CHAPTER 7: AUDITING IN A COMPUTERIZED ENVIRONMENT (NO 85)

1. CIS has several significant effects on an organization. Which of the following would not be important
from an auditing perspective?

a. Organizational changes c. The potential for material misstatement

b. The visibility of information d. None of the above; i.e., they are all important.

1. Which statement is incorrect when auditing in a CIS environment

a. A CIS environment exists when a computer of any type or size is involved in the processing by
the entity of financial information of significance to the audit, whether that computer is
operated by the entity or by a third party.

b. The auditor should consider how a CIS environment affects the audit.

c. The use of a computer changes the processing, storage and communication of financial
information and may affect the accounting and internal control systems employed by the entity.

d. A CIS environment changes the overall objective and scope of an audit.

2. An important characteristic of CIS is uniformity of processing. Therefore a risk exists that:

a. Auditors will not be able to access data quickly.

b. Auditors will not be able to determine if data is processed consistently.

c. Erroneous processing can result in the accumulation of a great number of misstatements in a

short period of time.

d. All of the above.

3. The characteristics that distinguish computer processing from manual processing include the
following:

1) Computer processing uniformly subjects like transactions to the same instructions.

2) Computer systems always ensure that complete transaction trails useful for audit purposes
are preserved for indefinite periods.
 3) Computer processing virtually eliminates the occurrence of clerical errors normally
associated with manual processing.

4) Control procedures as to segregation of functions may no longer be necessary in computer

environment.

a. All of the above statements are true. c. Only statements (1) and (3) ate true

b. Only statements (2) and (4) are true. d. All of the above statements are false.

4. Which of the following is not a risk specific to CIS environments?

a. Reliance on the functioning capabilities of hardware and software

b. Increased human involvement

c. Loss of data due to insufficient backup

d. Unauthorized access

5. Which of the following is not a risk in a computerized Information system (CIS)?

a. Need for CIS experienced STAFF c. Improved audit trail

b. Separation of CIS duties from accounting d. Hardware and data vulnerability

functions

6. Which of the following statements is not correct?

a. The overall objective and scope of an audit do not change in a CIS environment.

b. When computers or CIS are introduced, the basic concept of evidence accumulation remains the
same.

c. Most CIS rely extensively on the same type of procedures for control that are used in manual
processing system.

d. The specific methods appropriate for implementing the basic auditing concepts do not change,
as systems become more complex.
 D

7. The use of CIS will least likely affect the

a. The procedures followed by the auditor in obtaining a sufficient understanding of the accounting
and internal control systems.

b. The auditor’s specific audit objectives.

c. The consideration of inherent risk and control risk through which the auditor arrives at the risk
assessment.

d. The auditor’s design and performance of tests of control and substantive procedures appropriate
to meet the audit objective.

8. Which of the following is unique to CIS?

a. Error listing c. Questionnaires

b. Flowchart d. Prenumbered documents

9. Where computer processing is used in significant accounting applications, internal control

procedures may be defined by classifying control procedures in two types: general and

a. Administrative b. Specific c. Application d. Authorization

10. A control which relates to all parts of the CIS is called a(n)

a. Systems control b. General control c. Applications control d. Universal control

11. Controls which apply to a specific use of the system are called

a. Systems controls b. General controls c. Applications controls d. User controls

C
12. Some CIS control procedure relate to all CIS activities (general controls) and some relate to specific
tasks (application controls). General controls include

a. Controls designed to ascertain that all data submitted to CIS for processing have been properly
authorized.

b. Controls that relate to the correction and resubmission of data that were initially incorrect

c. Controls for documenting and approving programs and changes to programs

d. Controls designed to assure the accuracy of the processing results.

13. Which of the following statements is correct?

a. Auditors should evaluate application controls before evaluating general controls.

b. Auditors should evaluate application controls and general controls simultaneously.

c. Auditors should evaluate general controls before evaluating application controls.

d. None of these statements is correct.

14. Which of the following is a component of general controls?

a. Processing controls c. Back-up and contingency planning

b. Output controls d. Input controls

15. Which of the following is least likely to be a general control over computer activities?

a. Procedures for developing new programs and systems.

b. Requirements for system documentation.

c. An access control.

d. A control total.

D
16. Which of the following is an example of general control?

a. Input Validation checks. c. Operations manual.

b. Control total. d. Generalized audit software.

17. Which of the following is not a general control?

a. The plan of organization and operation of CIS activity.

b. Procedures for documenting, reviewing, and approving systems and programs.

c. Processing controls.

d. Hardware controls.

18. Which of the following activities would most likely be performed in CIS department?

a. Initiation of changes to master records.

b. Conversion of information to machine-readable form.

c. Correction of transactional errors.

d. Initiation of changes to existing applications.

19. For control purposes, which of the following should be organizationally segregated from the
computer operations functions?

a. Data conversion c. Minor maintenance according to a schedule

b. Systems development d. Processing of data

20. Which of the following computer related employees should not be allowed access to program
listings of application programs?

a. The systems analyst. b. The programmer.

 c. The operator. d. The librarian.

21. Where computers are used, the effectiveness of internal control depends, in part, upon whether the
organizational structure includes any incompatible combinations. Such a combination would exist
when there is no separation of the duties between

a. Documentation librarian and manager of programming

b. Programming and computer operator

c. Systems analyst and programmer

d. Processing control clerk and keypunch supervisor

22. Which of the following is a general control that would most likely assist an entity whose system
analyst left the entity in the middle of a major project?

a. Grandfather-father-son record retention c. Systems documentation.

b. Data encryption d. Check digit verification.

23. Internal control is ineffective when computer department personnel

a. Participate in computer software acquisition decision.

b. Design documentation for computerized systems.

c. Originate changes in master files.

d. Provide physical security for program files.

24. An example of an access control is a:

a. Check digit. b. Password. c. Test facility. d. Read only memory.

B
25. Access control in an online CIS can best be provided in most circumstances by

a. An adequate librarianship function controlling access to files.

b. A label affixed to the outside of a file medium holder that identifies the contents.

c. Batch processing of all input through a centralized, well-guarded facility.

d. User and terminal identification controls, such as passwords.

26. Controls which are built in by the manufacturer to detect equipment failure are called:

a. Input controls. c. Hardware controls.

b. Data integrity controls. d. Manufacturer's controls.

27. In a CIS environment, automated equipment controls or hardware controls are designed to:

a. Correct errors in the computer programs.

b. Monitor and detect errors in source documents.

c. Detect and control errors arising from the use of equipment.

d. Arrange data in a logical sequential manner for processing purposes.

28. To determine that user ID and password controls are functioning, an auditor would most likely:

a. Test the system by attempting to sign on using invalid user identifications and passwords.

b. Write a computer program that simulates the logic of the client's access control software.

c. Extract a random sample of processed transactions and ensure that the transactions were
appropriately authorized

d. Examine statements signed by employees stating that they have not divulged their user
identifications and passwords to any other person

A
 29. Adequate control over access to data processing is required to

a. Deter improper use or manipulation of data files and programs.

b. Ensure that only console operators have access to program documentation.

c. Minimize the need for backup data files.

d. Ensure that hardware controls are operating effectively and as designed by the computer
manufacturer.

30. The management of ABC Co. suspects that someone is tampering with pay rates by entering changes
through the Co.’s remote terminals located in the factory. The method ABC Co. should implement to
protect the system from these unauthorized alterations to the system’s files is

a. Batch totals c. Passwords

b. Checkpoint recovery d. Record count

31. Passwords for microcomputer software programs are designed to prevent:

a. Inaccurate processing of data. c. Incomplete updating of data files.

b. Unauthorized access to the computer. d. Unauthorized use of the software.

32. The possibility of losing a large amount of information stored in computer files most likely would be
reduced by the use of

a. Back-up files c. Completeness tests

b. Check digits d. Conversion verification

33. Which of the following controls most likely would assure that an entity can reconstruct its financial
records?

a. Hardware controls are built into the computer by the computer manufacturer.
 b. Backup diskettes or tapes of files are stored away from originals.

c. Personnel who are independent of data input perform parallel simulations.

d. System flowcharts provide accurate descriptions of input and output operations.

34. Unauthorized alteration of online records can be prevented by employing:

a. Key verification c. Computer matching

b. Computer sequence checks d. Data base access controls

35. XYZ Company updates its accounts receivable master file weekly and retains the master files and
corresponding update transactions for the recent 2-week period. The purpose of this practice is to

a. Verify run-to-run control totals for receivables.

b. Match internal labels to avoid writing on the wrong volume.

c. Permit reconstruction of the master file if needed.

d. Validate groups of update transactions for each

36. Which of the following is not a general control?

a. Separation of duties c. Output controls

b. Systems development d. Hardware controls

37. General controls include all of the following except:

a. Systems development. c. Check digit

b. Online security. d. Hardware controls.

38. Which of the following is not a general control?

 a. Computer performed validation tests of input accuracy

b. Equipment failure causes error messages on monitor

c. Separation of duties between programmer and operators

d. Adequate program run instructions for operating the computer

39. In their consideration of a client's CIS controls, the auditors will encounter general controls and
application controls. Which of the following is an application control?

a. The operations manual. c. Systems documentation.

b. Hash total. d. Control over program changes.

40. Which of the following statements related to application controls is correct?

a. Application controls relate to various aspects of the CIS operation including software acquisition
and the processing of transactions.

b. Application controls relate to various aspects of the CIS operation including physical security and
the processing of transactions in various cycles.

c. Application controls relate to all aspects of the CIS operation.

d. Application controls relate to the processing of individual transactions.

41. Which of the following is not an example of an applications control?

a. Back-up of data to a remote site for data security.

b. There is a preprocessing authorization of the sales transactions.

c. There are reasonableness tests for the unit selling price of a sale.

d. After processing, all sales transactions are reviewed by the sales department.

A
42. Which of the following is not an example of an application control?

a. An equipment failure cases an error message on the monitor.

b. There is a preprocessing authorization of the sales transactions.

c. There are reasonableness tests for the unit-selling price of a sale.

d. After processing, all sales transactions are reviewed by the sales department.

43. Which of the following is not a processing control?

a. Control risk b. Reasonable test c. Check digits d. Control total

44. When CIS programs or files can be accessed from terminals, users should be required to enter a(n)

a. Parity check. c. Self-diagnosis test

b. Personal identification code. d. Echo check.

45. Which of the following is an example of a check digit?

a. An agreement of the total number of employees to the total number of checks printed by the
computer.

b. An algebraically determined number produced by the other digits of the employee number.

c. A logic test that ensures all employee numbers are nine digits.

d. A limit check that an employee’s hours do not exceed 50 hours per work week.

46. Controls which are designed to assure that the data that will be processed by the computer is
authorized, complete, and accurate are called:

a. An input controls. c. Output controls.

b. Processing controls. d. General controls.

A
47. The completeness of computer-generated sales figures can be tested by comparing the number of
items listed on the daily sales report with the number of items billed on the actual invoices. This
process uses

a. Check digits b. Validity tests. c. Control totals d. Process tracing data.

48. A company's labor distribution report requires extensive corrections each month because of labor
hours charged to inactive jobs. Which of the following data processing input controls appears to be
missing?

a. Completeness test. c. Limit test.

b. Validity test. d. Control total.

49. Which of the following is correct?

a. Check digits should be used for all data codes.

b. Check digits are always placed at the end of a data code

c. Check digits do not affect processing efficiency.

d. Check digits are designed to detect transcription errors.

50. A clerk inadvertently entered an account number 12368 rather than account number 12638. In
processing this transaction, the error would be detected with which of the following controls?

a. Batch total c. Self-checking digit

b. Key verifying d. An internal consistency check

51. Totals of amounts in computer-record data fields, which are not usually added but are used only for
data processing control purposes, are called

a. Records totals b. Hash totals

 c. Processing data totals d. Field totals.

52. If a control total were to be computed on each of the following data items, which would best be
identified as a hash total for a payroll application?

a. Net pay. c. Department numbers.

b. Hours worked. d. Total debits and total credits.

53. In updating a computerized accounts receivable file, which one of the following would be used as a
batch control to verify the accuracy of the posting of cash receipts remittances?

a. The sum of the cash deposits plus the discounts less the sales returns.

b. The sum of the cash deposits.

c. The sum of the cash deposits less the discounts taken by customers.

d. The sum of the cash deposits plus the discounts taken by customers.

54. Which statement is NOT correct? The goal of batch controls is to ensure that during processing

a. Transactions are not omitted. c. Transactions are not added.

b. Transactions are processed more than d. An audit trail is created.

once.

55. An example of a hash total is

a. Total payroll checks - P12,315 c. Sum of the social security numbers - 12,
555, 437,251.
b. Total number of employees -10.
d. None of the above.

C
56. The employee entered “40" in the “hours worked per day” field. Which check would detect this
unintentional error?

a. Numeric/alphabetic check c. Sign check

b. Limit check d. Missing data check

57. Output controls are not designed to assure that information generated by the computer are:

a. Accurate. c. Complete

b. Distributed only to authorized people. d. Used appropriately by management.

58. Output controls need to be designed for which of the following data integrity objectives?

a. detecting errors after the processing is completed

b. preventing errors before the processing is completed

c. detecting ends in the general ledger adjustment process

d. preventing errors in separation of duties for CIS personnel

59. An unauthorized employee took computer printouts form output bins accessible to all employees. A
control which would have prevented this occurrence is

a. A storage/retention control.

b. An output review control.

c. A spooler file control.

d. A report distribution control.

60. Which of the following is likely to be of least importance to an auditor in considering the internal
control in a company with computer processing?
 a. The segregation of duties within the computer center.

b. The control over source documents.

c. The documentation maintained for accounting applications.

d. The cost/benefit of data processing operations.

61. It involves application of auditing procedures using the computer as an audit tool. This includes
computer programs and data the auditor uses as part of the audit procedures to process data of
audit significance contained in an entity’s information systems.

a. Test data approach c. Generalized audit software

b. Computer assisted audit techniques d. Auditing around the computer

62. The process of assessing control risk considering only non IT controls is known as?

a. Integrated test facility c. Auditing around the computer

b. The test data approach d. Generalized audit software

63. When auditing “around” the computer, the independent auditor focuses solely upon the source
documents and

a. Test data c. Compliance techniques

b. CIS processing b. CIS output

65. Which of the following CIS generally can be audited without examining or directly testing the
computer programs of the system?

a. A system that performs relatively uncomplicated processes and produces detail output

b. A system that affects a number of essential master files and produces no a limited output
 c. A system that updates a few essential master files and produces no printed output other than
final balances

d. A system that uses an online real-time processing feature.

66. Which of the following procedures is an example of auditing "around" the computer?

a. The auditor traces adding machine tapes of sales order batch totals to a computer printout of
the sales journal.

b. The auditor develops a set of hypothetical sales transactions and, using the client's computer
program, enters the transactions into the system and observes the processing flow.

c. The auditor enters hypothetical transactions into the client's processing system during client
processing of live data.

d. The auditor observes client personnel as they process the biweekly payroll. The auditor is
primarily concerned with computer rejection of data that fails to meet reasonableness limits.

67. A disadvantage of auditing around the computer is that it

a. Permits no direct assessment of actual processing.

b. Requires highly skilled suitors.

c. Demands intensive use of machine resources.

d. Interacts actively with auditee applications.

68. Auditing by testing the input and output of an IT system instead of the computer program itself will

a. Not detect program errors which do not show up in the output sampled.

b. Detect all program errors, regardless of the nature of the output.

c. Provide the auditor with the same type of evidence.

d. Not provide the auditor with confidence in the results of the auditing procedures.

A
69. Which of the following is NOT a common type of white box approach?

a. Test data c. Integrated test facility

b. Auditing around the computer d. Parallel simulation

70. Compliance testing of an advanced CIS

a. Can be performed using only actual transactions since testing of simulated transactions is of no
consequence

b. Can be performed using actual transactions or simulated transactions

c. Is impractical since many procedures within the CIS activity leave no visible evidence of having
been performed

d. Is inadvisable because it may distort the evidence in master files

71. Which of the following best describes the test data approach?

a. Auditors process their own test data using the client’s computer system and application program

b. Auditors process their own test data using their own computers that stimulate the client's
computer system

c. Auditors use auditor-controlled software to do the same operations that the client's software
does, using the same data files

d. Auditors use client-controlled software to do the same operations that the client's software
does, using auditor created data files

72. Creating simulated transactions that are processed through a system to generate results that are
compared with predetermined results, is an auditing procedure referred to as

a. Program checking c. Completing outstanding jobs.

b. Use of test data. e. Parallel simulation.

B
73. An auditor estimates that 10,000 checks were issued during the accounting period. If a computer
application control which performs a limit check for each check request is to be subjected to the
auditor’s test data approach, the sample should include

a. Approximately 1,000 test items

b. A number of test items determined by the auditor to be sufficient under the circumstances

c. A number of test items determined by the auditor’s reference to the appropriate sampling tables

d. One transaction

74. An integrated test facility (ITF) would be appropriate when the auditor needs to

a. Trace a complex logic path through an application system.

b. Verify processing accuracy concurrently with processing.

c. Monitor transactions in an application system continuously.

d. Verify load module integrity for production programs.

75. The auditor’s objective to determine whether the client’s computer programs can correctly handle
valid and invalid transactions as they arise accomplished through the

a. Test data approach. c. Microcomputer-aided auditing approach.

b. Generalized audit software approach d. Generally accepted auditing standards.

76. When an auditor tests a computerized accounting system which of the following is true of the test
data approach?

a. Several transactions of each type must be tested

b. Test data must consist of all possible valid and invalid conditions

c. The program tested is different from the program used throughout the year by the client

d. Test data should include data that the client's system should accept or reject
 D

77. Which of the following statements is not true to the test data approach when testing a computerized
accounting system?

a. The test needs to consist of only those valid and invalid conditions which interest the auditor.

b. Only one transaction of each type need be tested.

c. The test data must consist of all possible valid and invalid conditions.

d. Test data are processed by the client’s computed programs under the auditor’s control

78. In auditing through a computer, the test data method is used by auditors to test the

a. Accuracy of input data. c. Procedures contained within the program.

b. Validity of the output. d. Normalcy of distribution of test data.

79. Which of the following computer-assisted auditing techniques allows fictitious and real transactions
to be processed together without client operating personnel being aware of the testing process?

a. Parallel simulation. c. Integrated test facility.

b. Generalized audit software programming. d. Test data approach.

80. A primary reason auditors are reluctant to use an ITF is that it requires them to

a. Reserve specific master file records and process them at regular intervals

b. Collect transaction and master file records in a separate file

c. Notify user personnel so they can make manual adjustments to output

d. Identify and reverse the fictitious entries to avoid contamination of the master file

81. Which of the following is a disadvantage of the integrated test facility approach?
 a. In establishing fictitious entities, the auditor may be compromising audit independence.

b. Removing the fictitious transactions from the system is somewhat difficult and, if not done
carefully, may contaminate the client's files.

c. ITF is simply an automated version of auditing "around" the computer.

d. The auditor may not always have a current copy of the authorized version of the client's
program.

82. The audit approach in which the auditor runs his/her own program on a controlled basis in order to
verify the client’s data recorded in a machine language is

a. The test data approach. c. The microcomputer-aided auditing approach.

b. The generalized audit software approach. d. Called auditing around the computer.

83. Bandy Corporation has numerous customers. A customer file is kept on disk storage. Each account in
the customer file contains name, address, credit limit, and account balance. The auditor wishes to
test this tile to determine whether credit limits are being exceeded. The best procedure the auditor
to follow would be to:

a. Develop test data that would cause some account balance to exceed the credit limit and
determine if the system properly detects such situations.

b. Develop a program to compare credit limits with account balances and print out the details of
any account with a balance exceeding its credit limit.

c. Require a printout of all account balances so they can be manually checked against the credit
limits.

d. Request a printout of a sample of account balances so they can be individually checked against
the credit limits.

84. Which of the following methods of testing application controls utilizes a generalized audit software
package prepared by the auditors?

a. Parallel simulation c. Test data approach

b. Integrated testing facility approach d. Exception report tests

 A

85. When performing a parallel simulation the auditor may use generalized audit software (GAS). Which
of the following is not seen as an advantage to using GAS?

a. Auditors can learn the software in a short period of time

b. Can be applied to a variety of clients after detailed customizations

c. Can be applied to a variety of clients with minimal adjustments to the software

d. Greatly accelerates audit testing over manual procedures

86. Parallel simulation is an audit technique employed to verify processing by making use of audit test
programs. These audit test programs “simulate” the processing logic of an application program or
progress under review. Which statement indicates the use of parallel simulation audit techniques?

a. Live transactions are processed using live programs

b. Live transactions are processed with test master file

c. Test transactions are processed using test programs

d. Live transactions are processed using test Programs

87. Which of the following computer-assisted auditing techniques inserts an audit module in the client's
application system to identify specific tests of transactions?

a. Parallel simulation testing

b. Test data approach

c. Embedded audit module

d. Generalized audit software testing

C