Ais Master Reviewer 1 8 Accounting Info System Test Bank

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AIS Master Reviewer 1 8 - Accounting Info System Test bank
Accounting Information Systems (Far Eastern University)
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Chapter 1—The Information System: An 12. A backbone system is completely finished,

Accountant’s Perspective tested, and ready for implementation.
TRUE/FALSE ANS: F
1. Information is a business resource. 13. The internal auditor represents the interests of
third-party outsiders.
ANS: T
ANS: F
2. An information system is an example of a natural
system. 14. Information Technology (IT) audits can be
performed by both internal and external auditors.
ANS: F
ANS: T
3. Transaction processing systems convert non-
financial transactions into financial transactions. 15. The single largest user of computer services is
the personnel function.
ANS: F
ANS: F
4. Information lacking reliability may still have value.
16. Increased control is one of the key advantages of
ANS: F distributed data processing.
5. A balance sheet prepared in conformity with ANS: F
GAAP is an example of discretionary reporting.
17. The flat-file approach is most often associated
ANS: F with so-called legacy systems.
6. The Management Reporting System provides the ANS: T
internal financial information needed to manage a
business. 18. In a flat-file system, files are easily shared by
users.
ANS: T
ANS: F
7. Most of the inputs to the General Ledger System
come from the Financial Reporting System. 19. Legacy systems were eliminated in the effort to
make systems Y2K compliant.
ANS: F
ANS: F
8. When preparing discretionary reports,
organizations can choose what information to report 20. One of the greatest disadvantages of database
and how to present it. systems is that all data is always available to all
users.
ANS: T
ANS: F
9. Retrieval is the task of permanently removing
obsolete or redundant records from the database. 21. Under SOX legislation auditors are no longer
allowed to provide consulting services to audit
ANS: F clients.
10. Systems development represents 80 to 90 ANS: T
percent of the total cost of a computer system.
22. Under SOX legislation auditors are no loger
ANS: F allowed to provide consulting services to their
11. The database administrator is responsible for the clients.
security and integrity of the database. ANS: F
ANS: T They cannot provide such services to audit clients
but may still provide them to non-audit clients

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MULTIPLE CHOICE c. convenience
1. Which of the following is not a business resource? d. completeness
a. raw material ANS: C
b. labor 6. An example of a nonfinancial transaction is
c. information a. sale of products
d. all are business resources b. cash disbursement
ANS: D c. log of customer calls
2. Which level of management is responsible for d. purchase of inventory

short-term planning and coordination of activities
necessary to accomplish organizational objectives? ANS: C
a. operations management 7. An example of a financial transaction is
b. middle management a. the purchase of computer
c. top management b. a supplier’s price list
d. line management c. a delivery schedule
ANS: B d. an employee benefit brochure
3. Which level of management is responsible for ANS: A

controlling day-to-day operations? 8. Which subsystem is not part of the Accounting
a. top management Information System?
b. middle management a. Transaction Processing System
c. operations management b. Expert System
d. executive management c. General Ledger/Financial Reporting System
ANS: C d. Management Reporting System
4. The ability to achieve the goals of a system ANS: B

depends upon the effective functioning and 9. The major difference between the Financial
harmonious interaction between its subsystems. This Reporting System (FRS) and the Management
is called Reporting System (MRS) is the
a. system decomposition a. FRS provides information to internal and external
b. system redundancy users; the MRS provides information to internal
users
c. backup system
b. FRS provides discretionary information; the MRS
d. subsystem interdependency provides nondiscretionary information
ANS: D c. FRS reports are prepared using information

provided by the General Ledger System; the MRS
5. The value of information for users is determined provides information to the General Ledger System
by all of the following but
d. FRS reports are prepared in flexible,
a. reliability nonstandardized formats; the MRS reports are
b. relevance prepared in standardized, formal formats

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ANS: A b. the key
10. The purpose of the Transaction Processing c. the file

System includes all of the following except
d. the attribute
a. converting economic events into financial
transactions ANS: D
b. recording financial transactions in the accounting 15. In a database, a complete set of attributes for a
records single occurrence of an entity class is called
c. distributing essential information to operations a. a key

personnel to support their daily operations b. a file
d. measuring and reporting the status of financial c. a record
resources and the changes in those resources
d. a character
ANS: D
ANS: C
11. The Transaction Processing System includes all of
the following cycles except 16. Effective information has all of the following
characteristics except
a. the revenue cycle
a. relevance
b. the administrative cycle
b. completeness
c. the expenditure cycle
c. summarization
d. the conversion cycle
d. structure
ANS: B
ANS: D
12. The primary input to the Transaction Processing
System is 17. Database management tasks do not include
a. a financial transaction a. summarization
b. an accounting record b. storage
c. an accounting report c. retrieval
d. a nonfinancial transaction d. deletion
ANS: A ANS: A
13. When designing the data collection activity, 18. The author distinguishes between the
which type of data should be avoided? Accounting Information System and the
management Information System based on
a. data that is relevant
a. whether the transactions are financial or
b. data that is efficient nonfinancial
c. data that is redundant b. whether discretionary or nondiscretionary reports
d. data that is accurate are prepared
ANS: C c. the end users of the reports
14. The most basic element of useful data in the d. the organizational structure of the business
database is ANS: A
a. the record

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19. Which activity is not part of the finance function? b. separation of duties, such as record keeping and
custody of physical resources
a. cash receipts
c. generation of accurate and timely information
b. portfolio management
d. business segmentation by function
c. credit
ANS: B
d. general ledger
24. In the distributed data processing approach
ANS: D
a. computer services are consolidated and managed
20. Market research and advertising are part of as a shared organization resource
which business function?
b. the computer service function is a cost center
a. materials management
c. the end users are billed using a charge-back
b. finance system
c. marketing d. computer services are organized into small
d. production information processing units under the control of
end users
ANS: C
ANS: D
21. Which function manages the financial resources
of the firm through portfolio management, banking, 25. The data control group is responsible for
credit evaluation, and cash receipts and a. performing the day-to-day processing of
disbursements? transactions
a. accounting b. security and integrity of the database
b. finance c. liaison between the end user and data processing
c. materials management d. providing safe storage for off-line data files
d. distribution ANS: C
ANS: B 26. Data processing does not involve
22. Which of the following is not part of the a. data control
accounting function?
b. computer operations
a. managing the financial information resource of
the firm c. system maintenance
b. capturing and recording transactions in the d. data conversion

database
ANS: C
c. distributing transaction information to operations
personnel 27. Independent auditing is performed by
d. managing the physical information system of the a. external auditors

firm b. internal accountants
ANS: D c. licensed auditors
23. The term “accounting independence” refers to d. third-party accountants
a. data integrity ANS: A

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28. Which individual is least involved in new systems d. confidence that all data is current
development?
ANS: B
a. systems analyst
33. Disadvantages of distributed data processing
b. external auditor include all of the following except
c. end user a. mismanagement of organizationwide resources
d. data librarian b. hardware and software incompatibility
ANS: D c. cost reductions
29. The objectives of all information systems include d. difficulty in hiring qualified IT professionals
all of the following except
ANS: C
a. support for the stewardship function of
management 34. Advantages of distributed data processing
include each of the following except
b. evaluating transaction data
a. cost reductions
c. support for the day-to-day operations of the firm
b. better management of organization resources
d. support for management decision making
c. improved operational efficiency
ANS: B
d. increased user satisfaction
30. Which individuals may be involved in the
Systems Development Life Cycle? ANS: B
a. accountants 35. Disadvantages of the distributed data processing

approach include all of the following except
b. systems professionals
a. possible mismanagement of organization
c. end users resources
d. all of the above b. redundancy of tasks
ANS: D c. software incompatibility
31. An appraisal function housed within the d. system is not responsive to the user’s situation
organization that performs a wide range of services
for management is ANS: D
a. internal auditing 36. ERP packages include all of the following

modules except
b. data control group
a. human resources
c. external auditing
b. general ledger
d. database administration
c. inventory management
ANS: A
d. they include all of the above
32. Advantages of a database system include all of
the following except ANS: D
a. elimination of data redundancy 37. All of the following are external end users except
b. open access to all data by all users a. cost accountants
c. single update for changes in data b. creditors

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c. stockholders 3. Transactions with trading partners include

____________________ and
d. tax authorities ____________________.
ANS: A ANS: sales, purchases
38. Useful information must possess all of the 4. A system is a group of two or more interrelated
following characteristics except components that
a. relevance ___________________________________.
b. timelessness ANS: serve a common purpose
c. accuracy 5. The task of locating and transferring an existing

record from the database for processing is called
d. completeness data ____________________.
ANS: B ANS: retrieval
39. The objectives of an information system include 6. Three ways that a business can be divided into
each of the following except segments are by __________________________,
__________________________ and by
a. support for the stewardship responsibilities of __________________________.
management
ANS: geographic location, product lines, function
b. furthering the financial interests of shareholders
7. Three activities that are part of the finance
c. support for management decision making function are __________________________,
d. support for the firm’s day-to-day operations __________________________, and
__________________________.
ANS: B
ANS: portfolio management, treasury, credit, cash
40. Accountants play many roles relating to the disbursements, cash receipts
accounting information system, including all of the
following except 8. Two distinct ways to structure the Data Processing
Department are ____________________ and
a. system users ____________________.
b. system designers ANS: centralized, distributed
c. system auditors 9. Two methods to acquire information systems are
to __________________________ and to
d. system converters
__________________________.
ANS: D
ANS: develop customized systems, purchase
SHORT ANSWER commercial systems
1. Entities outside the organization with a direct or 10. Audits are conducted by
indirect interest in the firm, such as stockholders, ____________________, ____________________,
financial institutions, and government agencies, are and ____________________ auditors.
called ____________________.
ANS: internal, external, IT
ANS: stakeholders
11. Sales of products to customers, purchases of
2. The process of breaking a system into smaller inventory from vendors, and cash disbursements are
subsystem parts is called all example of __________________________.
______________________________.
ANS: financial transactions
ANS: system decomposition

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12. The three major subsystems of the AIS are their audit clients. This is now prohibited from doing
_______________________________, so under SOX legislation.
___________________________, and
_______________________________. 19. What is discretionary reporting?
ANS: the transaction processing system, the general ANS: Reports used by management that the
ledger/financial reporting system, the management company is not obligated by law, regulation, or
reporting system contract to provide. These are often used for
internal problem-solving issues rather than by
13. The __________________________ and external constituents.
__________________________ standards that
characterize the AIS clearly distinguish it from the 20. Name the five characteristics of information?
MIS. ANS: Relevance, accuracy, completeness,
ANS: legal, professional summarization, and timeliness.
14. The transaction processing system is comprised Chapter 2—Introduction to Transaction

of three cycles: __________________________, Processing
__________________________, and
__________________________. TRUE/FALSE
ANS: revenue, expenditure, conversion 1. Processing more transactions at a lower unit cost
makes batch processing more efficient than real-
15. The REA model identifies an organization’s time systems.
____________________, ____________________,
and ____________________. ANS: T
ANS: resources, events, agents. 2. The process of acquiring raw materials is part of
the conversion cycle.
16. Sarbanes-Oxley legislation requires that
management designs and implements controls over ANS: F
the entire financial reporting process. What systems 3. Directing work-in-process through its various
does this include? stages of manufacturing is part of the conversion
ANS: This includes the financial reporting system, the cycle.
general ledger system, and the transaction ANS: T
processing systems that supply the data for financial
reporting. 4. The top portion of the monthly bill from a credit
card company is an example of a turn-around
17. Why is it necessary to distinguish between AIS document.
and MIS?
ANS: T
ANS: Because of the highly integrative nature of
modern information systems, management and 5. The general journal is used to record recurring
auditors need a conceptual view of the information transactions that are similar in nature.
system that distinguishes key processes and areas of
risk and legal responsibility from the other (non- ANS: F
legally binding) aspects of the system. Without such 6. Document flowcharts are used to represent
a model, critical management and audit systems at different levels of detail.
responsibilities under SOX may not be met.
ANS: F
18. How has SOX legislation impacted the consulting
practices of public accounting firms? 7. Data flow diagrams represent the physical system.
ANS: Prior to SOX, a gray area of overlap existed ANS: F

between assurance and consulting services. Auditors
were once allowed to provide consulting services to

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8. Document flowcharts are often used to depict ANS: F

processes that are handled in batches.
20. An inverted triangle with the letter “N”
ANS: T represents a file in “name” order.
9. Program flowcharts depict the type of media ANS: F

being used (paper, magnetic tape, or disks) and
terminals. 21. Real-time processing in systems that handle large
volumes of transactions each day can create
ANS: F operational inefficiencies.
10. System flowcharts represent the input sources, ANS: T

programs, and output products of a computer
system. 22. Operational inefficiencies occur because
accounts unique to many concurrent transactions
ANS: T need to be
11. Program flowcharts are used to describe the updated in real time.
logic represented in system flowcharts.
ANS: F
ANS: T
23. Operational inefficiencies occur because
12. Batch processing systems can store data on accounts common to many concurrent transactions
direct access storage devices. need to be
ANS: T updated in real time.
13. Backups are automatically produced in a direct ANS: T

access file environment.
24. Batch processing of noncritical accounts
ANS: F improves operational efficiency.
14. The box symbol represents a temporary file. ANS: T
ANS: F 25. Batch processing of accounts common to many

concurrent transactions reduces operational
15. Auditors may prepare program flowcharts to efficiency.
verify the correctness of program logic.
ANS: F
ANS: T
MULTIPLE CHOICE
16. A control account is a general ledger account
which is supported by a subsidiary ledger. 1. Which system is not part of the expenditure cycle?
ANS: T a. cash disbursements
17. The most significant characteristic of direct b. payroll

access files is access speed.
c. production planning/control
ANS: T
d. purchases/accounts payable
18. Real time processing is used for routine
transactions in large numbers. ANS: C
ANS: F 2. Which system produces information used for

inventory valuation, budgeting, cost control,
19. Batch processing is best used when timely
information is needed because this method performance reporting, and make-buy decisions?
processes data a. sales order processing
efficiently.

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b. purchases/accounts payable b. accounts receivable
c. cash disbursements c. fixed assets
d. cost accounting d. inventory
ANS: D ANS: A
3. Which of the following is a turn-around 8. Subsidiary ledgers are used in manual accounting
document? environments. What file is comparable to a
a. remittance advice subsidiary ledger in a computerized environment?
b. sales order a. archive file
c. purchase order b. reference file
d. payroll check c. transaction file
ANS: A d. master file
4. The order of the entries made in the ledger is by ANS: D
a. transaction number 9. A journal is used in manual accounting

environments. What file is comparable to a journal
b. account number in a
c. date computerized environment?
d. user a. archive file
ANS: B b. reference file
5. The order of the entries made in the general c. transaction file
journal is by
d. master file
a. date
ANS: C
b. account number
10. In a computerized environment, a list of
c. user authorized suppliers would be found in the
d. customer number a. master file
ANS: A b. transaction file
6. In general a special journal would not be used to c. reference file
record
d. archive file
a. sales
ANS: C
b. cash disbursements
11. Which of the following is an archive file?
c. depreciation
a. an accounts payable subsidiary ledger
d. purchases
b. a cash receipts file
ANS: C
c. a sales journal
7. Which account is least likely to have a subsidiary
ledger? d. a file of accounts receivable that have been
written off
a. sales

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ANS: D a. depict logical tasks that are being performed, but

not who is performing them
12. Which document is not a type of source
document? b. illustrate the relationship between processes, and
the documents that flow between them
a. a sales order
and trigger activities
b. an employee time card
c. represent relationships between key elements of
c. a paycheck the computer system
d. a sales return receipt d. describe the logic of the process
ANS: C ANS: B
13. The most important purpose of a turn-around 17. When determining the batch size, which
document is to consideration is the least important?
a. serve as a source document a. achieving economies by grouping together large
b. inform a customer of the outstanding amount numbers of transactions
payable b. complying with legal mandates
c. provide an audit trail for the external auditor c. providing control over the transaction process
d. inform the bank of electronic funds deposits d. balancing the trade off between batch size and
ANS: A error detection
14. Which type of graphical documentation ANS: B

represents systems at different levels of detail? 18. In contrast to a real-time system, in a batch
a. data flow diagram processing system
b. document flowchart a. there is a lag between the time when the

economic event occurs and the financial records
c. system flowchart
are updated
d. program flowchart
b. relatively more resources are required
ANS: A
c. a greater resource commitment per unit of output
15. Data flow diagrams is required
a. depict logical tasks that are being performed, but d. processing takes place when the economic event
not who is performing them occurs
b. illustrate the relationship between processes, and ANS: A
the documents that flow between them
19. In contrast to a batch processing system, in a
and trigger activities real-time system
c. represent relationships between key elements of a. a lag occurs between the time of the economic
the computer system event and when the transaction is recorded
d. describe in detail the logic of the process b. relatively fewer hardware, programming, and
training resources are required
ANS: A
c. a lesser resource commitment per unit of output is
16. Document flowcharts required

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d. processing takes place when the economic event b. turn-around document

occurs
c. master document
ANS: D
d. product document
20. The type of transaction most suitable for batch
processing is ANS: C
a. airline reservations 25. Which method of processing does not use the
destructive update approach?
b. credit authorization
a. batch processing using direct access files
c. payroll processing
b. real-time processing
d. adjustments to perpetual inventory
c. batch processing using sequential files
ANS: C
d. all of the above use the destructive update
21. The type of transaction most suitable for real- approach
time processing is
ANS: C
a. recording fixed asset purchases
26. Which symbol represents a data store?
b. recording interest earned on long-term bonds
27. Which symbol represents a manual operation?
c. adjusting prepaid insurance
28. Which symbol represents accounting records?
d. recording a sale on account
29. Which symbol represents a document?
ANS: D
30. Which symbol represents a magnetic tape
22. Which step is not found in batch processing using (sequential storage device)?
sequential files?
31. Which symbol represents a decision?
a. control totals
32. The characteristics that distinguish between
b. sort runs batch and real-time systems include all of the
following
c. edit runs
except
d. immediate feedback of data entry errors
a. time frame
ANS: D
b. resources used
23. Both the revenue and the expenditure cycle can
be viewed as having two key parts. These are c. file format
a. manual and computerized d. efficiency of processing
b. physical and financial ANS: C
c. input and output 33. A file that stores data used as a standard when
processing transactions is
d. batch and real-time
a. a reference file
ANS: B
b. a master file
24. All of the following can provide evidence of an
economic event except c. a transaction file
a. source document d. an archive file

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ANS: A c. accounts unique to many concurrent transactions

need to be updated in real time.
34. Sequential storage means
d. None of the above are true statements
a. data is stored on tape
ANS: B
b. access is achieved through an index
39. Operational efficiencies can be improved by
c. access is direct
a. updating accounts both common and unique to
d. reading record 100 requires first reading records 1 many concurrent transactions in real time.
to 99
b. updating accounts both common and unique to
ANS: D many concurrent transactions in batch mode.
35. Real-time processing would be most beneficial in c. updating accounts unique to many concurrent
handling a firm’s transactions in real time and updating common
a. fixed asset records accounts in batch mode.
b. retained earning information d. None of the above are true statements
c. merchandise inventory ANS: C
d. depreciation records SHORT ANSWER
ANS: C 1. List two of the three transaction cycles.
36. Which accounting application is least suited for ANS: expenditure cycle, conversion cycle, revenue
batch processing? cycle
a. general ledger 2. Documents that are created at the beginning of

the transaction are called
b. vendor payments
__________________________.
c. sales order processing
ANS: source documents
d. payroll
3. ______________________________________ are
ANS: C the two data processing approaches used in modern
systems.
37. Which accounting application is best suited for
batch processing? ANS: Batch processing and real-time processing
a. general ledger 4. Give a specific example of a turn-around
document.
b. vendor payments
ANS: credit card, electricity, water, or telephone bill,
c. sales order processing etc.
d. payroll 5. Explain when it is appropriate to use special
ANS: D journals.
38. Operational inefficiencies occur because ANS: Special journals are used to record large
volumes of recurring transactions that are similar in
a. accounts both common and unique to many nature.
concurrent transactions need to be updated in real
time. 6. What are the subsystems of the revenue cycle?
b. accounts common to many concurrent ANS: sales order processing, cash receipts
transactions need to be updated in real time.

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7. What are the subsystems of the expenditure ANS: time lag, resource use, efficiency
cycle?
16. Give one advantages of real-time data collection.
ANS: purchasing, cash disbursements, payroll
ANS: certain transaction errors can be prevented or
8. Most organizations have replaced the general detected and corrected at their source.
journal with a _______________________________.
17. In one sentence, what does updating a master
ANS: journal voucher system file record involve?
9. Provide a specific example of a general ledger ANS: Updating a master file record involves changing
account and a corresponding subsidiary ledger. the value of one or more of its variable fields to
reflect the effects of a transaction.
ANS:
18. What is destructive update?
accounts receivable control account and accounts
receivable subsidiary, accounts payable control ANS: Destructive update involves replacing an old
data value with a new value and thus destroying the
account and accounts payable subsidiary, inventory original.
control and a subsidiary of specific inventory
Chapter 3—Ethics, Fraud, and Internal
items, fixed asset control account and a subsidiary of
specific fixed assets, notes receivable/payable Control
and individual notes receivable and payable TRUE/FALSE
10. Name five documentation techniques? 1. The ethical principle of justice asserts that the
benefits of the decision should be distributed fairly
ANS: entity-relationship diagrams, data flow to those who share the risks.
diagrams, document flowcharts, system flowcharts,
program flowcharts ANS: T
11. Why is the audit trail important? 2. The ethical principle of informed consent suggests
that the decision should be implemented so as to
ANS: The audit trail is used to track transactions minimize all of the risks and to avoid any
from the source document to the financial unnecessary risks.
statements and vice versa. Accountants use the
audit trail to correct errors, answer queries, and ANS: F
perform audits. 3. Employees should be made aware of the firm’s
12. List a method of data processing that uses the commitment to ethics.
destructive update approach? ANS: T
ANS: batch method using direct access files or real- 4. Business ethics is the analysis of the nature and
time processing social impact of computer technology, and the
13. Only four symbols are used in data flow corresponding formulation and justification of
diagrams. What are they? policies for the ethical use of such technology.
ANS: process, data store, data flow, entity ANS: F
14. Which flowchart depicts the relationship 5. Para computer ethics is the exposure to stories
between processes and the documents that flow and reports found in the popular media regarding
between them and trigger activities? the good or bad ramifications of computer
technology.
ANS: document flowcharts
ANS: F
15. What are the three characteristics that are used
to distinguish between batch and real-time systems. 6. Source code is an example of intellectual property.

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ANS: T ANS: F
7. Copyright laws and computer industry standards 19. A key modifying assumption in internal control is
have been developed jointly and rarely conflict. that the internal control system is the responsibility
of management.
ANS: F
ANS: T
8. Business bankruptcy cases always involve
fraudulent behavior. 20. Database management fraud includes altering,
updating, and deleting an organization’s data.
ANS: F
ANS: F
9. Defalcation is another word for financial fraud.
21. While the Sarbanes-Oxley Act prohibits auditors
ANS: T from providing non-accounting services to their
10. The trend toward distributed data processing audit clients, they are not prohibited from
increases the exposure to fraud from remote performing such services for non-audit clients or
locations. privately held
ANS: T companies.
11. The external auditor is responsible for ANS: T

establishing and maintaining the internal control 22. The Sarbanes-Oxley Act requires the audit
system. committee to hire and oversee the external auditors.
ANS: F ANS: T
12. Segregation of duties is an example of an internal 23. Section 404 requires that corporate management
control procedure. (including the CEO) certify their organization’s
ANS: T internal controls on a quarterly and annual basis.
13. Controls in a computer-based information ANS: F

system are identical to controls in a manual system. 24. Section 302 requires the management of public
ANS: F companies to assess and formally report on the
effectiveness of their organization’s internal
14. Preventive controls are passive techniques controls.
designed to reduce fraud.
ANS: F
ANS: T
25. The objective of SAS 99 is to seamlessly blend
15. Ethical issues and legal issues are essentially the the auditor’s consideration of fraud into all phases of
same. the audit process.
ANS: F ANS: T
16. Internal control systems are recommended but MULTIPLE CHOICE
not required of firms subject to the Foreign Corrupt
Practices Act. 1. Which ethical principle states that the benefit
from a decision must outweigh the risks, and that
ANS: F there is no alternative decision that provides the
same or greater benefit with less risk?
17. Operations fraud is the misuse or theft of the
firm’s computer resources. a. minimize risk
ANS: T b. justice
18. The Foreign Corrupt Practices Act requires only c. informed consent
that a firm keep good records.

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d. proportionality a. is perpetrated at a level to which internal controls

do not apply
ANS: D
b. involves misstating financial statements
2. Individuals who acquire some level of skill and
knowledge in the field of computer ethics are c. involves the direct conversion of cash or other
involved in which level of computer ethics? assets to the employee’s personal benefit
a. para computer ethics d. involves misappropriating assets in a series of

complex transactions involving third parties
b. pop computer ethics
ANS: C
c. theoretical computer ethics
7. Forces which may permit fraud to occur do not
d. practical computer ethics include
ANS: A a. a gambling addiction
3. All of the following are issues of computer security b. lack of segregation of duties
except
c. centralized decision making environment
a. releasing incorrect data to authorized individuals
d. questionable integrity of employees
b. permitting computer operators unlimited access
to the computer room ANS: C
c. permitting access to data by unauthorized 8. Which of the following best describes lapping?
individuals
a. applying cash receipts to a different customer’s
d. providing correct data to unauthorized individuals account in an attempt to conceal previous thefts of
funds
ANS: B
b. inflating bank balances by transferring money
4. Which characteristic is not associated with among different bank accounts
software as intellectual property?
c. expensing an asset that has been stolen
a. uniqueness of the product
d. creating a false transaction
b. possibility of exact replication
ANS: A
c. automated monitoring to detect intruders
9. Operations fraud includes
d. ease of dissemination
a. altering program logic to cause the application to
ANS: C process data incorrectly
5. For an action to be called fraudulent, all of the b. misusing the firm’s computer resources
following conditions are required except
c. destroying or corrupting a program’s logic using a
a. poor judgment computer virus
b. false representation d. creating illegal programs that can access data files
c. intent to deceive to alter, delete, or insert values
d. injury or loss ANS: B
ANS: A 10. Who is responsible for establishing and

maintaining the internal control system?
6. One characteristic of employee fraud is that the
fraud a. the internal auditor

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b. the accountant d. comparing the accounts receivable subsidiary

ledger to the control account
c. management
ANS: A
d. the external auditor
15. A well-designed purchase order is an example of
ANS: C a
11. The concept of reasonable assurance suggests a. preventive control
that
b. detective control
a. the cost of an internal control should be less than
the benefit it provides c. corrective control
b. a well-designed system of internal controls will d. none of the above

detect all fraudulent activity
ANS: A
c. the objectives achieved by an internal control
system vary depending on the data processing 16. A physical inventory count is an example of a
method a. preventive control
d. the effectiveness of internal controls is a function b. detective control
of the industry environment
c. corrective control
ANS: A
d. feedforward control
12. Which of the following is not a limitation of the
internal control system? ANS: B
a. errors are made due to employee fatigue 17. The bank reconciliation uncovered a
transposition error in the books. This is an example
b. fraud occurs because of collusion between two of a
employees
a. preventive control
c. the industry is inherently risky
b. detective control
d. management instructs the bookkeeper to make
fraudulent journal entries c. corrective control
ANS: C d. none of the above
13. The most cost-effective type of internal control is ANS: B
a. preventive control 18. In balancing the risks and benefits that are part
of every ethical decision, managers receive guidance
b. accounting control from each of the following except
c. detective control a. justice
d. corrective control b. self interest
ANS: A c. risk minimization
14. Which of the following is a preventive control? d. proportionality
a. credit check before approving a sale on account ANS: B
b. bank reconciliation 19. Which of the following is not an element of the
c. physical inventory count internal control environment?
a. management philosophy and operating style

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b. organizational structure of the firm a. to avoid collusion between the programmer and
the computer operator
c. well-designed documents and records
b. to ensure that supervision is not required
d. the functioning of the board of directors and the
audit committee c. to prevent the record keeper from authorizing
transactions
ANS: C
d. to enable the firm to function more efficiently
20. Which of the following suggests a weakness in
the internal control environment? ANS: C
a. the firm has an up-to-date organizational chart 24. Segregation of duties in the computer-based
information system includes
b. monthly reports comparing actual performance to
budget are distributed to managers a. separating the programmer from the computer
operator
c. performance evaluations are prepared every three
years b. preventing management override
d. the audit committee meets quarterly with the c. separating the inventory process from the billing
external auditors process
ANS: C d. performing independent verifications by the

computer operator
21. Which of the following indicates a strong internal
control environment? ANS: A
a. the internal audit group reports to the audit 25. Which of the following is not an internal control
committee of the board of directors procedure?
b. there is no segregation of duties between a. authorization

organization functions
b. management’s operating style
c. there are questions about the integrity of
management c. independent verification
d. adverse business conditions exist in the industry d. accounting records
ANS: A ANS: B
22. According to SAS 78, an effective accounting 26. The decision to extend credit beyond the normal
system performs all of the following except credit limit is an example of
a. identifies and records all valid financial a. independent verification

transactions b. authorization
b. records financial transactions in the appropriate c. segregation of functions
accounting period
d. supervision
c. separates the duties of data entry and report
generation ANS: B
d. records all financial transactions promptly 27. When duties cannot be segregated, the most
important internal control procedure is
ANS: C
a. supervision
23. Which of the following is the best reason to
separate duties in a manual system? b. independent verification
c. access controls

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d. accounting records 32. The board of directors consists entirely of

personal friends of the chief executive officer. This
ANS: A indicates a weakness in
28. An accounting system that maintains an a. the accounting system
adequate audit trail is implementing which internal
control procedure? b. the control environment
a. access controls c. control procedures
b. segregation of functions d. this is not a weakness
c. independent verification ANS: B
d. accounting records 33. Computer fraud can take on many forms,

including each of the following except
ANS: D
a. theft or illegal use of computer-readable
29. Employee fraud involves three steps. Of the information
following, which is not involved?
b. theft, misuse, or misappropriation of computer
a. concealing the crime to avoid detection equipment
b. stealing something of value c. theft, misuse, or misappropriation of assets by
c. misstating financial statements altering computer-readable records and files
d. converting the asset to a usable form d. theft, misuse, or misappropriation of printer

supplies
ANS: C
ANS: D
30. Which of the following is not an example of
independent verification? 34. When certain customers made cash payments to
reduce their accounts receivable, the bookkeeper
a. comparing fixed assets on hand to the accounting embezzled the cash and wrote off the accounts as
records uncollectible. Which control procedure would most
likely prevent this irregularity?
b. performing a bank reconciliation
a. segregation of duties
c. comparing the accounts payable subsidiary ledger
to the control account b. accounting records
d. permitting authorized users only to access the c. accounting system
accounting system
d. access controls
ANS: D
ANS: A
31. The importance to the accounting profession of
the Foreign Corrupt Practices Act of 1977 is that 35. The office manager forgot to record in the
accounting records the daily bank deposit. Which
a. bribery will be eliminated control procedure would most likely prevent or
detect this error?
b. management will not override the company’s
internal controls a. segregation of duties
c. firms are required to have an effective internal b. independent verification
control system
c. accounting records
d. firms will not be exposed to lawsuits
d. supervision
ANS: C
ANS: B

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36. Business ethics involves c. management override
a. how managers decide on what is right in d. stability of systems

conducting business
ANS: D
b. how managers achieve what they decide is right
for the business 41. Management can expect various benefits to
follow from implementing a system of strong
c. both a and b internal control. Which of the following benefits is
least likely to occur?
d. none of the above
a. reduced cost of an external audit.
ANS: C
b. prevents employee collusion to commit fraud.
37. All of the following are conditions for fraud
except c. availability of reliable data for decision-making
purposes.
a. false representation
d. some assurance of compliance with the Foreign
b. injury or loss Corrupt Practices Act of 1977.
c. intent e. some assurance that important documents and
d. material reliance records are protected.
ANS: D ANS: B
38. The four principal types of fraud include all of the 42. Which of the following situations is not a
following except segregation of duties violation?
a. bribery a. The treasurer has the authority to sign checks but

gives the signature block to the assistant treasurer to
b. gratuities run the check-signing machine.
c. conflict of interest b. The warehouse clerk, who has the custodial
responsibility over inventory in the warehouse,
d. economic extortion selects the vendor and authorizes purchases when
ANS: B inventories are low.
39. The characteristics of useful information include c. The sales manager has the responsibility to
approve credit and the authority to write off
a. summarization, relevance, timeliness, accuracy, accounts.
and completeness
d. The department time clerk is given the
b. relevance, summarization, accuracy, timelessness, undistributed payroll checks to mail to absent
and completeness employees.
c. timeliness, relevance, summarization, accuracy, e. The accounting clerk who shares the record
and conciseness keeping responsibility for the accounts receivable
subsidiary ledger performs the monthly
d. disaggregation, relevance, timeliness, accuracy,
reconciliation of the subsidiary ledger and the
and completeness
control account.
ANS: A
ANS: B
40. Internal control system have limitations. These
43. Which of the following is not an issue to be
include
addressed in a business code of ethics required by
a. possibility of honest error the SEC?
b. circumvention a. Conflicts of interest

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b. Full and Fair Disclosures c. locking the warehouse
c. Legal Compliance d. preparing a trial balance
d. Internal Reporting of Code Violations e. counting inventory
e. All of the above are issues to be addressed ANS: A. preventive; B. detective; C. preventive; D.
detective; E. detective
ANS: E
Use the internal control procedures listed below to
SHORT ANSWER complete the statements.
1. What are the main issues to be addressed in a segregation of duties
business code of ethics required by the SEC?
specific authorization
ANS: Conflicts of interest, Full and Fair Disclosures,
Legal Compliance, Internal Reporting of Code general authorization
Violations, Accountability
accounting records
2. List the four broad objectives of the internal
control system. access controls
ANS: safeguard assets, ensure the accuracy and independent verification

reliability of accounting records, promote supervision
organizational efficiency, comply with
management’s policies and procedures 7. A clerk reorders 250 items when the inventory
falls below 25 items. This is an example of
3. Explain the purpose of the PCAOB __________________________.
ANS: The PCAOB is empowered to set auditing, ANS: general authorization
quality control, and ethics standards; to inspect
registered accounting firms; to conduct 8. The internal audit department recalculates payroll
investigations; and to take disciplinary actions. for several employees each pay period. This is an
example of __________________________.
4. What are the five internal control components
described in the SAS 78 / COSO framework ANS: independent verification
ANS: the control environment, risk assessment, 9. Locking petty cash in a safe is an example of
information and communication, monitoring, and __________________________.
control activities
ANS: access controls
5. What are management responsibilities under
section 302 and 404? 10. Approving a price reduction because goods are
damaged is an example of
ANS: Section 302 requires that corporate __________________________.
management (including the CEO) certify their
organization’s internal controls on a quarterly and ANS: specific authorization
annual basis. Section 404 requires the management 11. Using cameras to monitor the activities of
of public companies to assess and formally report on cashiers is an example of
the effectiveness of their organization’s internal __________________________.
controls.
ANS: supervision
6. Identify to indicate whether each procedure is a
preventive or detective control. 12. Not permitting the computer programmer to
enter the computer room is an example of
a. authorizing a credit sale _______________________________.
b. preparing a bank reconciliation ANS: segregation of duties

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13. Sequentially numbering all sales invoices is an the stolen check. This is in effect a small scale Ponzi
example of __________________________. scheme.
ANS: accounting records 20. What are the six broad classes of physical control
activities defined by SAS 78?
14. What are the five conditions necessary for an act
to be considered fraudulent? ANS: Transaction authorization, segregation of
duties, supervision, access controls, accounting
ANS: false representation, material fact, intent, records, independent verification
justifiable reliance, and injury or loss
Chapter 4—The Revenue Cycle
15. What is the objective of SAS 99?
TRUE/FALSE
ANS: The objective of SAS 99 is to seamlessly blend
the auditor’s consideration of fraud into all phases of 1. The packing slip is also known as the shipping
the audit process. notice.
16. Distinguish between exposure and risk. ANS: F
ANS: Exposure is the absence or weakness of a 2. The bill of lading is a legal contract between the
control which increases the firm’s risk of financial buyer and the seller.
loss or injury. Risk is the probability of incurring such
a loss or injury. ANS: F
17. Explain the characteristics of management fraud. 3. Another name for the stock release form is the
picking ticket.
ANS: Management fraud typically occurs at levels
above where the internal control system is effective. ANS: T
Financial statements are frequently modified to 4. Warehouse stock records are the formal
make the firm appear more healthy than it actually accounting records for inventory.
is.
ANS: F
If any misappropriation of assets occurs, it is usually
5. The purpose of the invoice is to bill the customer.
well hidden.
ANS: T
18. The text discusses many questions about
personal traits of employees which might help 6. In most large organizations, the journal voucher
uncover fraudulent activity. What are three? file has replaced the formal general journal.
ANS: executives: with high personal debt, living ANS: T
beyond their means, engaged in habitual gambling,
appear to abuse alcohol or drugs, appear to lack 7. The cash receipts journal is a special journal.
personal codes of ethics, appear to be unstable
ANS: T
19. Give two examples of employee fraud and
8. In the revenue cycle, the internal control “limit
explain how the theft might occur.
access” applies to physical assets only.
ANS: Charges to expense accounts: Cash could be
ANS: F
stolen and charged to a miscellaneous expense
account. Once the account is closed, detection 9. In real-time processing systems, routine credit
would be more difficult. authorizations are automated.
Lapping: This involves converting cash receipts to ANS: T
personal use. If a customer’s check is taken, his/her
balance will not reflect a payment and will be 10. In a computerized accounting system,
detected when a statement is sent. In order to segregation of functions refers to inventory control,
conceal this fraud, a later payment is used to cover accounts receivable, billing, and general ledger tasks.

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ANS: F d. three subsystems–sales order processing, credit

authorization, and cash receipts
11. A written customer purchase order is required to
trigger the sales order system. ANS: B
ANS: F 2. The reconciliation that occurs in the shipping

department is intended to ensure that
12. Inventory control has physical custody of
inventory. a. credit has been approved
ANS: F b. the customer is billed for the exact quantity

shipped
13. The principal source document in the sales order
system is the sales order. c. the goods shipped match the goods ordered
ANS: T d. inventory records are reduced for the goods

shipped
14. Sales orders should be prenumbered documents.
ANS: C
ANS: T
3. The adjustment to accounting records to reflect
15. Integrated accounting systems automatically the decrease in inventory due to a sale occurs in the
transfer data between modules.
a. warehouse
ANS: T
b. shipping department
16. If a customer submits a written purchase order,
there is no need to prepare a sales order. c. billing department
ANS: F d. inventory control department
17. Sales return involves receiving, sales, credit, and ANS: D

billing departments, but not accounts receivable.
4. Which document triggers the revenue cycle?
ANS: F
a. the sales order
18. A remittance advice is a form of turn-around
document. b. the customer purchase order
ANS: T c. the sales invoice
19. A bill of lading is a request for payment for d. the journal voucher
shipping charges. ANS: B
ANS: F 5. Copies of the sales order can be used for all of the
20. In point of sale systems, authorization takes the following except
form of validation of credit card charges. a. purchase order
ANS: T b. credit authorization
MULTIPLE CHOICE c. shipping notice
1. The revenue cycle consists of d. packing slip
a. one subsystem–order entry ANS: A
b. two subsystems–sales order processing and cash 6. The purpose of the sales invoice is to
receipts
a. record reduction of inventory
c. two subsystems–order entry and inventory control

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b. transfer goods from seller to shipper a. the customer purchase order is received
c. bill the customer b. the backordered goods are shipped
d. select items from inventory for shipment c. the original goods are shipped
ANS: C d. customers are not billed for backorders because a

backorder is a lost sale
7. The customer open order file is used to
ANS: B
a. respond to customer queries
12. Usually specific authorization is required for all of
b. fill the customer order the following except
c. ship the customer order a. sales on account which exceed the credit limit
d. authorize customer credit b. sales of goods at the list price
ANS: A c. a cash refund for goods returned without a receipt
8. The stock release copy of the sales order is not d. write off of an uncollectible account receivable
used to
ANS: B
a. locate and pick the items from the warehouse
shelves 13. Which of following functions should be
segregated?
b. record any out-of-stock items
a. opening the mail and making the journal entry to
c. authorize the warehouse clerk to release custody record cash receipts
of the inventory to shipping
b. authorizing credit and determining reorder
d. record the reduction of inventory quantities
ANS: D c. maintaining the subsidiary ledgers and handling
9. The shipping notice customer queries
a. is mailed to the customer d. providing information on inventory levels and

reconciling the bank statement
b. is a formal contract between the seller and the
shipping company ANS: A
c. is always prepared by the shipping clerk 14. Which situation indicates a weak internal control
structure?
d. informs the billing department of the quantities
shipped a. the mailroom clerk authorizes credit memos
ANS: D b. the record keeping clerk maintains both accounts

receivable and accounts payable
10. The billing department is not responsible for
subsidiary ledgers
a. updating the inventory subsidiary records
c. the warehouse clerk obtains a signature before
b. recording the sale in the sales journal releasing goods for shipment
c. notifying accounts receivable of the sale d. the accounts receivable clerk prepares customer
statements every month
d. sending the invoice to the customer
ANS: A
ANS: A
15. The most effective internal control procedure to
11. Customers should be billed for backorders when prevent or detect the creation of fictitious credit

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memoranda for sales returns is to a. all sales are profitable
a. supervise the accounts receivable department b. all sales are recorded
b. limit access to credit memoranda c. credit is authorized
c. prenumber and sequence check all credit d. inventory to be shipped is not stolen
memoranda
ANS: A
d. require management approval for all credit
memoranda 20. Which control does not help to ensure that
accurate records are kept of customer accounts and
ANS: D inventory?
16. The accounts receivable clerk destroys all a. reconcile accounts receivable control to accounts
invoices for sales made to members of her family receivable subsidiary
and does not record the sale in the accounts
receivable subsidiary ledger. Which procedure will b. authorize credit
not detect this fraud? c. segregate custody of inventory from record
a. prenumber and sequence check all invoices keeping
b. reconcile the accounts receivable control to the d. segregate record keeping duties of general ledger
accounts receivable subsidiary ledger from accounts receivable
c. prepare monthly customer statements ANS: B
d. reconcile total sales on account to the debits in 21. Internal controls for handling sales returns and
the accounts receivable subsidiary ledger allowances do not include
ANS: C a. computing bad debt expense using the percentage

of credit sales
17. Which department is least likely to be involved in
the revenue cycle? b. verifying that the goods have been returned
a. credit c. authorizing the credit memo by management
b. accounts payable d. using the original sales invoice to prepare the

sales returns slip
c. billing
ANS: A
d. shipping
22. The printer ran out of preprinted sales invoice
ANS: B forms and several sales invoices were not printed.
The best internal control to detect this error is
18. Which document is included with a shipment
sent to a customer? a. a batch total of sales invoices to be prepared
compared to the actual number of sales invoices
a. sales invoice prepared
b. stock release form b. sequentially numbered sales invoices
c. packing slip c. visual verification that all sales invoices were
d. shipping notice prepared
ANS: C d. none of the above will detect this error
19. Good internal controls in the revenue cycle ANS: A

should ensure all of the following except 23. Which department prepares the bill of lading?

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a. sales ANS: D
b. warehouse 28. A cash prelist is
c. shipping a. a document that records sales returns and

allowances
d. credit
b. a document returned by customers with their
ANS: C payments
24. A remittance advice is c. the source of information used to prepare
a. used to increase (debit) an account receivable by monthly statements
the cash received d. none of the above
b. is a turn-around document ANS: D
c. is retained by the customer to show proof of 29. An advantage of real-time processing of sales is
payment
a. the cash cycle is lengthened
b. current inventory information is available
ANS: B
c. hard copy documents provide a permanent record
25. A weekly reconciliation of cash receipts would of the transaction
include comparing
d. data entry errors are corrected at the end of each
a. the cash prelist with bank deposit slips batch
b. the cash prelist with remittance advices ANS: B
c. bank deposit slips with remittance advices 30. Commercial accounting systems have fully
d. journal vouchers from accounts receivable and integrated modules. The word “integrated” means
general ledger that
ANS: A a. segregation of duties is not possible
26. At which point is supervision most critical in the b. transfer of information among modules occurs
cash receipts system? automatically
a. accounts receivable c. batch processing is not an option
b. general ledger d. separate entries are made in the general ledger

accounts and the subsidiary ledgers
c. mail room
ANS: B
d. cash receipts
31. The data processing method that can shorten the
ANS: C cash cycle is
27. EDI trading partner agreements specify all of the a. batch, sequential file processing
following except
b. batch, direct access file processing
a. selling price
c. real-time file processing
b. quantities to be sold
c. payment terms
ANS: C
d. person to authorize transactions

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32. Which of the following is not a risk exposure in a d. a memo prepared in the mailroom
microcomputer accounting system?
ANS: C
a. reliance on paper documentation is increased
37. The revenue cycle utilizes all of the following files
b. functions that are segregated in a manual except
environment may be combined in a microcomputer
accounting system a. credit memo file
c. backup procedures require human intervention b. sales history file
d. data are easily accessible c. shipping report file
ANS: A d. cost data reference file
33. Which journal is not used in the revenue cycle? ANS: D
a. cash receipts journal 38. All of the following are advantages of real-time
processing of sales except
b. sales journal
a. The cash cycle is shortened
c. purchases journal
b. Paper work is reduced
d. general journal
c. Incorrect data entry is difficult to detect
ANS: C
d. Up-to-date information can provide a competitive
34. Periodically, the general ledger department advantage in the marketplace
receives all of the following except
ANS: C
a. total increases to accounts receivable
SHORT ANSWER
b. total of all sales backorders
1. Distinguish between a packing slip, shipping
c. total of all sales notice, and a bill of lading.
d. total decreases in inventory ANS: The packing slip travels with the goods to the
customer, and it describes the contents on the
ANS: B order.
35. The credit department Upon filling the order, the shipping department
a. prepares credit memos when goods are returned sends the shipping notice to the billing department
to notify them that the order has been filled and
b. approves credits to accounts receivable when shipped. The shipping notice contains additional
payments are received information that the packing slip may not contain,
such as shipment date, carrier and freight charges.
c. authorizes the granting of credit to customers
The bill of lading is a formal contract between the
d. none of the above seller and the transportation carrier; it shows legal
ANS: C ownership and responsibility for assets in transit.
36. Adjustments to accounts receivable for 2. State two specific functions or jobs that should be
payments received from customers is based upon segregated in the sales processing system.
a. the customer’s check ANS: sales order processing and credit approval;
inventory control (record keeping) from warehouse
b. the cash prelist (custody); and general ledger from accounts
receivable subsidiary ledger
c. the remittance advice that accompanies payment

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3. State two specific functions or jobs that should be procedure that would prevent or detect this fraud.
segregated in the cash receipts system.
ANS: supervision (two people) when opening the
ANS: cash receipts (custody) from accounts mail; customer complaints when monthly
receivable (record keeping); and general ledger from statements mailed
accounts receivable subsidiary ledger
9. A customer payment of $247 was correctly posted
mail room (receiving cash) and accounts receivable in the general ledger but was recorded as $274 in
subsidiary ledger the customer’s account receivable. Describe a
specific internal control procedure that would detect
4. List two points in the sales processing system this error.
when authorization is required.
ANS: reconcile the accounts receivable control
ANS: credit check, sales returns policy, preparation account to the accounts receivable subsidiary ledger;
of cash prelist compare control totals of cash received with total
5. For the revenue cycle, state two specific credits to A/R subsidiary ledger
independent verifications that should be performed. 10. Goods are shipped to a customer, but the
ANS: shipping verifies that the goods sent from the shipping department does not notify billing and the
warehouse are correct in type and quantity; customer never receives an invoice. Describe a
specific internal control procedure that would detect
billing reconciles the shipping notice with the sales this error.
order to ensure that customers are billed only for
the quantities shipped; ANS: Billing department matches the stock release
copy of the sales order (from shipping) to the
general ledger reconciles journal vouchers submitted invoice, ledger, and file copies of the sales order
by the billing department (sales journal), (sent directly to billing), and then mails the invoice
to the customer. After a certain amount of time has
inventory control (inventory subsidiary ledger), and passed, the billing department should investigate
cash receipts (cash receipts journal) any unmatched invoice, ledger, and file copies of the
treasurer determines that all cash received got to sales order.
the bank 11. A clerk embezzles customer payments on
6. What task can the accounts receivable account and covers up the theft by making an
department engage in to verify that all checks sent adjustment to the accounts receivable ledger.
by the customers have been appropriately deposited Describe a specific internal control procedure that
and recorded? would prevent this fraud.
ANS: The company should periodically, perhaps ANS: segregation of duties; do not let one person
monthly, send an account summary to each have custody of payments and the ability to make
customer listing invoices and amounts paid by check adjustments to the records; all adjustments to
number and date. This form allows the customer to accounts receivable records must be authorized
verify the accuracy of the records. If any payments 12. A credit sale is made to a customer, even though
are not recorded, they will notify the company of the the customer’s account is four months overdue.
discrepancy. These reports should not be handled by Describe a specific internal control procedure that
the accounts receivable clerk or the cashier. would prevent this from happening.
7. What specific internal control procedure would ANS: perform a credit check and require
prevent the sale of goods on account to a fictitious management approval for all sales to accounts that
customer? are overdue
ANS: credit check 13. What specific internal control procedure would
8. The clerk who opens the mail routinely steals prevent a customer from being billed for all 50 items
remittances. Describe a specific internal control ordered although only 40 items were shipped?

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ANS: billing should reconcile the shipping report with 3. The organization structure should be such that the
the sales order perpetration of a fraud requires collusion between 2
or more individuals.
14. What specific internal control procedure would
prevent the shipping clerk from taking goods from 20. What is automation and why is it used?
the storeroom and sending them to someone who
had not placed an order? ANS: Automation involves using technology to
improve the efficiency and effectiveness of a task.
ANS: shipping clerk should not have access to the
storeroom Automation of the revenue cycle is typically used to
reduce overhead costs, make better credit granting
15. What specific internal control procedure would decisions, and better collect outstanding accounts
prevent an accounts receivable clerk from issuing a receivable.
fictitious credit memo to a customer (who is also a
relative) for goods that were “supposedly” returned 21. What is the objective of re-engineering?
from previous sales? ANS: The objective of re-engineering is to greatly
ANS: credit memo should be authorized after reduce costs by identifying and eliminating non
verifying the return of goods based on evidence value-added tasks and also by streamlining
from the person who received the goods necessary existing processes.
16. What specific internal control procedure would 22. What are the key segregation of duties related to
prevent an increase in sales returns since salesmen computer programs that process accounting
were placed on commission? transactions.
ANS: customer credit should be verified by the credit ANS: Response: The tasks of design, maintenance,
department reduce commissions for sales returns and operation of computer programs need to be
segregated. The programmers who write the original
17. What specific internal control procedure would computer programs should not also be responsible
detect the misplacement of a sales invoice after for making program changes. Both of these functions
preparation and not mailed to the customer? The must also be separate from the daily task of
invoice was never found. operating the system.
ANS: all documents should be prenumbered 23. How is EDI more than technology? What unique
control problems may it pose?
18. What function does the receiving department
serve in the revenue cycle? ANS: EDI represents a unique business arrangement
between the buyer and seller in which they agree, in
ANS: The receiving department counts and inspects advance, to the terms of their relationship on such
items which are returned by customers. The items as selling price, quantities, delivery times,
receiving department prepares a return slip of which payment terms and methods of handling disputes.
a copy goes to the warehouse for restocking, and a The terms of agreement are binding. One problem is
copy goes to the sales order department so that a ensuring that only valid transactions are processed.
credit memo can be issued to the customer. Another risk is that a non-trading partner will
19. What are the three rules that ensure that no masquerade as a trading partner and access the
single employee or department processes a firm's processing systems.
transaction in its entirety. 24. What makes point-of-sales systems different
ANS: The three rules that ensure segregation of from revenue cycles of manufacturing firms?
functions are: ANS: In point-of-sale systems, the customer literally
1. Transaction authorization should be separate has possession of the items purchased, thus the
from transaction processing inventory is in hand. Typically, for manufacturing
firms, the order is placed and the good is shipped to
2. Asset custody should be separate from asset the customer at some later time period. Thus,
record keeping. updating inventory at the time of sale is necessary in

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point-of-sale systems since the inventory is changing 7. Proper segregation of duties requires that the
hands, while it is not necessary in manufacturing responsibility approving a payment be
firms until the goods are actually shipped to the separated from posting to the cash
customer. disbursements journal.
ANS: T
25. Give three examples of Access Control in a Point- 8. A major risk exposure in the expenditure cycle is
of-Sale (POS) system. that accounts payable may be overstated at the
ANS: Lock on the cash drawer end of the accounting year.
ANS: F
Internal cash register tape that can be accessed only 9. When a trading partner agreement is in place,
by the manager the traditional three way match may be
eliminated.
Physical security over the inventory. The following ANS: T
are examples: Steel cables to secure expensive 10. Authorization of purchases in a merchandising
leather coats to the clothing rack. Locked showcases firm occurs in the inventory control department.
to display jewelry and costly electronic equipment. ANS: T
Magnetic tags attached to merchandise, which will 11. A three way match involves a purchase order, a
sound an alarm when removed from the store. purchase requisition, and an invoice.
Note to Instructor: Some physical security devices ANS: F
could also be classified as supervision 12. Authorization for a cash disbursement occurs in
the cash disbursement department upon receipt
Chapter 5—The Expenditure Cycle Part I: of the supplier’s invoice.
Purchases and Cash Disbursements ANS: F
13. An automated cash disbursements system can
Procedures
yield better cash management since payments
are made on time.
ANS: T
TRUE/FALSE 14. Permitting warehouse staff to maintain the only
inventory records violates separation of duties.
1. Purchasing decisions are authorized by
ANS: T
inventory control.
15. A purchasing system that employs electronic
ANS: T data interchange does not use a purchase order.
ANS: F
2. The blind copy of the purchase order that goes 16. Inventory control should be located in the
to the receiving department contains no item warehouse.
descriptions. ANS: F
ANS: F 17. Inspection of shipments in the receiving
3. Firms that wish to improve control over cash department would be improved if the
disbursements use a voucher system. documentation showed the value of the
ANS: T inventory.
4. In a voucher system, the sum of all unpaid ANS: F
vouchers in the voucher register equals the 18. One reason for authorizing purchases is to
firm’s total voucher payable balance. enable efficient inventory management.
ANS: T ANS: T
5. The accounts payable department reconciles the 19. If accounts payable receives an invoice directly
accounts payable subsidiary ledger to the from the supplier it needs to be reconciled with
control account. the purchase order and receiving report.
ANS: F ANS: T
6. The use of inventory reorder points suggests the 20. Supervision in receiving is intended to reduce
need to obtain specific authorization. the theft of assets.
ANS: F ANS: T

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MULTIPLE CHOICE d. the quantity of items received
1. The purpose of the purchase requisition is to ANS: C
a. order goods from vendors 6. The purchase order
b. record receipt of goods from vendors a. is the source document to make an entry into the
accounting records
c. authorize the purchasing department to order
goods b. indicates item description, quantity, and price
d. bill for goods delivered c. is prepared by the inventory control department
ANS: C d. is approved by the end-user department
2. The purpose of the receiving report is to ANS: B
a. order goods from vendors 7. The reason that a blind copy of the purchase order
is sent to receiving is to
b. record receipt of goods from vendors
a. inform receiving when a shipment is due
c. authorize the purchasing department to order
goods b. force a count of the items delivered
d. bill for goods delivered c. inform receiving of the type, quantity, and price of
items to be delivered
ANS: B
d. require that the goods delivered are inspected
3. All of the following departments have a copy of
the purchase order except ANS: B
a. the purchasing department 8. The receiving report is used to
b. the receiving department a. accompany physical inventories to the storeroom

or warehouse
c. accounts payable
b. advise the purchasing department of the dollar
d. general ledger value of the goods delivered
ANS: D c. advise general ledger of the accounting entry to
4. The purpose of the purchase order is to be made
a. order goods from vendors d. advise the vendor that the goods arrived safely
b. record receipt of goods from vendors ANS: A
c. authorize the purchasing department to order 9. When a copy of the receiving report arrives in the
goods purchasing department, it is used to
d. approve payment for goods received a. adjust perpetual inventory records
ANS: A b. record the physical transfer of inventory from

receiving to the warehouse
5. The open purchase order file in the purchasing
department is used to determine c. analyze the receiving department’s process
a. the quality of items a vendor ships d. recognize the purchase order as closed
b. the best vendor for a specific item ANS: D
c. the orders that have not been received 10. The financial value of a purchase is determined
by reviewing the

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a. packing slip 15. Because of time delays between receiving

inventory and making the journal entry
b. purchase requisition
a. liabilities are usually understated
c. receiving report
b. liabilities are usually overstated
d. supplier’s invoice
c. liabilities are usually correctly stated
ANS: D
11. Which document is least important in
determining the financial value of a purchase? ANS: A
a. purchase requisition 16. Usually the open voucher payable file is

organized by
b. purchase order
a. vendor
c. receiving report
b. payment due date
c. purchase order number
ANS: A
d. transaction date
12. In a merchandising firm, authorization for the
payment of inventory is the responsibility of ANS: B
a. inventory control 17. Which of the following statements is not correct?
b. purchasing a. the voucher system is used to improve control

over cash disbursements
c. accounts payable
b. the sum of the paid vouchers represents the
d. cash disbursements voucher payable liability of the firm
ANS: C c. the voucher system permits the firm to
13. In a merchandising firm, authorization for the consolidate payments of several invoices on one
purchase of inventory is the responsibility of voucher
a. inventory control d. many firms replace accounts payable with a

voucher payable system
b. purchasing
ANS: B
c. accounts payable
18. In the expenditure cycle, general ledger does not
d. cash disbursements
a. post the journal voucher from the accounts
ANS: A payable department
14. When purchasing inventory, which document b. post the account summary from inventory control
usually triggers the recording of a liability?
c. post the journal voucher from the purchasing
a. purchase requisition department
b. purchase order d. reconcile the inventory control account with the
inventory subsidiary summary
c. receiving report
ANS: C
19. The documents in a voucher packet include all of
ANS: D the following except

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a. a check ANS: C
b. a purchase order 24. Of the following duties, it is most important to

separate
c. a receiving report
a. warehouse from stores
d. a supplier’s invoice
b. warehouse from inventory control
ANS: A
c. accounts payable and accounts receivable
20. To maintain a good credit rating and to optimize
cash management, cash disbursements should arrive d. purchasing and accounts receivable
at the vendor’s place of business
ANS: B
a. as soon as possible
25. In a firm with proper segregation of duties,
b. on the due date adequate supervision is most critical in
c. on the discount date a. purchasing
d.by the end of the month b. receiving
ANS: C c. accounts payable
21. The cash disbursement clerk performs all of the d. general ledger
following tasks except
ANS: B
a. reviews the supporting documents for
completeness and accuracy 26. The receiving department is not responsible to
b. prepares checks a. inspect shipments received
c. signs checks b. count items received from vendors
d. marks the supporting documents paid c. order goods from vendors
ANS: C d. safeguard goods until they are transferred to the

warehouse
22. When a cash disbursement in payment of an
accounts payable is recorded ANS: C
a. the liability account is increased 27. The major risk exposures associated with the
receiving department include all of the following
b. the income statement is changed except
c. the cash account is unchanged a. goods are accepted without a physical count
d. the liability account is decreased b. there is no inspection for goods damaged in

shipment
ANS: D
c. inventories are not secured on the receiving dock
23. Authorization for payment of an accounts
payable liability is the responsibility of d. the audit trail is destroyed
a. inventory control ANS: D
b. purchasing 28. When searching for unrecorded liabilities at the

end of an accounting period, the accountant would
c. accounts payable search all of the files except
d. cash disbursements a. the purchase requisition file

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b. the cash receipts file b. all checks signed by check-signing equipment
c. the purchase order file c. checks over a certain dollar amount manually
signed by the treasurer
d. the receiving report file
d. checks over a certain dollar amount manually
ANS: B signed by the cash disbursements clerk
29. In regards to the accounts payable department, ANS: C
which statement is not true?
33. The document which will close the open
a. the purchase requisition shows that the purchase requisition file is the
transaction was authorized
a. purchase order
b. the purchase order proves that the purchase was
required b. vendor invoice
c. the receiving report provides evidence of the c. receiving report

physical receipt of the goods
d. the supplier’s invoice indicates the financial value
of the transaction ANS: C
ANS: B 34. Goods received are inspected and counted to
30. In a computerized system that uses an economic a. determine that the goods are in good condition
order quantity (EOQ) model and the perpetual b. determine the quantity of goods received
inventory method, who determines when to reorder
inventory? c. preclude payment for goods not received or
received in poor condition
a. the inventory control clerk
d. all of the above
b. the purchasing department
ANS: D
c. the vendor
35. If a company uses a standard cost system,
d. the computer system inventory records can be updated from the
ANS: D a. vendor invoice
31. Firms can expect that proper use of a valid b. purchase order
vendor file will result in all of the following benefits
except c. receiving report
a. purchasing agents will be discouraged from d. purchase requisition

improperly ordering inventory from related parties
ANS: C
b. purchases from fictitious vendors will be detected
36. If a company uses an actual cost system,
c. the most competitive price will be obtained inventory records can first be updated from the
d. the risk of purchasing agents receiving kickbacks a. vendor invoice

and bribes will be reduced
b. purchase order
ANS: C
c. receiving report
32. In a real-time processing system with a high
number of transactions, the best and most practical d. purchase requisition
control over cash disbursements is to have ANS: A
a. all checks manually signed by the treasurer

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37. Copies of a purchase order are sent to all of the ANS: receiving report
following except
3. List specific jobs that should be segregated in
a. inventory control the purchases processing system.
b. receiving ANS: inventory control from warehouse, general

ledger from accounts payable subsidiary ledger
c. general ledger
4. List specific jobs that should be segregated in
d. accounts payable the cash disbursements system.
ANS: C ANS: general ledger from accounts payable
38. The receiving report subsidiary ledger, accounts payable subsidiary ledger
from cash disbursements
a. is used to update the actual cost inventory ledger
5. Describe an internal control procedure that
b. accompanies the goods to the storeroom would detect that a vendor overcharged for
goods delivered.
c. is sent to general ledger
ANS: Accounts payable should compare the price on
d. is returned to the vendor to acknowledge receipt the purchase order to the price on the supplier’s
of the goods invoice. Accounts payable should recalculate the
ANS: B math (extensions and additions) and check all other
charges such as freight, tax, etc.
39. A supplier invoice
a. is included with the goods would prevent payment of a invoice for goods
that were never delivered.
b. shows what was ordered even if all was not
shipped ANS: Accounts payable should match every item on
every invoice to a receiving report.
c. is sent by vendor to accounts payable
would prevent issuing two checks in payment of
ANS: C the same invoice.
40. The cash disbursement function is ANS: The supporting documents should be marked
“paid” after the check is signed. A computerized
a. part of accounts payable system will tag the invoice number as paid.
b. an independent accounting function 8. Explain why supervision is so important in the
receiving department.
c. a treasury function
ANS: Receiving department employees have custody
d. part of the general ledger department
of the asset and record keeping responsibilities.
ANS: C Without proper supervision, employees may fail to
count and inspect incoming shipments. Without
SHORT ANSWER proper supervision, shipments may disappear from
the receiving dock before being transferred to the
1. Which internally generated document should be
warehouse.
compared to the supplier’s invoice to verify the
price of an item? 9. What type of error or fraud might happen if the
accounts payable ledger is not periodically
ANS: purchase order
reconciled to the control account in the general
2. Which internally generated document should be ledger?
compared to the supplier’s invoice to verify the
quantity being billed for?

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ANS: errors in A/P processing would go undetected, 17. Explain why a three way match may not be
overstated payments produce debit balances in A/P. required for transactions covered by a trading
partner agreement.
10. What type of error or fraud might happen if
suppliers’ invoices are not compared to ANS: Under a trading partner agreement the parties
purchase orders or to receiving reports before contractually agree to terms of trade such as price,
payment? quantities to be shipped, discounts, and lead times.
With these sources of potential discrepancy
ANS: payment at higher than anticipated prices, eliminated, financial information about purchases is
overpayment for goods not received known in advance and the vendor’s invoice provides
11. What internal accounting control(s) would be no critical information that cannot be derived from
the most effective in preventing a storekeeper the receiving report. Thus, a three way match is
from taking inventory home at night? When unnecessary.
shortages become apparent, he claims the
Chapter 6—The Expenditure Cycle Part II:
goods were never received.
Payroll Processing and Fixed Asset
ANS: receiving records items received on a receiving
report, storekeeper initials receipt of goods Procedures
12. Why should the copy of a purchase order, which TRUE/FALSE

is sent to receiving, be a “blind” copy? 1. Time cards are used by cost accounting to allocate
ANS: to force workers in receiving to count and direct labor charges to work in process.
inspect the goods received ANS: F
13. What is(are) the purpose(s) of maintaining a 2. The personnel department authorizes changes in
valid vendor file? employee pay rates.
ANS: Inventories should only be acquired from valid ANS: T
vendors. This control procedure helps to deter the
purchasing agent from buying inventories at 3. Most payroll systems for mid-size firms use real-
excessive costs and receiving kickbacks or from time data processing.
buying from an entity in which the purchasing agent
has a relationship, such a relative or a friend. ANS: F
14. Name two major benefits of automating the 4. To improve internal control, paychecks should be
purchasing effort. distributed by the employee's supervisor.
ANS: improved inventory control, better cash ANS: F

management, streamlining the purchasing effort 5. Employee paychecks should be drawn against a
15. What function or department typically initiates special checking account.
a purchase in a merchandising business? ANS: T
ANS: Inventory control determines that the level of 6. Because a time clock is used, no supervision is
certain items warrants restocking and sends a required when employees enter and leave the work
purchase requisition to purchasing. place.
16. Where in the purchasing/cash disbursement ANS: F
functions is access control exercised?
7. Inventory control performs the formal record
ANS: physical control of inventory and cash, access keeping function for fixed assets.
to documents that control physical assets–such as
purchase requisitions, purchase orders, receiving ANS: F
reports, etc.
8. The depreciation schedule shows when assets are
fully depreciated.

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ANS: T 20. The fixed asset disposal report authorizes the

user department to dispose of a fixed asset.
9. Authorization to dispose of fixed assets should be
issued by the user of the asset. ANS: F
ANS: F MULTIPLE CHOICE
10. Work-in-process records are updated by payroll 1. The document that captures the total amount of
personnel. time that individual workers spend on each
production job is called a
ANS: F
a. time card
11. Ideally, payroll checks are written on a special
bank account used only for payroll. b. job ticket
ANS: T c. personnel action form
12. The supervisor is the best person to determine d. labor distribution form
the existence of a “phantom employee” and should
distribute paychecks. ANS: B
ANS: F 2. An important reconciliation in the payroll system

is
13. Payroll processing can be automated easily
because accounting for payroll is very simple. a. general ledger compares the labor distribution
summary from cost accounting to the disbursement
ANS: F voucher from accounts payable
14. Timekeeping is part of the personnel function. b. personnel compares the number of employees
authorized to receive a paycheck
ANS: F
c. production compares the number of hours
15. Fixed asset accounting systems include cost reported on job tickets to the number of hours
allocation and matching procedures that are not part reported on time cards
of routine expenditure systems.
d. payroll compares the labor distribution summary
ANS: T to the hours reported on time cards
16. Asset maintenance involves only the recording of ANS: A
depreciation charges. Physical improvements are
always expensed. 3. Which internal control is not an important part of
the payroll system?
ANS: F
a. Supervisors verify the accuracy of employee time
17. Fixed Asset Systems must keep track of the cards.
physical location of each asset to promote
accountability. b. Paychecks are distributed by an independent
paymaster.
ANS: T
c. Accounts payable verifies the accuracy of the
18. Time cards capture the total time an individual payroll register before transferring payroll funds to
worker spends on each production job. the general checking accounting.
ANS: F d. General ledger reconciles the labor distribution
19. Accounting conventions and IRS rules sometime summary and the payroll disbursement voucher.
specify the depreciation parameters to be used. ANS: C
ANS: T 4. Which transaction is not processed in the Fixed
Asset System?

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a. purchase of building d. maintaining a record of the fair market value of all

fixed assets
b. improvement of equipment
ANS: D
c. purchase of raw materials
9. Which of the following is not a characteristic of
d. sale of company van the Fixed Asset System?
ANS: C a. Acquisitions are routine transactions requiring
5. Depreciation general authorization.
a. is calculated by the department that uses the fixed b. Retirements are reported on an authorized
asset disposal report form.
b. allocates the cost of the asset over its useful life c. Acquisition cost is allocated over the expected life
of the asset.
c. is recorded weekly
d. Transfer of fixed assets among departments is
d. results in book value approximating fair market recorded in the fixed asset subsidiary ledger.
value
ANS: A
ANS: B
10. In the payroll subsystem, which function should
6. Depreciation records include all of the following distribute paychecks?
information about fixed assets except
a. personnel
a. the economic benefit of purchasing the asset
b. timekeeping
b. the cost of the asset
c. paymaster
c. the depreciation method being used
d. payroll
d. the location of the asset
ANS: C
ANS: A
11. Where does the responsibility lie for reconciling
7. Which control is not a part of the Fixed Asset the labor distribution summary and the payroll
System? disbursement voucher?
a. formal analysis of the purchase request a. cash disbursements
b. review of the assumptions used in the capital b. cost accounting
budgeting model
c. personnel
c. development of an economic order quantity
model d. general ledger
d. estimates of anticipated cost savings ANS: D
ANS: C 12. Which of the following statements is not true?
8. Objectives of the Fixed Asset System do not a. Routine payroll processing begins with the
include submission of time cards.
a. authorizing the acquisition of fixed assets b. Payroll clerks must verify the hours reported on
the time cards.
b. recording depreciation expense
c. Payroll reconciles personnel action forms with
c. computing gain and/or loss on disposal of fixed time cards and prepares paychecks.
assets

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d. Cash disbursements signs paychecks and forwards b. to prevent an absent employee’s check from
them to the paymaster for distribution. being lost
ANS: B c. to avoid paying absent employees for payday
13. In a manufacturing firm, employees use time d. to prevent the paymaster from cashing unclaimed
cards and job tickets. Which of the following checks
statements is not correct?
ANS: A
a. Job tickets are prepared by employees for each
job worked on, so an employee may have more that 17. Which of the following is not a reasonable
one job ticket on a given day. control for fixed assets?
b. An individual employee will have only one time a. Proper authorization is required for acquisition
card. and disposal of fixed assets.
c. The time reported on job tickets should reconcile b. Fixed asset records show the location of each
with the time reported on time cards. asset.
d. Paychecks should be prepared from the job c. Fully depreciated assets are immediately disposed
tickets. of.
ANS: D d. Depreciation policies are in writing.
14. Which department is responsible for approving ANS: C

changes in pay rates for employees? 18. Cost accounting updates work-in-process
a. payroll accounts from
b. treasurer a. time cards
c. personnel b. the labor distribution summary
d. cash disbursements c. job tickets
ANS: C d. personnel action forms
15. Which of the following situations represents a ANS: C

serious control weakness? 19. Payroll uses time card data to do all of the
a. Timekeeping is independent of the payroll following except
department. a. prepare the payroll register
b. Paychecks are distributed by the employees b. update employee payroll records
immediate supervisor.
c. prepare the labor distribution summary
c. Time cards are reconciled with job tickets.
d. prepare paychecks
d. Personnel is responsible for updating employee
records, including creation of records for new hires. ANS: C
ANS: B 20. Payroll checks are typically drawn on
16. Why would an organization require the a. the regular checking account
paymaster to deliver all unclaimed paychecks to the
internal audit department? b. a payroll imprest account
a. to detect a “phantom employee” for whom a c. a wages payable account

check was produced d. petty cash

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ANS: B d. personnel action form
21. The personnel action form provides ANS: C

authorization control by
26. A control technique that can reduce the risk of a
a. preventing paychecks for terminated employees terminated employee being paid is
b. verifying pay rates for employees a. a security camera viewing the time clock
c. informing payroll of new hires b. the supervisor taking role during the shift
d. all of the above c. paychecks being distributed by an independent

paymaster
ANS: D
d. reconciliation of time cards and job tickets
22. Accounting records that provide the audit trail
for payroll include all of the following except ANS: C
a. time cards 27. Accounts payable
b. job tickets a. signs paychecks
c. payroll register b. prepares the payroll voucher
d. accounts payable register c. reconciles time cards and employee records
ANS: D d. distributes paychecks to employees
23. Personnel actions forms are used to do all of the ANS: B

following except
28. All of the following are processed by the Fixed
a. activate new employees Asset System except
b. terminate employees a. sale of unneeded equipment
c. record hours worked b. purchase of raw materials
d. change pay rates c. repair of production equipment
ANS: C d. purchase of a new plant
24. The payroll department performs all of the ANS: B

following except
29. The Fixed Asset System performs all of the
a. prepares the payroll register following except
b. distributes paychecks a. determines the need for new assets
c. updates employee payroll records b. maintains depreciation records
d. prepares paychecks c. records retirement and disposal of assets
ANS: B d. tracks the physical location of fixed assets
25. The document that records the total amount of ANS: A

time spent on a production job is the
30. The payroll department performs all of the
a. time card following except
b. job ticket a. prepares paychecks
c. labor distribution summary

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b. transfers adequate funds to the payroll imprest 35. Asset disposal

account
a. occurs as soon as an asset is fully depreciated
c. updates employee payroll records
b. requires no special authorization
d. prepares the payroll register
c. automatically initiates the purchase of a
ANS: B replacement asset
31. Depreciation d. must follow formal authorization procedures
a. assures that assets are reported at fair market ANS: D

value
SHORT ANSWER
b. is discretionary for many firms
1. Describe an internal control procedure that would
c. allocates the cost of an asset over its useful life prevent an employee from punching the time clock
d. is the responsibility of the department using the for another, absent employee.
asset
ANS: supervision of the time clock at the start of the
ANS: C shift
32. The Fixed Asset System is similar to the 2. Why should the employee’s supervisor not
expenditure cycle except distribute paychecks?
a. fixed asset transactions are non-routine and ANS: A form of payroll fraud involves a supervisor
require special authorization and controls submitting fraudulent time cards for nonexistent
employees. The resulting paychecks, when returned
b. fixed assets are capitalized, not expensed to the supervisor are then cashed by the supervisor.
c. both a and b 3. Describe an internal control procedure that would
d. none of the above prevent a supervisor from stealing the unclaimed
paychecks of employees who have been terminated.
ANS: C
ANS: This type of fraud can be reduced or eliminated
33. Asset maintenance involves by using a paymaster to distribute paychecks to
employees in person. Any uncollected paychecks are
a. the recording of periodic depreciation then returned to payroll. Also, mail final paychecks
b. adjusting the asset records to reflect the cost of to terminated employees.
physical improvements 4. Why should employee paychecks be drawn
c. keeping track of the physical location of the assets against a special checking account?
d. all of the above ANS: A separate imprest account is established for

the exact amount of the payroll based on the payroll
ANS: D summary. When the paychecks are cashed, this
account should clear leaving a zero balance. Any
34. The Fixed Asset Systems does all of the following
errors in checks (additional checks or abnormal
except
amounts) would result in a non-zero balance in the
a. records acquisition of assets imprest account and/or some paycheck would not
clear. This will alert management to the problem so
b. records improvements to assets corrective action can be taken.
c. estimates the fair market value of assets in service 5. Why should employees clocking on and off the job
be supervised.
d. records the disposal of assets
ANS: C

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ANS: A form of payroll fraud involves employees longer on hand. Prepare reports about the disposal
clocking the time cards of absent employees. of assets.
Bysupervising the clocking in and out process, this
fraud can be reduced or eliminated. 13. Describe an internal control that would prevent
the charging of depreciation expense to the
6. What is a personnel action form? maintenance department for a sweeper that is now
located in and used by the engineering department.
ANS: The personnel action form provides the payroll
department with a list of currently active employees, ANS: Prepare reports about the transfer of fixed
so that any submission of time cards by supervisors assets. Perform an annual physical inventory and
for fictitious or ex-employees will not be processed. note the location of assets. Budget and then hold
each department accountable for depreciation
7. In a manufacturing firm, employees typically fill expense for assets located in each department.
out two different documents regarding their time
worked. What are they? Why are there two? 14. Describe an internal control that would prevent
the acquisition of office equipment which is not
ANS: The two documents are the time card and the needed by the firm.
job ticket. Two are required because the time card
records all the time worked by an employee during ANS: A higher organizational level or other
the period while the job ticket details the time by appropriate person authorizes fixed asset
project. acquisitions; part of the authorization is showing
that a need for the asset exists.
8. List two types of authorization required in the
Fixed Asset System. 15. What negative consequences result when fixed
asset records include assets that are no longer
ANS: authorization to purchase the asset and to owned by the firm?
dispose of the asset
ANS: On the financial statements, assets will be
9. List four types of data that appear on a overstated and depreciation expense could be
depreciation schedule. overstated. Assets on property tax returns will be
ANS: item description, depreciation method, useful overstated and too much tax will be paid. Insurance
life, date acquired, cost, salvage value, accumulated premiums will be paid on nonexistent assets.
depreciation, depreciation expense per period, book 16. Explain the purpose of each of the following
value documents used in the payroll system: the personnel
10. Which documents prompt the fixed asset action form, the job ticket, the time card.
department to create a fixed asset record? ANS: The personnel action form is a document which
ANS: the receiving report and the disbursement identifies employees who should receive a paycheck;
voucher reflects changes in pay rates, payroll deductions, and
job classifications. The job ticket collects information
11. Describe an internal control that would prevent on the time individual workers spend on each
an employee from stealing a computer and then production job. The time card captures the total
reporting it as scrapped. time that an employee is at work.
ANS: Supervisors must authorize the disposal of the 17. How do fixed asset systems differ from the
computer. Unless so authorized, the record will expenditure cycle?
continue to show that the employee is responsible
for the computer. ANS: The fixed asset system processes nonroutine
transactions for a wider group of users in the
12. Describe an internal control that would prevent organization than the expenditure cycle. Further, the
the payment of insurance premiums on an expenditure cycle processes routine acquisitions of
automobile that is no longer owned by the company. raw materials inventories for the production
function and finished goods inventories for the sales
ANS: Perform an annual physical inventory of fixed function. The expenditure cycle transactions are
assets and adjust the records to reflect assets no oftentimes automatically approved by the system,

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while fixed asset transaction approvals typically ANS: T

demand individual attention due to the uniqueness
of the transactions. 6. Because a time clock is used, no supervision is
required when employees enter and leave the work
18. What is recorded by the asset maintenance part place.
of the Fixed Asset System?
ANS: F
ANS: periodic depreciation following an approved
depreciation schedule and physical improvements to 7. Inventory control performs the formal record
the asset to increase the subsidiary account and to keeping function for fixed assets.
adjust the depreciation schedule ANS: F
19. How are the following carried out in the Fixed 8. The depreciation schedule shows when assets are
Asset System: authorization, supervision, fully depreciated.
independent verification?
ANS: T
ANS: Independent authorization is required to
acquire an asset and to formalize the depreciation 9. Authorization to dispose of fixed assets should be
schedule. issued by the user of the asset.
Supervision must be exercised over the physical ANS: F

assets.
10. Work-in-process records are updated by payroll
Independent verification must confirm the location, personnel.
existence, and condition of the assets.
ANS: F
20. Which department authorizes changes to
employee pay rates? 11. Ideally, payroll checks are written on a special
bank account used only for payroll.
ANS: The personnel department via the personnel
action form ANS: T
Chapter 6—The Expenditure Cycle Part II: Payroll 12. The supervisor is the best person to determine
Processing and Fixed Asset Procedures the existence of a “phantom employee” and should
distribute paychecks.
TRUE/FALSE
ANS: F
1. Time cards are used by cost accounting to allocate
direct labor charges to work in process. 13. Payroll processing can be automated easily
because accounting for payroll is very simple.
ANS: F
ANS: F
2. The personnel department authorizes changes in
employee pay rates. 14. Timekeeping is part of the personnel function.
ANS: T ANS: F
3. Most payroll systems for mid-size firms use real- 15. Fixed asset accounting systems include cost
time data processing. allocation and matching procedures that are not part
of routine expenditure systems.
ANS: F
ANS: T
4. To improve internal control, paychecks should be
distributed by the employee's supervisor. 16. Asset maintenance involves only the recording of
depreciation charges. Physical improvements are
ANS: F always expensed.
5. Employee paychecks should be drawn against a ANS: F

special checking account.

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17. Fixed Asset Systems must keep track of the a. Supervisors verify the accuracy of employee time
physical location of each asset to promote cards.
accountability.
b. Paychecks are distributed by an independent
ANS: T paymaster.
18. Time cards capture the total time an individual c. Accounts payable verifies the accuracy of the
worker spends on each production job. payroll register before transferring payroll funds to
the general checking accounting.
ANS: F
d. General ledger reconciles the labor distribution
19. Accounting conventions and IRS rules sometime summary and the payroll disbursement voucher.
specify the depreciation parameters to be used.
ANS: C
ANS: T
4. Which transaction is not processed in the Fixed
20. The fixed asset disposal report authorizes the Asset System?
user department to dispose of a fixed asset.
a. purchase of building
ANS: F
b. improvement of equipment
MULTIPLE CHOICE
c. purchase of raw materials
1. The document that captures the total amount of
time that individual workers spend on each d. sale of company van
production job is called a
ANS: C
a. time card
5. Depreciation
b. job ticket
a. is calculated by the department that uses the fixed
c. personnel action form asset
d. labor distribution form b. allocates the cost of the asset over its useful life
ANS: B c. is recorded weekly
2. An important reconciliation in the payroll system d. results in book value approximating fair market
is value
a. general ledger compares the labor distribution ANS: B

summary from cost accounting to the disbursement
voucher from accounts payable 6. Depreciation records include all of the following
information about fixed assets except
b. personnel compares the number of employees
authorized to receive a paycheck to the number of a. the economic benefit of purchasing the asset
paychecks prepared b. the cost of the asset
c. production compares the number of hours c. the depreciation method being used
reported on job tickets to the number of hours
reported on time cards d. the location of the asset
d. payroll compares the labor distribution summary ANS: A

to the hours reported on time cards
7. Which control is not a part of the Fixed Asset
ANS: A System?
3. Which internal control is not an important part of a. formal analysis of the purchase request
the payroll system?

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b. review of the assumptions used in the capital b. cost accounting

budgeting model
c. personnel
c. development of an economic order quantity
model d. general ledger
d. estimates of anticipated cost savings ANS: D
ANS: C 12. Which of the following statements is not true?
8. Objectives of the Fixed Asset System do not a. Routine payroll processing begins with the
include submission of time cards.
a. authorizing the acquisition of fixed assets b. Payroll clerks must verify the hours reported on
the time cards.
b. recording depreciation expense
c. Payroll reconciles personnel action forms with
c. computing gain and/or loss on disposal of fixed time cards and prepares paychecks.
assets
d. Cash disbursements signs paychecks and forwards
d. maintaining a record of the fair market value of all them to the paymaster for distribution.
fixed assets
ANS: B
ANS: D
13. In a manufacturing firm, employees use time
9. Which of the following is not a characteristic of cards and job tickets. Which of the following
the Fixed Asset System? statements is not correct?
a. Acquisitions are routine transactions requiring a. Job tickets are prepared by employees for each
general authorization. job worked on, so an employee may have more that
one job ticket on a given day.
b. Retirements are reported on an authorized
disposal report form. b. An individual employee will have only one time
card.
c. Acquisition cost is allocated over the expected life
of the asset. c. The time reported on job tickets should reconcile
with the time reported on time cards.
d. Transfer of fixed assets among departments is
recorded in the fixed asset subsidiary ledger. d. Paychecks should be prepared from the job
tickets.
ANS: A
ANS: D
10. In the payroll subsystem, which function should
distribute paychecks? 14. Which department is responsible for approving
changes in pay rates for employees?
a. personnel
a. payroll
b. timekeeping
b. treasurer
c. paymaster
c. personnel
d. payroll
d. cash disbursements
ANS: C
ANS: C
11. Where does the responsibility lie for reconciling
the labor distribution summary and the payroll 15. Which of the following situations represents a
disbursement voucher? serious control weakness?
a. cash disbursements a. Timekeeping is independent of the payroll

department.

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b. Paychecks are distributed by the employees b. update employee payroll records

immediate supervisor.
c. prepare the labor distribution summary
c. Time cards are reconciled with job tickets.
d. prepare paychecks
d. Personnel is responsible for updating employee
records, including creation of records for new hires. ANS: C
ANS: B 20. Payroll checks are typically drawn on
16. Why would an organization require the a. the regular checking account
paymaster to deliver all unclaimed paychecks to the b. a payroll imprest account
internal audit department?
c. a wages payable account
a. to detect a “phantom employee” for whom a
check was produced d. petty cash
b. to prevent an absent employee’s check from ANS: B

being lost
21. The personnel action form provides
c. to avoid paying absent employees for payday authorization control by
d. to prevent the paymaster from cashing unclaimed a. preventing paychecks for terminated employees
checks
b. verifying pay rates for employees
ANS: A
c. informing payroll of new hires
17. Which of the following is not a reasonable
control for fixed assets? d. all of the above
a. Proper authorization is required for acquisition ANS: D

and disposal of fixed assets. 22. Accounting records that provide the audit trail
b. Fixed asset records show the location of each for payroll include all of the following except
asset. a. time cards
c. Fully depreciated assets are immediately disposed b. job tickets
of.
c. payroll register
d. Depreciation policies are in writing.
d. accounts payable register
ANS: C
ANS: D
18. Cost accounting updates work-in-process
accounts from 23. Personnel actions forms are used to do all of the
following except
a. time cards
a. activate new employees
b. the labor distribution summary
b. terminate employees
c. job tickets
c. record hours worked
d. personnel action forms
d. change pay rates
ANS: C
ANS: C
19. Payroll uses time card data to do all of the
following except 24. The payroll department performs all of the
following except
a. prepare the payroll register
a. prepares the payroll register

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b. distributes paychecks a. determines the need for new assets
c. updates employee payroll records b. maintains depreciation records
d. prepares paychecks c. records retirement and disposal of assets
ANS: B d. tracks the physical location of fixed assets
25. The document that records the total amount of ANS: A

time spent on a production job is the
30. The payroll department performs all of the
a. time card following except
b. job ticket a. prepares paychecks
c. labor distribution summary b. transfers adequate funds to the payroll imprest

account
d. personnel action form
c. updates employee payroll records
ANS: C
d. prepares the payroll register
26. A control technique that can reduce the risk of a
terminated employee being paid is ANS: B
a. a security camera viewing the time clock 31. Depreciation
b. the supervisor taking role during the shift a. assures that assets are reported at fair market
value
c. paychecks being distributed by an independent
paymaster b. is discretionary for many firms
d. reconciliation of time cards and job tickets c. allocates the cost of an asset over its useful life
ANS: C d. is the responsibility of the department using the

asset
27. Accounts payable
ANS: C
a. signs paychecks
32. The Fixed Asset System is similar to the
b. prepares the payroll voucher expenditure cycle except
c. reconciles time cards and employee records a. fixed asset transactions are non-routine and
d. distributes paychecks to employees require special authorization and controls
ANS: B b. fixed assets are capitalized, not expensed
28. All of the following are processed by the Fixed c. both a and b
Asset System except d. none of the above
a. sale of unneeded equipment ANS: C
b. purchase of raw materials 33. Asset maintenance involves
c. repair of production equipment a. the recording of periodic depreciation
d. purchase of a new plant b. adjusting the asset records to reflect the cost of
ANS: B physical improvements
29. The Fixed Asset System performs all of the c. keeping track of the physical location of the assets
following except d. all of the above

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ANS: D ANS: F
34. The Fixed Asset Systems does all of the following 7. The SAP R/3 system organizes business processes
except into four categories: financial, logistics, human
resources, and business process support.
a. records acquisition of assets
ANS: T
b. records improvements to assets
8. The objective of the Economic Order Quantity
c. estimates the fair market value of assets in service model is to reduce total inventory costs by
d. records the disposal of assets minimizing carrying costs and ordering costs.
ANS: C ANS: T
35. Asset disposal 9. The work-in-process file is the subsidiary ledger

for the work-in-process control account.
a. occurs as soon as an asset is fully depreciated
ANS: T
b. requires no special authorization
10. Move tickets authorize the storekeeper to
c. automatically initiates the purchase of a release materials to work centers.
replacement asset
ANS: F
d. must follow formal authorization procedures
11. An operating characteristic of modern
ANS: D manufacturing firms is that labor is replaced with
capital so that the firm can be more efficient and
Chapter 7—The Conversion Cycle therefore more competitive.
TRUE/FALSE ANS: T
1. The philosophy of customer satisfaction 12. Computer Integrated Manufacturing focuses on
permeates the world-class firm. reducing the complexity of the physical
ANS: T manufacturing layout of the shop floor.
2. Reports generated by the cost accounting system ANS: F

include performance reports and budget reports. 13. The only objective of the Just-In-Time philosophy
ANS: T is to reduce inventory levels.
3. The cost accounting system authorizes the release ANS: F

of raw materials into production. 14. Accounting in a world-class manufacturing
ANS: F environment emphasizes standard cost and variance
analysis.
4. Batch processing creates a homogeneous product
through a continuous series of standard procedures. ANS: F
ANS: F 15. Identifying cost drivers is an essential step in

implementing the Just-In-Time philosophy.
5. The bill of materials specifies the types and
quantities of the raw materials and subassemblies ANS: F
used in producing a single unit of finished product. 16. A world class information system produces very
ANS: T little paper.
6. A purchase requisition authorizes the storekeeper ANS: T

to release materials to individuals or work centers in
the production process.

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17. Internal control procedures are virtually identical b. authorize release of raw materials
in a world-class manufacturing environment and in a
traditional manufacturing environment. c. direct the movement of work-in-process
ANS: F d. determine material requirements
18. In a world-class company, all activities, from ANS: A

acquisition of raw materials to selling the final 4. Which process creates a homogeneous product
product, form a “chain of customers.” through a continuous series of standard procedures?
ANS: T a. batch process
19. The two subsystems of a traditional conversion b. make-to-order process
cycle are the production system and the delivery
system. c. continuous process
ANS: F d. none of the above
20. Manufacturing resources planning (MRP II) has ANS: C

evolved into electronic resource planning (ERP).
5. An example of a continuous process is the
ANS: F production of
MULTIPLE CHOICE a. wedding invitations
1. Which item does not describe a world-class b. milk products

company?
c. jet aircraft
a. the goal of a world-class company is to delight its
customers d. all of the above
b. customers in a world-class company are external ANS: B

departments only 6. All of the following are characteristics of batch
c. world-class companies work in cross-functional processing except
teams a. each item in the batch is similar
d. a world-class company has a flat organizational b. batches are produced in accordance with detailed
structure customer specifications
ANS: B c. batches are produced to replenish depleted
2. Which subsystem is not a part of the production inventory levels
system? d. setting up and retooling is required for different
a. directing the movement of work through the batches
process ANS: B
b. determining raw material requirements 7. When determining which items to produce, a firm
c. authorizing work to be performed must know
d. monitoring the flow of cost information related to a. last year’s production level
production b. raw material inventory levels
ANS: D c. the standard cost of the item
3. The purpose of the cost accounting system is to d. the sales forecast
a. produce information for inventory valuation ANS: D

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8. The production schedule is ANS: C
a. the expected demand for the firm’s finished goods 12. The storekeeper releases raw materials based on
for a given year the
b. the formal plan and authority to begin production a. production schedule
c. a description of the type and quantity of raw b. materials requisition

materials and subassemblies used to produce a
single unit of finished product c. work order
d. the sequence of operations during manufacturing d. bill of materials
ANS: B ANS: B
9. A move ticket 13. Which of the following is not an assumption of

the Economic Order Quantity model?
a. is the formal plan and authority to begin
production a. demand for the product is known with certainty
b. specifies the materials and production required b. total cost per year of placing orders is fixed
for each batch c. lead time is known and is constant
c. records the work done in each work center d. there are no quantity discounts
d. authorizes the storekeeper to release materials to ANS: B
work centers
14. Firms hold safety stock to compensate for
ANS: C
a. mathematical weaknesses of the Economic Order
10. The internal control significance of the excess Quantity model
materials requisition is that it
b. variations in lead time or daily demand
a. indicates the amount of material released to work
centers c. fluctuations in carrying costs
b. identifies materials used in production that d. uncertainty in the estimation of ordering costs
exceed the standard amount allowed
ANS: B
c. indicates the standard quantities required for
production 15. What is the economic order quantity if the
annual demand is 10,000 units, set up cost of placing
d. documents the return to raw materials inventory each order is $3 and the holding cost per unit per
of unused production materials year is $2?
ANS: B a. 174
11. Inventory control performs all of the following b. 123

tasks except it
c. 245
a. provides production planning and control with the
inventory status report of finished goods d. none of the above
b. updates the raw material inventory records ANS: A
c. prepares a materials requisition for each 16. If the daily demand is 40 units and the lead time
production batch is 12 days, the reorder point is
d. records the completed production as an increase a. 52 units

to finished goods inventory b. 48 units

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c. 480 units d. financial
d. none of the above ANS: C
ANS: C 21. Which situation violates the segregation of

functions control procedure?
17. Which statement is not correct?
a. production planning and control is located apart
a. general ledger creates a new cost record upon from the work centers
receipt of a work order from production planning
and control b. inventory control maintains custody of inventory
items
b. cost accounting updates the cost record with data
gathered from the materials requisition c. cost accounting has custody of and makes entries
on cost records
c. general ledger posts summary information about
the manufacturing process based on a journal d. work centers record direct labor on job tickets
voucher prepared by cost accounting
ANS: B
d. cost accounting computes variances and applies
overhead to individual cost records 22. All of the following are internal control
procedures that should be in place in the conversion
ANS: A cycle except
18. Which of the following is not a category of a. calculation and analysis of direct material and
critical success factors in most manufacturing direct labor variances
companies?
b. retention of excess materials by work centers
a. product quality
c. physical count of inventory items on hand
b. customer service
d. limited access to raw material and finished goods
c. revenue generation inventories
d. resource management ANS: B
ANS: C 23. Process simplification focuses on
19. Computer integrated manufacturing groups all of a. using Computer Numerical Controlled machines
the following technologies except which stand alone within a traditional setting
a. robotics b. completely automating the manufacturing

environment
b. materials requirements planning
c. reducing the complexity of the physical
c. automated storage and retrieval systems manufacturing layout of the shop floor
d. computer aided design d. organizing the process into functional
ANS: B departments
20. The SAP R/3 system provides pre-defined ANS: C

modules to support business processes in the all of 24. A manufacturing process that is organized into
the following categories except group technology cells utilizing no human labor is
a. human resources called
b. business process support a. islands of technology
c. strategic b. process simplification
c. Computer Integrated Manufacturing

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d. traditional manufacturing b. warranty claims
ANS: C c. scheduling delays
25. An example of automation of manufacturing d. proceeds from the sale of scrap

design is
ANS: D
a. Computer Aided Engineering
30. A flexible manufacturing system
b. Automated Storage and Retrieval Systems
a. creates bottlenecks in the process
c. Computer Numerical Control
b. leads to an “us” versus “them” attitude among
d. robotics workers
ANS: A c. shortens the physical distance between activities
26. An example of automation of manufacturing d. is organized along functional lines

planning is
ANS: C
a. Computer Aided Engineering
31. Deficiencies of the traditional cost accounting
b. Automated Storage and Retrieval Systems information system include all of the following
except
c. Materials Requirements Planning
a. an emphasis on financial performance
d. Computer Numerical Control
b. inaccurate cost allocations
ANS: C
c. an emphasis on standard costs
27. Firms implement a Just-In-Time inventory
approach to d. immediate feedback about deviations from the
norm
a. reduce investment in inventories
ANS: D
b. determine the optimum inventory level using the
EOQ model 32. Which statement is not correct?
c. camouflage production problems a. an activity driver is a means to measure the

activity used by the cost object
d. ensure overproduction of inventory
b. cost object describes the work performed in a firm
ANS: A
c. activities cause costs
28. Characteristics of Just-In-Time manufacturing
include all of the following except d. cost objects create a demand for activities
a. push manufacturing ANS: B
b. zero defects 33. Firms are adopting Activity Based Costing (ABC)
because
c. reduced setup time and small lot sizes
a. it facilitates the analysis of variances
d. reliable vendors
b. it more accurately allocates costs to products
ANS: A
c. it recognizes the importance of direct labor as a
29. The cost of poor quality includes all of the component of total manufacturing cost
following except
d. the financial nature of the reports permits
a. cost of rework comparisons to be made among different types of
products

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ANS: B 38. Transaction authorization occurs in a traditional

manufacturing environment in all of the following
34. In traditional firms, information reporting ways except
a. provides financially oriented information relating a. production planning and control initiates
to operations production with a work order
b. presents detailed information about activities b. movement of the work through the production
c. shows the allocation of costs first to activities and process follows the move ticket
then to cost objects c. the sales department modifies work orders to
d. identifies nonessential activities match changes in demand
ANS: A d. the materials requisition authorizes the

storekeeper to release materials to the work centers
35. Types of information provided by Activity Based
Costing include ANS: C
a. a description of the single activity driver used for 39. Manufacturing flexibility incorporates four
overhead application characteristics. These include all of the following
except
b. the dollar value of the direct material usage
variance a. high product quality
c. identification of cost drivers b. high inventory levels
d. details of the components of the single overhead c. automation of manufacturing processes

cost pool d. physical reorganization of production facilities
ANS: C ANS: B
36. Which statement is not correct? 40. The stages of the automation continuum are (in
a. the benchmark approach compares key activities order)
with similar activities in other firms a. traditional, computer-integrated manufacturing,
b. critical success factors include product and islands of technology, process simplification
process quality b. process simplification, traditional, islands of
c. the ABC model includes two perspectives: an technology, computer-integrated manufacturing
allocation of cost perspective and a process c. traditional, islands of technology, process
perspective simplification, computer-integrated manufacturing
d. in world-class manufacturing firms, quality control d. traditional, process simplification, computer-
activities at the end of the process are essential integrated manufacturing, islands of technology
ANS: D ANS: C
37. All of the following are documents in batch Chapter 8—General Ledger, Financial Reporting, and
process production systems except Management Reporting Systems
a. production schedule TRUE/FALSE
b. route sheet 1. The most common means of making entries
c. materials requisition in the general ledger is via the journal voucher.
d. purchase order ANS: T
ANS: D

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2. Individuals with access authority to general ANS: F

ledger accounts should not prepare journal
vouchers. 14. The control function entails evaluating a
process against a standard and, if necessary, taking
ANS: T corrective action.
3. The journal voucher is the document that ANS: T

authorizes entries to be made to the general ledger.
15. Standards are the basis for evaluating actual
ANS: T performance.
4. Each account in the chart of accounts has a ANS: T

separate record in the general ledger master file.
16. A report is said to have information content
ANS: T if it eliminates uncertainty associated with a problem
facing the decision maker.
5. The responsibility center file is primarily
used by the Financial Reporting System. ANS: F
ANS: F 17. An inventory out-of-stock report is an

example of a programmed, on-demand report.
6. Management reporting is often called
discretionary reporting because it is not mandated ANS: T
as is financial reporting.
18. A principle of responsibility accounting is
ANS: T that managers are responsible for controllable and
uncontrollable costs.
7. Primary recipients of financial statement
information are internal management. ANS: F
ANS: F 19. The manager of a cost center is responsible

for cost control and revenue generation.
8. The Management Reporting System is a
nondiscretionary system. ANS: F
ANS: F 20. Designing an effective management

reporting system does not require an understanding
9. When evaluating decision alternatives, one of the information managers need to deal with the
option is to take no action. problems they face.
ANS: T ANS: F
10. In most cases intangible decision criteria 21. The formalization of tasks principle suggests
can be quantified. that management should structure the firm around
ANS: F the unique skills sets of key individuals.
11. One benefit of the Management Reporting ANS: F

System is that it can alert management to delays in 22. If a manager delegates responsibility to a
project implementation. subordinate, he or she must also grant the
ANS: T subordinate authority to make decisions.
12. Responsibility refers to an individual’s ANS: T

obligation to achieve desired results. 23. Operational control involves motivating
ANS: T managers at all levels to use resources, including
materials, personnel, and financial assets, as
13. A firm with a wide span of control tends to productively as possible.
have relatively more layers of management.

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ANS: F 5. The most important advantage of an alphabetic

code is that
24. The block code is the coding scheme most
appropriate for a chart of accounts. a. meaning is readily conveyed to users
ANS: T b. sorting is simplified
MULTIPLE CHOICE c. the capacity to represent items is increased
1. The coding scheme most appropriate for a chart d. missing documents can be identified
of accounts is
ANS: C
a. sequential code
6. Entries into the General Ledger System (GLS) can
b. block code be made using information from
c. group code a. the general journal
d. mnemonic code b. a journal voucher which represents a summary of

similar transactions
ANS: B
c. a journal voucher which represents a single,
2. A common use for sequential coding is unusual transaction
a. creating the chart of accounts d. all of the above
b. identifying inventory items ANS: D
c. identifying documents 7. Which statement is not correct? The general
d. identifying fixed assets ledger master file
ANS: C a. is based on the firm’s chart of account
3. The most important advantage of sequential b. contains a record for control accounts
coding is that c.is an output of the Financial Reporting System
a. missing or unrecorded documents can be (FRS)
identified d. supplies information for management decision
b. the code itself lacks informational content making
c. items cannot be inserted ANS: C
d. deletions affect the sequence 8. What type of data is found in the general ledger
master file?
ANS: A
a. a chronological record of all transactions
4. When a firm wants its coding system to convey
meaning without reference to any other document, b. the balance of each account in the chart of
it would choose accounts
a. an alphabetic code c. budget records for each account in the chart of

accounts
b. a mnemonic code
d. subsidiary details supporting a control account
c. a group code
ANS: B
d. a block code
9. Which report is not an output of the Financial
ANS: B Reporting System (FRS)?

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a. variance analysis report a. trial balance
b. statement of cash flows b. adjusted trial balance
c. tax return c. general ledger
d. comparative balance sheet d. general journal
ANS: A ANS: B
10. Which steps in the Financial Accounting Process 14. Risk exposures in the General Ledger and
are in the correct sequence? Financial Reporting Systems include all of the
following except
a. record the transaction, post to the ledger, prepare
the adjusted trial balance, enter adjusting entries, a. loss of the audit trail
prepare financial statements
b. unauthorized access to the general ledger
b. record the transaction, prepare the unadjusted
trial balance, record adjusting journal entries, record c. loss of physical assets
closing entries, prepare financial statements d. general ledger account out of balance with the
c. record the transaction, post to the ledger, record subsidiary account
adjusting entries, prepare the unadjusted trial ANS: C
balance, prepare financial statements
15. Which situation indicates an internal control risk
d. record the transaction, post to the ledger, prepare in the General Ledger/Financial Reporting Systems
the adjusted trial balance, prepare financial (GL/FRS)?
statements, record closing entries
a. the employee who maintains the cash journal
ANS: D computes depreciation expense
11. Which statement is not correct? b. the cash receipts journal voucher is approved by
a. the post-closing trial balance reports the ending the Treasurer
balance of each account in the general ledger c. the cash receipts journal vouchers are
b. one purpose of preparing the unadjusted trial prenumbered and stored in a locked safe
balance is to ensure that debits equal credits d. the employee who maintains the cash receipts
c. financial statements are prepared based on the journal records transactions in the accounts
unadjusted trial balance receivable subsidiary ledger
d. the unadjusted trial balance reports control ANS: D

account balances but omits subsidiary ledger detail 16. With a limited work force and a desire to
ANS: C maintain strong internal control, which combination
of duties performed by a single individual presents
12. What account appears on the postclosing trial the least risk exposure?
balance?
a. maintaining the inventory ledger and recording
a. income summary the inventory journal voucher in the general ledger
b. machinery b. recording the inventory journal voucher in the

general ledger and maintaining custody of inventory
c. rent expense
c. maintaining the cash disbursements journal and
d. interest income recording direct labor costs applied to specific jobs
ANS: B d. preparing the accounts payable journal voucher
13. Financial statements are prepared from the and recording it in the general ledger

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ANS: C d. the MRS focuses on internal decision-making

information
17. The audit trail fulfills all of the following purposes
except ANS: D
a. provides the ability to answer inquiries 21. Which statement is not true?
b. ensures the accuracy of the application software a. authority refers to an individual’s obligation to
achieve desired results
c. fulfills governmental regulations
b. if an employee is given the responsibility for a
d. offers a means for preventing, detecting, and task, that employee should be given authority to
correcting errors make decisions within the limits of that task
ANS: B c. the level of detail provided to an employee is a
18. Which best describes a batch process General function of the employee’s position with the firm
Ledger System (GLS) d. all of the above are true
a. paper documents are eliminated ANS: A
b. the general ledger master file is updated each 22. Which statement is not true? The manager’s
night span of control
c. there is a time lag between transaction processing a. is narrow for routine and repetitive tasks
and posting to the general ledger
b. is related to the number of layers of management
d. no direct access or querying of the General Ledger
is possible c. affects the amount of detail provided to a
manager
ANS: C
d. can affect employee morale and motivation
19. An advantage of a batch General Ledger System
(GLS) is that ANS: A
a. separation between authorization and transaction 23. Short-range planning involves

processing is strictly enforced
a. setting goals and objectives of the firm
b. the general ledger master file is recreated with
each update b. planning the production schedule for the next
quarter
c. updates and reconciliation of transactions occur as
a step within the transaction cycle c. planning the growth of the firm
d. errors and out-of-balance conditions are identified d. deciding on the degree of diversification among
at the end of the month the firm’s products
ANS: C ANS: B
20. A characteristic of the Management Reporting 24. Long-range planning involves

System (MRS) is a. planning the marketing and promotion for a
a. the MRS operates in conformity with generally product
accepted accounting principles b. presenting department heads with budgetary
b. it is a legal requirement that the MRS be installed goals for the next year
and functioning properly c. preparing a work force utilization budget for the
c. the MRS is developed by implementing SEC next quarter
requirements d. deciding the optimum size of the firm

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ANS: D c. span of control
25. The level of management that makes tactical d. all of the above
planning decisions is
ANS: D
a. top management
30. All of the following are elements of problem
b. middle management structure except
c. operations management a. certainty
d. front-line management b. data
ANS: B c. procedures
26. The decision to enter a new market is an d. objectives

example of
ANS: A
a. strategic planning
31. All of the following are examples of programmed
b. tactical planning reports except
c. management control a. cash flow reports for Division B
d. operational control b. year-to-date local income tax payments made by

all employees living in City X and working in City Y
ANS: A
c. inventory exception reports for Division G
27. All of the following are elements of operational
control decisions except d. equipment utilization reports for Plant M
a. determining the scope of the activity ANS: B
b. setting operating standards 32. A fundamental principle of responsibility

accounting is that
c. evaluating performance
a. managers are accountable only for items they
d. taking corrective action when necessary control
ANS: A b. a manager’s span of control should not exceed
28. In contrast to tactical planning decisions, eight people
management control decisions, and operational c. structured reports should be prepared weekly
control decisions, strategic planning decisions
usually d. the information flow is in one direction, top-down
a. are more focused ANS: A
b. have a shorter time frame 33. Which statement is not true? Responsibility
accounting
c. are unstructured
a. involves both a top-down and bottom-up flow of
d. have a high degree of certainty information
ANS: C b. acknowledges that some economic events cannot
29. Which of the following management principles be traced to any manager
affects the management reporting system? c. creates a budget
a. formalization of tasks d. compares actual performance with budget
b. authorization ANS: B

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34. What mechanism is used to convey to managers a. emphasis on both the short and long run.
the standards by which their performance will be
measured? b. review of the attributes and behavior of the
organization’s competition.
a. the responsibility report
c. analysis of external economic factors.
b. the scheduled report
d. analysis of consumer demand.
c. the budget
ANS: A
d. all of the above
39. Which of the following performance measures
ANS: C can not result in dysfunctional behavior?
35. All of the following concepts encourage goal a. price variance

congruence except
b. quotas
a. detailed information reporting at all management
levels c. ROI
b. authority and responsibility d. net income
c. formalization of tasks e. all of the above can result in dysfunctional

behavior
d. responsibility accounting
ANS: E
ANS: A
40. Which of the following best describes a profit
36. Which of the following statements is NOT true? center:
a. Sorting records that are coded alphabetically a. authority to make decisions affecting the major
tends to be more difficult for users than sorting determinants of profit, including the power to
numeric sequences. choose its markets and sources of supply.
b. Mnemonic coding requires the user to memorize b. authority to make decisions affecting the major
codes. determinants of profit, including the power to
choose its markets and sources of supply, and
c. Sequential codes carry no information content significant control over the amount of invested
beyond their order in the sequence. capital.
d. Mnemonic codes are limited in their ability to c. authority to make decisions over the most
represent items within a class. significant costs of operations, including the power
ANS: B to choose the sources of supply.
37. Which file has as its primary purpose to present d. authority to provide specialized support to other
comparative financial reports on a historic basis? units within the organization.
a. journal voucher history file e. responsibility for combining the raw materials,
direct labor, and other factors of production into a
b. budget master file final product.
c. responsibility file ANS: A
d. general ledger history file
ANS: D
38. All of the following are characteristics of the

strategic planning process except the

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AIS Master Reviewer 1 8 - Accounting Info System Test bank

Accounting Information Systems (Far Eastern University)

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Chapter 1—The Information System: An 12. A backbone system is completely finished,

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MULTIPLE CHOICE c. convenience

1. Which of the following is not a business resource? d. completeness

a. raw material ANS: C

b. labor 6. An example of a nonfinancial transaction is

c. information a. sale of products

d. all are business resources b. cash disbursement

ANS: D c. log of customer calls

2. Which level of management is responsible for d. purchase of inventory

a. operations management 7. An example of a financial transaction is

b. middle management a. the purchase of computer

c. top management b. a supplier’s price list

d. line management c. a delivery schedule

ANS: B d. an employee benefit brochure

3. Which level of management is responsible for ANS: A

b. middle management a. Transaction Processing System

c. operations management b. Expert System

d. executive management c. General Ledger/Financial Reporting System

ANS: C d. Management Reporting System

4. The ability to achieve the goals of a system ANS: B

ANS: D c. FRS reports are prepared using information

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ANS: A b. the key

10. The purpose of the Transaction Processing c. the file

c. distributing essential information to operations a. a key

a. a financial transaction a. summarization

b. an accounting record b. storage

c. an accounting report c. retrieval

d. a nonfinancial transaction d. deletion

ANS: C c. the end users of the reports

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b. capturing and recording transactions in the d. data conversion

d. managing the physical information system of the a. external auditors

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c. end user a. mismanagement of organizationwide resources

d. data librarian b. hardware and software incompatibility

ANS: D c. cost reductions

a. accountants 35. Disadvantages of the distributed data processing

d. all of the above b. redundancy of tasks

ANS: D c. software incompatibility

a. internal auditing 36. ERP packages include all of the following

b. open access to all data by all users a. cost accountants

c. single update for changes in data b. creditors

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c. stockholders 3. Transactions with trading partners include

b. timelessness ANS: serve a common purpose

c. accuracy 5. The task of locating and transferring an existing

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14. The transaction processing system is comprised Chapter 2—Introduction to Transaction

ANS: Prior to SOX, a gray area of overlap existed ANS: F

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8. Document flowcharts are often used to depict ANS: F

9. Program flowcharts depict the type of media ANS: F

10. System flowcharts represent the input sources, ANS: T

ANS: T updated in real time.

13. Backups are automatically produced in a direct ANS: T

14. The box symbol represents a temporary file. ANS: T

ANS: F 25. Batch processing of accounts common to many