Accounting Information System 1st Edition by Vernon Richardson -Test Bank

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Accounting Information System 1st Edition by Vernon Richardson -Test Bank

Chapter 02

Accountants as Business Analysts

 

True / False Questions

1. Accountants now face a challenge of helping businesses optimize processes.

True    False

 

2. To be valuable business partners, accountants must understand how the business delivers value to its employees.

True    False

 

3. A business process constrains business rules.

True    False

 

4. A business model is typically a graphical depiction of the essential business process information.

True    False

 

5. Documentation can be thought of as a tool for information transmission and communication.

True    False

 

6. Documentation helps with training but won’t help with regulatory compliance issues.

True    False

 

7. Models should be simpler than the processes and systems they depict.

True    False

 

8. Because business models are simpler than the processes they depict, they are limited in their ability to integrate local views of a process.

True    False

 

9. Activity models are a relatively new process modeling tool.

True    False

 

10. In Business Process Modeling Notation (BPMN), activities are named with a short verb phrase placed within the rectangle.

True    False

 

11. Business Process Modeling Notation (BPMN) activity models show the sequence of flow from right to left and top to bottom.

True    False

 

12. Business Process Modeling Notation (BPMN) activity diagrams depict events as circles.

True    False

 

13. Business Process Modeling Notation (BPMN) activity diagrams depict activities as circles.

True    False

 

14. An activity can depict a single action or some logical combination of actions depending on the required level of detail to achieve the objectives of the business process analysis.

True    False

 

15. Gateways show decisions and possible branching as a result of the decision.

True    False

 

16. Swimlanes identify participants, e.g., organizations, in a process.

True    False

 

17. Business Process Modeling Notation (BPMN) activity diagrams are conceptually similar to process maps.

True    False

 

18. Business Process Modeling Notation (BPMN) start events are shown using ovals and flowchart start events are shown using circles.

True    False

 

19. Opportunity flowcharts identify opportunities for process improvement by separating value-added from non-value-added activities.

True    False

 

20. Data Flow Diagrams start with a circle indicating the start event.

True    False

 

 

Multiple Choice Questions

21. Which of the following is not a Stewardship and Reporting role of the Accounting/Finance Function in Business?

A. Human Resource management

 

B. Regulatory compliance

 

C. Tax returns

 

D. Statutory reporting

 

22. Which of the following is not a Business Management Support role of the Accounting/Finance Function in Business?

A. Management information

 

B. Planning, budgeting and forecasting

 

C. Financial consolidation, reporting and analysis

 

D. Investment appraisal

 

23. Which of the following is not an Accounting/Finance Operations role of the Accounting/Finance Function in Business?

A. Financial close – completing period end accounts

 

B. Stakeholder assurance

 

C. People management

 

D. Financial consolidation, reporting and analysis

 

24. Which of the following is not part of the business analysis process?

A. Ascertaining information about current and future business processes.

 

B. Using business process modeling tools.

 

C. Using IT to make finance and accounting processes more efficient and effective.

 

D. Documenting current and future business processes.

 

25. Which of the following best describes a business model?

A. A simple, abstract representation of a business process or processes.

 

B. A sequence of business activities.

 

C. An evaluation of potential business process improvements.

 

D. None of the above.

 

26. Process documentation does not include which of the following?

A. Process models

 

B. Business rules

 

C. User manuals

 

D. External audit workpapers

 

27. Which of the following is not a purpose of documentation?

A. Training

 

B. Determining staffing

 

C. Describing current processes

 

D. Establishing accountability

 

28. Business models provide value in all of the following areas except which one?

A. Employee performance appraisal

 

B. Managing complexity

 

C. Specifying systems requirements

 

D. Eliciting requirements for new systems

 

29. Which of the following best describes the purpose of an activity model?

A. An activity model describes the sequence of workflow in a business process.

 

B. An activity model constrains and guides process operations.

 

C. An activity model depicts data structures.

 

D. None of the above.

 

30. Which of the following is not a common element of activity models regardless of the specific modeling notation?

A. Events to start and stop the workflow

 

B. Sequence of flow between tasks

 

C. Multiplicities

 

D. Decision points that affect the process flow

 

31. Which of the following is not a building block for Business Process Modeling Notation (BPMN) diagrams?

A. Associations

 

B. Events

 

C. Gateways

 

D. Sequence flows

 

32. Which of the following best describes the purpose of an event in a Business Process Modeling Notation (BPMN) activity diagram?

A. Shows where the work takes place.

 

B. Describes the sequence of workflow.

 

C. Affects the flow of the business process.

 

D. Controls branching and merging.

 

33. Which of the following best describes the purpose of a gateway in a Business Process Modeling Notation (BPMN) activity diagram?

A. Shows where the work takes place.

 

B. Describes the sequence of workflow.

 

C. Affects the flow of the business process.

 

D. Controls branching and merging.

 

34. Which of the following symbols depicts an intermediate event?

A. An arrow

 

B. A circle with a double line perimeter

 

C. A rectangle

 

D. A circle with a wide single line perimeter

 

35. Which of the following symbols depicts an activity?

A. An arrow

 

B. A circle with a double line perimeter

 

C. A rectangle

 

D. A circle with a wide single line perimeter

 

36. Which of the following symbols is used to depict different organizations in one Business Process Modeling Notation (BPMN) diagram?

A. Gateway

 

B. Message flow

 

C. Pool

 

D. Intermediate event

 

37. Which of the following best describes the purpose of a swimlane?

A. Depicts different organizations involved in a process.

 

B. Depicts different departments of the same organization in a process.

 

C. Depicts interactions between organizations in a process.

 

D. Depicts the sequence of tasks in a process.

 

38. Which of the following best describes a Business Process Modeling Notation (BPMN) message flow?

A. Shows sequence of activities in a process.

 

B. Shows interactions between participants in a process.

 

C. Affects the flow of a business process.

 

D. Shows branching and merging in a business process.

 

39. Which of the following best describes the difference between a Business Process Modeling Notation (BPMN) gateway and a flowcharting decision diamond?

A. Only the decision diamond shows branching of the sequence flow.

 

B. The gateway only represents branching and not the decision that results in branching.

 

C. Only the gateway shows branching of the sequence flow.

 

D. The decision diamond can depict more branching options.

 

40. Which of the following is a difference between Business Process Modeling Notation (BPMN) activity diagrams and flowcharts?

A. BPMN symbols can show a variety of intermediate events that affect the sequence flow.

 

B. Flowcharts have symbols to represent the start and end of a process.

 

C. BPMN diagrams show the sequence flow of activities.

 

D. Flowcharts can be annotated with text.

 

 

Essay Questions

41. Use the following description to create a Business Process Modeling Notation (BPMN) activity diagram of the process.

Nora accesses the Amazon.com website to purchase a favorite musician’s latest album. She searches for the musician’s name. Amazon displays the results of the search, and she selects the correct entry. She samples the music and then decides whether to purchase the album. If she decides to purchase the album, then she must decide whether to purchase a physical CD or just download the MP3 files.

If she decides to purchase the CD, she clicks on the buy now button. Since she is an Amazon Prime member, she automatically receives free 2-day delivery and the item is charged to her credit card. She then waits 2 days for the delivery of the CD. When it arrives, she can enjoy the music.

If she decides to purchase the MP3, she selects that option and again clicks on the buy now button. She is charged for the item and taken to a page to download her music. She downloads the album, and then she can enjoy her music.

 

 

 

 

42. Use the following description to create a Business Process Modeling Notation (BPMN) activity diagram of the process.

Jeremy is using his banks online banking site to pay for his new phone. He logs onto the bank’s website by entering his user name and password, confirming his SiteKey. After access to his account, he selects the Bill Pay tab. He searches to see of the phone company is already listed in the “Pay To Accounts.”

If the phone company is not listed, he clicks on the option to “Add a New Pay To Account.” He fills in the information for the phone company, including the name, address, account number, and phone number. After completing the entry, he is taken back to the list of “Pay To Accounts.”

If the phone company is listed (or if he just completed entering the new account), he enters the amount of the payment. Then, he selects the option to set up a recurring payment. He enters the number of payments. Then, he selects the date that the payment should be sent each month. He then logs out of the banks online banking site and closes his browser.

 

 

 

 

43. Use the following description to create a Business Process Modeling Notation (BPMN) activity diagram of the process.

Caitlin is planning to run in the local July 4th 5K run. She wants to register online, but she forgot the websites URL. So, she navigates to Google and starts a search for the site. She selects the registration site from the search results. Once at the site, she selects the option to register for the 4th of July run. She fills in the registration form and provides her credit card information for payment.

After completing her own registration, she decides to register the other members of her team. One-by-one, she enters the registration information for the team member and pays for their entry. After completing all the registrations, she provides a user name and password so she can return to the site to see their results after the race. She logs out of the site and closes her browser.

 

 

 

 

Chapter 02 Accountants as Business Analysts Answer Key

True / False Questions

1. Accountants now face a challenge of helping businesses optimize processes.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Describe the roles of the accounting/finance function in business and why those roles require knowledge of technology and business processes.
Source: Original
Topic: Business analysis
 

 

2. To be valuable business partners, accountants must understand how the business delivers value to its employees.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Describe the roles of the accounting/finance function in business and why those roles require knowledge of technology and business processes.
Source: Original
Topic: Business analysis
 

 

3. A business process constrains business rules.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-03 Recognize the value of business models.
Source: Original
Topic: Business analysis
 

 

4. A business model is typically a graphical depiction of the essential business process information.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Recognize the value of business models.
Source: Original
Topic: Business analysis
 

 

5. Documentation can be thought of as a tool for information transmission and communication.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Understand the importance of business process documentation.
Source: Original
Topic: Business analysis
 

 

6. Documentation helps with training but won’t help with regulatory compliance issues.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Understand the importance of business process documentation.
Source: Original
Topic: Business analysis
 

 

7. Models should be simpler than the processes and systems they depict.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Recognize the value of business models.
Source: Original
Topic: Business analysis
 

 

8. Because business models are simpler than the processes they depict, they are limited in their ability to integrate local views of a process.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Recognize the value of business models.
Source: Original
Topic: Business analysis
 

 

9. Activity models are a relatively new process modeling tool.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-04 Articulate the characteristics of activity models.
Source: Original
Topic: Business analysis
 

 

10. In Business Process Modeling Notation (BPMN), activities are named with a short verb phrase placed within the rectangle.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-04 Articulate the characteristics of activity models.
Source: Original
Topic: Business analysis
 

 

11. Business Process Modeling Notation (BPMN) activity models show the sequence of flow from right to left and top to bottom.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-04 Articulate the characteristics of activity models.
Source: Original
Topic: Business analysis
 

 

12. Business Process Modeling Notation (BPMN) activity diagrams depict events as circles.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

13. Business Process Modeling Notation (BPMN) activity diagrams depict activities as circles.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

14. An activity can depict a single action or some logical combination of actions depending on the required level of detail to achieve the objectives of the business process analysis.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

15. Gateways show decisions and possible branching as a result of the decision.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

16. Swimlanes identify participants, e.g., organizations, in a process.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

17. Business Process Modeling Notation (BPMN) activity diagrams are conceptually similar to process maps.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

18. Business Process Modeling Notation (BPMN) start events are shown using ovals and flowchart start events are shown using circles.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

19. Opportunity flowcharts identify opportunities for process improvement by separating value-added from non-value-added activities.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Articulate the characteristics of activity models.
Source: Original
Topic: Business analysis
 

 

20. Data Flow Diagrams start with a circle indicating the start event.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-04 Articulate the characteristics of activity models.
Source: Original
Topic: Business analysis
 

 

Multiple Choice Questions

21. Which of the following is not a Stewardship and Reporting role of the Accounting/Finance Function in Business?

A. Human Resource management

 

B. Regulatory compliance

 

C. Tax returns

 

D. Statutory reporting

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Describe the roles of the accounting/finance function in business and why those roles require knowledge of technology and business processes.
Source: Original
Topic: Business analysis
 

 

22. Which of the following is not a Business Management Support role of the Accounting/Finance Function in Business?

A. Management information

 

B. Planning, budgeting and forecasting

 

C. Financial consolidation, reporting and analysis

 

D. Investment appraisal

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Describe the roles of the accounting/finance function in business and why those roles require knowledge of technology and business processes.
Source: Original
Topic: Business analysis
 

 

23. Which of the following is not an Accounting/Finance Operations role of the Accounting/Finance Function in Business?

A. Financial close – completing period end accounts

 

B. Stakeholder assurance

 

C. People management

 

D. Financial consolidation, reporting and analysis

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 02-01 Describe the roles of the accounting/finance function in business and why those roles require knowledge of technology and business processes.
Source: Original
Topic: Business analysis
 

 

24. Which of the following is not part of the business analysis process?

A. Ascertaining information about current and future business processes.

 

B. Using business process modeling tools.

 

C. Using IT to make finance and accounting processes more efficient and effective.

 

D. Documenting current and future business processes.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Understand the importance of business process documentation.
Source: Original
Topic: Business analysis
 

 

25. Which of the following best describes a business model?

A. A simple, abstract representation of a business process or processes.

 

B. A sequence of business activities.

 

C. An evaluation of potential business process improvements.

 

D. None of the above.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Recognize the value of business models.
Source: Original
Topic: Business analysis
 

 

26. Process documentation does not include which of the following?

A. Process models

 

B. Business rules

 

C. User manuals

 

D. External audit workpapers

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Understand the importance of business process documentation.
Source: Original
Topic: Business analysis
 

 

27. Which of the following is not a purpose of documentation?

A. Training

 

B. Determining staffing

 

C. Describing current processes

 

D. Establishing accountability

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-02 Understand the importance of business process documentation.
Source: Original
Topic: Business analysis
 

 

28. Business models provide value in all of the following areas except which one?

A. Employee performance appraisal

 

B. Managing complexity

 

C. Specifying systems requirements

 

D. Eliciting requirements for new systems

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-03 Recognize the value of business models.
Source: Original
Topic: Business analysis
 

 

29. Which of the following best describes the purpose of an activity model?

A. An activity model describes the sequence of workflow in a business process.

 

B. An activity model constrains and guides process operations.

 

C. An activity model depicts data structures.

 

D. None of the above.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Articulate the characteristics of activity models.
Source: Original
Topic: Business analysis
 

 

30. Which of the following is not a common element of activity models regardless of the specific modeling notation?

A. Events to start and stop the workflow

 

B. Sequence of flow between tasks

 

C. Multiplicities

 

D. Decision points that affect the process flow

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-04 Articulate the characteristics of activity models.
Source: Original
Topic: Business analysis
 

 

31. Which of the following is not a building block for Business Process Modeling Notation (BPMN) diagrams?

A. Associations

 

B. Events

 

C. Gateways

 

D. Sequence flows

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

32. Which of the following best describes the purpose of an event in a Business Process Modeling Notation (BPMN) activity diagram?

A. Shows where the work takes place.

 

B. Describes the sequence of workflow.

 

C. Affects the flow of the business process.

 

D. Controls branching and merging.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

33. Which of the following best describes the purpose of a gateway in a Business Process Modeling Notation (BPMN) activity diagram?

A. Shows where the work takes place.

 

B. Describes the sequence of workflow.

 

C. Affects the flow of the business process.

 

D. Controls branching and merging.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

34. Which of the following symbols depicts an intermediate event?

A. An arrow

 

B. A circle with a double line perimeter

 

C. A rectangle

 

D. A circle with a wide single line perimeter

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

35. Which of the following symbols depicts an activity?

A. An arrow

 

B. A circle with a double line perimeter

 

C. A rectangle

 

D. A circle with a wide single line perimeter

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

36. Which of the following symbols is used to depict different organizations in one Business Process Modeling Notation (BPMN) diagram?

A. Gateway

 

B. Message flow

 

C. Pool

 

D. Intermediate event

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

37. Which of the following best describes the purpose of a swimlane?

A. Depicts different organizations involved in a process.

 

B. Depicts different departments of the same organization in a process.

 

C. Depicts interactions between organizations in a process.

 

D. Depicts the sequence of tasks in a process.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

38. Which of the following best describes a Business Process Modeling Notation (BPMN) message flow?

A. Shows sequence of activities in a process.

 

B. Shows interactions between participants in a process.

 

C. Affects the flow of a business process.

 

D. Shows branching and merging in a business process.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

39. Which of the following best describes the difference between a Business Process Modeling Notation (BPMN) gateway and a flowcharting decision diamond?

A. Only the decision diamond shows branching of the sequence flow.

 

B. The gateway only represents branching and not the decision that results in branching.

 

C. Only the gateway shows branching of the sequence flow.

 

D. The decision diamond can depict more branching options.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

40. Which of the following is a difference between Business Process Modeling Notation (BPMN) activity diagrams and flowcharts?

A. BPMN symbols can show a variety of intermediate events that affect the sequence flow.

 

B. Flowcharts have symbols to represent the start and end of a process.

 

C. BPMN diagrams show the sequence flow of activities.

 

D. Flowcharts can be annotated with text.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

Essay Questions

41. Use the following description to create a Business Process Modeling Notation (BPMN) activity diagram of the process.

Nora accesses the Amazon.com website to purchase a favorite musician’s latest album. She searches for the musician’s name. Amazon displays the results of the search, and she selects the correct entry. She samples the music and then decides whether to purchase the album. If she decides to purchase the album, then she must decide whether to purchase a physical CD or just download the MP3 files.

If she decides to purchase the CD, she clicks on the buy now button. Since she is an Amazon Prime member, she automatically receives free 2-day delivery and the item is charged to her credit card. She then waits 2 days for the delivery of the CD. When it arrives, she can enjoy the music.

If she decides to purchase the MP3, she selects that option and again clicks on the buy now button. She is charged for the item and taken to a page to download her music. She downloads the album, and then she can enjoy her music.

There could be several similar answers, but this is a basic solution:

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

42. Use the following description to create a Business Process Modeling Notation (BPMN) activity diagram of the process.

Jeremy is using his banks online banking site to pay for his new phone. He logs onto the bank’s website by entering his user name and password, confirming his SiteKey. After access to his account, he selects the Bill Pay tab. He searches to see of the phone company is already listed in the “Pay To Accounts.”

If the phone company is not listed, he clicks on the option to “Add a New Pay To Account.” He fills in the information for the phone company, including the name, address, account number, and phone number. After completing the entry, he is taken back to the list of “Pay To Accounts.”

If the phone company is listed (or if he just completed entering the new account), he enters the amount of the payment. Then, he selects the option to set up a recurring payment. He enters the number of payments. Then, he selects the date that the payment should be sent each month. He then logs out of the banks online banking site and closes his browser.

There could be several similar answers, but this is a basic solution:

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

43. Use the following description to create a Business Process Modeling Notation (BPMN) activity diagram of the process.

Caitlin is planning to run in the local July 4th 5K run. She wants to register online, but she forgot the websites URL. So, she navigates to Google and starts a search for the site. She selects the registration site from the search results. Once at the site, she selects the option to register for the 4th of July run. She fills in the registration form and provides her credit card information for payment.

After completing her own registration, she decides to register the other members of her team. One-by-one, she enters the registration information for the team member and pays for their entry. After completing all the registrations, she provides a user name and password so she can return to the site to see their results after the race. She logs out of the site and closes her browser.

There could be several similar answers, but this is a basic solution:

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 02-05 Understand and apply the building blocks for BPMN (activity) diagrams.
Source: Original
Topic: Business analysis
 

 

Chapter 10

Accounting Information Systems and Internal Controls

 

True / False Questions

1. The Sarbanes-Oxley Act of 2002 (SOX) 2002 requires the management of all companies and their auditors to assess and report on the design and effectiveness of internal control over financial reporting annually.

True    False

 

2. According to the Sarbanes-Oxley Act of 2002, it is the responsibility of the Board of Directors to establish and maintain the effectiveness of internal control.

True    False

 

3. In a computerized environment, internal controls can be categorized as general controls and application controls.

True    False

 

4. Internal controls guarantee the accuracy and reliability of accounting records.

True    False

 

5. Segregation of duties reduces the risk of errors and irregularities in accounting records.

True    False

 

6. The chief executive officer is ultimately responsible for enterprise risk management.

True    False

 

7. The risk of a company’s internal auditing processes failing to catch the misstated dollar amount of revenue on the company’s income statement is classified as inherent risk.

True    False

 

8. Processing controls are IT general controls.

True    False

 

9. COBIT (Control Objectives for Information and related Technology) is a generally accepted framework for IT governance in the U.S.

True    False

 

10. The main objective of the ISO 27000 series is to provide a model for establishing, implementing, operating, monitoring, maintaining, and improving information security.

True    False

 

11. Given the requirement of the Sarbanes-Oxley Act of 2002 (SOX), the Public Company Accounting Oversight Board (PCAOB) established the Securities and Exchange Commission (SEC) to provide independent oversight of public accounting firms.

True    False

 

12. Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 (AS 5) encourages auditors to start from the basic/bottom of financial records to identify the key controls.

True    False

 

13. Corporate governance is a set of processes and policies in managing an organization with sound ethics to safeguard the interests of its stakeholders.

True    False

 

14. Internal control is a process consisting of ongoing tasks and activities. It is a means to an end, not an end in itself.

True    False

 

15. A firm must establish control policies, procedures, and practices that ensure the firm’s business objectives are achieved and its risk mitigation strategies are carried out.

True    False

 

 

Multiple Choice Questions

16. According to COSO, which of the following components of the enterprise risk management addresses an entity’s integrity and ethical values?

A. Information and communication

 

B. Internal environment.

 

C. Risk assessment.

 

D. Control activities.

 

17. Which of the following items is one of the eight components of COSO’s enterprise risk management framework?

A. Operations.

 

B. Reporting.

 

C. Monitoring.

 

D. Compliance.

 

18. In a large pubic corporation, evaluating internal control procedures should be responsibility of:

A. Accounting management staff who report to the CFO.

 

B. Internal audit staff who report to the board of directors.

 

C. Operations management staff who report to the chief operation officer.

 

D. Security management staff who report to the chief facilities officer.

 

19. Which of the following represents an inherent limitation of internal controls?

A. Bank reconciliations are not performed on a timely basis.

 

B. The CEO can request a check with no purchase order.

 

C. Customer credit check not performed.

 

D. Shipping documents are not matched to sales invoices.

 

20. Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

A. Disclosing lack of segregation of duties to external auditors during the annual review.

 

B. Replacing personnel every three or four years.

 

C. Requiring accountants to pass a yearly background check.

 

D. Allowing for greater management oversight of incompatible activities.

 

21. Review of the audit log is an example of which of the following types of security control?

A. Governance.

 

B. Detective.

 

C. Preventive.

 

D. Corrective.

 

22. Which of the following is not a component of internal control as defined by COSO?

A. Control environment.

 

B. Control activities.

 

C. Inherent risk

 

D. Monitoring.

 

23. Which of the following is considered an application input control?

A. Run control total.

 

B. Edit check.

 

C. Reporting distribution log.

 

D. Exception report.

 

24. Which of the following control activities should be taken to reduce the risk of incorrect processing in a newly installed computerized accounting system?

A. Segregation of duties.

 

B. Ensure proper authorization of transactions.

 

C. Adequately safeguard assets.

 

D. Independently verify the transactions.

 

25. Which of the following statement is correct regarding internal control?

A. A well-designed internal control environment ensures the achievement of an entity’s control objectives.

 

B. An inherent limitation to internal control is the fact that controls can be circumvented by management override.

 

C. A well-designed and operated internal control environment should detect collusion perpetrated by two people.

 

D. Internal control in a necessary business function and should be designed and operated to detect errors and fraud.

 

26. Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been:

A. Authorized.

 

B. Implemented.

 

C. Tested.

 

D. Monitored.

 

27. A manufacturing firm identified that it would have difficulty sourcing raw materials locally, so it decided to relocate its production facilities. According to COSO, this decision represents which of the following response to the risk?

A. Risk reduction.

 

B. Prospect theory.

 

C. Risk sharing.

 

D. Risk acceptance.

 

28. Each of the following types of controls is considered to be an entity-level control, except those:

A. Relating to the control environment.

 

B. Pertaining to the company’s risk assessment process.

 

C. Regarding the company’s annual stockholder meeting.

 

D. Addressing policies over significant risk management practices

 

29. Controls in the information technology area are classified into preventive, detective, and corrective categories. Which of the following is preventive control?

A. Contingency planning.

 

B. Hash total.

 

C. Echo check.

 

D. Access control software.

 

30. All of the following are examples of internal control procedures except

A. Using pre-numbered documents

 

B. Reconciling the bank statement

 

C. Customer satisfaction surveys

 

D. Insistence that employees take vacations

 

31. The Public Company Accounting Oversight Board (PCAOB) is not responsible for standards related to:

A. Accounting practice.

 

B. Attestation.

 

C. Auditing.

 

D. Quality control over attestation and/or assurance.

 

32. Which of the following most likely would not be considered as an inherent limitation of the effectiveness of a firm’s internal control?

A. Incompatible duties.

 

B. Management override.

 

C. Mistakes in judgment.

 

D. Collusion among employees.

 

33. According to COSO which of the following is not a component of internal control?

A. Control risk.

 

B. Control activities.

 

C. Monitoring.

 

D. Control environment.

 

34. When considering internal control, an auditor should be aware of reasonable assurance, which recognizes that

A. Internal control may be ineffective due to mistakes in judgment and personal carelessness.

 

B. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.

 

C. Establishing and maintaining internal control is an important responsibility of management.

 

D. The cost of an entity’s internal control should not exceed the benefits expected to be derived.

 

35. Proper segregation of duties calls for separation of the following functions:

A. Authorization, execution, and payment.

 

B. Authorization, recording, and custody.

 

C. Custody, execution, and reporting.

 

D. Authorization, payment, and recording.

 

36. An entity’s ongoing monitoring activities often include

A. Periodic audits by the audit committee.

 

B. Reviewing the purchasing function.

 

C. The audit of the annual financial statements.

 

D. Control risk assessment in conjunction with quarterly reviews.

 

37. The overall attitude and awareness of a firm’s top management and board of directors concerning the importance of internal control is often reflected in its

A. Computer-based controls.

 

B. System of segregation of duties.

 

C. Control environment.

 

D. Safeguards over access to assets.

 

38. Management philosophy and operating style would have a relatively less significant influence on a firm’s control environment when

A. The internal auditor reports directly to the controller.

 

B. Management is dominated by one individual.

 

C. Accurate management job descriptions delineate specific duties.

 

D. The audit committee does not have regular meetings.

 

39. Control risk should be assessed in terms of

A. Specific controls.

 

B. Types of potential fraud.

 

C. Financial statement assertions.

 

D. Control environment factors.

 

40. An auditor assesses control risk because it

A. is relevant to the auditor’s understanding of the control environment.

 

B. provides assurance that the auditor’s materiality levels are appropriate.

 

C. indicates to the auditor where inherent risk may be the greatest.

 

D. affects the level of detection risk that the auditor may accept.

 

41. The framework could be used by management in its internal control assessment under requirements of SOX is the:

A. COSO internal framework.

 

B. COSO enterprise risk management framework.

 

C. COBIT framework.

 

D. All of the above are correct.

 

42. The internal control provisions of SOX apply to which companies in the United States?

A. All companies.

 

B. SEC registrants.

 

C. All issuer (public) companies and nonissuer (nonpublic) companies with more than $100,000,000 of net worth.

 

D. All nonissuer companies.

 

43. Reconciliation of cash accounts may be referred to as what type of control?

A. Detective.

 

B. Preventive.

 

C. Adjustive.

 

D. Non-routine.

 

44. Sound internal control dictates that immediately upon receiving checks from customers by mail, a responsible employee should

A. Add the checks to the daily cash summary.

 

B. Verify that each check is supported by a pre-numbered sales invoice.

 

C. Prepare a summary listing of checks received.

 

D. Record the checks in the cash receipts journal.

 

45. Tracing shipping documents to pre-numbered sales invoices provides evidence that

A. No duplicate shipments or billings occurred.

 

B. Shipments to customers were properly invoiced.

 

C. All goods ordered by customers were shipped.

 

D. All pre-numbered sales invoices were accounted for.

 

46. Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission?

A. Hash total.

 

B. Parity check.

 

C. Encryption.

 

D. Check digit.

 

47. A customer intended to order 100 units of a product A, but incorrectly ordered nonexistent product B. Which of the following controls most likely would detect this error?

A. Validity check

 

B. Record count

 

C. Hash total

 

D. Parity check

 

48. Which of the following is an example of a validity check?

A. The computer ensures that a numerical amount in a record does not exceed some predetermined amount.

 

B. As the computer corrects errors and data are successfully resubmitted to the system, the causes of the errors are printed out.

 

C. The computer flags any transmission for which the control field value did not match that of an existing file record.

 

D. After data for a transaction are entered, the computer sends certain data back to the terminal for comparison with data originally sent.

 

49. Which of the following is a computer test made to ascertain whether a given characteristic belongs to the group?

A. Check digit.

 

B. Validity check.

 

C. Echo check.

 

D. Limit check.

 

 

Essay Questions

50. Put the listed steps in the corresponding parentheses in the risk assessment and response approach diagram below.

(A) Avoid, share or accept risk
(B) Reduce risk by implementing controls
(C) Is it cost beneficial to protect the firm from the risk?
(D) Estimate the likelihood of each risk occurring
(E) Identify control to mitigate the risk
(F) Estimate the costs and benefits from instituting controls
(G) Identify the risks
(H) Estimate the impact or potential loss, from each risk

 

 

 

 

51. What is the impact of the Sarbanes-Oxley Act of 2002 (SOX) on public companies and public accounting firms?

 

 

 

 

52. Describe the three categories of objectives and five essential components of the COSO 2.0 framework.

 

 

 

 

53. What are the three main functions of COSO ERM?

 

 

 

 

54. What are the definitions of “governance” and “management” in the COBIT 5.0 framework?

 

 

 

 

55. Discuss the ethical values created in Starbucks. How do they help to form the firm’s control environment?

 

 

 

 

56. The information system of Company ABC is deemed to be 90% reliable. A major threat has been identified with an exposure of $5,000,000. Two control procedures exist to deal with the threat. Implementation of control A would cost of $140,000 and reduce the risk to 4%. Implementation of control B would cost $100,000 and reduce the risk to 6%. Implementation of both controls would cost $220,000 and reduce the risk to 2%. Given the data and based solely on an economic analysis of costs and benefits, which control procedure should you choose?

 

 

 

 

57. Which internal control(s) would you recommend to prevent the following situations from occurring?

a. While entering the details about a large credit sale, a clerk mistakenly typed in a nonexistent account number. Consequently, the company never received the payment from this customer.
b. A customer filled in a wrong account number on the remittance advice. Consequently, a clerk entered the same number into the system, and the payment was credited to another customer’s account.
c. After processing a large sales transaction, the inventory records showed negative quantities on hand for several items.

 

 

 

 

Chapter 10 Accounting Information Systems and Internal Controls Answer Key

True / False Questions

1. The Sarbanes-Oxley Act of 2002 (SOX) 2002 requires the management of all companies and their auditors to assess and report on the design and effectiveness of internal control over financial reporting annually.

FALSE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

2. According to the Sarbanes-Oxley Act of 2002, it is the responsibility of the Board of Directors to establish and maintain the effectiveness of internal control.

FALSE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

3. In a computerized environment, internal controls can be categorized as general controls and application controls.

TRUE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Control and Governance Frameworks
 

 

4. Internal controls guarantee the accuracy and reliability of accounting records.

FALSE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

5. Segregation of duties reduces the risk of errors and irregularities in accounting records.

TRUE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

6. The chief executive officer is ultimately responsible for enterprise risk management.

TRUE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

7. The risk of a company’s internal auditing processes failing to catch the misstated dollar amount of revenue on the company’s income statement is classified as inherent risk.

FALSE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

8. Processing controls are IT general controls.

FALSE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

9. COBIT (Control Objectives for Information and related Technology) is a generally accepted framework for IT governance in the U.S.

TRUE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-03 Describe the overall COBIT framework and its implications for IT governance.
Source: Original
Topic: Control and Governance Frameworks
 

 

10. The main objective of the ISO 27000 series is to provide a model for establishing, implementing, operating, monitoring, maintaining, and improving information security.

TRUE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-04 Describe other governance frameworks related to information systems management and security.
Source: Original
Topic: Control and Governance Frameworks
 

 

11. Given the requirement of the Sarbanes-Oxley Act of 2002 (SOX), the Public Company Accounting Oversight Board (PCAOB) established the Securities and Exchange Commission (SEC) to provide independent oversight of public accounting firms.

FALSE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

12. Public Company Accounting Oversight Board (PCAOB) Auditing Standard No. 5 (AS 5) encourages auditors to start from the basic/bottom of financial records to identify the key controls.

FALSE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

13. Corporate governance is a set of processes and policies in managing an organization with sound ethics to safeguard the interests of its stakeholders.

TRUE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

14. Internal control is a process consisting of ongoing tasks and activities. It is a means to an end, not an end in itself.

TRUE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

15. A firm must establish control policies, procedures, and practices that ensure the firm’s business objectives are achieved and its risk mitigation strategies are carried out.

TRUE

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

Multiple Choice Questions

16. According to COSO, which of the following components of the enterprise risk management addresses an entity’s integrity and ethical values?

A. Information and communication

 

B. Internal environment.

 

C. Risk assessment.

 

D. Control activities.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2009 examination, adapted
Topic: Control and Governance Frameworks
 

 

17. Which of the following items is one of the eight components of COSO’s enterprise risk management framework?

A. Operations.

 

B. Reporting.

 

C. Monitoring.

 

D. Compliance.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2012 examination, adapted
Topic: Control and Governance Frameworks
 

 

18. In a large pubic corporation, evaluating internal control procedures should be responsibility of:

A. Accounting management staff who report to the CFO.

 

B. Internal audit staff who report to the board of directors.

 

C. Operations management staff who report to the chief operation officer.

 

D. Security management staff who report to the chief facilities officer.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: CPA 2012 examination, adapted
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

19. Which of the following represents an inherent limitation of internal controls?

A. Bank reconciliations are not performed on a timely basis.

 

B. The CEO can request a check with no purchase order.

 

C. Customer credit check not performed.

 

D. Shipping documents are not matched to sales invoices.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2009 examination, adapted
Topic: Control and Governance Frameworks
 

 

20. Which of the following is the best way to compensate for the lack of adequate segregation of duties in a small organization?

A. Disclosing lack of segregation of duties to external auditors during the annual review.

 

B. Replacing personnel every three or four years.

 

C. Requiring accountants to pass a yearly background check.

 

D. Allowing for greater management oversight of incompatible activities.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2012 examination, adapted
Topic: Control and Governance Frameworks
 

 

21. Review of the audit log is an example of which of the following types of security control?

A. Governance.

 

B. Detective.

 

C. Preventive.

 

D. Corrective.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2012 examination, adapted
Topic: Control and Governance Frameworks
 

 

22. Which of the following is not a component of internal control as defined by COSO?

A. Control environment.

 

B. Control activities.

 

C. Inherent risk

 

D. Monitoring.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2011 examination, adapted
Topic: Control and Governance Frameworks
 

 

23. Which of the following is considered an application input control?

A. Run control total.

 

B. Edit check.

 

C. Reporting distribution log.

 

D. Exception report.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2010 examination, adapted
Topic: Control and Governance Frameworks
 

 

24. Which of the following control activities should be taken to reduce the risk of incorrect processing in a newly installed computerized accounting system?

A. Segregation of duties.

 

B. Ensure proper authorization of transactions.

 

C. Adequately safeguard assets.

 

D. Independently verify the transactions.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2012 examination, adapted
Topic: Control and Governance Frameworks
 

 

25. Which of the following statement is correct regarding internal control?

A. A well-designed internal control environment ensures the achievement of an entity’s control objectives.

 

B. An inherent limitation to internal control is the fact that controls can be circumvented by management override.

 

C. A well-designed and operated internal control environment should detect collusion perpetrated by two people.

 

D. Internal control in a necessary business function and should be designed and operated to detect errors and fraud.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2011 examination, adapted
Topic: Control and Governance Frameworks
 

 

26. Obtaining an understanding of an internal control involves evaluating the design of the control and determining whether the control has been:

A. Authorized.

 

B. Implemented.

 

C. Tested.

 

D. Monitored.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2012 examination, adapted
Topic: Control and Governance Frameworks
 

 

27. A manufacturing firm identified that it would have difficulty sourcing raw materials locally, so it decided to relocate its production facilities. According to COSO, this decision represents which of the following response to the risk?

A. Risk reduction.

 

B. Prospect theory.

 

C. Risk sharing.

 

D. Risk acceptance.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2012 examination, adapted
Topic: Control and Governance Frameworks
 

 

28. Each of the following types of controls is considered to be an entity-level control, except those:

A. Relating to the control environment.

 

B. Pertaining to the company’s risk assessment process.

 

C. Regarding the company’s annual stockholder meeting.

 

D. Addressing policies over significant risk management practices

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2011 examination, adapted
Topic: Control and Governance Frameworks
 

 

29. Controls in the information technology area are classified into preventive, detective, and corrective categories. Which of the following is preventive control?

A. Contingency planning.

 

B. Hash total.

 

C. Echo check.

 

D. Access control software.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: CPA 2009 examination, adapted
Topic: Control and Governance Frameworks
 

 

30. All of the following are examples of internal control procedures except

A. Using pre-numbered documents

 

B. Reconciling the bank statement

 

C. Customer satisfaction surveys

 

D. Insistence that employees take vacations

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

31. The Public Company Accounting Oversight Board (PCAOB) is not responsible for standards related to:

A. Accounting practice.

 

B. Attestation.

 

C. Auditing.

 

D. Quality control over attestation and/or assurance.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

32. Which of the following most likely would not be considered as an inherent limitation of the effectiveness of a firm’s internal control?

A. Incompatible duties.

 

B. Management override.

 

C. Mistakes in judgment.

 

D. Collusion among employees.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

33. According to COSO which of the following is not a component of internal control?

A. Control risk.

 

B. Control activities.

 

C. Monitoring.

 

D. Control environment.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

34. When considering internal control, an auditor should be aware of reasonable assurance, which recognizes that

A. Internal control may be ineffective due to mistakes in judgment and personal carelessness.

 

B. Adequate safeguards over access to assets and records should permit an entity to maintain proper accountability.

 

C. Establishing and maintaining internal control is an important responsibility of management.

 

D. The cost of an entity’s internal control should not exceed the benefits expected to be derived.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Risk Analysis
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

35. Proper segregation of duties calls for separation of the following functions:

A. Authorization, execution, and payment.

 

B. Authorization, recording, and custody.

 

C. Custody, execution, and reporting.

 

D. Authorization, payment, and recording.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

36. An entity’s ongoing monitoring activities often include

A. Periodic audits by the audit committee.

 

B. Reviewing the purchasing function.

 

C. The audit of the annual financial statements.

 

D. Control risk assessment in conjunction with quarterly reviews.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

37. The overall attitude and awareness of a firm’s top management and board of directors concerning the importance of internal control is often reflected in its

A. Computer-based controls.

 

B. System of segregation of duties.

 

C. Control environment.

 

D. Safeguards over access to assets.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

38. Management philosophy and operating style would have a relatively less significant influence on a firm’s control environment when

A. The internal auditor reports directly to the controller.

 

B. Management is dominated by one individual.

 

C. Accurate management job descriptions delineate specific duties.

 

D. The audit committee does not have regular meetings.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

39. Control risk should be assessed in terms of

A. Specific controls.

 

B. Types of potential fraud.

 

C. Financial statement assertions.

 

D. Control environment factors.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

40. An auditor assesses control risk because it

A. is relevant to the auditor’s understanding of the control environment.

 

B. provides assurance that the auditor’s materiality levels are appropriate.

 

C. indicates to the auditor where inherent risk may be the greatest.

 

D. affects the level of detection risk that the auditor may accept.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

41. The framework could be used by management in its internal control assessment under requirements of SOX is the:

A. COSO internal framework.

 

B. COSO enterprise risk management framework.

 

C. COBIT framework.

 

D. All of the above are correct.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

42. The internal control provisions of SOX apply to which companies in the United States?

A. All companies.

 

B. SEC registrants.

 

C. All issuer (public) companies and nonissuer (nonpublic) companies with more than $100,000,000 of net worth.

 

D. All nonissuer companies.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

43. Reconciliation of cash accounts may be referred to as what type of control?

A. Detective.

 

B. Preventive.

 

C. Adjustive.

 

D. Non-routine.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

44. Sound internal control dictates that immediately upon receiving checks from customers by mail, a responsible employee should

A. Add the checks to the daily cash summary.

 

B. Verify that each check is supported by a pre-numbered sales invoice.

 

C. Prepare a summary listing of checks received.

 

D. Record the checks in the cash receipts journal.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

45. Tracing shipping documents to pre-numbered sales invoices provides evidence that

A. No duplicate shipments or billings occurred.

 

B. Shipments to customers were properly invoiced.

 

C. All goods ordered by customers were shipped.

 

D. All pre-numbered sales invoices were accounted for.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

46. Which of the following input controls is a numeric value computed to provide assurance that the original value has not been altered in construction or transmission?

A. Hash total.

 

B. Parity check.

 

C. Encryption.

 

D. Check digit.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

47. A customer intended to order 100 units of a product A, but incorrectly ordered nonexistent product B. Which of the following controls most likely would detect this error?

A. Validity check

 

B. Record count

 

C. Hash total

 

D. Parity check

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

48. Which of the following is an example of a validity check?

A. The computer ensures that a numerical amount in a record does not exceed some predetermined amount.

 

B. As the computer corrects errors and data are successfully resubmitted to the system, the causes of the errors are printed out.

 

C. The computer flags any transmission for which the control field value did not match that of an existing file record.

 

D. After data for a transaction are entered, the computer sends certain data back to the terminal for comparison with data originally sent.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

49. Which of the following is a computer test made to ascertain whether a given characteristic belongs to the group?

A. Check digit.

 

B. Validity check.

 

C. Echo check.

 

D. Limit check.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

Essay Questions

50. Put the listed steps in the corresponding parentheses in the risk assessment and response approach diagram below.

(A) Avoid, share or accept risk
(B) Reduce risk by implementing controls
(C) Is it cost beneficial to protect the firm from the risk?
(D) Estimate the likelihood of each risk occurring
(E) Identify control to mitigate the risk
(F) Estimate the costs and benefits from instituting controls
(G) Identify the risks
(H) Estimate the impact or potential loss, from each risk

G D H E F C A (No) B (yes)

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

51. What is the impact of the Sarbanes-Oxley Act of 2002 (SOX) on public companies and public accounting firms?

SOX requires public companies registered with the SEC and their auditors to annually assess and report on the design and effectiveness of internal control over financial reporting.

SOX also established the Public Company Accounting Oversight Board (PCAOB) to provide independent oversight of public accounting firms. The PCAOB issues auditing standards and oversees quality controls of public accounting firms.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-01 Explain essential control concepts and why a code of ethics and internal controls are important.
Source: Original
Topic: Ethics, Sarbanes-Oxley Act 2002 and Corporate Governance
 

 

52. Describe the three categories of objectives and five essential components of the COSO 2.0 framework.

Objectives:

1) Operations Objectives – effectiveness and efficiency of a firm’s operations on financial performance goals and safeguarding assets.
2) Reporting Objectives – reliability of reporting, including internal and external financial and non-financial reporting.
3) Compliance Objectives – adherence to applicable laws and regulations.

Five components of internal control:

1) Control Environment — include the management’s philosophy and operating style, integrity and ethical values of employees, organizational structure, the role of the audit committee, proper board oversight for the development and performance of internal control, and personnel policies and practices.
2) Risk Assessment — Risk assessment involves a dynamic process for identifying and analyzing a firm’s risks from external and internal environments.
3) Control Activities — A firm must establish control policies, procedures, and practices that ensure the firm’s objectives are achieved and risk mitigation strategies are carried out.
4) Information and Communication — Relevant information should be identified, captured, and communicated in a form and timeframe that enables employees to carry out their duties.
5) Monitoring Activities — The design and effectiveness of internal controls should be monitored by management and other parties outside the process in an ongoing basis.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

53. What are the three main functions of COSO ERM?

Identifies potential events that may affect the firm
Manages risk to be within the firm’s risk appetite
Provides reasonable assurance regarding the achievement of the firm’s objectives.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

54. What are the definitions of “governance” and “management” in the COBIT 5.0 framework?

COBIT 5.0 defines “governance” as ensuring that firm objectives are achieved by evaluating stakeholder needs; setting direction through decision making; and monitoring performance, compliance and progress. In most firms, the board of directors is responsible for governance. Per COBIT 5, “management” includes planning, building, running and monitoring activities in alignment with the direction in achieving the firm objectives.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Reporting
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-03 Describe the overall COBIT framework and its implications for IT governance.
Source: Original
Topic: Control and Governance Frameworks
 

 

55. Discuss the ethical values created in Starbucks. How do they help to form the firm’s control environment?

Students’ answers may vary.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

56. The information system of Company ABC is deemed to be 90% reliable. A major threat has been identified with an exposure of $5,000,000. Two control procedures exist to deal with the threat. Implementation of control A would cost of $140,000 and reduce the risk to 4%. Implementation of control B would cost $100,000 and reduce the risk to 6%. Implementation of both controls would cost $220,000 and reduce the risk to 2%. Given the data and based solely on an economic analysis of costs and benefits, which control procedure should you choose?

Estimate value of control A: 5,000,000*(10% – 4%) = $300,000 (problem states that Control A reduces the risk TO 4%)
Estimate value of control B: 5,000,000*(10% – 6%) = $200,000 (problem states that Control A reduced the risk TO 6%)
Estimate value of control A&B: 5,000,000*(10% – 2%) = $400,000
Benefits exceed cost of A: 300,000 – 140,000 = 160,000
Benefits exceed cost of B: 200,000 – 100,000 = 100,000
Benefits exceed cost of A&B: 400,000 – 220,000 = 180,000
Choose Control C.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

57. Which internal control(s) would you recommend to prevent the following situations from occurring?

a. While entering the details about a large credit sale, a clerk mistakenly typed in a nonexistent account number. Consequently, the company never received the payment from this customer.
b. A customer filled in a wrong account number on the remittance advice. Consequently, a clerk entered the same number into the system, and the payment was credited to another customer’s account.
c. After processing a large sales transaction, the inventory records showed negative quantities on hand for several items.

a. Use Validity check for actual customer records.
b. Use Closed-loop verification when entering customers’ account numbers.
c. Use sign check on quantity on hand.

 

AACSB: Reflective Thinking
AICPA BB: Industry
AICPA FN: Decision Making
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 10-02 Explain the objectives and components of the COSO internal control framework and the COSO enterprise risk management framework.
Source: Original
Topic: Control and Governance Frameworks
 

 

Chapter 14

Evaluating AIS Investments

 

True / False Questions

1. In making the business case for an IT investment, companies should assess the sensitivity of results to the assumptions.

True    False

 

2. The appropriate cost of capital to use in valuing an IT project is the same regardless of the project riskiness.

True    False

 

3. Capital budgeting techniques provide precise estimates on an IT projects costs and benefits.

True    False

 

4. Net present value techniques compute the unique rate of return for a particular IT project.

True    False

 

5. One weakness of the internal rate of return financial metric is that larger projects tend to have higher internal rates of return.

True    False

 

6. The value proposition step in the analysis of an IT initiative should focus on five questions, including the timing of expected benefits.

True    False

 

7. The benefits of an IT project are not necessarily measurable in financial terms.

True    False

 

8. Benefits are often estimated without complete information.

True    False

 

9. The business case for an IT project does not need to address risk, since risk will be factored into the discount rate.

True    False

 

10. Time that employees devote to self-training on new technology is an example of direct operating costs.

True    False

 

 

Multiple Choice Questions

11. Which of the following is not a reason that large IT projects require economic justification?

A. IT is a commodity, every firm makes IT investments

 

B. IT investments require large amounts of capital

 

C. Capital resources are limited

 

D. Major IT projects can affect substantial portions of the organization

 

12. Which of the following is not a question that businesses should answer before making major IT investments?

A. What key business issues does it address?

 

B. What are the risks of doing the project?

 

C. How will success be measured?

 

D. None of the above

 

13. Which of the following is not a major consideration when assessing business requirements for IT initiatives?

A. Complementary business process changes

 

B. Potential technological solutions

 

C. Gaps in performance indicated by the strategy map

 

D. Project risks

 

14. Which of the following is not a direct acquisition cost of an IT initiative?

A. Cost of hardware

 

B. Cost of business disruption

 

C. Cost of project management

 

D. Cost of software development

 

15. Which of the following is not a direct operating cost of an IT initiative?

A. End-user data management

 

B. Ongoing hardware replacement

 

C. Software upgrades

 

D. Hardware disposal

 

16. Which of the following is not a potential benefit of an IT investment?

A. Revenue enhancement

 

B. Revenue savings

 

C. Cost avoidance

 

D. Revenue protection

 

17. Which of the following is the least effective approach to quantifying expected benefits of an IT project?

A. Find out what other firms experienced in similar situations

 

B. Review options with the hardware vendor

 

C. Consult with experts

 

D. Use simulation software

 

18. Which of the following is an example of project risk?

A. The technology will not work as expected.

 

B. The IT project is not aligned with the company’s strategy.

 

C. The financial benefits may not be delivered.

 

D. The IT project may exceed budget.

 

19. Which of the following is an example of solution risk?

A. The solution is not aligned with the company’s strategy.

 

B. The solution will not generate projected benefits.

 

C. The solution will be delayed.

 

D. Employees are unwilling to make the necessary changes.

 

20. Which of the following is the best approach to mitigate alignment risk?

A. Assure top management support

 

B. Conduct training and provide incentives

 

C. Use the balanced scorecard framework

 

D. Use sensitivity analysis

 

 

Essay Questions

21. Explain why it is easier to assess the costs of an IT project than to assess the benefits. What factors complicate the cost estimates? What factors complicate the benefits estimates? Do the risks associated with the project primarily affect the costs or the benefits? Why?

 

 

 

 

22. Pacific Green Company is considering buying a unique bar-coding machine to help them track their plant inventory. They are using the payback period and accounting rate of return methods to evaluate the purchase. They will consider the project further if the payback period is less than four years and it has a minimum accounting rate of return of 7%. Relevant information on the machine is as follows:

Acquisition cost = $48,000
Expected salvage value = $0
Expected annual cash inflow benefits = $13,000 per year for 5 years
Expected useful life = 5 years

Required: Compute the payback period and ARR. Advise GPC on their appropriate action.

 

 

 

 

23. Yellow Duck Brewery is considering two similar technology investments to help track production. Investment (1) has an NPV of $245,000 and a payback period of 3 years. Investment (2) has an NPV of $250,000 and a payback period of 4.25 years. Which investment would you advise them to choose? Why?

 

 

 

 

24. Pacific Green Company is considering buying a unique bar-coding machine to help them track their plant inventory. They evaluated the payback period and accounting rate of return and selected the project for further evaluation. Relevant information on the machine is repeated as follows:

Acquisition cost = $48,000
Expected salvage value = $0
Expected annual cash inflow benefits = $13,000 per year for 5 years
Expected useful life = 5 years

Required: Compute the net present value of the project assuming a discount rate of 16%. Use EXCEL to compute the internal rate of return. Advise PGC on the best course of action with respect to the investment.

 

 

 

 

25. Cooper Automotive is considering expanding, but to do so, they need to invest in new systems expected to cost $1,000,000. They estimate the salvage value to be $0 at the end of 10 years, so depreciation will be $100,000 per year. They estimate that profits will increase by $250,000 per year. Coop’s cost of capital is 10%.

Required: Compute the payback period, the accounting rate of return, the net present value, and the internal rate of return. Advise Coop on whether he should invest. Would your advice change if the increase in profits is only $175,000 per year?

 

 

 

 

Chapter 14 Evaluating AIS Investments Answer Key

True / False Questions

1. In making the business case for an IT investment, companies should assess the sensitivity of results to the assumptions.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Articulate similarities and differences between major IT initiatives and other capital investments.
Source: Original
Topic: Evaluating AIS Investments
 

 

2. The appropriate cost of capital to use in valuing an IT project is the same regardless of the project riskiness.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Articulate similarities and differences between major IT initiatives and other capital investments.
Source: Original
Topic: Evaluating AIS Investments
 

 

3. Capital budgeting techniques provide precise estimates on an IT projects costs and benefits.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Articulate similarities and differences between major IT initiatives and other capital investments.
Source: Original
Topic: Evaluating AIS Investments
 

 

4. Net present value techniques compute the unique rate of return for a particular IT project.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-01 Articulate similarities and differences between major IT initiatives and other capital investments.
Source: Original
Topic: Evaluating AIS Investments
 

 

5. One weakness of the internal rate of return financial metric is that larger projects tend to have higher internal rates of return.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-06 Apply capital budgeting techniques to assess the value of an IT initiative.
Source: Original
Topic: Evaluating AIS Investments
 

 

6. The value proposition step in the analysis of an IT initiative should focus on five questions, including the timing of expected benefits.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-02 Explain the major steps in the economic justification of an IT initiative.
Source: Original
Topic: Evaluating AIS Investments
 

 

7. The benefits of an IT project are not necessarily measurable in financial terms.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-03 Explain potential benefits of IT initiatives and how to evaluate them.
Source: Original
Topic: Evaluating AIS Investments
 

 

8. Benefits are often estimated without complete information.

TRUE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-03 Explain potential benefits of IT initiatives and how to evaluate them.
Source: Original
Topic: Evaluating AIS Investments
 

 

9. The business case for an IT project does not need to address risk, since risk will be factored into the discount rate.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

10. Time that employees devote to self-training on new technology is an example of direct operating costs.

FALSE

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-04 Assess potential costs of IT initiatives and how to evaluate them.
Source: Original
Topic: Evaluating AIS Investments
 

 

Multiple Choice Questions

11. Which of the following is not a reason that large IT projects require economic justification?

A. IT is a commodity, every firm makes IT investments

 

B. IT investments require large amounts of capital

 

C. Capital resources are limited

 

D. Major IT projects can affect substantial portions of the organization

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Articulate similarities and differences between major IT initiatives and other capital investments.
Source: Original
Topic: Evaluating AIS Investments
 

 

12. Which of the following is not a question that businesses should answer before making major IT investments?

A. What key business issues does it address?

 

B. What are the risks of doing the project?

 

C. How will success be measured?

 

D. None of the above

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-01 Articulate similarities and differences between major IT initiatives and other capital investments.
Source: Original
Topic: Evaluating AIS Investments
 

 

13. Which of the following is not a major consideration when assessing business requirements for IT initiatives?

A. Complementary business process changes

 

B. Potential technological solutions

 

C. Gaps in performance indicated by the strategy map

 

D. Project risks

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-02 Explain the major steps in the economic justification of an IT initiative.
Source: Original
Topic: Evaluating AIS Investments
 

 

14. Which of the following is not a direct acquisition cost of an IT initiative?

A. Cost of hardware

 

B. Cost of business disruption

 

C. Cost of project management

 

D. Cost of software development

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-03 Explain potential benefits of IT initiatives and how to evaluate them.
Source: Original
Topic: Evaluating AIS Investments
 

 

15. Which of the following is not a direct operating cost of an IT initiative?

A. End-user data management

 

B. Ongoing hardware replacement

 

C. Software upgrades

 

D. Hardware disposal

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-03 Explain potential benefits of IT initiatives and how to evaluate them.
Source: Original
Topic: Evaluating AIS Investments
 

 

16. Which of the following is not a potential benefit of an IT investment?

A. Revenue enhancement

 

B. Revenue savings

 

C. Cost avoidance

 

D. Revenue protection

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-03 Explain potential benefits of IT initiatives and how to evaluate them.
Source: Original
Topic: Evaluating AIS Investments
 

 

17. Which of the following is the least effective approach to quantifying expected benefits of an IT project?

A. Find out what other firms experienced in similar situations

 

B. Review options with the hardware vendor

 

C. Consult with experts

 

D. Use simulation software

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-03 Explain potential benefits of IT initiatives and how to evaluate them.
Source: Original
Topic: Evaluating AIS Investments
 

 

18. Which of the following is an example of project risk?

A. The technology will not work as expected.

 

B. The IT project is not aligned with the company’s strategy.

 

C. The financial benefits may not be delivered.

 

D. The IT project may exceed budget.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

19. Which of the following is an example of solution risk?

A. The solution is not aligned with the company’s strategy.

 

B. The solution will not generate projected benefits.

 

C. The solution will be delayed.

 

D. Employees are unwilling to make the necessary changes.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

20. Which of the following is the best approach to mitigate alignment risk?

A. Assure top management support

 

B. Conduct training and provide incentives

 

C. Use the balanced scorecard framework

 

D. Use sensitivity analysis

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

Essay Questions

21. Explain why it is easier to assess the costs of an IT project than to assess the benefits. What factors complicate the cost estimates? What factors complicate the benefits estimates? Do the risks associated with the project primarily affect the costs or the benefits? Why?

Open ended.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

22. Pacific Green Company is considering buying a unique bar-coding machine to help them track their plant inventory. They are using the payback period and accounting rate of return methods to evaluate the purchase. They will consider the project further if the payback period is less than four years and it has a minimum accounting rate of return of 7%. Relevant information on the machine is as follows:

Acquisition cost = $48,000
Expected salvage value = $0
Expected annual cash inflow benefits = $13,000 per year for 5 years
Expected useful life = 5 years

Required: Compute the payback period and ARR. Advise GPC on their appropriate action.

Payback period = $48,000/$13,000 = 3.7 years
ARR = ($13,000 – $9,600 depreciation expense)/$48,000 = 7.1%
It meets the thresholds for further evaluation

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

23. Yellow Duck Brewery is considering two similar technology investments to help track production. Investment (1) has an NPV of $245,000 and a payback period of 3 years. Investment (2) has an NPV of $250,000 and a payback period of 4.25 years. Which investment would you advise them to choose? Why?

(open ended but they should address the decreased risk connected with the shorter payback period despite the slight difference in NPV).

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Evaluate
Difficulty: 3 Hard
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

24. Pacific Green Company is considering buying a unique bar-coding machine to help them track their plant inventory. They evaluated the payback period and accounting rate of return and selected the project for further evaluation. Relevant information on the machine is repeated as follows:

Acquisition cost = $48,000
Expected salvage value = $0
Expected annual cash inflow benefits = $13,000 per year for 5 years
Expected useful life = 5 years

Required: Compute the net present value of the project assuming a discount rate of 16%. Use EXCEL to compute the internal rate of return. Advise PGC on the best course of action with respect to the investment.

NPV is negative
IRR is approximately 11% (and below GPC’s hurdle rate)
Do not invest

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

25. Cooper Automotive is considering expanding, but to do so, they need to invest in new systems expected to cost $1,000,000. They estimate the salvage value to be $0 at the end of 10 years, so depreciation will be $100,000 per year. They estimate that profits will increase by $250,000 per year. Coop’s cost of capital is 10%.

Required: Compute the payback period, the accounting rate of return, the net present value, and the internal rate of return. Advise Coop on whether he should invest. Would your advice change if the increase in profits is only $175,000 per year?

At $250,000 annual incremental profit:

Payback is 4 years;
ARR is 15%;
NPV is ~$500,000;
IRR is 21%.
Invest

At $175,000 annual incremental profit:

Payback increases to almost 6 years;
ARR drops to 7.5%;
NPV decreases to ~$75,000;
IRR decreases to 12%.
Advise evaluating the sensitivity of the estimates to changes in assumptions.

 

AACSB: Analytic
AICPA BB: Leveraging Technology
AICPA FN: Leveraging Technology
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 14-05 Describe potential risks of IT initiatives and corresponding risk mitigation techniques.
Source: Original
Topic: Evaluating AIS Investments
 

 

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