Test Bank With Answers of Accounting Information System by Turner Chapter 12

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ACCOUNTING INFORMATION SYSTEMS

ADMINISTRATIVE PROCESSES AND CONTROLS
TURNER / WEICKGENANNT
CHAPTER 12: Administrative Processes and Controls
TEST BANK – CHAPTER 12 – TRUE / FALSE
1. The sale of bonds should be considered a regular, recurring process since these
types of transactions are recorded in the general ledger.
2. Administrative processes are transactions and activities that either are specifically
authorized by top managers or are used by managers to perform administrative
functions.
3. Not all organizations require long-term, capital assets such as land, buildings,
and equipment to operate.
4. Capital usually comes from assets or short-term debt.
5. Source of operational processes are those processes to authorize the raising of

capital, the execution of raising capital, and the proper accounting of that capital.
6. The board of directors must decide between debt, assets, or equity for capital
funds.
7. An underwriter is a third party that contracts with a corporation to bring a new

issue of securities to the public market.
8. Operations processes are those processes which authorize, execute, manage,

and properly account for debt.
9. A corporation’s own stock that is repurchased by the company on the open

market is a marketable security.
10. For both source of capital processes and investment processes, the important
control is the specific authorization and oversight by top management.
11. Business processes in an organization do not include events that are accounting
transactions.
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12. Subsidiary ledgers maintain the detail information regarding routine transactions,
with an account established for each entity.
13. Special journals are journals that are established to record the transactions of
specific customers and vendors.
14. In the case of a manual accounting system, an approved journal voucher must
be forwarded to the general ledger department before transactions can be
recorded.
15. Approvals for each journal voucher are specific authorizations.
16. An example of good internal control is having one person responsible for the
value of the total of the sales in the sales journal and another person responsible
for the balance of sales in the general ledger.
17. General ledger employees should record journal vouchers, but they should not
authorize journal vouchers, have custody of assets, or have recording
responsibility for any special journals or subsidiary ledgers.
18. A well-defined chart of accounts would contain an account titled “Rent.”
19. Because of their access to the accounting system, internal managers need less
detailed reports than external users.
20. External users need detailed balance information on every existing account in the
general ledger.
21. Service firm internal reports are more likely to focus on sales and the status of
projects.
22. Unethical and fraudulent behaviors are much more likely to be initiated by
employees, not .management.
23. One of the reasons that management, not employees, initiate more unethical
and fraudulent activities are that employees do not have access to much of the
documentation needed to affect the event.
24. Employees are more likely to hide or conceal fraudulent activity in the records of
fixed assets and capital acquisition events than elsewhere.
25. Reports disseminated to lower level managers are usually used to provide
feedback and establish production schedules or sales goals.
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26. To set a proper ethical tone, top managements should measure several factors
of managerial performance without over-emphasizing profitability or cost cutting.
27. The only method of exercising corporate governance over administrative

processes and financial reporting is through the company’s budgeting process.
28. Because of regulatory and auditing issues, good corporate governance does not
depend upon the ethical conduct of management.
ANSWERS TO TEST BANK - CHAPTER 12 - TRUE/FALSE:
1. F 7. T 13. F 19. F 25. F

2. T 8. F 14. T 20. F 26. T
3. F 9. F 15. F 21. T 27. F
4. F 10. T 16. T 22. F 28. F
5. F 11. F 17. T 23. T
6. F 12. T 18. F 24. F
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TEST BANK – CHAPTER 12 – MULTIPLE CHOICE
29. Capital or investment processes:

A. is a regular and frequent event.
B. only requires the specific approval of someone such as a senior accountant.
C. requires the specific approval of top management or board of directors.
D. can be considered revenue since it results in cash inflows.
30. Capital or investment processes:

A. is a regular and frequent event.
B. do not require established procedures or internal controls due to their
infrequency.
C. require established procedures and internal controls even though they are
considered infrequent events.
D. do not involve the company’s own bond issues.
31. Conversion processes, systems and controls result from transactions:

A. that are large volumes of daily materials transactions.
B. that are large volumes of daily sales and cash inflow transactions.
C. that are periodic.
D. that are infrequent.
32. Revenue and return processes, systems and controls result from transactions:
D. that are infrequent.
33. Administrative processes, systems and controls result from transactions:

D. that are infrequent or intermittent.
34. External reports do not include:

A. balance sheets.
B. income statements.
C. sales reports.
D. cash flows.
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35. Internal reports do not include:

A. balance sheets.
B. sales reports.
C. cash flows.
D. inventory status reports.
36. Select the answer that contains only external reports.

A. Balance sheet, income statement, cash flow statement.
B. Sales, balance sheet, income statement.
C. Balance sheet, income statement, aged receivables.
D. Sales, inventory, aged receivables.
37. Select the answer that contains only internal reports.

A. Balance sheet, income statement, cash flow statement.
B. Sales, balance sheet, income statement.
C. Balance sheet, income statement, aged receivables.
D. Sales, inventory, aged receivables.
38. Payroll transactions are considered:

A. large volume daily events.
B. small volume daily events.
C. periodic events.
D. intermittent or infrequent events.
39. Raw material events can be found in which two processes?

A. 1) Revenue and return processes, systems & controls and 2) expenditures
and return processes, systems & controls.
B. 1) Expenditures and return processes, systems & controls and 2) conversion
processes, systems & controls.
C. 1) Conversion processes, systems & controls and 2) Administrative
D. 1) Administrative processes, systems & controls and 2) Revenue and return
40. Capital is/are the funds:

A. utilized to acquire long-term and short-term or current assets.
B. received from customers from accounts receivable.
C. utilized to acquire long-term assets
D. that are cash inflows regardless of source.
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41. The decision to raise or acquire capital funds is:

A. the responsibility of contract stock underwriters.
B. the responsibility of contract bond underwriters.
C. affects only bonds.
D. is the responsibility of the board of directors.
42. Capital funds are acquired through:

A. the issuance of bonds only.
B. the issuance of stocks and/or bonds.
C. the issuance of stocks only.
D. the initiation of debt instruments only.
43. Long-term debt is considered:

A. Bonds and loans with payment schedules several years in the future.
B. stocks.
C. loans with payment due in the near future.
D. All of the above, A, B, and C, are examples of long-term debt.
44. Equity is considered:

A. Bonds and loans with payment schedules several years in the future.
B. stocks.
C. loans with payment due in the near future.
D. All of the above, A, B, and C, are examples of long-term debt.
45. The transactions and resulting processes related to loans, bonds payable, and
stock should be executed only when
A. received funds have been expended through the purchase of fixed assets.
B. the transactions are completed.
C. top supervisors authorize them
D. top management or the board of directors authorize them.
46. Select the correct statement from those listed below.

A. Issuance of bonds and the origination of loans are considered debt while
the issuance of stock is considered equity.
B. Issuance of bonds and the origination of loans are considered debt while
the issuance of stock is considered revenue.
C. Issuance of bonds, the origination of loans, and the issuance of stock are all
considered debt.
D. Issuance of bonds, the origination of loans, and the issuance of stock are all
considered equity.
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47. Items associated with debt do not include:

A. interest.
B. maturity date.
C. dividends.
D. changes in stockholders’ equity.
48. Items associated with equity include all but:

A. interest.
B. maturity date.
C. dividends.
D. changes in stockholders’ equity.
49. Investment processes:

A. issue stock.
B. issue bonds.
C. purchase of fixed assets.
D. invest excess funds.
50. The _____________ of a corporation has the responsibility for making

investment decision.
A. board of directors.
B. chief financial officer.
C. treasurer.
D. president/CEO.
51. The _____________ of a corporation usually has physical custody of securities

held as investments.
A. treasurer.
B. president/CEO.
C. board of directors.
D. chief financial officer.
52. Corporations with complex IT systems:

A. may automate their investment process.
B. still handle all investment processes manually.
C. generally isolate the investment process from their accounting application.
D. cannot forecast surplus cash levels.
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53. Select the true statement from those given below.

A. Capital processes require top management approval while investment
processes only require treasurer approval.
B. Both the capital process and the investment process require only treasurer
approval.
C. Both the capital process and the investment process require top
management approval.
D. Neither the capital process nor the investment processes require top
management approval.
54. Fraud associated with the capital and investment process is:
A. is generally the actions of the employees handling the cash associated with
transactions.
B. usually related to management fraud.
C. prevented by the use of electronic funds transfers.
D. usually not pursued by the Securities and Exchange Commission.
55. The proper sequence of events for the accounting cycle is:
A. journalize, post, trial balance, adjusting entries, financial statements, and
closing entries.
B. journalize, post, trial balance, adjusting entries, closing entries, and
financial statements.
C. journalize, post, adjusting entries, trial balance, closing entries, and
D. trial balance, adjusting entries, journalize, post, closing entries, and
56. Special journals include:

A. accounts receivable journal, cash receipts journal, payroll journal, purchases
journal, and sales journal.
B. accounts payable journal, cash disbursements journal, payroll journal,
purchases journal, and sales journal.
C. cash disbursements journal, cash receipts journal, general journal, payroll
journal, purchases journal, and sales journal.
D. cash disbursements journal, cash receipts journal, payroll journal, purchases
journal, and sales journal.
57. Special journals so not include the:

A. sales journal
B. inventory journal.
C. cash receipts journal.
D. payroll journal.
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58. Special journals include the:

A. accounts receivable journal.
B. accounts payable journal.
C. purchases journal.
D. inventory journal.
59. Select the correct statement from the following.

A. To review purchases from a vendor inspect the purchases journal, to review
payments to a vendor inspect the cash receipts journal.
B. To review purchases from a vendor and review payments to a vendor
inspect the cash disbursements journal.
C. To review the purchases from a vendor inspect the purchases journal, to
determine inventory levels of a specific item inspect the inventory journal.
D. To review the payments to a vendor inspect the cash receipts journal, to
determine inventory levels of a specific item inspect the inventory journal.
60. Select the correct statement from the following:

A. The accounts payable journal will not show detail of purchases from a
vendor.
B. Details of amounts owed by a customer in are the accounts payable journal.
C. The sales journal contains all sales information.
D. Details of amounts owed to a vendor are contained in the purchases
journal.
61. Select the correct statement from the following:

A. If the trial balance debits equal the trial balance credits, adjusting entries
are not necessary.
B. Adjusting entries are made after the adjusted trial balance report is printed.
C. Accounts payable information in detail can be found in both the general
ledger and the accounts payable subsidiary ledger.
D. Financial statements must be prepared before the closing entries are
journalized.
62. Sales and sales returns can affect which journals?

A. Accounts receivable, accounts payable, inventory, and sales.
B. Accounts receivable, cash, inventory, and sales.
C. Accounts receivable, accounts payable, purchases, and inventory.
D. Sales, cash receipts, cash disbursements, inventory, and purchases.
63. Special journals are:

A. utilized for infrequent special journal entries.
B. for regular and recurring transactions.
C. not utilized in automated accounting processes.
D. often the source of information regarding a specific customer.
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64. The sales journal would have columns for:

A. a debit to sales, a credit to accounts receivable.
B. a debit to cash, a debit to accounts receivable, and a credit to sales.
C. a debit to accounts receivable and a credit to cost of goods sold.
D. a debit to accounts receivable and a credit to sales.
65. Subsidiary ledgers:

A. would not contain the detailed information of a customer’s account.
B. would contain the detailed information of a customer’s account.
C. would contain only information related to secondary interests of the
organization.
D. would not be utilized in automated accounting processes.
66. When special journals are utilized:

A. a general journal is not required.
B. segregation of duties is required.
C. a general journal is still utilized for infrequent and unique journal entries.
D. a general ledger is not required.
67. Corrections to posting errors are made:

A. before the first trial balance.
B. only after the first trial balance.
C. when discovered.
D. only when directed by top management.
68. Closing entries are:

A. journalized in all of the special journals.
B. journalized in the general journal.
C. journalized in the subsidiary ledgers.
D. journalized in the general ledger.
69. Closing entries:

A. close all of the general ledger accounts.
B. end the fiscal period.
C. close all of the subsidiary ledger accounts.
D. are journalized in the subsidiary ledgers.
70. Today’s automated accounting process:

A. is built on a structure independent of manual accounting.
B. does not require special journals or subsidiary ledgers.
C. is built on an operational structure similar to manual accounting.
D. eliminate errors in the accounting process.
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71. Today’s automated accounting process:

A. helps the user by identifying modules for activities.
B. precludes the use of subsidiary ledgers.
C. requires manual posting of general journal transactions.
D. All of the above, A, B, and C, are correct.
72. Transactions are recorded in the special journals and subsidiary ledgers:
A. at the time of the transaction.
B. only when approved by top management.
C. only during the adjusting process.
D. only during the closing process.
73. Posting to the general ledger occurs:

A. as the transaction is recorded in the special journals.
B. is not required if special journals are utilized.
C. automatically at the end of each business day.
D. only when proper authorization has been given.
74. In automated accounting:

A. paper vouchers are still required before the posting process is started.
B. transaction information may be held in a special module awaiting posting.
C. general ledger accounts are updated as transactions are recorded in special
journals.
D. authorization is required for each specific transaction.
75. As computerized accounting systems get more and more complex and
integrated:
A. the level of authorization for posting gets higher in the level of
responsibilities.
B. the level of authorization for posting has not changed.
C. the level of authorization for posting gets lower in the level of
responsibilities.
D. more levels of authorization are required.

A. general ledger employees should have custody of any assets that they
record in the general ledger.
B. General ledger employees should never be given responsibility for
authorizing any journal vouchers.
C. General ledger employees should record journal vouchers from any
operational departments when received.
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A. general ledger employees should not have custody of any assets that they
record in the general ledger.
B. General ledger employees should never be given responsibility for
authorizing any journal vouchers.
C. General ledger employees should only record journal vouchers that have
been authorized by the appropriate manager.
78. General ledger employees should record journal vouchers, but they should not
A. have recording responsibility for any special journals or subsidiary ledgers.
B. authorize journal vouchers.
C. have custody of assets.
79. Segregation of duties:

A. remains unchanged between computerized and manual accounting.
B. may be more difficult in less complex computerized accounting systems.
C. is not a factor with computerized accounting systems.
D. is not a factor with manual accounting systems.
80. When transactions are posted in a computerized accounting system:

A. the user must post all transactions awaiting in the module.
B. segregation of duties is not a factor.
C. can select which batches of transactions to post.
D. anyone with general ledger access can post the transactions.
81. Within ERP systems:

A. a single user with a password may be authorized to purchase and receive
the item.
B. segregation of duties and responsibilities allows incompatible privileges.
C. purchasing requires a different approval than receiving.
D. user profiles are not recorded within the system.
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82. While using a manual general ledger system, the audit trail could consist of:
1. general ledger.
2. electronic images.
3. journal vouchers.
4. paper documents.
5. source documents.
6. special journals.
7. subsidiary ledgers.
A. 1, 2, 3, 4, 5, 6, and 7.
B. 1, 3, 4, 5, 6, and 7.
C. 1, 2, 4, 5, 6, and 7.
D. 1, 2, 4, 6, and 7.
83. While using a computerized IT accounting system, the audit trail could consist of:
1. general ledger.
2. electronic images.
3. journal vouchers.
4. paper documents.
5. source documents.
6. special journals.
7. subsidiary ledgers.
A. 1, 2, 3, 4, 5, 6, and 7.
B. 2.
C. 2, 4, 5, and 7.
D. 1, 4, 6, and 7.
84. Audit trails:

A. can proceed only from the source document to the journal entry.
B. can proceed only from the journal entry to the source document.
C. is only utilized by the CPA auditors.
D. can be from the source document to the journal entry or from the journal
entry to the source document.
85. Security of source documents:

A. is essential for both manual general ledger systems and IT accounting
systems.
B. is not a factor with IT accounting systems since the source documents are
electronic images.
C. is not a factor with manual general ledger systems since they are printed
documents in archive files.
D. None of the options, A, B, or C, are correct.
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86. Select the correct statement from those listed below.

A. Investors and creditors use nonfinancial feedback to evaluate business
performance.
B. Internal managers need only nonfinancial feedback for proper planning and
control of operations.
C. Internal managers need reports at the same frequency as external users.
D. Internal managers need much more frequent and detailed reports than
external users.
87. Internal users:

1. need more frequent reports than external users.
2. need the same reports as external users to manage the operation.
3. do not utilize nonfinancial information in the planning and control of
operations.
4. utilize nonfinancial information in the planning and control of operations.
A. Only 1.
B. Only 1 and 4.
C. Only 1 and 2.
D. Only 4.
88. The external general purpose financial statements/reports are the:

1. aged accounts payable report.
2. aged accounts receivable report.
3. balance sheet.
4. income statement.
5. inventory statement.
6. statement of cash flows.
7. statement of retained earnings.
A. 1, 2, 3, 4, 5, 6, and 7.
B. Only 1, 2, 3, 4, 6, and 7.
C. Only 3, 4, 6, and 7.
D. Only 1, 3, 4, 6, and 7.
89. Financial statements:

A. are generated from the values of the special journals and subsidiary
ledgers.
B. are presented with complete chart of account detail.
C. may contain condensed data from the general ledger.
D. show units in inventory and dollar value of those units.
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90. The four general purpose financial statements:

A. are generated at the end of each month.
B. are generated at the end of each fiscal period.
C. are distributed only to external users.
D. are distributed only to internal users.
91. Internal reports of financial information:

A. are standardized by the AICPA.
B. are the same as those distributed to the external users.
C. vary by the user.
D. are distributed on the same time schedule as external reports.
92. The factor that does not affect internal reports is:
A. the type of organization.
B. the audit status of the organization.
C. the underlying function being managed.
D. the time horizon.
93. The account that a manufacturing operation and a retail firm would have in
common would be:
A. raw materials.
B. work in process.
C. labor.
D. inventory.
94. A service firm would focus on:

A. raw materials and work in process.
B. sales and project status.
C. work in process and labor.
D. raw materials and labor.
95. A common interest for manufacturing, retail, and service firms is:
A. inventory.
B. revenues.
C. profitability.
D. Both B and C.
96. Not-for-profit organizations would be interested in:

A. cash flows, revenues, and expenditures.
B. cash flows, funding sources, and expenditures.
C. revenues, expenses, and funding sources.
D. cash inflows, cash outflows, and profits.
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97. Select the true statement from those listed below.

A. Managers only need reports showing dollar values.
B. Managers only need reports showing unit data.
C. All managers need the same information.
D. Managers need the information associated with their area of responsibility.
98. Studies show:

A. that for day-to-day operations unit data is the critical element.
B. that for day-to-day operations general ledger dollar value is the critical
element.
C. that the general ledger dollar values have little impact on long-term time
horizons.
D. Both A and B are correct.
99. Unethical or fraudulent behavior

1. can occur in administrative processing of an organization.
2. can occur in the reporting functions of an organization.
3. are much more likely to be initiated by management.
4. are much more likely to be initiated by employees.
A. Only 1, 2, and 3 are correct.
B. Only 1, 2, and 4 are correct.
C. Only 1 and 3 are correct.
D. Only 2 and 4 are correct.
100. Select the true statement from the following.

A. Employee fraud is more prevalent in the routine processes. Management
fraud is more prevalent in administrative processes and reporting.
B. Employee fraud is less prevalent in the routine processes and administrative
processes. Management fraud is more prevalent in operational processes
and reporting.
C. Employee fraud is less prevalent in the administrative processes.
Management fraud is more prevalent in operational processes and
reporting.
D. Employee and managerial fraud is prevalent in the routine processes as well
as the administrative processes and reporting equally.
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101. in a properly controlled system of administrative and reporting functions,

1. employees have access to related assets or source documents.
2. administrative processes are tightly controlled by supervisors.
3. employees have the authority to initiate processes such as investing.
4. in processes such as sales and cash receipts employees are given general
authorization to initiate and process transactions.
A. Only 1 and 4 are true.
B. Only 1, 2, and 4 are true.
C. Only 4 is true.
D. Only 1, 3, and 4 are true.
102. Examples of employee initiated fraud would not include:

A. the writing off uncollectible accounts of a friend even when it could be
collected.
B. the inflation of hours worked on time card
C. the theft of cash or checks from the mailroom.
D. the release of false or misleading general purpose financial statements.
103. Fraud is:

A. harder to conceal in the routine events of conversion and sales because of
their visibility.
B. harder to conceal in the administrative processes such as investments
because of the limited access to the records.
C. harder to conceal when initiated by top management due to limited access
to the records.
D. precluded by proper internal control processes.
104. The raising of capital:

A. requires the complete and honest details of the utilization of the funds.
B. should be supported by correct and factual financial statement values.
C. should be supported by correct and factual financial statement footnotes.
105. The four primary functions of corporate governance do not include:

A. management oversight.
B. inventory control.
C. financial stewardship.
D. ethical conduct.
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106. A proper corporate governance structure must be in place in order to properly

deter instances of: and reports.
A. fraud.
B. theft.
C. misuse or manipulation of administrative resources.
107. When management designs and implements effective administrative processes:

A. delegation of responsibility is prohibited.
B. the ability to steal or misuse capital is eliminated.
C. constant monitoring is necessary.
D. the responsibility of executing related capital functions to employees is
prohibited.
108. When management designs and implements effective administrative processes:

A. delegation of responsibility is prohibited.
B. a budgeting process is a method of corporate governance.
C. the responsibility of executing related capital functions to employees is
prohibited.
D. the ability to steal or misuse capital is eliminated.
ANSWERS TO TEST BANK - CHAPTER 12 - MULTIPLE CHOICE:
29. C 46. A 63. B 80. C 97. D

30. C 47. C 64. D 81. A 98. A
31. A 48. A 65. B 82. B 99. B
32. B 49. D 66. C 83. B 100. A
33. C 50. C 67. C 84. D 101. C
34. C 51. C 68. B 85. A 102. C
35. A 52. A 69. B 86. D 103. A
36. A 53. C 70. C 87. B 104. D
37. D 54. B 71. A 88. C 105. B
38. C 55. A 72. A 89. C 106. D
39. B 56. D 73. D 90. B 107. C
40. C 57. B 74. B 91. C 108. B
41. D 58. C 75. C 92. B
42. B 59. C 76. B 93. D
43. A 60. A 77. D 94. B
44. B 61. D 78. D 95. D
45. C 62. B 79. B 96. B
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TEST BANK – CHAPTER 12 – END OF CHAPTER QUESTIONS:
109. Which of the following is not part of an administrative process?

A. The sale of stock
B. The sale of bonds
C. The write-off of bad debts
D. The purchase of marketable securities
110. Which of the following statements is not true regarding source of capital
transactions?
A. These processes should not be initiated unless there is specific authorization
by management at a top level.
B. Source of capital processes will result in potential dividend or interest
payments.
C. Retirement of debt is a source of capital process.
D. The fact that these transactions and processes cannot occur without
oversight by top management means other controls are not necessary.
111. The officer within a corporation that usually has oversight responsibility for
investment processes is the
A. controller.
B. treasurer.
C. chief executive officer (CEO).
D. chief accounting officer (CAO).
112. Which of the following statements is not true regarding internal controls of
capital and investment processes?
A. Internal controls aimed at preventing and detecting employee fraud in
capital and investment processes are not as effective.
B. Top management fraud, rather than employee fraud, is more likely to occur.
C. Any fraud is likely to involve manipulating capital and investment processes.
D. Because of top management oversight, the auditor need not review these
processes.
113. Which of the following statements is true?

A. Routine transactions are recorded in the general journal.
B. Nonroutine transactions are entered in the general journal.
C. Nonroutine transactions are recorded in a subsidiary ledger.
D. Nonroutine transactions are recorded in a special journal.
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114. Regarding subsidiary ledgers and general ledger control accounts, which of the
following is not true?
A. Total balances in a subsidiary ledger should always equal the balance in the
corresponding general ledger account.
B. The general ledger maintains details of subaccounts.
C. Control is enhanced by separating the subsidiary ledger from the general
ledger.
D. Reconciling a subsidiary ledger to the general ledger can help to detect
errors or fraud.
115. Which of the following statements regarding the authorization of general ledger
posting is not true?
A. Posting to the general ledger always requires specific authorization.
B. User IDs and passwords can serve as authorization to post transactions to
the general ledger.
C. A journal voucher serves as authorization for manual systems.
D. As IT systems become more automated, the authorization of general ledger
posting is moved to lower levels of employees.
116. In a manual system with proper segregation of duties, an employee in the

general ledger department should only
A. authorize posting to the general ledger.
B. post transactions to the general ledger.
C. reconcile the subsidiary ledger to the general ledger.
D. post transactions to the subsidiary ledger.
117. Which of the following statements about reporting is true?

A. External users need detailed, rather than summarized, information.
B. All reports, internal and external, are derived only from general ledger data.
C. All organizations need similar internal reports.
D. Internal reports are tailored to the specific needs of each management level
and function.
118. Which of the following is not an area of measure in a balanced scorecard?

A. Vendor
B. Customer
C. Financial
D. Learning and growth
ANSWERS:
109. C 111. B 113. B 115. A 117. D
110. D 112. B 114. B 116. B 118. A
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TEST BANK – CHAPTER 12 – SHORT ANSWER QUESTIONS
119. What characteristics of administrative processes are different from the

characteristics of revenue, expenditures, or conversion processes?
Answer: The characteristics of administrative processes that are different from
revenue, expenditure, or conversion processes are the frequency of occurrence and
the extent of management authorization. Whereas revenue, expenditure, and
conversion processes typically occur on a regular, recurring basis (usually daily),
administrative processes occur on a non-regular basis, either as the need arises or
on a periodic basis. Therefore, revenue, expenditure, and conversion processes
usually involve established procedures and controls that allow these processes to
occur without intervention or specific authorization by management. Administrative
processes, on the other hand, typically require that specific authorization for each
transaction would be necessary.
120. How do other processes (revenue, expenditures, conversion) affect the general
ledger?
Answer: Revenue, expenditure and conversion processes affect the general ledger
periodically through the administrative processes of financial reporting. This is the
process of funneling all of the transactions into the general ledger accounts so they
can be included in various financial reports.
121. How would you describe capital?

Answer: Capital can be described as the funds used to acquire the long-term capital
assets of an organization. Capital usually comes from long-term debt or equity.
122. Describe the nature of the authorization of source of capital processes.

Answer: Source of capital processes are those processes that authorize the raising
of capital, the execution of raising capital, and the proper accounting of that capital.
Because of the magnitude and importance of these methods of raising capital, these
financial instruments should be used only when necessary. The transactions and
resulting processes related to loans, bonds, and stock should be executed only when
management authorizes, and the use of the resulting capital must be properly
controlled and used.
123. How does the specific authorization and management oversight of source of
capital processes affect internal controls?
Answer: Since top management authorizes and controls the capital transaction
processes, there is inherent control. The fact that these transactions and processes
cannot occur without specific authorization and oversight by top management is a
strong internal control.
21
124. Describe when an organization would have a need to undertake investment

processes.
Answer: An organization would need to undertake investment processes when it
finds that it has more funds on hand than necessary to operate the business. The
proper performance of the stewardship function would suggest that management
should park (or invest) the excess funds in a place that it can earn a return.
125. Why is the monitoring of funds flow an important underlying part of investment
processes?
Answer: The monitoring of funds flow is an important part of the investment process
because funds should be invested only if management has no immediate plans for
their use. Therefore, future cash needs of the organization should be monitored
regularly in comparison with cash balances to determine if there are excess funds
available for investment.
126. How are IT systems potentially useful in monitoring funds flow?

Answer: IT systems can help management to monitor the organization’s cash needs
by forecasting future cash payments and collections. The system can continually
compare current cash balances to forecasted needs and sources and provide
feedback to top management about potential excess funds that would be available
for investing.
127. Explain how cash resulting from source of capital processes may be handled
differently than cash in revenue processes.
Answer: The cash resulting from source of capital processes is likely to be handled
differently than in revenue processes because of the large sums of money involved
in source of capital transactions. Whereas collections from revenue processes are
typically handled by the organization’s employees, these employees are not likely to
handle the large sums of cash that tend to result from stock sales or other source of
capital transactions. Instead the funds are usually transferred electronically between
brokers and banks.
128. What advantages would motivate management to conduct fraud related to

source of capital processes?
Answer: Management may be motivated to conduct fraud through the source of
capital processes because of the large sums of money that tend to result from these
transactions. In addition, there is a lack of traditional controls covering this process;
there are no other employees responsible for reporting or controlling these
transactions. Internal controls are not as effective in this area because of their non-
regular occurrence and their dependence on close scrutiny by top management and
the auditors. The opportunity is greater for management to perpetrate fraud in this
process than for other more routine processes.
22
129. Why are internal controls less effective in capital and investment processes?
Answer: Internal controls are not as effective in this area because of their non-
regular occurrence and their dependence on close scrutiny by top management and
the auditors. The opportunity is greater for management to perpetrate fraud in this
process than for other more routine processes.
130. How is a special journal different from a general journal?

Answer: A special journal is a chronological record of specific types of transactions
(such as a sales journal, purchases journal, cash receipts journal, etc.); whereas a
general journal records irregular, non-recurring transactions that are not included in
a special journal.
131. How is a subsidiary ledger different from a general ledger?

Answer: A subsidiary ledger is a detailed record of routine transactions, with an
account established for each entity; whereas a general ledger is a summary of
information from special journals, with specific accounts established for each type of
transaction. A subsidiary ledger is updated whenever new transactions occur. A
general ledger is updated periodically for the summarization of the special journal
details.
132. In what way are subsidiary ledgers and special journals replicated in accounting
software?
Answer: Subsidiary ledgers and special journals are replicated in accounting
software as they are summarized for the general ledger postings at the end of the
period. Although transaction recording in the special journals and subsidiary ledgers
takes place at the time the transaction occurs, their replication in the general ledger
is an end-of-period summarization process.
133. Within accounting software systems, what is the purpose of limiting the number
of employees authorized to post to the general ledger?
Answer: Limiting the number of employees authorized to post to the general ledger
allows management to give general authority to certain employees to post to the
general ledger. Through the assignment of limited access to the general ledger
module, management can limit the capability of general ledger posting to selected
employees. When an employee with the appropriate access level logs into the
accounting system, he can process the general ledger posting. Employees who have
not been given access to general ledger posting will be unable to post to the general
ledger. In this manner, management may be able to prevent the recording of
unauthorized general ledger transactions.
23
134. In a complex IT system, how may a customer actually “authorize” a sale?

Answer: A customer may actually authorize a sale in a complex IT environment
when their inventory systems interact. For example, When a customer’s inventory
levels fall below an establish reorder point, the IT system may authorize a transfer
of products from the supplier to the customer. This means that the sale and
subsequent update of sales and receivable accounts are triggered by the customer’s
computer system. Therefore, these systems require pre-existing and negotiated
relationships between buyer and seller companies. Both parties must have already
approved these processes and established IT systems that execute the processes.
135. To properly segregate duties, what are the three functions that general ledger
employees should not do?
Answer: Three important segregations should be in place in a manual general ledger
system. The three segregations are that the general ledger employees should record
journal vouchers, but they should not (1.) authorize journal vouchers, (2.) have
custody of assets, or (3.) have responsibility for recording the transactions in the
subsidiary ledgers.
136. In an IT accounting system, which IT controls ensure the security of the general
ledger?
Answer: In an IT accounting system where the records are electronic file images,
access to the system is limited through the use of user IDs, passwords, and
resource authority tables. These general controls establish which employees have
access to specific records or files.
137. Describe the nature of reports for external users.

Answer: Since external users do not need detailed balance information on every
existing account in the general ledger, certain accounts may be combined or “rolled
up” into a single line item that appears on a financial statement. This summary
process may occur for all of the line items on the general purpose financial
statements. The four general purpose financial statements, the balance sheet,
income statement, statement of cash flows, and statement of retained earnings, are
each derived from general ledger account balances. These general ledger balances
are rolled up in such a manner as to provide summarized information that is useful
to evaluate business performance.
24
138. Does the general ledger provide all information necessary for internal reports?
Answer: The general ledger does not provide all information necessary for internal
reports. Internal reports often rely on information from various parts of the
organization. For instance, manufacturing, retail, service, and charitable
organizations would each use different types of information to manage the details of
their revenue and expenditure processes. In each of these scenarios, non-financial
information is often useful to managers in order to supplement the financial
information derived from the general ledger. In addition, there may be detailed
financial and non-financial information in an organization’s accounting system that is
useful for internal reporting purposes but may not be readily apparent in the general
ledger. In addition, internal reports may contain past or future information that is
not included in the current period’s general ledger.
139. How would operational internal reports differ from financial internal reports?
Answer: Operational internal reports focus on non-financial details of operations,
such as machine hours, down-time, inventory and sales units, headcounts for
human resources, etc. These types of operational reports may not be prepared from
data in the general ledger. However, as transactions are recorded in the accounting
processes, financial as well as non-financial data is accumulated. Therefore, the
accounting system often records both financial and operational data that can be
used in reports. Financial reports, on the other hand, are prepared directly from
ledgers, journals, and other accounting records.
140. How does time horizon affect the type of information in internal reports?
Answer: In day-to-day management, managers are more likely to use unit measures
and physical counts. For time horizons of one month or longer, however, managers
are more likely to use financial measures such as those generated by information in
the general ledger.
25
141. Why are managers, rather than employees, more likely to engage in unethical
behavior in capital and investment processes?
Answer: There are three main reasons why management may be more likely to
engage in unethical behavior in the capital and investment processes:
• Employees typically do not have access to the assets or records in the capital
and investment processes. These assets and records are controlled by
management because of their non-routine nature and because of the high
amounts of related funds.
• Internal controls for these processes are dependent upon the close scrutiny
and specific authorization of top management, whereas employees typically
have no authority over these types of transactions. However, managers are
most likely to be tempted to alter or hide financial information in an effort to
improve the appearance of the organization’s financial results for investors
and creditors.
• The non-routine nature of these transactions makes it more difficult to hide
fraudulent transactions. Fraud as committed by employees would be much
easier to hide within the volumes of transactions in the routine processes like
revenues, expenditures, etc.
142. How do processes with large volumes of transactions make fraudulent behavior
easier?
Answer: The routine nature and large volumes of transactions in the processes for
sales, purchases, payroll, etc. make it easier for employees to hide fraudulent
transactions or unethical behavior. Fraud may be hidden in the large masses of
transactions within these processes.
143. Explain the importance of full disclosure in source of capital processes.

Answer: Full disclosure is extremely important in the source of capital processes so
that creditors can be fully informed of all relevant information in making credit
decisions. Accordingly, financial reports and other disclosures must be complete and
accurate in order to avoid misleading any current or potential creditors.
26
TEST BANK – CHAPTER 12 – SHORT ESSAY
144. Describe the steps in source of capital processes and explain how top
management is involved.
Answer: When the need for capital arises, the Board of Directors is consulted for
approval and for determination of whether debt of equity capital will be pursued. If
equity capital is chosen, a stock underwriter will be contracted to sell the shares of
stock and collect the proceeds. The company will need to determine whether or not
to pay dividends. If debt capital is chosen, the company will need to decide whether
it should issue bonds or borrow the funds. If bonds are chosen, the company will
contract with a bond underwriter, who will sell the bonds and collect the proceeds,
as well as handle the periodic payment of interest. If funds are borrowed,
arrangements must be made for the bank loan by contracting with creditors. The
proceeds will be collected and periodic interest will be paid. Throughout this
process, management is involved in most of these steps. Management would
present the need for capital to the Board of Directors. Depending on the source of
capital determined by the Board, management would then be responsible for
contracting with the appropriate party (stock or bond underwriter or bank creditor).
Finally, management would be involved in the arrangements for collecting proceeds
from the source of capital processes as well as the payment of interest or dividends.
145. Describe the steps in investment processes and explain how top management is
involved.
Answer: When excess funds are identified, they are to be evaluated in comparison
with upcoming needs of the organization. If it is decided that the excess should be
invested, the type of investment must be determined. The company may invest in
marketable securities, in which case it would contract with a stock broker to buy
stocks or bonds (and sell these securities as necessary). Alternatively, the company
may invest in treasury stock, in which case it would contract with a stock broker to
buy the treasury shares and reissue shares as desired. Throughout this process,
management involvement occurs at many points. Management is responsible for
monitoring cash flows to determine if excess funds exist and if they are available for
investment or needed for upcoming operations. Management would also be
responsible for contracting with a stock broker for the purchase of stocks, bonds, or
treasury stock (as well as the subsequent sale of these investments, as needed).
27
146. Explain the internal control environment of source of capital and investment
processes.
Answer: For both source of capital and investment processes, the important control
is the specific authorization and oversight by top management. The very close
supervision of these transactions helps prevent risks related to the theft or misuse of
the cash that is related to capital and investment processes. In addition, the large
sums of money involved in capital and investment decisions usually dictates that the
cash not be handled by the regular company employees. Instead, the funds are
likely to be transferred electronically between brokers and banks. Because of the
high risk of management fraud in these processes and the potential for
management circumvention of controls, typical internal controls such as segregation
of duties and reconciliations are not as effective in the prevention or detection of
fraud surrounding these processes. As an added control feature, auditors are often
urged to carefully examine capital and investment transactions.
147. Describe the steps in a manual accounting cycle.

Answer: When a transaction occurs, it must be identified as either routine or non-
routine. Routine transactions are recorded in a special journal and subsidiary ledger;
non-routine transactions are recorded in the general journal. At the end of the day,
week, or other period, the journals and ledgers are summarized and posted to the
general ledger. General ledger totals are summarized in a trial balance, and end-of-
period adjusting entries are prepared. The adjusted general ledger is used to
prepare financial statements. Once the financial statements are completed, closing
entries are prepared, and then the cycle may begin anew.
148. Describe why it is true that there may be two authorizations related to revenue,
expenditures, and conversion processes before they are posted to the general
ledger.
Answer: In a properly controlled accounting system, transactions within the revenue
and conversion processes must be authorized before they are carried out. In
addition, another authorization is needed to begin the process of posting entries
from the special journals and subsidiary ledgers to the general ledger. Thus, there
may be two authorizations related to these routine processes.
28
149. For each report shown, indicate in the appropriate column whether the report is
likely to be for internal or external users (some reports may be both), and
whether data would come exclusively from the general ledger.
Report Name Internal or External Exclusively G/L Data?

Income statement
Aged accounts receivable
Inventory stock status
Open purchase orders
Machine down-time
Cash flow statement
Production units produced
Answer:
Report Name Internal or External Exclusively G/L Data?
Income statement External Yes
Aged accounts receivable Both No
Inventory stock status Internal No
Open purchase orders Internal No
Machine down-time Internal No
Cash flow statement External No
Production units produced Internal No
TEST BANK – CHAPTER 12 – PROBLEMS
150. Compare source of capital processes with sales processes in terms of

a. the frequency of transactions;
b. the volume of transactions;
c. the magnitude in dollars of a single transaction; and
d. the manner of authorization.
Answer: Compared with the sales processes, (a. and b.) source of capital processes
occur much less frequently and in smaller volumes. Whereas sales transactions
typically occur on a daily basis (and may even occur several times per day), source
of capital transactions tend to occur in small volumes and on an irregular basis.
Often, there may be only a few times within any given annual period that a source
of capital transaction occurs. In addition, (c.) the magnitude of an individual source
of capital transaction tends to be much greater than for an individual sales
transaction. Finally, (d.) whereas routine sales transactions are usually authorized by
employees having general authorization privileges, source of capital transactions
require specific authorization of management.
29
151. Compare investment processes with sales processes in terms of

a. the frequency of transactions;
b. the volume of transactions;
c. the magnitude in dollars of a single transaction; and
d. the manner of authorization.
Answer: Compared with the sales processes, (a. and b.) investment processes occur
much less frequently and in smaller volumes. Whereas sales transactions typically
occur on a daily basis (and may even occur several times per day), investment
transactions tend to occur in small volumes and on an irregular basis. Often, there
may be only a few times within any given annual period that an investment
transaction occurs. In addition, (c.) the magnitude of an individual investment
transaction tends to be much greater than for an individual sales transaction. Finally,
(d.) whereas routine sales transactions are usually authorized by employees having
general authorization privileges, investment transactions require specific
authorization of management.
152. Exhibit 12-9 shows a screen capture from Dynamics GP® accounting software.
The following modules in Dynamics GP® are shown:
> Financial
> Sales
> Purchasing
> Inventory
> Payroll
> Manufacturing
>Fixed Assets
30
153. For each of the transactions listed, explain which module would you choose and
why.
a. Entering an invoice received from a supplier.
b. Entering the receiving of materials at the shipping dock.
c. Enter a check received in payment of an account receivable.
d. Posting a batch of sales invoices to the general ledger.
e. Enter hours worked by employees.
f. Print checks for suppliers
Answer:
a. Entering an invoice received from a supplier- this would fall under the
Purchasing module. The purchasing module is appropriate because it would
record the purchase or expenditure in the purchases journal, as well as the
related payable to the supplier in an accounts payable subsidiary ledger.
b. Entering the receipt of material at the shipping dock – this would fall under
the Inventory module. The inventory module is appropriate because it would
record the items on hand and the movement of goods available for
production.
c. Entering a check received in payment of an account receivable – this would
fall under the Sales module. The sales module is appropriate because it would
include collections of sales in the cash receipts journal and the related
customer accounts in the accounts receivable subsidiary ledger.
d. Posting a batch of sales invoices to the general ledger – this would fall under
the Financial module. The financial module is appropriate because it includes
all accounting cycle functions, including the summarization of special journals
and their posting to the general ledger.
e. Entering hours worked by employees – this would fall under the Payroll
module. The payroll module is appropriate because it records all periodic
workforce activities in a payroll journal.
f. Printing checks for suppliers – this would fall under the Purchasing module.
The purchasing module is appropriate because it would record the payment
to the supplier in an accounts payable subsidiary ledger as well as the related
release of funds in a cash disbursements journal.
31

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ACCOUNTING INFORMATION SYSTEMS

CHAPTER 12: Administrative Processes and Controls

TEST BANK – CHAPTER 12 – TRUE / FALSE

4. Capital usually comes from assets or short-term debt.

5. Source of operational processes are those processes to authorize the raising of

7. An underwriter is a third party that contracts with a corporation to bring a new

8. Operations processes are those processes which authorize, execute, manage,

9. A corporation’s own stock that is repurchased by the company on the open

15. Approvals for each journal voucher are specific authorizations.

18. A well-defined chart of accounts would contain an account titled “Rent.”

27. The only method of exercising corporate governance over administrative

ANSWERS TO TEST BANK - CHAPTER 12 - TRUE/FALSE:

1. F 7. T 13. F 19. F 25. F

TEST BANK – CHAPTER 12 – MULTIPLE CHOICE

29. Capital or investment processes:

30. Capital or investment processes:

31. Conversion processes, systems and controls result from transactions:

33. Administrative processes, systems and controls result from transactions:

34. External reports do not include:

35. Internal reports do not include:

36. Select the answer that contains only external reports.

37. Select the answer that contains only internal reports.

38. Payroll transactions are considered:

39. Raw material events can be found in which two processes?

40. Capital is/are the funds:

41. The decision to raise or acquire capital funds is:

42. Capital funds are acquired through:

43. Long-term debt is considered:

44. Equity is considered:

46. Select the correct statement from those listed below.

47. Items associated with debt do not include:

48. Items associated with equity include all but:

49. Investment processes:

50. The _____________ of a corporation has the responsibility for making

51. The _____________ of a corporation usually has physical custody of securities

52. Corporations with complex IT systems:

53. Select the true statement from those given below.

56. Special journals include:

57. Special journals so not include the:

58. Special journals include the:

59. Select the correct statement from the following.

60. Select the correct statement from the following:

61. Select the correct statement from the following:

62. Sales and sales returns can affect which journals?

63. Special journals are:

64. The sales journal would have columns for:

65. Subsidiary ledgers:

66. When special journals are utilized:

67. Corrections to posting errors are made:

68. Closing entries are:

69. Closing entries:

70. Today’s automated accounting process:

71. Today’s automated accounting process:

73. Posting to the general ledger occurs:

74. In automated accounting:

76. Select the correct statement from the following.

77. Select the correct statement from the following.

79. Segregation of duties:

80. When transactions are posted in a computerized accounting system:

81. Within ERP systems:

84. Audit trails:

85. Security of source documents:

86. Select the correct statement from those listed below.