CHAPTER 1 · Conceptual system- production of several
alternative designs for a new system.
The Information System:
An Accountant’s Perspective
· Accounting information systems – specialized
subset of information systems that processes
financial transactions.
· Attest function- independent auditor’s
responsibility to opine as to the fair presentation of a
client firm’s financial statement.
· Auditor- expert who expresses an opinion about a
company’s financial statements.
· Centralized data processing- model under which all
data processing is performed by one or more large
computers, housed at a central site, that serve users
throughout an organization.
· Cloud computing-the practice of using a network of
remote servers hosted on the Internet to store,
manage, and process data, rather than a local server
or a personal computer.
- 3 categories: software as a service (SaaS),
infrastructure as a service (IaaS), and
platform as a service (PaaS)
· Commercial software- or seldom payware, is a
computer software that is produced for sale or that
serves commercial purposes. Commercial software
can be proprietary software or free and open-source
software.
- Commercial software is available for both
general accounting use and for industry
specific applications, such as medical billing.
Commercial software packages are
sometimes called turnkey systems because
they can often be implemented by the user
with little or no modification.
· Data sources- financial transactions that enter the
information system from both internal and external
- Involves specifying the criteria for identifying
delinquent customers and the information
that needs to be reported.
· Custom software- is a software that is specially
developed for some specific organization or other
user. As such, it can be contrasted with the use of
software packages developed for the mass market,
such as commercial off-the-shelf (COTS) software, or
existing free software.
- Larger organizations with unique
information needs often develop custom
software through a formal process called
the systems development life cycle. Creating
it requires the organization to have an in
house team qualified and experienced IT
professionals consisting of systems analysts,
programmers, and data base design.
· Data- facts which may or may not be processed
(edited, summarized, or refined) and which have no
direct effect on the user.
· Database- physical repository for financial and non-
financial data.
· Database management- special software system
that is programmed to know which data elements
each user is authorized to access.
- 3 fundamental tasks: storage, retrieval and
decision.
·Data collection- first operational stage in the
information system. Ensure that data are valid,
complete, and free from material errors.
- Two rules: relevance and efficiency.
· Data processing- group that manages the computer
resources used to perform the day-to-day processing
of transactions.
- Data collected require processing to produce
information.
sources.
- External financial transactions are economic
exchanges between business entities and
individuals outside the organization. Internal
financial transactions involve the exchange
or movement of resources within the org.
· Data storage- efficient information system that
captures and stores data only once and makes this
single source available to all users who need it.
· Discretionary reporting- type of reporting wherein
the organization can choose what information to
report and how to present it.
- Refers to such reports provided to the
internal management of an organization
that are non-legal and non-mandatory in
nature.
· Distributed data processing (DBP)- reorganizing the
IT function into small information processing units or
IPUs that are distributed to end users and placed
under their control.
· End users- users for whom the system is built.
- Can be external or internal. External users
include creditors, stockholders, investors
and customers. Internal users include
management at every level of organization.
· Enterprise resource planning (ERP) - system
assembled of prefabricated software components.
- Is an information system model that enables
an organization to automate and integrate
its key business processes. ERP breaks down
traditional functional barriers by facilitating
data sharing, information flows, and the
introduction of common business practices
among all organizational users
· External users- people outside the business entity
(organization) who use accounting information.
 - Include creditors, stockholders, potential
investors, regulatory agencies, tax
authorities, suppliers, and customers.
· Feedback– form of output that is sent back to the
system as a source of data. Feedback may be internal
or external and is used to initiate or alter a process.
· Financial transaction – economic event that affects
the assets and equities of the organization, is
measured in financial terms, and is reflected in the
accounts of the firm.
· General ledger/ Financial reporting system
(GL/FRS) – system that produces traditional financial
statements such as income statements, balance
sheets, statements of cash flows, tax returns and
other reports required by law.
· General model for AIS–model that describes all
information systems, regardless of their technological
architecture. The elements of the general model are
end users, data sources, data collection, data
processing, database management, information
generation, and feedback.
· Independence – separation of the record-keeping
function of accounting from the functional areas that
have custody of physical resources.
· Information - is defined simply as processed data,
which cause the user to take an action that he or she
otherwise could not, or would not, have taken, and
determined by the effect it has on the user, not by its
physical form.
· Information flows– flow of information into and out
of an organization.
· Information generation- process of compiling,
arranging, formatting, and presenting info to users.
· Information system – set of formal procedures by
which data are collected, processed into information,
and distributed to users.
· Infrastructure as a service (IaaS) - is a form of cloud
computing that provides virtualized computing
resources over the internet.
- The provision of computing power and disk
space to client firms who access it from
desktop PCs. The client firm can configure
the structure for storage, network, and
other computing needs, including running
operating systems and data processing
applications.
- Service model that delivers computer
infrastructure on an outsourced basis to
support enterprise operations.
· Internal auditing – appraisal function housed within
the organization.
- Internal auditors perform a wide range of
activities on behalf of the organization,
including conducting financial statement
audits, examining an operation’s compliance
with organizational policies, reviewing the
organization’s compliance with legal
obligations, evaluating operational
efficiency, detecting and pursuing fraud
within the firm, and conducting IT audits.
· Internal users – include management at every level
of the organization, as well as operations personnel.
· IT auditing – review of the computer-based
components of an organization. The audit is often
performed as part of a broader financial audit.
- Auditor attests to the integrity of elements
of the organization’s information system
that have become complicated by computer
technology.
· IT outsourcing – contracting with a third-party
vendor to take over the costs, risks, and
responsibilities associated with maintaining an
effective corporate IT function, including mgmt. of IT
assets and staff and delivery of IT services such as
data entry, data center operations, applications
development, applications maintenance, and
network management.
· Management information system (MIS) – system
that processes non-financial transactions not
normally processed by traditional accounting
information system.
· Management reporting system (MRS) – system that
provides internal financial information needed to
manage a business.
· Network – A collection of interconnected computers
and communication devices that allows users to
communicate, access data and applications, and
share information and resources.
- Variation of the hierarchical model.
· Network administration - Responsible for the
effective functioning of the software and hardware
that constitute the organization’s network. This
involves configuring, implementing, and maintaining
network equipment.
- Involves a wide array of operational tasks
that help a network to run smoothly and
efficiently.
· Non-Discretionary reporting - type of reporting
wherein an org. has few or no choices in the info it
provides. Much of this info consists of traditional
financial statements, tax returns, & other legal docs.
· Nonfinancial transactions - events that do not meet
the narrow definition of a financial transaction. For
example, adding a new supplier of raw materials to
the list of valid suppliers is an event that may be
processed by the enterprise’s information system as
a transaction.
· Physical system –medium and method for capturing
and presenting the info. The computer professionals
determine the most economical and effective tech for
accomplishing the task. Hence, systems design should
be a collaborative effort. Because of the uniqueness
of each system and the susceptibility of systems to
serious error and even fraud, the accountant’s
involvement in systems design should be pervasive
· Platform as a service (PaaS) – is a cloud computing
model in which a third-party provider delivers
hardware and software tools -- usually those needed
for application development -- to users over the
internet.
- Is a complete development and deployment
environment in the cloud, with resources
that enable you to deliver everything from
simple cloud-based apps to sophisticated,
cloud-enabled enterprise applications.
· Reliability –Property of information that makes it
useful to users.
·Segments –A functional unit of a business org. to
promote internal efficiencies through the
specialization of labor and cost-effective resource
allocations
· Software as a service (SaaS) - A software
distribution model in which service provides host
applications for client organizations over a private
network or the internet.
- Via a subscription, rather than bought and
installed on individual computers.
· Stakeholders – Entities either inside or outside an
organization that have a direct or indirect interest in
the firm.
· Substantive tests – Tests that determine whether
database contents fairly reflect the org’s transactions
- These involve detailed investigations of
specific account balances and transactions.
· System of development life cycle –Software
development process.
- The formal process by which organizations
obtain information systems by either
developing customized systems from scratch
through in-house systems development
activities or by purchasing pre-programmed
commercial systems from software vendors.
· Tests of controls – Tests that establish whether
internal controls are functioning properly.
- Is an audit procedure to test the
effectiveness of a control used by a client
entity to prevent or detect material
misstatements. Depending on the results of
this test, auditors may choose to rely upon a
client's system of controls as part of their
auditing activities.
· Trading partners – Category of external user,
including customer sales and billing information,
purchase information for suppliers, and inventory
receipts information.
· Transactions – Event that affects an org and that is
processed by its info system as a unit of work.
- The information system accepts input, called
transactions, which are converted through
various processes into output information
that goes to users.
- Two classes: financial transactions and
nonfinancial transactions.
· Transaction processing system (TPS) – is central to
the overall function of the information system by
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 their daily
operations. The TPS deals with business events that
occur frequently.
- 3 major subsystems-the revenue cycle, the
expenditure cycle, and the conversion cycle.
· Turnkey Systems – completely finished and tested
systems that are ready for implementation;
- Typically, general-purpose system(s)
customized to a specific industry.
- Turnkey systems are usually sold only as
compiled program modules, and users have
limited ability to customize such systems to
their specific needs.
1. What are the four levels of activity in the pyramid
representing the business organization? Distinguish
between horizontal and vertical flows of
information.
Operational, operations management,
middle management, and top management.
Horizontal flows support operation-level tasks. The
information is highly detailed about the day-to-day
operations. Vertical flows distribute summarized
information to manager at all levels, and this
information flows upward. Instructions, quotas, and
budgets also flow downward.
2. What is the relationship among data, information,
and an information system?
Data are facts that are collected in a ― “raw”
form and made meaningful through processes such as
sorting, aggregating, classifying, mathematically
manipulating, and summarizing. The meaningful data
is considered to be information.
3. Distinguish between AIS and MIS.
AISs process financial transactions and
certain nonfinancial transactions that directly affect
the processing financial transactions. The external
financial reporting documents of AIS are subject to
legal and professional standards. Consequently,
management and accountants have greater legal
responsibility for AIS applications that for MIS
applications. The MIS processes nonfinancial
transactions that are outside the scope of the AIS. MIS
applications expand the information set provided to
such areas as production sales, marketing, and
inventory management. MIS often draws from and
builds on data from AIS.
 11. What are the fundamental objectives of all IV. Cash disbursement
4. What are the three cycles of transaction information systems? V. Cash receipt
processing system? a) to support the stewardship function of G. Accounting
 Revenue Cycle management, I. Inventory control
 Expenditure Cycle b) to support the decision-making processes of II. Cost accounting
 Conversion Cycle managers, and III. Payroll
c) to support the day-to-day operations of the IV. Accounts payable
5. What is discretionary reporting? firm. V. Accounts receivable
VI. Billing
Reports used by management, which the 12. What does stewardship mean and what is its role VII. Fixed-asset accounting
company is not obliged by law, regulation, or contract in an information system? VIII. General ledger
to provide. These are often used for internal problem Stewardship is the responsibility of mgt. to H. Computer Service
solving issues rather than by external constituents. properly utilize the resources of the firm entrusted to I. Data processing
them. Info systems provide mgt. with reports to II. Systems development and maintenance
6. What are the characteristics of good or useful better manage the resources and also provide III. Database administration
information? responsibility reports by which mgt. may be
 Relevance evaluated. 14. Distinguish the roles of internal and external
 Accuracy auditors.
 Completeness 13. List 5 functional areas and their sub-functions. Internal auditors are responsible for in-
 Summarization house appraisal of the financial reporting system.
 Timeliness A. Materials Management Internal auditors are concerned with deterring and
I. Purchasing detecting fraud and for conducting EDP audits.
7. What rules govern data collection? II. Receiving External auditors are independent CPAs engaged by
 Relevance and efficiency. III. Stores the firm to attest to the completeness and accuracy
B. Production of the financial statements. External auditors work
8. What are the levels of data hierarchy? I. Production planning together with the internal auditors.
 Data attribute (field), II. Quality control
 Record III. Maintenance 15. What is the role of a database administrator?
 File C. Marketing The database administrator is responsible
 Database I. Advertising for the security and integrity of the database.
II. Market research
9. What are the three fundamental tasks of database III. Sales order processing 16. What is the role of the accounting function in an
management? D. Distribution organization?
 Storage I. Warehouse The accounting function manages the
 Retrieval II. Shipping financial information resource of the firm. In this
 Deletion E. Personnel regard, it plays two important roles in transaction
10. What is feedback and how is it useful in an I. Recruiting processing. First, accounting captures and records the
information system? II. Training financial effects of the firm’s transactions. These
Feedback is output that is sent back to the III. Benefits include events such as the movement of raw
system as a source of data. Feedback is useful IV. Counseling materials from the warehouse into production,
because it can be used to initiate or adjust the system F. Finance shipments of the finished products to customers, cash
processes. I. Portfolio management flows into the firm and deposits in the bank, the
II. Treasury acquisition of inventory, and the discharge of
III. Credit financial obligations. Second, the accounting function
distributes transaction information to operations
personnel to coordinate many of their key tasks.
Accounting activities that contribute directly to
business operations include inventory control, cost
accounting, payroll, accounts payable, accounts
receivable, billing, fixed asset accounting, and the
general ledger.
17. Distinguish between the centralized and
distributed approaches to organizing the IT function.
In a centralized data processing approach,
the computer services function is centrally located.
The databases are housed in one place where all of
the data processing occurs by one or more main
computers. All systems dev. and maintenance work
for the entire organization is performed by systems
professionals. End users wishing to have new systems
or features must submit a formal request to this
group and are usually prioritized and placed in a
queue. In a distributed data-processing approach, the
CPUs are spread out and control over data and
processing is at the information processing unit (IPU)
level. Thus, end users have more influence over the
systems development projects, which are typically
handled by systems professionals at the IPU level.
18. What is distributed data processing?
Data processing is organized around several
information processing units, which are distributed
throughout the organization and placed under the
control of end users. The central computer services
are eliminated or minimized.
19. What is an ERP system?
Enterprise Resource Planning (ERP) is an info
system model that enables an org to automate and
integrate its key business processes. ERP breaks down
traditional functional barriers by facilitating data
sharing, info flows, and the introduction of common
business practices among all organizational users.
20. What two roles are played by accountant with
respect to the information system?
The role of the accounting function is to
manage the financial information resources of the
firm. First, the accountants must capture and record
business events of a firm and their financial impact.
Secondly, the accounting function distributes
transaction information to decision makers and
operations personnel to help them coordinate their
many tasks. The accountants must also assign
accountability for each of these tasks.
21. Define the term attest function.
The attest function is performed by an
independent certified public accountant who
expresses an opinion about the fairness of a client-
firm’s financial statements.
22. Define the term financial services.
Financial services is defined as the products
and services offered by institutions like banks of
various kinds for the facilitation of various financial
transactions and other related activities in the world
of finance like loans, insurance, credit cards,
investment opportunities and money management as
well as providing information on the stock market and
other issues like market trends.
23. What is IT auditing?
IT auditing is part of a broader financial audit
in which the auditor attests to the integrity of
elements of the organization’s information system
that have become complicated by computer
technology.
24. Distinguish between conceptual and physical
systems.
The conceptual system must first be
determined. It specifies the nature of the information
required, how and when it is to be collected, and who
is the user. For each conceptual system, many
different physical configurations may be possible. The
physical system is the medium and method used to
collect the data, process it, and disseminate the
resulting information.
25 What is the role of the audit committee of the
board of directors?
Audit committee is responsible for selecting
and engaging an independent auditor, for ensuring
that an annual audit is conducted, for reviewing the
audit report, and for ensuring that deficiencies are
addressed.
26. Who initiates fraud audit within the
organization?
Internal auditors perform a wide range of
activities on behalf of the organization, including
conducting financial statement audits, examining an
operation's compliance with organizational policies,
reviewing the organization's compliance with legal
obligations, evaluating operational efficiency,
detecting and pursuing fraud within the firm, and
conducting IT audits.
27. When can external auditors rely on the work
performed by internal auditors?
The independence and competence of the
internal audit staff determine the extent to which
external auditors may cooperate with and rely on
work that internal auditors perform. Some internal
audit departments report directly to the controller.
Under this arrangement, the internal auditor’s
independence is compromised, and the professional
standards prohibit the external auditor from relying
on evidence that the internal auditors provide. In
contrast, external auditors can rely in part on
evidence gathered by internal audit departments that
are organizationally independent and that report to
the board of directors’ audit committee. A truly
independent internal audit staff adds value to the
audit process. Internal auditors can gather audit
evidence throughout a fiscal period; external auditors
can then use this evidence at year-end to conduct
more efficient, less disruptive, and less costly audits
of the organization’s financial statements.
28. Name the tasks that auditors perform to gather
evidence.
Evidence is collected by performing tests of
controls, which establish whether internal controls
are functioning properly, and substantive tests, which
determine whether accounting databases fairly
reflect the org’s transactions and account balances.
 Observe the counting of physical inventory.
 Compare receiving reports, supplier
invoices, purchase orders, and journal
entries for the period and the beginning of
the next period.
 Review purchase agreements, insurance
policies, and related documents
 Review entity’s aging of accounts and
evaluate the adequacy of the allowance for
uncorrectable accounts
 Obtain information from entity lawyers
about the status of litigation and estimates
of potential loss.
29. What characteristic conceptually distinguishes
internal and external auditing?
The feature that most clearly distinguishes
the internal and external auditing is their respective
constituencies. External auditors represent third
party outsiders such as stockholders, creditors, and
government agencies, whereas internal auditors
represent the interests of management such as
performing a wide range of activities on behalf of the
org, including conducting financial statement audits,
examining an operation’s compliance with org’l
policies, reviewing the organization’s compliance
with legal obligations, evaluating operational
efficiency, detecting and pursuing fraud within the
firm, and conducting IT audits.
30. What is the role of network administration?
The main role/tasks associated with network
administration include:
(1) Design, installation and evaluation of the network
(2) Execution and admin of regular backups (3)
Creation of precise technical documentation, such as
network diagrams, network cabling documents, etc.
(4) Provision for precise authentication to access
network resources (5) Provision for troubleshooting
assistance(6) Administration of network security,
including intrusion detection.
31. What is cloud computing?
Cloud computing is the use of various
services, such as software development platforms,
servers, storage and software, over the internet,
often referred to as the "cloud". It may also be
defined as a location-independent computing variant
of IT outsourcing whereby shared data centers deliver
hosted IT services over the Internet.
It is common to categorize cloud computing
services as infrastructure as a service (IaaS), platform
as a service (PaaS) or software as a service (SaaS).
32. Name the two ways in which organizations
acquire information systems.
● They develop customized systems in-house through
formal systems development activities. Many orgs
require systems that are highly tuned to their unique
operations. These firms design their own info systems
through in-house systems development activities.
● They purchase commercial systems from software
vendors. Numerous commercial vendors offer high-
quality, general-purpose information systems. These
vendors primarily serve organizations with generic
information needs. Typically, their client firms have
business practices so standardized that they can
purchase predesigned information systems and
employ them with little or no modifications
33. Why are custom systems more expensive than
commercial systems?
Custom systems are more expensive that
commercial packages because the organization must
absorb all the development costs, which commercial
vendors are able to spread across the entire user
population. For example, companies in competitive,
fast-moving industries such as telecommunications,
pharmaceuticals, and financial services invest in
hundreds of millions of dollars in custom software.
When information needs are unique, however, and
no commercial package adequately meets them,
custom software is often the only option.
34. What types of companies are potential
customers for commercial software?
Commercial software is available for both
general accounting use and for industry-specific
applications, such as medical billing. Both small and
large firms that have standardized information needs
are potential customers for commercial software.
35. Briefly explain accounting independence.
Accounting independence means that the
process of accounting for transactions having
financial impact should be handled separately from
the process that physically carries out that
transaction. In other words, accounting activities
must be separate and independent of the functional
areas that manage and maintain custody of physical
resources.
Accounting only tracks and monitors these
transactions by keeping a record of the transaction. It
does not actually physically deal with the said activity.
This ensures that the information generated by the
accounting system is reliable.
36. Why do system designers need to know anything
about auditing?
System designers should not only have the
skills in computer programming. They should have
also the knowledge in terms of auditing so that the
information system will not violate accounting
principles, fairness of company’s financial statements
will be achieved, lack of necessary controls will be
avoided and large system failures as well as computer
frauds will be prevented.

1. Discuss the difference between internal and
external users of information and their needs and
demands on an information system. Historically,
which type of user has the firm catered to most?
The reporting requirements of external
users such as lending institutions, the IRS, the SEC,
and the stockholders are subject to stringent
reporting standards. Thus, firms have historically
placed a very high emphasis on the accuracy of the
AISs and the reports they produce for external
agencies since failure to provide accurate and timely
information carries heavy penalties. Internal users,
such as managers, also need vital information to
make good decisions. Firms are beginning to realize
that needs of these internal users are also very
important to efficiently and effectively operate and
plan for the future.
2. Comment on the level of detail necessary for
operations management, middle management, and
stockholders.
The level of detail necessary for the
stockholders is highly aggregated and typically
follows the format prescribed by the SEC and GAAP.
Much more detailed information is necessary for
middle management to plan and control operations.
Highly detailed information is needed at the
operations management level in order to run the day
-to-day business processes and operations.
3. Distinguish between financial and nonfinancial
transactions. Give three examples of it.
Financial transactions affect the accounts in
the balance sheet in some manner. Three examples
are:
I. Use of equipment-depreciation,
II. Payment of a bond payable, and
III. Receipt of cash from a customer for a sale
previously made on account.
Nonfinancial transactions include business
events that do not impact the financial statements.
Three examples are:
I. A book checked out by a student in a school library,
II. The recording of a customer complaint via a toll-
free hotline, and
III. Status reports of research and development
projects.
4. An information system must meet three
fundamental objectives. Discuss why these
objectives cannot effectively be met by a common
set of information.
Every organization needs an information
system to plan short- and long-term goals. An
information system has three unique objectives, each
of which requires a different set to be met.
5.) Do you think transaction processing systems
differ significantly between service and
manufacturing industries? Are they equally
important to both sectors?
The transaction processing systems only
differ in the types of data elements collected. Both
service and manufacturing industries need to collect
data regarding business processes. While a
manufacturing firm may collect data regarding the
amount of scrap generated at a particular
workstation, a service firm, such as a public
accounting firm, needs to collect data regarding the
number of hours spent by staff to verify cash
balances. Transaction processing systems are equally
important to both types of industries.
6. Discuss the difference between the financial
reporting system and general ledger system.
The General Ledger System (GLS)
summarizes all of the transaction cycle activity and
general journal entries. The GLS provides most of the
input in the Financial Reporting System (FRS). The FRS
communicates information from the GLS to the
external users. The FRS often collects additional
pieces of information other than that which is found
in the GLS. An example of this is when a pending
lawsuit is likely to be settled in the next year. The GLS
would not have this information.
7. Examine Figure 1-4 and discuss where and how
problems can arise that can cause the resulting
information to be bad or ineffective.
If the collected data are not accurate and/or
not correctly entered, then the resulting information
will not be accurate. Furthermore, if the data
processing system is not correctly processing the
information, then the resulting information will also
be incorrect. Also, if the database is not accurately
maintained over time, the resulting information will
also be inaccurate.
8. Discuss how the elements of efficiency,
effectiveness, and flexibility are crucial to the design
of an information system.
Firstly, efficiency is crucial to an accounting
information system. The cost of collecting and
producing information should not outweigh its
benefits. In addition, the applications should run in a
manner that places the least strain on the overall
system. An example of this is the printing of checks to
vendors which should not be done during the day
since it slows down the online sales order processing
system in a multitasking environment. In order for the
system to be effective, the appropriate data should
be processed, and the resulting information
disseminated to the appropriate users. An example of
this is the accounts receivable delinquent report
should be sent to the collection department in a
timely fashion, so that measures can be taken to
collect the funds. Flexibility, on the other hand, or the
ability to react to a change is very important,
especially in a Financial Reporting Standard where
reporting requirements and standards change
frequently.

9. Discuss what is meant by the statement, “The
accounting system is a conceptual flow of
information that represents physical personnel,
machinery, and flows of raw materials and cash
through the organization.”
This statement means that the accounting
system is a representation of the operations of the
firm. As machines operate, workers perform their
duties, raw materials are transferred into finished
goods and cash flows are exchanged between
suppliers and customers, the accounting system must
be continuously updated to accurately reflect these
actions. This conceptual flow is crucial because it
allows management to view in summary and in detail
the financial effects of these operations on the firm.
10. Discuss the importance of accounting
independence in accounting information systems.
Give an example where this concept is important
(use an example other than inventory control)
Accounting independence is important bec
the separation between the record-keeping functions
and the physical resources is crucial. This concept is
extremely important for cash receipts operations.
The person in charge of deposits of currency and
check receipts should not be allowed to reconcile the
sales records to the cash deposits and/or the bank
account. If these duties are not separated, then the
cash receipts clerk can steal money and cover it up
during the reconciliation process.
11. Discuss why it is crucial to internal auditors
report solely to the audit committee of the board of
directors and answer to no other group.
The internal auditors are responsible for
detecting and pursuing fraud within the firm. If
management-level employees are involved, the
internal auditors may fear losing their jobs if they
blow the whistle on such activities. Thus, the internal
auditors should report to the board of directors so
that they do not fear any repercussions of their
actions from top management.
12. Contrast centralized data processing with
distributed data processing. How do the roles of end
users differ between the two approaches?
In a centralized data-processing
environment, the computer services personnel are all
housed in one department where all of the systems
development and maintenance takes place. End users
must formally request any additions or
enhancements to the current system. In a distributed
data processing (DDP) system, the systems
professionals may still be housed together or they
may be located throughout the various segments of
the organization. End users gain more control over
their data and applications. DDP is becoming more
and more popular as networking computers is
becoming easier and more commonplace.
13. Discuss how conceptual and physical systems
differ and which functions are responsible for each
of these systems.
Conceptual system involves specifying the
criteria for identifying delinquent customers and the
info that needs to be reported. Accounting function is
the one responsible for this system. The accountant
determines the nature of the info required, its
sources, its destination, and accounting rules that
need to be applied. On the other hand, physical
system is the medium and method for capturing and
presenting the info, & IT function is responsible for it.
14. Why is an active board of directors’ audit
committee important to an organization?
Accountants, although providers of financial
information to both internal and external users, are
still the primary users of the AIS. The accountants
oversee the data collection, data processing, and
output of the AIS. Thus, as new AISs are developed by
system professionals, accountants’ need as seen from
the viewpoint of a user are very important. Thus, the
accountants guide the systems developers by
conveying their needs and constraints.
15. Do you agree with the statement, “The term IT
Auditor should be considered obsolete because it
implies a distinction between regular auditors and
auditors who examine computerized AIS”? Why or
why not?
Yes and No. Virtually all publicly traded firms
have computerized as well as most small & medium-
sized firms. Audit of non-computerized systems are
becoming rare. Thus, one may say that virtually at
auditors must deal with electronic processing of data.
However, certain auditing personnel, known as IT
auditors have special skills in dealing the
effectiveness of a client’s IT controls to establish their
degree of compliance with prescribed standards.
Because many of the modern organization’s internal
controls are computerized, the IT audit may be a large
portion of the over ‘processing’. Thus distinguishing
these auditors from auditors who do not have such
skills may still be appropriate.
16. Describe cloud computing and explain how it is
similar to obtaining a commodity product.
Cloud computing means that instead of all
the computer hardware and software you're using
sitting on your desktop, or somewhere inside your
company's network, it's provided for you as a service
by another company and accessed over the Internet,
usually in a completely seamless way. Exactly where
the hardware and software is located and how it all
works doesn't matter to you, the user—it's just
somewhere up in the nebulous "cloud" that the
Internet represents.
It is similar to obtaining a commodity
product in a way that the buyer enters into a contract
with the seller. When the demand exceeds the seller’s
capacity, it acquires additional capacity from data
centers in the cloud like how public utility companies
go to the national electric grid to tap into the
production of other electricity generators across the
country.
17. Why is it important to organizationally separate
the accounting function from other functions of the
organization?
Accounting function is in charge of record-
keeping of the day-to-day operations activities. The
task of separation of accounting information from all
other functions is important for an organization as it
helps in achieving the accounting independence. So
these record- keeping task must be separate from an
area that has custody over an asset. It has to remain
independent.
18. What is an external financial audit, and what are
the sources of audit evidence?
An external financial audit is an attestation
service carried out by an independent agency. It
evaluates the financial statements of an organization
and expresses an opinion regarding the correctness of
accounts. It also evaluates and provides compliance
to standard accounting practices. It provides
assurance to the stakeholders of the organization
pertaining to handling of its accounts. It is important
that the external audit is carried out independently
and objectively for the stakeholders to have
confidence in the auditor's report.
The sources of audit evidence are from
inspection of records or documents, inspection of
tangible assets, observation, inquiry, confirmation,
recalculation, performance & analytical procedures.
19. Why do firms outsource their IT functions?
Explain the options of traditional IT outsourcing and
cloud computing, and how they differ.
● To reduce cost, because outsourcing means saving
money. This is often due to lower labor costs or
advantageous tax system in the outsourcing location.
● To access skills that are unavailable locally. It is
because resources that are scarce at home can
sometimes be found in abundance elsewhere,
meaning you can easily reach them through
outsourcing.
● To better use internal resources and to accelerate
business processes.
● The purchase and maintenance of hardware,
Software, building and retaining IT personnel with
high technical skills etc. all puts an added burden on
the org. It diverts their focus away from their core
business area. It relieves them of the headache of
managing their IT functions themselves.
Traditional IT outsourcing - the org sells its IT
resources (hardware, software, and facilities) to a
third-party outsourcing vendor. The outsourcing org
then leases back IT services from the vendor for a
contract period of typically between 5 and 10 years.
Cloud computing - instead of all the computer
hardware & software you're using sitting on your
desktop, or somewhere inside your co's network, it's
provided for you as a service by another co. &
accessed over the Internet, usually in a completely
seamless way. Exactly where the hardware &
software is located and how it all works doesn't
matter to you, the user- it's just somewhere up in the
nebulous "cloud" that the Internet represents.
Difference between the two: In cloud
computing, their contracts are flexible and relatively
short-term. In contrast, traditional outsourcing
contracts tend to be fixed price, inflexible, and much
longer term.
1. Which of the following is NOT a purpose of the
transaction processing system?
a. managing and reporting on the status of
financial investments
b. converting economic events into financial
transactions
c. distributing essential information to
operation personnel to support their daily operations
d. recording financial transactions in the
accounting records
Justification: The TPS is central to the overall function
of the information system by converting economic
events into financial transactions, recording financial
transactions in the accounting records (journals and
ledgers), and distributing essential financial info to
operations personnel to support their daily ops.
- B & c captures the purpose of TPS - is to deal
with business events that occur frequently.
2. Which of the following are the objectives of the
data collection activity within the general model for
AIS?
a. relevant and redundant c. efficient and redundant
b. efficient and relevant d. efficient and objective
Justification: These are the two rules that govern the
design of data collection procedures. Collection of
data must be cost effective and important: AIS is used
to provide accurate and timely info to the users.
3. Which of the following is NOT a database
management task?
a. retrieval c. summarization
b. storage d. deletion
Justification: Database management involves three
fundamental tasks: storage, retrieval, and deletion.
Summarization is part of the characteristics for useful
information.
4. Which of the following is NOT a financial
transaction?
a. update valid vendor file c. cash receipts
b. purchase of products d. sale of inventory
Justification: Updating valid vendor file does not
affect the assets & equities of the org, is not reflected
in the accounts, nor is it measured in monetary terms
which is why it isn’t a financial transaction.
- Choices B to D are both financial transactions
because it affects the assets and equities of
the organization and is measured using
monetary terms.

5. The following are subsystems of accounting
information system, EXCEPT the
a. transaction processing system
b. general ledger/financial reporting system
c. human resources system
d. management reporting system
Justification: The AIS has only 3 major subsystems
which are transaction processing system, general
ledger/financial reporting system, and management
reporting system.
- HR system is one of the subsystems of
Management Information Systems.
6. Which of the following is NOT a characteristic of
effective information?
a. relevance c. accuracy
b. precision d. summarization
Justification: There are 5 characteristics of effective
communication and these are relevance, accuracy,
summarization, timeliness and completeness.
- Precision (accuracy), a degree through which
an instrument continues to repeat the
measurement at a particular period of time.
7. When viewed from the highest to the most
elemental level, the data hierarchy is
a. file, record, attribute d. table, record, key
b. attribute, record, file e. key, record, table
c. record, attribute, key
Justification: attribute - most elemental piece of
potentially useful data in the database, record-
complete set of attributes for a single occurrence
within an entity class, and file- complete set of
records of an identical class.
8. Which of the following is least likely to be used as
evidence by an external auditor?
a. substantive tests result
b. work performed by internal auditors who
organizationally report to the controller
c. tests of control results
d. work performed by internal auditors who report to
the audit committee of the BOD
Justification: 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. Some internal
audit departments report directly to the controller.
Under this arrangement, the internal auditor’s
independence is compromised, and the external
auditor is prohibited by the professional standards
from relying on evidence provided by them.
- This is because internal audit should report
to the audit committee who directly reports
to the BOD.
9. Which of the following is NOT an objective of all
information systems?
a. support for the stewardship function of
management
b. support for management decision making
c. support for the day-to-day operations of the
management
d. all of the above are objective
Justification: The choices, a, b, and c, are
fundamental objectives which are common to all
systems including the accounting information system.
- The objective of the info system is to support
day-to-day operation of the org, to support
the stewardship function of the mgt. and to
support the mgt. decision making process.
10. Which of the following best describes the
activities of the materials management function?
a. purchasing, receiving, and inventory control
b. purchasing, receiving and storage
c. receiving sales, distribution, and purchasing
d. receiving, storage, purchasing, and accounts
payable
Justification: The objective of material mgt. is to plan
and control the materials inventory of the company.
As mentioned, it has three act. which the first one is
purchasing. It is responsible for ordering inventory
from vendors when inventory levels fall to their
reorder points. The second one is receiving wherein
it is the task of accepting the inventory previously
ordered. Lastly, storage which takes physical custody
of the inventory received and releases these
resources into the production process as needed.
11. Which of the following best describes the
activities of the production function?
a. maintenance, inventory control, and production
planning
b. quality control, production planning,
manufacturing, and payroll
c. maintenance, production planning, storage, and
quality control
d. production planning, quality control,
manufacturing, and maintenance
e. manufacturing, quality control, and maintenance
Justification: Production function occurs in the
conversion cycle in which raw materials, labor and
plant assets are used to create finished products.
- Production support activities ensure that
primary manufacturing activities operate
efficiently and effectively. These include,
but are not limited to, the following types
of activities: Production planning, quality
control and maintenance
-
12. Which of the following best describes the
activities of the accounting function?
a. inventory control, cash receipts, accounts payable,
cash disbursements, and payroll
b. fixed assets, accounts payable, cash
disbursements, and cost accounting
c. purchasing, cash receipts, accounts payable, cash
disbursements, and payroll
d. inventory control, accounts payable, fixed assets,
and payroll e. inventory control, cost accounting,
accounts payable, cash disbursements, and payroll
Justification: Inventory control, accounts payable,
fixed assets, and payroll best describes the activities
of the accounting function because they contribute
directly to business operations.
- A talks about financial function while choices
B and D includes cash disbursement which is
also under financial function.
13. Which statement best describes cloud
computing?
a. cloud computing involves long-term contracts
b. cloud computing is location-independent
computing
c. cloud computing involves an organization selling its
IT resources to a vendor and leasing back IT
services from the vendor
d. cloud computing involves fixed price contracts
Justification: Cloud computing is defined as the
location-independent computing variant of IT
outsourcing whereby shared data centers deliver
hosted IT services over the internet. Thus, it is a
location-independent computing.
14. Which of the following statements is most
accurate?
a. ERP systems are commercial software packages
that are sometimes called turnkey systems
because they can be implemented by the user with
little or no modification
b. substantive tests provide evidence focused on the
system controls
c. public accounting firms that provide attest services
are not allowed under SOX to offer IT advisory
services
d. both small and large firms that have standardized
information needs are potential customers for
commercial software
e. external auditors may rely on the work of internal
auditors only if they report to the controller or the
CEO of the client company
Justification: Choice letter A is wrong since ERP
systems belong to custom systems; it is not a
commercial software packages. B is inaccurate
because substantive tests gives evidence for any
fraud or misstatements. C is also wrong for the fact
that there is no passage under SOX that prohibits the
public accounting firms that provide attest services to
offer IT advisory services. E is false for under this
arrangement, the external auditors are prohibited by
professional standards from relying on evidence
provided by the internal auditors.
- Small and large firms that have standardized
information requirements are a potential
customer for commercial software. Since
they are standardized, then they need little
to no changes in their accounting
information system and do not need a
complex system to operate.
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