processed to maximize C) field check
cash flows? D) reasonableness test
D) What are the optimal prices for each product or service? Answer: D
Answer: B Page Ref: 339
Page Ref: 332-333 Objective: Learning Objective 3
Objective: Learning Objective 2 Difficulty : Easy
Difficulty : Easy AACSB: Analytic
AACSB: Analytic
17) During the sales order entry process, a ________ is
13) Which of the following is not a basic activity of the performed to verify that each transaction record contains all
revenue cycle? appropriate data items.
A) sales order entry A) completeness test
B) shipping B) redundant data check
C) receiving C) field check
D) billing D) reasonableness test
Answer: C Answer: A
Page Ref: 333 Page Ref: 339
Objective: Learning Objective 1 Objective: Learning Objective 3
Difficulty : Easy Difficulty : Easy
AACSB: Analytic AACSB: Analytic

14) Retail stores could send their orders directly to the 18) When a customer places an order (on account) for a
manufacturer's sales order system in a format that would certain product, what should be done before the order is
eliminate the need for data entry, using checked for inventory availability?
A) Vendor Managed Inventory. A) The customer's available credit should be checked.
B) Electronic Data Interchange. B) The sales order should be created and written to a file.
C) Point Of Sale. C) Shipping should be notified of an order in process.
D) Electronic Funds Transfer. D) A picking list should be generated for the warehouse.
Answer: B Answer: A
Page Ref: 338 Page Ref: 335
Objective: Learning Objective 1 Objective: Learning Objective 1
Difficulty : Easy Difficulty : Easy
AACSB: Analytic AACSB: Analytic

15) Matching customer account numbers and inventory item 19) How is credit approval generally handled for established
numbers to the numbers in the customer and inventory customers with a documented payment history?
master files is an example of a A) Specific authorization by the credit manager
A) completeness test. B) General authorization by a sales clerk
B) field check. C) A new credit application is requested
C) reasonableness test. D) A formal credit check should be made for each sale
D) validity check. Answer: B
Answer: D Page Ref: 340
Page Ref: 339 Objective: Learning Objective 1
Objective: Learning Objective 3 Difficulty : Easy

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AACSB: Analytic inventory records.
D) RFID tags.
20) What is a typical procedure for processing sales orders Answer: D
from new customers or customers making a purchase that Page Ref: 342
causes their credit limit to be exceeded? Objective: Learning Objective 3
A) General authorization to approve the order is given to Difficulty : Easy
sales clerks. AACSB: Analytic
B) Specific authorization must be granted by the credit
manager. 24) This document is a legal contract that defines
C) The sale should be rejected. responsibility for goods that are in transit.
D) The sales clerk should order a report from a credit bureau A) packing slip
before approving the order. B) bill of lading
Answer: B C) picking list
Page Ref: 340 D) back order
Objective: Learning Objective 1 Answer: B
Difficulty : Easy Page Ref: 345
AACSB: Analytic Objective: Learning Objective 1
Difficulty : Easy
21) A company should check inventory quantities before AACSB: Analytic
accepting a sales order for all the following reasons except to
A) verify the accuracy of the perpetual inventory records. 25) Two documents usually accompany goods shipped to a
B) inform the customer about availability and delivery times. customer. What are the two documents?
C) know which items may need to be back ordered. A) a bill of lading and an invoice
D) update inventory records to reduce the quantity available B) a packing slip and a bill of lading
by the number of items ordered. C) an invoice and a packing slip
Answer: A D) an invoice and a sales order
Page Ref: 341-342 Answer: B
Objective: Learning Objective 1 Page Ref: 345
Difficulty : Moderate Objective: Learning Objective 1
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
22) Responding to customer inquiries and general customer
service is an important aspect in the revenue cycle. Since 26) What is the basic document created in the billing
customer service is so important, software programs have process?
been created to help manage this function. These special A) bill of lading
software packages are called B) sales order
A) EDI systems. C) packing list
B) POS systems. D) sales invoice
C) VMI systems. Answer: D
D) CRM systems. Page Ref: 349
Answer: D Objective: Learning Objective 1
Page Ref: 343 Difficulty : Easy
Objective: Learning Objective 1 AACSB: Analytic
Difficulty : Moderate
AACSB: Analytic 27) A company uses the method for tracking accounts
receivable where customers pay according to individual sales
23) The best solution for maintaining accurate automated invoices. This describes the ________ method.
perpetual inventory system is to use A) monthly statement
A) closed-loop verification when inventory is received from B) open-invoice
vendors and recorded. C) balance forward
B) point of sale devices integrated with inventory records. D) cycle billing
C) periodic physical counts to reconcile with perpetual Answer: B

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Page Ref: 350 Page Ref: 351
Objective: Learning Objective 1 Objective: Learning Objective 1
Difficulty : Moderate Difficulty : Moderate
AACSB: Analytic AACSB: Reflective Thinking

28) A method for tracking accounts receivable that matches 32) A type of business document in which part of the original
specific invoices and payments from the customer is called document is returned to the source for further processing is
a(n) ________ method. called a ________ document.
A) specific identification A) feedback
B) balance forward B) returnable
C) cycle billing C) closed-loop
D) open-invoice D) turnaround
Answer: D Answer: D
Page Ref: 350 Page Ref: 350
Objective: Learning Objective 1 Objective: Learning Objective 1
Difficulty : Moderate Difficulty : Easy
AACSB: Analytic AACSB: Analytic

29) The document a customer returns with their payment and 33) A document typically encountered in the revenue cycle
that identifies the source and the amount of the payment is that is both an output document and a source document is
called a the
A) remittance advice. A) sales invoice.
B) remittance list. B) customer purchase order.
C) credit memorandum. C) sales order.
D) debit memorandum. D) packing slip.
Answer: A Answer: A
Page Ref: 350 Page Ref: 349
Objective: Learning Objective 1 Objective: Learning Objective 1
Difficulty : Easy Difficulty : Moderate
AACSB: Analytic AACSB: Analytic

30) In the ________ method of tracking accounts receivable, 34) A ________ system prepares and mails monthly
customers pay according to the amount showing on their statements to customers throughout the entire month,
monthly statement and payments are applied against the instead of just at the end of the month.
total account balance. A) continuous
A) specific identification B) open-invoice
B) open-invoice C) cycle billing
C) balance forward D) balance forward
D) remittance advice Answer: C
Answer: C Page Ref: 351
Page Ref: 350 Objective: Learning Objective 1
Objective: Learning Objective 1 Difficulty : Easy
Difficulty : Moderate AACSB: Analytic
AACSB: Analytic
35) The accounts receivable department must know when
31) When a customer pays off the balance on an invoice, the customers pay their invoices, yet segregation of duties
payment is credited to the ________ file. controls dictate that the collection and recording functions be
A) customer master kept separate from each other. What is a solution to this
B) sales transaction potential internal control problem?
C) cash receipts master A) Have customers send a remittance advice with their
D) All of the above are correct. payment.
Answer: A B) Have mailroom personnel prepare a remittance list which

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can be forwarded to accounts receivable. Interchange with the Electronic Funds Transfer is
C) Establish a lockbox arrangement with a bank. A) Financial Electronic Data Interchange.
D) all of the above B) e-commerce.
Answer: D C) to use procurement cards.
Page Ref: 353-354 D) an electronic lockbox.
Objective: Learning Objective 3 Answer: A
Difficulty : Moderate Page Ref: 354
AACSB: Analytic Objective: Learning Objective 3
Difficulty : Easy
36) The benefits of a lockbox arrangement with a bank are AACSB: Analytic
maximized when
A) the bank is located nearby to the company, so remittance 40) Key differences exist when an integrated Enterprise
advices can be delivered to the company every day. Resource Planning system (ERP) replaces an existing AIS or
B) several banks around the country are used, in order to legacy system. For example, ________ are more accurate and
minimize the time payments spend in the mail. timely, enabling sales order entry staff to provide customers
C) an arrangement is made with only one bank, so all more accurate information about delivery dates.
remittance advices can be batched for processing. A) inventory records
D) the bank deposits the payments and accesses the B) cash receipts
customer's information system to record the payments. C) credit approval decisions
Answer: B D) exception reports
Page Ref: 354 Answer: A
Objective: Learning Objective 3 Page Ref: 342
Difficulty : Moderate Objective: Learning Objective 2
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
37) An arrangement where a bank receives customer
payments through the postal system, scans the remittance 41) When an ERP is used, it is assumed that there will be
advices, and transmits payment data to the business increases in efficiency and the effectiveness of the activities
electronically is known as related to the revenue cycle. However, what must be in place
A) e-commerce. and functioning well to fully realize these benefits?
B) an electronic lockbox. A) an effective marketing staff
C) electronic funds transfer (EFT). B) all the components of the expenditure cycle
D) electronic data interchange (EDI). C) adequate controls
Answer: B D) adequate system flowchart documentation
Page Ref: 354 Answer: C
Objective: Learning Objective 3 Page Ref: 335
Difficulty : Moderate Objective: Learning Objective 3
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
38) Customers that send their payments electronically
directly to the company's bank are using 42) The activities involved in soliciting and processing
A) electronic data interchange (EDI). customer orders within the revenue cycle are known as the
B) electronic funds transfer (EFT). ________.
C) procurement cards. A) sales order entry process
D) an electronic lockbox. B) shipping order process
Answer: B C) revenue process
Page Ref: 354 D) marketing process
Objective: Learning Objective 3 Answer: A
Difficulty : Moderate Page Ref: 337
AACSB: Analytic Objective: Learning Objective 1
Difficulty : Easy
39) A way to incorporate the advantages of Electronic Data AACSB: Analytic

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43) To ensure proper segregation of duties, only the Difficulty : Easy
________ has authority to issue credit memos. AACSB: Analytic
A) accounts receivable supervisor
B) controller 47) Separating the shipping and billing functions is designed
C) credit manager to reduce the threat of
D) cashier A) failure to bill customers.
Answer: C B) billing customers for wrong quantities.
Page Ref: 352 C) billing customers before merchandise has been shipped.
Objective: Learning Objective 3 D) shipping the wrong merchandise.
Difficulty : Moderate Answer: A
AACSB: Analytic Page Ref: 350
Objective: Learning Objective 3
44) It has been discovered that credit sales have been made Difficulty : Moderate
to customers with a poor credit rating. If this continues, the AACSB: Reflective Thinking
company will face increasing uncollectible receivables and
losses due to bad debts. Separation of duties between 48) All of the following edit checks for online editing of
________ and ________ should help resolve the problem. accounts receivable transactions would probably be included
A) shipping; billing duties except
B) credit approval; marketing A) validity checks on customer ID and invoice numbers.
C) billing; credit approval B) check digit verification on the amount of the sale.
D) marketing; accounts receivable C) closed loop verification on the customer ID.
Answer: B D) field checks on the values in dollar fields.
Page Ref: 340 Answer: B
Objective: Learning Objective 3 Page Ref: 352
Difficulty : Moderate Objective: Learning Objective 3
AACSB: Analytic Difficulty : Moderate
AACSB: Reflective Thinking
45) Consider the following revenue cycle scenario: The
company has been exposed to customer dissatisfaction and 49) When a proper segregation of duties exists in the area of
the suggested control procedure to be implemented is to handling cash receipts, the ________, who reports to the
install and use bar-code scanners. What is the threat? ________, actually handles the cash and is not the same
A) The company may be shipping the wrong merchandise. person who posts cash receipts to customer accounts.
B) The company may be shipping the wrong quantities of A) cashier; treasurer
merchandise. B) cashier; controller
C) The company may be shipping orders to the wrong C) accountant; treasurer
address. D) accountant; controller
D) All of the above threats may apply to this scenario. Answer: A
Answer: A Page Ref: 355
Page Ref: 345 Objective: Learning Objective 3
Objective: Learning Objective 3 Difficulty : Moderate
Difficulty : Moderate AACSB: Analytic
AACSB: Reflective Thinking
50) In a revenue cycle with proper controls, the ________
46) Which of the following would be the least effective who reports to the ________, is not involved in any cash
control to minimize the loss of inventory? handling activities.
A) Secure the storage location of inventory. A) accounts receivable clerk; treasurer
B) Release inventory only with proper documentation. B) accounts receivable clerk; controller
C) Periodically back up all perpetual inventory records. C) cashier; controller
D) Reconcile the physical counts with and perpetual records. D) cashier; treasurer
Answer: C Answer: B
Page Ref: 345 Page Ref: 355
Objective: Learning Objective 3 Objective: Learning Objective 3

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Difficulty : Moderate B) validity check.
AACSB: Analytic C) limit check.
D) closed-loop verification.
51) A serious exposure in the revenue cycle is loss of assets. Answer: A
What is the related threat and applicable control procedure Page Ref: 339
that address this exposure? Objective: Learning Objective 3
A) shipping errors; reconciliation of sales order with picking Difficulty : Easy
ticket and packing slip AACSB: Reflective Thinking
B) theft of cash; segregation of duties and minimization of
cash handling 55) The manager of Callow Youth Clothing was entering an
C) making sales that turn out to be uncollectible; force sales order online from Sad Clown Pajamas. He entered all the
people to make collection calls on customers with past due items and quantities, completed the checkout and payment
balances process, but the following error message popped up when he
D) poor performance; preparation and review of performance tried to exit the site: "Please enter your email address." This
reports message is likely the result of a
Answer: B A) customer relationship management software application.
Page Ref: 337 B) validity check.
Objective: Learning Objective 3 C) completeness test.
Difficulty : Moderate D) closed-loop verification.
AACSB: Analytic Answer: C
Page Ref: 339
52) Which of the following duties could be performed by the Objective: Learning Objective 3
same individual and not violate segregation of duty controls? Difficulty : Easy
A) handling cash and posting to customer accounts AACSB: Reflective Thinking
B) issuing credit memos and maintaining customer accounts
C) handling cash and authorizing credit memos 56) Sad Clown Pajamas is an Internet-based wholesaler.
D) handling cash receipts and mailing vendor payments Customers enter their orders online. The manager of Callow
Answer: D Youth Clothing was entering an order when the following
Page Ref: 355 error message popped up: "Your total order exceeds your
Objective: Learning Objective 3 available credit. A Credit Department representative will
Difficulty : Moderate contact you within 24 hours." This message is the result of a
AACSB: Reflective Thinking A) validity check.
B) reasonableness test.
53) To prevent the loss of valuable data in the revenue cycle, C) limit check.
internal file labels can be used to D) sign check.
A) keep competitors from accessing files. Answer: C
B) record off-site storage locations. Page Ref: 340
C) organize the on-site physical storage site. Objective: Learning Objective 3
D) reduce the possibility of erasing important files. Difficulty : Moderate
Answer: D AACSB: Reflective Thinking
Page Ref: 277, 335
Objective: Learning Objective 3 57) In Petaluma, California, electric power is provided to
Difficulty : Easy consumers by the Power To The People Electrical Company, a
AACSB: Analytic local co-op. Each month PTTP mails bills to 70,000 households
and then processes payments as they are received. The
54) The manager of Callow Youth Clothing was entering an customers are provided with a remittance advice, which is a
order online from Sad Clown Pajamas. He ordered 100 one- A) warning that failure to pay by the due date will result in a
size fits all pajama bottoms, but when he ordered 1000 one- late charge.
size fits all pajama tops, the following error message popped B) confirmation of the firm's privacy policy.
up: "Did you mean to enter a quantity of 1000 for your C) turnaround document.
order?" This message is the result of a D) bill.
A) reasonableness test. Answer: C

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Page Ref: 350 61) A customer service manager at Sad Clown Pajamas, Bob,
Objective: Learning Objective 1 received a call from the manager at Callow Youth Clothing,
Difficulty : Easy who informed Bob that Callow was entering bankruptcy
AACSB: Analytic liquidation and it was unlikely that they would be able to pay
the outstanding balance on their account. Bob should
58) Laz Chance wears roller blades and headphones when he A) document the phone conversation and forward it to the
is at work at the Squishy Things Toy Company. He is a product billing department manager.
packer. The headphones give him computer-generated B) prepare a credit memo.
instructions so he knows the location of each item and C) approve a credit memo.
quantity that should be included in the order. These D) document the phone conversation and forward it to the
instructions are the equivalent of a credit department manager.
A) picking ticket. Answer: D
B) bill of lading. Page Ref: 352
C) packing slip. Objective: Learning Objective 1
D) sales order. Difficulty : Difficult
Answer: A AACSB: Reflective Thinking
Page Ref: 342
Objective: Learning Objective 1 62) Because it is the most fungible of all assets, the
Difficulty : Easy management of cash has always been the most difficult of all
AACSB: Analytic control issues. The most important of cash controls is
A) minimization of cash handling.
59) The shipping department at Squishy Things Toy Company B) lockbox arrangements.
follows policies that determine which carrier will deliver C) segregation of duties.
orders according to the size, weight, and destination of the D) frequent reconciliation of records.
shipment. It maintains standing agreements with shippers Answer: C
that specify legal responsibility for the shipment while it is in Page Ref: 355
transit. The terms of the agreements are documented on Objective: Learning Objective 3
A) picking tickets. Difficulty : Moderate
B) bills of lading. AACSB: Analytic
C) packing slips.
D) RFID tags. 63) A sales clerk at an electronics store scanned the bar code
Answer: B for a low cost set of headphones and then substituted a high
Page Ref: 345 cost set of headphones for his friend, who paid the lower
Objective: Learning Objective 1 price. Which of the following controls would best help to
Difficulty : Easy prevent this sort of fraud?
AACSB: Analytic A) Use of RFID tags
B) Physical inventory count
60) Sad Clown Pajamas is an Internet-based wholesaler. The C) Segregation of duties
manager of Callow Youth Clothing received an order from Sad D) Limited physical access to bar codes
Clown and found that the wrong product had been shipped. Answer: A
He repackaged the order and sent it back for a refund. When Page Ref: 342
Sad Clown Pajamas received the returned product, they Objective: Learning Objective 3
mailed a ______ to Callow Youth Clothing's manager. Difficulty : Moderate
A) packing slip AACSB: Analytic
B) letter requesting an explanation
C) remittance advice 64) The accounts receivable management method typically
D) credit memo used by credit card companies is
Answer: D A) balance forward.
Page Ref: 352 B) postbilling.
Objective: Learning Objective 1 C) monthly statement.
Difficulty : Easy D) open-invoice.
AACSB: Analytic Answer: A

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Page Ref: 351 Objective: Learning Objective 3
Objective: Learning Objective 1 Difficulty : Moderate
Difficulty : Easy AACSB: Reflective Thinking
AACSB: Analytic
68) Describe the basic revenue cycle activities.
65) The accounts receivable clerk destroys all invoices for Answer: The revenue cycle is a recurring set of business
sales made to family and friends and does not record the activities and related information processing operations
sales in the accounts receivable subsidiary ledgers. The family associated with providing goods and services to customers
and friends usually give the clerk cash as a"thank you". Which and collecting cash in payment for those sales. The basic
procedure will not prevent or detect this fraud? activities in the revenue cycle are: order entry  soliciting and
A) Send monthly statements to all customers with balances processing customer activities  filling customer orders and
owed. shipping merchandise  invoicing customers and maintaining
B) Reconcile sales invoices in the billing department to the customer accounts collections  the cashier handles
total debits to accounts receivable subsidiary ledgers. remittances and deposits them in the bank; accounts
C) Sequentially prenumber all invoices and prepare a receivable personnel credits customer accounts for the
sequence check at the end of each day. payments received.
D) Reconcile the accounts receivable control account to the Page Ref: 333
accounts receivable subsidiary ledger. Objective: Learning Objective 1
Answer: A Difficulty : Easy
Page Ref: 350 AACSB: Analytic
Objective: Learning Objective 3
Difficulty : Moderate 69) Explain how validity checks, completeness tests and
AACSB: Reflective Thinking reasonableness tests can be implemented to ensure accuracy
of customer orders.
66) Which of the following poses an internal control Answer: Validity checks can be used to compare the
problem? customer and inventory information on the customer order
A) Physical inspection of inventory quantity and condition is with the information in the customer and inventory master
outsourced to a firm that specializes in this service. files. A completeness test can ensure that all the necessary
B) Products are released from inventory after a warehouse information is present on the customer order. A
employee and a shipping clerk both sign the pick list. reasonableness test can compare the quantity ordered with
C) Sales representatives have authority to increase the customer's past order history for that item.
customers' credit limits in $1,000 increments. Page Ref: 339
D) When customer payments are received in the mail, checks Objective: Learning Objective 3
are sent to the cashier's office and remittance advices are Difficulty : Moderate
sent to the accounts receivable department. AACSB: Analytic
Answer: C
Page Ref: 340 70) Define and describe benefits of a CRM system.
Objective: Learning Objective 3 Answer: CRM stands for customer relationship management.
Difficulty : Easy Since customer service is so important today, special CRM
AACSB: Analytic software packages have been created that support this vital
process. CRM systems help a company to organize detailed
67) For sales returns, the least effective control to prevent data about customers so that more personalized service can
fraudulent processing of a credit memo is to be given to them. A CRM system may retain customer
A) reconcile total of credit memos to total debits posted to preferences and customer transaction history, which can be
customers' subsidiary ledgers. used to suggest other products the customer may wish to
B) require approval for each credit memo by the credit purchase. The system could also take a pro-active marketing
manager. approach in contacting customers at certain re-order points.
C) sequentially prenumber all credit memos and perform a A well-implemented CRM system can help the business
sequence check at the end of each day. achieve the goal of turning satisfied customers into loyal
D) match each credit memo with a receiving report. customers.
Answer: A Page Ref: 343
Page Ref: 352 Objective: Learning Objective 1

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Difficulty : Moderate Objective: Learning Objective 1
AACSB: Analytic Difficulty : Moderate
AACSB: Analytic
71) How can Electronic Data Interchange (EDI) facilitate the
billing and accounts receivable process? 74) Describe cycle billing and identify how an organization
Answer: The basic document created in the billing process is might benefit by using cycle billing.
the sales invoice. Many companies still print paper invoices Answer: Cycle billing is spreading out the customer base so
and send them to customers in the mail. Batch processing of that a portion of the billing is done each day to a group of
invoices may create cash flow problems because of the time customers. Credit card and utility companies use it
it takes invoices to flow through the regular mail system. extensively because of their large customer bases. The
Companies that use EDI can create quicker turnaround for advantage of this method is that the billing load is dispersed
payment, and save costs by reducing paper handling and and the cash flow of the company is evened out dramatically.
processing. Depending on the number of invoices processed Page Ref: 351
per year, these savings can be significant. Objective: Learning Objective 1
Page Ref: 349 Difficulty : Moderate
Objective: Learning Objective 1 AACSB: Analytic
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
72) Describe typical credit approval procedures. this threat?
Answer: Most business-to-business sales are made on credit. Answer: Both accounts receivable and cash flows should be
Key to revenue cycle success is the approval of credit sales monitored. Segregation of duty controls should always be
before they are processed and goods shipped. A part of good implemented and monitored for compliance. Also, a control
control in this area is to establish a credit limit for customers. used to deal with accounts receivable (which directly impacts
With new customers, or when orders exceed a customer's cash flow) is to use an accounts receivable aging schedule.
credit limit, or the customer has a past due balance, specific This schedule lists customer account balances by length of
authorization for the credit manager should specifically time outstanding and provides information for estimating bad
authorize and approve further credit. The system can also be debts. It can also assist in evaluating credit policies and
programmed to do a limit check for each order processed to specific customer credit limits. Also, a cash budget can be
maintain further control in this area. Also, marketing used to provide a more precise estimate of cash inflows (cash
personnel should not make credit decisions, as a potential collected from sales) and cash outflow (outstanding
conflict of interest is possible. payables). An organization can be alerted to a pending cash
Page Ref: 339-340 flow shortage, thus enabling it to secure short-term financing
Objective: Learning Objective 1 at competitive rates to deal with the problem in a timely
Difficulty : Moderate manner.
AACSB: Analytic Page Ref: 341, 356
Objective: Learning Objective 3
73) Describe the two methods to manage accounts Difficulty : Difficult
receivable. AACSB: Analytic
Answer: Open invoice system  customers pay the invoice by
returning a remittance advice turnaround document and a 76) Discuss ways in which technology can be used to
check. Remittances are applied against specific open invoices. streamline cash collections.
The open-invoice method can be used to offer discounts for Answer: Answers may include the following points: A lockbox
prompt payments since invoices are individually tracked. system can reduce delays due to processing and geographical
However, such individual tracking adds complexity in distance between customer and company. Customers send
maintaining information. Balance-forward method  remittances to a nearby P.O. box; a local bank picks up
customers pay according to the amount shown on a monthly remittances, deposits cash and sends remittance advices and
statement and remittances are applied against the total copies of all checks to the company. The main disadvantage is
outstanding balance; this method is used by department cost; the banks charge a service fee up to 1% of the cash
stores typically where customers make a large number of processed through the system. Information technology can
smaller dollar amount purchases. provide additional efficiencies in the use of lockboxes. An
Page Ref: 350 electronic lockbox sends electronic notification of remittances

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to the company. This method enables the company to begin physical access controls to prevent leakage to competitors
applying remittances to customer accounts before the and irregularities.
photocopies of the checks arrive.  An EFT system eliminates Threat 9: Poor performance  Controls: Use sales and
paper checks and uses electronic payments between banks. profitability analyses; accounts receivable aging; and cash
Integrating EFT and EDI, called the financial electronic data budgets to track operations.
interchange, automates billing and cash collections. 
Procurement cards or credit cards can be used. These cards Page Ref: 336-337
eliminate the risks and costs associated with creating and Objective: Learning Objective 3
maintaining accounts receivable, but cost between 2% to 4% Difficulty : Moderate
of the gross sales price. AACSB: Analytic
Page Ref: 354
Objective: Learning Objective 1 78) Discuss the general control issue of the loss of data, as it
Difficulty : Difficult relates to the revenue cycle.
AACSB: Analytic Answer: One of the two general objectives that pertain to all
revenue cycle activities is the loss of data. The primary
77) Describe four threats in the revenue cycle and identify threats related to the data availability objective are the loss
appropriate controls for each threat. of data and access controls. It is imperative that accurate
Answer: Answers can include the following information: customer account and inventory records be maintained for
Threat 1: Sales to customers with poor credit  Controls: external and internal reporting purposes and for customer
Having an independent credit approval function and inquiries. Such records must be protected from loss and
maintaining good customer accounting can help to prevent damage by using backup files. One backup file should be kept
problems. on-site, while a second should be kept off-site. Backup files of
Threat 2: Shipping errors  Controls: Reconciling shipping the most recent transactions should also be maintained. Also,
notices with picking tickets; bar-code scanners; and data all disks and tapes should have both external and internal file
entry application controls will help to catch these errors. labels to reduce the possibility of accidental erasure of
Threat 3: Theft of inventory  Controls: Secure the location of important files. Access controls are also important as a
inventory and document transfers; release only with valid general control. Unauthorized access to information may
shipping orders; have good accountability for picking and cause leaks of the information to competitors and the risk of
shipping; and finally, periodically reconcile records with a damage to sensitive and important data files. Employees
physical count. should have certain access restrictions to help prevent this
Threat 4: Failure to bill customers  Controls: Separating threat from occurring. Passwords and user IDs will help to
shipping and billing and pre-numbering of shipping limit access to files and the operations allowed to be
documents helps along with reconciliation of all sales performed on files. For example, the sales staff should not be
documents. allowed write-access to customers' credit limit and approval
Threat 5: Billing errors  Controls: Reconciliation of picking information. Individual terminals should also have access
tickets and bills of lading with sales orders; data entry edit controls in place. An example of this control would be to
controls; and price lists may prevent billing errors. prevent someone at a shipping dock terminal from entering a
Threat 6: Theft of cash  Controls: Segregation of duties is sales transaction order. Another control that should be put in
essential to prevent this serious problem (the following duties place is to require activity logs of any management approved
should be separate: handling cash and posting to customer transaction. Such a log should be maintained for audit trail
accounts; handling cash and authorizing credit memos and purposes.
adjustments; issuing credit memos and maintaining customer Page Ref: 335
accounts); use of lockboxes for receipts and EFT for Objective: Learning Objective 3
disbursements; mailing customer statements monthly; use Difficulty : Difficult
cash registers in retail operations where cash payments are AACSB: Analytic
received; deposit cash daily in the bank; and have the bank
reconciliation function performed by independent third 79) Explain how to effectively segregate duties in the sales
parties. order activity.
Threat 7: Posting errors in updating accounts receivable  Answer: Sales orders should be recorded by sales personnel.
Controls: Use of editing and batch totals is essential here. Credit decisions should be made by the credit manager, not
Threat 8: Loss of data  Controls: Regular backups are sales personnel. Also, sales orders authorize release of goods
essential with one copy stored off-site; and logical and to shipping. Warehouse and shipping should be separate

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from sales. Because a computer does recording and Credit card number and expiration date
authorization, it is important to ensure integrity of the Items ordered and quantity of each
programs and to perform edit checks on any online entries. Unit price of each item ordered
Page Ref: 337-344 Identify and describe at least ten specific control policies and
Objective: Learning Objective 3 procedures you will implement for the sales order process. Be
Difficulty : Moderate very specific describing the controls and number each new
AACSB: Analytic control you suggest.

80) Discuss the revenue cycle threat of stockouts, carrying Answer:

costs, and markdowns. 1. Validity check on customer number
Answer: Stockouts, carrying costs, and markdowns are a 2. Authorization controls to set up new customer records
threat in the sales order entry process. The problem with 3. Check digit on customer number
stockouts is that when goods are not available to ship to 4. Modulus 11 on customer number
customers, the business risks losing the sale to a competitor 5. Closed-loop verification on customer number
that can provide the goods in a timely manner. The opposite 6. Credit approval before accepting orders
problem can also occur where excess inventory increases 7. Credit check and credit limit establishment for new
carrying costs, with the result that markdowns may be customers, before accepting orders
necessary in order to sell the inventory. Two controls can be 8. Preformatting of customer state, zip code and phone
implemented to cope with this threat. One control that can number
be put into place is to establish accurate inventory control. An 9. On-line real-time authorization of credit card charges
AIS with real-time online capabilities can be programmed to 10. Field check on credit card number and expiration date
use the perpetual inventory method. This will ensure that 11. Validity check on item number
accurate records are maintained about the quantity of 12. Check digit on item number
inventory for sale. This will eliminate mistakes in placing 13. Modulus 11 on item number
orders for goods when a sufficient inventory amount is on 14. Closed-loop verification on item number
hand. Periodic physical counts of inventory will also verify the 15. Auto fill of unit price, based on item number
perpetual amounts recorded by the AIS. Another important 16. Field check on quantity ordered
control in this situation is that of accurate sales forecasting. 17. Batch control totals for mail and fax orders
Proper marketing efforts should be made in conjunction with 18. Encryption of credit card data
regularly reviewing sales forecasts for accuracy. Such 19. Completeness check
forecasts should be revised as necessary. Sales force Page Ref: 339
marketing efforts should be commensurate with inventory Objective: Learning Objective 3
levels as well. Difficulty : Moderate
Page Ref: 342 AACSB: Analytic
Objective: Learning Objective 3
Difficulty : Difficult Chapter 13 (CHAP 7) The Expenditure Cycle: Purchasing to
AACSB: Analytic Cash Disbursements

81) You have been hired by a catalog company to 1) The Squishy Things Toy Company was established in 1948.
computerize its sales order entry process. Approximately 70% It recently signed a large contract with a chain of retail toy
of all orders are received over the telephone by a sales stores. As a condition of the contract, the Squishy will be
person. The other 30% of orders are received by a sales required to track and forecast product sales by linking in to
person through mail or fax. The catalog company wants the the chain's sales database. Squishy will then be responsible
phone orders processed real-time. The mail and fax orders for shipping products to the chain's regional warehouses as
will be processed in batches of 50 orders. The following needed. The relationship between Squishy and the chain is an
attributes are collected for every sales order: example of
Customer number (if the order is from a new A) vendor-managed inventory.
customer, a new number needs to be assigned) B) sales force automation.
Customer name C) electronic data interchange.
Address D) optical character recognition.
Payment method (credit card for phone and fax Answer: A
orders and check for mailed orders) Page Ref: 382

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Objective: Learning Objective 1 Difficulty : Moderate
Difficulty : Easy AACSB: Reflective Thinking
AACSB: Analytic
5) Which of the following would be the least effective control
2) Requiring all packing slips be reconciled to purchase orders to prevent paying the same vendor invoice twice?
before accepting a delivery of inventory would be most likely A) Allow only the accounts payable department to authorize
to prevent which of the following situations? payment for vendor invoices and allow only the cash
A) A supplier delivers more inventory than ordered at the end disbursements department to cut and mail checks to vendors.
of the year and sends an invoice for the total quantity B) Only pay from original invoices.
delivered. C) Cancel each document in the voucher package once the
B) An employee mails a fake invoice to the company, which is check is prepared and mailed.
then paid. D) Only pay vendor invoices that have been matched and
C) The inventory records are incorrectly updated when a reconciled to a purchase order and a receiving report.
receiving department employee enters the wrong product Answer: A
number on the receiving report. Page Ref: 391
D) Receiving department employees steal inventory and then Objective: Learning Objective 3
claim the inventory was received and delivered to the Difficulty : Moderate
warehouse. AACSB: Reflective Thinking
Answer: A
Page Ref: 386 6) To accomplish the objectives set forth in the expenditure
Objective: Learning Objective 3 cycle, a number of key management decisions must be
Difficulty : Moderate addressed. Which of the decisions below is not ordinarily
AACSB: Reflective Thinking found as part of the expenditure cycle?
A) How can cash payments to vendors be managed to
3) Comparing quantities on a vendor invoice to quantities on maximize cash flow?
the receiving report would not prevent or detect which of the B) What is the optimal level of inventory and supplies to carry
following situations? on hand?
A) Receiving and accepting inventory not ordered C) Where should inventories and supplies be held?
B) Theft of inventory by receiving department employees D) What are the optimal prices for each product or service?
C) Update of wrong inventory items due to data entry error Answer: D
D) Order for an excessive quantity of inventory Page Ref: 372
Answer: A Objective: Learning Objective 2
Page Ref: 386 Difficulty : Easy
Objective: Learning Objective 3 AACSB: Analytic
Difficulty : Moderate
AACSB: Reflective Thinking 7) One of the basic activities in the expenditure cycle is the
receiving and storage of goods, supplies, and services. What
4) Which of the following would probably be the least is the counterpart of this activity in the revenue cycle?
effective control to mitigate the risk of paying an invoice A) sales order entry process
payable to a phony vendor for inventory purchases, mailed to B) shipping function
the company by an employee attempting to commit fraud? C) cash collection activity
D) cash payments activity
A) Only pay from original invoices. Answer: B
B) Cancel all invoices and supporting documentation when Page Ref: 373
paid. Objective: Learning Objective 1
C) Strict access and authorization controls for the approved Difficulty : Moderate
vendor master file. AACSB: Reflective Thinking
D) Require three-way match for all inventory purchase
invoices. 8) The traditional approach to inventory management to
Answer: A ensure sufficient quantity on hand to maintain production is
Page Ref: 387 known as
Objective: Learning Objective 3 A) safety stock.

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B) just-in-time production. C) determine the optimal reorder point
C) economic order quantity. D) determine the optimal order size
D) optimal inventory quantity. Answer: B
Answer: C Page Ref: 378
Page Ref: 378 Objective: Learning Objective 1
Objective: Learning Objective 1 Difficulty : Easy
Difficulty : Easy AACSB: Analytic
AACSB: Analytic
13) Materials requirements planning (MRP)
9) Economic Order Quantity (EOQ) includes several variables A) reduces the uncertainty about when materials are needed,
that must be taken into consideration when calculating the thereby reducing the need to carry large levels of inventory.
optimal order size. One variable, the costs associated with B) is able to compute exactly the cost of purchasing by taking
holding inventory, is referred to as into account all costs associated with inventory carrying.
A) ordering costs. C) requires vendors to deliver inventory to the production site
B) carrying costs. exactly when needed and in the correct quantities.
C) the reorder point. D) None of the above are correct.
D) stockout costs. Answer: A
Answer: B Page Ref: 378
Page Ref: 378 Objective: Learning Objective 1
Objective: Learning Objective 1 Difficulty : Moderate
Difficulty : Easy AACSB: Analytic
AACSB: Analytic
14) The inventory management approach that attempts to
10) The need to place an order for inventory is specified by minimize, if not eliminate, carrying and stockout costs is
the A) materials requirements planning.
A) company inventory policies. B) economic order quantity.
B) economic order quantity. C) just-in-time inventory.
C) stockout point. D) evaluated receipt settlement.
D) reorder point. Answer: C
Answer: D Page Ref: 378
Page Ref: 378 Objective: Learning Objective 1
Objective: Learning Objective 1 Difficulty : Difficult
Difficulty : Easy AACSB: Analytic
AACSB: Analytic
15) What aspect below best characterizes a Just-In-Time (JIT)
11) When goods are being ordered from a vendor, which inventory system?
electronic files are either read or updated? A) frequent deliveries of smaller quantities of items to the
A) inventory, vendors, and accounts payable work centers
B) vendors and accounts payable B) frequent deliveries of large quantities to be held at the
C) open purchase orders and accounts payable work centers
D) inventory, vendors, and open purchase orders C) less frequent deliveries of large quantities of goods to
Answer: D central receiving
Page Ref: 374 D) infrequent bulk deliveries of items directly to work centers
Objective: Learning Objective 1 Answer: A
Difficulty : Moderate Page Ref: 378-379
AACSB: Analytic Objective: Learning Objective 1
Difficulty : Easy
12) What is a key feature of materials requirements planning AACSB: Analytic
(MRP)?
A) minimize or entirely eliminate carrying and stockout costs 16) What is the key difference between the MRP and JIT
B) reduce required inventory levels by scheduling production inventory management approaches?
rather than estimating needs A) Only JIT reduces costs and improves efficiency.

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B) MRP is especially useful for products such as fashion C) a contract between the buyer and vendor once accepted
apparel. by the vendor.
C) JIT is more effectively used with products that have D) All of the above are true.
predictable patterns of demand. Answer: D
D) MRP schedules production to meet estimated sales needs; Page Ref: 381
JIT schedules production to meet customer demands. Objective: Learning Objective 1
Answer: D Difficulty : Easy
Page Ref: 379 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Moderate 21) Stepanek Sales and Service provides free coffee to
AACSB: Analytic employees. Stepanek arranged with Ingebrigtson's Joe to
deliver as many coffee packages, sugar, creamer, and filters
17) MRP will be a preferred method over JIT when the as needed each week. Ingebrigtson's sends a monthly invoice
A) demand for inventory is fairly predictable. for Stepanek to pay. This arrangement is best described as a
B) demand for inventory is mostly unpredictable. A) blanket purchase order.
C) product has a short life cycle. B) set purchase order.
D) MRP is always a preferred method over JIT. C) fixed purchase order.
Answer: A D) standard purchase order.
Page Ref: 379 Answer: A
Objective: Learning Objective 1 Page Ref: 381
Difficulty : Moderate Objective: Learning Objective 1
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
18) A key decision in ordering is selecting a suitable vendor.
Which of the following would not be a major criterion in 22) A major cost in the purchasing function is the number of
vendor selection? purchase orders processed. One technique that may reduce
A) prices of goods purchasing-related expenses is to have suppliers compete
B) quality of goods with each other to meet demand at the lowest price. This
C) credit rating of the vendor name of this technique is
D) ability to deliver on time A) an EDI auction.
Answer: C B) a trading exchange.
Page Ref: 380 C) a reverse auction.
Objective: Learning Objective 1 D) a supplier consortium.
Difficulty : Easy Answer: C
AACSB: Analytic Page Ref: 382
Objective: Learning Objective 1
19) Once a vendor is selected for a product, the vendor's Difficulty : Moderate
identity is recorded in the AACSB: Analytic
A) purchase requisition transaction file.
B) purchase requisition master file. 23) One of the major responsibilities of the receiving
C) inventory transaction file. department is
D) inventory master file. A) deciding if the delivery should be accepted.
Answer: D B) verifying any purchase discounts for the delivery.
Page Ref: 381 C) deciding on the location where the delivery will be stored
Objective: Learning Objective 1 until used.
Difficulty : Moderate D) updating inventory subsidiary ledgers.
AACSB: Analytic Answer: A
Page Ref: 384
20) A purchase order is Objective: Learning Objective 1
A) a document formally requesting a vendor to sell a certain Difficulty : Easy
product at a certain price. AACSB: Analytic
B) a request for delivery of certain items and quantities.

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24) Which of the following is generally not shown on a Objective: Learning Objective 1
receiving report? Difficulty : Moderate
A) price of the items AACSB: Analytic
B) quantity of the items
C) purchase order number 28) Vendor invoices are approved by the ________, which
D) counted and inspected by reports to the ________.
Answer: A A) purchasing department; controller
Page Ref: 384 B) accounts payable department; treasurer
Objective: Learning Objective 1 C) purchasing department; treasurer
Difficulty : Easy D) accounts payable department; controller
AACSB: Analytic Answer: D
Page Ref: 387
25) A receiving clerk notes that a delivery of 10 units has been Objective: Learning Objective 1
received, but the purchase order specified 12 units. A debit Difficulty : Moderate
memo will need to be prepared to adjust for the difference AACSB: Analytic
between the quantity ordered and received. Who should
prepare this document? 29) The disbursement voucher and supporting documents are
A) the receiving clerk sent to the ________ for payment prior to the due date.
B) the controller A) cashier
C) the vendor B) treasurer
D) the purchasing department manager C) controller
Answer: D D) accounts payable department
Page Ref: 385 Answer: A
Objective: Learning Objective 1 Page Ref: 390
Difficulty : Moderate Objective: Learning Objective 1
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
26) Identify in which of the following scenarios a company
could adjust the balance due the vendor by issuing a debit 30) A(n) ________ system posts an approved invoice to the
memo. vendor account and stores it in an open invoice file until
A) quantity different from that ordered payment is made by check.
B) damage to the goods A) nonvoucher
C) goods that fail inspection for quality B) voucher
D) All of the above are possible scenarios. C) cycle
Answer: D D) evaluated receipt settlement
Page Ref: 385 Answer: A
Objective: Learning Objective 1 Page Ref: 387
Difficulty : Moderate Objective: Learning Objective 1
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
27) What is one of the best ways to improve the overall
efficiency and effectiveness of the receipt and storage of 31) A disbursement voucher contains
ordered items? A) a list of outstanding invoices.
A) requiring all suppliers to have the carrier verify quantities B) the net payment amount after deducting applicable
and item numbers before shipment discounts and allowances.
B) requiring all suppliers to include RFID tags on their items C) the general ledger accounts to be debited.
C) requiring all suppliers to use EDI to expedite the receiving D) All of the above are correct.
department function Answer: D
D) requiring all delivery trucks to have satellite data terminals Page Ref: 387
to expedite the receiving department function Objective: Learning Objective 1
Answer: B Difficulty : Easy
Page Ref: 385 AACSB: Analytic

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 A) accounts payable; purchasing; cashier
32) One objective of accounts payable is to authorize B) purchasing; accounts payable; cashier
payment only for goods or services actually ordered and C) purchasing; cashier; accounts payable
received. The best way to process supplier invoices is to use D) purchasing; accounts payable; treasurer
A) electronic funds transfer for small, occasional purchases Answer: B
from suppliers. Page Ref: 375
B) a nonvoucher system. Objective: Learning Objective 3
C) EDI for all small, occasional purchases from suppliers. Difficulty : Moderate
D) a disbursement voucher system. AACSB: Analytic
Answer: D
Page Ref: 387 36) A voucher package should include
Objective: Learning Objective 1 A) a purchase requisition, vendor invoice, and receiving
Difficulty : Moderate report.
AACSB: Analytic B) a purchase order, vendor invoice, and receiving report.
C) a purchase requisition, purchase order, and receiving
33) What is not an advantage of using disbursement report.
vouchers? D) a bill of lading and vendor invoice.
A) Disbursement vouchers reduce the number of checks Answer: B
written. Page Ref: 387
B) Disbursement vouchers can be prenumbered which Objective: Learning Objective 1
simplifies the tracking of all payables. Difficulty : Moderate
C) Disbursement vouchers facilitate separating the time of AACSB: Analytic
invoice approval from the time of invoice payment.
D) There are no disadvantages to using disbursement 37) Evaluated receipt settlement (ERS) approves payment of
vouchers. vendor invoices after reconciling the purchase order and the
Answer: D A) vendor invoice.
Page Ref: 387 B) sales invoice.
Objective: Learning Objective 1 C) receiving report.
Difficulty : Easy D) disbursement voucher.
AACSB: Analytic Answer: C
Page Ref: 388
34) Which of the following is not an advantage of a voucher Objective: Learning Objective 3
system? Difficulty : Easy
A) Several invoices may be included on one voucher, reducing AACSB: Analytic
the number of checks.
B) Disbursement vouchers may be pre-numbered and tracked 38) All of the following are opportunities to improve
through the system. efficiency of the accounts payable function except
C) The time of voucher approval and payment can be kept A) use blanket purchase orders.
separate. B) convert a manual AIS system to EDI and EFT.
D) It is a less expensive and easier system to administer than C) streamline noninventory purchases.
other systems. D) use evaluated receipt settlement.
Answer: D Answer: A
Page Ref: 387 Page Ref: 387-388
Objective: Learning Objective 1 Objective: Learning Objective 1
Difficulty : Moderate Difficulty : Easy
AACSB: Analytic AACSB: Analytic

35) Duties in the expenditure cycle should be properly 39) When purchasing miscellaneous supplies, companies can
segregated to promote internal control. This means that the reduce costs, improve efficiency, and combat employee fraud
authorization function is performed by ________, the by
recording function is performed by ________, and cash A) using procurement cards.
handling is performed by the ________. B) implementing a JIT inventory system.

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C) requiring employees to personally purchase items then B) kickbacks.
reimbursing employees at the end of each month. C) requests for unnecessary items.
D) paying amounts out of petty cash. D) errors in vendor invoices.
Answer: A Answer: A
Page Ref: 389 Page Ref: 385
Objective: Learning Objective 1 Objective: Learning Objective 3
Difficulty : Easy Difficulty : Easy
AACSB: Analytic AACSB: Analytic

40) If available, a 1% discount for payment within 10 days 44) What is the best way to prevent the acceptance of
instead of 30 days represents an approximate savings of unordered goods?
________ % annually. A) Order only from approved vendors.
A) 1 B) Match the packing slip to a purchase order before
B) 12 accepting delivery.
C) 18 C) Enforce an appropriate conflict of interest policy in place.
D) 36 D) Require specific authorization from the purchasing
Answer: C manager before accepting any goods.
Page Ref: 390 Answer: B
Objective: Learning Objective 1 Page Ref: 386
Difficulty : Moderate Objective: Learning Objective 3
AACSB: Analytic Difficulty : Easy
AACSB: Analytic
41) What is the best control to mitigate the threat of paying
prices that are too high for goods ordered? 45) Which of the following is not a common control for
A) require the receiving department to verify the existence of ensuring inventory is secure and inventory counts are
a valid purchase order accurate?
B) use only approved suppliers and solicit competitive bids A) control of physical access to the inventory storage areas
C) only pay invoices that are supported by the original B) transfers of inventory with proper documentation
voucher package C) sending "blind" copies of purchase orders to inventory
D) use bar-code technology to eliminate data entry errors control for data entry
Answer: B D) making physical counts of inventory at least once per year
Page Ref: 382 Answer: C
Objective: Learning Objective 3 Page Ref: 376
Difficulty : Moderate Objective: Learning Objective 3
AACSB: Analytic Difficulty : Moderate
AACSB: Analytic
42) What is probably the most effective control for the
prevention of kickbacks to purchasing agents? 46) Double-checking the accuracy of an invoice is a control
A) purchasing from approved vendors that can help to neutralize a threat in the expenditure cycle.
B) diligent supervision in the purchasing department What activity would specifically be associated with this
C) a corporate policy to prohibit purchasing agents from control?
accepting kickbacks A) ordering goods
D) reviews of vendor performance B) receiving and storing goods
Answer: C C) paying for goods and services
Page Ref: 383 D) requesting goods be ordered
Objective: Learning Objective 3 Answer: C
Difficulty : Moderate Page Ref: 389
AACSB: Analytic Objective: Learning Objective 3
Difficulty : Easy
43) One of the threats associated with the process and AACSB: Analytic
activity of receiving and storing goods is
A) errors in counting. 47) What control would best mitigate the threat of paying an

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invoice twice? 51) What control should be put in place that assigns
A) never authorize payment of a photocopy of an invoice responsibility for EFT payments made to vendors?
B) double-check mathematical accuracy of invoices A) Encrypt all EFT transmissions.
C) approval of purchase orders B) Time stamp all EFT transactions.
D) maintaining adequate perpetual inventory records C) Establish a control group to monitor EFT transactions for
Answer: A validity and accuracy.
Page Ref: 391 D) Number all EFT transactions.
Objective: Learning Objective 3 Answer: C
Difficulty : Easy Page Ref: 391
AACSB: Analytic Objective: Learning Objective 3
Difficulty : Moderate
48) Which control would best prevent payments made to AACSB: Analytic
fictitious vendors?
A) Allow payments only to approved vendors. 52) Which of the following threats is not specific to the
B) Restrict access to any payment or approval documents. purchase requisition process of the expenditure cycle?
C) Have an independent bank reconciliation. A) stockouts
D) Make sure all documents are in order before approving B) purchasing from unauthorized vendors
payments. C) requisitioning goods not needed
Answer: A D) All of the above are threats in the purchase requisition
Page Ref: 392 process.
Objective: Learning Objective 3 Answer: B
Difficulty : Moderate Page Ref: 380
AACSB: Analytic Objective: Learning Objective 3
Difficulty : Moderate
49) In the expenditure cycle, good control dictates that AACSB: Analytic
expenditures should be paid by check. This may not be
feasible when minor purchases are made. To facilitate quick 53) There is a symmetrical interdependence between a firm's
payment for minor purchases, a(n) ________ should be set expenditure cycle and its suppliers'
up and maintained using ________. A) production cycle.
A) special bank account; disbursement vouchers B) revenue cycle.
B) imprest fund; vouchers C) expenditure cycle.
C) cash box; small denomination bills D) general ledger and reporting system.
D) petty cash fund; procurement cards Answer: B
Answer: B Page Ref: 372
Page Ref: 392 Objective: Learning Objective 1
Objective: Learning Objective 3 Difficulty : Moderate
Difficulty : Easy AACSB: Reflective Thinking
AACSB: Analytic
54) The Squishy Things Toy Company was established in 1948.
50) A surprise count of an imprest petty cash fund should find It recently signed a large contract with a chain of retail toy
the total of ________ equal to the amount authorized for the stores. As a condition of the contract, the Squishy will be
fund. required to track and forecast product sales by linking in to
A) cash and credit memos the chain's sales database. Squishy will then be responsible
B) cash and vouchers for shipping products to the chain's regional warehouses as
C) cash needed. The technology that is used for communication
D) cash and checks between Squishy and the chain is
Answer: B A) vendor-managed inventory.
Page Ref: 392 B) sales force automation.
Objective: Learning Objective 3 C) electronic data interchange.
Difficulty : Easy D) optical character recognition.
AACSB: Analytic Answer: C
Page Ref: 372

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Objective: Learning Objective 1 Objective: Learning Objective 3
Difficulty : Moderate Difficulty : Moderate
AACSB: Analytic AACSB: Reflective Thinking

55) The management at Sad Clown Pajamas, an Internet- 58) The management at Sad Clown Pajamas, an Internet-
based wholesaler, is considering a new inventory control based wholesaler, is considering a new inventory control
system. The current system is inadequate because it results in system. The current system is inadequate because it results in
stockouts that interrupt production and excess stocks of stockouts that interrupt production and excess stocks of
some materials that result in markdowns and high carrying some materials that result in markdowns and high carrying
costs. The new system, which will focus on ensuring that the costs. The new system, which will focus on reducing or
amounts purchased minimize these costs, will employ completely eliminating carrying costs, will employ
A) a just-in-time inventory system. A) a just-in-time inventory system.
B) the economic order quantity. B) the economic order quantity.
C) a reorder point. C) a reorder point.
D) materials requirements planning. D) materials requirements planning.
Answer: B Answer: A
Page Ref: 378 Page Ref: 378
Objective: Learning Objective 3 Objective: Learning Objective 3
Difficulty : Moderate Difficulty : Moderate
AACSB: Reflective Thinking AACSB: Reflective Thinking

56) The management at Sad Clown Pajamas, an Internet- 59) Bob Chum is the sales manager at Folding Squid
based wholesaler, is considering a new inventory control Technologies. At lunch with the company CEO, he proudly
system. The current system is inadequate because it results in announced that he had negotiated a(n) ________ with a
stockouts that interrupt production and excess stocks of client that defined a long-term commitment to buy
some materials that result in markdowns and high carrying components from Folding Squid.
costs. The new system, which will focus on ensuring that A) purchase order
orders are placed with sufficient lead time to prevent B) blanket purchase order
stockouts, will employ C) evaluated receipt settlement
A) a just-in-time inventory system. D) voucher
B) the economic order quantity. Answer: B
C) a reorder point. Page Ref: 381
D) materials requirements planning. Objective: Learning Objective 1
Answer: C Difficulty : Easy
Page Ref: 378 AACSB: Analytic
Objective: Learning Objective 3
Difficulty : Moderate 60) Bob Chum is the sales manager at Folding Squid
AACSB: Reflective Thinking Technologies. At lunch with the company CEO, he proudly
announced that he had received a ________ from a client to
57) The management at Sad Clown Pajamas, an Internet- buy a large quantity of components from Folding Squid.
based wholesaler, is considering a new inventory control A) purchase order
system. The current system is inadequate because it results in B) blanket purchase order
stockouts that interrupt production and excess stocks of C) voucher
some materials that result in markdowns and high carrying D) purchase requisition
costs. The new system, which will focus on forecasting Answer: A
demand for Sad Clown's products, will employ Page Ref: 381
A) a just-in-time inventory system. Objective: Learning Objective 1
B) the economic order quantity. Difficulty : Easy
C) a reorder point. AACSB: Analytic
D) materials requirements planning.
Answer: D 61) Bob Chum is the sales manager at Folding Squid
Page Ref: 378 Technologies. At lunch with the company CEO, he complained

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that a recent shipment from a vendor had been B) Credit cards can be used to make purchases without an
unsatisfactory and so had to be returned. That required the explicit sign off by supervisors, but procurement cards require
purchasing manager to send a ________ to the supplier. a sign off.
A) purchase order C) Procurement cards can only be used with approved
B) blanket purchase order vendors, but credit cards can be used anywhere.
C) receiving report D) Procurement card invoices are sent separately for each
D) debit memo card, whereas corporate credit cards are consolidated into a
Answer: D single invoice.
Page Ref: 385 Answer: C
Objective: Learning Objective 1 Page Ref: 389
Difficulty : Easy Objective: Learning Objective 1
AACSB: Analytic Difficulty : Moderate
AACSB: Analytic
62) To minimize the number of checks that need to be written
to pay vendor invoices a company should use a 66) The purchasing manager at Folding Squid Technologies
A) voucher system. has responsibility for reviewing and authorizing purchase
B) just-in-time inventory system. orders. He also reviews receiving reports, approves or
C) nonvoucher system. corrects them, and authorizes the cashier to pay vendor
D) evaluated receipt settlement system. invoices. Which of the following would correct control
Answer: A weaknesses, if any, related to these activities?
Page Ref: 387 A) Vendor invoices should be reviewed by the purchasing
Objective: Learning Objective 1 manager to ensure that they are correct.
Difficulty : Moderate B) Accounts payable should reconcile purchase orders,
AACSB: Analytic receiving reports, and invoices.
C) Vendor invoices should be reviewed by accounts receivable
63) Evaluated receipt settlement increases efficiency by and then cancelled when paid.
A) eliminating the need for receiving reports. D) Controls are adequate under the current system.
B) eliminating the need for vendor invoices. Answer: B
C) eliminating the need for purchase orders. Page Ref: 387
D) eliminating the need to prepare and mail checks. Objective: Learning Objective 3
Answer: B Difficulty : Moderate
Page Ref: 388 AACSB: Analytic
Objective: Learning Objective 1
Difficulty : Easy 67) The purchasing manager at Folding Squid Technologies
AACSB: Analytic has responsibility for reviewing and authorizing purchase
orders. Receiving reports are prepared by shipping and
64) In the expenditure cycle, Financial Electronic Data receiving based on the relevant purchase order(s). Purchase
Interchange (FEDI) increases efficiency by orders, receiving reports, and vendor invoices are reconciled
A) eliminating the need for receiving reports. by accounts payable, which authorizes payment. Which of the
B) eliminating the need for vendor invoices. following would correct control weaknesses, if any, related to
C) eliminating the need for purchase orders. these activities?
D) eliminating the need to prepare and mail checks. A) Vendor invoices should be reviewed by the purchasing
Answer: D manager to ensure that they are correct.
Page Ref: 390 B) Accounts payable should authorize purchase orders.
Objective: Learning Objective 1 C) Receiving reports should be reviewed and corrected by the
Difficulty : Easy purchasing manager.
AACSB: Analytic D) Controls are adequate under the current system.
Answer: D
65) Procurement cards differ from corporate credit cards in Page Ref: 387
which of the following ways? Objective: Learning Objective 3
A) Credit limits can be set for procurement cards, but not Difficulty : Moderate
corporate credit cards. AACSB: Analytic

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68) The receiving clerk at Folding Squid Technologies Difficulty : Moderate
examines incoming shipments and reconciles their contents AACSB: Reflective Thinking
with the relevant purchase orders. A receiving report is then
sent to accounts receivable and the vendor's invoice is 71) The document below would be known as what by Alpha
approved for payment. Which of the following would correct Omega Electronics?
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 A) Receiving report
orders and invoices and payment is authorized. Which of the B) Purchase order
following would correct control weaknesses, if any, related to C) Purchase requisition
these activities? D) Packing slip
A) Vendor invoices should be approved for payment by the Answer: A
shipping clerk after the purchase order and receiving report Page Ref: 384
are reconciled. Objective: Learning Objective 1
B) Vendor invoices should be approved for payment by the Difficulty : Moderate
purchasing manager. AACSB: Reflective Thinking
C) Purchase orders and receiving reports should be reconciled
by the purchasing manager. 72) Which of the following would be the best control to
D) Controls are adequate under the current system. prevent receiving department employees from stealing
Answer: D inventory and claiming the ordered quantity wasn't received
Page Ref: 387 from the vendor?
Objective: Learning Objective 3 A) Reconcile quantity on packing slip to physical count when
Difficulty : Moderate accepting delivery.
AACSB: Analytic B) Restrict physical access to the receiving area.
C) Require all deliveries be made at the receiving area.
70) Which of the controls below would be least effective to D) Require dual signatures on the move ticket when receiving
prevent ordering goods at higher than market prices? delivers the inventory to the warehouse.
A) Variance analysis of actual expenses to budgeted expenses Answer: A
B) For high-dollar goods, solicit competitive bids from Page Ref: 386
possible vendors Objective: Learning Objective 3
C) Only place orders with vendors on an approved vendor list Difficulty : Moderate
D) Frequent review of, and update to, vendor price lists AACSB: Reflective Thinking
stored in the AIS
Answer: A 73) Define and describe the EOQ approach to inventory
Page Ref: 382 management.
Objective: Learning Objective 3 Answer: EOQ (economic order quantity) is the traditional

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inventory control method to maintain sufficient inventory 76) Explain what is meant by the expenditure cycle as a
levels so production can continue without interruption. EOQ "mirror image" of the revenue cycle.
should take into account a situation where inventory use is Answer: The expenditure cycle has been called a "mirror
greater than expected. EOQ calculates the optimal order size image" of the revenue cycle because the activities of the
to minimize the sum of ordering, carrying, and stockout costs. expenditure cycle are the opposite, or "reflection" of several
Ordering costs  all expenses associated with processing activities found in the revenue cycle. For example, the order
purchasing transactions. Carrying costs  costs associated goods activity generates a purchase order, which serves as
with holding inventory. Stockout costs  costs from inventory customer input to the sales order entry process. The receive
shortages, such as lost sales or production costs. goods activity handles the goods sent via the supplier's
Page Ref: 378 shipping function. The pay for goods activity generates the
Objective: Learning Objective 1 payments that are processed by the supplier's cash collection
Difficulty : Moderate activity. This mirror image also means that major
AACSB: Analytic technological improvements in the expenditure cycle may
bring about complementary improvements in suppliers'
74) Discuss the differences between EOQ, MRP, and JIT. revenue cycle as well.
Answer: Economic Order Quantity (EOQ) is the traditional Page Ref: 372-373
approach to managing inventory. EOQ is used to find the Objective: Learning Objective 1
optimal order size. Ordering costs, carrying costs, and Difficulty : Difficult
stockout costs are considered in finding the EOQ. The MRP AACSB: Reflective Thinking
(Materials Requirements Planning) inventory method seeks
to reduce inventory levels by scheduling production, based on 77) Identify possible problems associated with receiving
estimated sales, rather than by estimating needs (which EOQ goods and appropriate actions in response to the problems.
does). A just-in-time inventory system (or JIT) attempts to Answer: When a shipment of goods arrives, the quantity of
minimize, if not totally eliminate, both carrying and stockout goods received may not be the same as the quantity ordered;
costs through the frequent delivery of small amounts of the goods may have been damaged in shipment and
materials, parts, and supplies when they are needed. JIT does therefore are not suitable for use; and, goods may be
not attempt to estimate needs or schedule production based received that are inferior in quality and fail an inspection.
on estimated sales, as it is based on customer demand at a Whenever any of these problems occur, the purchasing
given time. A JIT system almost eliminates finished goods department should deal with the vendor and issue a debit
inventory. memo to record an adjustment to the order. The vendor
Page Ref: 378 should then issue a credit memo in acknowledgment of the
Objective: Learning Objective 1 problem and the pending adjustment.
Difficulty : Difficult Page Ref: 385
AACSB: Analytic Objective: Learning Objective 3
Difficulty : Moderate
75) a) What is the major cost driver in the purchasing AACSB: Analytic
function? b) Describe how information technology can be
used to control this cost driver. 78) How can information technology be used to improve the
Answer: a) The major cost driver in the purchasing function is vendor invoice approval process?
the number of purchase orders processed. b) The number of Answer: EDI eliminates the need to enter invoice data and
purchase orders can be reduced or streamlined by: Electronic the matching of payment documents  all of this can be done
data interchange (EDI) for transmitting purchase orders to using computers and network technologies. Technology can
vendors. Use procurement cards for small dollar and small eliminate the need for vendor invoices by approving payment
quantity purchases of non-inventory items. Reduce clerical upon receipt of the goods. Imaging systems can eliminate
costs by using the Internet to perform certain purchasing paper flow, and universal languages such as XML can provide
functions. Use vendor-managed inventory programs to a paperless means of receiving and storing vendor invoices.
reduce purchasing and inventory costs. Implement reverse Use of procurement cards, credit cards, and electronic
auctions and pre-award audits. expense forms can improve the efficiency of non-inventory
Page Ref: 382, 389 purchases. ERS, which is invoiceless, is a means to replace the
Objective: Learning Objective 1 traditional three-matching process (vendor invoice, receiving
Difficulty : Moderate report and purchase order) with a two-way match of the
AACSB: Analytic purchase order and receiving report.

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Page Ref: 387-389 special watermark or identifying mark that is readable at a
Objective: Learning Objective 1 certain angle as well.
Difficulty : Moderate Page Ref: 392
AACSB: Analytic Objective: Learning Objective 3
Difficulty : Moderate
79) Under what conditions is MRP more suitable than JIT and AACSB: Analytic
vice versa?
Answer: MRP systems schedule production based on 81) Identify ten threats and applicable control procedures in
estimated sales, and JIT systems schedule production based the expenditure cycle.
on customer demand. The choice between these two systems Answer: Answers can include the following information:
is based on the types of products a company sells. For 1: Stock-outs  Controls: Inventory control system; accurate
example, products that have predictable patterns of demand perpetual inventory; and vendor performance analysis is
and a long life cycle are more suitable for MRP systems. In needed to prevent this problem
this case, sales can be forecast with greater accuracy. 2: Requesting goods not needed  Controls: Review and
Conversely, if the product has an unpredictable pattern of approval by supervisors; use of pre-numbered requisition
demand and a shorter life cycle, then a JIT system is more forms; and restricted access to blank purchase orders
suitable. JIT is able to adapt better to continuously changing 3: Purchasing goods at inflated prices  Controls: Competitive
production levels. bidding and proper supervision; approved purchase orders;
Page Ref: 379 and price list consultations are needed to prevent this
Objective: Learning Objective 1 problem
Difficulty : Moderate 4: Purchasing goods of inferior quality  Controls: Use
AACSB: Analytic experienced buyers who know good vendors; review
purchase orders; and incorporate approved vendor list into
80) In the expenditure cycle, the majority of payments made formal procedures
are by check. What are some control issues related to 5: Purchasing from unauthorized vendors  Control: Pre-
payment of vendors by check? numbered purchase orders should be approved; restrict
Answer: Key control problems in the area of payment by access to approved vendor list and have procedures in place
check can give rise to fraudulent activity. Fraudulent for any change to the list
disbursements made by check to fictitious suppliers are one 6: Kickbacks paid to buyers to influence their decisions 
of the most common types of fraud. Control over checks can Controls: Clear conflict of interest policy prohibiting the
be strengthened in a number of ways. First, all checks should acceptance of any gift from vendors; disclosure of financial
be sequentially pre-numbered and kept under lock and key interest policy for purchasing agents; and vendor audits
until use. The internal auditor should randomly audit the 7: Receiving unordered goods  Controls: Receiving
supply of unused checks and verify that none are missing. Use department must reject any goods for which there is no
of the voucher system will also provide control over paying a approved purchase order
"phantom" supplier, since several supporting documents 8: Errors in counting goods received  Controls: Use "blind"
must be present in the voucher packet in order to have a P.O. copies to force receiving personnel to actually count
check issued. The cashier and/or treasurer should be the only goods; provide incentives for counting goods
parties authorized to sign checks. Two signatures should be 9: Theft of inventory  Controls: Secure inventory storage
required on all checks in excess of a predetermined dollar locations; make transfers of inventory with proper approval
amount to provide independent review of large expenditures. and documentation; do periodic physical count and
Also, signed checks should not be returned to accounts reconciliation with recorded amounts
payable, but should be mailed by the cashier or treasurer. 10: Errors in vendor invoices  Controls: Invoice accuracy
When a check is issued, all documents in the voucher package should be verified and compared to P.O.s and receiving
should be cancelled so that the voucher cannot be report data
resubmitted for payment. To provide another independent 11: Paying for goods not received  Controls: Voucher
review of checking account activity, someone not connected package and original invoice should be necessary for
with either accounts payable or the treasurer's office should payments
reconcile all bank accounts. To help circumvent check 12: Failure to take available purchase discounts  Controls:
alteration and forgery, check protection machines should be File approved invoices by due date; track invoices by due
used to write the dollar amount of the check as well as the date; use a cash budget to plan for cash needs
date. The paper the check is printed on should have some 13: Paying same invoice twice  Controls: Invoices should be

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approved only with a full voucher package and paid ones only provides identification and quantity data about the
should be canceled so they cannot be used again; do not pay product; it can also provide specific production information
invoices marked "Duplicate" or "Copy" such as date and time of manufacture, production run
14: Recording and posting errors for purchases and payments information, etc. Electronically encoding such information
 Controls: Data entry controls, and periodic reconciliation of into an integrated AIS provides up-to-the-minute inventory
subsidiary ledger with general ledger control account counts, as well as counts of units sold, and returns for use in a
15: Misappropriation of cash by paying fictitious vendors and perpetual inventory system. Also, both vendor and customers
alteration of checks  Controls: Restrict access to cash, blank can read tags and bar codes, and certain formats are
checks, and check signing machine; use check protection, pre- universal in nature. This allows goods to be sold virtually
numbered checks, and imprinted amounts on checks to cut anywhere in the world, allowing for easier global marketing
down on forgery and fraud; use petty cash fund for small efforts to be made by businesses. It also eliminates the need
expenditures only; have proper segregation of duties and for human data entry and reduces the risk of stockouts.
independent bank reconciliation function Page Ref: 374
16: Theft associated with EFT use  Controls: Access controls Objective: Learning Objective 3
to the system; encryption of transmissions; time-stamp and Difficulty : Moderate
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

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