Accounting Information Systems 4th Edition by Robert Hurt SOLUTIONS MANUAL

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 1: Role and purpose of AIS

1. Reading review questions a. What is an accounting information system? An accounting information system, like all systems, is a collection of inter-related parts designed to achieve a specific goal.

In the case of AIS, that goal is to prepare information for decision making. b. Explain three reasons AIS is an important area of study for future accountants.

(1) Developing a strong AIS helps achieve some of the components of the FASB Conceptual Framework of Accounting. (2) Studying AIS helps students develop many of the core competencies suggested by the AICPA. (3) Acquiring knowledge about AIS helps students learn more about common business processes. c. List and discuss the five parts of a generic accounting information system.

The five generic parts of the AIS are: inputs (such as source documents), processing (such as with general ledger software), outputs (such as the general purpose financial statements), storage (such as in master and transaction files) and internal control (such as separation of duties). d. Identify five broad criteria you can use to evaluate information on the Internet and in other sources. The University of Maryland University College offered five criteria for information evaluation. They are: authority, accuracy, objectivity, currency and coverage. e. In a manner specified by your instructor (e.g., individually or with a group, as a written paper or as an oral presentation), prepare an original response to one or more of the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

2. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 1: Role and purpose of AIS

3. Reading review problem a. Consider the five business processes described in the chapter. Which one best applies to the activities described? Why? The activities described are most closely aligned with the sales / collection process, since they involve selling goods to a customer and collecting payment. In addition, preparing the food (Step 4) is an example of a conversion process. b. Does Richie’s need an accounting information system? Why, or why not?

Richie’s, like all organizations, needs an AIS. If properly designed and implemented, the AIS can produce general purpose financial statements and other outputs which will serve as a basis for decision making. c. If you were an accountant for Richie’s, how might you demonstrate the AICPA core competencies discussed in the chapter in your interaction with management? The chapter discussed six elements of the AICPA core competencies framework. The broad business perspective competencies included strategic / critical thinking and resource management; functional competencies were risk analysis and research. Personal competencies discussed in the chapter were problem solving and decision making and communication. An accountant could demonstrate strategic / critical thinking by focusing on what accounting (and other) data tell management about how to compete more effectively in their markets; resource management competencies come into play, for example, by understanding human motivation and applying theories like Vroom’s expectancy theory. All organizations face risk; an accountant could point out risks in interacting with management. Research would be required as part of strategic thinking, since knowing what competitors are doing can inform what Richie’s does. Both personal competencies are an integral part of the others. d. Suggest one example of each generic AIS element within the context of Richie’s. Input, customer order. Process, collecting payment. Output, customer bill.

Storage, electronic files with accounting data. Internal control, Developing standard procedures for taking orders, preparing and delivering food. e. Do a Google search on “operating a successful restaurant.” Pick one of the articles it produces and evaluate it using the UMUC criteria. One such article is “Start A Killer Restaurant: 6 Tips” by Jeff Haden. It appeared in the 23 January 2012 issue of Inc. magazine. Here is a sample evaluation using the UMUC criteria.

•

Authority. The author is a professional journalist; his contact information is provided at the end of the article.

•

Accuracy. The article explains that the source of the information is an interview with a successful restaurant owner. It does not appear to have erroneous information.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 1: Role and purpose of AIS

•

Objectivity. The article is not primarily advertising oriented, but it does have some information about the restaurant owner’s businesses. The article is available freely.

•

Currency. The article is about two years old, which means it could be a bit dated in the fast-paced restaurant industry. But, its advice seems as applicable today as they were in 2012.

•

Coverage. The article is completed; it is not particularly deep, but its length seems tailored to both the venue and its audience.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are a few elements they might include in a discussion of Sebastian and Viola’s IT needs.

•

Spreadsheets. Commonly available and widely used, but they are not specifically designed for accounting tasks and can be cumbersome.

•

General ledger software. Several choices are available and most accountants know how to use at least one or two. Choosing can be challenging.

•

Tax preparation software. This tool can make the process of filing tax returns simpler, but it still requires significant recordkeeping.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 1: Role and purpose of AIS

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

6. Look up the following references online or in your school’s library. Using the criteria and specific questions from the UMUC Web site referenced in the chapter, evaluate and discuss the quality of each reference. (Note: I found all these articles through ABI Inform; many of them may also be accessible on the publications’ own web sites. I’m analyzing the first article in the list to demonstrate how to use the UMUC criteria.)

“Xelltec Reports Laptop Security Microchip.” Wireless News, 25 February 2011.

Authority: This brief article is very weak in terms of authority, as its author is listed as “anonymous.” Presumably, the article was written by someone at Xelltec.

Accuracy: The article appears to have no major errors of fact; however, it does not provide much in the way of facts since its main purpose appears to be publicity for the security microchip.

Objectivity: This article’s main purpose is to advertise the security microchip; thus, it is not very objective. Note the last sentence, which states that the company is in the business of selling security devices.

Currency: The article was published in February 2011. Thus, its information is fairly current.

Coverage: As far as it goes, this article does an OK job of coverage. However, in the broader sense, its coverage is inadequate, since it does not compare the company’s security microchip to other forms of IT security.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 1: Role and purpose of AIS

7. Terminology 1. E 2. H 3. D 4. C 5. G

6. F 7. J 8. B 9. I 10. A

8. Multiple choice questions 1. A 2. B 3. B 4. B 5. C

9. Statement evaluation a. sometimes true. Data can be stored either electronically, on paper or both. When data are stored electronically, they might be stored on a disk, on a flash drive, on a network or in some other medium. b. never true c. always true d. sometimes true. If information found on the Internet meets established criteria, such as those suggested by UMUC, it can be very reliable. e. always true f. always true g. sometimes true. Whether internal and external users can use the information depends on a number of factors, including the type of information and the sophistication / background of the users themselves. h. never true i. sometimes true. Source documents can be paper-based; they can also be, and increasingly are, electronic. j. sometimes true. Some questions in AIS have a single correct answer, such as “what is the journal entry to record the purchase of inventory on account in a perpetual system.” On the other hand, many questions in AIS have more than one good answer, such as when someone evaluates the suitability of information.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 1: Role and purpose of AIS

10. Excel application RRP Corporation Trial balance 31 December 2013 Cash $ Accounts receivable Inventory Supplies Equipment Accumulated depreciation--equipment Land Accounts payable Deferred service revenue Notes payable Common stock Additional paid-in capital Treasury stock Retained earnings Sales Sales discounts Cost of goods sold Wages expense Depreciation expense Totals $

470 4,600 6,000 700 53,870

$

53,870

Average balances

$

4,897

$

6,734

Largest balances

$

9,300

$

15,860

Smallest balances

$

200

$

800

7,700 6,100 8,000 200 9,100 $

5,800

9,300 5,300 800 6,400 6,600 6,300 1,700 15,860 6,810

11. Conceptual framework of accounting a) comprehensive income b) materiality c) asset d) economic entity e) relevance f) qualitative characteristics g) expenses h) consistency i) purpose j) matching Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

1. Reading review questions a. In your own words, explain the similarities and differences between accounting and bookkeeping. Bookkeeping is the subset of accounting activities specifically concerned with recording transactions in the AIS, leading eventually to the production of the four general purpose financial statements. Although both accounting and bookkeeping require some elements of critical thinking, accounting probably requires more. In addition, the essential elements of bookkeeping can be mastered in a much shorter time than the entire body of knowledge in accounting. b. What systems do accountants use to create and modify a chart of accounts?

In general, most charts of accounts follow a block or hierarchical coding system. In block coding, similar items are coded similarly; for example, all current assets might have account numbers that start with “1.” Hierarchical coding is good for more complex charts of accounts, and is a specialized form of block coding. In hierarchical coding, groups of digits have meaning. Such a system might be used in a business that has multiple product lines and / or multiple geographic locations. c. What internal controls are common in the accounting cycle? Internal controls useful in completing the accounting cycle include: sequentially numbered documents, adequate supervision, training & education and separation of duties. In addition, the requirement that journal entries maintain the equality of debits and credits is also an internal control. d. How is human judgment involved in the accounting cycle? Human judgment is required to recognize recordable transactions. To the extent that the accounting cycle involves estimates (as with depreciation and bad debts), human judgment is also important. e. How has information technology been employed in the accounting cycle?

Information technology is an important component of most modern accounting information systems; however, the technology is not the system. Common IT tools employed in the accounting cycle include: general ledger software, spreadsheets, relational databases and enterprise resource planning systems. Auditors can also use IT to sample transactions. f. List and discuss the six common types of adjusting entries found in most accounting information systems. Accrued revenues occur when an organization provides goods or services in one accounting period, but does not bill clients in that same period. Accrued expenses, on the other hand, occur when an organization incurs an expense, but does not pay cash until a subsequent period. Prepaid expenses are assets purchased in one period that are used up over multiple accounting periods, while deferred revenues involve the receipt of cash in one period for work that will be performed in a subsequent period. Depreciation and bad debt adjustments both involve estimates.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

g. Explain the purpose and structure of each general-purpose financial statement. AIS outputs associated with the accounting cycle include four generalpurpose financial statements. The income statement, which includes revenues and expenses, reports the results of business activity on the accrual basis for a specified period of time. The statement of shareholders’ equity tracks the changes in both paid-in capital and retained earnings, also for a period of time. The balance sheet embodies the accounting equation (assets = liabilities + equity), and reports financial position at a specified point in time. The statement of cash flows comprises three sections (operating, investing and financing), and reports the changes in cash for a specified period of time. h. In a manner specified by your instructor (e.g., individually or with a group, as a written paper or as an oral presentation), prepare an original response to one or more of the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

2. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

3. Reading review problem a. How should Regal code its chart of accounts to facilitate financial reporting?

Create account numbers for cash, capital stock and advertising expense for the following Regal theatres: Regal O’Fallon Stadium 14 (O’Fallon, Missouri), Regal Windward Stadium 10 (Kaneohe, Hawaii) and Regal Goldstream Stadium 16 (Fairbanks, Alaska). Regal should use some form of hierarchical coding for financial reporting purposes. A three-part code could be appropriate, where one set of digits denotes the state, a second set of digits denotes the specific theatre and a third set of digits denotes the specific account number. The latter should be block coded.

Using that system would yield the results shown below for the accounts and theatres noted. (The state code is based on an alphabetical listing of all 50 states. The theatre code is an assumption; so long as it’s consistent within the same theatre, any two digits should be OK. The account code is based on a standard block system.)

• Regal O’Fallon Stadium 14 o Cash: 25.01.101 o Capital stock: 25.01.501 o Advertising expense: 25.01.701

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

• Regal Windward Stadium 10 o Cash: 11.01.101 o Capital stock: 11.01.501 o Advertising expense: 11.01.701 • Regal Goldstream Stadium 16 o Cash: 02.01.101 o Capital stock: 02.01.501 o Advertising expense: 02.01.501 b. Suggest three source documents Regal would use to complete the steps in the accounting cycle. To pay its bills, Regal would use checks. It would use invoices as the basis for writing those checks. Credit card / receipts for cash would be used for things like ticket and concession sales. c. What journal entries would Regal make to record the transactions indicated above? Selling tickets: Debit Cash, Credit Sales. Paying employees: Debit Wages Expense, Credit various liability accounts for withholdings, Credit Cash for net pay.

Purchasing snack foods: Debit Snack Foods Inventory, Credit Accounts Payable.

Advertising new films: Debit Advertising Expense, Credit Accounts Payable. Declaring dividends on its capital stock: Debit Retained Earnings, Credit Dividends Payable. d. What roles would human judgment and information technology play in Regal’s transaction processing activities? Human judgment would be important in deciding when and how much to pay in dividends, as well as in choosing which films to show in which theatres. Information technology would allow Regal to send and receive data electronically from its various theatres, as well as to produce financial statements quickly and easily.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Here are a few notes as a guide. a. Recordable transactions are I and IV. b. Principles-based accounting will probably not impact the design of the AIS at all, since it focuses more on judgment in recording transactions and reporting information. The steps in the accounting cycle are unlikely to change. c. Students could calculate any of a variety of ratios, prepare common-size statements or use other techniques.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

6. Journal entries a Cash $ Capital stock Additional paid-in capital

1,750,000 $

b Accounts receivable Sales

10,000

c

3,000

50,000 1,700,000

10,000

Supplies Accounts payable

3,000

d Utility expense Cash

1,500 1,500

e no entry required f

Wages expense Cash

$

6,000 $

g Equipment Cash Notes payable

50,000

h Cash Accounts receivable

5,000

i

Accounts payable Cash

1,400

Interest expense Interest payable

400

j

6,000

10,000 40,000

5,000

1,400

400

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

7. Adjusting entries. a Depreciation expense Accumulated depreciation b Interest expense Interest payable c

Wages expense Wages payable

$ 1,000 $ 100 100 1,000 1,000

d Deferred fees Sales

300

e Supplies expense Supplies

650

f

1,000

300

650

no entry

g Bad debt expense Allowance for bad debts

160 160

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

GLP Corporation Adjusted trial balance September 30, 20x4 Cash $ Accounts receivable Allowance for bad debts Inventory Supplies Equipment Accumulated depreciation Accounts payable Wages payable Interest payable Notes payable Deferred fees Capital stock Additional paid-in capital Retained earnings Sales Cost of goods sold Advertising expense Wages expense Interest expense Depreciation expense Supplies expense Bad debt expense Miscellaneous expense Totals $

6,000 2,500 $

360

4,500 150 15,000 11,000 1,200 1,000 100 6,000 600 7,000 8,000 11,000 16,300 13,500 5,000 13,000 100 1,000 650 160 1,000 62,560

$

62,560

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

8. Financial statements.

GLP Corporation Income statement For the quarter ended September 30, 20x4 Sales Cost of goods sold Gross profit

$ $

Expenses: Advertising expense $ 5,000 Wages expense 13,000 Interest expense 100 Depreciation expense 1,000 Supplies expense 650 Bad debt expense 160 Miscellaneous expense 1,000 Net loss

16,300 13,500 2,800

20,910 $

(18,110)

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

GLP Corporation Balance sheet As of September 30, 20x4 Assets Cash Accounts receivable (net) Inventory Supplies Equipment (net) Total assets Liabilities & equity Accounts payable Wages payable Interest payable Notes payable Deferred fees

$

$

Capital stock $ Additional paid-in capital Retained earnings (deficit)

1,200 1,000 100 6,000 600

$

6,000 2,140 4,500 150 4,000 16,790

$

8,900

7,000 8,000 (7,110)

Total liabilities & equity

7,890 $

16,790

9. Coding systems a. mnemonic b. sequential c. sequential d. hierarchical e. sequential f. hierarchical g. block h. block i. block j. block

10. Terminology 1. F 2. D 3. C Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

4. B 5. I 6. G 7. A 8. H 9. E 10. J

11. Multiple choice questions 1. B 2. A 3. C 4. B 5. D

12. Statement evaluation a. never true b. sometimes true. The adjusting entry for an accrued liability is an example. c. always true d. sometimes true. The complexity of the chart of accounts will help determine which system to use. e. never true f. sometimes true. The statement describes an accrued revenue adjustment; the term “accrual” could also be used for an accrued expense. g. never true h. always true i. sometimes true. Block coding facilitates closing entries, but not all automated AIS use block coding. j. always true

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 2: Transaction Processing in the AIS

13. Excel application Equipment basis $ Salvage value Estimated life

65,000 3,000 5

TPL Corporation Equipment depreciation schedule Straight-line

Year 1 2 3 4 5

Depreciation expense

Accumulated depreciation

$12,400 12,400 12,400 12,400 12,400

$12,400 24,800 37,200 49,600 62,000

Book value $52,600 40,200 27,800 15,400 3,000

TPL Corporation Equipment depreciation schedule SYD

Year 1 2 3 4 5

Depreciation expense

Accumulated depreciation

$20,667 16,533 12,400 8,267 4,133

$20,667 37,200 49,600 57,867 62,000

Book value $44,333 27,800 15,400 7,133 3,000

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

1. Reading review questions a. What is internal control? Why is internal control important in organizations?

Internal control is a system of policies and procedures designed to help an organization run more efficiently and effectively. Without strong internal control, an organization is much more susceptible to various forms of risk which can compromise its operations and its financial reporting. b. What are the four basic purposes of internal control? Give an example of each one. Internal control helps an organization safeguard its assets, such as by keeping inventory in a physically secure location. It also ensures reliable financial reporting, such as through internal and independent audits. A third purpose of internal control is to promote operating efficiency, which can be accomplished via strong separation of duties. Finally, internal control should also encourage compliance with management directives, possibly through a well-written procedures manual. c. List and discuss four broad categories of organizational risk exposures. For each broad category, suggest two examples. Brown’s risk taxonomy identifies four risk exposure categories: financial risk (running out of money, decreases in stock price), operational risk (accountants making mistakes in recording journal entries, computer viruses), strategic risk (expanding into new markets without sufficient preparation, violating laws like the Foreign Corrupt Practices Act) and hazard risk (violating laws like the Sarbanes-Oxley Act or RICO statutes). d. What is COSO? Why is the work of COSO important in internal control? COSO is an acronym for the Committee of Sponsoring Organizations of the Treadway Commission on Fraudulent Financial Reporting. Comprising five accounting organizations, COSO has published several documents related to enterprise risk management and internal control. Their internal control framework has been widely applied as organizations respond to the requirements of the Sarbanes-Oxley Act of 2002. e. Prepare a response to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

2. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

3. Reading review problem a. What is internal control? According to COSO, internal control is “a process, effected by an entity’s board of directors, management and other personnel, designed to provide reasonable assurance regarding the achievement of objectives in the following categories: effectiveness and efficiency of operations, reliability of financial reporting and compliance with applicable laws and regulations. b. Explain the importance of COSO’s 2013 Internal Control—Integrated Framework in establishing strong internal control. The COSO framework gives organizations some guidance in developing an internal control system. It lays out the pieces of that important task in a comprehensive, yet detailed way. Additionally, many organizations use the framework as part of SOX compliance. c. Consider the following risk exposures at Enron: insufficient cash for operations, fraudulent accounting, too close a relationship with auditors, declines in stock price. For each risk exposure, indicate the relevant category of the Brown taxonomy; suggest at least one internal control to address the risk.

Risk Insufficient cash for operations

Category Liquidity risk

Fraudulent accounting

Legal & regulatory risk

Too close a relationship with auditors

Business strategy risk

Declines in stock price

Market risk

Internal control Prepare an annual cash budget to estimate needs Establish an independent internal audit function to review transactions Enforce the corporate code of conduct regarding conflicts of interest Monitor stock price daily via some automated system

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Here are some notes on possible responses: a. Alphabet Soup Consulting: establish and enforce a policy that prohibits Richard’s actions. Gary & Dan: Store blank checks more securely. Southern State University: set a time limit on initial passwords, after which they must be created again if not used.

Village Bookstore: Institute periodic inventory counts. b. Risks include: insufficient cash for operations, inability to attract enough business, hiring employees with insufficient experience / qualifications, locating in an area where competition is heavy, information system breakdowns.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

6. Internal control has four basic purposes: safeguarding assets, ensuring financial statement reliability, promoting operational efficiency, and encouraging compliance with management’s directives. Consider each of the internal control procedures described below. For each procedure, indicate which purpose(s) of internal control it is designed to address. a. safeguarding assets b. promoting operating efficiency, encouraging compliance with management directives c. safeguarding assets, promoting operating efficiency d. safeguarding assets, encouraging compliance with management directives e. all four purposes f. ensuring financial statement reliability, promoting operating efficiency g. safeguarding assets h. safeguarding assets, promoting operating efficiency i. safeguarding assets, ensuring financial statement reliability j. safeguarding assets, promoting operating efficiency

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

7. Visit the web site of the Wild Cat Zoo in southern California (www.cathousefcc.org). Classify each of the following risks using Brown’s taxonomy. Also suggest one or more internal controls to address each risk. For each internal control you suggest, specify which broad purpose(s) of internal control it satisfies, as well as whether it is preventive / detective / corrective in nature.

Explain your responses.

Brown a. The zoo fails to attract a sufficient number of visitors. b. One or more animals get sick. c. The zoo’s web site becomes unavailable due to a computer virus. d. Promotional and educational literature contain errors of fact about the animals and the zoo’s operating hours. e. One of the animals escapes because a keeper fails to lock its cage securely. f. An employee falsifies his / her credentials to obtain a position as a veterinarian. g. The zoo’s admission prices are prohibitively high for school groups. h. The zoo loses its 501(c)(3) status with the Internal Revenue Service. i. The gift shop runs out of a popular souvenir item. j. A disgruntled former volunteer attempts to set a fire at the zoo.

Internal control Established policy on marketing and advertising Regular veterinary checkups

Liquidity risk Legal & regulatory risk

Purpose Preventive Preventive, detective

Systems risk

Disaster recovery plan

Corrective

Human error

Independent review of promotional & educational literature

Detective, corrective

Human error

Audible alarm

Detective

Human error

Background checks

Preventive, detective

Liquidity risk

Discounted pricing for school groups

Preventive

Business strategy risk

Internal audits of activity vis-a-vis IRS requirements

Detective

Liquidity risk

Ordering based on historic demand

Preventive

Liquidity risk

Insurance

Corrective

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

8. Do a Google search for the Fortune 100 companies. Choose two of the companies from the list and prepare a risk / control matrix similar to the one illustrated in the chapter. Include five to seven risks for each company you choose. Here is an example for Verizon Communications.

Risk

Risk category

Internal control

Falling stock prices

Market risk

Frequent stock price monitoring

Communication network failure Losing customers to competing firms

Systems risk

Built-in network redundancy Periodic surveys of customers who switched

Customers fail to pay amounts owed

Fraud

Strategic risk

Credit risk Legal & regulatory risk

Internal control purpose

Detective

Preventive

Detective

Checking customer credit before creating an account

Preventive

Regular fraud audits

Preventive, detective

Comments

Stock prices can be checked frequently with information technology.

Building in redundancy can be costly, but may be worth the money.

Surveys can be done electronically.

Customers can be required to provide a form of payment before they establish an account.

These audits can sometimes be done by internal auditors.

9. In each of the following independent situations, identify internal control deficiencies and make suggestions regarding their correction/improvement a. This company should take steps to make its inventory more secure, such as by keeping it in a locked storage area or implementing some form of video surveillance. In addition, the company should have a clear policy on the consequences of theft. b. This company needs stronger separation of duties; the controller should not be able to order inventory and approve invoices for payment. Further, the company should set up a stronger policy requiring authorization for setting up new offices. c. Terminated employees need to be removed from the information system immediately. The company could also discontinue paper checks, opting instead for electronic payments and direct deposit. Regular bank reconciliations would also be helpful.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

10. MailMed Inc. Risk The computer is installed on the ground floor behind plate glass windows.

Documentation is developed only on a “time available” basis.

The company backs up data “periodically.”

The computer equipment can be damaged by flooding.

Control Relocate the computer to a more secure location.

Develop systems documentation as a regular part of systems development and implementation.

Backups need to be regularly scheduled, preferably at least daily.

Equipment needs to be insured and stored in a place that minimizes this risk.

11. Richards Furniture Company a. What risks does Richards face? Sales staff could make errors or commit fraud by manipulating prices and discounts. The cashier could approve credit for customers that are not creditworthy. The manager could steal cash from the bank deposit. b. If you were an unethical customer and/or employee of Richards, how could you defraud the company given their current procedures? Customers and / or employees could collude with the sales staff and cashier to falsify records. c. What internal control strengths does the company possess? What risks are those strengths designed to address? Documents are sequentially numbered, thus addressing the risk that they will be misused. Cash is deposited daily in the bank, addressing the risk of theft. The bank account is reconciled monthly, also addressing the risk of embezzlement. d. How could internal control be improved at Richards? Richards should establish a separate department in charge of authorizing credit. They should also have an independent party reconcile the bank statement more frequently. They could consider employee bonding, and also need a separate department for processing returns.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

12. Price Right Electronics a. Identify at least two internal control strengths of PEI’s system. Indicate why each is a strength. The system is being developed and implemented gradually; doing so both enhances cash flow and helps ensure that software is matched to the organization’s needs. Credit checking is done automatically; it is not in the hands of sales staff, who might be tempted to grant credit to customers who do not deserve it.

The company has a separate department that evaluates credit for new customers, thus promoting objectivity in the process. b. Identify at least three internal control weaknesses in PEI’s system. Explain the nature of each weakness and recommend a way to address it. The system generates multiple copies of the sales order, but we have no idea how many copies, where they go or if they are sequentially numbered. That lack of control could lead to fictitious sales orders and should be addressed simply by incorporating all the above information.

Credit manager issues credit memos based on customer requests, reflecting weak separation of duties. Returned merchandise transactions should be handled independently.

We do not know what happens to returned merchandise. The Warehouse should receive some documentation indicating what merchandise is being returned so as to keep inventory records up to date.

The Warehouse, which has physical custody of inventory, should not be handling the recordkeeping for inventory (i.e., updating the inventory database). Such weak separation of duties could lead to inventory shrinkage. The database should be updated by personnel outside the Warehouse function.

Shipping and Receiving should be separated.

The Billing department should not be pricing the sales orders; in addition, pricing should take place before shipment. Sales orders should be priced automatically when the order is generated to improve internal control.

Billing prepares sales journals, but Accounts Receivable updates customer records directly from source documents. Such duplication of effort may lead to errors.

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3-7

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

13. Terminology 1. G 2. A 3. C 4. H 5. I

6. J 7. B 8. D 9. F 10. E

14. Multiple choice questions 1. C 2. A 3. B 4. A 5. D

15. Statement evaluation a. Sometimes true. The cost and time of an audit depends on the type of audit and many factors other than internal controls. b. Always true. c. Sometimes true. Having more than one person authorized to sign checks does not necessarily weaken internal control. d. Always true. e. Never true. f. Sometimes true. Internal controls can also detect / correct fraud. In addition, even organizations with strong internal controls can be the victims of fraud. g. Sometimes true. The importance of a given risk vis-a-vis other risks depends on the nature of the business. h. Sometimes true. The cost of controls is not exclusively associated with the purpose of a control. For example, installing video surveillance equipment may be significantly less expensive than maintaining an internal audit staff. i. Never true. j. Sometimes true. Many things impact stock prices; in addition, internal control breaches are not always made public.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 3: Internal control

16. Excel application t-Test: Two-Sample Assuming Equal Variances

Mean Variance Observations Pooled Variance Hypothesized Mean Difference df t Stat P(T<=t) one-tail t Critical one-tail P(T<=t) two-tail t Critical two-tail

Variable 1 6310.526316 319401.3743 19 1711858.825 0 36 -7.37446613 5.32946E-09 1.688297714 1.06589E-08 2.028094001

Variable 2 9440.947368 3104316.275 19

Conclusion: There is a significant difference between purchase orders processed in the first half vs the second half of the month. Therefore, an internal control breach may be occurring, and further investigation is necessary. Please note that the above results do not establish conclusive proof of anything, other than a difference in the means of the two groups.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

1. Reading review questions a. What are the elements of COSO’s enterprise risk management framework?

COSO’s ERM framework comprises eight elements: internal environment, objective setting, event identification, risk assessment, risk response, control activities, information and communication, and monitoring. b. What is business process management? List and discuss the steps managers often use to change a business process. Business process management, as the name implies, is a way organizations can make their business processes more effective and efficient. By doing so, organizations can create value for their stakeholders. The generalized model of BPM discussed in the chapter comprises seven steps: Select the process and define its boundaries. Observe document, and map the process steps and flow. Collect process-related data. Analyze the collected data. Identify and prioritize potential process improvements. Optimize the process. Implement and monitor process improvements. c. List and discuss seven principles of business process management.

Eppele suggested seven principles to keep in mind in a BPM project: Understand how business processes interact with / support organizational strategy. Move away from the “we’ve always done it this way” mentality. Enlist top management support. Managing business processes is fundamentally about people, not technology / documents. Don’t rely on external consultants to the exclusion of internal employees. When using consultants, make sure the task is well defined, with specific deliverables defined by the company. Communicate early; communicate often. d. What are the elements of expectancy theory? Give examples of each one.

Vroom suggested that motivation depends on three factors: expectancy, instrumentality and valence. Expectancy is the strength of someone’s belief that effort will lead to accomplishment; for example, a student may believe that completing all their accounting homework will lead to passing the course. Instrumentality is the strength of someone’s belief that achieving a goal will lead to a reward; for example, a student may believe that graduating with a 4.0 GPA will lead to a good job. Finally, valence is the extent to which a reward is valued; for example, a student may really want a good job. e. In a format specified by your instructor, respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

2. Reading review problem a. Use COSO’s framework to develop an enterprise risk management plan for McDonald’s corporate office. Ensure that the risks you identify are focused on the corporate office, not individual locations.

•

Internal environment. In its quarterly earnings announcement conference, the CEO and CFO discuss the role ERM plays in McDonald’s operations.

•

Objective setting. One of the corporation’s goals is to increase earnings per share by at least 1% annually.

•

Event identification. Corporate profits may be insufficient to achieve that goal.

•

Risk assessment. Moderate to high.

•

Risk response. Accept, reduce.

•

Control activities. Use data analytics and related tools to monitor profitability continuously. Take corrective actions as needed.

•

Information and communication. McDonald’s includes the broad structure of its ERM plan in its corporate annual report.

•

Monitoring. The corporate internal audit department reviews the ERM plan annually and makes suggestions for its improvement.

b. The corporate office has many business processes, including establishing new franchises, paying dividends to shareholders and communicating with news agencies. Choose one of those processes and at least three of Eppele’s basic principles of business process management. Explain how the process you chose should be aligned with the principles you chose.

•

Process. Communicating with news agencies.

•

Principle 1. Understand how business processes interact with / support organizational strategy.

•

Alignment. In its communications with news agencies, McDonald’s should emphasize its strategic plan whenever possible.

•

Principle 2. Move away from the “we’ve always done it this way” mentality. Be open to alternatives.

•

Alignment. McDonald’s corporate communications department should explore uses of new social media tools to communicate with news agencies.

•

Principle 3. Communicate early; communicate often.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

•

Alignment. The corporate office should plan a regular schedule of communications with news agencies, leaving room for “special communications” as the need arises.

c. Consider the process of establishing a new franchise from two perspectives: the person requesting the franchise and the McDonald’s employee evaluating the application. In a format similar to Table 4.1 in the chapter, apply the elements of expectancy theory to explain each party’s motivation.

Factor Expectancy

Instrumentality

Valence

Application from requestor’s perspective If I submit a good application, will it be approved?

If the application is approved, will I be able to start a successful franchise?

Do I value the rewards of such a franchise?

Application from corporate perspective If I make a recommendation on this application, will it be followed?

If my recommendation is followed, will I be rewarded in some way—perhaps with a pay bonus?

Do I value the pay bonus or other method of reward?

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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4-3

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. But, here are a few points students may raise in responding to the various parts of this problem. a. Objective setting: Increase market share. Event identification: Competitors develop more innovative product offerings. Control activity: Invest more in research and development, as well as market research. b. Data to collect: Cost of processing each expense reimbursement. Analysis tools: activity-based costing, spreadsheets. Suggestion for improvement: Automate the process for expenses below a specified threshold. c. Expectancy: If AOL’s corporate officers follow the recommendations, will they achieve a lower overall cost? Instrumentality: If they achieve a lower overall cost, will their stock price increase? Valence: Is a stock price increase important to them?

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

6. Enterprise risk management Which element of the COSO ERM framework is most closely associated with each of the following? a. ALG Corporation bonds key employees. Control activities b. Based on previous experience, TRG Corporation’s management believes the risk of inventory shortages is moderate. Risk assessment c. BPC Corporation implements a profit sharing plan as a way to motivate managers to control costs. Control activities d. BRN Corporation’s board of directors hires a consultant to explain ERM. Internal environment e. CNV Corporation’s managers accept the risk of stock price decreases. Risk response f. DTI Corporation holds quarterly staff lunches where employees discuss how they manage risk. Information and communication

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

g. EIV Corporation’s president organizes monthly meetings for managers to discuss books and articles related to ERM. Internal environment h. FLM Corporation operates manufacturing plants on three continents. Event identification i. FPO Corporation follows a top-down model for strategic planning. Objective setting j. HRP Corporation’s internal audit department assesses and tracks the effectiveness of its ERM plan. Monitoring k. Management at CNV Corporation determines the probability of a decrease in stock value is very high. Risk assessment l. MGG Corporation occasionally hires a consultant to provide feedback on its ERM plan. Monitoring m. RCH Corporation’s enterprise risk management department prepares and distributes a monthly ERM newsletter. Information and communication n. SSO Corporation reviews and revises its strategic plan annually. Objective setting o. TRG Corporation’s managers want to avoid inventory shortages. Risk response p. WRL Corporation does not use data encryption in its wireless network. Event identification

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

7. Expectancy theory elements Which element of expectancy theory is described in each of the following independent scenarios? a. Anh completed the steps for licensure as a Certified Public Accountant and received a pay raise. Instrumentality. Achieving licensure (accomplishment) leads to reward (pay raise). b. Claudia completed a BPM project early; her boss said she could either have extra time off or a small pay raise. Claudia chose the pay raise. Valence. Claudia values the pay raise over the time off. c. Ethan put in many extra hours in January, and was pleased to be named “employee of the month.” Instrumentality. Effort (extra hours) leads to reward (employee of the month). d. Lupe believes her company’s new general ledger software is too complex to master. Expectancy. Effort will not lead to accomplishment. e. Mark changed his major from finance to accounting because he heard jobs are more plentiful in accounting. Valence. Mark values having a good job. f. Richard has stopped suggesting business process improvements because his ideas are never implemented. Expectancy. Effort (suggestions) did not lead to accomplishment (ideas are never implemented).

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

8. Expectancy theory and employee motivation In the previous problem, you identified one relevant element of expectancy theory.

Consider each scenario again; “fill in” the other two elements. Here’s an example: Expectancy: Anh studied hard and took a review course that enabled her to pass the CPA exam on her first attempt. Instrumentality: Anh completed the steps for licensure as a Certified Public Accountant and received a pay raise. Valence: Anh celebrated her pay raise with her family and close friends.

Case Expectancy a Anh studied hard and took a review course that enabled her to pass the CPA exam on her first attempt.

b

Claudia believed that completing the BPM project early would “get her noticed” by her boss.

c

Ethan believed that putting in extra hours would go a long way toward being recognized as employee of the month.

Lupe believed the general ledger software was too complex to master.

d

e

Changing his major would lead to success in the new major.

f

Richard stopped making suggestions because his ideas were never implemented.

Instrumentality Anh completed the steps for licensure as a Certified Public Accountant and received a pay raise.

Claudia believed that being noticed would result in some sort of reward.

Ethan put in extra hours and was named employee of the month.

Lupe believed that, even if she mastered the software, she wouldn’t be rewarded for her effort.

Success in the new major would lead to a better job.

Even if his ideas were implemented, Richard was uncertain he would benefit.

Valence Anh celebrated her pay raise with her family and close friends

Claudia chose the pay raise.

Ethan was very proud to be named employee of the month.

Lupe was content with her present job, salary and responsibilities; she was not interested in any change to them.

Mark values having a good job, so he changed majors.

Richard was happy as he was, and didn’t want any changes in his position at work.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

9. Business process management principles Which of Eppele’s seven principles is violated in each of the following independent cases? Justify your responses. (Each case may violate more than one principle.) a. Amanda objected to her company’s new approach to training because they had never used it before. Be open to alternatives. b. Esther started a BPM project by looking for appropriate information technology tools. Managing business processes is fundamentally about people, not about technology or documents. c. Eugene, an entry-level employee, implemented a new system for taking inventory. Understand how business processes interact with / support organizational strategy. Enlist top management support. d. Jeff decided to change his company’s purchasing process because their current process seemed too cumbersome. Understand how business processes interact with / support organizational strategy. Enlist top management support e. Minh told the consultants for a BPM project to prepare and submit reports as they felt it appropriate. Don’t rely on external consultants to the exclusion of internal employees. When using external consultants, make sure the task is well defined, with specific deliverables defined by the company. f. Molly told employees that all their concerns would be addressed at the end of the BPM project. Communicate early; communicate often. Deal immediately with objections / issues as they arise. g. Raul argued strongly that a proposed BPM project be managed by a consulting firm. Don’t rely on external consultants to the exclusion of internal employees.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

10. ERM plan Here is an ERM plan for Verizon Communications: COSO element Internal environment

Objective setting Event identification Risk assessment Risk response Control activities

Information and communication Monitoring

Verizon example The CEO and CFO of Verizon conduct a webinar emphasizing the importance of risk management and giving an overview of upcoming activities.

One of Verizon’s goals could be to increase its dividend payouts to shareholders.

Verizon might have insufficient cash flow to increase its dividend payouts.

The ERM team assesses the risk as moderate to high on both inherent and residual levels.

Verizon might choose to reduce the risk of insufficient cash flow.

One way to reduce the risk of insufficient cash flow is setting aside cash or other assets specifically to pay dividends.

The ERM plan would be publicized throughout Verizon, perhaps through another webinar.

Verizon might create a “risk management” department, specifically charged with monitoring the ERM plan.

11. Terminology 1. B

6. J

2. F

7. E

3. A

8. D

4. G

9. I

5. H

10. C

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

12. Multiple choice questions 1. B 2. C 3. C 4. D 5. C

13. Statement evaluation 1. Sometimes true. Depending upon the project / goal, someone outside the accounting department might be in the best position to determine valence.

2. Always true.

3. Always true.

4. Sometimes true. Not all BPM projects use information technology.

5. Never true.

6. Sometimes true. The usefulness of cost variances would depend on the nature of the BPM project.

7. Never true.

8. Sometimes true. Whether production workers are in the best position depends upon the BPM project.

9. Never true.

10. Always true.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 4: Management concepts

14. Excel application Employee number 234 234 234 237 237 237 240 240 240 240

Processing time (minutes) 41 46 38 36 41 42 23 25 47 40

Average of Processing time (minutes)

45.0 40.0

Row Labels 234 237 240 Grand Total

Average of Processing time (minutes) 41.7 39.7 33.8 37.9

35.0 30.0 25.0 20.0 15.0 10.0 5.0 0.0 234

237

240

Employee number

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4-11

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 5: Information systems concepts

1. Reading review questions a. What are the steps in the systems development life cycle? What activities does each step involve? The systems development life cycle comprises the seven steps listed and described below: •

Initiation / planning: A need for a new / revised system is identified. This phase often involves feasibility studies.

•

Requirements analysis: Analysts determine what needs the system should meet; data collection methods include surveys, interviews, observation and focus groups.

•

Design: Designers develop the first “concept sketches” of the system.

•

Build: Based on the design specifications, one or more systems professionals build the system.

•

Test: Users test the system and provide feedback on what works and what doesn’t work.

•

Implementation: The system “goes live.”

•

Operations and maintenance: The system is operated and maintained, which includes needed modifications.

b. What are the costs and benefits of using the SDLC? The SDLC is a wellstructured methodology that provides for plenty of user input. It can, however, be inflexible; changes may be difficult and expensive once the process is underway. c. How can the SDLC be useful in accounting information systems? The SDLC can be used to design, create and implement an accounting information system or some part(s) of it. It can also be used to select off-the-shelf software. d. What are the levels in the capability maturity model? What characteristics distinguish each level? The CMM comprises five levels, listed and described below: •

Chaotic: Processes lack cohesion; they may be specific to an individual who does not share them.

•

Repeatable: Processes become more mature; they are developed and implemented according to a schedule, with major milestones indicated throughout.

•

Defined: Processes are developed from broader organizational standards, rather than being viewed in isolation from one another.

•

Managed: The efficiency and effectiveness of a process are measured through benchmarks and other standards.

•

Optimized: An attitude of quality pervades the organization.

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5-1

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 5: Information systems concepts

e. What factors should managers consider when choosing information technology resources? Managers should consider “big picture” issues such as organizational need, strategic fit, personnel involvement and financing methods. They should also consider factors more closely related to individual projects, such as cost, adaptability, training requirements and vendor reliability. f. Prepare a response to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

2. Reading review problem a. Use the steps in the systems development life cycle (SDLC) to explain how a company like Amazon, Apple or some other firm would develop a product or service to compete with the Google product you chose.

•

Initiation / planning. Amazon believes there is a need for it to develop its own blogging tool, similar to Google’s Blogger.

•

Requirements analysis. Through an analysis of Blogger and market research, Amazon determines the desired characteristics of a blogging tool.

•

Design. Amazon uses the requirements analysis to create screen layouts of the tool.

•

Build. After feedback from potential users, Amazon develops a prototype.

•

Test. Amazon gives the prototype to a small group of potential users. They provide feedback and Amazon makes changes.

•

Implementation. Amazon “rolls out” its new tool, probably with a large comprehensive advertising campaign.

•

Operations and maintenance. A dedicated team of Amazon employees responds to user concerns and suggestions for improvement.

b. Does using the SDLC correspond to any particular level of the capability maturity model (CMM)? Why, or why not? Using the SDLC does not correspond to any particular level of the CMM. The SDLC is a fairly generic process; the CMM classifies business processes based on a particular organization. For example, if only one user in an organization used the SDLC, the process might be considered chaotic.

On the other hand, if it was more widely used in a standardized way, the process would likely be more mature.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 5: Information systems concepts

c. Consider at least one macro-level and one micro-level factor from Figure 5.3 in the context of the product / service you suggested in (a). Prepare a short written summary and / or oral presentation relating the factors to your product / service.

•

Need (macro-level factor). Is there a market need for a new blogging tool?

•

Training (micro-level factor). Will customers be able to use the new tool effectively with minimal training? If more extensive training is needed, how will Amazon provide it?

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Here are a few points they may raise in responding to each question. a. If an organization does not already have a culture of continuous improvement, it may be difficult to reach the “optimized” level of the CMM. Even previous levels produce some benefits, such as consistency over time. b. With general ledger software, a company could: (1) produce general purpose financial statements, (2) prepare an aging of accounts receivable, (3) monitor payables due dates to take advantage of any discounts. c. The first FTP software in the list on Download.com is JasFTP. If the factors are ease of use (10), cost (9) and cross-platform utilization (6) and its scores are 8, 6 and 7 respectively, its score using the weighted rating technique would be 176.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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5-3

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 5: Information systems concepts

6. Capability maturity model classification a. Repeatable—Alastor sets a goal, so he is engaging in some planning that may result in consistency over time. b. Managed—The process is measured in terms of time and money. This process is not optimized because the president focuses on just one of the three projects. c. Optimized—Monthly meetings focused on process improvement indicate it is ingrained in the organization. d. Repeatable—Each day, Christina sets a goal by deciding how many clients she will contact. e. Chaotic—The two people disagree about the best way to build a doghouse, likely leading to each one doing it in the way that seems best to them. f. Managed—Magdy compares the actual capital structure with the optimal capital structure (a form of measurement). g. Optimized—The company has an overall quality improvement plan. h. Chaotic—Sebastian had no legitimate methodology for hiring a new employee. i. Defined—The payroll manager is acting in accordance with broader organizational policies. j. Defined—Management seeks to understand relationships.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 5: Information systems concepts

7. Systems development life cycle a. Build—Dolores is actually creating the database tables. b. Operations and maintenance—Answering questions is an element of operating the system. c. Design—Esther is thinking conceptually about the form. d. Test—Liliane is working with simulations. e. Requirements analysis—The DFDs are used as a basis for discussing the sales / collection process with sales staff. f. Initiation / planning—Tony has identified a goal / need. g. Implementation—The system has been implemented using a direct cutover methodology.

8. Requirements analysis a. Questions to ask as part of requirements analysis might include: What don’t you like about the current system? How comfortable are you working with computers? How often do you need to consult the current inventory tracking system? Do you need to track inventory from remote locations? How many kinds of inventory should the system track? b. Questions to ask as part of requirements analysis might include: How many appointments do you usually take in a day? How comfortable are you working with computers? What problems are you experiencing with the paper-based system? Does anyone schedule appointments for you other than you? How much would you be able to budget for this project?

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5-5

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 5: Information systems concepts

9. AICPA Top Technology Initiatives The AICPA develops the list based on surveys of its members. The 2013 United States list includes: •

Managing and retaining data

•

Securing the IT environment

•

Managing IT risks and compliance

•

Ensuring privacy

•

Managing system implementation

•

Preventing and responding to computer fraud

10. Terminology 1. I 2. G 3. H 4. B 5. C

•

Enabling decision support and analytics

•

Governing and managing IT investment and spending

•

Leveraging emerging technologies

•

Managing vendors and service providers

6. F 7. D 8. J 9. A 10. E

11. Multiple choice questions 1. A 2. D 3. D 4. A 5. D

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 5: Information systems concepts

12. Statement evaluation 1. Sometimes true. The SDLC is one alternative for systems development; in some cases, it may be the best.

2. Never true.

3. Always true.

4. Always true.

5. Always true.

6. Sometimes true. While organizations should try to move through the CMM on an organization-wide basis, that doesn’t always happen. Thus, processes in two different departments can be at two different levels.

7. Sometimes true. Organizations can skip levels of the CMM, although doing so isn’t a really good idea most of the time.

8. Always true.

9. Sometimes true. The “managed” stage focuses on both defining and measuring. ABM can be used for those purposes, but it isn’t always.

10. Never true.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 5: Information systems concepts

13. Excel application Software cost

$

80,000

Year

Cash flow

Additional revenue generated annually

12,000

0

$ (80,000)

Annual cost savings

6,000

1

18,000

Anticipated life of the software

5

2

18,000

Discount rate

3%

3 4 5

18,000 18,000 18,000

Net present value Internal rate of return

$2,364 4%

The numerical results are an indicator that AGN should buy the software.

However, they should only be used as a guide, not as an absolute.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

1. Reading review questions a. What is a flowchart? Describe four different kinds of flowcharts and explain which are most often used in an accounting information system. A flowchart is one form of systems documentation used in accounting information systems.

Flowcharts come in at least four varieties: systems (give a “big picture” look at a business process), document (show the flow of a document through a system), hardware (map the hardware components of a system along with their relationships to one another) and program (describe the rules and logic of a specific computer program). Systems flowcharts are widely used in AIS, with document and hardware flowcharts being used occasionally. Program flowcharts are rarely used in AIS work. b. Summarize the rules and conventions commonly observed in the preparation of flowcharts. The conventions associated with flowcharting are meant to facilitate reading and interpretation. Flowcharts should be read from top to bottom and left to right; they should not be crowded. They should be organized in columns based on areas of responsibility, and should always have a complete title. Documents in a flowchart should always have clear points of origin and termination. c. List and explain the meaning and use of 10 common flowcharting symbols.

What sources would you consult for learning about additional symbols not on your list? The illustration below depicts common flowcharting symbols discussed and used throughout the text.

Symbol A is a document symbol, commonly used for items like purchase orders and sales invoices. Symbol B is a decision symbol; it should be used for decisions that have a binary outcome (yes or no). Symbols C and D are connectors; the former is an onpage connector, the latter is an off-page connector. Symbol E is a terminator; it should be used at the beginning and end of a flowchart. Symbol F is a manual process symbol, while Symbol G is a generic process symbol. Symbol H represents an electronic database. Symbol I is a predefined process symbol. Finally, Symbol J is a Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

manual file symbol. Additional symbols can be found in a variety of software packages and online. d. How are flowcharts used in working with accounting information systems?

Flowcharts can be used to understand how a business process works. They can also be used to spot internal control deficiencies and to recommend business process improvements. e. Respond to the questions for this chapter’s “AIS in the Business World.”

As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com).

Look for the 4th edition’s responses in the 15 December 2014 post.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

2. Reading review problem a. Prepare flowcharts of the steps described above—one flowchart for the sales / collection steps and a separate one for the acquisition / payment steps.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

b. Explain how you would use the flowcharts you created and / or those illustrated in the chapter as an independent auditor for Barnes & Noble and / or as the bookstore’s director of training and development.

Independent auditors would use the flowcharts for at least two purposes: to understand the business process depicted and as one tool to evaluate internal controls.

The director of training and development would likely use the flowcharts to teach employees about how business processes function at Barnes & Noble. c. List and discuss at least two internal control strengths / weaknesses based on the flowcharts you created.

There is some separation of duties in both processes, although it could be stronger.

Additionally, there is no mention of insuring the goods with the common carrier.

Document matching before paying a vendor invoice is a strength, but the process for resolving discrepancies could be more detailed.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Here are some points students may include in their responses: SmartDraw is relatively easier to learn and use than Visio. Visio has the advantage (or disadvantage, depending on your perspective) of being part of Microsoft Office, so users will have some familiarity with its interface.

Visio is also more expensive than SmartDraw.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

6. Flowchart creation a. Cori’s Catering Service

-

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

b. University Bookstore

-

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

c. Horacio

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

d. International Accounting Standards Board International Accounting Standards Board Systems flowchart of the standard development process Start

Conduct research

Board agenda

Receive proposals

Discussion paper

Optional

Consult public

Exposure draft

Consult public

Reviewed after two years

New IFRS

End

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

7. Narrative preparation from a flowchart a. A salesperson for Richards Furniture Company manually prepares a sales invoice with four copies. The salesperson keeps one, and sends the other three to the cashier.

The cashier approves and processes the sale; the invoice copies are distributed to the customer, the cashier’s file and the assistant manager. After approving the sale, the cashier assigns a consecutive transaction number and inputs the sale to the cash register. The assistant manager reconciles the cash register tape to the invoices.

Someone (probably the manager) prepares, makes and reviews the bank deposit. b. A customer at PriceRight Electronics submits an order to the marketing department, where it is input to the sales order system. Copies of the sales order go to the customer and the warehouse; the warehouse assembles the order. The credit department checks credit for new customers only. The warehouse, after assembling the order, sends a copy to the shipping and receiving department, where the order is packed and shipped.

An additional copy of the sales order goes to the customer. The warehouse also maintains the inventory master file.

8. Flowchart and system critiques a. Strengths of the flowchart: The flowchart is organized in columns depicting areas of responsibility. Some of the symbols are used correctly. Weaknesses of the flowchart: It does not include a proper heading, nor does it include appropriate terminator symbols.

Strengths of the process depicted: Cash is deposited in the bank, although we cannot tell how often. Bank deposit documents are filed in case they are needed for later reference. Weaknesses of the process depicted: The cashier should not be approving the sale; as an improvement, a separate department should perform that function. The process of preparing the reconciled report, as well as its content, is very jumbled and confused; Richards should develop a stronger, more cohesive process to improve internal control. b. Strengths of the flowchart: The flowchart is organized in columns depicting areas of responsibility. Some of the symbols are used correctly. Weaknesses of the flowchart: The lines do not have arrows, so it is impossible to tell which direction things are flowing. The system boundary is also poorly defined; the flowchart includes both information on the sales order process AND on the maintenance of the inventory master file. Strengths of the process depicted: The company maintains a master file of customer credit limits. Credit is checked and approved by the credit department, although not nearly often enough. Weaknesses of the process depicted: The credit department should check everyone’s credit—not just new customers. The sales order serves far too many purposes; the company should develop and use additional documents for things like packing and shipping.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

9. Terminology 1. J 2. C 3. H 4. G 5. D

6. I 7. B 8. F 9. A 10. E

10. Multiple choice questions 1. B 2. A 3. B 4. C 5. A 11. Statement evaluation 1. Always true 2. Sometimes true. Document flowcharts are focused on documents; other flowchart types have a different focus.

3. Sometimes true. Off-page connectors may be needed if a flowchart is long or complex.

4. Never true.

5. Sometimes true. In most cases, flowcharts will require revision when processes change.

6. Always true 7. Always true 8. Never true.

9. Sometimes true. Although possible, this situation is highly unlikely.

10. Sometimes true. Visio is sometimes the best tool, but not always.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

12. Excel application Flowchart skill rank Employee ID 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20 21 22 23 24 25

131 197 112 293 117 205 137 135 195 278 237 133 178 231 128 186 100 165 245 103 174 235 129 198 196

Highest skill rank

131

Start date 2/11/2008 3/19/2009 4/17/2009 5/20/2009 11/5/2008 10/9/2007 11/5/2007 6/18/2009 12/28/2008 12/1/2008 9/14/2007 2/18/2009 10/10/2008 7/11/2008 5/4/2008 4/7/2008 6/8/2008 3/7/2008 1/8/2008 9/11/2008 12/4/2007 1/22/2009 8/18/2007 7/19/2009 8/11/2008

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 6: Flowcharting

Time with TNG 4.51 4.59 4.67 4.76 4.84 4.93 5.00 5.07 5.14 5.21 5.28 5.36 5.45 5.53 5.62 5.72 5.79 5.88 5.95 6.04 6.13 6.21 6.29 6.36 6.43

Longest tenure

Employee ID 198 135 293 112 197 133 235 195 278 117 178 103 196 231 100 128 186 165 131 245 174 137 205 237 129

Start date 19-07-2009 18-06-2009 20-05-2009 17-04-2009 19-03-2009 18-02-2009 22-01-2009 28-12-2008 01-12-2008 05-11-2008 10-10-2008 11-09-2008 11-08-2008 11-07-2008 08-06-2008 04-05-2008 07-04-2008 07-03-2008 11-02-2008 08-01-2008 04-12-2007 05-11-2007 09-10-2007 14-09-2007 18-08-2007

129

Target date for time with TNG 22-01-2014 *Note to instructor: For the YearFrac function to work properly, dates must be entered with the DATE function.

If dates are entered as text, errors are likely to result.

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6-13

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

1. Reading review questions a. What is a data flow diagram? How are data flow diagrams used in accounting information systems? A data flow diagram is a form of systems documentation occasionally used in AIS work. DFDs focus on the flow of data in a process; compared to flowcharts, they are less concerned about who performs tasks and more concerned about what those tasks are and what data they require. They can be used in AIS work to gain a clearer understanding of a business process and / or as the basis for creating relational database tables. b. List and discuss the four symbols used in the development of data flow diagrams. Give an example of each symbol in an AIS context. A circle in a DFD symbolizes a process, such as “check customer credit.” A rectangle symbolizes an external entity, such as “customer.” Arrows in DFDs represent data flows, such as “customer credit information.” Finally, a set of parallel lines represents a database or data store, such as “customer file.” c. What rules/conventions should accountants follow when creating DFDs? DFDs should be clear and easy to read. Data flows should be labeled with noun phrases, while processes are labeled with verb phrases. In addition, DFDs must be balanced; that is, items should not disappear or appear between levels. Additional DFD conventions are discussed in the chapter. d. Define the following terms as they relate to the material presented in this chapter: relational database, table, primary key, foreign key, field, record, and query. A relational database is a collection of objects designed to collect data, analyze it and report information to decision makers. A table is the primary object in a relational database. Tables contain fields (columns) and records (rows), and should be normalized for efficiency and effectiveness. A primary key is a field in a table that uniquely identifies each record in the table, such as a transaction number. A foreign key is a primary key posted in another table; for example, a customer number would be a primary key in the customer table and a foreign key in the sales table. A query is a well-structured question designed to extract information from a database. Queries store instructions, not results; each time a query is run, it looks at the current data in the database. e. Respond to the questions for this chapter’s “AIS in the Business World.”

As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com).

Look for the 4th edition’s responses in the 15 December 2014 post.

2. Reading review problem Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

a. Create a Level Zero data flow diagram. Ensure that it is balanced with the context diagram.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

b. Create table specifications for the following tables: account holder, miles earned, miles used, miles used / account holder.

Account holder table: Account holder ID, account holder last name, account holder first name, account holder street address (and other identifying data, such as city, state, ZIP code) Miles earned table: Miles earned transaction ID, miles earned transaction date, [account holder ID], number of miles earned Miles used table: Miles used transaction ID, miles used transaction date Miles used / account holder table: [Miles used transaction ID], [account holder ID], number of miles used

c. Suggest at least two queries that would be useful to the airline and / or the account holder based on the tables you created. For each query, indicate its purpose and the tables and fields you would access to create it.

Query 1: Number of miles earned per account Purpose: Calculates the number of miles earned for each account holder ID. Tables and fields: Miles earned table: Account holder ID, number of miles earned. This query would also need a summation field.

Query 2: Number of miles used per account Purpose: Calculates the number of miles used for each account holder ID. Tables and fields: Miles used / account holder table: Account holder ID, number of miles used. This query would also need a summation field.

Query 3: Number of miles available per account Purpose: Calculates the difference between miles earned and miles used Tables and fields: From Query 1, the summation field. From Query 2, the summation field. This query would need a third summation field that calculates the difference.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Here are a few points students may raise in their responses: •

If they agree: DFDs are rarely used in accounting practice. Also, it is possible to design a database without constructing a DFD.

•

If they disagree: The two techniques have different purposes. They look at a process and its data from different points of view.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

6. Data flow diagram creation a. Geek Squad

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

b. IMA student case competition IMA case competition Context diagram

Awards

Student teams

Accounting faculty Case responses Published case

Case ideas Case competition system

Regional results

National results

Judging panel

IMA student case competition Level Zero diagram

1.0 Solicit ideas

Cal for ideas Judging panel

Accounting faculty National results Awards Case ideas

Selected case

2.0 Select & publish case

Student teams

Case database

Published case

Case responses

3.0 Receive & sort responses

Regional results

Sorted responses

4.0 Select regional winners.

Regional results

5.0 Conduct national competitio n

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

IMA case competition Level One diagram

Published case

Case responses

3.1 Receive responses

Copied tapes

3.2 Sort by region

Sorted responses

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

c. Cori’s Catering Services

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

Books

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

7. Creating database tables from flat files a. Purchase inventory table: Transaction number, transaction date, [employee ID], [vendor ID]. Purchase inventory / inventory table: [Transaction number], [Inventory description], quantity purchased, cost per item b. Open bank account table: Account number, bank account type, date account created, [employee ID]. Account holder / account table: [Account number], [Account holder email]. (Note: Account holder name is probably not the best identifier for the account holder in this table, as two account holders may have the same name.

However, each account holder should have a unique email address. If not, they should create one.) c. Register for courses table: Registration transaction number, registration date, [student ID]. Register for courses / courses table: [Registration transaction number], [Course ID]. (Note: the database would also have a ‘courses’ table that would include additional details about the course, such as its prefix and number, as well as its maximum enrollment.)

8. Creating database tables a. Cori’s Catering Service would require, at minimum, a client table and a bill client table. The client table would have the usual information about the client; the “bill client” table would include the Client ID as a foreign key. It would also include a transaction number as a primary key, amount billed and billing date.

University Bookstore would need a “document” table because of the “document database” symbol in the Level One DFD. The document database would contain information about purchase orders (the primary key), receiving reports and invoices.

The bookstore would also need an “issue payment” table, which would include a transaction number as its primary key, along with details of the payment (date, check number, amount).

Based on the Level One DFD for Geek Squad, a customer table (with the usual information) would be required. It would also likely need a “resolution table” that would include the resolution report number as a primary key, along with the customer ID (foreign key), employee ID (foreign key) and a memo field with details of the resolution.

Finally, the IMA case competition would include a “case table” to track data on cases used over the years. That table would include a Case ID as a primary key, along with the year, title, subject matter and author. The IMA would also need a “receive response” table, which would include a response code as the primary key, as well as fields for the date received, school name and regional code.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

b. The DMV system would need both a driver’s license table and a license plate table with the following specifications: Driver’s license table: License number, driver first name, driver last name, driver date of birth, driver restrictions, date of first issuance, license type, address, city, state, zip License plate table: License plate number, vehicle ID, manufacturer, model, year, color, [license number] c. The Robert Half applicant tracking system’s “applicant table” would include the following information: Applicant identification number, date applied, applicant last name, applicant first name, applicant address, city, state, zip, area code, phone number, e-mail address, highest college degree earned, major, university, professional certifications & licenses, software competencies.

9. Terminology 1. G 2. C 3. F 4. D 5. B

6. E 7. I 8. H 9. J 10. A

10. Multiple choice questions 1. A 2. D: “Review application” is the first thing the Society does. “Complete application” is a process completed by the client.

3. D: Review application, discuss needs, show animals, fill out paperwork, make follow-up call.

4. B: customer database, animal database.

5. D

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

11. Statement evaluation 1. Sometimes true. A context diagram will include data stores if indicated by the particular case.

2. Sometimes true. Although “downwardly compatible,” normal forms aren’t necessarily “upwardly compatible.” In other words, a 3NF table is, by definition, also in 1NF and 2NF. A 2NF table maybe in 3NF, but not necessarily.

3. Sometimes true. A salesperson may be an external entity, depending upon how the system boundary is defined.

4. Sometimes true. Which documentation tool is “better” depends upon the task at hand.

5. Sometimes true. If the form is appropriately designed, it can be used to look up information in a table.

6. Always true.

7. Always true.

8. Always true.

9. Always true.

10. Never true.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 7: Data flow diagramming

12. Excel application Here’s a screen shot that shows the actual layout along with the correct answers:

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

1. Reading review questions a. What are the similarities and differences between view-driven and event-driven accounting information systems? Both types of systems can involve information technology, although the specific technologies involved are different. In fact, most event-driven systems require some form of relational databases due to their complexity.

In addition, both system types are capable of producing the general purpose financial statements. Event-driven system are capable of producing many other types of reports as well. b. What does the acronym REA stand for? Give examples of each element. “R” stands for Resources, such as inventory and equipment. “E” stands for Event, such as “pay employees” or “purchase inventory.” “A” stands for Agent, such as a customer or employee. c. List the six steps for creating a REA model. 1. Understand the organization’s environment and objectives. 2. Review the business process and identify the strategically significant operating events. 3. Analyze each strategically significant operating event to identify its resources and agents. 4. Identify the relevant behaviors, characteristics and attributes of the REA model elements. 5. Identify and document the direct relationships between elements of the REA model. 6. Validate the REA model with business people. d. Explain how to establish a set of cardinalities between two elements of a REA model. Establishing a set of cardinalities involves asking four questions. If the elements are denoted by “x” and “y,” the four questions are: 1. For each X, what is the minimum number of Y involved? 2. For each X, what is the maximum number of Y involved? 3. For each Y, what is the minimum number of X involved? 4. For each Y, what is the maximum number of X involved? Answers to those questions commonly include 0, 1 and many (denoted with an asterisk). The answers to the first two questions are placed on the Y side of the relationship; the answers to the other two, on the X side. e. How would you use a REA model to design a relational database? In general, each box in a REA model requires at least one table. If the maximum relationships between two elements of the model are one and many, the primary key of the “one side” must be included as a foreign key on the “many” side. If the maximums are both many, a junction table is required. f. Prepare a response to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

2. Reading review problem a. Which systems documentation technique would you use if your goal was to construct the relational database that supports the narrative? Why? The best documentation technique for database design is REA modeling. A properly constructed REA model gives clear guidance when it comes to creating normalized database tables.

b. Regardless of your answer to (a), construct a complete REA model of the process.

c. Based on your REA model, identify four tables you would need in the relational database—one each for a resource, an event, an agent and a junction table. What would be each table’s primary key?

•

No resource table is required.

•

Event table: Create Account. Primary key: Account number.

•

Agent table: Customer. Primary key: Customer ID.

•

Junction table: Customer / use miles. Primary key: Customer ID, Use miles transaction number.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

d. Based on the tables you created, suggest two queries the airline might create.

For each query, indicate its name, its purpose and the fields involved.

•

Query 1: Customers that have not created an account. Fields: Customer ID, Account number. (The latter would be ‘null’ in the query to select customers without an account.)

•

Query 2: To calculate a customer’s mileage balance. Fields: Customer ID, miles earned, miles used. The query would need a calculated field to determine the balance.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

6. Constructing REA models a. Tom’s Trailers

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8-3

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling Here, “inventory” refers to a specific trailer.

(1,*)

Greet customer

(1,1)

(1,*)

(1,1)

(1,1) (0,1)

Customer

(1,1)

(1,1) (1,*)

(1,*)

Show trailers

(1,1) (1,*)

(1,*)

(1,*) (0,1)

Inventory (1,1)

(0,*) (0,1)

(1,1) Sell trailer

(1,*)

(1,1)

(1,1) (1,1) (1,1)

(1,1)

Receive payment

Cash

Salesperson

(1,1) (1,*) (1,*)

(1,*)

(1,1)

(0,1)

Bank

(1,*) (1,1) (1,1)

(1,1)

(1,1)

Deliver trailer

Delivery person

(1,*) (1,*)

The database would include at least the following tables (primary keys are underlined, foreign keys are in brackets): Inventory table: Identification number, make, model, year, date acquired, purchase price.

Cash table: Cash account number, beginning balance, beginning balance date, bank.

Greet customer table: [Customer ID], [Salesperson ID], date Show trailers table: Show transaction #, [Customer ID], date, [Salesperson ID] Sales table: Sales transaction #, transaction date, [inventory identification number], [salesperson ID], [customer ID], type of sale (cash or installment) Receive payment table: Receipt #, [sales transaction #], date, amount received, source (bank or customer), [salesperson ID], [customer ID], [cash account number] Delivery table: [Sales transaction #], [delivery person ID], delivery date Show trailers / inventory table: [Show transaction #], [inventory ID number], [salesperson ID], [customer ID] Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

Customer table: Customer ID, last name, first name, address, city, state, ZIP, area code, phone, date of first visit, date of first purchase Salesperson table: : Salesperson ID, last name, first name, address, city, state, ZIP, area code, phone, emergency contact information, date employed b. Maple Bluff Pharmacy

(0,*)

Fill prescription

(1,*)

(1,*)

(1,*)

(1,1)

(1,1) Pharmacist

(1,1) (1,1)

Drugs

Receive payment (1,*)

(1,*)

(1,1)

(0,*)

(1,*)

Customer

(1,1) (1,1)

Reconcile cash

Cash

(1,1) (1,1)

(1,1) (1,1) Deposit cash

(1,1) (0,*)

(2,2) (1,1)

Pharmacy employees

(0,*) (1,*)

(1,1)

Deposits Express

Drugs table: Drug code, drug name, dosage, instructions Cash table: Cash account number, beginning balance, beginning balance date, bank.

Fill prescription table: Prescription #, [drug code], [customer ID], date, [payment ID] Receive payment table: Payment ID, [customer ID], [employee ID], date, form of payment, amount received Reconcile cash table: Date, [employee ID #1], [employee ID #2], total cash Deposit cash table: Date, [employee ID], [Deposits Express ID], total cash Employee table: Employee ID, last name, first name, address, city, state, zip, area code, phone, emergency contact, job title, date employed (Note: I’ve combined the “pharmacist” and “pharmacy employees” into a single table Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

here. Since the narrative implies only one pharmacist, it seemed inefficient to create a separate “pharmacist” table. Pharmacists are differentiated from other employees via the “job title” field.)

Customer table: Customer ID, last name, first name, address, city, state, ZIP, area code, phone, date of first visit, medication allergies, primary doctor, insurance Deposits Express table: contact name, address, phone c. Western Steel Company (1,1) (0,*)

Receive customer order

(0,*)

(1,1) (1,1)

Employees (1,*)

(1,1)

(1,1)

(1,1)

(1,1) (0,*) Check credit (1,*)

(1,*) (1,1) (1,1)

Inventory

(1,*)

(1,1) Customer

(0,1) (1,*)

(0,*)

(1,1)

Fill order (1,1)

(1,*)

(0,*)

(1,1)

(1,1)

(1,1)

(1,1)

(1,1)

(1,*)

Ship order

(0,*)

(0,*) Price list

(1,1)

(1,1) (1,1) (1,*)

Invoice customer

(1,*) (1,1)

(1,*)

(0,*)

(1,*)

(1,1)

Bank

Receive payment notice

Inventory table: Inventory ID, description, beginning quantity, beginning date, average unit cost of beginning inventory Price list table: [Inventory ID], price Receive customer order table: Order ID, [employee ID], [customer ID], date Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

Receive order / inventory table: [Order ID], [Inventory ID], quantity ordered Check credit table: [Order ID], [employee ID], credit decision (yes / no) Fill order table: [Order ID], [employee ID], [customer ID], date Fill order / inventory table: [Order ID], [Inventory ID], quantity filled Ship order table: [Order ID], [customer ID], [employee ID], date shipped Ship order / inventory table: [Order ID], [Inventory ID], quantity shipped Invoice customer table: Invoice number, [Order ID], [customer ID], [employee ID], invoice date, payment notice date d. CPA firm payroll process (1,*) Submit hours (1,*)

(1,1)

(1,1) Auditors (1,1)

(1,1)

(1,*) Compare actual & budget

(1,1) Audit plan

(1,*)

(1,1) (1,1)

(1,1) (1,1)

Audit superviso r

(1,*)

Prepare & issue checks

(1,*)

(1,1) Payroll staff

Submit hours table: Transaction number, date submitted, [auditor ID], task, number of hours Compare actual & budget table: [Transaction number], comparison date, audit plan ID, [supervisor ID] Audit plan table: Audit plan ID, client ID, audit task, budgeted task hours (Each audit would involve multiple audit tasks. But, the # of tasks would be fixed;

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

therefore, a database designer would know how many “audit task” fields to include in this table. If a particular task was not included in an audit, its number of budgeted hours would be zero.)

Prepare & issue checks table: Check number, date prepared, [payroll staff ID], [auditor ID] Auditors table: Auditor ID, last name, first name, address, city, state, ZIP, area code, phone, billing rate, withholding status, withholding allowances Audit supervisors table: fields would be similar to the “auditors” table Payroll staff table: fields would be similar to the “auditors” table e. Textbook ordering and purchasing process (1,*) (1,*)

Collect order data

(1,1) Instructors

(1,*)

(1,1) (1,1)

(1,1) (1,*)

(1,*) Textbooks

(1,*)

Secretary

(0,*)

Prepare purchase order (1,1) (1,1)

(1,*) (1,1)

(1,*)

(0,*)

Receive books

(1,1)

(1,*)

(1,*)

Bookstore staff

(1,1)

(1,1) (1,1) (1,1)

(1,1)

(0,*) Publisher (1,*)

(1,1)

Pay invoice

For the sake of simplicity, this solution assumes that the bookstore does not receive partial shipments, nor does it pay for partial receipts.

Textbooks table: Textbook ID, title, author, copyright, publisher Collect order data table: Order ID, [instructor ID], [secretary ID], date

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8-8

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

Textbook / collect order data table: [Textbook ID], [Order ID], class, quantity Prepare purchase order table: Purchase order #, [bookstore staff ID], [publisher ID], date, [Order ID] Prepare purchase order / textbook table: [Purchase order #], [textbook ID], quantity ordered Receive books table: Receiving transaction #, [bookstore staff ID], [publisher ID], date Receive books / textbook table: [Receiving transaction #], [Textbook ID], quantity received Pay invoice table: Transaction #, [publisher ID], [bookstore staff ID], date, amount, [receiving transaction #] Agent tables would be similar to those found in other exercises.

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8-9

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

f. Beta Alpha Psi

Initiate new members table: Initiation event ID, Initiation date, Initiation place Initiate new members / Chapter members table: [Initiation event ID], [Chapter member ID] Points table: Event type ID, points available The other events would be similar to the “initiate new members” table. The “chapter members” table would be similar to other agent tables presented previously. And, the remaining junction table (host events / chapter members) would be similar to the junction table presented above.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

7. Interpreting a REA model A pet owner calls the grooming salon to make an appointment for a pet; a grooming salon employee assists the customer. A member of the grooming staff grooms the pet.

8. Terminology 1. J

6. A

2. E

7. F

3. I

8. C

4. D

9. G

5. H

10. B

9. Multiple choice questions 1. D 2. A 3. B 4. C 5. D 10. Statement evaluation a. Never true b. Always true c. Always true d. Sometimes true. DFDs and flowcharts may be unnecessary, depending upon the task at hand. e. Always true f. Never true. g. Sometimes true If resources and agents have a relationship independent of an event, they may be related.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

h. Sometimes true Some internal controls, such as adequate documentation, are not represented in a REA model. Separation of duties can be represented if it exists. i. Always true j. Sometimes true View-driven systems provide information for decisions based on the general-purpose financial statements; they do not, however, provide information for other kinds of decisions.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 8: REA modeling

11. Excel application

-

-Hill Education

8-13

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 9: XBRL

1. Reading review questions a. What is XBRL? How is it related to XML? XBRL is a way to tag data from an accounting information system; when properly tagged, the data can be read by many different hardware / software combinations, regardless of the tools used to create them.

XBRL is part of a larger family of languages called XML; thus, XBRL is a specification of XBRL. b. Define the following terms related to XBRL: specification, taxonomy, instance document. A specification is a specific example of a larger group; for example, XBRL is a specification of XML, just as “unearned service revenue” is a specification of “liability.” XBRL tags are organized in taxonomies, often based on commonly used accounting terminology in specific industries. Because XBRL is extensible, users can create tags for terms that do not exist in taxonomies. An instance document is a document, such as a statement of cash flows or tax return, that has been properly coded with XBRL tags. c. How can XBRL benefit organizations? In short, XBRL benefits organizations by allowing information to flow more freely and efficiently both within and outside the organizational structure. Since accountants will largely be freed from the tedious task of “translating” documents that have been prepared in different hardware / software platforms, organizations will also benefit from accountants’ expertise in decision making. d. Will most accountants need to learn to write “code” in XBRL? If not, how can they create XBRL-tagged documents? Thankfully, most accountants will not need to learn to write XBRL code. Numerous software packages, most of which function as add-ins to existing programs like Word and Peachtree, can automate the tagging process. e. Respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 9: XBRL

2. Reading review problem Consider each of Bumble’s statements. Determine whether each one is true; for those that are not true, indicate why.

1) Not true. XBRL is not a set of accounting principles; rather, it is a method of tagging data so that it is understandable across a variety of hardware and software platforms.

2) Not true. The SEC requires companies to use XBRL for their filings.

3) True.

4) Not true. If a company needs a tag that is not already defined, they can create a new one—that’s why XBRL is “extensible.”

5) Not true. Existing controls may need to be modified, but many of the risks associated with any form of IT are also applicable to XBRL. 6) True.

7) Not true. Taxonomies such as the Global Ledger taxonomy allow companies to use XBRL internally, whether or not they file with the SEC. 8) True.

9) Not true. Namespaces can be accessed by people outside the company that hosts them; if that were not true, XBRL would not truly be extensible.

10) Not true. XBRL can be considered from a relational database perspective.

Taxonomies can be thought of as tables; instance documents can be thought of as reports.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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9-2

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 9: XBRL

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise in responding to this question: •

Site summary. The site is basically a compendium of resources for XBRL.

•

Critique. Authorship is clear and content is accurate, although the site is in need of some updating.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

6. Contextual categories of XBRL a. Type of balance: debit, credit b. Time period: for the year ended 30 June 2011, for the quarter ended 31 December 2011. c. Currency: US Dollar, Euro. d. Account type: Liability, revenue e. Accounting rules (i.e., GAAP): US GAAP, IFRS f. Reporting language: English, French g. Preparation tools: Excel, Peachtree, Quickbooks 7. XBRL tagging a. Is XBRL relevant to companies that don’t file with the SEC? Justify your response. XBRL is relevant to companies that don’t file with the SEC. As illustrated in the reading review problem, the FDIC uses XBRL for Call Reports; the IRS can also use it for tax returns. b. List the six steps the authors recommend for creating XBRL-tagged documents. (1) Download the taxonomies. (2) Open Dragon Tag and the file you wish to tag. (3) Set up the entity profile. (4) Mark up the data. (5) Validate. (6) Export. c. How many XBRL-tagged filings did the SEC receive as part of its voluntary program? According to Exhibit 1 in the article, the SEC received 223 filings as part of the voluntary program.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 9: XBRL

8. Benefits of XBRL a. Consolidate results across divisions with much greater speed and reliability. b. Focus effort on analysis, forecasting and decision making, rather than on laborious tasks in gathering, compiling and preparing data. c. Free themselves from proprietary systems and software which are difficult and costly to replace d. Greatly reduce effort and costs in gathering and analyzing data. e. Improve investor relations through provision of more transparent and userfriendly information. f. Make better use of software to improve efficiency and speed. g. Make more effective use of the internet in communicating with investors. h. Obtain more rapid and reliable data on company financial performance. i. Save costs by preparing data in one form and automatically generating many outputs. j. Simplify the process and reduce the costs involved in regulatory reporting to tax and other authorities.

9. Terminology 1. F

6. D

2. I

7. J

3. A

8. B

4. H

9. C

5. E

10. G

10. Multiple choice questions 1. C 2. A 3. B 4. D 5. B 11. Statement evaluation a. Never true. b. Always true.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 9: XBRL

c. Sometimes true. The deciding factor is not a company’s geographic range, but rather, its need for the benefits of XBRL. d. Sometimes true. Diversification is not the deciding factor for XBRL adoption. e. Sometimes true. Some G/L software can create XBRL tags. f. Sometimes true. Organizations need to create their own namespace if they create their own XBRL tags. g. Always true. h. Sometimes true. Some new controls may be needed, but existing controls can often be applied to an XBRL environment. i. Always true. j. Never true.

12. Prior material application a. Earlier in the text, you learned that most AIS have five generic parts. The chapter talked about internal controls related to XBRL; give an example of each additional part related to XBRL. (For example, a 10-K report to the SEC would be an example of an AIS output.) Inputs to XBRL would include the data files from general ledger packages, such as journal entries and financial statements. The principle process associated with XBRL is tagging, but could also include the process of validating instance documents. In addition to 10-K reports, XBRL outputs could include the FDIC call reports described in this chapter’s reading review problem. Finally, XBRL tags are stored in a namespace; the XBRL files themselves are also a form of storage. b. When an organization incurs a cost, it can be recorded in one of two basic ways in the AIS. It can be debited to an asset (capitalized), as when a company buys a piece of equipment. It could be debited to an expense (expensed), as with salaries. Suppose a company hired a consultant to help with XBRL implementation. If the company expects to use XBRL for at least five years, should the cost of the consultant be capitalized or expensed? Use the FASB Conceptual Framework to justify your response. The cost of an XBRL consultant must be expensed in the period incurred. It does not meet the definition of an “asset” from the conceptual framework, since its future economic value cannot be objectively assessed. In addition, the matching concept would dictate that the cost be expensed along with items like payroll and depreciation.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 9: XBRL

c. In our discussion of management concepts, you read about Vroom’s expectancy theory, which helps us understand and analyze motivation in organizations. With respect to an XBRL project, someone with low expectancy might say: “Why should I invest the time and energy to learn about XBRL? I’m lousy with computer stuff, and I probably can’t learn it anyway.” Create a similar statement for the other two elements of expectancy theory (instrumentality and valence). Then, explain how you would improve someone’s motivation by addressing each objection. Someone with low instrumentality might say: “How will learning XBRL benefit me? Am I going to get a pay raise?” And, someone with low valence could comment: “I’m perfectly content in my job right now; there’s no reward you can give me for learning XBRL that I would value.” To address low expectancy, you could explain a structured process for learning XBRL that would allow almost anyone to master it. Low instrumentality could be addressed by pointing out the benefits of gaining additional knowledge, such as mobility within and between organizations. Low valence may be more of a problem, as learning what reward a person values is more an “internal” process than the others. Some probing, however, might lead to a potential reward the person would value. d. The systems development life cycle comprises seven steps; the development and implementation of XBRL is a systems development project. Work with a group of students to develop a paper / presentation that explains how the SDLC would apply to an XBRL project. For example, the initiation / planning phase might begin when the CFO attends an XBRL workshop / presentation. Here’s a short outline that such a paper / presentation might incorporate: Initiation / planning: The CFO attends an XBRL workshop; the company conducts a feasibility study for an XBRL implementation.

Requirements analysis: The XBRL team would interview accountants and others in the company to determine what kinds of information they would need, and how XBRL would facilitate the preparation and dissemination of that information.

Design: The team might review several examples of tagging software; they would also look at various taxonomies to determine which one(s) would be appropriate.

Build: The team could, at this point, create additional tags; they might also choose a tagging software.

Test: Employees could work with “dummy data” or previous financial statements to develop instance documents.

Implementation: The company would begin using XBRL in its operations.

Operations / maintenance: Internal auditors, or other designated employees / consultants, would monitor the use of XBRL, addressing problems and issues as they arise.

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9-6

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 9: XBRL

13. Excel application Operating cash flows Cash received from customers $

9,215

Cash paid for inventory Cash paid to employees

(5,676) (9,805) (6,266)

Total $ usgaap:NetCashProvidedByUse dInOperatingActivitiesAbstract

Investing cash flows Cash received from sale of marketable securities $ Cash loaned as notes receivable Total $

Financing cash flows Cash received from issuance of capital stock $ Cash paid to retire long-term bonds Total $

usgaap:NetCashProvidedByUsedI nFinancingActivitiesAbstract

7,448 (5,265) 2,183

usgaap:NetCashProvidedByUse dInInvestingActivitiesAbstract

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9-7

9,499 (8,427) 1,072

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

1. Reading review questions a. What is the distinguishing characteristic of e-business that makes it different from traditional brick-and-mortar businesses? The principal defining feature of ebusiness is transacting business via some form of computer network. b. The chapter discusses five basic types of e-business arrangements. Identify and describe each one; give an example of each type other than the example in the chapter. Business-to-business: Inventory suppliers selling goods to Home Depot.

Business-to-consumer: Barnes and Noble selling books and related items to individuals. Government-to-business: The City of Los Angeles Business Assistance Virtual Network (http://www.labavn.com/) posts RFPs on its web site. Government-toconsumer: The United States Department of State (http://www.state.gov/) posts travel alerts for US citizens abroad. Consumer-to-consumer: Via Angie’s List, individuals can create and disseminate reviews to potential customers of local businesses. c. What is an enterprise resource planning system? An ERP system is a sophisticated form of relational database software. Typically organized in modules, an ERP system can provide more integrated information for running a business than separate information systems for the various disciplines. d. What common problems cause ERP implementations to fail? What can managers do to promote successful ERP implementations? The chapter discusses ten common problems that lead to ERP failure: poor leadership from top management, automating existing redundant processes, unrealistic expectations, poor project management, inadequate education and training, trying to maintain the status quo, bad match between software and processes, inaccurate data, “IT project” view, and significant technical difficulties. Successful implementations can be promoted by: obtaining organizational commitment, communicating strategic goals clearly, viewing the project as an enterprise-wide venture, selecting a compatible system, resolving multi-site issues and ensuring data accuracy. e..Prepare a response to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

2. Reading review problem The following responses are based on Google. a. What forms of e-business does Google engage in? Google engages in both B2B and B2C e-business. Google’s AdWords service is an example of B2B, while applications like Blogger are examples of B2C. b. Which common ERP system modules would Google use to calculate the net sales reported on the income statement? How would they be used? Net sales is calculated as (Sales – Sales Returns & Allowances – Sales Discounts). So, Google would access the Customer Relationship Management module of an ERP system to calculate the figure. They would set up a query for the relevant tables (sales / inventory, for example) for the calculation itself. c. Could Google be considered an application service provider? Why, or why not? Google can definitely be considered an ASP. It hosts a variety of software applications, such as Blogger, Gmail and Calendar, that can be accessed from the Internet.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise as they respond to this question: a. Carr’s article identifies three major causes of Hershey’s initial difficulties with ERP. “The Big Bang” exemplifies several of Umble and Umble’s failure causes, including unrealistic expectations and poor project management. “Unentered Data” is an example of inaccurate data in the system. Finally, “no leadership” is connected to poor leadership from top management. b. The value of e-business may be limited in the real estate industry. Almost no-one buys a house over the Internet! (That’s not to say that the real estate industry doesn’t use the Internet and e-business in other ways, but simply to say that its value may be limited.)

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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10-2

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

6. Internal controls in e-business Internal controls appropriate to e-business might also include: Password rotation. Employees should be required to change their passwords periodically—perhaps every six months.

Password composition. Passwords should be “strong.” They should incorporate upper- and lower-case letters, as well as digits. They should be at least eight digits long, and not comprise words you’d find in a dictionary.

Adequate documentation. Steps for common business processes should be developed with user consultation and documented.

Daily file back-ups. All data should be backed up at the end of each business day on a secure server or other media.

Virus protection. Software should be installed to promote data integrity.

7. Types of computer networks a. Local-area network: A Local Area Network (LAN) is a computer network covering a small local area, like a home, office, or small group of buildings such as a home, office, or college. b. Network architecture: In computing, network architecture is the design of a computer network. c. Network protocol: The set of standard rules for data representation, signaling, authentication, and error detection required to send information over a communications channel. d. Network topology: A network topology is the pattern of links connecting pairs of nodes of a network. e. Node: A node is a device that is connected as part of a computer network.

Nodes can be computers, personal digital assistants (PDAs), cell phones, or various other network appliances, such as routers, switches, and hubs. f. Server: In information technology, a server is a computer system that provides services to other computing systems—called clients—over a network. The term is most commonly applied to a complete computer system today, but it is also used occasionally to refer only to the hardware or software portions of such a system g. Wide-area network: A wide area network or WAN is a computer network covering a wide geographical area, involving a vast array of computers.

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10-3

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

8. Forms of e-business a. Buying materials for professional practice from www.aicpa.org: B2B b. Electronic reporting of state unemployment taxes: G2B c. Filing personal income taxes with TaxSlayer.com: B2B and G2C d. Getting medical advice from www.webmd.com: B2C e. Making appointments with the Department of Motor Vehicles: G2C f. Online banking: B2C or B2B g. Paying traffic citations online: G2C h. Purchases from Amazon.com: B2C i. Receiving the online newsletter from the Institute of Management Accountants: B2C j. Registration for seminars sponsored by the Association of Certified Fraud Examiners: B2C

9. Promoting ERP success

Enterprise Resource Planning Systems at Hewlett-Packard

What is an ERP system?

• A well-established technology • A way to increase communication and interdisciplinary thinking • A project that will involve departments throughout HP • A way to get better information that will lead to better decisions

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

How will ERP help HP? • Integrates information rather than stovepiping it • Shows relationships between departments • Allows the company to make more informed, strategic decisions, particularly in times of uncertainty

Who will be involved?

• Planning team – Representatives from throughout the company – At many levels of the organizational chart – With varying backgrounds and experiences within and outside HP

• System users – Input to requirements analysis – Feedback on prototypes

10. Application service providers a. After needs identification, organizations might: Write a request for proposal which identifies the purpose of and specifications for potential ASPs. Select a committee to evaluate the proposals. The committee should include members with backgrounds in information technology and accounting; it should also incorporate the people who will actually be using the ASP. Develop an objective set of evaluation criteria for the proposals.

Evaluate the proposals using the criteria; select a small number for further consideration.

Arrange interviews and / or demonstrations of the finalists.

Contact clients of the finalists to get their points of view.

Select an ASP.

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10-5

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

b. SSAE 16 statements i.

Not true ii.

True

iii.

True

iv.

True

v.

Not true

c. The database would include at least two tables. The first would contain client names and identification information (name, address, phone); it could also include licenses and certifications. The second table would incorporate the primary key from the client table and details about CPE units completed, such as subject, source and number of hours.

Internal controls would likely include password protection and backing up files daily.

11. Terminology 1. B

6. C

2. J

7. H

3. G

8. D

4. F

9. A

5. E

10. I

12. Multiple choice questions 1. B 2. A 3. B 4. C 5. B 13. Statement evaluation a. Sometimes true. E-business doesn’t necessarily lead to higher profit margins. b. Always true. c. Sometimes true. It can, but doesn’t necessarily do so in every case. d. Never true.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

e. Sometimes true. Due to the modular structure of ERP systems, an organization may use modules other than financial management. f. Never true. g. Always true. h. Always true. i. Always true. j. Always true.

14. Prior material application. a. When an organization implements an ERP system or enters into the ebusiness arena, it is exposed to a variety of risks. Use the COSO ERM framework discussed in Chapter 4 to design a generic risk management plan for one of those two situations.

ERM plan for a company entering the e-business arena: Internal environment: Company executives discuss the importance of enterprise risk management, relating it to the proposed e-business venture.

Objective setting: The company sets a goal of increasing its sales from ebusiness by 10% in the coming year.

Event identification: Price points on merchandise offered might be too high.

Risk assessment: The risk of prices being too high is at least moderate, particularly without sufficient market research.

Risk response: Avoid.

Control activities: Engage in continuous market research on prevailing prices for similar goods and services.

Information and communication: Post the ERM plan on the corporate intranet where it can be accessed by employees only. Send periodic e-mail reminders to look at the plan.

Monitoring: Assign a dedicated group of employees to monitor the plan on a regular schedule and propose modifications to it as necessary.

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10-7

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

b. A small bookstore wants to expand its operations to include e-business. Use the generalized model of business process management discussed in Chapter 4 to develop a plan for doing so.

Generic step 1. Select the process and define its boundaries.

2. Observe, document and map the process steps and flow.

3. Collect process-related data.

4. Analyze the collected data.

5. Identify and prioritize potential process improvements.

6. Optimize the process.

7. Implement and monitor process improvements.

Bookstore example The bookstore could initially focus on the process of buying inventory from vendors.

Develop a systems flowchart of the current inventory purchase process.

Collected data could include: transaction processing times, cost per transaction (other than the inventory itself), employee satisfaction with the current process.

Graph the time and cost data to see trends more clearly; summarize the results of employee satisfaction surveys. Determine if the expansion into e-business is justified.

Develop a list of specific ways to move the inventory purchase process into ebusiness. Consider, for example, if initial forays should focus on a subset of vendors / inventory.

Design the new process; develop a new systems flowchart or other form of systems documentation.

Pilot test the new system; continue monitoring the data collected and analyzed in Steps 3 and 4. Make appropriate changes and expand the system as necessary.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

c. A business plan is essential for starting an e-business venture. Do some research on how to develop a business plan; you might start by consulting www.sba.gov or by asking a strategy / entrepreneurship professor at your university. Document the steps for developing a business plan using one of the formats discussed in Part Two of the book.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 10: E-business and Enterprise Resource Planning Systems

14. Excel application

Case A: BBT Corp.

Total lease price $ 50,000 Number of periods 3 Interest rate 3% Annual payment $17,677 *The actual payment number will come out as negative in Excel; I've used the absolute value formula (=ABS) to make it positive.

Case B: RDN Corp.

Number of periods 48 Total lease price $ 40,000 Monthly payment (1,200) Annual interest rate 19% *The monthly payment must be entered as a negative number. Also, the number of periods must be converted from years to months.

Finally, to get the annual interest rate, the formula result must be multiplied by 12.

Case C: JPD Corp.

Total lease price $ 32,000 Annual interest rate 6% Monthly payment (1,500) Length of lease 22.6 *In the formula, the annual interest rate must be converted to a monthly rate to make it consistent with the timing of the payments.

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10-10

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

1. Reading review questions a. What four common classifications are often associated with computer crime?

Carter’s taxonomy includes: target (where the computer is the object of the crime), instrumentality (where the computer is instrumental in committing the crime), incidental (where the computer simplifies criminal action) and associated (where the presence of computers has created new forms of crime). b. What computer crime–related risks and threats are associated with information systems? The chapter discusses eleven types of risks and threats: fraud, error, service interruption & delays, disclosure of confidential information, intrusions, information theft, information manipulation, malicious software, denial of service attacks, web site defacements and extortion. c. What categories are commonly associated with computer criminals? Describe each category. “Script kiddies” use code written by others to perpetrate computer crime. Hackers may be motivated simply by the challenge; cyber-criminals, by the potential for financial gain. Organized crime has also made significant inroads in computer crime. Corporate spies may be former employees or consultants, attempting to compromise an organization’s information system. Terrorists have also become involved in computer crime; and, corporate insiders may engage in computer crime if disgruntled or otherwise unhappy. d. How can organizations safeguard against computer crime? How can they detect it and recover from it if it happens? What role does CoBIT play in those tasks? Organizations can safeguard against computer crime via a strong system of internal controls. Internal controls can focus on the CIA triad: confidentiality, integrity and availability of information. Information systems controls fall into three major categories: physical (such as fire suppression systems), technical (such as requirements for strong passwords) and administrative (such as procedures manuals).

COBIT stands for Control Objectives for Information and Related Technology; developed by the Information Systems Audit and Control Association (ISACA), COBIT can guide managers and others in developing a strong internal control system. e. What is CoBIT? What are the seven information criteria discussed in the CoBIT framework? COBIT is a set of standards which gives accountants and other information systems professionals clear guidance in establishing strong internal controls, thereby deterring fraud. The seven information criteria are: effectiveness, efficiency, confidentiality, integrity, availability, compliance and reliability of information. f. Respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

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11-1

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

2. Reading review problem a. The following answers will be based on Standard 1: Install and maintain a firewall configuration to protect cardholder data. b. Failure to install and maintain a proper firewall could lead to comprised data, which fits into Carter’s taxonomy under “target.” c. Targeting the system data could lead to several kinds of business risks / threats, including disclosure of confidential information. d. In terms of COBIT’s enablers, installing a firewall is an example of “services, infrastructure and applications.” e. Installing a firewall is an example of a technical control.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise as they respond to this question:

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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11-2

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

6. Applying Carter’s taxonomy a. Incidental. b. Target (the computer is the object of the attack) and associated (computers themselves have “created” this form of computer crime) c. Target (computer is the object) and instrumentality (the backdoor allows the former employee access to the information system) d. Incidental (theft of assets can happen even without computers) and associated (identity theft has increased because of the presence of computers) e. Incidental (illegal pyramid schemes have existed for quite some time) and instrumentality (since e-mail was used to perpetrate the crime) f. Incidental (espionage is not limited to scenarios involving IT) g. Target (changing data), instrumentality (computer is used to change grades) h. Incidental

7. Identifying business risks and threats a. Extortion b. Denial of service attack c. Web site defacement d. Disclosure of confidential information e. Intrusions f. Fraud g. Error h. Service interruption & delay i. Information manipulation j. Information theft k. Malicious software

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11-3

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

8. Classification of controls a. Technical. Access control software restricts access to an organization’s information system via passwords or other means. b. Administrative. Employees should be supervised to promote strong internal control. c. Administrative. Authorized employees and others can be required to wear identification badges while on an organization’s premises. d. Technical. Encrypted data are “garbled” so that they cannot be read without decryption keys. e. Technical. Firewall software restricts both incoming and outgoing traffic. f. Administrative. Internal auditors can check systems for both security and efficiency. g. Technical. Organizations can employ, for example, automatic lockouts after three attempts to access a system without an authorized user name and password. h. Physical. Information systems should be kept behind locked and alarmed doors. i. Administrative. Organizations can require online or in-person seminars on a periodic basis. j. Physical. Security guards can restrict access to sensitive areas. k. Administrative. A well-developed security policy can outline specific acceptable and unacceptable actions. l. Physical. If a fire breaks out, smoke detectors can help minimize the damage. m. Physical. UPS protect an organization against electrical failures.

9. Terminology 1. C

6. A

2. F

7. J

3. E

8. G

4. H

9. D

5. B

10. I

10. Multiple choice questions 1. A 2. C 3. A 4. D 5. D

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11-4

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

11. Statement evaluation a. Always true. b. Sometimes true. Computer crime can also involve the computer as a target, associated with or incidental to the crime. c. Sometimes true. Computer crime can be committed by organized crime groups, but other types of computer criminals can engage in similar activities. d. Always true. e. Never true. f. Always true. g. Always true. h. Never true. i. Sometimes true. Criminals can be internal or external to the organization. j. Always true.

12. Prior material application a. Consider the five generic elements of most accounting information systems.

For each element, suggest one way it could be compromised via computer crime.

Inputs, such as source documents, could be electronically altered / falsified. The AIS processing function could be compromised in myriad ways, including the use of malicious software. To the extent that outputs are disseminated electronically, they could also be electronically altered; many companies post key financial data on their web sites, opening up the opportunity for web site defacement. Storage of AIS data could be compromised by deleting key data; internal controls can be compromised with malicious software, as illustrated in the reading review problem.

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11-5

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

b. Read “Protect Small Business” by Joseph T. Wells in the March 2003 issue of Journal of Accountancy; consider the case presented in the opening paragraphs of the article (Denise, a bookkeeper for a small trucking firm). Work with a group of students and / or interview a forensic accountant / certified fraud examiner to suggest a series of steps you could use to investigate the fraud. Document your steps using one of the techniques described in Part Two of the text.

In the August 2003 issue of Journal of Accountancy, Wells wrote an article titled “Sherlock Holmes—Part One.” In that article, he lays out a generic process often used to conduct a fraud examination. The steps are summarized below: 1. Gather data, such as from the AIS, interviews and other sources.

2. Analyze the data to detect abnormalities or evidence of unusual activity.

3. If sufficient predication exists, develop a fraud theory—a hypothesis about how the fraud occurred.

4. Gather additional evidence. Revise the fraud theory as needed.

5. Interview people to gain more information. Interviews should start with neutral third-party witnesses, and end with the suspect(s).

6. Prepare a report as to the findings.

7. If necessary, testify in court.

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11-6

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

c. This chapter provided a three-part taxonomy for IT controls; earlier in the text, you learned that internal controls have four broad purposes. Fill in the table below with appropriate examples; be prepared to explain your reasoning.

Internal control purpose

Physical controls

Technical controls

Safeguard assets

Lock rooms containing IT assets

Require login credentials before using IT assets.

Ensure financial statement reliability

Promote operating efficiency

Encourage compliance with management directives

Set up an alarm that Prepare financial will detect statements using unauthorized appropriate forms of intrusions to the IT. AIS. Create sufficient, but not excessive, Utilize IT to perform copies of appropriate tasks. documents used in the AIS. Create a dedicated Require managers web site where to interact with employees can workers, rather than make suggestions trying to manage for process from behind a desk. improvements.

Administrative controls Establish & enforce a policy of no eating / drinking around IT assets.

Create & utilize an internal audit function.

Make operating efficiency part of performance evaluation.

Make compliance with management directives part of performance evaluation.

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11-7

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

13. COBIT 5 a. Fill in the blanks according to COBIT 5’s principles. i. single integrated ii. end-to-end iii. holistic iv. stakeholder v. governance, management b. Which of COBIT 5’s enablers is described by each of the following items? i. organizational structures ii. culture, ethics and behavior iii. processes iv. service, infrastructure and applications v. people, skills and competencies vi. principles, policies and frameworks vii. information c. For each of the following independent cases, indicate at least one relevant COBIT principle and at least one relevant COBIT enabler.

Company

Principle

UPT Corporation

Meeting stakeholder needs Enabling a holistic approach Separating governance from management Enabling a holistic approach

YWN Corporation

Enabler Processes Culture, ethics and behavior Processes People, skills and competencies

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11-8

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 11: Computer crime and information technology security

14. Excel application SUMMARY OUTPUT

Question B(iii) IT employees

Regression Statistics Multiple R R Square Adjusted R Square Standard Error Observations

0.999 0.999 Question B(i) 0.998 23.967 10.000

60

Acctg. employees Annual sales

$

22 7,000

Predicted fraud amt.

$

5,392

ANOVA df

SS 2754566.326 3446.574 2758012.900

MS 918188.775 574.429

F 1598.437

Significance F 0.000

Coefficients Standard Error -209.057 97.151

t Stat -2.152

P-value 0.075

Lower 95% Upper 95% Lower 95.0% Upper 95.0% -446.778 28.664 -446.778 28.664

Regression Residual Total

Intercept Number of IT employees Number of accounting employees

3.000 6.000 9.000

Annual sales

-0.837

0.628

-1.332

0.231

-2.374

0.701

-2.374

0.701

1.177 0.804

0.890 0.014

1.323 59.220

0.234 0.000

-1.000 0.770

3.354 0.837

-1.000 0.770

3.354 0.837

Question B(ii) Annual sales is significant

-

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11-9

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

1. Reading review questions a. What activities are accounted for in the sales / collection process? The sales / collection process accounts for activities associated with selling goods and services to clients, along with the related cash collections. b. What are the steps in the sales / collection process? The process comprises seven steps: (1) Take a customer order. (2) Approve customer credit. (3) Fill the order based on approved credit. (4) Ship the product (if necessary). (5) Bill the customer. (6) Collect payment. (7) Process uncollectible receivables as necessary. c. How are the five generic elements of the AIS exemplified in the sales / collection process? Inputs to the sales / collection process include customer orders.

Processes include both the steps identified in (b) above, along with transaction processing steps in the accounting cycle. Outputs of the sales / collection process include invoices, accounts receivable aging reports and others. Data in the sales / collection process are stored in customer files, transaction files, inventory files and junction files. d. What recordable transactions are commonly associated with the sales / collection process? How are they recorded in the AIS? Common transactions include: sales of inventory on account (debit accounts receivable and cost of goods sold, credit sales and inventory), cash collections on account (debit cash and credit accounts receivable), bad debt write-offs (debit allowance for bad debts, credit accounts receivable) and others. e. What internal controls do organizations use in the sales / collection process?

What risks do they address? Risks and related internal controls for the process include: granting credit to customers who are not creditworthy (separation of duties, established credit check procedures), inventory stock-outs (maintaining adequate inventory) and billing the customer incorrectly (document matching). f. Respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

2. Reading review problem a. What forms and documents would KKD use in the process described? Which generic step(s) in the sales / collection process would use each form? In addition to the fundraising certificates, KKD would need a customer order form (Step 1), an invoice (Steps 5 and 6) and a remittance advice (Step 6).

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

b. In a manner specified by your instructor, document the process described from KKD’s perspective.

c. What risks do fundraising groups bear in the process? What internal controls would you recommend to a fundraising group to address those risks?

Fundraising groups’ risks include not having their application approved and not being able to sell all the certificates they purchase. They may also have more demand than expected, so inventory may run short. Related internal controls for not having their application approved would include carefully reading the guidelines for applications and talking in advance with a local KKD store manager. For not being able to sell all the certificates, the fundraising group should do an informal survey to assess demand; they might also consider discounting the certificates after a certain period of time. A demand survey would also be helpful to address the risk of too few certificates.

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12-2

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

d. Consider the following tables KKD might maintain for the process: fundraising group table, sell fundraising certificates table, redeem fundraising certificates table, redeem fundraising certificates / inventory table. What fields would you include in each table? Indicate primary keys by underlining and foreign keys with brackets.

•

Fundraising group table: Fundraising group ID, fundraising group name, date of first application, contact person name, contact person area code, contact person phone number, contact person email.

•

Sell fundraising certificates table: Fundraising sales transaction ID, [fundraising group ID], transaction date, first certificate number (e.g., 101), number of certificates sold, price per certificate

•

Redeem fundraising certificates table: Fundraising redemption transaction ID, transaction date, certificate number, [employee ID]

•

Redeem fundraising certificates / inventory table: [Fundraising redemption transaction ID], [Inventory ID], quantity sold, price per unit

e. Based on the tables you laid out in (d), suggest one simple query and one complex query KKD might use. For each query, explain its purpose and indicate the fields you would incorporate.

•

Simple query. Purpose: to calculate the total revenue from selling fundraising certificates. Fields: Quantity sold, price per unit.

•

Complex query. Purpose: to determine the number of certificates sold to each group. Fields: Fundraising group ID, fundraising group name, number of certificates sold, price per certificate.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise as they respond to this question: Steps in the sales / collection process: •

Reliable Reminders would take the customer’s order, including the usual information about the customer, but also the key dates the customer wants to include in the service.

•

As a startup, Reliable Reminders probably should not extend credit directly to customers; rather, they should rely on third-party credit cards as the main form of payment.

•

Reliable Reminders would enter the customer’s data into their information system.

•

They would query the information system daily to determine clients’ needs, complete relevant tasks (sending cards, shopping) and bill the client.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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12-4

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

6. Modeling sales / collection processes a. Dave’s Pool Service Dave

Client

Start Invoice

Perform services Remit payment Bill client

Check

Deposit in bank

End

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

b. Nauertz Insurance (1,*) Assess needs

(1,*)

(1,1)

Insurance options

(1,*)

(1,1) Client

(0,*) (0,*)

(1,*)

(1,1) (1,1)

Write policy (0,*) (1,1) (1,1)

Owner (1,1) (1,1) (1,1)

(1,*) Collect payment

(0,*)

(1,*)

Cash

(1,1)

(1,1)

(1,1) Employee

(1,*)

(1,1) (1,1) Make bank deposit

(1,*)

c. Answers will vary.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

d. Here is the rest of the systems flowchart, picking up from Figure 12.2:

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

7. Transaction processing Date Account 2 Accounts receivable Cost of goods sold Sales Inventory 5

10

15

19

21

30

30

a.

$

Cash Cost of goods sold Sales Inventory

$

Cash Sales discounts Accounts receivable

$

Allowance for bad debts Accounts receivable

$

Accounts receivable Cost of goods sold Sales Inventory

$

Cash Cost of goods sold Sales Inventory

$

Cash Accounts receivable

$

Bad debt expense $ Allowance for bad debts

Dr 1,000 300

Cr

$

1,000 300

$

900 200

$

1,000

$

500

$

2,000 500

$

1,100 300

$

2,000

$

30

900 200

980 20

500

2,000 500

1,100 300

2,000

30

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

b. Net sales = ($1,000 + $900 + $2,000 + $1,100) - $20 = $4,980.

Cost of goods sold = $300 + $200 + $500 + $300 = $1,300.

Gross profit = $4,980 - $1,300 = $3,680.

c. All sales transactions would use a customer order and customer invoice. Cash collections on account would utilize a customer check and a remittance advice.

d. Customer table: Customer ID, customer last name, customer first name, customer address, customer city, customer state, customer ZIP code, customer area code, customer phone number, customer email, date of first sale Sell inventory table: Sales transaction ID, transaction date, [customer ID], [employee ID] Receive cash table: Cash receipt transaction ID, transaction date, [customer ID], [bank account ID], amount received Inventory / sell inventory table: [Sales transaction ID], [Inventory ID], number of units sold, price per unit

e. Purpose: to determine which customers buy which inventory items. Fields: customer ID, customer last name, customer first name, sales transaction ID, inventory ID

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

8. Internal controls Item a

Control Alarm system Insurance

Purpose Safeguard assets Safeguard assets

b

Credit check Conduct cash-only business

Ensure reliable financial reporting Promote operating efficiency

c

Sprinkler system Insurance

Safeguard assets Safeguard assets

d

Echo check Adequate supervision

Promote operating efficiency Encourage compliance with management directives

e

Information technology Trial balance

Promote operating efficiency Ensure reliable financial reporting

f

Independent checking Adequate supervision

Safeguard assets Safeguard assets

g

Adequate packing Insurance

Safeguard assets Safeguard assets

h

Adequate supervision Appropriate company policy

Safeguard assets Safeguard assets, encourage compliance with management directives

i

Lockbox system Video surveillance

Safeguard assets; promote operating efficiency Safeguard assets

Document matching Adequate supervision

Promote operating efficiency Promote operating efficiency

j

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

9. Internal controls and risks 1. No.

6. Yes.

2. Yes.

7. Yes.

3. No.

8. No.

4. Yes.

9. Yes.

5. No.

10. No.

10. Internal controls Internal control strengths include: follow-ups for delinquent accounts and the use of an external consultant to make recommendations for revision. The two main internal control weaknesses in this system are: the controller extends credit to customers (corrected by establishing a separate credit-granting function), differential credit arrangements based on highly subjective factors (establish a clear policy for granting credit).

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

11. Flowchart interpretation and internal controls analysis a. Flowchart weaknesses include: inappropriate use of symbols (e.g., ‘to bank’), no “end” symbol, symbols spanning multiple columns, many documents lack an appropriate point of termination. b. The sale is approved after the invoice is created; it should be approved before invoicing. A transaction number is assigned too late in the process; it should be assigned as part of preparing the invoice. The cashier should not be approving the sale; the credit department should do that if Richards extends its own credit to clients.

It’s unclear from the flowchart who prepares the bank deposit; either the assistant manager / manager should do so. c. For simplicity, the following steps assume Richards does not extend credit directly to customers; they also assume that the customer pays for the furniture and takes it home immediately, rather than having it shipped. (1) The salesperson takes the customer’s order and prepares an electronic invoice. (2) The cashier retrieves the invoice and accepts payment for the order. (3) The cashier marks the invoice “paid” in the database. (4) The assistant manager reconciles the cash register tape with the day’s actual receipts, reconciles any differences and prepares a reconciliation report, which is filed electronically. (5) The assistant manager prepares the bank deposit. (6) The manager verifies the amount of the bank deposit against the cash register tape, the day’s actual receipts and the reconciliation report. (7) The manager deposits cash receipts daily in the bank.

Here’s a systems flowchart of that process:

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

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12-13

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

12. Comprehensive problem a. Here is a system’s flowchart of the case; it assumes the bank is outside the system boundary.

b. The following items are illustrative, not exhaustive: Risk exposure Insufficient sales Damaged goods Failure to collect from clients

Existing control (if any) None Secure packing None

Recommended control Marketing plan Insurance Require payment in advance and / or accept credit cards

c. Inventory table: inventory item number, item name, beginning quantity on hand, beginning date, beginning inventory cost per unit.

Customer table: customer ID, customer last name, customer first name, customer address, customer city, customer state, customer ZIP code, customer e-mail, customer area code, customer phone number, date of first order.

Sales / inventory table: Transaction ID, inventory item number, quantity sold, price per unit.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

d. Responses will vary.

13. Terminology 1. B

6. D

2. E

7. H

3. C

8. F

4. G

9. I

5. A

10. J

14. Multiple choice questions 1. B 2. B 3. B 4. A 5. C

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

15. Statement evaluation a. Sometimes true. If a company sells multiple products / services, a junction table would be required. b. Never true. c. Sometimes true. Many companies complete all the activities; some companies, however, specialize in a subset of the value chain activities. For example, Federal Express focuses on inbound & outbound logistics. d. Sometimes true. Borrowing money is a good idea if the interest rate on debt is less than the implied interest rate from forgoing a cash discount. e. Always true. f. Always true. g. Never true. h. Sometimes true. In a well-designed internal control system, this statement is always true. i. Sometimes true. A bill of lading is required if merchandise has to be shipped. j. Sometimes true. Web sites can facilitate customer orders, but are not used in every firm.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

16. Prior material application a.

Framework element Internal environment

ICE example ICE’s executive board conducts a company retreat focused on ERM.

Objective setting

Generate revenue of at least $5,000.

Event identification

Too few people register to generate the required revenue.

Risk assessment

Moderate to high

Risk response

Reduce

Control activities

Conduct more seminars; increase the number of participants allowed in each seminar.

Information & communication

Publicize the plan among ICE employees via meetings and newsletters.

Monitoring

Create an executive board position specifically charged with monitoring the plan on a regular schedule.

b.

BPM principle Be open to alternatives.

ICE example Consider a more efficient method for processing registrations and payments, such as via the Internet.

Hire people who see the big picture.

Conduct periodic brainstorming sessions where employees can suggest new ideas for improving the process.

Avoid too much reliance on external consultants.

Create a digital “suggestion box” where employees can submit new ideas whenever they choose.

Communicate!

Provide feedback for suggestions not implemented, and acknowledge the source of those that are implemented.

c. Answers will vary significantly.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 12: Sales / collection process

17. Excel application Transaction number 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16 17 18 19 20

Sales revenue $

4,818 1,070 3,783 4,862 1,510 4,419 3,269 2,477 2,409 3,643 4,163 1,926 4,659 4,421 1,120 1,107 3,320 4,955 3,568 2,315

Cost of goods sold

Gross profit

$

$

973 411 817 979 477 913 740 622 611 796 874 539 949 913 418 416 748 993 785 597

3,845 659 2,966 3,883 1,033 3,506 2,529 1,855 1,798 2,847 3,289 1,387 3,710 3,508 702 691 2,572 3,962 2,783 1,718

COGS / Sales 20.20% 38.41% 21.60% 20.14% 31.59% 20.66% 22.64% 25.11% 25.36% 21.85% 20.99% 27.99% 20.37% 20.65% 37.32% 37.58% 22.53% 20.04% 22.00% 25.79%

Gross profit / Sales

COGS / Gross profit

79.80% 61.59% 78.40% 79.86% 68.41% 79.34% 77.36% 74.89% 74.64% 78.15% 79.01% 72.01% 79.63% 79.35% 62.68% 62.42% 77.47% 79.96% 78.00% 74.21%

25.31% 62.37% 27.55% 25.21% 46.18% 26.04% 29.26% 33.53% 33.98% 27.96% 26.57% 38.86% 25.58% 26.03% 59.54% 60.20% 29.08% 25.06% 28.21% 34.75%

Conditional formatting could be useful in the sales / collection process in several ways, such as by identifying the customers with the largest outstanding balances and / or the inventory items with the highest turnover.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

1. Reading review questions a. What is the basic purpose of the acquisition/payment process? The acquisition / payment process focuses on the activities an organization uses to acquire and pay for needed resources. Although its generalized process can apply to virtually any asset, it is most often used for inventory; other assets (such as cash) may be considered in separate business processes (such as the financing process). b. What steps do companies commonly complete as part of the acquisition/payment process? The acquisition / payment process comprises six steps: (1) Request goods and services based on monitored need. (2) Authorize a purchase. (3) Purchase goods / services. (4) Receive goods and services. (5) Disburse cash. (6) Process purchase returns as necessary. c. What documents are important in the acquisition/payment process? At least five documents are typically used to complete the steps in the acquisition / payment process: purchase requisition, purchase order, receiving report, vendor invoice and check. d. What risks do managers face as part of the acquisition/payment process? What internal controls help reduce exposure to those risks? Process risks (and related controls) include the following: ordering unneeded goods (inventory monitoring), purchasing from inappropriate vendors (conflict of interest policy), receiving defective goods (inspection prior to acceptance) and theft of inventory (internal audit). f. Respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

2. Reading review problem a. If a KKD franchise location wants to purchase equipment through the KKD corporate office, what document would the franchise use? What document would the corporate office use to buy the equipment from a vendor? To request the purchase of equipment, the franchise location would use a purchase requisition; to buy the equipment from the vendor, the corporate office would use a purchase order. b. What documents would the franchise location need before issuing a check to pay for the equipment? As a form of internal control, the franchise location would need three documents before issuing a check: a purchase order (to show the equipment was legitimately ordered), a receiving report (to show it was received) and

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

the vendor invoice (to show how much to pay). Reconciling the three documents is an internal control known as “document matching.” c. Suppose a franchise location purchased a piece of equipment with a list price of $25,000; transportation and testing cots totaled $5,000, and sales tax of 5% was levied on the list price alone. Create the required journal entry if the franchise location paid 30% of the list price, all the sales tax and all the transportation and testing costs in cash and financed the remainder with a 10month, 6% note payable.

Equipment Cash Notes payable

$31,250 $13,750 17,500

Computations: Equipment: ($25,000 * 1.05) + $5,000 Cash: ($25,000 * 30%) + ($25,000 * 5%) + $5000 Notes payable: $31,250 - $13,750 OR $25,000 * 70% d. Other than document matching prior to issuing a check, what internal controls should the franchise location have in place with respect to the equipment? Those internal controls would include, but not be limited to, physically securing the equipment, insuring it, training employees in its proper use, maintaining it properly and issuing it a serial number for tracking purposes.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

e. Each purchase transaction can involve multiple pieces of equipment, but each piece of equipment is only purchased one time. What tables should the franchise location maintain in its relational database for the purchase transaction and the equipment itself? What fields would each table contain? Indicate primary and foreign keys in the usual way.

Purchase equipment table: Transaction ID, transaction date, [employee ID], [vendor ID] Equipment table: Equipment ID, [transaction ID], equipment cost basis, estimated salvage value, expected useful life, depreciation method

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise as they respond to this question: a. The generic steps would not need much change, although they may not involve goods as frequently as services. All the documents would be purely internal, and FMD would have to set up a transfer pricing system for inter-divisional purchases.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

b. Here is a systems flowchart of the process:

c. Database tables would include one for each process in the flowchart.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

6. Modeling acquisition / payment processes a. Big State University Big State University Library

Payment

Acquisition / payment process Invoice

Level Zero DFD Requestors

4.0

Vendor

Request info

Match documents

Ordered items

Matched documents

Request database 1.0

Recorded request

Record request

Purchase order

Merchandise to order

5.0 3.0

Purchase order E-mail notification

Receiving report

Pay vendor

Match p.o. & receiving report

2.0 Purchase order

Order merchandise

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

b. Goodkind Corporation

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

c. Buying a home

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

d. Brooks Corporation

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

e. Generic acquisition / payment process

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

7. Acquisition / payment process transactions Date Account Debit Credit 1 Accounts payable $ 6,445 Cash $ 6,445 3

6

12

14

18

21

24

25

27

Inventory $ Accounts payable

1,220

Accounts payable Cash Inventory

4,500

$

Inventory $ Accounts payable

3,555

Accounts payable Cash

10,000

$

Supplies $ Accounts payable Accounts payable Cash

$

1,220

$

4,455 45

$

3,555

$

10,000

$

600

$

5,780

$

1,500

$

1,485 15

$

4,000 16,000

600

$

5,780

Inventory $ Accounts payable

1,500

Accounts payable Cash Inventory

$

1,500

Equipment Cash Notes payable

$

20,000

PLR Corporation Schedule of accounts payable 31 May 2011 QOC Corp.

$

600

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

c. Information about the vendor (name, address, and so on), information about items purchased (quantities, cost per unit, item names and IDs), information that connects the purchase transaction with the items purchased (as in a purchases / inventory table).

8. Document information 1. B, C, D, E

6. A through E

2. A, B

7. B, D

3. B, C, D

8. D, E

4. B

9. B, D, E

5. A

10. E

9. Internal controls While the proposed system may cut down on errors, employees are likely to feel resentful at such a radical change. Effectively, the system is moving toward a “Theory X” model, which assumes that employees are inherently lazy and must be closely supervised to ensure optimal results. Many of the internal controls discussed in the chapter would be very helpful in this system: increased use of information technology, stamping documents “paid” when checks are written, inventory monitoring systems, document matching and assigning employees to specific vendors.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

10. Internal control analysis A review of purchase orders, receiving reports and cash payments, coupled with periodic inventory counts, would establish a correlation between what “is” on hand and what “should be” on hand. If the documents supported the allegations of fraud, an internal auditor might determine which employees had access to the inventory, and proceed to interview them. Internal controls that could prevent similar problems in the future include: video surveillance systems, electronic tagging on tools (such as those used in high-end retail stores), keeping tools physically secure and limiting the employees authorized to access them.

11. Terminology 1. J

6. G

2. C

7. A

3. F

8. B

4. I

9. E

5. D

10. H

12. Multiple choice questions 1. A 2. C 3. C 4. C 5. C

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

13. Statement evaluation a. Sometimes true. A bill of lading is required if the goods need to be shipped. b. Sometimes true. The number of processes will vary between organizations. c. Never true. d. Sometimes true. A conflict of interest policy alone does not ensure strong internal control. e. Never true. f. Sometimes true. The form of documents will vary across organizations. g. Always true. h. Sometimes true. Events such as purchasing insurance can be triggered by the passage of time. i. Always true. j. Never true.

14. Process relationships The proper order is: a, g, h, f, j, i, c, b, d, e.

15. Prior material application a. Answers will vary based on the packages selected, criteria and weights chosen. b. Expectancy: “I can probably figure out a way to steal inventory.” Instrumentality: “If I steal inventory, I can probably sell it or find another way to profit from it.” Valence: “I really need to make some extra money.”

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

16. Relational database design a. How many tables would be required in a relational database of the second REA model? Justify your response. The second REA model would require three tables: book, author and author / book. The junction table is required because of the many-tomany relationship between authors and books. b. For each table indicated by the second REA model, indicate: its name, its primary key and at least two additional fields.

Book table: ISBN, book title, number of pages, copyright year Author table: Author ID, author last name, author first name Author / book table: [Author ID], [ISBN], share of royalties c. Update the second REA model by adding the event “revise book.” Create appropriate cardinalities. Indicate any additional table(s) that would be required; specify needed primary and foreign keys for any additional tables.

Revise book table: Revision ID, [ISBN], revision start date, revision end date Revise book / author table: [Revision ID], [Author ID]

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 13: Acquisition / payment process

17. Excel application Transaction number 1 2 3 4 5 6 7 8 9 10

Total cost of units purchased $

Units purchased

Cost per unit

212 $ 226 200 256 219 250 292 262 214 213

25 12 13 14 15 18 19 21 17 23

B $

5,300 2,712 2,600 250 units or more 3,285 250 units or more 250 units or more 250 units or more 3,638 4,899

C $

5,300 Cost less than $15 Cost less than $15 Cost less than $15 3,285 4,500 5,548 5,502 3,638 4,899

41,568

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

1. Reading review questions a. What is the basic purpose of each business process discussed in this chapter (conversion, financing, human resources)? The conversion process is responsible for transforming material, labor and overhead into finished products. The financing process, a specialized case of acquisition / payment, deals with how an organization obtains and repays external funding (long-term debt, capital stock and the like). The human resources process comprises all the activities from hiring a new employee to termination. b. What are the similarities and differences between job costing and process costing systems? How is each system reflected in the organization of the accounting information system? Both job and process costing are concerned with tracking material, labor and overhead from their raw states to finished products. In addition, both are systems used in manufacturing organizations. But, whereas job costing tracks the costs by “job,” process costing is more concerned with “processes.”

Job costing systems are reflected in the AIS by maintaining ledger accounts for each job; process costing systems have ledger accounts organized by process. c. What are the four common transactions associated with the financing business process? What information must be tracked for each transaction? The transactions (and associated data) are: (a) issuance of capital stock (number of shares, par value per share, market value per share, shareholder identification data), (b) purchase of treasury shares (number of shares, price per share, shareholder identification data), (c) long-term debt transactions (principal, coupon interest rate, market interest rate at time of issuance, time to repayment, number of annual interest payments, lender identification data) and (d) dividend distributions (type of dividend, shareholder identification data, amount of dividend, dates) d. What forms are commonly used in processing payroll transactions? Forms discussed in the chapter include: W-4, W-2, payroll register, employee earnings record, Form 1099, Form 940 and Form 941. e. How are the purposes of internal control fulfilled in each business process discussed in the chapter? In the conversion process, assets (material, work in process, finished goods) can be safeguarded through physical controls and monitoring.

In the financing process, protecting cash is a primary concern; the usual controls (bank reconciliation, authorized signatures) apply. In the human resource process, the main concern is compliance with management directives; that objective can be attained through careful procedure development and periodic audits. All three processes Copyright © 2016 McGraw-Hill Education. All rights reserved. No reproduction or distribution without the prior written consent of McGraw-Hill Education

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

produce data for the financial statements; internal and external audits help promote the reliability of financial statements. f. Respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

2. Reading review problem The following answers are based on Starbucks. a. Does the organization have a conversion process? If so, what is its primary product? Which type of costing system does it use? If the organization does not have a conversion process, suggest a product it might use to start one. Which type of costing system would that product use? Starbucks does have a conversion process; its primary product is coffee drinks of various types. Since the drinks are made to order, not mass produced, Starbucks would account for them using a job costing system.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

b. Figure 14.2 shows a systems flowchart of the employee hiring process.

Choose another task associated with the human resources process, such as paying employees, evaluating their performance or terminating them. Draw a systems flowchart of the task, then suggest at least three internal controls you would implement for it.

Here is a systems flowchart of the employee performance evaluation process:

Internal controls would include: ensuring evaluations are done regularly, that they are based on clear criteria and that consequences / results of them are clearly documented.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

c. Do some research on your chosen company to determine: its IPO date, its current stock price, its last dividend payment date and amount, its total market capitalization. Explain how each of those items relates to the financing process.

Starbucks’ IPO took place on 26 June 1992. As of 5 June 2014, its stock price is $74.67 / share. Its last dividend of $0.26 / share was paid on 23 May 2014, and its total market capitalization as of 5 June 2014 is $56.25 billion.

The IPO date is the first date Starbucks’ shares were available for purchase by the general public; its current stock price would be used in making stock-related journal entries. (The stock’s par value would be accumulated in the Capital Stock account, while any excess of market over par would go to Additional Paid-In Capital.) The last dividend payment date and amount are self-explanatory; the total market capitalization is the current market value of all outstanding shares.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise as they respond to this question: 5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

6. Costing systems a. job costing

g. process costing

b. job costing

h. process costing if the consultant specializes in a certain type of engagement (e.g., QuickBooks training)

c. job costing d. job costing

i. process costing

e. process costing

j. process costing

f. job costing if the work is principally focused on design; process if focused on maintenance 7. Transactions and business processes a. human resources

f. financing

b. conversion

g. conversion

c. financing

h. financing

d. financing

i. financing

e. human resources

j. conversion

8. Transaction explanations a. paying the organization’s share of payroll taxes

f. issuing a stock dividend (large) g. allocating manufacturing overhead to work in process

b. recording depreciation on manufacturing equipment

h. paying interest on long-term debt

c. purchasing treasury shares

i. issuing long-term debt at a discount

d. issuing capital stock for cash

j. recording the sale of finished goods

e. recording payroll

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

9. Payroll forms data a. 4, 5 b. 4, 5

1. Form 940

c. 1 through 4

2. Form 941

d. 4

3. Form 1099

e. 1 through 4

4. Form W-2

f. 4, 5

5. Form W-4

g. 5 h. 3 through 5 i. 4 j. 1

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

10. Risk analysis and internal controls a. Lack of product demand (market research to determine price points, objective customer satisfaction surveys). Workplace accidents (worker training, workers’ compensation insurance). Poor quality goods (quality control inspections, pre-qualifying material suppliers). b. Changes in technology leading to product obsolescence (market research, welldefined R & D processes). Price-level changes (market research, cost control processes). Inaccurate forecasts (customer surveys, independent verification of forecasts). c. Insufficient capital for expansion (line of credit, independent budgeting process).

Lack of FDA approval (verification of research results, independent review of proposals). Lack of response to IPO (IPO training, team approach for developing IPO). d. Spoilage (climate control, low inventory levels). Equipment malfunctions (periodic maintenance, worker training for proper operation). Worker injury (training, workers’ compensation). e. Excessive leasing costs (contracts with price caps, headcount control). Decreased worker motivation (employee satisfaction surveys, morale-boosting activities).

Unreliable leasing firm (background research, qualification process). f. Inaccurate forecast of cash needs (independent review, post-audits of test stores).

Lack of ability to repay debt (sinking fund, debt covenant). Financial statement fraud (independent audits, internal audit department).

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

11. Systems documentation a.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

b.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

c.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

d.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

e.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

12. Database design a. Dreambox Creations.

•

Employee table: Employee ID, employee last name, employee first name, employee address, employee city, employee state, employee ZIP code, employee area code, employee phone number, date hired, date terminated (Other fields related to the employee may be added.)

•

Report hours table: Reporting hours transaction ID, reporting date, [employee ID], [client ID], hours reported

•

Query 1: Lists names of current employees. Fields: Employee first name, Employee last name, Date terminated. (Date terminated would have a criterion of “blank” for this query)

•

Query 2: Hours reported by employee. Fields: Employee ID, hours reported.

b. Hiring new faculty.

•

Request funding table: Funding request ID, date requested, amount requested, [department ID]

•

Advertise position / advertisers table: [Advertisement ID], [Advertiser ID], advertisement start date, advertisement length of time, advertisement cost

•

Candidate table: see the specifications for the “employee table” in Part A of this problem.

•

Query 1: Total funding requested by each department. Fields: Department ID, amount requested.

•

Query 2: Number of candidates. Fields: Candidate ID (from the Candidate table).

c. Geoff.

•

Client table: See the specifications for “employee table” in Part A.

•

Schedule appointment table: Appointment ID, date scheduled, time scheduled, [client ID]

•

Prepare tax return / client table: [Preparation transaction ID], [Client ID]

•

Query 1: Clients who have not scheduled an appointment. Fields: Client ID, Appointment ID. (The latter would have a criterion of “blank” for the query.)

•

Query 2: Schedule of daily appointments. Fields: Client ID, date scheduled, time scheduled.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

d. Journal entries tables (Note that the directions are different for this part of the problem.)

•

Chart of accounts table additional fields: Account name, beginning balance, beginning balance date

•

Make journal entries table additional fields: Journal entry date, employee ID, notes

•

Make journal entries / chart of accounts table additional fields: dollar amount, debit or credit

•

To create general purpose financial statements, the accountant would create one or more queries grouped by account number to determine each account’s balance. Then, the accountant would create a report for each of the general purpose financial statements with appropriate subtotals.

13. Terminology 1. D

6. I

2. A

7. E

3. J

8. F

4. C

9. H

5. G

10. B

14. Multiple choice questions 1. D 2. A 3. D 4. B 5. A

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

15. Statement evaluation a. Sometimes true. All five processes may be required, depending on the nature of the organization. b. Sometimes true. Many companies with long-term debt establish sinking funds as an internal control. c. Sometimes true. Like most forms, they can be paper-based or electronic. d. Always true. e. Never true. f. Always true. g. Always true. h. Never true. i. Never true. j. Never true.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

16. Prior material application a.

Primary activities Transporting steel to its facility Inbound logistics

Operations

Manufacturing boat heaters

Outbound logistics

Shipping boat heaters to retail stores

Marketing & sales

Creating & distributing product brochures

Service

Staffing a dedicated customer support phone line

Procurement

Support activities Purchasing steel to be transported

Information technology

Using an ERP system for transaction processing

Evaluating employees on Human resource management a regular basis

Infrastructure

Engaging in research & development to improve products

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

b.

ERM framework element Internal environment Objective setting Event identification Risk assessment Risk response Control activities Information & communication Monitoring

Heater Craft example Management brings in a consultant to give seminars on the importance of enterprise risk management.

Increase sales revenue by 5% in the coming year.

Lack of sales due to declines in the economy.

High Accept, avoid Diversify product line Post copies of ERM plan throughout the facility.

Make monitoring & updating the plan part of the CFO’s responsibilities.

c. Answers will vary considerably.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

17. Excel application If the formulas are properly constructed using absolute and relative cell referencing, this problem provides an opportunity for students to do “what if” analysis.

Case A Sales price / unit $ Variable cost / unit Total fixed cost

32 17 18,000

Units sold

Total revenue 0 $ 400 12,800 800 25,600 1200 38,400 1600 51,200

$60,000

Total cost $ 18,000 24,800 31,600 38,400 45,200

$50,000 $40,000 Total revenue

$30,000

Total cost $20,000

*The unit levels could be specified differently, although they should always start at -0- and include the breakeven point.

$10,000

$0

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

Case B Sales price / unit $ Variable cost / unit Total fixed cost

40 17 18,000

$70,000 $60,000

Units sold

Total revenue 0 $ 400 16,000 800 32,000 1200 48,000 1600 64,000

Total cost $ 18,000 24,800 31,600 38,400 45,200

*The unit levels could be specified differently, although they should always start at -0- and include the breakeven point.

$50,000 $40,000 Total revenue $30,000

Total cost

$20,000 $10,000

$0

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

Case C Sales price / unit $ Variable cost / unit Total fixed cost

32 15 18,000

Units sold

Total revenue 0 $ 400 12,800 800 25,600 1200 38,400 1600 51,200

$60,000

Total cost $ 18,000 24,000 30,000 36,000 42,000

$50,000 $40,000 Total revenue

$30,000

Total cost $20,000

*The unit levels could be specified differently, although they should always start at -0- and include the breakeven point.

$10,000

$0

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

Case D Sales price / unit $ Variable cost / unit Total fixed cost

32 17 23,400

Units sold

Total revenue 0 $ 400 12,800 800 25,600 1200 38,400 1600 51,200

$60,000

Total cost $ 23,400 30,200 37,000 43,800 50,600

$50,000 $40,000 Total revenue

$30,000

Total cost $20,000

*The unit levels could be specified differently, although they should always start at -0- and include the breakeven point.

$10,000

$0

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 14: Other business processes

Case E Sales price / unit $ Variable cost / unit Total fixed cost

35 12 19,800

Units sold

Total revenue 0 $ 400 14,000 800 28,000 1200 42,000 1600 56,000

$60,000

Total cost $ 19,800 24,600 29,400 34,200 39,000

$50,000 $40,000 Total revenue

$30,000

Total cost $20,000

*The unit levels could be specified differently, although they should always start at -0- and include the breakeven point.

$10,000

$0

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

1. Reading review questions a. What is information overload? What causes it? What are its effects? How can decision makers deal with information overload in their professional lives?

Information overload occurs when people try to process too much information too quickly. It can be caused by human limitations, characteristics of the information itself, information technology, task and process parameters and / or organizational design.

Information overload leads to suboptimal decision making and stress, with its attendant psychological, behavioral and physical effects. Decision makers can deal with information overload by allowing more time to complete important tasks, breaking larger tasks down into smaller tasks and / or imposing a structure on the information. b. Explain the idea of knowledge management. Why is it important? What are some techniques you can use to manage knowledge now and in the future?

Knowledge management refers to the tools, techniques and processes people in organizations use to create an “institutional memory.” With good knowledge management, companies don’t have to “re-create the wheel” each time they’re faced with a decision. Relational databases and organizational culture are important tools in managing knowledge. c. Summarize the ideas and steps associated with Wolcott and Lynch’s Steps for Better Thinking. Steps for Better Thinking (SBT) is a developmental problem-solving and decision-making process. It is especially relevant to the kinds of problems we face in business today—complex and open-ended, without single, “correct,” deterministic responses. It comprises a foundation level (knowing) and four increasingly complex steps: identifying, exploring, prioritizing and envisioning. d. Respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

2. Reading review problem a. What is a knowledge management system? What steps would American Express use to develop one? A knowledge management system is a relational database that facilitates decision making in organizations. KMSs help preserve organizational memory and link together the various functions of an organization. Call recommended a seven-step process for creating a KMS: 1. Create an organizational culture that supports the ideas of knowledge sharing and development. 2. Define the business goals the knowledge management system will address. 3. Perform a knowledge audit to identify any duplication, gaps, and overlaps in an organization’s knowledge base. 4. Create a visual map that describes units of knowledge and the relationships between them. 5. Develop a knowledge management strategy based on the content management, integration, search mechanisms, information delivery, and collaboration. 6. Purchase or build appropriate tools for capturing, analyzing, categorizing, and distributing knowledge. 7. Periodically reassess the value of the knowledge management system and make necessary adjustments.

b. Bumble Beasley was considering applying for an American Express card, but had a difficult time deciding which card was right for him. Suggest why Bumble was experiencing difficulty; frame your answer using the causes of information overload discussed in the chapter. For each cause you identify, suggest at least one countermeasure Bumble could use. Eppler and Mengis identified five broad causes of information overload that may be impacting Bumble’s decision process, along with some countermeasures to address them. The table below connects them in this case.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

Generic cause Personal factors

Information technology

Organizational design Task & process parameters

Information characteristics

Application to Bumble Bumble may be tired or otherwise distracted.

Countermeasures He should focus on the value-added information that is important to him, such as interest rates and fees.

Bumble may have done an He should define his internet search that decision rules to narrow returned a lot of down the relevant information. information; for example, does he want a card with no annual fee?

As Bumble is making this decision alone, this cause may not apply to him.

If Bumble is trying to make He needs to allow more the decision quickly, he time to make the decision. may be experiencing this cause.

The information Bumble is dealing with isn’t inordinately complex, so this cause may not apply.

c. Shawn has had a personal American Express card for many years. He recently started a business and has considered changing to a small business American Express card. Use Steps for Better Thinking to explain how Shawn should decide whether to follow through with his idea. Steps for Better Thinking (SBT) comprises five main levels; their application to Shawn’s situation are discussed below: •

Knowing. Shawn needs to learn about the similarities and differences between personal credit and small business credit.

•

Identifying. The problem is whether or not to switch to a small business AmEx. Uncertainties might include card fees and the impact on Shawn’s personal credit.

•

Exploring. Shawn lists the advantages and disadvantages of personal vs. small business credit, such as cost, credit score impact and long-term implications.

•

Prioritizing. Shawn decides which of those factors are most important. He decides to move forward with the plan to get a small business card.

•

Envisioning. After a year’s experience with the small business card, Shawn reflects on his decision in deciding whether to maintain it or switch back.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

d. What types of Big Data would American Express use to make decisions about developing new card types? How would it use descriptive / predictive / prescriptive analytics in that process? AmEx could potentially use several different types of Big Data in developing new card types. For example, it could use web / social media data to get users’ opinions on existing cards and desired new features. Machinegenerated data could give AmEx an idea of usage patterns. AmEx would use analytics to “make meaning” from the data collected in terms of what exists (descriptive), what could happen in the future (predictive) and what should happen (prescriptive).

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise as they respond to this question: •

Knowing: Parmeet takes a class to learn about engineering.

•

Identifying: She considers the skills needed to succeed in engineering.

•

Exploring: Parmeet talks to advisors to help her interpret the information she’s gathered.

•

Prioritizing: Parmeet decides whether to change her major.

•

Envisioning: She evaluates her decision and plans her future studies.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

6. Analyzing current issues in accounting Here’s an analysis of question “g” from the list in the text (has the conceptual framework of accounting fulfilled its purpose) based on SBT. a) Identifying i) Problem: The problem is to determine whether the conceptual framework of accounting has fulfilled its purpose. ii) Relevant information: What was the original purpose of the conceptual framework? What are the elements of the framework? How, if at all, has the framework been incorporated in promulgating new financial accounting standards? iii) Uncertainties: Since the framework was developed in the late 1970s, we’ve probably “lost” some of the conversations and debates that surrounded its development. While we’re certainly left with plenty of written records, it’s a bit like trying to determine the intent of the writers of the US Constitution. b) Exploring i) Biases: The FASB will be biased in favor of the framework.

Accounting educators might also feel the same way, since the framework has become such an integral part of the accounting curriculum. Practitioners, on the other hand, may be biased against the framework, given the number of standards spawned since its development. ii) Assumptions: The conceptual framework does serve a purpose. And, it is a convenient way of organizing some fundamental knowledge about financial accounting.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

iii) Qualitative interpretation from various points of view (1) FASB: The cost to develop the framework is “sunk,” and therefore irrelevant in the decision. And, the framework appears to be “doing no harm.”

(2) Accounting educators: Properly applied and incorporated in the curriculum, the framework can be used to explain many subsequent accounting pronouncements and ideas.

(3) Practitioners: The conceptual framework is something to test on accounting professional exams; it’s not connected directly enough to pronouncements and “real world” decisions. iv) Information organization: Opinions about the framework could easily be solicited through an online survey, such as with Survey Money (www.surveymonkey.com). Properly designed, the survey would provide a good organizational structure for the information. c) Prioritizing i) Ranked list of factors to consider (note that this ranking is still highly subjective, and might differ between decision makers) (1) Practitioner opinions (2) FASB opinions (3) Educator opinions ii) Conclusion: The conceptual framework has, at least somewhat, fulfilled its original purpose. It may become more important with the move toward principles-based accounting.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

d) Envisioning i) Limitations of endorsed solution (decision makers would monitor and report on these over time, using them to inform later decisions) (1) The conceptual framework is fixed, static and dated; it wouldn’t be easy to change, even if it were a complete failure.

(2) Present standards may not appeal directly enough to the elements of the framework.

(3) The framework is based on US GAAP, and may be problematic in the international standards harmonization effort. ii) Skills integration: The FASB could ask for feedback on new standards based on the elements of the framework.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

7. Software acquisition decision using SBT SBT Critter Harbour Credit step Sitters Management Knowing Learn the features of Search for “spam each program being management” considered. software on download.com and in other places.

Identifying The problem is selecting The problem is software for the AIS. selecting software Relevant factors include: to manage spam. cost, ease of use and the Relevant factors hardware platform in use. include: cost, Uncertainties include the effectiveness and degree to which sophistication of employees will accept / users. resist the change.

Uncertainties include how much spam the software will have to filter.

Exploring Prepare a chart that lays Prepare a chart that out the relevant factors. lays out the relevant factors.

Prioritizing Use something similar to Use the systems the weighted-rating development life technique to determine cycle (or some which factors are most similar important and to guide methodology) as a the choice of software. basis for Make a choice and implementing the implement. chosen solution.

Envisioning Monitor the system.

Monitor the system.

Record observations and Record issues in a KMS. Make observations and modifications as needed. issues in a KMS. Make modifications as needed.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

8. Types of Big Data The chapter discussed five types of Big Data. Indicate which category best fits each of the following examples; if an example fits more than one category, explain why. a. Airline ticket reservations: human generated b. Blood type: biometric c. Cell phone tower usage: machine-to-machine d. Daily credit card transactions: human generated or machine-to-machine e. Fax transmissions: human generated or machine-to-machine f. Journal articles: human generated g. Pinterest posts: web and social media h. Voice print analysis: biometric i. X-rays: biometric or human generated j. YouTube videos: web / social media or human generated

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

9. Creating knowledge management systems a. Viola could create a relational database table with the following fields (field types are indicated in parentheses): Firm name (text), date employed (date), exit date (date), responsibilities (text), annual salary (currency) and comments (memo). b. Here’s an example based on the Introduction to AIS course at my school (Cal Poly Pomona). The rows are topics; the columns are skills. The cells explain how those skills are developed in the class for each area of knowledge.

Internal control

Technical

Communication

Information technology

Reading, homework, exams

Analyzing & writing about an assigned case.

Not applicable

Flowcharting

In-class activities, reading, homework

Not applicable

Project requiring preparation of a flowchart from a case

Business processes

Lectures, class discussions

Presenting solutions to homework problems

Application of prior material to business processes

c. The eight rows of the table (provided in the text) would serve as database fields.

Each column would become its own record; the data in the “cells” would populate the tables.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

10. Terminology 1. G

6. D

2. A

7. F

3. H

8. B

4. C

9. I

5. E

10. J

11. Multiple choice questions 1. C 2. A 3. D 4. A 5. D 12. Statement evaluation a. Never true. b. Never true. c. Always true. d. Sometimes true. The utility of the various types of analytics depends on the task at hand. e. Sometimes true. Whether or not the statement is true depends on the nature of the personal factors causing information overload. f. Always true. g. Never true. h. Never true. i. Sometimes true. The utility of a graph would depend on the nature of the information. j. Never true.

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15-11

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

13. Prior material application a. This chapter outlined seven steps for creating a knowledge management system, using Netflix as an example. Think about the steps in the broader context of a functionally-organized corporation; who should complete each of the steps for creating the system? In a format specified by your instructor, document the steps based on the parties you believe should complete them.

1. Create an organizational culture that supports the ideas of knowledge sharing and development: top management.

2. Define the business goals the knowledge management system will address: department managers and long-time employees.

3. Perform a knowledge audit to identify any duplication, gaps, and overlaps in an organization’s knowledge base: long-time employees within each unit.

4. Create a visual map that describes units of knowledge and the relationships between them: KMS creation committee (should include members from each department).

5. Develop a knowledge management strategy based on the content management, integration, search mechanisms, information delivery, and collaboration: KMS creation committee & an external consultant.

6. Purchase or build appropriate tools for capturing, analyzing, categorizing, and distributing knowledge: information systems department.

7. Periodically reassess the value of the knowledge management system and make necessary adjustments: internal auditors.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

b.

Cause Personal factors Information characteristics Organizational design Task & process parameters Information technology

Financing process example Experiencing fatigue when issuing dividend checks because of the repetitive nature of the task.

Interpreting data from a securities trading market, such as the NYSE. Managing a finance department with people from various educational and experiential backgrounds.

Needing to prepare a report for a board of directors meeting that takes place in a week.

Finding information online about the advantages & disadvantages of debt vs. equity financing.

c. The database could be considered an intangible asset, similar to a web site. If that were the case, the costs could be capitalized to an asset account; they would be amortized over the life of the KMS. If the costs were deemed immaterial, however, they could be expensed when incurred. d. Descriptive: Chapters 1, 2, 4, 6, 8, 10, 12, 13 Predictive: Chapters 3, 5, 11 Prescriptive: Chapter 14

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 15: Decision making models and knowledge management

14. Excel application Here are the first ten records based on my solution; students’ results will be different since this exercises focuses on random sampling. a – e.

Record Random number number 1853 0.003 7592 0.006 2355 0.014 4298 0.018 2788 0.029 8458 0.033 3679 0.034 2870 0.034 1164 0.035

Mean Median Standard deviation

3930.1 3274.5 2382.4

f. Random samples can be used in accounting in a variety of ways, including determining which transactions to test in a financial statement audit or sampling documents for a fraud examination.

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15-15

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 16: Professionalism, ethics and career planning

1. Reading review questions a. List and discuss at least five characteristics of a professional and/or professional behavior. Where possible, include a specific example of each characteristic from your own experience as a student. Characteristics discussed in the chapter include those suggested by Bell: communicating effectively; thinking rationally, logically, and coherently; appropriately using technical knowledge; integrating knowledge from many disciplines; exhibiting ethical professional behavior; recognizing the influence of political, social, economic, legal, and regulatory forces; and actively seeking additional knowledge. McDonald also provided four characteristics of a professional: specialized knowledge base, complex skills, autonomy of practice and adherence to a code of ethical behavior. b. Define ethics. Explain why ethics is so important in the accounting profession.

Ethics focuses on making systematic, informed judgments about acceptable behavior.

Because the public relies on accountants to provide important information for decision making, and because recent ethical scandals have shaken their trust, ethics are critically important for the accounting profession. c. What basic schools of thought exist regarding ethical behavior? What are the strengths and weaknesses of each one? The utilitarian school of ethics believes that the end justifies the means; while straightforward and easy to understand, the “ends” are often ethically questionable. The rights and duties school puts forward the idea that every individual has certain rights; others have the duty not to interfere with those rights.

One strength of that school is its focus on individual behavior; a major weakness, however, is deciding where one person’s “rights” end and another person’s “duty” begins. Third, the justice school’s principle tenet is that everyone should be given what they deserve. Although simplistic on its face, the real question is what a person deserves. Finally, the virtues school teaches that everyone should do what is right & virtuous. While intuitively appealing, people frequently disagree on what behaviors meet that standard. d. Explain the basic facts of fraud schemes associated with Ponzi, Adelphia, and Enron. Ponzi used international postal reply coupons to perpetrate the fraud that now bears his name. In a “ponzi scheme,” early investors are paid a return with the money of later investors, rather than with legitimate returns on investment. The Adelphia Cable case involved the Rigas family; John Rigas ran the company with an “iron fist,” and justified his fraudulent actions by saying he spent the money so as to benefit others.

Finally, Enron was a massive case of fraudulent financial statements; Enron effectively made up its own accounting rules. The fraud was not detected by their auditors, Arthur Andersen, because of the close relationship between the two firms. Both of them are now defunct.

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16-1

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 16: Professionalism, ethics and career planning

e. Respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

2. Reading review problem a. Which characteristics of a professional did Woodford demonstrate? At minimum, Woodford demonstrated the following characteristics: communicates effectively; thinks rationally, logically and coherently; exhibits ethical professional behavior. b. Which school of ethical thought best explains Woodford’s actions? The actions of Olympus staff? Woodford’s actions are most closely aligned with deontology. He believes that shading the truth is wrong, and infringes on the rights of people who rely on the shaded truth. The Olympus staff, on the other hand, exemplifies ethical egoism; they were acting in their own best interest. c. Suppose you were an Olympus employee that Woodford asked for information. Outline a process you would use to decide whether to provide it. The process recommended by Langenderfer and Rockness would be useful in that situation. It comprises eight steps: (1) Identify the facts. (2) Identify the ethics issues and stakeholders involved. (3) Define the norms, principles and values related to the situation. (4) Identify the alternative courses of action. (5) Evaluate the consequences of each possible course of action. (6) Decide the best course of action consistent with the norms, principles and values. (7) If appropriate, discuss the alternative with a trusted person to help gain greater perspective regarding the alternatives. (8) Reach a decision as to the appropriate course of action. d. Do a Google search to learn more about the Olympus case and its aftermath. What similarities and differences do you see between it and the Madoff case? Similarities between the two cases include: both of them involved fraud and both were highly publicized. On the other hand, the nature of the fraud was different between the two (Ponzi scheme for Madoff, fraudulent financial statements for Olympus) and the method of discovery for the fraud was different.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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16-2

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 16: Professionalism, ethics and career planning

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise as they respond to this question: •

Ethical egoism: The school demonstrated by Buenrostro and Villalobos.

•

Utilitarianism: Their actions harmed shareholders, and were therefore inconsistent with utilitarian principles.

•

Deontology: Their actions were inconsistent with most universal moral codes.

•

Virtues: While difficult to speculate on their fundamental moral character, it’s unlikely Buenrostro and Villalobos would meet the standard of this school.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

6. Personal philosophy Answers will vary significantly.

7. Schools of ethical thought a. Sean was working with a group of three other students on a financial statement analysis project for his introductory financial accounting course.

He told the other group members that he would do the entire project with minimal input from them to ensure the whole group got a good grade.

School of ethical thought: utilitarianism. Reworded for ethical egoism: replace “to ensure the whole group got a good grade” with “to ensure he got a good grade.” b. Lydia downloaded a solution to a graded homework problem in her AIS course from the Internet. She reasoned that doing so was ethical since it would give her a better grade when she presented the problem in class.

School of ethical thought: ethical egoism. Reworded for deontology: Lydia refused to download a solution. . .since it would constitute cheating. c. Nicole’s friend offered to share her intermediate accounting term paper with her; the paper had received an A when Nicole’s friend took the course.

Nicole refused her friend’s offer, saying that cheating in any form is unethical. School of ethical thought: deontology. Reworded for virtue: Nicole refused her friend’s offer since she thought of herself as a fundamentally honest person.

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16-3

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 16: Professionalism, ethics and career planning

d. Ruben felt that using his class notes for a closed-book exam contradicted the values he had grown up with, so he decided not to do so. School of ethical thought: virtue. Reworded for utilitarianism: Ruben felt that using his class notes was OK, so long as he also shared them with the rest of the class.

8. Professional certification & licensure Answers will vary significantly.

9. Terminology 1. H

6. F

2. E

7. A

3. J

8. I

4. G

9. B

5. D

10. C

10. Multiple choice questions 1. A 2. A 3. C 4. C 5. C 11. Statement evaluation a. Always true. b. Never true. c. Never true. d. Sometimes true. Whether following the law is ethical depends on the decision maker’s ethical point of view. e. Never true. f. Always true. g. Sometimes true. Virtue ethicists believe that ethical actions are the natural product of being an ethical person; however, professionalism may involve other schools of ethical thought. h. Never true. i. Always true. j. Always true.

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16-4

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 16: Professionalism, ethics and career planning

12. Prior material application a. Answers will vary depending on the exam chosen. b. Topics (customary area in parentheses) include: systems development life cycle (information systems), expectancy theory (human resource management), SarbanesOxley Act (business law), database design (information systems) and ethics (philosophy). c. Specialized knowledge is involved in at least the following: the accounting cycle, database design, business process management. Many topics discussed earlier involve complex skills, such as systems documentation and critiques of internal controls. d. Here is an example focused on the acquisition / payment process: Step Request goods & services based on monitored need.

Authorize a purchase.

Purchase goods & services.

Receive goods & services.

Disburse cash.

Process purchase returns as necessary.

Potential ethics issue Ordering goods & services that are not based on legitimate need Authorizing purchases for personal items Purchasing from a firm owned by a relative or close friend Falsifying counts of incoming goods.

Forging a signature on a check Processing returns without receiving the associated merchandise.

e. Considering the ethics of forging a signature on a check: School

Response

Utilitarianism

If the goods were legitimately ordered and correctly paid for, forging a signature shouldn’t be a problem.

Ethical egoism

The person who forged the signature is acting ethically.

Virtues Deontology

A fundamentally virtuous person would not forge a signature.

Forging signatures is a form of lying, and is therefore wrong.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 16: Professionalism, ethics and career planning

13. Excel application Correlation

0.02988

Anova: Single Factor SUMMARY Groups Small Medium Large

Count

ANOVA Source of Variation Between Groups Within Groups Total

Sum Avg Var 5 45 9 7.5 5 54 10.8 11 5 47 9.4 13

SS

df MS F P-value F crit 8.93 2.00 4.47 0.43 0.66 3.89 124.00 12.00 10.33 132.93 14.00

Since p > 0.05, we conclude there is no relationship between the two variables.

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16-6

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 17: Auditing and evaluating the AIS

1. Reading review questions a. List and discuss the seven types of audits described in the chapter. A financial audit involves the examination of a company’s accounting information system and financial statements. In an operational audit, auditors examine a company’s rules and procedures for conducting business. A systems audit determines whether the various forms of information technology in an AIS are producing expected results. A compliance audit determines whether or not a GNFP is following the rules and regulations in the Yellow Book. A management audit determines the degree to which the assumptions underlying decisions are valid; it also examines the ways in which management decisions are supported. An investigative audit, which may be conducted by a Certified Fraud Examiner, may be triggered by observation of unusual behavior or discrepancies in the accounting information system. An international audit is really a “basket” of the other types; it can be conducted in a US-based firm with international operations or a non-US based firm. b. Explain the ten generally accepted auditing standards that guide financial audits. First and foremost, an auditor must be well-trained in auditing before an engagement commences. Independence speaks to the auditor’s mental attitude; that is, the auditor must always remain independent from the client. The auditor must exercise due professional care in preparing for and completing the audit. The audit is to be properly planned, and all staff members must be adequately supervised. A thorough assessment of internal controls is a critical step early in the audit process.

The evidence standard speaks to the importance of having an objective, reasonable basis for expressing an opinion on the company’s financial statements. The audit opinion must state whether or not the statements are presented in accordance with generally accepted accounting principles. Full disclosure is a commonality between GAAS and the conceptual framework. Consistency is one of the qualitative characteristics of accounting information in the conceptual framework; it is also one of the reporting standards. c. Describe the common steps associated with an audit. The five steps are: (1) Assess management’s integrity. (2) Evaluate management’s credentials. (3) Review the internal control system. (4) Perform compliance testing. (5) Issue the audit report. d. Respond to the questions for this chapter’s “AIS in the Business World.” As in previous editions, I’ve posted responses to each chapter’s AIS in the Business World on my accounting information systems blog (www.bobhurtais.blogspot.com). Look for the 4th edition’s responses in the 15 December 2014 post.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 17: Auditing and evaluating the AIS

2. Reading review problem a. Which type(s) of audits discussed in the chapter are relevant to this situation?

Why? A compliance audit would be helpful since the EPA is a government agency. A forensic audit would be applicable since this case involves fraud. And, an operational audit would be useful to discover how Beale’s actions continued for so long.

b. The Audit Clarity Project standards apply to financial statement audits. Using Table 17.1 as a guide, prepare a memo that summarizes Beale’s case. Here are some items students should include in their responses: •

Title: Independent auditor’s report on the EPA’s financial statements

•

Addressee: EPA management

•

Introductory paragraph: EPA, general purpose financial statements applicable to a government agency (Note to instructor: This problem provides an opportunity to discuss briefly the differences between government and business financial reporting.)

•

Management’s responsibilities: Management is responsible for both internal controls and the content and presentation of the financial statements.

•

Auditor’s responsibilities: To complete the audit in accordance with GAAS.

•

Auditor’s opinion: Unmodified, if the circumstances warrant. Modified may be more appropriate here because of the fraud problem.

•

Signature, address and date: At the student’s discretion

c. How is the Beale case related to other topics you’ve discussed in your AIS course. Beale’s case reveals a need for stronger internal controls at the EPA; expectancy theory would also inform his behavior. It’s likely his actions were contrary to at least part of the EPA’s standard human resource business process. COSO’s risk management framework would be a good planning tool to avoid similar situations in the future.

3. Multiple choice review questions. Answers to all of these questions appear at the end of the textbook itself.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 17: Auditing and evaluating the AIS

4. Making choices and exercising judgment Students’ answers may vary significantly since the point of these exercises is for them to think critically. Nevertheless, here are some points students may raise as they respond to this question: • • • •

Barb’s main responsibility should be to supervise the other team members.

Laura can continue evaluating internal controls and interacting with management; she may assign some of the more straightforward internal control evaluations (such as cash) to other team members.

Richard can continue with his previous responsibilities, as well as taking on some new areas, such as fixed asset audits.

Albert can take on virtually any audit area, but will need to interact frequently with Barb and / or Laura to ensure he is following VLS procedures.

5. Field exercises Answers to these exercises will vary significantly. Although I’m not providing solutions to them, don’t hesitate to share your students’ work with me if they come up with an especially strong response.

6. Audit types a. financial

f. systems

b. investigative

g. operational

c. operational

h. international

d. financial

i. systems

e. financial

j. management

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17-3

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 17: Auditing and evaluating the AIS

7. Audit Clarity Project a. As structured under the ACP, each standard concludes with guidance and explanatory material. b. Audit reports prepared under the ACP must have a subheading at the start of each paragraph. c. Auditors must obtain management’s acknowledgement that they are responsible for financial statements and internal controls. d. If an auditor expresses an adverse opinion, they must indicate the reason in a(n) emphasis-of-matter paragraph. e. In an unmodified audit report, the opinion states that the financial statements are fairly presented. f. In each audit standard, the requirements section can guide the auditor in designing specific audit procedures. g. In terms of purpose, the ACP is similar to the FASB codification. h. One goal of the ACP is to converge U.S. auditing standards with international auditing standards. i. Specifying when an audit standard should be applied is part of the standard’s introduction. j. US GAAP and IFRS are examples of financial reporting frameworks.

8. Violations of GAAS a. Supervision, training b. Disclosure c. Independence, professional care d. Independence, professional care e. Independence, internal controls f. Training

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17-4

Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 17: Auditing and evaluating the AIS

9. Investigative audit a. An investigative auditor would: (1) Examine the relevant documents (checks and deposit slips). (2) Interview employees in the travel department to verify that the executives actually did not travel. (3) Interview the auditors or whomever told the company to stop the practice. (4) Interview the executives and the controller.

Recommended internal controls in this situation would include: separation of duties (the controller should not be signing checks or making bank deposits) and adequate documentation (the company should develop a specific policy prohibiting the conduct). b. The investigative auditor has already examined some relevant documents (purchase orders, invoices); additional documents might include the company’s conflict of interest policy (if such a policy exists). Physical observation of the widgets would be essential to determine if there was some legitimate reason for the high prices; interviews with production personnel would provide additional evidence in that area. Other people to interview here would include shipping and receiving personnel (to verify that the widgets were actually received) and, ultimately, purchasing personnel. Internal controls should include a conflict of interest policy, independent authorization / verification of purchase orders and an independent vendor approval process.

10. Terminology 1. E

6. D

2. H

7. F

3. C

8. J

4. I

9. B

5. A

10. G

11. Multiple choice questions 1. D 2. C 3. D 4. A 5. C

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 17: Auditing and evaluating the AIS

12. Statement evaluation a. Never true. b. Sometimes true. Financial audits focus on statements; other kinds of audits examine other aspects of an organization. c. Always true. d. Sometimes true. Unqualified opinions are appropriate most of the time, but not always. e. Never true. f. Never true. g. Never true. h. Never true. i. Sometimes true. Publicly traded companies need to have audits. j. Sometimes true. The audit opinion talks about the financial statements; a company may have a weak internal control system but (through happy accident) still have fair statements.

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Accounting Information Systems: Basic Concepts and Current Issues (4th edition) Dr. Bob Hurt, C.F.E. End-of-chapter solutions Chapter 17: Auditing and evaluating the AIS

13. Prior material application a. Processes would be examined through observation; they would also likely be compared to standard business processes and the company’s own descriptions. The general purpose financial statements are the primary (but not only) output examined in a financial audit; they would be examined throughout the audit. For internal controls, the auditor might talk to employees, observe them and read written accounts of how internal controls should (and do) function. Finally, regarding storage, an auditor would examine account balances by verifying the transactions recorded in them. b. An investigative auditor would use professional judgment and other clues to determine which transactions to investigate. For example, if investigating a case of suspected fraud involving fixed assets, those transactions would be scrutinized more carefully than others. c. Since the chief internal auditor has not shared the plan with anyone else, it is most likely at the “chaotic” stage of the CMM. To be considered “repeatable,” each operational audit would need specific goals. A “defined” operational audit would draw its standards and procedures from broader policies of the organization. When the process becomes “measured,” actual results are compared to expected results in key areas, such as cost and time. Finally, an “optimized” operational audit would be considered a way of improving quality throughout the organization.

14. Excel application Students’ responses will likely be different, since the problem requires them to select a random sample.

Mean Standard deviation

Sample 3 $ 11 19 30 41

630 523 350 476 661

$

528 125

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