Chapter 01 The Information System: An Accountant's Perspective

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Chapter 01 The Information System: An Accountant’s Perspective

True / False
1. Information is a business resource.

a. True
b. False
ANSWER: True
2. IT outsourcing is location-independent computing.

a. True
b. False
ANSWER: False
3. Transaction processing systems convert non-financial transactions into financial transactions.

a. True
b. False
ANSWER: False
4. Information lacking reliability may still have value.

a. True
b. False
ANSWER: False
5. A balance sheet prepared in conformity with GAAP is an example of discretionary reporting.
a. True
b. False
ANSWER: False
6. The management reporting system provides the internal financial information needed to manage a business.
a. True
b. False
ANSWER: True
7. Most of the inputs to the general ledger system come from the financial reporting system.
a. True
b. False
ANSWER: False
8. When preparing discretionary reports, organizations can choose what information to report and how to
present it.
a. True
b. False
ANSWER: True
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9. Retrieval is the task of permanently removing obsolete or redundant records from the database.
a. True
b. False
ANSWER: False
10. Systems development represents 80 to 90 percent of the total cost of a computer system.

a. True
b. False
ANSWER: False
11. The database administrator is responsible for the security and integrity of the database.
a. True
b. False
ANSWER: True
12. Custom software is developed and maintained by enterprise resource planners.

a. True
b. False
ANSWER: False
13. The internal auditor represents the interests of third-party outsiders.

a. True
b. False
ANSWER: False
14. Information technology (IT) audits can be performed by both internal and external auditors.
a. True
b. Fals
e
ANSWER: True
15. Custom software is the most affordable systems development option.

a. True
b. Fals
e
ANSWER: Fals
e
16. A database is a collection of interconnected computers and communications devices that allows users to
communicate, access data and applications, and share information and resources.
a. True
b. Fals
e
ANSWER: Fals
Name: Class Date:
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e
17. Systems maintenance consumes the majority of a system’s total costs.

a. True
b. Fals
e
ANSWER: True
18. Cloud computing is a practice in which the organization sells its IT resources to a third-party outsourcing vendor then
leases back IT services from the vendor for a contract period.
a. True
b. Fals
e
ANSWER: Fals
e
19. A potential benefit of cloud computing is that the client firm does not need to know where its data are being
processed.
a. True
b. Fals
e
ANSWER: Fals
e
20. One of the greatest disadvantages of database systems is that all data is always available to all users.
a. True
b. Fals
e
ANSWER: Fals
e
21. Under SOX legislation public accounting firms are no longer allowed to provide consulting services to audit
clients.
a. True
b. Fals
e
ANSWER: True
22. One member of a company’s audit committee must be an independent CPA.

a. True
b. Fals
e
ANSWER: Fals
e

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Multiple Choice
23. Which of the following is not a business resource?

a. raw material
b. labor
c. information
d. all are business resources
ANSWER: d
24. Which level of management is responsible for short-term planning and coordination of activities necessary
to accomplish organizational objectives?
a. operations management
b. middle management
c. top management
d. line management
ANSWER: b
25. Which level of management is responsible for controlling day-to-day operations?

a. top management
b. middle management
c. operations management
d. executive management
ANSWER: c
26. Location-independent computing in which shared data centers deliver hosted IT services over the Internet is
called
a. IT outsourcing
b. network administration
c. cloud computing
d. custom software
ANSWER: c
27. The value of information for users is determined by all of the following except
a. reliability
b. relevance
c. convenience
d. completeness
ANSWER: c
28. An example of a nonfinancial transaction is

a. sale of products
b. cash disbursement
c. log of customer calls
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d. purchase of inventory
ANSWER: c
29. An example of a financial transaction is

a. the purchase of computer
b. a supplier’s price list
c. a delivery schedule
d. an employee benefit brochure
ANSWER: a
30. Which subsystem is not part of the accounting information system?

a. transaction processing system
b. expert system
c. general ledger/financial reporting system
d. management reporting system
ANSWER: b
31. The major difference between the financial reporting system (FRS) and the management reporting system
(MRS) is the
a. FRS provides information to internal and external users; the MRS provides information
to internal users
b FRS provides discretionary information; the MRS provides nondiscretionary
. information
c. FRS reports are prepared using information provided by the general ledger system;
the MRS provides information to the general ledger system
d FRS reports are prepared in flexible, nonstandard formats; the MRS reports are
. prepared in standardized, formal formats
ANSWER: a
32. The purpose of the transaction processing system includes all of the following except
a. converting economic events into financial transactions
b. recording financial transactions in the accounting records
c. distributing essential information to operations personnel to support their daily
operations
d. measuring and reporting the status of financial resources and the changes in those
resources
ANSWER: d
33. The transaction processing system includes all of the following cycles except
a. the revenue cycle
b. the administrative cycle
c. the expenditure cycle
d. the conversion cycle
ANSWER: b
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34. The primary input to the transaction processing system is

a. a financial transaction
b. an accounting record
c. an accounting report
d. a nonfinancial transaction
ANSWER: a
35. When designing the data collection activity, which type of data should be avoided?
a. data that is relevant
b. data that is efficient
c. data that is redundant
d. data that is accurate
ANSWER: c
36. The most basic element of useful data in the database is the

a. record
b. key
c. file
d. attribute
ANSWER: d
37. In a database, a complete set of attributes for a single occurrence of an entity class is called a
a. key
b. file
c. record
d. character
ANSWER: c
38. Effective information has all of the following characteristics except

a. relevance
b. completeness
c. summarization
d. structure
ANSWER: d
39. Database management tasks do not include

a. summarization
b. storage
c. retrieval
d. deletion
ANSWER: a

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40. The author distinguishes between the accounting information system and the management information
system based on
a. whether the transactions are financial or nonfinancial
b. whether discretionary or nondiscretionary reports are prepared
c. the end users of the reports
d. the organizational structure of the business
ANSWER: a
41. Which activity is not part of the finance function?

a. cash receipts
b. portfolio management
c. credit
d. general ledger
ANSWER: d
42. Market research and advertising are part of which business function?

a. materials management
b. finance
c. marketing
d. production
ANSWER: c
43. Which function manages the financial resources of the firm through portfolio management, banking, credit
evaluation, and cash receipts and disbursements?
a. accounting
b. finance
c. materials management
d. distribution
ANSWER: b
44. Which of the following is not part of the accounting function?

a. managing the financial information resource of the firm
b. capturing and recording transactions in the database
c. distributing transaction information to operations
personnel
d. managing the physical information system of the firm
ANSWER: d
45. The term “accounting independence” refers to

a. data integrity
b. separation of duties, such as record keeping and custody of physical resources
c. generation of accurate and timely information
d. business segmentation by function
Name: Class Date:
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ANSWER: b
46. In the distributed data processing approach

a. computer services are consolidated and managed as a shared organization resource
b. the computer service function is a cost center
c. the end users are billed using a charge-back system
d. computer services are organized into small information processing units under the control of end users
ANSWER: d
47. Which of the following is not a cloud computing service?

a. software as a service
b. infrastructure as a service
c. network as a service
d. platform as a service
ANSWER: c
48. The goal of data processing is

a. the verification of the algorithms used
b. to collect only relevant data
c. the production of useful information
d. to develop a hierarchy of outputs
ANSWER: c
49. Attestation services are performed by

a. external auditors
b. internal accountants
c. internal auditors
d. third-party accountants
ANSWER: a
50. IT professionals create custom software using

a. distributed data processing
b. turnkey systems
c. enterprise resource planning
d. the system development life cycle
ANSWER: d
51. The objectives of all information systems include all of the following except
a. support for the stewardship function of management
b. evaluating transaction data
c. support for the day-to-day operations of the firm
d. support for management decision making

Name: Class Date:
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ANSWER: b
52. Which individuals may be involved in the systems development life cycle?

a. accountants
b. systems professionals
c. end users
d. all of the above
ANSWER: d
53. An appraisal function housed within the organization that performs a wide range of services for management
is
a. internal auditing
b. data control group
c. external auditing
d. database administration
ANSWER: a
54. Which of the following is not a production support activity?

a. maintenance
b. marketing
c. production planning
d. quality control
ANSWER: b
55. Advantages of cloud computing include all of the following except

a. access to whatever computing power is needed
b. paying only for what is used
c. unknown data processing location
d. flexible, short term contracts
ANSWER: c
56. Motivations for IT outsourcing include each of the following except

a. IT’s highly technical nature
b. long term contracts in IT outsourcing
c. expense of IT
d. dynamically changing nature of IT
ANSWER: b
57. An internal audit department’s independence is compromised when the department reports to:
a. the company controller
b. the audit committee of the board of directors
c. Both a. and b.

Name: Class Date:
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d. Neither a. nor b.
ANSWER: a
58. What factor conceptually distinguishes external auditing and internal auditing?

a. tests of controls
b. substantive tests
c. education
d. constituencies
ANSWER: d
59. All of the following are external end users except

a. cost accountants
b. creditors
c. stockholders
d. tax authorities
ANSWER: a
60. Useful information must possess all of the following characteristics except

a. relevance
b. precision
c. accuracy
d. completeness
ANSWER: b
61. The objectives of an information system include each of the following except

a. support for the stewardship responsibilities of management
b. furthering the financial interests of shareholders
c. support for management decision making
d. support for the firm’s day-to-day operations
ANSWER: b
62. Accountants play many roles relating to the accounting information system, including all of the following
except
a. system users
b. system designers
c. system auditors
d. system converters
ANSWER: d
Completion
63. Entities outside the organization with a direct or indirect interest in the firm, such as stockholders, financial
institutions, and government agencies, are called ____________________.
Name: Class Date:
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ANSWER: stakeholders
64. Location-independent sharing of data centers hosting IT servers over the Internet is called
______________________________.
ANSWER: cloud computing
65. Transactions with trading partners include ____________________ and ____________________.

ANSWER: sales, purchases
66. A practice in which an organization sells its IT resources and leases them back is called
___________________________________.
ANSWER: IT outsourcing
67. The task of locating and transferring an existing record from the database for processing is called data
____________________.
ANSWER: retrieval
68. These tests focus on data rather than process: __________________________.

ANSWER: substantive tests
69. Three activities that are part of the finance function are __________________________,
__________________________, and __________________________.
ANSWER: portfolio management, treasury, credit evaluation, cash disbursements, cash receipts,
banking
70. Two distinct ways to structure the data processing function are ____________________ and
____________________.
ANSWER: centralized, distributed
71. Two methods to acquire information systems are to __________________________ and to

__________________________.
ANSWER: develop custom systems, purchase commercial systems
72. The most common audit types are ____________________, ____________________, and

____________________ auditors.
ANSWER: internal (operational), external (attestation), fraud
73. Sales of products to customers, purchases of inventory from vendors, and cash disbursements are all
examples of __________________________.
ANSWER: financial transactions
74. The three major subsystems of the accounting information system are

_______________________________, ___________________________, and
_______________________________.
ANSWER: the transaction processing system (TPS), the general ledger/financial reporting system (GL/FRS), the
management reporting system (MRS)
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75. The __________________________ and __________________________ standards that characterize the

accounting information system clearly distinguish it from the management information system.
ANSWER: legal, professional
76. The transaction processing system is comprised of three cycles: __________________________,

__________________________, and __________________________.
ANSWER: revenue, expenditure, conversion
77. The tests that focus on the system itself and how it is designed to reduce risk is called
____________________.
ANSWER: tests of controls
78. Sarbanes-Oxley legislation requires that management designs and implements controls over the entire
financial reporting process. What systems does this include?
ANSWER This includes the financial reporting system, the general ledger system, and the
: transaction processing systems that supply the data for financial reporting.
79. Why is it necessary to distinguish between accounting information systems (AIS) and management
information systems (MIS)?
ANSWER: Because of the highly integrative nature of modern information systems, management and auditors need a
conceptual view of the information system that distinguishes key processes and areas of risk and legal
responsibility from the other (non-legally binding) aspects of the system. Without such a model, critical
management and audit responsibilities under SOX may not be met.
80. How has SOX legislation impacted the consulting practices of public accounting firms?
ANSWER: Prior to SOX, a gray area of overlap existed between assurance and consulting services. Auditors were once
allowed to provide consulting services to their audit clients. They are now prohibited from doing so under SOX
legislation.
81. What is discretionary reporting?

ANSWER Reports used by management that the company is not obligated by law, regulation, or
: contract to provide. These are often used for internal problem-solving issues rather
than by external constituents.
82. Name the five characteristics of information.

ANSWER: Relevance, accuracy, completeness, summarization, and timeliness.
Essay
83. Contrast the responsibilities of operations management, middle management, and top management. Explain the
different information needs for each level of management.
ANSWER: Operations management is directly responsible for controlling day-to-day operations. Operations managers
require detailed information on individual transactions such as sales, shipment of goods, usage of labor and
materials in the production process, and internal transfers of resources from one department to another.
Budgeting information and instructions flow downward from top and middle management to operations
management.

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Middle managers perform short-term planning and coordination of activities necessary to accomplish
organizational objectives. Middle management requires information that is more summarized and oriented
toward reporting on overall performance and problems, rather than routine operations.
Top management is responsible for longer-term planning and setting organizational objectives. Information
provided to top management is highly summarized.
84. Explain the difference between data and information.

ANSWER: Data are facts which may or may not be processed; data have no particular impact on the user. Information is
processed data that causes the user to take action.
85. Why do auditors need to understand the organizational structure of the business?

ANSWER: The structure of an organization reflects the distribution of responsibility, authority, and accountability
throughout the organization. Auditors need to know how the organization functions to properly audit it.
86. Several advantages of cloud computing have been discussed. Discuss at least three.
ANSWER: The advantages of cloud computing include access to whatever computing power it needs, paying only for
what is used, and flexible and relatively short-term computing contracts.
87. Name and explain the purpose of the three major subsystems of the accounting information system (AIS):
ANSWER: TPS records the financial transactions of the firm

GL/FRS produces the financial statements, etc. required by law
MRS provides information to internal management for decision making
88. What are the three primary functions performed by the transaction processing system?
ANSWER The primary functions are converting economic events into financial transactions,
: recording financial transactions in the accounting records (journals and ledgers), and
distributing essential financial information to operations personnel to support daily
operations.
89. What factors motivate management to outsource IT?

ANSWER Management may be motivated to outsource IT because the IT segment of an
: organization comprises highly technical, dynamically changing, and expensive
activities. The administrative burden and high costs associated with managing and
maintaining IT functions are also motivations.
90. Describe the problem of data redundancy.

ANSWER: Information systems have limited collection, processing, and data storage capacity. Data redundancy overloads
facilities and reduces the overall efficiency of the system. Inconsistency among redundant data elements can
result in inappropriate actions and bad decisions.

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91. Compare and contrast IT outsourcing and cloud computing.
ANSWER IT outsourcing involves an organization selling its IT resources (hardware, software,
: and facilities) to a third-party outsourcing vendor and then leasing back IT services
from the vendor for a contract period of typically between five and ten years. A variant
of IT outsourcing, called cloud computing, is location-independent computing whereby
shared data centers deliver hosted IT services over the Internet. An organization
pursuing cloud computing signs a contract with an IT service provider to provide
computing resources. When demand exceeds the provider’s IT capacity, it acquires
additional capacity from data centers in the “cloud” that are connected via the Internet.
The advantage to the client organization is access to whatever computing power it
needs, while it pays only for what it uses. Also, cloud computing contracts are flexible
and relatively short term. In contrast, traditional outsourcing contracts tend to be fixed
price, inflexible, and much longer term.
92. Distinguish between the accounting information system and the management information system.
ANSWER: The accounting information system processes financial (e.g., cash receipts) and nonfinancial (e.g., addition to
the approved vendor list) transactions that directly affect the processing of financial transactions. These are
handled by the three major subsystems: transaction processing, general ledger/financial reporting, and
management reporting. The management information system processes additional nonfinancial transactions
that contribute to the decision making of managers.
93. Describe the attest function and its objectives.

ANSWER The attest function—the task of an external audit—is an independent attestation
: performed by an expert—the auditor—who expresses an opinion regarding the
presentation of financial statements. The attest function is performed by certified public
accountants (CPAs) who work for public accounting firms that are independent of the
client organization being audited. The audit objective is always associated with
assuring the fair presentation of financial statements. These audits are, therefore, often
referred to as financial audits. The Securities and Exchange Commission (SEC)
requires all publicly traded companies to undergo a financial audit annually. CPAs
conducting such audits represent the interests of outsiders: stockholders, creditors,
government agencies, and the general public.
94. Why is it important to organizationally separate the accounting function from other functions of the
organization?
ANSWER: The accounting function provides record-keeping services for all of the operations and day-to-day activities of
other departments, which affect the financial position of the organization. Record keeping tasks must be kept
separate from any area that has custody over assets. Thus, the accounting function must remain independent so
that the protection of the firm’s assets is carried out in an environment with minimum possibilities for theft.
95. How does SOX affect the provision of attest and advisory services
ANSWER Prior to the passage of SOX, accounting firms could provide advisory services
: concurrently to audit (attest function) clients. SOX legislation, however, greatly
restricts the types of non-audit services that auditors may render audit clients. It is now
unlawful for a registered public accounting firm that is currently providing attest
services for a client to provide the following services: bookkeeping or other services
related to the accounting records or financial statements of the audit client, financial
information systems design and implementation, appraisal or valuation services,
fairness opinions, or contribution-in-kind reports, actuarial services, internal audit
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outsourcing services, management functions or human resources, broker or dealer,
investment adviser, or investment banking services, legal services and expert services
unrelated to the audit, or any other service that the board of directors determines, by
regulation, is impermissible.
96. What are the similarities and differences between external auditors and internal auditors?
ANSWER The characteristic that conceptually distinguishes external auditors from internal
: auditors is their respective constituencies: while external auditors represent outsiders,
internal auditors represent the interests of the organization. Nevertheless, in this
capacity, internal auditors often cooperate with and assist external auditors in
performing aspects of financial audits. This cooperation is done to achieve audit
efficiency and reduce audit fees. For example, a team of internal auditors can perform
tests of computer controls under the supervision of a single external auditor. The
independence and competence of the internal audit staff determine the extent to which
external auditors may cooperate with and rely on work performed by internal auditors.
External auditors can rely in part on evidence gathered by internal audit departments
that are organizationally independent and report to the board of directors’ audit
committee. A truly independent internal audit staff adds value to the external audit
process.
97. What are fraud audits and why have they become more common?
ANSWER The objective of a fraud audit is to investigate anomalies and gather evidence of fraud
: that may lead to criminal conviction. Sometimes fraud audits are initiated when
corporate management suspects employee fraud. Alternatively, boards of directors may
hire fraud auditors to investigate their own executives if theft of assets or financial
fraud is suspected. Organizations victimized by fraud usually contract with specialized
fraud units of public accounting firms or with companies that specialize in forensic
accounting. In recent years, fraud audits have increased in popularity as a corporate
governance tool. They have been thrust into prominence due to a corporate
environment in which both employee theft of assets and major financial frauds by
management (e.g., Enron and WorldCom) have become rampant.

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Name: Class Date:

Chapter 01 The Information System: An Accountant’s Perspective

1. Information is a business resource.

2. IT outsourcing is location-independent computing.

3. Transaction processing systems convert non-financial transactions into financial transactions.

4. Information lacking reliability may still have value.

Copyright Cengage Learning. Powered by Cognero. Page 1

Chapter 01 The Information System: An Accountant’s Perspective

10. Systems development represents 80 to 90 percent of the total cost of a computer system.

12. Custom software is developed and maintained by enterprise resource planners.

13. The internal auditor represents the interests of third-party outsiders.

15. Custom software is the most affordable systems development option.

Chapter 01 The Information System: An Accountant’s Perspective

17. Systems maintenance consumes the majority of a system’s total costs.

22. One member of a company’s audit committee must be an independent CPA.

Copyright Cengage Learning. Powered by Cognero. Page 3

Chapter 01 The Information System: An Accountant’s Perspective

23. Which of the following is not a business resource?

25. Which level of management is responsible for controlling day-to-day operations?

28. An example of a nonfinancial transaction is

Chapter 01 The Information System: An Accountant’s Perspective

29. An example of a financial transaction is

30. Which subsystem is not part of the accounting information system?

Chapter 01 The Information System: An Accountant’s Perspective

34. The primary input to the transaction processing system is

36. The most basic element of useful data in the database is the

38. Effective information has all of the following characteristics except

39. Database management tasks do not include

Copyright Cengage Learning. Powered by Cognero. Page 6

Chapter 01 The Information System: An Accountant’s Perspective

41. Which activity is not part of the finance function?

42. Market research and advertising are part of which business function?

44. Which of the following is not part of the accounting function?

45. The term “accounting independence” refers to

Chapter 01 The Information System: An Accountant’s Perspective

46. In the distributed data processing approach

47. Which of the following is not a cloud computing service?

48. The goal of data processing is

49. Attestation services are performed by

50. IT professionals create custom software using

Copyright Cengage Learning. Powered by Cognero. Page 8

Chapter 01 The Information System: An Accountant’s Perspective

52. Which individuals may be involved in the systems development life cycle?

54. Which of the following is not a production support activity?

55. Advantages of cloud computing include all of the following except

56. Motivations for IT outsourcing include each of the following except

Copyright Cengage Learning. Powered by Cognero. Page 9

Chapter 01 The Information System: An Accountant’s Perspective

58. What factor conceptually distinguishes external auditing and internal auditing?

59. All of the following are external end users except

60. Useful information must possess all of the following characteristics except

61. The objectives of an information system include each of the following except

Chapter 01 The Information System: An Accountant’s Perspective

65. Transactions with trading partners include ____________________ and ____________________.

68. These tests focus on data rather than process: __________________________.

71. Two methods to acquire information systems are to __________________________ and to

72. The most common audit types are ____________________, ____________________, and

74. The three major subsystems of the accounting information system are

65. Transactions with trading partners include and .

72. The most common audit types are , , and

75. The and standards that characterize the