Chapter 1The Information System: An Accountants Perspective

TRUE/ A!SE 1. Information is a business resource. ANS: T 2. An information system is an example of a natural system. ANS: F 3. Transaction processing systems convert non financial transactions into financial transactions. ANS: F !. Information lac"ing reliability may still #ave value. ANS: F $. A balance s#eet prepare% in conformity &it# 'AA( is an example of %iscretionary reporting. ANS: F ). T#e *anagement +eporting System provi%es t#e internal financial information nee%e% to manage a business. ANS: T ,. *ost of t#e inputs to t#e 'eneral -e%ger System come from t#e Financial +eporting System. ANS: F .. /#en preparing %iscretionary reports0 organi1ations can c#oose &#at information to report an% #o& to present it. ANS: T 2. +etrieval is t#e tas" of permanently removing obsolete or re%un%ant recor%s from t#e %atabase. ANS: F 13. Systems %evelopment represents .3 to 23 percent of t#e total cost of a computer system. ANS: F 11. T#e %atabase a%ministrator is responsible for t#e security an% integrity of t#e %atabase. ANS: T 12. A bac"bone system is completely finis#e%0 teste%0 an% rea%y for implementation.

ANS: F 13. T#e internal au%itor represents t#e interests of t#ir% party outsi%ers. ANS: F 1!. Information Tec#nology 4IT5 au%its can be performe% by bot# internal an% external au%itors. ANS: T 1$. T#e single largest user of computer services is t#e personnel function. ANS: F 1). Increase% control is one of t#e "ey a%vantages of %istribute% %ata processing. ANS: F 1,. T#e flat file approac# is most often associate% &it# so calle% legacy systems. ANS: T 1.. In a flat file system0 files are easily s#are% by users. ANS: F 12. -egacy systems &ere eliminate% in t#e effort to ma"e systems 627 compliant. ANS: F 23. 8ne of t#e greatest %isa%vantages of %atabase systems is t#at all %ata is al&ays available to all users. ANS: F 21. 9n%er S8: legislation au%itors are no longer allo&e% to provi%e consulting services to au%it clients. ANS: T 22. 9n%er S8: legislation au%itors are no loger allo&e% to provi%e consulting services to t#eir clients. ANS: F T#ey cannot provi%e suc# services to au%it clients but may still provi%e t#em to non au%it clients "U!TIP!E C#$ICE 1. /#ic# of t#e follo&ing is not a business resource; a. ra& material b. labor c. information %. all are business resources ANS: <

2. /#ic# level of management is responsible for s#ort term planning an% coor%ination of activities necessary to accomplis# organi1ational ob=ectives; a. operations management b. mi%%le management c. top management %. line management ANS: > 3. /#ic# level of management is responsible for controlling %ay to %ay operations; a. top management b. mi%%le management c. operations management %. executive management ANS: ? !. T#e ability to ac#ieve t#e goals of a system %epen%s upon t#e effective functioning an% #armonious interaction bet&een its subsystems. T#is is calle% a. system %ecomposition b. system re%un%ancy c. bac"up system %. subsystem inter%epen%ency ANS: < $. T#e value of information for users is %etermine% by all of t#e follo&ing but a. reliability b. relevance c. convenience %. completeness ANS: ? ). An example of a nonfinancial transaction is a. sale of pro%ucts b. cas# %isbursement c. log of customer calls %. purc#ase of inventory ANS: ? ,. An example of a financial transaction is a. t#e purc#ase of computer b. a supplier@s price list c. a %elivery sc#e%ule %. an employee benefit broc#ure ANS: A .. /#ic# subsystem is not part of t#e Accounting Information System; a. Transaction (rocessing System b. Axpert System c. 'eneral -e%gerBFinancial +eporting System %. *anagement +eporting System

ANS: > 2. T#e ma=or %ifference bet&een t#e Financial +eporting System 4F+S5 an% t#e *anagement +eporting System 4*+S5 is t#e a. F+S provi%es information to internal an% external usersC t#e *+S provi%es information to internal users b. F+S provi%es %iscretionary informationC t#e *+S provi%es non%iscretionary information c. F+S reports are prepare% using information provi%e% by t#e 'eneral -e%ger SystemC t#e *+S provi%es information to t#e 'eneral -e%ger System %. F+S reports are prepare% in flexible0 nonstan%ar%i1e% formatsC t#e *+S reports are prepare% in stan%ar%i1e%0 formal formats ANS: A 13. T#e purpose of t#e Transaction (rocessing System inclu%es all of t#e follo&ing except a. converting economic events into financial transactions b. recor%ing financial transactions in t#e accounting recor%s c. %istributing essential information to operations personnel to support t#eir %aily operations %. measuring an% reporting t#e status of financial resources an% t#e c#anges in t#ose resources ANS: < 11. T#e Transaction (rocessing System inclu%es all of t#e follo&ing cycles except a. t#e revenue cycle b. t#e a%ministrative cycle c. t#e expen%iture cycle %. t#e conversion cycle ANS: > 12. T#e primary input to t#e Transaction (rocessing System is a. a financial transaction b. an accounting recor% c. an accounting report %. a nonfinancial transaction ANS: A 13. /#en %esigning t#e %ata collection activity0 &#ic# type of %ata s#oul% be avoi%e%; a. %ata t#at is relevant b. %ata t#at is efficient c. %ata t#at is re%un%ant %. %ata t#at is accurate ANS: ? 1!. T#e most basic element of useful %ata in t#e %atabase is a. t#e recor% b. t#e "ey c. t#e file %. t#e attribute ANS: < 1$. In a %atabase0 a complete set of attributes for a single occurrence of an entity class is calle%

a. b. c. %.

a "ey a file a recor% a c#aracter

ANS: ? 1). Affective information #as all of t#e follo&ing c#aracteristics except a. relevance b. completeness c. summari1ation %. structure ANS: < 1,. <atabase management tas"s %o not inclu%e a. summari1ation b. storage c. retrieval %. %eletion ANS: A 1.. T#e aut#or %istinguis#es bet&een t#e Accounting Information System an% t#e management Information System base% on a. &#et#er t#e transactions are financial or nonfinancial b. &#et#er %iscretionary or non%iscretionary reports are prepare% c. t#e en% users of t#e reports %. t#e organi1ational structure of t#e business ANS: A 12. /#ic# activity is not part of t#e finance function; a. cas# receipts b. portfolio management c. cre%it %. general le%ger ANS: < 23. *ar"et researc# an% a%vertising are part of &#ic# business function; a. materials management b. finance c. mar"eting %. pro%uction ANS: ? 21. /#ic# function manages t#e financial resources of t#e firm t#roug# portfolio management0 ban"ing0 cre%it evaluation0 an% cas# receipts an% %isbursements; a. accounting b. finance c. materials management %. %istribution ANS: >

22. /#ic# of t#e follo&ing is not part of t#e accounting function; a. managing t#e financial information resource of t#e firm b. capturing an% recor%ing transactions in t#e %atabase c. %istributing transaction information to operations personnel %. managing t#e p#ysical information system of t#e firm ANS: < 23. T#e term Daccounting in%epen%enceE refers to a. %ata integrity b. separation of %uties0 suc# as recor% "eeping an% custo%y of p#ysical resources c. generation of accurate an% timely information %. business segmentation by function ANS: > 2!. In t#e %istribute% %ata processing approac# a. computer services are consoli%ate% an% manage% as a s#are% organi1ation resource b. t#e computer service function is a cost center c. t#e en% users are bille% using a c#arge bac" system %. computer services are organi1e% into small information processing units un%er t#e control of en% users ANS: < 2$. T#e %ata control group is responsible for a. performing t#e %ay to %ay processing of transactions b. security an% integrity of t#e %atabase c. liaison bet&een t#e en% user an% %ata processing %. provi%ing safe storage for off line %ata files ANS: ? 2). <ata processing %oes not involve a. %ata control b. computer operations c. system maintenance %. %ata conversion ANS: ? 2,. In%epen%ent au%iting is performe% by a. external au%itors b. internal accountants c. license% au%itors %. t#ir% party accountants ANS: A 2.. /#ic# in%ivi%ual is least involve% in ne& systems %evelopment; a. systems analyst b. external au%itor c. en% user %. %ata librarian

ANS: < 22. T#e ob=ectives of all information systems inclu%e all of t#e follo&ing except a. support for t#e ste&ar%s#ip function of management b. evaluating transaction %ata c. support for t#e %ay to %ay operations of t#e firm %. support for management %ecision ma"ing ANS: > 33. /#ic# in%ivi%uals may be involve% in t#e Systems <evelopment -ife ?ycle; a. accountants b. systems professionals c. en% users %. all of t#e above ANS: < 31. An appraisal function #ouse% &it#in t#e organi1ation t#at performs a &i%e range of services for management is a. internal au%iting b. %ata control group c. external au%iting %. %atabase a%ministration ANS: A 32. A%vantages of a %atabase system inclu%e all of t#e follo&ing except a. elimination of %ata re%un%ancy b. open access to all %ata by all users c. single up%ate for c#anges in %ata %. confi%ence t#at all %ata is current ANS: > 33. <isa%vantages of %istribute% %ata processing inclu%e all of t#e follo&ing except a. mismanagement of organi1ation&i%e resources b. #ar%&are an% soft&are incompatibility c. cost re%uctions %. %ifficulty in #iring Fualifie% IT professionals ANS: ? 3!. A%vantages of %istribute% %ata processing inclu%e eac# of t#e follo&ing except a. cost re%uctions b. better management of organi1ation resources c. improve% operational efficiency %. increase% user satisfaction ANS: > 3$. <isa%vantages of t#e %istribute% %ata processing approac# inclu%e all of t#e follo&ing except a. possible mismanagement of organi1ation resources b. re%un%ancy of tas"s c. soft&are incompatibility %. system is not responsive to t#e user@s situation

ANS: < 3). A+( pac"ages inclu%e all of t#e follo&ing mo%ules except a. #uman resources b. general le%ger c. inventory management %. t#ey inclu%e all of t#e above ANS: < 3,. All of t#e follo&ing are external en% users except a. cost accountants b. cre%itors c. stoc"#ol%ers %. tax aut#orities ANS: A 3.. 9seful information must possess all of t#e follo&ing c#aracteristics except a. relevance b. timelessness c. accuracy %. completeness ANS: > 32. T#e ob=ectives of an information system inclu%e eac# of t#e follo&ing except a. support for t#e ste&ar%s#ip responsibilities of management b. furt#ering t#e financial interests of s#are#ol%ers c. support for management %ecision ma"ing %. support for t#e firm@s %ay to %ay operations ANS: > !3. Accountants play many roles relating to t#e accounting information system0 inclu%ing all of t#e follo&ing except a. system users b. system %esigners c. system au%itors %. system converters ANS: < S#$RT A%S&ER 1. Antities outsi%e t#e organi1ation &it# a %irect or in%irect interest in t#e firm0 suc# as stoc"#ol%ers0 financial institutions0 an% government agencies0 are calle% GGGGGGGGGGGGGGGGGGGG. ANS: sta"e#ol%ers 2. T#e process of brea"ing a system into smaller subsystem parts is calle% GGGGGGGGGGGGGGGGGGGGGGGGGGGGGG.

ANS: system %ecomposition 3. Transactions &it# tra%ing partners inclu%e GGGGGGGGGGGGGGGGGGGG an% GGGGGGGGGGGGGGGGGGGG. ANS: sales0 purc#ases !. A system is a group of t&o or more interrelate% components t#at GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG. ANS: serve a common purpose $. T#e tas" of locating an% transferring an existing recor% from t#e %atabase for processing is calle% %ata GGGGGGGGGGGGGGGGGGGG. ANS: retrieval ). T#ree &ays t#at a business can be %ivi%e% into segments are by GGGGGGGGGGGGGGGGGGGGGGGGGG0 GGGGGGGGGGGGGGGGGGGGGGGGGG an% by GGGGGGGGGGGGGGGGGGGGGGGGGG. ANS: geograp#ic location0 pro%uct lines0 function ,. T#ree activities t#at are part of t#e finance function are GGGGGGGGGGGGGGGGGGGGGGGGGG0 GGGGGGGGGGGGGGGGGGGGGGGGGG0 an% GGGGGGGGGGGGGGGGGGGGGGGGGG. ANS: portfolio management0 treasury0 cre%it0 cas# %isbursements0 cas# receipts .. T&o %istinct &ays to structure t#e <ata (rocessing <epartment are GGGGGGGGGGGGGGGGGGGG an% GGGGGGGGGGGGGGGGGGGG. ANS: centrali1e%0 %istribute% 2. T&o met#o%s to acFuire information systems are to GGGGGGGGGGGGGGGGGGGGGGGGGG an% to GGGGGGGGGGGGGGGGGGGGGGGGGG. ANS: %evelop customi1e% systems0 purc#ase commercial systems 13. Au%its are con%ucte% by GGGGGGGGGGGGGGGGGGGG0 GGGGGGGGGGGGGGGGGGGG0 an% GGGGGGGGGGGGGGGGGGGG au%itors. ANS: internal0 external0 IT 11. Sales of pro%ucts to customers0 purc#ases of inventory from ven%ors0 an% cas# %isbursements are all example of GGGGGGGGGGGGGGGGGGGGGGGGGG. ANS:

financial transactions 12. T#e t#ree ma=or subsystems of t#e AIS are GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG0 GGGGGGGGGGGGGGGGGGGGGGGGGGG0 an% GGGGGGGGGGGGGGGGGGGGGGGGGGGGGGG. ANS: t#e transaction processing system0 t#e general le%gerBfinancial reporting system0 t#e management reporting system 13. T#e GGGGGGGGGGGGGGGGGGGGGGGGGG an% GGGGGGGGGGGGGGGGGGGGGGGGGG stan%ar%s t#at c#aracteri1e t#e AIS clearly %istinguis# it from t#e *IS. ANS: legal0 professional 1!. T#e transaction processing system is comprise% of t#ree cycles: GGGGGGGGGGGGGGGGGGGGGGGGGG0 GGGGGGGGGGGGGGGGGGGGGGGGGG0 an% GGGGGGGGGGGGGGGGGGGGGGGGGG. ANS: revenue0 expen%iture0 conversion 1$. T#e +AA mo%el i%entifies an organi1ation@s GGGGGGGGGGGGGGGGGGGG0 GGGGGGGGGGGGGGGGGGGG0 an% GGGGGGGGGGGGGGGGGGGG. ANS: resources0 events0 agents. 1). Sarbanes 8xley legislation reFuires t#at management %esigns an% implements controls over t#e entire financial reporting process. /#at systems %oes t#is inclu%e; ANS: T#is inclu%es t#e financial reporting system0 t#e general le%ger system0 an% t#e transaction processing systems t#at supply t#e %ata for financial reporting. 1,. /#y is it necessary to %istinguis# bet&een AIS an% *IS; ANS: >ecause of t#e #ig#ly integrative nature of mo%ern information systems0 management an% au%itors nee% a conceptual vie& of t#e information system t#at %istinguis#es "ey processes an% areas of ris" an% legal responsibility from t#e ot#er 4non legally bin%ing5 aspects of t#e system. /it#out suc# a mo%el0 critical management an% au%it responsibilities un%er S8: may not be met. 1.. Ho& #as S8: legislation impacte% t#e consulting practices of public accounting firms; ANS: (rior to S8:0 a gray area of overlap existe% bet&een assurance an% consulting services. Au%itors &ere once allo&e% to provi%e consulting services to t#eir au%it clients. T#is is no& pro#ibite% from %oing so un%er S8: legislation. 12. /#at is %iscretionary reporting; ANS: +eports use% by management t#at t#e company is not obligate% by la&0 regulation0 or contract to provi%e. T#ese are often use% for internal problem solving issues rat#er t#an by external constituents.

23. Name t#e five c#aracteristics of information; ANS: +elevance0 accuracy0 completeness0 summari1ation0 an% timeliness. ESSA' 1. ?ontrast t#e responsibilities of operations management0 mi%%le management0 an% top management. Axplain t#e %ifferent information nee%s for eac# level of management. ANS: 8perations management is %irectly responsible for controlling %ay to %ay operations. 8perations managers reFuire %etaile% information on in%ivi%ual transactions suc# as sales0 s#ipment of goo%s0 usage of labor an% materials in t#e pro%uction process0 an% internal transfers of resources from one %epartment to anot#er. >u%geting information an% instructions flo& %o&n&ar% from top an% mi%%le management to operations management. *i%%le managers perform s#ort term planning an% coor%ination of activities necessary to accomplis# organi1ational ob=ectives. *i%%le management reFuires information t#at is more summari1e% an% oriente% to&ar% reporting on overall performance an% problems0 rat#er t#an routine operations. Top management is responsible for longer term planning an% setting organi1ational ob=ectives. Information provi%e% to top management is #ig#ly summari1e%. 2. Axplain t#e %ifference bet&een %ata an% information. ANS: <ata are facts &#ic# may or may not be processe%C %ata #ave no particular impact on t#e user. Information is processe% %ata t#at causes t#e user to ta"e action. 3. /#y %o accountants nee% to un%erstan% t#e organi1ational structure of t#e business; ANS: T#e structure of an organi1ation reflects t#e %istribution of responsibility0 aut#ority0 an% accountability t#roug#out t#e organi1ation. Accountants nee% to un%erstan% t#is %istribution pattern in or%er to assess t#e information nee%s of users0 an% to %esign t#e Accounting Information System to meet t#ose nee%s. !. Several %isa%vantages of %istribute% %ata processing #ave been %iscusse%. <iscuss at least t#ree. ANS: <istributing t#e control of information resources can lea% to mismanagement of organizational resources. Hardware and software incompatibility can result. <istribution of responsibility can result in many users performing redundant tasks. In%ivi%ual user control can lea% to internal control concerns &#en users perform incompatible duties. Small organi1ational units may #ave %ifficulty hiring qualified IT professionals. <istribution of %ecision ma"ing can result in a lack of standards. $. Name an% explain t#e purpose of t#e t#ree ma=or subsystems of t#e AIS:

ANS: T(S '-BF+S *+S

recor%s t#e financial transactions of t#e firm pro%uces t#e financial statements etc. reFuire% by la& provi%es information to internal management for %ecision ma"ing

). /#at are t#e t#ree primary functions performe% by t#e transaction processing system; ANS: converting economic events into financial transaction0 recor%ing financial transaction in t#e accounting recor%s 4=ournals an% le%gers50 an% %istributing essential financial information to operations personnel to support %aily operations. ,. T#e most commonly state% benefits of <<( are cost savings0 increase% user satisfaction0 an% improve% operational efficiency. Axplain. ANS: T#e costs of bot# processing an% %ata storage #ave %ecline% significantly in t#e time since early automation. In a%%ition0 %ata entry can be %istribute% an% application complexity re%uce%. 9sers are typically more satisfie% &#en t#ey can control t#e resources t#at affect t#eir profitability. Also users &ant systems people &#o &ill respon% to t#eir nee%s an% involve t#em in %evelopment an% implementation of t#eir o&n systems. <elegation of cost control to in%ivi%ual units lea%s to more efficient use of unit resources. .. <ata re%un%ancy is %escribe% as a problem in flat file systems %ue to %ata storage0 up%ating0 an% currency issues. Axplain. ANS: <ata t#at is store% 13 %ifferent times ta"es up 13 times t#e storage space of %ata store% once. If %ata is store% in multiple files0 eac# file must be up%ate% &#en a c#ange occurs. If t#e issue of up%ates is mismanage% in a flat file environment0 some %ata may be unc#ange%0 t#erefore be non current an% lea% to incorrect %ecisions. 2. Axplain t#e elements of t#e +AA mo%el an% give an example of eac#. ANS: Aconomic resources are t#e assets of t#e organi1ation. T#ey are ob=ects t#at are scarce an% un%er t#e control of t#e organi1ation. T#ey %o not inclu%e accounts receivable. An example is inventory. Aconomic events are actions t#at affect c#anges is resources. An example is a sale to a customer. Aconomic agents are in%ivi%uals an% business units t#at participate in economic events. An example is a sales cler". 13. <istinguis# bet&een t#e accounting information system an% t#e management information system. ANS:

T#e AIS processes financial 4e.g.0 cas# receipts5 an% nonfinancial 4e.g.0 a%%ition to t#e approve% ven%or list5 transactions t#at %irectly affect t#e processing of t#e financial transaction. T#ese are #an%le% by t#e t#ree ma=or subsystems: transaction processing0 general le%gerBfinancial reporting0 an% management reporting. T#e *IS processes a%%itional nonfinancial transactions t#at contribute to t#e %ecision ma"ing of managers. 11. /#y #ave re engineering efforts been ma%e to integrate AIS an% *IS; ANS: *anagers of all areas typically nee% %ata from bot# t#e AIS an% t#e *IS. If t#e %ata nee%e% by managers for %ecision ma"ing processes are locate% in t&o or more %ata sets0 t#e preparation of reports is bot# inefficient an% expensive. Furt#er0 a lac" of coor%ination bet&een t#e t&o %ata sets can result in %ata t#at is not consistent an% is unreliable. 12. /#y is it important to organi1ationally separate t#e accounting function from ot#er functions of t#e organi1ation; ANS: T#e accounting function provi%es recor% "eeping services for all of t#e operations an% %ay to %ay activities of ot#er %epartments0 &#ic# affect t#e financial position of t#e organi1ation. +ecor% "eeping tas"s must be "ept separate from any area t#at #as custo%y over assets. T#us0 t#e accounting function must remain in%epen%ent so t#at t#e protection of t#e firm@s assets is carrie% out in an environment &it# minimum possibilities for t#eft. 13. T#e +AA mo%el is base% on t#e premise t#at Dbusiness %ata must not be preformatte% or artificially constraine% an% must reflect all relevant aspects of t#e un%erlying economic events.E /#at %oes t#is mean an% #o& is it applie% ANS: T#e +AA mo%el reFuires t#at accounting p#enomena be c#aracteri1e% in a manner consistent &it# t#e %evelopment of multiple user vie&s not simply t#ose of t#e accounting function. As suc#0 +AA proce%ures an% %atabases are structure% aroun% events rat#er t#an accounting artifacts suc# as =ournals0 le%gers0 c#arts of accounts0 an% %ouble entry accounting. 9n%er t#e +AA mo%el0 business organi1ations prepare financial statements %irectly from t#e event %atabase. 1!. A+( systems are comprise% of a #ig#ly integrate% set of stan%ar%i1e% mo%ules. <iscuss t#e a%vantages an% potential %isa%vantages of t#is approac#. ANS: A%vantages of A+( Anterprise +esource (lanning 4A+(5 systems enable organi1ations to automate an% integrate "ey business processes. A+(s brea" %o&n tra%itional functional barriers by facilitating %ata s#aring A+( soft&are embo%ies an% supports t#e best business practices of a given in%ustry t#us encouraging positive c#anges in t#e &ay firms %o business 8rgani1ations experience internal efficiencies by employing stan%ar% business practices among all organi1ational units. <isa%vantages of A+(

T#e implementation of an A+( system can be a massive un%erta"ing t#at can span several years. >ecause of t#eir complexity an% si1e0 fe& organi1ations are &illing or able to commit t#e necessary financial resources an% incur t#e ris" of %eveloping an A+( system in #ouse. Hence0 virtually all A+(s are commercial pro%ucts %esigne% to solve stan%ar%i1e% business problems. *any organi1ations #ave uniFue nee%s t#at reFuire customi1e% systems. 8rgani1ations t#at implement an A+( often nee% to mo%ify t#eir business processes to suit uniFue business functions0 particularly in%ustry specific tas"s. T#ese applications0 often calle% bolt ons0 are not al&ays %esigne% to communicate &it# A+( pac"ages. A+( pac"ages are enormously expensive. 8rgani1ation management s#oul% exercise great care in %eci%ing &#ic#0 if any0 A+( is best for t#em. 1$. <istinguis# bet&een t#e centrali1e% an% %istribute% approac#es to organi1ing t#e computer services function. ANS: In a centrali1e% %ata processing approac#0 t#e computer services function is centrally locate%. T#e %atabases are #ouse% in one place &#ere all of t#e %ata processing occurs by one or more main computers. All systems %evelopment an% maintenance &or" for t#e entire organi1ation is performe% by systems professionals. An% users &is#ing to #ave ne& systems or features must submit a formal reFuest to t#is group an% are usually prioriti1e% an% place% in a Fueue. In a %istribute% %ata processing approac#0 t#e ?(9s are sprea% out an% control over %ata an% processing is at t#e information processing unit 4I(95 level. T#us0 en% users #ave more influence over t#e systems %evelopment pro=ects0 &#ic# are typically #an%le% by systems professionals at t#e I(9 level.