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Test bank accounting information system by turner 09 chapter

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ACCOUNTING INFORMATION SYSTEMS
CONTROLS AND PROCESSES
TURNER / WEICKGENANNT
CHAPTER 9: Expenditures Processes and Controls – Purchases
TEST BANK - CHAPTER 9 - TRUE / FALSE
1. When the company is a vendor, goods flow into the company and cash is paid out.
2. Companies in the same line of business are not likely to have many differences in their
purchasing habits.
3. The purchasing process starts when the purchase invoice is submitted by the vendor.
4. A purchase order is essentially an internal document, one that does not go outside the
company, whereas a purchase requisition is an external document, which will be presented to
an entity outside the company.
5. A purchase requisition is essentially an internal document, one that does not go outside the
company, whereas a purchase order is an external document, which will be presented to an
entity outside the company.
6. The use of a blind purchase order forces the receiving clerk to perform an independent check
of the quantity and quality of the delivery.
7. A company is not obligated to pay for goods until 30 days after the goods are received.
8. Even though a company has an obligation to pay for goods as soon as the goods are received,

it is common to not record the actual liability until the invoice is received.
9. It is necessary for the purchasing department to set up the proper procedures to avoid
problems related to cutoff issues.
10. The accounts payable department keeps copies of purchase orders and receiving reports, that
will be compared to the related invoice, to be sure that the invoices represent goods that were
ordered and received.
11. The accounting department is responsible for implementing internal controls over each
business process.
12. Independent reconciliation of the accounts payable subsidiary ledger to the general ledger
control account will help to assure that all inventories has been properly recorded.
13. Independent reconciliation of the periodic inventory counts and the inventory ledger and the
general ledger will help to assure that inventory is being properly accounted for.
14. For a number of different reasons, a company may find it necessary to reject goods received
which will start the purchase returns process.


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15. The cash disbursement process must be designed to ensure that the company appropriately
records all accounts payable transactions.
16. Most companies conduct business transactions with checks so that a written record is
established for cash disbursements.
17. Copies of invoices should be filed in the account in alphabetic order by name of the vendors.
18. When an invoice is paid, it should be canceled to indicate that it has been paid.
19. When preparing the cash disbursement journals, it is important that the records have the
actual date of cash disbursement, as is shown on the check.
20. Cash should be periodically verified by comparing the balance in the check book with the
balance in the cash account in the general ledger.
21. Cash should be periodically verified by comparing the cash balance with the bank statement.
22. Only the purchasing department should authorize the processing of a cash disbursement
transaction.
23. The authorization of a cash disbursement occurs when the accounts payable department
matches the purchase order, receiving report, and the invoice, and then forwards the matched
documents to the cash disbursements department.
24. Designated members of management should be given the responsibility for authorizing the
actual payments and sign their signatures on the face of the check.
25. If the purchasing, receiving, accounts payable, and cash disbursements processes are
completed by the same individuals, the internal controls will be stronger because someone in
the company will have an overall view of company activities.
26. In order to institute an automated matching system, all of the relevant files must exist in the


same physical room.
27. When an automated matching system is used, all of the relevant files must be online (or in
databases). The system can then access the online purchase order and receiving files and
check the match of items, quantities, and prices.
28. A user who logs in to the computer-based accounting system to enter invoices should also
have access to the portion of the system that would allow her / him to order goods.
29. Computer logs should be maintained in order to have a complete record of who used the
system and the histories of that use. This computer log would allow monitoring and
identification of unauthorized accesses or uses.
30. When a company implements an evaluated receipt settlement results in the increase in the
strength of the internal controls.


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31. Because the evaluated receipts settlement process relies heavily on an IT system that can
quickly access online purchase-order files, a system slowdown could halt all receiving activity.
32. E-business and EDI have much different advantages and risks to the vendor than what exists
for the customer.
33. Redundancy is needed for servers, data, and networks.
34. It is likely that expenditure fraud and ethics violations could be eliminated by a strong, ethical
“tone at the top” along with encouragement of ethical behavior by all employees, and strong
internal controls.
35. Corporate governance policies and procedures must be in place to assure that funds are
expended only to the benefit the organization and its owners.
36. It is necessary that managers remember that they are stewards of funds expended by a
business - that the funds are not owned by the managers.
37. Strong corporate governance will prevent fraud, theft, and mismanagement within the
expenditure process.
ANSWERS TO TEST BANK – CHAPTER 9 – TRUE / FALSE:
1.
2.
3.
4.
5.
6.
7.
8.

F
F
F
F
T
T
F
T

9.
10.
11.
12.
13.
14.
15.
16.

T
T
F
F
T
T
F
T

17.
18.
19.
20.
21.
22.
23.
24.

F
T
T
F
T
F
T
T

25.
26.
27.
28.
29.
30.
31.
32.

F
F
T
F
T
F
T
F

33.
34.
35.
36.
37.

T
F
T
T
F

TEST BANK - CHAPTER 9 - MULTIPLE CHOICE
38. The policies and procedures that employees following in completing the purchase of goods or
materials, capturing vendor data and purchase quantities, and routing the resulting purchasing
documents to the proper departments within the company are called:
A. Systems
B. Processes
C. Activities
D. Requisitions
39. The information from a purchase must flow into the purchase recording systems, the accounts
payable and cash disbursement systems, and the inventory tracking systems. In an IT
accounting system, these recording and processing systems are called:
A. General Ledger Systems
B. Integrated Accounting Systems
C. Journal Application Systems
D. Transaction Processing Systems


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40. The
A.
B.
C.
D.

acquisition of materials and supplies and the related cash disbursements is referred to as:
The Procurement Process
Systems and Control Process
Expenditure and Return Process
Conversion Process

41. Which of the following would be referred to as a common carrier?
A. Taxi-cab
B. Trucking company
C. City bus
D. Fire department vehicle
42. Common expenditure processes would include all of the following, except:
A. Preparation of a purchase requisition
B. Reception of the goods or services
C. Recording the liability
D. Payment received on account
43. The textbook referred to the three primary categories of process in the typical purchasing
system. Which of the following in not one of those categories?
A. Purchase Processes
B. Cash Disbursement Processes
C. Receiving Processes
D. Purchase Return Processes
44. Each category of processes in the typical purchasing system would include controls and risks.
For each of the categories, the goal of the internal controls system is to reduce specific types of
business risks. Which of the following is not one of those risks?
A. Recording invalid transactions.
B. Recording transactions at the wrong amounts.
C. Omitting actual transactions from the accounting records.
D. Transactions properly accumulated or transferred to the correct accounting records.
45. This form is prepared to document the need to make a purchase and requests that the specific
items and quantities be purchased.
A. Purchase order
B. Purchase requisition
C. Purchase invoice
D. Purchase journal
46. This form is issued by the buyer, and presented to the seller, to indicate the details for products
or services that the seller will provide to the buyer. Information included on this form would be:
products, quantities, and agreed-upon prices.
A. Purchase order
B. Purchase requisition
C. Purchase invoice
D. Purchase journal


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47. A record keeping tool used to record purchases in a manual accounting system. This “tool”
would consist of recording all of the purchased orders issued to vendors in a chronological
order.
A. Purchase order
B. Purchase requisition
C. Purchase invoice
D. Purchase journal
48. There are different ways to issue a purchase order to a vendor. Which of the following is not
one of the ways?
A. Hard copy via fax or mail
B. Hard copy by hand
C. Electronically via e-mail
D. Directly through the computer network
49. When purchased goods are received, which of the following tasks should be completed in the
receiving area?
A. An inspection of the goods - quantity counted and condition assessed.
B. Documenting the details of the receipt, before the carrier leaves.
C. Match the purchase order, the receiving report, and the purchase invoice to be sure that
they agree.
D. Preparation of a receiving report detailing the contents and condition of the goods.
50. This document, prepared and maintained by the receiving department, is a sequential listing of
all receipts.
A. Receiving report
B. Packing slip
C. Bill of lading
D. Receiving log
51. This document, prepared by the purchasing department, for use by the receiving department, is
copy of the purchase order that eliminates all data about the price and quantity of the items
ordered.
A. Packing slip
B. Blind purchase order
C. Empty purchase order
D. Receiving report
52. This document, prepared by the vendor, provides details of the items included in the delivery;
and is normally signed by the receiving clerk as verification of receipt.
A. Packing slip
B. Receiving report
C. Bill of lading
D. Purchase order


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53. This document, prepared by the vendor, is intended to show the quantities and descriptions of
items included in the shipment.
A. Packing slip
B. Sales invoice
C. Bill of lading
D. Purchase order
54. When goods are received at the end of the accounting period, and the invoice is not received
until after the start of the following period, a problem may arise as to when to record the
liability. This is referred to as a(n):
A. Obligation referral
B. Cutoff issue
C. Liability deferral
D. Channel stuffing
55. The
A.
B.
C.
D.

date that is the end of the accounting period is referred to as the:
Fiscal date
Change off
Accounting cut
Cutoff

56. The
A.
B.
C.
D.

accounting record includes the details of amounts owed to each vendor is called the:
Accounts payable subsidiary ledger
Purchases journal
Accounts receivable subsidiary ledger
Receiving log

57. The internal control activities within the purchasing process, related to authorization of
transactions, would include which of the following?
A. The accounting duties related to requisitioning, ordering, and receiving goods should be
performed by different individuals.
B. The custody of inventory and the recording of inventory transactions are required to be
maintained.
C. Specific individuals are to be authoritative responsibility for preparing purchase requisitions
and purchase orders which would include which items to purchase, how many items, and
which vendor.
D. Periodic physical inventory counts are to be reconciled with the inventory ledger and
general ledger.
58. Internal control activities within the purchasing process, identified as segregation of duties,
would include all of the following, except:
A. Responsibility for authorization, custody, and record keeping are to be assigned to different
individuals.
B. Duties related to requisitioning, ordering, purchase approval, receiving, inventory control,
accounts payable, and general accounting are to be delegated to separate departments or
individuals.
C. Complete separation of inventory custody from inventory accounting.
D. Purchasing records and programs must be protected from unauthorized access.


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59. Internal control activities within the purchasing process, identified as adequate records and
documents, would include which of the following?
A. Files are to be maintained for purchase requisitions, purchase orders, receiving reports,
and invoices.
B. Periodic physical inventory counts are to be reconciled with the inventory ledger.
C. Companies are to implement controls where the corresponding benefit exceeds the related
cost.
D. Avoid having the same individuals who handle the inventory also have access to the related
accounting records.
60. A company should study risks common to it system prior to deciding the mix of controls needed.
High-risk characteristics that might justify the need for extensive internal controls include all of
the following, except:
A. Goods received are especially difficult to differentiate, count, or inspect.
B. High volumes of goods are often received, or the goods are of high value.
C. Receiving and / or record keeping are performed at one centralized location.
D. Changes in price or vendors are frequent.
61. The internal control process of having the receiving reports prepared on pre-numbered forms so
that the sequence of receipts can be reviewed for proper recording will help to minimize the
related risk of:
A. Invalid vendors
B. Omitted purchases
C. Fictitious purchases
D. Timing issues
62. The internal control process of separating the custody of internal control from the accounts
payable record keeping will help to minimize the risk of:
A. Fictitious purchases
B. Invalid vendors
C. Duplicate purchases
D. Incorrect amounts
63. The internal control process of requiring physical controls in the warehouse and receiving areas,
in order to limit access to inventory items, will help to minimize the risk of:
A. Incorrect posting
B. Omitted purchases
C. Invalid vendors
D. Stolen goods
64. The internal control process that requires purchase records be matched and verified for item
descriptions, quantities, dates, authorized prices, and mathematical accuracy, will help to
minimize the risk of:
A. Stolen goods
B. Omitted transactions
C. Invalid purchases
D. Incorrect accumulation


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65. A company may reject goods received due to a number of reasons. The process related to this
is referred to as:
A. Purchases
B. Purchase Returns
C. Accounts Payable
D. Receiving
66. Goods received are unacceptable due to many different situations. Which of the following is not
one of those situations?
A. Damage or defects
B. Changes in the company needs regarding future sales or production
C. Errors in the type of goods delivered or ordered
D. Timing issues
67. The document that identifies the items being returned, along with the relevant information
regarding the vendor, quantity and price, is called:
A. Credit memo
B. Receiving report
C. Purchase requisition
D. Debit memo
68. Internal controls related to the purchase returns would include all of the following, except:
A. The accounts payable employee who prepares the debit memo should also be responsible
for handling the inventory and approving the return.
B. Special authorization should be required to officially reject and return the items.
C. Debit memos should be issued on pre-numbered forms in numerical sequence.
D. Accounts payable records and data files should be restricted to those who are specifically
authorized to approve or record the related purchase return.
69. The internal control process that requires the approval of the purchase return transaction take
place before the preparation of the debit memo will help to minimize the risk of:
A. Fictitious returns
B. Omitted returns
C. Invalid returns
D. Wrong vendor
70. The internal control process that requires the segregation of the authorization of purchase
returns and the accounts payable record keeping and the custody of inventory, will help to
minimize the risk of:
A. Incorrect amounts
B. Fictitious returns
C. Timing issues
D. Duplicate returns


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71. The internal control process that requires vendor statements to be reviewed monthly and
reconciled with accounts payable records, will help to minimize the risk of:
A. Invalid returns
B. Stolen goods
C. Wrong account numbers
D. Omitted returns
72. The internal control process that requires purchase return records be matched with the original
purchase documentation and verified for item descriptions, quantities, dates, and prices, will
help to minimize the risk of:
A. Incorrect amounts
B. Omitted returns
C. Fictitious returns
D. Invalid vendors
73. The careful oversight of cash balances, forecasted cash payments, and forecasted cash receipts
to insure that adequate cash balances exist to meet obligations is called:
A. Cash disbursements
B. Cash management
C. Independent checks
D. Accounts payable management
74. Which department is generally responsible for the notification of the need to make cash
disbursements and the maintenance of vendor accounts?
A. Accounting department
B. Purchasing department
C. Accounts payable department
D. Shipping department
75. It is important that documentation support or agree with an invoice before payment is approved
and a check is issued. Which documents should be matched to make sure that the invoice
received relates to a valid order that was placed and that the goods were received?
A. Purchase requisition, purchase order, and receiving report.
B. Purchase order, receiving log, and invoice.
C. Purchase requisition, receiving report, and statement.
D. Purchase order, receiving report, and invoice.
76. It is necessary for a company to maintain good control over their accounts payable and paying
by the due date, for all of the following reasons, except:
A. Avoid late payment fees
B. Maintain relationships with customers
C. To take advantage of discounts for early payment
D. To stay on good terms with its vendors


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77. A tear-off part of a check that has a simple explanation of the reasons for the payment is called:
A. Remittance advice
B. Disbursement journal
C. Transaction description
D. Cash register
78. When a payment has been made, the cash disbursements clerk will clearly mark the invoice with
information pertaining to the date and the check number used to satisfy the obligation. This
process is called:
A. Marking the invoice
B. Retiring the invoice
C. Cancelling the invoice
D. Destroying the invoice
79. A chronological listing of all payments is referred to as a(n):
A. Remittance Advice
B. Cash Disbursements Journal
C. Accounts Payable Ledger
D. Purchases Journal
80. This control requires the approval and signature of two authorized persons, which reduces the
risk of significant fraud or error.
A. Double Remittance
B. Duo-Authorization
C. Bi-Sign
D. Dual Signature
81. The
A.
B.
C.
D.

security of assets and documents would include all of the following, except:
Access to cash should be limited to the authorized check signers.
Physical controls should be in place where the cash is retained and disbursed.
Access to records should be limited to persons with the authority to sign checks.
The company’s stock of unused checks should be protected and controlled.

82. The internal control process that requires the approval of cash disbursement transaction to take
place prior to the preparation of the check will help to minimize the risk of:
A. Fictitious payments
B. Invalid payments
C. Timing issues
D. Stolen cash
83. The internal control process that requires that the bank reconciliation be performed monthly will
help to minimize the risk of:
A. Invalid payments
B. Invalid vendors
C. Incorrect posting
D. Duplicate payments


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84. A computer software technique in which the computer software matches an invoice to its related
purchase order and receiving report is called a(n):
A. Three way matching
B. Document matching
C. Disbursement approval
D. Automated matching
85. Advantages of an automated system include all of the following, except:
A. Reduce time, costs, errors, and duplicate payments.
B. Increased cost of the system.
C. Provides management more timely information to forecast future cash outflows for
payment of invoices.
D. Summarized detailed transactions into summary amounts that are posted to the general
ledger accounts.
86. The security and confidentiality risks of computer based matching would include:
A. Unauthorized access to the system’s ordering and matching functions would allow the
insertion of fictitious vendors and / or invoices.
B. Errors in system logic can cause systematic and repetitive errors in matching.
C. The criteria used to identify duplicate payments may be too tightly defined and will
overlook duplicate payments.
D. System breakdowns or interruptions can stop or slow the processing of invoices and
payments.
87. This type of system matching takes place without invoices. The receipt of goods is carefully
evaluated and, if it matches the purchase order, settlement of the obligation occurs through the
system.
A. Business Process Engineering
B. Controlled Access Invoicing
C. Evaluated Receipt Settlement
D. Double Matching System
88. In order to help safeguard the security and confidentiality in an electronic business environment,
a company should implement controls such as user ID, password, log-in procedures, access
levels, and authority tables in order to reduce the risk of:
A. Unauthorized access
B. Incomplete audit trail
C. Virus and worm attacks
D. Repudiation of purchase transactions
89. In order to help safeguard the processing integrity in an electronic business environment, a
company should implement input controls such as field check, validity check, limit check,
reasonableness check, and computer logs in order to reduce the risk of:
A. Worm attacks
B. Hackers
C. Unauthorized access
D. Invalid data entry


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90. In order to help safeguard the availability in an electronic business environment, a company
should implement controls such as business continuity planning, backup data and systems, in
order to reduce the risk of:
A. Unauthorized access
B. System failures
C. Repudiation of purchase transactions
D. Invalid data entry
91. The examination of the system to determine the adequacy of security measures and to identify
security deficiencies is called:
A. Intrusion detection
B. Penetration testing
C. Vulnerability testing
D. Integrity testing
92. Intentionally attempting to circumvent IT system access controls to determine whether there
are weaknesses in any controls is called:
A. Penetration testing
B. Intrusion detection
C. Integrity testing
D. Vulnerability testing
93. This type of software alerts the organization to hacking or other unauthorized use of the system
or net work.
A. Penetration testing
B. Intrusion detection
C. Integrity testing
D. Vulnerability testing
94. One of the newest technologies related to payables is one where invoices are exchanged and
payments are made via the internet. The name given to this process is:
A. Random Array of Invoice and Disbursements (RAID)
B. Electronic Invoice Payment Procedures (EIPP)
C. Electronic Invoice Presentment and Payment (EIPP)
D. Routing Application Invoice Delivery (RAID)
95. Credit cards given to employees by the organization in order for the employees to make
designated purchases are called:
A. Employee Debit Cards
B. Organization Purchase Cards
C. Expenditure Cards
D. Procurement Cards
96. Which of the following groups has an ethical obligation to establish the proper tone at the top,
strong internal controls, and high ethical standards?
A. Stockholders
B. Board of Directors and Management
C. Employees
D. Audit Committee


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97. There are four primary functions of corporate governance. Which of the following is NOT one of
those functions?
A. Availability
B. Management Oversight
C. Internal Controls and Compliance
D. Financial Stewardship
ANSWERS TO TEST BANK – CHAPTER 9 – MULTIPLE CHOICE:
38.
39.
40.
41.
42.
43.
44.
45.
46.
47.
48.
49.

B
D
A
B
D
C
D
B
A
D
B
C

50.
51.
52.
53.
54.
55.
56.
57.
58.
59.
60.
61.

D
B
C
A
B
D
A
C
D
A
D
B

62.
63.
64.
65.
66.
67.
68.
69.
70.
71.
72.
73.

A
D
C
B
B
D
A
C
B
D
A
B

74.
75.
76.
77.
78.
79.
80.
81.
82.
83.
84.
85.

C
D
B
A
C
B
D
C
B
A
D
B

86.
87.
88.
89.
90.
91.
92.
93.
94.
95.
96.
97.

A
C
A
D
B
C
A
B
C
D
B
A

TEST BANK – CHAPTER 9 – END OF CHAPTER QUESTIONS:
98. Within the purchases processes, which of the following is the first document prepared and
thereby the one that triggers the remaining purchasing processes?
A. The invoice
B. The receiving report
C. The purchase order
D. The purchase requisition
99. Personnel who work in the receiving area should completed all of the following processes,
except:
A. Counting the goods received
B. Inspecting goods received for damage
C. Preparing a receiving report
D. Preparing an invoice
100. Which of the given departments will immediately adjust the vendor account for each purchase
transaction so that the company will know the correct amount owed to the vendor?
A. Purchasing
B. Receiving
C. Accounts Payable
D. Shipping


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101. One
A.
B.
C.
D.

of the most critical controls to prevent theft of inventory purchased is to:
Require authorization of the purchase requisition.
Segregate inventory custody from inventory record keeping.
Compare the purchase order, receiving report, and invoice.
Segregate the authorization of purchases from the inventory record keeping.

102. Internal control is strengthened by the use of a blind purchase order, upon which the quantity
of goods ordered is intentionally left blank. This blind copy is used in which department?
A. The department that initiated the purchase request.
B. The receiving department.
C. The purchasing department.
D. The accounts payable department.
103. Which of the following questions would most likely be included in an internal control
questionnaire concerning the completeness of purchasing transactions?
A. Is an authorized purchase order required before the receiving department can accept a
shipment or the accounts payable department can record a voucher?
B. Are prenumbered purchase requisitions used and are they subsequently matched with
vendor invoices?
C. Is there a regular reconciliation of the inventory records with the file of unpaid vouchers?
D. Are prenumbered purchase orders, receiving reports, and vouchers used, and are the
entire sequences accounted for?
104. Which of the following controls is not normally performed in the accounts payable department?
A. The vendor’s invoice is matched with the related receiving report.
B. Vendor invoices are approved for payment.
C. Asset and expense accounts to be recorded are assigned.
D. Unused purchase orders and receiving reports are accounted for.
105. In a
A.
B.
C.
D.

system of proper internal controls, the same employee should not be allowed to:
Sign checks and cancel the supporting voucher package.
Receive goods and prepare the related receiving report.
Prepare voucher packages and sign checks.
Initiate purchase requisitions and inspect goods received.

106. The
A.
B.
C.
D.

document prepared when purchased items are returned is a(n):
Debit memo
Invoice
Receiving report
Shipping notice

107. Within cash disbursements, all of the following should be true before a check is prepared,
except that:
A. The purchase order, receiving report, and invoice have been matched.
B. The purchased goods have been used.
C. Sufficient cash is available.
D. The invoice discount date or due date is imminent.


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108. A manager suspects that certain employees are ordering merchandise for themselves over the
Internet without recording the purchase or receipt of the merchandise. When vendors’ invoices
arrive, one of the employees approves the invoices for payment. After the invoices are paid, the
employee destroys the invoices and related vouchers. To trace whether this is actually
happening, it would be best to begin tracing from the:
A. Cash disbursements.
B. Approved vouchers.
C. Receiving reports.
D. Vendors’ invoices.
109. Within accounts payable, to ensure that each voucher is submitted and paid only once, each
invoice approved to be paid should be:
A. Supported by a receiving report.
B. Stamped “paid” by the check signer.
C. Prenumbered and accounted for.
D. Approved for authorized purchases.
110. For proper segregation of duties in cash disbursements, the person who signs checks also:
A. Reviews the monthly bank reconciliation.
B. Returns the checks to accounts payable.
C. Is denied access to the supporting documents.
D. Is responsible for mailing the checks.
111. Which of the following internal controls would help prevent overpayment to a vendor or
duplicate payment to a vendor?
A. Review and cancellation of supporting documents after issuing payment.
B. Requiring the check signer to mail the payment to the vendor
C. Review of the accounts where the expenditure transaction has been recorded
D. Approving the purchase before the goods are ordered from the vendor
112. Which of the following is not an independent verification related to cash disbursements?
A. The cash disbursements journal is reconciled to the general ledger.
B. The stock of unused checks should be adequately secured and controlled.
C. The bank statement is reconciled on a monthly basis.
D. The accounts payable subsidiary ledger is reconciled to the general ledger.
113. Which of the following IT systems is designed to avoid the document matching process and is
an “invoiceless” system?
A. Computer-based matching system
B. Electronic data interchange
C. Evaluated receipt settlement
D. Microsoft Dynamics GP®
114. Input controls such as field check, validity check, limit check, and reasonableness check are
useful in IT systems of purchase to lessen which of the following risks?
A. Unauthorized access
B. Invalid data entered by vendors
C. Repudiation of purchase transactions
D. Virus and worm attacks


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115. Which of the following is most likely to be effective in deterring fraud by upper level managers?
A. Internal controls
B. An enforced code of ethics
C. Matching documents prior to payment
D. Segregating custody of inventory from inventory record keeping
ANSWERS TO TEST BANK – CHAPTER 9 – END OF CHAPTER QUESTIONS
98.
99.
100.
101.

D
D
C
B

102.
103.
104.
105.

B
D
D
C

106.
107.
108.
109.

A
B
A
B

110.
111.
112.
113.

B
A
B
C

114. B
115. B

TEST BANK – CHAPTER 9 – SHORT ANSWER QUESTIONS
116. Name the first document that should be prepared when a production employee recognizes
that the quantity of goods on hand is insufficient to meet customer demand.
Answer: Purchase requisition.
117. How does the maintenance of a receiving log enhance internal controls?
Answer: A receiving log is a sequential listing of all goods received. It serves as an audit trail and
allows the physical goods received to be matched against other documentation to ensure that all
goods are received.
118. Why should a receiving clerk be denied access to information on a purchase order?
Answer: This practice is called a “blind PO” and the advantage is that it forces a physical count of
goods received. A clerk cannot complete the “quantity received” field of a receiving report until
the goods have been counted. If the PO contained quantities ordered, the clerk could assume
that the quantity received is equal to quantity purchased and therefore, skip the physical count.
However, conducting the physical count is a much better practice and the blind PO serves as a
control to force such a count.
119. Under what circumstances would it be necessary to manually update accounts payable prior to
the receipt of a vendor’s invoice?
Answer: When the receipt of goods occurs at the end of a period, but the invoice is not received
until the next period, the liability should be recorded in the first period even though the invoice
has not yet been received.
120. Which department is responsible for making sure that payments are made in time to take
advantage of vendor discounts?
Answer: It is the responsibility of accounts payable.
121. Why would some checks need to include two signatures?
Answer: Large checks over a specified amount may require two signatures. Large checks entail
more risk for the company and the dual signature lessens risks.


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122. During the process of reconciling the bank account, why is it necessary to review the dates,
payees, and signatures on the canceled checks?
Answer: Reviewing dates, payees, and signatures on cancelled checks may help uncover unusual
events. These unusual events can then be checked to make sure that they are not part of a fraud
scheme.
123. What specifically does a cash disbursements clerk do when he or she “cancels” an invoice? How
does this compare to the procedures used when computer-based matching exists.
Answer: To cancel an invoice means to mark or stamp it with the date paid and check number.
The purpose is to help prevent duplicate payment of an invoice. In an automated matching
system, the system would be programmed to ensure that there were no previous payments that
would make a new payment a duplicate payment.
124. Why should accountants periodically review the sequence of checks issued?
Answer: To ensure there are no missing or unaccounted checks. This helps prevent errors and
fraud.
125. What accounting records are used by accounts payable personnel to keep track of amounts
owed to each vendor?
Answer: An accounts payable subsidiary ledger is used to record the detail of amounts owed to
each vendor.
126. Identify some inefficiencies inherent in a manual expenditures processing system.
Answer: There is a physical matching of documents by humans and this process is time
consuming and error prone. Even if a software system such as Microsoft Dynamics GP is used,
there are many human tasks that are time consuming and error prone. Those tasks are: keying
of data for a purchase order; the manual process of comparing an order received to the PO;
keying in the receiving report and finding the PO in the system to match it against; keying the
invoice into the system and finding the PO in the system to match it against; and the human
decision making process of which invoices to approve for payment. These inefficiencies cause a
large expenditure in salaries and wages for the personnel who do the matching.
127. What are the advantages of BPR?
Answer: Using BPR to design IT systems can reduce the amount of paperwork, manual processing
and the costs inherent in paperwork and manual processing. The costs include wages and
salaries for the time to do manual processing and to correct errors or mismatches that occur in
the manual processes.
128. List three examples of BPR used in the expenditures processes.
Answer: BPR can be used to change a manual matching and payment system into one of three IT
systems. These three include computer based three-way matching, Evaluated Receipt Settlement
(ERS), and EDI.
129. Explain how system logic errors could cause cash management problems.
Answer: When there are logic errors in a system, it may cause the system to make the same error
repetitively. If the logic error is in approving payments, the system may repetitively approve
payments at the wrong times or in the wrong amounts. Since the error is repetitive, it could
quickly cause cash flow problems by paying too much cash, too soon.


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130. Explain how system availability problems could cause cash management problems.
Answer: Significant amounts of downtime in the system could delay payments to vendors. In
turn, vendors may delay shipments of materials to the company, which would then delay sales to
customers and cash inflows.
131. How is an audit trail maintained in an IT system where no paper documents are generated?
Answer: Backup files and computer logs of transactions can serve as part of an audit trail.
132. What can a company do to protect itself from business interruptions due to power outages?
Answer: A company should have a disaster recovery plan and they should use uninterruptible
power supplies as a backup to the normal power source.
133. What paper document is eliminated when ERS is used?
Answer: ERS is an invoiceless match system. This means the invoice is eliminated and the vendor
is paid if the purchase order matches the goods received.
134. Identify compensating controls needed for an effective ERS system.
Answer: Some of the compensating controls needed are: Established procedures in receiving to
ensure goods are only accepted when quantities and part numbers match exactly; there must be
a much more detailed negotiation with suppliers to establish accepted practices and firm prices
with suppliers; vendors must understand that substitutions and partial shipments cannot be
accepted; there should be established procedures to handle exceptions that arise, but exceptions
should be very rare.
135. What is typically the most time-consuming aspect within the expenditures process?
Answer: It is the matching of documents in a three-way match system. The time involved is
usually very high because of the manual steps and because of the time involved in reconciling
mismatches of part numbers, quantities, and prices in many shipments.
136. Identify the category of risk that can be reduced by using authority tables, computer logs,
passwords, and firewalls.
Answer: The category of risk that these controls reduce is security and confidentiality risk, and
more specifically, unauthorized access.
137. Explain why the availability of computer systems in the receiving department is such an
important component of an automated expenditures process.
Answer: In most automated vendor payment systems, there is a presumption that the receiving
personnel must reject shipments that do not match the purchase order. This means that the
receiving personnel must be able to look up the desired purchase order at the same time the
delivery is at the receiving dock. The receiving personnel must be able to reject the shipment, of
necessary, while the delivery person is still at the receiving dock. In this circumstance, the
purchase order files must be online and readily accessible to receiving personnel.
138. Identify three ways that buyers and sellers may be linked electronically.
Answer: EDI systems link buyers and sellers electronically. The electronic link may be in the form
of private leased lines, third-party networks called value-added networks, or via the Internet.


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139. What techniques can a company use to reveal problems concerning potential exposure to
unauthorized access to its systems?
Answer: Penetration testing, vulnerability assessment, and intrusion detection systems all help
expose potential unauthorized access.
140. How are Web browsers used in e-payables systems?
Answer: In many accounting systems, the accounting software has a custom designed screen to
view and enter data. In e-payable system, a web browser is used as the interface to receive and
review invoices, as well as to make vendor payments. The web browser is perceived to be a
more user friendly approach to the interface.
141. Explain how procurement cards provide for increased efficiencies in the accounts payable
department.
Answer: P-cards are used for purchases of things such as supplies, maintenance, and travel and
entertainment expenses. Without p-cards, many companies find they have a large volume of
these small dollar transactions that would still require the regular matching process in accounts
payable. The p-card eliminates this time consuming matching process for items purchased with
the p-card. This eliminates soliciting bids, keying PO and invoice data, matching documents,
reconciling mismatches, and writing small dollar amount checks. Instead, the company receives
one monthly bill from the credit card issuer.


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TEST BANK – CHAPTER 9 – SHORT ESSAY
142. Describe what is likely to occur if company personnel erroneously recorded a purchase
transaction for the wrong vendor? What if a cash disbursement was posted to the wrong
vendor? Identify internal controls that would detect or prevent this from occurring.
Answer: If a company erroneously recorded a purchase transaction to the wrong vendor, it is
likely to make a payment to the wrong party. When the correct vendor does not collect its
payment, it will notify the company and demand payment. This will likely result in the company
making a duplicate payment for the same transaction.
If a cash disbursement was posted to the wrong vendor account, this would also likely result
in the company making a duplicate payment for the same transaction. Since the first payment did
not get recorded correctly, the company would not have proper record of the payment. When it
reviewed its vendor accounts, it would note that it still needed to make a payment.
It would be difficult to discover an erroneous posting of a purchase transaction or cash
disbursement to the wrong vendor account. (An incorrect posting of a cash disbursement is more
likely to be discovered in the document matching and subsequent posting process.) The following
internal controls could detect these types of problems:
• When invoices arrive from the vendor companies, there should be an attempt to match the
invoice to the purchase order and receiving report before the transaction is posted to the
vendor account within the accounts payable subsidiary ledger. During this posting, the
employee who posts should verify that the transaction is recorded in the proper vendor
account.
• A reconciliation should be performed upon receipt of the vendor's statement. This should
reveal any differences in terms of purchase or payment information.
• A review of the vendor file should be performed periodically. The vendor to which the
purchase should have been recorded or the vendor to which a payment was erroneously
applied may show a negative balance (paid more than recorded purchases).
The error may also be discovered when there is a reconciliation of the accounts payable
subsidiary ledger to the general ledger, although this is not as likely. The reconciliation would still
balance even if an amount is recorded in the wrong vendor account. It is also possible that this
error would not be discovered particularly if there are always outstanding balances in vendor
accounts. The best internal control to prevent these errors would be to use an automated, rather
than manual system. An automated system would automatically post to the correct vendor as the
purchase order is created.
143. Debate the logic used in the following statement: “The person responsible for approving cash
disbursements should also prepare the bank reconciliation because he is most familiar with the
checks that have been written on that bank account.”
Answer: It may be true that this person is more familiar with the checks, but it would not
represent a good internal control process. If a separate person reconciles the account, it prevents
the first person from writing fraudulent checks and covering it up by altering the bank
reconciliation.


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144. Expenditure systems are crucial in the automobile manufacturing industry, where hundreds or
thousands of parts must be purchased to manufacture cars. Briefly describe how EDI would be
beneficial in this industry.
Answer: Since there would be such a large volume of purchase orders, invoices, and receiving
reports, that handling so many paper document would be inefficient. EDI would eliminate all of
the manual steps in handling these paper documents, eliminate the keying of the data on these
documents, and eliminate mail delays. An EDI system would be faster, more efficient and less
error prone. Therefore, it would also reduce the cost per transaction.
145. Describe how the matching of key information on supporting documents can help a company
determine that purchase transactions have been properly executed.
Answer: If the company has established proper segregation of duties and matches documents,
there is a likelihood they have properly insured that purchase transactions are properly executed.
Purchasing would not complete a PO and place an order until they receive a purchase requisition.
The PO would be forwarded to accounts payable. The receiving department would complete and
forward a receiving report upon receiving the goods. The invoice comes from a separate party –
the vendor. If these three separate documents match, it is a good assurance that it was a valid,
authorized order, it was properly received, and the vendor billed correctly for goods ordered and
received.
146. Describe how the use of pre-numbered forms for debit memos can help a company determine
that purchase return transactions have not been omitted from the accounting records.
Answer: It is much easier to account for all debit memos if they are pre-numbered. The sequence
of numbers can be checked to ensure all have been posted.
147. Describe how an ERS system could improve the efficiency of expenditure processes?
Answer: An ERS is an invoiceless system that pays vendors if the goods received match the
purchase order. This system completely eliminates the document matching system that usually
occurs in accounts payable. This eliminates the most time consuming aspect of paying vendors.
However, it does require much more strictly defined purchasing agreements with vendors.
Vendors must understand that the company cannot accept price differences from those
negotiated, substitution of products, undershipments, overshipments, or partial shipments.
148. Describe how a procurement card improves the efficiency of purchasing supplies.
Answer: A procurement card is usually used to purchase supplies or pay for travel and
entertainment. Using a p-card for these purchases eliminates the typically process of PO,
receiving report, and invoice matching. Individual users have much more control over the
purchase of their supplies and central inventories of supplies need not be maintained.


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TEST BANK – CHAPTER 9 – PROBLEMS
149. Identify an internal control procedure that would reduce the following risks in a manual system:
a. The purchasing department may not be notified when goods need to be purchased.
b. Accounts payable may not be updated for items received.
c. Purchase orders may be prepared based on unauthorized requisitions.
d. Receiving clerks may steal purchased goods.
e. Payments may be made for items not received.
f. Amounts paid may be applied to the wrong vendor account.
g. Payments may be made for items previously returned.
h. Receiving clerks may accept delivery of goods in excess of quantities ordered.
i. Duplicate payments may be issued for a single purchase transaction.
Answer:
a. The purchasing department may not be notified when goods need to be purchased.
Require that an inventory control department monitor inventory records and request
purchases (purchase requisition) when goods need to be reordered.
b. Accounts payable may not be updated for items received. Require that the
receiving department complete a receiving report for all goods received, and that a
copy of the report is forwarded to accounts payable.
c. Purchase orders may be prepared based on unauthorized requisitions. Require that
the appropriate manager approve each purchase requisition by signing the
requisition form.
d. Receiving clerks may steal purchased goods. Require good physical security such as
security cameras and good supervision of receiving employees. Using a “blind” PO
at receiving may also help since constant shortages when goods are stolen is more
likely to be noticed.
e. Payments may be made for items not received. Require a three-way match of the
purchase order, receiving report, and invoice before a payment can be approved.
f. Amounts paid may be applied to the wrong vendor account. Assuming that the
payment was to the correct vendor, but posted to the wrong account, it is very
difficult to uncover this error. A reconciliation of subsidiary ledge to the accounts
payable account may not uncover this because the total balance would be the same.
It may be uncovered if someone notices that the records show payments to a
vendor are in excess of that owed. There is no method to completely eliminate
errors in posting.
g. Payments may be made for items previously returned. Require a debit
memorandum be completed for any goods returned, and that a copy of this be
forwarded to accounts payable so that the balance owed can be changed.
h. Receiving clerks may accept delivery of goods in excess of quantities ordered. First,
there must be a clear policy on overshipments that receiving personnel can apply.
For example, a policy may be written that overshipments under 5% can be
accepted, but all others should be rejected and returned. Second, there must be a
policy that all received goods are compared against a purchase order. Also, the use
a “blind” PO to force receiving personnel to count goods and they might therefore
more easily detect overshipments.
i. Duplicate payments may be issued for a single purchase transaction. Require that
payment documentation be “cancelled’ when payment is made. This stamp on the
documents should help prevent duplicate payments.


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150. Chris Smith’s coffee and pastry cart uses a procurement card. Suggest some controls that
should be in place. Identify some resources that need to be purchased for this business.
Answer: The credit card used should have a dollar amount limit as well as a daily limit. The card
can also be restricted to certain kinds of vendors. For example, hotels, air fare, electronics stores,
and liquor stores could all be vendors that would be prohibited purchases on this credit card. The
types of resources that would be purchased are paper products such as coffee filters, paper cups,
napkins, and plates; plastic utensils; ground coffee beans; creamer, sugar, sweetener, and milk;
pastries; and various cleaning supplies. Finally, Chris should review all charges on the credit card
each month to detect any misuse of the card.
151. Discuss AZO Company using a business process reengineering project (BPR).
Answer: BPR involves the radical redesign of processes, along with IT enablement of processes, to
improve the efficiency and lower the cost of processes. BPR in a manual expenditure system
would involve methods to convert manual processes into automated processes. Any of the IT
enablement methods suggested in this chapter are possible solutions. Therefore, computer based
document matching, evaluated receipt settlement, e-business or EDI, e-payables, and
procurement cards are all possible. Some combination of these would also be possible. For
example, ABC could use an EDI system for purchases of inventory, but use a procurement card
for small supplies and travel expenditures.
152. The following list presents statements regarding the expenditure processes. Each statement is
separate and should be considered to be from a separate company. For each statement,
determine whether it is an internal control strength or weakness, then describe why it is a
strength or weakness. If it is an internal control weakness, provide a method or methods to
improve the internal control.
a. A purchasing agent updates the inventory subsidiary ledger when an order is placed.
b. An employee in accounts payable maintains the accounts payable subsidiary ledger.
c. Purchasing agents purchase items only if they have received an approved purchase
requisition.
d. The receiving dock employee counts and inspects goods and prepares a receiving
document that is forwarded to accounts payable.
e. The receiving dock employee compares the packing list to the goods received and if they
match, forwards the packing list to accounts payable.
f. An employee in accounts payable matches an invoice to a receiving report before
approving a payment of the invoice.
g. A check is prepared in the accounts payable department when the invoice is received.
Answer:
a. A purchasing agent updates the inventory subsidiary ledger when an order is placed.
This is an internal control weakness. The purchasing agent is part of the authorization
of orders. Therefore, he/she should not have record keeping duties for those
purchases. If one person has both duties, unauthorized purchases can be initiated and
records can be altered to cover up these unauthorized purchases. These duties should
be segregated and someone who does not authorize and does not have custody of
purchases should be assigned to the record keeping.
b. An employee in accounts payable maintains the accounts payable subsidiary ledger.
This is internal control strength. The payable should be recorded when the invoice
arrives and it matches a purchase order and receiving report.


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c. Purchasing agents purchase items only if they have received an approved purchase
requisition. This is internal control strength. The purchasing agents cannot initiate
purchases without proper approval from a separate department or person.
d. The receiving dock employee counts and inspects goods and prepares a receiving
document that is forwarded to accounts payable. This is internal control strength. The
counting and inspecting of goods ensures that goods are not damaged and that the
proper amount was received. This count and inspection prevents companies from
paying full price for damaged goods or missing goods.
e. The receiving dock employee compares the packing list to the goods received and if
they match, forwards the packing list to accounts payable. This is an internal control
weakness. Goods should not be compared to the packing list; they should be compared
to the purchase order. A comparison to the packing list will not reveal any
undershipments, overshipments, or product substitutions. The improvement would be
to compare the goods received to the purchase order and forward a receiving report,
not the packing list, to accounts payable.
f. An employee in accounts payable matches an invoice to a receiving report before
approving a payment of the invoice. This is an internal control weakness because there
is one more document that should be matched. The purchase order should also be
matched to the invoice and receiving report.
g. A check is prepared in the accounts payable department when the invoice is received.
This represents two internal control weaknesses. First, there is no document matching
mentioned (PO, invoice, and receiving report). Second, accounts payable should
authorize payment by check, but should not write the check. The matched
documentation should be forwarded to cash disbursements and the check is written by
cash disbursements.
153. Hitchins, Inc. computerization. Required: Assume that Hitchins, Inc. is preparing to
computerize the manual input processes such as completing a receiving report. Use Microsoft
Excel to perform the following: Design an appropriate format for a data entry screen that
could be used at the receiving dock to enter information from the packing slip in the
company’s expenditure system.
Answer: See the EXCEL file Problem 9-56.xls.
154. Since the accounts payable system of matching purchase orders, invoices, and receiving
reports can often be complex, organizations must routinely check to ensure they are not
making a duplicate payment. The text book Web site contains a spreadsheet titled
“invoices.xls”. Using your knowledge of spreadsheets and the characteristics of duplicate
payments, identify any payments within the spreadsheet that appear to be duplicate or
problem payments.
Answer: For the following PO’s, there are duplicate payments in which the invoice amounts are
exactly the same, and the same PO is referenced. PO 1514; invoices 5644 and 6871. PO 2635;
invoices 7176 and 7700. PO 3477; invoices 7957 and 8340. PO 2818 was invoiced twice, but in
different amounts and it could be a duplicate payment, or it could be two partial payments. We
would need the amount of the purchase order to determine whether or not it is correct.


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155. Fracho and EDI Controls. Required: Describe the IT controls that Frimco should include when
it implements an internet EDI system. For each control you suggest, describe the intended
purpose of the control.
Answer: Since Frimco will be sending data electronically using a computer system, there are
many general and application controls that should be a part of this IT system. Frimco may not
be able to afford all of the general controls mentioned below, but they should implement as
many as are cost effective. General controls include: user IDs, passwords, log-in procedures,
access levels, authority tables, firewalls, encryption of data, vulnerability assessment,
penetration testing, intrusion detection, software testing, and computer logs, These general
controls limit unauthorized access to the IT system. To help prevent availability risks, general
controls such as business continuity planning, backup data and backup systems, firewalls,
encryption of data, vulnerability assessment, intrusion detection, and penetration testing. The
purchasing software and the EDI translation software should also incorporate application input
controls such as field check, validity check, limit check, and reasonableness check
156.
a.
b.
c.
d.
e.
f.
g.
h.
i.

Wikkam Company and segregation of duties:
Accounts payable record keeping.
Authorization of new vendors
Authorization of purchase returns
Authorization of purchases
Cash disbursements record keeping
Check-signing authority
Custody of inventory in the receiving area.
Maintaining custody of cash.
Preparation of a debit memo for a purchase return

Required:
For each of the three employees (supervisor, employee 1, and employee 2), consider the duties
you would assign to each employee. In assigning duties, no employee should have more than
three tasks and there should be a proper separation of duties to achieve appropriate internal
control. List the three people, the duties you assigned to each employee and a description of why
those assignments achieve proper separation of duties. There are likely to be a few possible
answers that could be effective. The critical aspect is to try to segregate authorization, custody,
and record keeping for related events as much as possible. There is no “perfect” segregation
since there are only three employees.
Answer:
Supervisor: duties F, G, and H. The supervisor would be the most logical person to sign checks.
As a supervisor, he/she can override internal controls so it is not as much a problem that there
may be some incompatibility for a supervisor.
Employee 1: duties A, E, I. This places all record keeping and document preparation with
employee 1. He/she has no custody or authorization.
Employee 2: duties B, C, and D. He/she can authorize vendors, purchases, and purchase returns,
but has no custody or record keeping responsibility.


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