ACCOUNTING INFORMATION SYSTEM 4TH EDITION BY VERNON RICHARDSON, CHENGYEE CHANG, ROD SMITH SOLUTIONS

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ACCOUNTING INFORMATION SYSTEM 4TH EDITION BY VERNON RICHARDSON, CHENGYEE CHANG, ROD SMITH SOLUTIONS MANUAL Chapter 1: Accounting Information Systems and Firm Value Multiple Choice Questions 1. (LO 1-1) Accounting information systems a. are always computerized. b. report only financially related information. c. are information systems that record, process, and report on transactions to provide financial and nonfinancial information for decision making and control. d. require a CITP designation to understand.

Answer: C 2. (LO 1-1) Which of the following is a characteristic of relevance? a. Materiality b. Timeliness c. Verifiable d. Cost to generate Answer: A 3. (LO 1-2) Which of the following is considered to be mandatory information required by a regulatory body? a. 10-Q submission to the Securities and Exchange Commission b. The cost to produce a Samsung Galaxy c. The number of organic bananas that are sold at Whole Foods on July 28 d. The cost to build an all-new Starbucks restaurant in Shenzhen, China Answer: A 4. (LO 1-4) The correct order of events in the value chain is a. Inbound logistics ➛ Operations ➛ Service. b. Inbound logistics ➛ Outbound logistics ➛ Marketing and sales. c. Inbound logistics ➛ Operations ➛ Outbound logistics. d. Inbound logistics ➛ Operations ➛ Marketing and Sales.

Answer: C

5. (LO 1-8) Which system contributes information on direct labor to a cost accounting system? a. Supply chain management system (SCMS)

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b. Financial reporting system (FRS) c. Customer Relational Management System (CRM) d. Human resource management system (HRMS) Answer: D 6. (LO 1-7) A supply chain a. supplies jewelry chains. b. refers to the flow of materials, information, payments, and services. c. is similar in function and purpose to the value chain. d. does not apply to a service firm like an accounting firm.

Answer: B 7. (LO 1-7) Customer relationship management software does not include information about a. current customers. b. prospective customers. c. former customers. d. current employees.

Answer: D 8. (LO 1-6) An information system that measures and records accounting transactions and reports them in the financial statements is called a a. financial reporting system (FRS). b. enterprise system (ES). c. manufacturing system (MS). d. cost accounting system.

Answer: A 9. (LO 1-3) What is the name of the position for a person responsible for determining Information needs of a business and designing a system to meet those needs? a. Chief information officer b. Controller c. IT auditor d. Systems analyst Answer: D

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10. (LO 1-9) The balance sheet account most likely affected by an AIS investment in supply chain management software would be a. inventories. b. fixed assets. c. cash and cash equivalents. d. unearned revenue.

Answer: A 11. (LO 1-7) The software/system that helps make sure the retail firm doesn’t have a stockout is a. supply chain management software. b. customer relationship management software. c. enterprise systems. d. human resource systems.

Answer: A 12. (LO 1-9) Data analytics performed to identify the most profitable customers would be most likely to affect which income statement account? a. Selling, general, and administrative expenses (SG&A) b. Interest expense c. Revenues d. Cost of goods sold Answer: C 13. (LO 1-7, LO 1-9) Customer relationship management systems would generally be considered to be an a. internal business process. b. external business process. c. interior business process. d. exterior business process.

Answer: B 14. (LO 1-3) An auditor testing internal controls would generally be considered to fill which role with respect to accounting information systems? a. User b. Manager c. Designer

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d. Evaluator Answer: D 15. (LO 1-2) Which of these represents the proper transformation from data to decision according to the information value chain? a. Data ➛ Information ➛ Knowledge ➛ Decision b. Data ➛ Knowledge ➛ Information ➛ Decision c. Data ➛ Business event ➛ Information ➛ Decision d. Data ➛ Analysis ➛ Information ➛ Decision Answer: A

Discussion Questions 1. Brainstorm a list of discretionary information that might be an output of an accounting information system and be needed by Starbucks. Prioritize which items might be most important and provide support.

Answers will vary. Here are some potential answers: The cost of a cup of coffee, by type: Breakfast blend, Cafe estima, caffe Verona, espresso roast, Ethiopia sidamo, French roast, Gold Coast blend, Guatemala Antigua, house blend, Italian roast, Kenya coffee, komodo dragon blend, organic Serena blend, organic shade grown Mexico, Sumatra, decaf caffe Verona, decaf espresso roast, decaf house blend, and decaf Sumatra!

Monthly Sales per square foot of retail space.

Employee cost for each operating hour.

Advertising expenditures per dollar of sales.

The cost of condiments per dollar sales of coffee. Condiments might include sweeteners, liquid creamers, cream canisters, sugar packets, sugar canisters, stir sticks!

The cost of electricity per operating hour each month of the year.

2. Explain the information value chain. How do business events turn into data then into information and then into knowledge? Give an example starting with the business event of the purchase of a Super Smash Bros. Nintendo Switch Game at GameStop all the way to giving useful information for the CEO and other decision makers.

The information value chain represents the overall transformation from a business need and business event (like each individual sale of U.S. flag) to an ultimate decision. The information

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value chain might be represented considering the purchase of a Nintendo Switch Game at Best Buy in the following way: The game will be recorded as sales revenue and then after deducting its costs will add to or subtract from corporate income. The cash from the game sale will also add to the operating cash flows.

The specific game will be recorded in the information as a sale to monitor which games are selling within Best Buy. This will help Best Buy and its suppliers know which games are selling and which type of games should be reordered. The type of game will also help the marketing department better understand its customers and their respective demographic profile to better market to them.

In addition, knowing the location of the game sale will also help decision makers know where its sales are occurring.

The CEO can look at the profitability of games overall, the specific types of games that are selling and the location of those sales all due to the information value chain.

3. Give three examples of types of discretionary information at your college or university and explain how the benefits of receiving that information outweigh the costs.

Answers will vary. The following represents potential answers: Universities are often interested in their freshmen retention (the percentage of sophomores that return after their freshman year). They also quite interested in their four- or five-year graduation rates.

Universities are also interested in their production of research grants. This is often used to monitor the success of their research and their ability to get interested sponsors (such as the National Institute of Health or the National Science Foundation).

Information for each of these three examples can be gained by the information system at the university. However, a university generic information system does not usually offer this information as a standard report or standard output of the system. Therefore, work must be done to capture (and potentially digitize) this information, ensure its validity and then report it in an appropriate useful format. The cost of getting useful information will depend on the university and its technology. However, since these represent three keys metrics of a university and will likely be used as a key input to manage the university, the benefits will potentially outweigh those costs.

4. After a NCAA women’s basketball game, a box score is produced detailing the number of points scored, assists made and rebounds retrieved (among other statistics). Using the characteristics of useful information discussed at the beginning of the chapter, please explain how this box score meets (or does not meet) the characteristics of useful information.

A box score of a NCAA women’s basketball game (or other sports) produces overall team statistics by half and quarter and details player performance including minutes played, shots taken, shots made, free throw shots taken and made, assists, rebounds, steals, blocks and fouls.

To be relevant, the information must potentially impact a decision that a decision maker must make. Relevant information is usually characterized by having predictive value, feedback value

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and receiving it on a timely basis. This information provides feedback value to explain how players performed in the game. The box score provides predictive value to the extent that prior performance (as reflected in the box score) is predictive of future performance. Since box scores are available immediately following the game, it is also received on a timely enough basis to make decisions for a subsequent game.

To exhibit the quality of faithful representation, the information must be verifiable, be representationally faithful and be neutral. There are often some allegations that the statistics included in a box score is affected by the bias of the scorekeeper. While the actual points scored by the team is verified by the officials, more minute details are not verified and may be subject to bias, thus limiting their reliability.

The information is potentially relevant to the coach in helping to figure out which players are most efficient and productive. Which players play well against different teams and which players are good at particular aspects of offense and defense, among others.

5. Some would argue that the role of accounting is simply as an information provider. Will a computer ultimately completely take over the job of the accountant? As part of your explanation, explain how the role of accountants in information systems continues to evolve.

Accountants have a role as a business analyst. That is, they gather information to solve business problems or address business opportunities. They determine what information is relevant in solving business problems, then create or extract that information and finally analyze the information to solve the problem. An AIS provides a systematic means for accountants to get needed information and solve a problem.

While a computer is very good at reliably collecting, processing and producing information, the role of the accountant when serving as a business analyst will continue to be able to assess the problems the business is facing and work to provide information that will address it.

6. How do you become a Certified Internal Auditor (CIA)? What do they do on a daily basis?

An individual can earn a CIA designation with a combination of required education, professional experience, character references and passing of the CIA exam.

The CIA designation identifies accountants with a broad range of knowledge about the company. They work inside an individual company, generally providing an independent assessment of the company’s operations, including the effectiveness of a company’s internal controls. They may be called upon to investigate the possibility of fraud in financial statement reporting, or investigate the throughput of a manufacturing system, among many other things.

On a daily basis, CIAs might evaluate internal controls associated with financial reporting, help devise a more efficient financial reporting system, or help audit an operational issue which the audit committee needs to better understand.

7. How do you become a Certified Information Technology Professional (CITP)? What do they do on a daily basis?

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A CPA can earn a CITP designation with a combination of business experience, lifelong learning and an optional exam.

The CITP designation identifies accountants (CPAs) with a broad range of technology knowledge and experience. On a daily basis, CITPs may help devise a more efficient financial reporting system, help figure out how an information system can provide needed decision-relevant information, help the accounting function go paperless or consult on how an IT function may transform the business.

8. Explain the value chain for an appliance manufacturer, particularly the primary activities. Which activities are most crucial for value creation (or in other words, which activities would you want to make sure are the most effective)? Rank the five value-chain enhancing activities in importance for an appliance manufacturer.

The value chain goes all the way from product design, through sourcing to manufacturing to shipping the final product to the warranty and repair business. Many would consider the product design, which ensures that the appliance has the desired functionality at the right priced points, to be a critical activity for value creation. Sourcing the product components to low cost, yet high quality component providers is also key to creating value. Final assembly (or operations) of the product components is also key to ensuring high product quality at reasonable prices. Marketing the final product through appropriate distribution channels and supporting the final product through the warranty and repair process also are crucial parts of the value chain.

My opinion of the ranking of the five primary activities would be that product design would be the most important, then sourcing (inbound logistics), then marketing, then warranty and repair and finally final assembly (or operations).

9.

Which value chain supporting activities would most be most important to support a healthcare provider’s primary activities? How about the most important primary activities for a university?

Of course, all of the supporting activities are important. Human Resources perhaps can be viewed as most important to make sure the right nurses and right doctors with the appropriate skills are available at the right time to service the sick and injured. Technology is increasingly becoming an important part of hospitals, especially with the digital medical records are becoming increasingly available and useful. Certainly, other arguments can be made for other supporting activities.

The primary activities of a university would be to attract students, educate them and then helping them find a good job once they have graduated. Educating students is probably the most important primary activities in the university as that is its primary mission.

10. Where does new product development fit in the value chain for a pharmaceutical company?

Where does new product development for a car manufacturer fit in the value chain?

The support activity of technology generally would include research and development for both a pharmaceutical company as well as a car manufacturer. In either case, this is a support activity that can drive the value for a company.

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11. List and explain three ways that an AIS can add value to the firm.

Accounting Information Systems add value by providing decision relevant information to management.

Three specific examples would include the following: Customer relationship management (CRM) techniques could attract new customers, generating additional sales revenue. Enterprise systems can significantly lower the cost of support processes included. Supply Chain Management Software allows firms to carry the right inventory and have it in the right place at the right time.

12. An enterprise system is a centralized database that collects and distributes information throughout the firm. What type of financial information would be useful for both the marketing and manufacturing operations might both need?

Both marketing and manufacturing operations might both need records of the past sales as well as projections of which products are selling best. For the marketing group, this information would be helpful to optimize marketing campaigns, understand the demographics of the customer, and make predictions of future products. Manufacturing operations might need product information to decide which products to produce as well as needed changes to be able to produce future products. The enterprise systems might be able to provide answers to questions like, what manufacturing equipment might be needed to produce new products or is the existing manufacturing capacity sufficient to fulfill future product needs.

13. Customer Relationship Management software is used to manage and nurture a firm’s interactions with its current and potential clients. What information would Airbus want to know about its current and potential airplane customers? Why is this so critical?

For Airbus, understanding its customers is of paramount importance. Airbus would want to know who their potential customers are, who the key contacts are, what the customer’s business models are (e.g., short flights, long flights, fuel efficiency, loads on each flight, cargo volume and capacity, etc., who their key supplier has been in the past (Boeing, Airbus, Embraer, Comac, etc.) , what they value in a plane manufacturer (e.g., financing, customer service, after sale service, parts, etc.).

This information is critical as it helps Airbus tailor its offering and propose new offerings based on the needs of the customer.

14. What data from internal business processes will serve as inputs into a cost accounting system for your university? From which specific enterprise systems will this data be recorded and managed?

Data from internal business processes would be 1) direct and indirect labor (professors, lecturers, administrative assistants, recruiters, etc.), 2) use of buildings, computer equipment, furnishings (depreciation, maintenance, repair), 3) security (police, fire, security guards), etc.

This data generally comes from financial reporting systems and human resource management systems.

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15. How would an AIS help a company identify the products with the highest profit margin?

Accounting information systems keep track of the revenues and the costs of each product. If the information is reliable, exhibiting the faithful representation qualities, AIS can compute the highest profit margin and highest profit margin percentages. This will help the company know how best to grow its profits, potentially by increasing sales of the products with highest profit margins and perhaps deemphasizing those of lowest profit margin.

Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. Accenture recently wrote an article entitled, “Meet the Finance 2020 Workforce” (2017) suggesting that accountants will need to not only embrace traditional financial questions of "What happened" and "Why did it happen" questions, but also the questions of "What should we do"? How is that consistent with the idea that the accountant should serve as a business analyst argued in the chapter?

Accountants address management questions, and serve as business analysts. They not only measure what happened and why it happened, but they also help address the questions of what should happen next based on expectations. They help management address these questions and optimize a company’s prospects for the future. This is increasingly the role of accountants in the modern business organization.

2. Accenture recently wrote an article entitled, “Meet the Finance 2020 Workforce” (2017) suggesting that accountants will need to embrace new financial roles to analyze new business opportunities and way the organization can profit from them. Consider the internal and external business processes and give ideas of how they might allow the accountant to analyze business opportunities and how the company might able to profit from them.

Financial Reporting Systems – Accountants record and manage the financial reporting system, capturing financial transactions, and summarizing and communicating their results to all interested stakeholders. While this is a traditional role for accountants, increasingly they are being called on to gather insights from firm performance and use such information to set and evaluate company strategy. Will offering new products or entering new markets actually be profitable for the company?

Human Resource Management Resource System - Since company employees are generally regarded as the company's most important asset, such a system helps a company manage and evaluate its labor force. Such information from the system might help an accountant see if they have the needed capacity to meet customer needs. Accountants can help determine if the company will have the necessary human capital capability to address strategic opportunities the company may face.

Supply Chain Management System – Accountants help determine if they have the right product in the right place at the right time at the right price, or, in other words, refers to a network of processes that delivers a finished good or service to the final customer. Accountants might

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address questions like: Is there a cheaper way to source the product? How much inventory should we hold to not run out of product while maintaining a lean organization?

Customer Relationship Management System – The customer relationship management system might help the company determine customer preferences and ordering patterns. Accountants might help determine the optimal mix of products to offer and the optimal price for each product.

3. If computers and enterprise systems do much of the traditional work of recording transactions and processing journal entries and other accounting information, what role is left for the accountant to perform?

Answers may vary. With computers doing much of the recording and processing of accounting information, the accountant can become more of a business analyst, knowing what information is available and knowing what information is needed to help management make important decisions.

4. (Connect) Match the value chain activity in the left column with the scenario in the right column.

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2.

3.

4.

5.

6.

7.

8.

9.

Service Activities matches best with B. Warranty Work Inbound Logistics matches best with F. Receiving dock for raw materials Marketing and sales activities matches best with A. Surveys for prospective customers Firm Infrastructure matches best with G. CEO and CFO Human Resource Management matches best with I. Worker recruitment Technology matches best with E. New-product development Procurement matches best with H. Buying (sourcing) raw materials Outbound Logistics matches best with D. Delivery to the firm’s customer Operations matches best with C. Assembly Line

5. (Connect) Match the value chain activity in the left column with the scenario in the right column.

1.

2.

3.

4.

5.

6.

7.

8.

9.

Customer Call Center matches best with G. Service Activities Supply Schedules matches best with B. Inbound Logistics Order Taking matches best with I. Marketing and sales activities Accounting Department matches best with D. Firm Infrastructure Staff Training matches best with E. Human Resource Management Research and Development matches best with F. Technology Verifying quality of raw materials matches best with C. Procurement Distribution Center matches best with H. Outbound Logistics Manufacturing matches best with A. Operations

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6. In 2002, John Deere’s $4 billion commercial and consumer equipment division implemented supply chain management software and reduced its inventory by $500 million. As sales continued to grow, they have been able to keep their inventory growth flat. How did the supply chain management software implementation allow them to reduce inventory on hand? How did this allow them to save money? Which income statement accounts (e.g., revenue, cost of goods sold, SG&A expenses, interest expense, etc.) would this affect?

The use of supply chain software allowed the business to reduce its inventory and then as sales growth continued, keep its inventory growth flat. This is at least $500 million less that the company had to finance with either liabilities or equity. To the extent it reduced its debt, this would reduce its interest expense. The reduction in inventory also reduced the number of needed warehouses to store the inventory, potentially reducing SG&A expenses.

(Connect only) Questions Supply chain software allows a business to reduce which of the following balance sheet accounts?

If the reduction in inventory reduces the need for warehouses for storing product, which income statement accounts would this affect?

A reduction in inventory frees up cash to reduce longterm debt, which income statement account would this affect?

Answers Inventory Sales, general and administrative expenses Interest expense

7. Dell Computer used Customer Relationship Management Software called IdeaStorm to collect customer feedback. This customer feedback led the company to build select consumer notebooks and desktops pre-installed with the Linux platform. Dell also decided to continue offering Windows 10 as a pre-installed operating system option in response to customer requests. Where does this fit in the value chain? How will this help Dell create value? By listening to the customer and meeting their needs, will this increase revenues or decreases expenses?

The use of IdeaStorm at Dell helped Dell get to know its customers and their needs. The primary activity in the value chain that directly addresses the use of CRM is marketing and sales activities, which identifies the needs and wants of their customers to help attract them to the firm’s products and buy them.

Using customer feedback to get to know their customers helps Dell get the right product at the right price to the right customer. It will potentially increase revenues and potentially reduce obsolete inventory by having the products that the customers need.

(Connect only)

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Questions Which primary value chain activities are affected by the customer relationship management systems at Dell?

How will the customer relationship management systems at Dell potentially affect income statement accounts?

Answers Marketing and sales activities It has potential to increase revenues.

8. (Connect) Ingersoll Rand operates as a manufacturer in four segments: Air Conditioning Systems and Services, Climate Control Technologies, Industrial Technologies, and Security Technologies.

They installed an Oracle enterprise system, a supply chain system and a customer relationship management system. They boast the following results:      

Decreased direct product costs by 11% Increased labor productivity by 16% Increased inventory turns by four times Decreased order processing time by 90% and decreased implementation time by 40% Ensured minimal business disruption Streamlined three customer centers to one

Please take each of these results and explain which of these systems most directly affected those results.

1. Decreased direct product costs by 11% - this likely came about by efficiencies gained by the supply chain system.

2. Increased labor productivity by 16% - this likely came about by efficiencies gained by the supply chain system.

3. Increased inventory turns by four times - this likely came about by efficiencies gained by a combination of the supply chain system and customer relationship management (by having the right product to the right customer) 4. Decreased order processing time by 90% and decreased implementation time by 40% (this was likely caused by a combination of the implementation of supply chain management, customer relationship management and enterprise systems).

5. Ensured minimal business disruption - uncertain how this is tied to the implementation of supply chain management, customer relationship management and enterprise systems 6. Streamlined three customer centers to one - uncertain how this is tied to the implementation of supply chain management, customer relationship management and enterprise systems 9. (Connect) Information systems have an impact on financial results. Using Figure 1-8 as a guide, which system is most likely to impact the following line items on an income statement? The systems to consider are human resource management system, supply chain systems, manufacturing system, and customer relationship management systems.

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1.

2.

3.

4.

5.

Revenues Cost of Goods Sold Sales, General and Administrative Expenses Interest Expense Net Income

Income Statement Item Revenues

Cost of Goods Sold Sales, General and Administrative Expenses Interest Expense Net Income

System Customer relationship management system Supply chain system and/or Manufacturing system Human Management Reporting system Supply chain system All of these

10. (Connect) Accountants have four potential roles in accounting information systems: user, manager, designer and evaluator. Match the specific accounting role to the activity performed.

1. Controller meeting with the systems analyst to ensure accounting information system is able to accurately capture information to meet regulatory requirements -- Designer 2. Cost accountant gathering data for factory overhead allocations from the accounting information system -- User 3. IT auditor testing the system to assess the internal controls of the accounting information system -- Evaluator 4. CFO plans staffing to effectively direct and lead accounting information system – Manager 11. (Connect) Which firm information system (Customer Relationship Management, Financial Reporting System, Human Resource Management System, Supply Chain Management) would address each of the following questions?

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Questions

What is the value of fixed assets (property, plant and equipment) on the balance sheet?

How much does Boeing owe Rolls Royce for its turbine engines?

When will the shampoo products from Procter and Gamble arrive at the Walmart distribution center?

Which customers should we no longer sell to due to poor credit?

When was the depreciation adjusting journal entry made?

How long does it take Microsoft to get electronic parts from Vietnam?

Who is Apple’s most profitable customer?

What is the salary of the web page designers most recently hired at Ebay?

Information System (Customer Relationship Management System, Financial Reporting System, Human Resource Management System, Supply Chain Management System) Financial Reporting System Customer Relationship Management System (or Financial Reporting System) Supply Chain Management System

Customer Relationship Management System Financial Reporting System Supply Chain Management System Customer Relationship Management System Human Resource Management System

12. (Connect) Management has questions. Accountants have answers. These answers should come from either internal or external business processes. And come from which firm information system (Enterprise System, Customer Relationship Management, Supply Chain)?

Questions

Internal or External Business Process

What is the value of fixed assets (property, plant and equipment) on the balance sheet?

Which shoes are least desired by Zappo’s customers?

When will the United Parcel Service (UPS) deliver the inventory?

What is the salary of the accounting staff most recently hired at Home Depot headquarters?

How long does it take to close the books at the end of the period?

How long does it take to deliver tires from Nissan to its car dealers?

Internal Business Process

Information System (Customer Relationship Management System, Financial Reporting System, Human Resource Management System, Supply Chain Management System) Financial Reporting System

External Business Process External Business Process

Customer Relationship Management System Supply Chain Management System

Internal Business Process

Human Resource Management System

Internal Business Process External Business Process

Financial Reporting System Supply Chain Management System

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13. (Connect) Identify the certification required to address each of the following questions/tasks including Certified Internal Auditor (CIA), Certified Public Accountant (CPA), Certified Information Technology Professional (CITP) and Certified Information Systems Auditor (CISA) Questions

Who helps determine if the internal controls are designed properly and working?

Who helps an individual file taxes with the IRS? Who performs IT audits for Deloitte (a Big 4 auditor)?

Who designs a more efficient financial reporting system?

Who looks for fraudulent financial transactions and works for the audit committee?

Who performs an external audit for a company before filing with the Securities and Exchange Commission?

Who helps design and implement a financial reporting system be done without paper?

Who evaluates whether there is a threat of a cybersecurity breach to the financial reporting system of a company it is auditing?

Certification (Certified Internal Auditor (CIA), Certified Public Accountant (CPA), Certified Information Technology Professional (CITP) and Certified Information Systems Auditor (CISA)) Certified Internal Auditor (CIA) Certified Public Accountant (CPA) Certified Information Technology Professional (CITP) Certified Information Systems Auditor (CISA) Certified Internal Auditor (CIA) Certified Public Accountant (CPA)

Certified Information Technology Professional (CITP) Certified Information Systems Auditor (CISA)

14. The appropriate amount of an Allowance for Doubtful Accountants (that serves as a contra asset to Accounts Receivable) is generally determined by figuring out how long the underlying receivables have remained unpaid? How might a customer relationship management system be able to help determine whether an outstanding accounting might be paid?

Answers will vary. The CRM might be able to provide the following information about the customer and whether they will be able to be paid. CRMs can help:   

see if the customer has a dispute with the items received (causing the non-payment). see if the customer is continuing to purchase from the company. develop statistical models that predict allowances and collections based on all available data in the CRM.

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Chapter 2 – Data Analytics in Accounting Multiple Choice Questions 1.(LO 2-2) Big Data is often described by the 4 Vs, or a. Volume, velocity, veracity, and variability. b. Volume, velocity, veracity, and variety. c. Volume, volatility, veracity, and variability. d. Volume, volatility, veracity, and variety.

Answer: B 2.(LO 2-5) According to estimates considered in the chapter, up to what percentage of a data analyst’s time is spent cleaning (or scrubbing) the data to be ready for analysis? a. 40 percent b. 0 percent c. 20 percent d. 90 percent Answer: D 3.(LO 2-5) The acronym ETL, in the process of readying data for use in data analysis, refers to what three words? a. Extrapolate, transform, and learn b. Extrapolate, transpose, and load c. Extract, transform, and load d. Extract, transform, and learn Answer: C 4.(LO 2-1) Which term is used to describe the science of examining raw data, removing excess noise from the dataset, and organizing the data with the purpose of drawing conclusions for decision making? a. Big Data b. Data Analytics c. Audit Analytics d. Extract, transform, and load Answer: B 5.(LO 2-5) ADS is a standard format for data files and fields typically needed to support an external audit in a given financial business process area that was developed by the AICPA. The acronym ADS stands for what three words? a. Accounting Data Specification b. Accounting Data Standards 1

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c. Audit Data Standards d. Auditor Data Standards Answer: C 6.(LO 2-4) Which type of question does prescriptive analytics address? a. What happened? b. What should we do based on what we expect will happen? c. Why did it happen? d. Will it happen in the future?

Answer: B 7.(LO 2-4) Which type of question does predictive analytics address? a. What happened? b. What should we do based on what we expect will happen? c. Why did it happen? d. Will it happen in the future?

Answer: D 8.(LO 2-4) What type of analytics addresses questions of “Why did it happen”? a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics d. Prescriptive analytics Answer: B 9.(LO 2-6) What type of analytics would address the question of whether a customer will ultimately pay if credit is granted? a. Descriptive analytics b. Diagnostic analytics c. Predictive analytics d. Prescriptive analytics Answer: C 10. (LO 2-6) If we wanted to know what score we needed to get on the final in this class based on our expected performance before the final, we would call that analytics. a. Descriptive b. Diagnostic c. Predictive d. Prescriptive

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Answer: D Discussion Questions 1. How might an airline use data analytics to evaluate different services provided to business and casual travelers to maximize revenue?

Data Analytics might be used in an airline setting to maximize revenue of selling to business and casual travelers in many ways. For example, data analytics might define business travelers by the time before travel that a ticket is purchased (say in the final week before travel is made) and define casual travelers also by the time before travel (say before the final week before travel is made). Data Analytics could then look at questions like baggage charges and giving one rate for those who purchase baggage more than a week ahead of time versus those who purchase baggage less than a week ahead of time.

2. What is the difference between Big Data and data analytics? Give an example of the difference.

Big Data is defined as datasets that are too large and complex for businesses’ existing systems to handle utilizing their traditional capabilities to capture, store, manage, and analyze these datasets while Data Analytics is the science of examining raw data (now often Big Data), removing excess noise from the dataset, and organizing the data with the purpose of drawing conclusions for decision making. Big Data seems to highlight the size of the data, that it is simply so big and unmanageable, but Data Analytics uses context to figure out what is needed to draw conclusions to be useful in decision making. Specifically, Data Analytics provides a way to search through large and unstructured data to identify unknown patterns or relationships.

As an example, Big Data might collect all tweets since the beginning of Twitter to answer questions. Data Analysis might take that data, extract the appropriate information to answer a question and then address questions like:  What do tweeters think about Christmas?  How do investors (those that are on Twitter) respond to a share buyback?  Do tweeters retweet earnings announcement information to others?

Accountants may incorporate data analytics into their work by using it to assess estimates, predict goodwill write-downs, predict audit issues and outcomes, and as a basis for managerial decision making.

3. Why is it important to have software vendors, such as ACL Inc., use the Audit Data Standards?

For software that companies and/or audit firms consistently use (like SAP), it would be very helpful to have an option to output information in conformance with Audit Data Standards. That would make it a relatively effortless exercise to export or import data from an external party. If the software vendors know these standards well in advance, they can make it much easier for their customers and be a highly value-added option to the software the vendors provide.

4. What efficiencies are there for external auditors to use Audit Data Standards?

Before an audit, external auditors ask the company being audited for certain information. In the past, they have generally been flexible as to how the data is extracted and formatted for their use. The external auditors then have to spend time doing Extract, Transform and Load to get it ready for analysis and testing.

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If both the company being audited and the external auditor are able to communicate electronically using Audit Data Standards (ADS), then the transfer of information will be relatively effortless and error free. The time that was used to extract and reformat the data can now be used for the arguably more important testing and analysis performed by external auditors.

5. In field 17 of Exhibit 2.6, Audit Data Standards includes a record of who approved the journal entry. Why do you think the external auditor might be interested in this field? Why do you think they might also be interested in who modified a journal entry (field 19 of Exhibit 2.6) and on what date (field 20 of Exhibit 2.6)?

External auditors perform tests of controls to analyze segregation of duties and other internal controls. For this reason, the Audit Data Standards maintains a field that tells not only who entered a journal entry (Field #14 in Figure 1), but who authorized that journal entry (Field #17 in Figure 1). Understanding who modified a journal and the date of such modification might help one understand who has the ability to modify a journal entry to make sure it is consistent with established internal controls.

6. What is the difference between descriptive and diagnostic analytics?

Descriptive analytics is usually more factual, stating what happened that doesn’t require a lot of extra analysis. A sum of assets, a count of customers, or a histogram of aged accounts receivable would be typical of descriptive analytics. In contrast, diagnostic analytics requires more detailed analysis to figure out what happened. For example, while descriptive analytics would figure out we earned more profit this year, diagnostic analytics would figure out why that occurred – was it more revenue or less expense, were we more profitable in some regions than in others? Were customers responding to higher quality or better advertising, etc.?

7. What type of analytics (descriptive, diagnostics, predictive, or prescriptive) is required to find the needed product sales to break even? Why? Prescriptive analytics would be required to find the needed level of product sales required to breakeven. Prescriptive analytics is defined as identifies best possible options given constraints or changing conditions. Prescriptive analytics would allow us to change the performance on earlier sales and see how it might impact the needed score on the final exam to achieve a particular grade.

Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. (Connect) Data Analytics can be disaggregated into four steps as part of the ARMS. Classify each of these ARMS processes would be considered Master the Data (or ETL (Extract Load and Transfer)) or Perform the Analysis. a. Removing extraneous data and noise. – Master the Data b. Looking for trends in the data that might predict new sales opportunities. – Perform the Analysis c. Finding the necessary data from the financial reporting system to give to the external auditor for analysis. - Master the Data d. Performing tests of internal controls by the external auditor. - Perform the Analysis 4

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e. Considering Champaign, IL weather patterns to predict corn production in the immediate area. - Perform the Analysis f. Consolidating large volumes of data from multiple sources and platforms. – Master the Data 2. (Connect) Match these definitions with either of the four V’s to describe Big Data, namely, Volume, Velocity, Variety or Veracity. a. Unstructured and unprocessed data, such as comments in social media, emails, Global Positioning System measurements, etc. - Variety b. The massive amount of data involved. - Volume c. Data coming in at fast speeds or in real time, such as streaming videos and news feeds. – Velocity d. Opinions or Facts – Veracity e. Data with a lot of missing observations - Veracity f. Stock market data that updates every five seconds - Velocity g. Financial statement data that appears in tables – Variety h. All Twitter Data from 2021 - Volume 3. (Connect) Match the definition of the key words with their terms, including Audit Data Standards, Big Data, Descriptive analytics, Diagnostic analytics, AMPS: Master the Data, and AMPS: Share the Story. a. A standard format for data files and fields typically needed to support an external audit.

– Audit Data Standards b. Datasets that are too large and complex for businesses' existing systems to handle using their traditional capabilities to capture, store, manage, and analyze these datasets. – Big Data c. The process of cleaning and scrubbing the data before data analysis can take place. – Master the Data d. Process of determining how separation of duties was violated at the company. – Diagnostic analytics e. Process of summarizing accounts receivable by how long it has been outstanding. – Descriptive analytics f. Delivering the findings to the decision maker of which firms our company should approve for credit. – Share the story

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Chapter 3 – Data Analytics: Data Visualizations Multiple Choice Questions 1. (LO 3-1) Which of the following best describes a data visualization? a. Part of the information value chain b. A tool for preparing the data c. A tool for recording data transactions d. A graphical representation that presents information to decision makers e. None of the above Answer: D 2. (LO 3-5) Which of the following charts is used to show trend over time? a. Symbol maps b. Scatter plots c. Line charts d. Pie charts e. Treemaps Answer: C 3. (LO 3-4) Which of the following charts is generally considered the best way to show proportions? a. Bar charts b. Scatter plots c. Line charts d. Pie charts e. Treemaps Answer: D 4. (LO 3-3) Which of the following software is best at data analysis, as compared to visualizations? a. Power BI b. Excel c. Tableau d. Powerpoint Answer: B 5. (LO 3-3) The use of visualizations to help perform the analysis is called a. explanatory visualizations. b. diagnostic visualizations.

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c. exploratory visualizations. d. interpretive visualizations.

Answer: C 6. (LO 3-3) The use of visualizations to communicate the results to decision makers is called a. explanatory visualizations. b. prescriptive visualizations. c. exploratory visualizations. d. diagnostic visualizations.

Answer: A 7. (LO 3-4) Which of the following statements is true? a. Scatterplots show values of two variables each plotted on its own axis to exhibit potential trends. b. Scatterplots show values of two variables each plotted on its own axis to exhibit potential correlation. c. Graphs show values of two variables each plotted on its own axis to exhibit potential trends. d. Graphs show values of two variables each plotted on its own axis to exhibit potential correlation. e. None of the above Answer: B 8. (LO 3-4) Assume that Netflix wants to show the relative frequency of its sales by state. Which of the following would be most appropriate? a. Word cloud b. Filled geographic map c. Bar chart d. Pie chart e. None of the above Answer: B 9. (LO 3-4) Which of the following software tools is more associated with getting the data ready for analysis? a. Tableau Desktop b. Tableau Prep c. Python d. SAS e. None of the above Answer: B

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10. (LO 3-6) If the CEO prefers less detail in their written report, the analyst might suggest a. an executive summary. b. a complete set of visualizations. c. a full report. d. a sampling of the most important visualizations e. None of the above Answer: A Discussion Questions 1. Answers will vary. Tableau and Power BI are substantially easier for some visualizations. They connect with more kinds of datasets and handle more data. They are designed for data analytics and Excel requires pivot tables first.

2. Students should recognize the substantial similarities and consider the elements listed in the Data Visualization Concepts section as well as the Common Elements section. To prepare a quality report, a student would need to understand the audience, the data, and the questions to be addressed, gather data, organize the data, and present it in the best way to communicate the information to the intended audience.

3. The Common Elements section provides a good start to a list of required capabilities. Various data analytics software products can be compared based on what data they connect with, the ease of setting relationships among tables, the ability to select and/or create attributes, and the ability to present the data in a variety of easy to use charts/visualizations.

4. Answers will vary. Both products are very capable.

5. Most students will say they use pie, bar, and line charts. This can lead to a discussion of why they chose those charts, what the advantages are, and whether there are any disadvantages.

6. Increasingly, visualizations are preferred to written content to communicate results. For example, 91 percent of people prefer visual content over written content.1 Why is that? Well, some argue that the brain processes images 60,000 times faster than text (and 90 percent of information transmitted to the brain is visual). However, sometimes it is hard to see precise numbers in a visual, so that so that would be one case where a table of numbers might be superior to a data visualization.

7. Explanatory visualizations, as opposed to exploratory visualizations, specifically communicate results of the data analysis to interested stakeholders. Since they have different audiences (analysts vs. decision makers), they will have different aims.

Problems

1. (LO 3-2, LO 3-4, LO 3-5) Match the data visualization to the type of data analytics (descriptive, diagnostic, predictive, or prescriptive) it is most associated with.

1

Zohar Dayan, “Visual Content: The Future of Storytelling,” Forbes, April 2, 2018, https://www.forbes.com/sites/forbestechcouncil/2018/04/02/visual-content-the-future-of-storytelling/?sh=6517bfbe3a46, April 2, 2018 (accessed January 14, 2021).

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Data Visualization

Type of Data Analytics (Descriptive, Diagnostic, Predictive, or Prescriptive)

Scatterplot

Diagnostic

Times series data with forecast

Predictive

Sensitivity analysis table evaluating assumptions made

Prescriptive

Pie charts

Descriptive

Break-even graph

Prescriptive

Line and bar charts

Descriptive

Box plots highlighting extreme observations

Diagnostic

Histograms

Descriptive

2. (LO 3-2, LO 3-4, LO 3-5) Match each term with its definition.

Term

Definition

1. Categorical Data

f. A form of qualitative data that are represented either by words or by non-meaningful numerical data

2. Trend

c. General direction in which something is moving

3. Proportion

b. The number of observations in a particular category divided by the grand total of observations

4. Numerical data

d. Data represented by meaningful numbers, such as a transaction amount, net sales, or the score on an exam

5. Scatterplot

a. The values of two variables, each plotted on its own axis to exhibit possible correlation

6. Time series data

e. Values taken on by a variable at different points in time

3. (LO 3-2, LO 3-4, LO 3-5) Determine whether each of the following is more likely to be associated with exploratory data visualizations or explanatory data visualizations.

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Term

Exploratory Data Visualization or Explanatory Data Visualization

Visualizations in Executive Summary

Explanatory Data Visualization

Scatterplot

Exploratory Data Visualization

Visualizations in Written Report

Explanatory Data Visualization

Past time series of data to forecast performance

Exploratory Data Visualization

Plotting data to see if it departs from expectations as part of diagnostic analytics

Exploratory Data Visualization

Dashboard with dynamic updates to track performance

Explanatory Data Visualization

4. (LO 3-1, LO 3-5) What does the following data visualization tell us about the relationship between labor cost per lawn mowed and monthly (profit) margin (the extent to which revenues exceed expenses) as shown on the vertical axis?

Solution: As the labor cost per lawn goes up, the overall profitability (profit margin) declines. There is a negative relationship between the labor cost per lawn mowed and the monthly profit margin.

Connect only auto-graded answer: A) As labor cost increases, the monthly (profit) margin increases.

B) As labor cost increases, the monthly (profit) margin decreases.

C) As labor cost decreases, the monthly (profit) margin decreases.

D) As labor cost decreases, the monthly (profit) margin stays the same.

5. (LO 3-1, LO 3-5) Is the data visualization shown in Exercise 4 immediately above better or worse than the same data in the following tabular format? Explain.

Solution: The same data is shown in the table as is shown in the visualization; however, it is often easier to see trends using a line graph. If exact details of the decline in profitability as labor costs increase are needed, the table is likely best. If you’re trying to view overall trends, the visualization (line graph) is likely the best way to report results to stakeholders.

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A) There is no difference in effectiveness between the two presentations (for a sighted person).

B) The data table is more effective at showing the trend (for a sighted person).

C) The visualization line chart is more effective at showing the trend (for a sighted person).

6. (LO 3-4, LO 3-5) Download the data set, Sales Growth Dataset.xlsx, which has sales data for year 20X1 and 20X2 for a set of publicly traded companies. Calculate the sales growth using New – Old / Old or Sales20X2 – Sales20X1  / Sales20X2 for each company.

Required: 1. Use Excel, Tableau, or Power BI to plot the results in a column chart, histogram, or add a box plot. Which of these data visualization types will be most useful in diagnostic analytics to find the most extreme sales growth percentages? Explain.

Solution: Histograms and Box Plots seem to work best for finding outliers.

2. Does the visualization suggest the sales growth percentages skew to the left or to the right?

Solution: The results skew to the right, as shown in the graph.

3. Looking at the results of the column chart, histogram, or box plot, which individual observation is more likely?

A) 100% B) 157% C) 200% D) 233%

7. (LO 3-5) Use the following data to graph the sales revenue and net income for Walmart from 2012–2020 in Excel.

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The data file, Walmart Trend Analysis.xls, is available in Connect or via the Additional Student Resources page. (Note the data is in $ millions.)

Year Sales Revenue 2012 $ 468,651 2013 $ 476,294 2014 $ 485,651 2015 $ 482,130 2016 $ 485,873 2017 $ 500,343 2018 $ 514,343 2019 $ 523,964 2020 $ 559,151

Net Income $ 17,756 $ 16,695 $ 17,099 $ 15,080 $ 14,293 $ 10,523 $ 6,670 $ 14,881 $ 13,510

Required: 1. Create a bar graph for sales revenue, and create a line graph for net income, formatting the X- and Y-axes with year and numbers and inserting appropriate chart titles.

2. What trends do you see for Walmart sales and Walmart net income over this time period?

Solution: While sales revenue appears to trend upward, net income appears to first decrease and then increase.

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8. (LO 3-4, LO 3-5) Download the Costs of Moistureshield Production dataset in Excel. Analyzing this data will allow Moisture Shield, a manufacturer of wood-plastic composite decking, determine its cost structure.

Required: Use a scatterplot to show the relationship between total production costs and total number of units produced. Add a trendline to visualize the relationship.

9. (LO 3-4, LO 3-5) Download the SkyDio Drone Sales Journal data set in Excel. Note the sales price and cost of each sale. In Excel, calculate the gross margin percentage (Sales Price – Cost)/Sales Price for each sale (or row in the sales journal). Use either the descriptive statistics tool featured in Excel’s Data Analysis ToolPak or Excel functions to compute the summary statistics and answer the following questions.

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Required: a. Create a histogram of the gross margin percentages. (Hint: Insert>Charts>Statistic Chart>Histogram). Submit this screenshot to your instructor if assigned. b. How many transactions were for 47% or higher? 9 c. How many transactions were for 40% or lower? 11

10. (LO 3-4, LO 3-5) Download the sp-500-historical-annual-returns data set in Excel from Connect or Additional Student Resources.2 Note the annual stock market returns to investment in the S&P 500.

Required: 1. Create a visualization in Excel using a bar (column) chart. Note the volatility of returns over the years, which is an indicator that the stock market is a risky investment.

2. Label the vertical axis as “Annual Percentage Return”, the horizontal axis as “Year”, and the chart title as “Annual Returns to the S&P 500 Index”.

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Source: https://www.macrotrends.net/2526/sp-500-historical-annual-returns.

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11. (LO 3-4, LO 3-5) Download the nasdaq-by-year-historical-annual-returns data set in Excel from Connect or Additional Student Resources.3 Note the annual stock market returns to investment in the NASDAQ stock market index. Use any type of visualization (such as histograms, bar charts, or column charts) that will allow you to complete the following requirements.

Required: a. Create a chart of the annual returns. (Hint: Insert > Charts). Submit this screenshot to your instructor if assigned.

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Source: https://www.macrotrends.net/2623/nasdaq-by-year-historical-annual-returns.

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b. What is the average return on the NASDAQ market? The median return? (Hint: Use AVERAGE() and MEDIAN() functions in Excel.) Average = 13.35; Median = 15.43 c. Based on the visualization, count how many annual returns were for 20% or higher? Hint: Perform a count. 18 d. Based on the visualization, count how many annual returns were negative? Perform a count.

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Chapter 4: Accountants as Business Analysts Multiple Choice Questions 1. (LO 4-1) Which of the following is not a role of the accounting function in business? a. Financial close b. Regulatory compliance c. Project management d. Using IT to make finance and accounting processes more efficient e. All of these are roles of the accounting function Answer: E 2. (LO 4-2) Which of the following is not an example of business process documentation? a. Business process models b. Training manuals c. Organization charts d. Internal audit e. All of these are examples of business process documentation Answer: D 3. (LO 4-2) Which of the following is not a purpose of business process documentation? a. Facilitating process improvement b. Specifying accountability c. Training d. Supporting internal audit e. All of these are purposes of business process documentation Answer: E 4. (LO 4-3) Which of the following best describes the value of business models? a. A communication tool b. A planning tool c. A process improvement tool d. A tool for managing complexity e. All of these are describe values of business models.

Answer: E 5. (LO 4-6) Which of the following describes how participants in a process are identified in BPMN? a. Message flows b. Sequence flows c. Pools d. Gateways e. Start events Answer: C 6. (LO 4-5) Which of the following symbols is used to represent a gateway in BPMN?

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Answer: B 7. (LO 4-5) Which of the following symbols is used to represent sequence flow in BPMN?

Answer: D 8. (LO 4-5) Which of the following statements about BPMN is not true? a. Arrows represent sequence flows. b. The BPMN specification is maintained by the Object Management Group (OMG). c. Events are modeled with a rectangle symbol. d. Annotations allow the modeler to add descriptive text. e. All of these statements are true.

Answer: C 9. (LO 4-5) Which of the following describe characteristics of good BPMN models? a. They are clear. b. They are complete. c. They are consistent. d. They are valid. e. All of these options.

Answer: E 10. (LO 4-5) Which of the following statements about sequence flows is not true? a. Sequence flows are continuous from the start event through activities and gateways, if any, to an end event in a pool. b. Sequence flows may not cross pool boundaries. c. Sequence flows may not cross lane boundaries. d. Tokens move along sequence flows. e. Sequence flows are modeled with solid arrows.

Answer: C 11. (LO 4-7) Which of the following best describes message flows? a. Message flows are continuous within each pool. b. Message flows are modeled with solid arrows.

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End of Chapter Solutions Manual: Richardson, Chang, Smith, Accounting Information Systems, 4 edition c. Message flows represent exchanges between pools. d. Message flows may not cross pool boundaries. e. Message flows may not cross lane boundaries.

Answer: C 12. (LO 4-8) Which of the following is the best description of the token concept? a. The token concept is a theoretical concept that describes process flow. b. The start event generates a token. c. The end event consumes the token. d. Tokens do not traverse message flows. e. All of these options describe the token concept.

Answer: E 13. (LO 4-8) Which of the following is not a flow object? a. Gateways b. Message events c. Activities d. Message flows e. Timer events Answer: D 14. (LO 4-8) Which of the following best describes an exclusive gateway? a. The only gateway in a BPMN diagram. b. A gateway that does not connect to message flows. c. A gateway with only one exit path per instance of a process. d. A gateway where all exit paths are taken for each instance of a process. e. None of these options describe an exclusive gateway.

Answer: C 15. (LO 4-8) Which of the following best describes an inclusive gateway? a. The gateway that is shared among two pools. b. A gateway with one or more exit paths per instance of a process. c. A gateway with only one exit path per instance of a process. d. A gateway where all exit paths are taken for each instance of a process. e. None of these options describe an inclusive gateway.

Answer: B 16. (LO 4-8) Which of the following is true about start events? a. A start event can catch a message. b. A start event cannot be a timer event. c. A start event can throw a message. d. A start event cannot be a message event. e. None of these statements are true.

Answer: A 17. (LO 4-8) Which of the following is true about end events? a. An end event can catch a message. b. An end event can throw a message. c. An end event can be a timer event.

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Answer: B 18. (LO 4-8) Which of the following is true about intermediate timer events? a. The process delays until a specific date or time. b. The process delays until a message is thrown. c. The process delays for an unspecified amount of time. d. The process delays until a message is received. e. The process is timed up to that point.

Answer: A 19. (LO 4-8) Which of the following best describes an intermediate error event? a. It is a boundary event attached to the boundary of an activity. b. It indicates alternate sequence flow begins when an error occurs. c. It is modeled with a leaning Z or flash sign. d. All of the above describe intermediate error events. e. None of the above describes intermediate error events.

Answer: D 20. (LO 4-9) Which of the following best describes a looping task? a. The task repeats until a condition is satisfied. b. A looping task only repeats twice. c. A looping task is modeled as a subprocess. d. A looping task happens multiple times in parallel. e. None of these options describe a looping task.

Answer: A 21. (LO 4-10) Which of the following is not true about data objects? a. They are modeled with a document icon. b. They represents data that are only available for the duration of the process. c. They are linked to activities with data associations. d. They are similar to but different from datastores. e. They can be linked to other pools with message flows.

Answer: E 22. (LO 4-10) Which of the following are not true about data associations? a. They are modeled as a dotted arrow. b. The association arrowhead shows the direction of data flow. c. They connect data objects to activities. d. They connect data objects to intermediate events. e. They connect datastores to activities.

Answer: D 23. (LO 4-11) Which of the following is not a step in preparing process models? a. Outline basic process flows b. Define model context c. Refine diagram d. Review BPMN standard 4

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End of Chapter Solutions Manual: Richardson, Chang, Smith, Accounting Information Systems, 4 edition e. Validate with stakeholders Answer: D

Discussion Questions 1. The answers will vary according to the student’s background, but it is likely that they will feel best prepared to use technology and less prepared to design, manage, and evaluate technology.

2. Managing regulatory compliance would involve collection and maintenance of a wide variety of information. First, organizations would have to collect regulatory requirement information. Then, they would have to collect process information to identify where process activities must comply with regulations. Finally, they would have ongoing collection of process performance data to ensure continued compliance and reporting.

3. The answer to this question depends on the individual but most students should be forming foundational and intermediate skills by the time they graduate.

4. The answer to this question depends on the individual but most students should be forming basic and applied knowledge by the time they graduate.

5. The IMA Competency Framework was a specific section titled Technology & Analytics so at first glance, students are more likely to say the IMA framework emphasizes technology more. However, technology and analytical skills are implicit in many of the topics.

6. If students search for the word: processes in the IMA Competency Framework document, they will find it on almost every page. This is a good opportunity to discuss the importance of processes and process documentation to accounting and business functions.

7. The CGMA Competency Framework foundational skills require basic understanding of business structure, operations and financial performance. Almost every skill could be facilitated by business models, so this is an opportunity to select a skill and discuss how or why models could aid the development of that skill.

8. Student responses will vary depending on their experience, but most will mention training, SOX compliance, regulatory compliance, identifying and collecting process performance information, aiding audits, and so on.

9. BPMN diagrams serve similar purposes to flowcharts. The following table compares basic symbols and shows the similarities. The BPMN symbols have more capability to handle events and the Gateways are more flexible that the flowchart decision symbol. The extended list of symbols in the chapter shows that many flowchart symbols are closely tied to specific and outdated data processing methods, whereas the BPMN symbols are independent of the technology.

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Element

BPMN Symbol

Flowchart Symbol

Events/ Start and End

Activities

Sequence Flows

Gateways/ Decisions

Annotations

Comparing BPMN to data flow diagrams shows that the models are very different. Data flow diagrams do not have start, end, or intermediate event symbols. They do, however, clearly show the flow of data in a process or processes, where the BPMN diagram more clearly shows the sequence of activities.

10. The stewardship and reporting function relates to regulatory/tax compliance. Accountants would need to collect information on regulatory regimes, tax rates, laws and regulations imposed and the performance of the company to comply with those laws and regulations.

11. BPMN activity diagrams support process documentation, process evaluation, and process improvement.

Thus, BPMN diagrams would document the finance and accounting processes to support employee training.

An accurate documentation would support an evaluation of process inefficiencies and potential process improvements including applications of technology, as well as a review of internal controls over the process and identification of potential weaknesses.

12. Process modeling is iterative. The analyst will model the process and then confirm his/her model with process participants. The confirmation process would likely raise questions about completeness.

13. The use of pools and lanes help establish responsibility. It would be hard to enforce responsibility where multiple departments are involved. Additionally, the assignment process helps define tasks/activities at an appropriate level of detail that allows the models to be used for training, process change, performance management, etc.

14. Exclusive gateways show distinct choices, such as when you select one option among multiple alternatives. Inclusive gateways allow selection of one or more options, such as ordering both an entrée and an appetizer or just an entrée. Parallel gateways take all possible options, such as when dining at a restaurant that charges one price for the meal that includes an appetizer, main course, beverage, and dessert.

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15. When the process experiences a delay such as described, the best way to model that is through the use of an intermediate event, such as an intermediate message (catching) event.

16. Processes that start with a timer event could be time to prepare financial reports, time to pay taxes, time to attend class, etc.

17. The basic steps are to establish the purpose of the business process model, describe the context, outline the basic process steps, define the activities comprising each step, refine the diagram and decompose activities, validate the model with stakeholders.

Problems Problem 4-1 Problem 4-1 Part a: Briefly describe the purpose of the model.

Purpose: To model Starbucks drive-through lane process.

Problem 4-1 Part b: Use pools and message flows to describe the context of the business process model.

The context is:

Problem 4-1 Part c: Outline the basic business process flows from the viewpoint of the Starbucks barista. What initiates the process? What are the basic steps to complete the process? What is the final outcome?

The basic process steps should look similar to the following model, although there could be some discussion about whether the payment happens before the delivery.

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(Note that “review menu” is a customer task and would not be modeled in the Starbucks pool. Of course, a Starbucks’ employee could answer menu questions or advise that certain items are not available at that time.)

Connect Questions

Answers

1. Which BPMN symbol should replace block 1 above to start the process?

A circle with a thin solid perimeter

2. The name for the symbol that you selected to replace block 1 in the process is which of the following?

A start event

3. Which BPMN symbol should replace block 2 above in the process?

A rectangle with rounded corners

4. The name for the symbol that you selected to replace block 2 is which of the following?

A task or activity

5. Which of the following is the best label or name to replace the number 2?

Receive order

6. Which of the following is the best label to replace the number 3?

Prepare order

7. Which of the following is the best label to replace the number 4?

Deliver order

8. Which of the following is the best label to replace the number 5?

Accept payment

9. After number 5, the process branches to process the type of payment. Which of the following BPMN symbols should then replace block 6 in the process?

10. The name for the symbol that you selected to replace block 6 in the process is which of the following?

A diamond A gateway

11. Which of the following is the best label to replace the number 6?

None of the choices are correct.

12. Assume that blocks 7, 8, and 9 represent 3 options for processing payments. After that branching, the process then merges again in block 10. Which of the following is the name of the BPMN symbol that should replace block 10?

A gateway

13. Which of the following is the best label to replace the number 11?

Provide receipt

14. Which of the following is the name of the BPMN symbol that should replace block 12?

An end event

15. Which of these describes the BPMN symbol that should replace block 12 above to end the process?

A circle with a thick solid perimeter

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Problem 4-1 Part d: Refine the diagram by adding the external customer pool and the message flows exchanged between the barista and the customer. Then, include the two following refinements.

Problem 4-1 Pard d1: The barista prepares each item in the order before delivering the order to the customer. Model the process to include a looping task.

Problem 4-1 Part d2: The coffee needs time to brew and isn’t immediately available. The barista asks the customer if he wants to wait. If the customer waits, 5 minutes will pass, and then the coffee can be prepared. Model the process to include an intermediate error event and an intermediate timer event.

Problem 4-2 Problem 4-2 Part a: Briefly describe the purpose of the model.

Purpose: The purpose is to describe Larry’s processes for going to school.

Problem 4-2 Part b. The next step would be to use pools and message flows to describe the context of the business process model; however, there is no external pool in this lab.

Context is just Larry.

Problem 4-2 Part c. Outline the basic business process flows from Larry's viewpoint. What initiates the process?

What are the basic steps to complete the process? What is the final outcome?

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Connect Questions

Answers

1. Assume that block 1 is the start event that begins this process. From the problem description, what is the trigger for the start of the process?

Alarm sounds

2. What is the name of the BPMN symbol that should replace block 1?

A start event

3. What is the name of the BPMN symbol that should replace block 2?

A task

4. Which of the following is the best label for block 2?

Get dressed

5. Assume that block 5 represents the “check weather” task. Then, block 6 represents where the process branches depending on weather. What kind of gateway should be used to replace block 6?

Exclusive gateway

6. Assume that block 7 represents a task labeled “put on jacket and take umbrella,” and block 8 represents a task labeled “drive to school.” Which of the following is the best label for block 9?

7. Which of the following is the name of the BPMN symbol that should replace block 12 to show that the two sequence options merge?

Park and walk to class A gateway

8. Which of the following describes the BPMN symbol that replaces block 12?

A diamond

9. Which of the following is the name of the BPMN symbol that should replace block 13?

An end event

Problem 4-2 Part d: Refine the model to include the following: Problem 4-2 Part d.1: Larry arrives at school early. Use an intermediate timer event to show the delay between arriving at school and going to class.

To refine the model, add an intermediate timer event to indicate the wait between arriving at school and going to class.

Connect 1. Which of the following best describes the purpose of an intermediate timer event?

A. Causes the process flow to branch 10

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B. Allows the process flows to merge C. Delays process flow until a specified time or specified duration D. Starts a process at a specified time E. None of the choices are correct.

Answer: C 2. Consider the following high-level model of this process. Where would you insert the intermediate timer event?

A. Between the start event and the dress task.

B. Between prepare for school tasks and go to school task.

C. Between go to school task and go to class task.

D. Between go to class task and end event.

E. None of the choices are correct.

Answer: C 3. Consider the following model. Why isn’t this an acceptable equivalent to the one shown in b above with an intermediate timer event?

A. The flow loops back to going to school and you are already there.

B. Gateways don’t develop information, they direct flow based on information from the previous task/activity.

C. The loop doesn’t delay the flow until a specified time.

D. All of these are reasons why model c is not equivalent to model b.

Answer: D Problem 4-2 Part d2: Larry doesn’t own a car. If it is raining, he texts his friend Jazmin for a ride. She texts back whether she’s available or not, and Larry either rides with her or walks to school in the rain.

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Assume the diagram above correctly summarizes the activity in question. Why is the following diagram not equivalent to the diagram above?

A. This diagram assumes that an error occurs when Jazmin will not give you a ride.

B. This diagram assumes that you don’t always text to ask for a ride.

C. This diagram assumes Jazmin’s car will not break down.

D. This diagram assumes that you do not want to walk to school.

E. None of these explains why the two diagrams are not equivalent.

Answer: A Problem 4-3 Problem 4-3 Part a: Briefly describe the purpose of the model.

The purpose of the model is to describe Yannis’ process of planning a vacation.

Problem 4-3 Part b. Use pools and message flows to describe the context of the business process model.

The context (partial). It could also include the airline and hotel participants.

Problem 4-3 Part c: Outline the basic business process flows from Yannis's viewpoint. What initiates the process? What are the basic steps to complete the process? What is the final outcome?

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Basic steps.

Connect Step 1 2 3 4 5 6 7 8 9 10

Symbol(s) Start Event Task Parallel Gateway Task and Task Parallel Gateway Intermediate Timer Event Task Looping Task Task End Event

Label(s) No label Prepare vacation plans No label Reserve Flights and Reserve Hotel No label No label Travel to Hawaii Enjoy vacation activities Travel to Home No label

Problem 4-3 Part d.1: When in Hawaii, they enjoy a number of tourist activities. Include a looping task to show this.

Included above in step 8.

Problem 4-3 Part d.2: There is a possibility that the hotel room and/or flights aren’t within their budget. If reservations are too expensive, they will try different dates. If reservations are still too expensive, they will cancel their trip. Use a collapsed subprocess and an intermediate error event to model these assumptions.

Refinements showing a looping task for enjoying activities and a collapsed subprocess for the reservation process.

The details of the reservations subprocess, including testing alternate dates, could be modeled separately.

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Problem 4-4 Problem 4-4 Part a: Briefly describe the purpose of the model.

Purpose: Purpose is to describe the income tax filing process.

Problem 4-4 Part b: Use pools and message flows to describe the context of the business process model.

The context includes you and the IRS. Message flows include tax filing and refund.

Problem 4-4 Part c: Outline the basic business process flows from your viewpoint. What initiates the process?

What are the basic steps to complete the process? What is the final outcome?

Basic process steps flow from the start timer indicating time to prepare and file your federal income taxes. Note that tasks could be represented as looping (for multiple forms or documents).

Connect Step 1 2 3 4 5 6 7 8 9

Symbol(s) Start Timer Event Task or Looping Task Task or Looping Task Task Inclusive Gateway Task and Task Inclusive Gateway Task Inclusive Gateway

Label(s) No label Assemble W-2 and 1099 Forms Download IRS forms and instructions Fill out forms No label Write check and Print Forms No label Mail Tax Filing No label

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10 11

Inclusive Gateway and End Event End Event

Receive and Deposit Refund and No label No label

4.d. Refine the diagram per the following 4.d.1. When you prepare your tax return, you use cloud-based tax software. You answer the questions and the tax software prepares the tax return for you. Once you’ve double-checked your work, you enter your checking account details and file your return electronically.

4.d.2. If you owe money, the IRS will automatically deduct the amount from your checking account in 7 days.

If you are getting a refund, the IRS will deposit the refund directly into your checking account.

Refinements instead of manual preparation, you use an online tax system to prepare and submit your tax forms.

The refund, if any, is sent directly to your bank.

Connect Step 1 2 3 4 5 6 7 8 9

Symbol(s) Start Timer Event Task or Looping Task Task Inclusive Gateway Task and Task Inclusive Gateway Inclusive Gateway End Event and Task End Event

Label(s) No label Assemble W-2 and 1099 Forms Use cloud software No label Submit tax return and Automatic deduction No label No label Receive refund in account and No label No label

Problem 4-5 Part a: (Connect Only) Briefly describe the purpose of the model.

Purpose is to describe the auto registration process.

Problem 4-5 Part b: (Connect Only) Use pools and message flows to describe the context of the business process model.

Context diagram including Heide, DMV, and smog check facility.

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Problem 4-5 Part c: (Connect Only) Outline the basic business process flows from Heide's viewpoint. What initiates the process? What are the basic steps to complete the process? What is the final outcome?

Basic process flow for Heide to renew her automobile registration after completing smog check.

Step 1 2 3 4 5

Symbol(s) Start Message Event Task Task Task Parallel Gateway

6

Task and Task

7

End Event

Label(s) No label Complete smog check Submit registration renewal Receive new registration No label Place registration in glove box and Place tags on license plate No label

PR 4-5 Part D1 (Connect Only)

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Step

Symbol(s)

Label(s)

Data Object Used

Data Object Created

2

Start Message Event Task

3

Task

Submit Renewal

4

Task

Receive New Documents

None

5

Parallel Gateway

None

6

Task, task

New registration and tags

None

7

End Event

None Place registration in glove box, Put tags on license None

New registration and tags None

None

None

1

None

None

None

Complete Smog Check

Renewal forms Renewal forms and Smog certificate

Smog certificate

PR 4-5 Part D2 (Connect Only)

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Step 1

3 4 5

Symbol(s) Start Message Event Task and Intermediate Error Event Task Task Task

6

Task and Task

7

End Event

2

Label(s) No label Complete smog check and No label Obtain repairs Submit registration renewal Receive new registration Place registration in glove box and Place tags on license plate No label

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Chapter 5: Data Modeling 1. (LO 5-1) Which of the following is not an objective of a structure model? a. Designate things of interest in the business domain. b. Describe characteristics of things of interest in the business domain. c. Support relational database design. d. Describe the sequence of activities. e. All of these are objectives of structure models.

Answer: D (Note: this is an objective of activity) 2. (LO 5-2) Which of the following symbols is used to represent a class in a UML class diagram?

Answer: A 3. (LO 5-2, LO 5-3) Which of the following statements concerning this class diagram with multiplicities is not true?

a. An order can involve only one customer. b. A customer can place only one order. c. A customer can place many orders. d. A customer may not have ordered yet. e. All of these statements are true.

Answer: B 4. (LO 5-2, LO 5-3) Which of the following statements is true about the following class diagram?

a. A sale can involve zero inventory items. b. A sale can involve one or many inventory items. c. A sale can only involve one inventory item. d. A sale must involve many inventory items. e. "A sale can involve one or many inventory items" and "A sale can only involve one inventory item".

Answer: B

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5. (LO 5-6) Which of the following is an example of an obligatory business rule? a. Customers must provide a valid credit card number. b. Customers normally enter a shipping address. c. Customers should not enter a post office box as a shipping address. d. Customers may use Visa or MasterCard. e. Both "Customers must provide a valid credit card number" and "Customers must enter a shipping address" are obligatory business rules.

Answer: A 6. (LO 5-6) Which of the following is not an enforcement level for a business rule? a. Strict enforcement b. Optional enforcement c. Pre-override enforcement d. Post-override enforcement e. Guideline Answer: E 7. (LO 5-1, LO 5-2, LO 5-3) Contrast the UML class diagrams with the entity-relationship diagrams shown in Appendix A. Which of the following pairs are not equivalent? a. Class and Entity b. Class and Relationship c. Association and Relationship d. Multiplicity and Cardinality e. All of these are equivalent.

Answer: B 8. (LO 5-2, LO 5-3) Which of the following best describes the meaning of this diagram?

a. Each sale can result in many subsequent cash receipts. b. Each cash receipt can apply to many sales. c. All sales must have cash receipts. d. Each sale can result in only one cash receipt. e. None of these describe the meaning of the diagram.

Answer: A 9. (LO 5-2, LO 5-3) Which of the following best describes the meaning of this UML class diagram?

a. Each new car can be sold once. b. A sale can involve multiple new cars. c. Each new car can be sold multiple times. d. No new cars are in inventory. e. None of these options describe the meaning of the diagram.

Answer: A

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10. (LO 5-2, LO 5-3) Which of the following best describes the meaning of this UML class diagram?

a. Each inventory item can be sold a minimum of 1 and maximum of many times. b. Each sale includes a minimum of 0 and maximum of 1 inventory items. c. Each inventory item can be sold a minimum of 0 and maximum of 1 time. d. Each sales includes a minimum of 1 and maximum of 1 inventory items. e. None of the options describe the meaning of the diagram.

Answer: C Refer to this diagram to answer Questions 11 through 20.

11. (LO 5-2, LO 5-3) Which of the following best describes the meaning of the multiplicities next to the number 1 in the preceding diagram? a. Stocks are traded in only one exchange. b. Stocks are traded in at least one exchange. c. Stocks are traded in a minimum of zero exchanges. d. Stocks are traded in a maximum of one exchange. e. Both "Stocks are traded in a minimum of zero exchanges" and "Stocks are traded in a maximum of one exchange" are correct.

Answer: C 12. (LO 5-2, LO 5-3) Which of the following best describes the meaning of the multiplicities next to the number 2 in the preceding diagram? a. Each exchange trades at least one stock. b. Each exchange trades only one stock. c. Each exchange trades a minimum of zero stocks. d. Each exchange trades a maximum of one stock. e. Both "Each exchange trades at least one stock" and "Each exchange trades a maximum of one stock" are correct.

Answer: A 13. (LO 5-2, LO 5-3, LO 5-4) Which of the following is true about implementing the Stock Exchanges and Stocks classes and the association between them in the preceding UML class diagram in a database?

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a. The primary key of Stocks is a foreign key in Stock Exchanges. b. The primary key of Stock Exchanges is a foreign key in Stocks. c. The association between Stocks and Stock Exchanges is implemented as a linking table. d. Both "The primary key of Stocks is a foreign key in Stock Exchanges" and "The primary key of Stock Exchanges is a foreign key in Stocks" are true. e. None of these is true.

Answer: C 14. (LO 5-2, LO 5-3) Which of the following best describes the meaning of the multiplicities next to the number 3 in the preceding diagram? a. Each transaction involves at least one stock. b. Each transaction involves only one stock. c. Each transaction involves a minimum of zero stocks. d. Each transaction involves a maximum of one stocks. e. Both "Each transaction involves at least one stock" and "Each transaction involves only one stock" are correct.

Answer: B 15. (LO 5-2, LO 5-3) Which of the following best describes the meaning of the multiplicities next to the number 4 in the preceding diagram? a. Each stock is bought/sold at least once. b. Each stock is bought/sold only once. c. Each stock is bought/sold a maximum of many times. d. Each stock is bought/sold a minimum of many times. e. Both "Each stock is bought/sold at least once" and "Each stock is bought/sold a maximum of many times" are correct.

Answer: C 16. (LO 5-2, LO 5-3, LO 5-4) Which of the following is the best way to implement the Buy/Sell Transactions and Stocks classes and the association between them in the preceding UML class diagram in a database? a. The primary key of Stocks is a foreign key in Buy/Sell Transactions. b. The primary key of Buy/Sell Transactions is a foreign key in Stocks. c. The association between Stocks and Buy/Sell Transactions is implemented as a linking table. d. Both "The primary key of Stocks is a foreign key in Buy/Sell Transactions" and "The primary key of Buy/Sell Transactions is a foreign key in Stocks" are true. e. None of these is true.

Answer: A 17. (LO 5-2, LO 5-3) Which of the following best describes the meaning of the multiplicities next to the number 5 in the preceding diagram? a. Each Broker is involved in one Buy/Sell Transaction. b. Each Broker is involved in a maximum of many Buy/Sell Transactions. c. Each Broker is involved in a minimum of one Buy/Sell Transaction. d. Each Broker is involved in a minimum of zero Buy/Sell Transactions. e. Both "Each Broker is involved in a maximum of many Buy/Sell Transactions" and "Each Broker is involved in a minimum of zero Buy/Sell Transactions" are correct.

Answer: E

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18. (LO 5-2, LO 5-3) Which of the following best describes the meaning of the multiplicities next to the number 6 in the preceding diagram? a. Each Buy/Sell Transaction involves one Broker. b. Each Buy/Sell Transaction involves many Brokers. c. Each Buy/Sell Transaction involves a minimum of zero Brokers. d. Each Buy/Sell Transaction involves a maximum of many Brokers. e. Both "Each Buy/Sell Transaction involves one Broker" and "Each Buy/Sell Transaction involves a maximum of many Brokers" are correct.

Answer: A 19. (LO 5-2, LO 5-3, LO 5-4) Which of the following is the best way to implement the Buy/Sell Transactions and Brokers classes and the association between them in the preceding UML class diagram in a database? a. The primary key of Brokers is a foreign key in Buy/Sell Transactions. b. The primary key of Buy/Sell Transactions is a foreign key in Brokers. c. The association between Brokers and Buy/Sell Transactions is implemented as a linking table. d. Both "The primary key of Brokers is a foreign key in Buy/Sell Transactions" and "The primary key of Buy/Sell Transactions is a foreign key in Brokers" are true. e. None of these is true.

Answer: A 20. (LO 5-2, LO 5-3, LO 5-4) Which of the following is the best way to implement the Stock Exchanges and Brokers classes in the preceding UML class diagram in a database? a. The primary key of Brokers is a foreign key in Stock Exchanges. b. The primary key of Stock Exchanges is a foreign key in Brokers. c. The association between Brokers and Stock Exchanges is implemented as a linking table. d. Both "The primary key of Brokers is a foreign key in Stock Exchanges" and "The primary key of Stock Exchanges is a foreign key in Brokers" are true. e. None of these is true.

Answer: E 21. (LO 5-5) Which of the following is not a general category of operational decision? a. Eligibility b. Accumulation c. Validation d. Risk e. Opportunity Answer: B 22. (LO 5-5) Which of the following is not a basic step in modeling process decision requirements? a. Identify process steps. b. Document decisions and how they impact business objectives. c. Decompose and refine requirements. d. Specify decision information and knowledge requirements. e. Identify required decisions.

Answer: A 23. (LO 5-7) Which of these is not one of the three main internal control functions? a. Preventive controls

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b. Respective controls c. Corrective controls d. Detective controls e. All of these are main internal control functions Answer: B

Answers to discussion questions 1. Although the foreign key could be posted in either table, it makes sense to post it in the cash receipt table. The multiplicities indicate that the cash receipt instance occurs after the corresponding sales instance. If you post the foreign key in the sale table, the field would be blank and then when entering cash receipt information, the database would need to update two tables (to update the foreign key in the sales table). If the foreign key (the sales primary key) is posted in the cash receipt table, that value is always available when the cash receipt information is added.

2. The multiplicities suggest the business sells items on account and collects payment in full. Each payment is for one sale. The multiplicities would change to 0..* next to the cash receipt class, indicating a minimum of 0 and a maximum of many payments for each sale.

3. Each student may take a minimum of 0 and a maximum of many courses. Each course may have been taken by a minimum of 0 and a maximum of many students. The tables would look something like: Students [Student ID (PK), Student Name, Student Address, Student email, …]

Courses [Course number (PK), Course Name, Course Description, …]

Student-Courses [Student ID + Course Number (PK), Date Student Took Course, Grade Student Earned, …]

4. The composition relationship would look like the model below. The descriptiveness is a matter of taste.

5. Other examples of composition relationships include a person and the parts of the anatomy, a sale and the related sales items. Composition relationships are a form of aggregation relationships where the parts do not usually exist separately. Examples of aggregation relationships include a bouquet and the individual flowers, a university and individual colleges, a high-rise building and the floors, etc.

6. There were undoubtedly a number of rules in the process: the student must pay tuition before enrollment; the student must have taken prerequisite courses before enrolling; the student must be admitted to the University before enrolling; the student cannot enroll outside of a specific date range. Most if not all these administrative rules would be expressed in writing so that they could be implemented in the University systems.

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7. A typical checkout would show the items selected for purchase (in your cart), shipping costs, taxes, the customer’s name, address, phone number, and email for both billing and shipping, plus payment information (e.g., credit card or PayPal). Decision categories might include Calculation (what are the shipping costs for example); Fraud (is the credit card stolen); Targeting (what other products should we suggest to this customer). There would be rules about which fields had to be completed. There would be rules about valid forms of payment. There could be rules about valid shipping destinations.

8. There are some obvious differences between the association lines and the relationship diamonds in the two figures. The ERD names the relationship, providing additional information about the business purpose of the relationship. Less obvious is that the multiplicities/cardinalities are on the opposite side.

9. A simple class diagram for attending several universities is as follows:

(This assumes that Universities have at least one student and a student has attended at least one University.)

If the diagram is drawn from the University’s perspective, the answer would depend on the purpose of the information. In the most likely case that the purpose is to collect students’ education history, then the answer would be the same.

10.10. a) Examples of one-to-one relationships include: Cash sales at the supermarket (one cash receipt per sale) Sales of new cars (each sale includes one car and a new car is sold only once) Credit card sales over the internet (one sale and one cash receipt)

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b) Examples of one-to-many relationships include: Sale of a new car and the customer’s payments Customers and sales Employees and paychecks Houses and the cities they are located in (excluding mobile homes) c) Examples of many-to-many relationships include: Sales and inventory (at a grocery store) Payments over time on credit card sales (each payment may apply to several sales and each sale could result in several payments) Answers to Problems 1. Dr. Franklin runs a small medical clinic specializing in family practice. The following simple diagram describes the basic relationships. It incorporates several assumptions: 1) a patient visit (sale) could take place without any diagnostic tests; 2) the tests/services are established in the database before they are used by Dr. Franklin; 3) patients are established in the database prior to the first patient visit (sale). Extensions to this model could include adding a second payer, such as an insurance company, as well as several options for payments (which are not shown in the diagram below).

2. Paige ran a small frozen yogurt shop. She bought several flavors of frozen yogurt mix from her yogurt supplier. She bought plastic cups in several sizes from another supplier. She bought cones from a third supplier. She counts yogurt and cones as inventory, but she treats the cups as operating expense and doesn’t track any cup inventory. The simple diagram below describes Paige’s purchases. Normally, a purchase must involve at least one inventory item, but she expenses the cups upon purchase, so a cup purchase involves 0 inventory items whereas a yogurt or cone purchase involves at least one inventory item. This model also assumes that suppliers are recorded before items are purchased from them.

3. A table structure to support problem 1 would look like: Patients Sales/Visits Tests/Services Visits-Services

[Patient ID (PK), Patient Name, Patient Address, …]

[Patient Visit Number (PK), Date, Basic Fee, Other Charges, Total Amount Due, Patient ID (FK), ..]

[Test/Service ID (PK), Test/Service Description, Charge for this Test/Service, …]

[Patient Visit Number + Test/Service ID (PK)]

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4. A table structure to support problem 2 would look like: Suppliers Purchases Inventory Purchase-Items

[Supplier ID (PK), Supplier Name, Supplier Address, …]

[Purchases Number (PK), Supplier ID (FK), Date, Amount, …]

[Inventory ID (PK), Inventory Description, Quantity on Hand, ..]

[Purchases Number + Inventory ID (PK), Quantity Purchased, …]

5. Multnomah County Library 

Classes in narrative: Patrons, Rooms, Computers, Books and DVDs, Issue Library Cards, Check Out Books/DVDs, Computer Use Sessions, Room Reservations Associations between classes: Patrons are associated with Issue Library Cards, Check Out Books/DVDs, Computer Use Sessions, Room Reservations. Books and DVDs are associated with Check Out Books/DVDs, Computers are associated with Computer Use Sessions, Rooms are associated with Room Reservations Next to Patrons, the multiplicities are all 1..1; next to the event/transaction classes (Issue Library Cards, Check Out Books/DVDs, Computer Use Sessions, Room Reservations), the multiplicities are 0..*. Each transaction involves a minimum of 1 and maximum of 1 Patron; Patrons can participate in a minimum of 0 and maximum of many transactions. Each Check Out Books/DVDs transaction can involve a minimum of 1 and maximum of many Books and DVDs; each Book or DVD can be checked out a minimum of 0 and maximum of many times. Each Computer can be used in a Computer Use Session a minimum of 0 and maximum of many times; each Computer Use Session involves one computer (minimum of 1 and maximum of 1). Each room can be reserved a minimum of 0 and maximum of many times; each Room Reservation is for one Room (minimum of 1 and maximum of 1).

The following model shows the Multnomah County Library data model. Each county citizen may obtain a library card, so the association between Patrons and Issue Library Cards indicates that constraint. Patrons can check out multiple books or DVDs. Patrons can use one computer at any time and reserve rooms. This assumes that each room reservation involves one room.



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

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Sample tables – with foreign keys - for the Access database might look like these.

Books and DVDs [Catalog# (PK), description, rental duration, …]

Computers [Computer# (PK), computer type, date purchased, …]

Rooms [Room # (PK), occupancy, location, …]

Issue Library Cards [Issue# (PK), issue date, Patron# (FK), …]

Check Out Books/DVD [Transaction# ((PK), date, Patron# (FK), …]

Computer Use Session [Session# (PK), date/time started, date/time ended, Computer# (FK), library card# (FK),…]

Room Reservations [Room Reservation # (PK), date, Room# (FK), library card# (FK), …]

Patrons [Library Card# (PK), Patron name, …]

See the separate Multnomah County Library Access database.

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Chapter 6 – Relational Databases and Enterprise Systems Multiple Choice Questions 1. (LO 6-2) In the hierarchical data model, the mapping from parent to child is a. 1:1 (one-to-one). b. 1:N (one-to-many). c. N:N (many-to-many). d. N:1 (many-to-one).

Answer: B 2. (LO 6-1) Advantages of relational data models generally include a. reduced information redundancy. b. low cost. c. ease of implementation. d. efficiency.

Answer: A 3. (LO 6-2) A class in a relational database model is defined as a. the sum of a whole. b. characteristics or properties of a table. c. person, place, thing, transaction, or event about which information is stored. d. being or existence, especially when considered as distinct, independent, or e. self-contained.

Answer: C 4. (LO 6-4) Which statement about enterprise systems is correct? a. Most enterprise systems are designed mainly for accounting and finance functions. b. SAP, Oracle, and Microsoft all offer products for enterprise systems. c. Most enterprise systems are designed for the service industry. d. Small companies do not use enterprise systems at all.

Answer: B 5. (LO 6-2) Refer to Exhibit 6.2; if Steve’s Stylin’ Sunglasses accepts installments without requiring a down payment, the multiplicities between Sales and Cash Receipts should be changed to a. Sales (0..1) - (1..*) Cash Receipts. b. Sales (1..1) - (0..*) Cash Receipts. c. Sales (1..1) - (1..1) Cash Receipts. d. Sales (0..*) - (1..1) Cash Receipts. e. None of these is correct.

Answer: B

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6. (LO 6-3) The FROM clause to the SELECT statement used in SQL indicates a. the name of the table(s) from which to retrieve data. b. the name of the column(s) from which to retrieve data. c. the name of the database(s) from which to retrieve data. d. the name of the query from which to retrieve data.

Answer: A 7. (LO 6-3) The WHERE clause to the SELECT statement used in SQL states the criteria that must be met a. to include a table in the query. b. to be included as an attribute in the table. c. to be included in the database. d. to be shown in the query result.

Answer: D 8. (LO 6-3) The “ORDER BY Amount ASC” clause to the SELECT statement used in SQL suggests that a. the rows in the query result will be listed in ascending order by amount. b. the rows in the query result will be listed in descending order by amount. c. the data attribute ASC be shown in order. d. None of the above Answer: A 9. (LO 6-4) SAP modules available for implementation include a. Payroll, Personnel Time Management, and Enterprise Management. b. Payroll, Financial Accounting, and Enterprise Management. c. Financial Accounting, Payroll, and Sales and Distribution. d. Sales and Distribution, Financial Accounting, and Procurement.

Answer: C 10. (LO 6-5) Cloud computing a. takes energy from the sun and clouds. b. is Internet-based computing, where shared resources, software, and information c. are provided to firms on demand. d. requires a firm to make an extensive investment in hardware and software to meet firm needs. e. can meet computing needs today but is not expected to meet tomorrow’s computing needs.

Answer: B 11. (LO 6-1) What kind of relationship does a network data model represent? a. One-to-one relationship b. One-to-many relationship

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c. Many-to-one relationship d. Many-to-many relationship Answer: D 12. (LO 6-2) Which of the following is a valid primary key for a cash receipt table? a. Purchase order number b. Check number c. Cash receipt number d. Receipt amount Answer: C 13. (LO 6-3) Which of the following is used in SQL to begin a query? a. BEGIN b. SELECT c. INPUT d. INSERT Answer: B 14. (LO 6-3) The GROUP BY operator in SQL is used to a. aggregate functions on the query results based on one or more columns. b. identify which columns are used to sort the resulting data. c. state the criteria that must be met to be shown in the query result. d. indicate the name of the table from which to retrieve data.

Answer: A 15. (LO 6-2) When using Microsoft Access, the main function of “Table” is to a. store data. b. report data. c. retrieve data. d. analyze data.

Answer: A 16. (LO 6-2) Which of the following is a correct statement about primary keys? a. The data values of a primary key must be different (i.e., unique). b. A primary is always another table’s foreign key. c. A primary cannot be used in another table as a foreign key. d. Most tables in a database may not require primary keys.

Answer: A 17. (LO 6-2) Which of the following is a correct statement about foreign keys? a. All foreign keys cannot be blank (null). b. Most foreign keys should not have any data values.

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c. A foreign key must be another table’s primary key. d. An attribute cannot be a foreign key used in different tables.

Answer: C 18. (LO 6-2) What is referential integrity rule? a. Primary keys cannot be null. b. Foreign keys cannot be null. c. The data values of a forging key always exist in the corresponding table. d. Foreign keys could be null.

Answer: D 19. (LO 6-2) Which of the following is a correct statement about entity integrity rule? a. The rule is regarding how to use foreign keys. b. The rule is used to verify the type of data values in each table. c. The rule requires each record’s primary key cannot be blank (null). d. The rule allows each primary key to be used to link tables.

Answer: C 20. (LO 6-2) When using Microsoft ACCESS, the main function of “Form” is to a. store data. b. enter data. c. retrieve data. d. analyze data.

Answer: B 21. (LO 6-2) When using Microsoft ACCESS, the main function of “Query” is to a. store data. b. enter data. c. retrieve data. d. analyze data.

Answer: C 22. (LO 6-2) Which of the following is the best primary key for cash disbursement table? a. Purchase order number b. Check number c. Inventory receipt number d. Disbursement voucher number Answer: D 23. (LO 6-2) Which of the following could be an “event” in REA data models? a. Cash b. Sales

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c. Customer d. Inventory Answer: B 24. (LO 6-2) Which of the following could be a relationship table (i.e., to link two tables with a many-tomany relationship)? a. Purchase order table b. Purchase line-item table c. Inventory receipt table d. Disbursement table Answer: B 25. (LO 6-2) Which of the following is not a valid link between tables? a. Linking Sales Table and Inventory Table b. Linking Purchases Table with Cash Disbursement Table c. Linking Salespeople Table with Customer Table d. Linking Vendor Table with Customer Table Answer: D

Discussion Questions 1. Explain the differences between hierarchical, network and relational data models. What makes the relational data model the most popular data model in use today?

Hierarchical data models organize data into a tree-like structure. In a hierarchical data model, data elements are related to each other using one-to-many relationships. A network data model is a flexible model representing objects and their relationships. It allows many-to-many relationships. The relational data model is a data model that stores information in the form of related two-dimensional tables. While hierarchical and network data models require relationships to be formed at the database creation, relational data models can be made up as needed.

The relational database is the most popular data model in use today because it has the following advantages: flexibility and scalability simplicity reduced information redundancy.

2. What are the basic requirements of a relational database?

The approach of relational database imposes requirements on the structure of tables:

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     

The Entity Integrity Rule: the primary key of a table must have data values (cannot be null).

The Referential Integrity Rule: the data value for a foreign key must either be null or match one of the data values that already exist in the corresponding table.

Each attribute in a table must have a unique name.

Values of a specific attribute must be of the same type.

Each attribute (column) of a record (row) must be single-valued. This requirement forces us to create a relationship table for each many-to-many relationship.

All other non-key attributes in a table must describe a characteristic of the class (table) identified by the primary key.

3. Structured Query Language (SQL) is used to retrieve data from a database. Why would an accountant need to learn SQL? The information accountants needed is not always ready for use in the database.

Accountants need to use SQL to pull data needed out from the master table, to design queries to get the calculated data and to run report in an application. Additionally, learning SQL helps accountants better communicate with IT support when they need assistance.

4. Exhibit 6.56 lists the modules available from SAP. List and explain which modules would be most appropriate for either Maytag or a manufacturing company you are familiar with.

—MM Materials Management: for the manufacturing companies, material management such as raw material purchase and usage, storage and condition check is always important because it affects the manufacturing process and cost of goods.

—PP Production Planning and Control: Production Planning consists of all master data, system configuration, and transactions to complete the Plan in produce process. It related to the planning stage to the completion of manufacturing, it is critical to the whole process of manufacturing.

—SD Sales and Distribution: The Sales and Distribution consists of all master data, system configuration, and transactions to complete the Order to Cash process. It is the purpose of manufacturing.

5. Given the description of Hershey’s failed enterprise system implementation from the chapter, which of the four challenges of the enterprise described in the chapter seem to best explain what happened? Use Google or Yahoo! to get more details on this case to help answer this question.

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The challenge of integrating with the firm’s own existing legacy systems best described Hershey’s failure of implementing of ERP. Before 1999, Hershey was running legacy systems. When it tried to implement ERP system in 1999, it chose to replace those systems. But the changes cause the delayed delivery of goods during holiday season and big loss in that year.

Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1.

Account# BA-6 BA-7 BA-9

Balance 253 48,000 950

Account# BA-9 BA-6

Balance 950 253

2.

3. (Connect) Use the Cash Table below to write a SQL query to show a list of checking accounts.

Cash Account# BA-6 BA-7 BA-8 BA-9

Type Checking Checking Draft Checking

Bank Boston5 Shawmut Shawmut Boston5

Balance 253 48,000 75,000 950

Answer: SELECT * FROM Cash WHERE Type = “Checking”; 4. (Connect) Use the Cash Table below to write a SQL query to show the total of all of the account balances.

Cash Account# BA-6 BA-7 BA-8 BA-9

Type Checking Checking Draft Checking

Bank Boston5 Shawmut Shawmut Boston5

Balance 253 48,000 75,000 950

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Answer: SELECT SUM(Balance) FROM Cash; 5.

6. (Connect) a. Customer table, sales table, cash receipt table are some examples. Students include a variety of tables containing subscriber data, such as movie ratings.

Customer table could include the following attributes: customer#, customer name, customer email address, customer phone#, customer zip b. Sales table could include the following attributes: sales#, sales date, customer#, item#, employee# Cash receipt table could include the following attributes: cash receipt#, cash receipt amount, cash receipt date, customer#, sales# etc. c. The customer# may have information in the data dictionary such as data type: integer, validation: required. Customer name may have data type: text. Customer zip may have field length: Cash receipt amount has data type: currency. d. Netflix tries to trace its customer information to find out the features of their customer in order to improve its product and improve its customer service. The company is also interested in sales and cash receipts information to analyze its profitability and manage its cash flows.

7. People may be reluctant to cloud computing because they may be concerned about the secure issue about the sensitive data. Additionally, they also may be concerned about the network stability because the system will not function if the network connection goes down. That may potentially cause big damage.

8. (Connect) Access Practice using Access_Practice.accdb to complete the required tasks. a. Link the tables

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1) Open the access database (called Access_Practice.accdb), select “Enable Content” in the yellow SECURITY WARNING to work on the assignment. If you do not see the warning, proceed to step 2.

2) Select the “DATABASE TOOLS” tab. Select “Relationships” in the “Relationships” box to open the Show Table window. Holding down shift, select “Inventory,” “Sales,” and “SalesItems” from the Tables list. Select Add then Close.

The following screen will show up:

3) Link the tables by dragging the primary key to its foreign key in the appropriate table.

For each link place a check in the Enforce Referential Integrity box. Select Create.

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4) Save your work then close the relationship window. b. Create the Item_Extension_Calculation query: 1) Select the CREATE tab. Select Query Design in the Queries box.

2) Select SalesItems in the Show Tables box. Select Add, then Close:

3) Drag InvoiceID, InventoryID, Quantity, and UnitPrice to the Field row of the design grid creating four columns.

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4) In the blank column on the right of the design grid, type Amt: then select Builder in the Query Setup box of the DESIGN tab:

5) Expand Access_Practice.accdb by selecting its plus sign (+). Select Tables. (Either select the plus sign or double-click Tables). Select SalesItems from the Expression Elements list, then double-click Quantity from the Expression Categories list. Type, * in the calculated query field. Double-click UnitPrice in the Expression Categories list. In the calculated query field delete <<Expr>>. Select OK.

6) Verify the Show: box in the Amt: column is selected. Then, select Property Sheet in the Show/Hide box of the DESIGN tab. The Property Sheet appears on the right side of the screen.

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7) Choose currency for the Format, close (x) the Property Sheet:

8) Select appear.

9) Select Save

in the Results box of the DESIGN tab. The extended amount of sales will

. Save the query as Item_Extension_Calculation. Select OK.

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c. Calculate the total dollar amount of each sale & Name the Query Sale_Amount_Calculation 1) Select the CREATE tab. Select Query Design in the Queries box.

a. Select the Queries tab. Choose Item_Extension_Calculation, then Add. Select the Tables tab. Choose Item_Extension_Calculation, then Add.

2) Double-click InvoiceID, InvoiceDate, CustomerID, EmployeeID in the Sales table and Amt in the Item_Extension_Calculation query.

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3) Select in the Show/Hide box of the DESIGN tab. Select Sum for Amt and leave the others as Group by. Format Amt as Currency using the Property Sheet as previously discussed.

4) Select , you will get the total dollar amount of each sale. Save the query as Sale_Amount_Calculation.

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d. Calculate total sales for each inventory item.

1) Create new query and select SalesItems and Inventory under the Tables tab. a. Hint: Hold control to select two items in a list that are not adjacent to each other.

2) Double-click Inventory ID and Name in the Inventory table to add them to the design grid. In the blank column on the right, type Amount and select Builder in the Query Setup section of Design tab.

3) In the Expression Builder under Expression Elements select the SalesItems table and double-click Quantity in the Expression Category list. Type *. Double-click UnitPrice under Expression Category. Delete <<Expr>>, then click OK.

4) Click

and select Sum for Amount in the Total row.

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5) Format Amount as Currency.

6) Select

, you will get total sales for each inventory item.

Save the query as Sales_for_Inventory_Items.

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e. Calculate Total Sales.

1) Select the CREATE tab. Select Query Design in the Queries box. Select SalesItems.

2) In the first column, select Builder in the Query Setup section of Design tab. Type in the formula written in the calculated query field in the Expression Builder image below.

Select OK.

2) Select to see the query result.

3) Save the Query as Total_Sales. f.

Calculate the month in which each sale occurred 1) Select the CREATE tab. Select Query Design in the Queries box Select Sales.

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2) Double-click Invoice ID and Invoice Date to insert into the first two columns. In the third column select Builder and type the formula written in the Expression Builder: 3)

4) Select

, and see the result:

5) Save the query as Sales_Month.

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g. Calculate the sum of sales for each month.

1) Select the CREATE tab. Select Query Design in the Queries box. Select the SalesItems table and Sales_Month query.

2) Link the table and query by dragging InvoiceID from the SalesItems table to InvoiceID in the Sales_Month query.

3) Double-click Month from the Sales_Month query. In the second column, select Builder and type the following formula:

4) Select

, select Group By for Month and Sum for Sales_Month in the Total row.

5) Format Sales_Month as Currency using the Property Sheet.

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6) Click

and save the query as Sales_by_Month.

9. (Connect) Continue from Problem 8. Access Practice using Access_Practice.accdb to complete the required tasks. a. Link the five tables, enforcing referential integrity: 1) Double-click the Employees table in the All Access Object menu to open it. Select the HOME tab. Select the View drop-down menu. Select Design View. Select EmployeeID. Select Primary Key from the Tools box. Close Employee table.

2) Select Relationships in the Relationships box of the DATABASE TOOLS tab to open the Relationships object. Select Show Table in the Relationships box. Hold the Shift key, select any tables missing from the Relationships tab. Select Add, then Close.

3) Create relationships by dragging the primary key to foreign key in the appropriate table and Enforce Referential Integrity for each one.

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Close the relationship object by right clicking the tab and choosing Close. b. Calculate the total sales for each customer & name the query Total_Customer_Sales.

1) Select the CREATE tab. Select Query Design in the Queries box.

2) Select SalesItems table. Add, then Close.

3) Double-click Invoice ID and in the second column of design gird, use Builder in the Query Setup section of DESIGN tab and type the following formula, selecting Quantity and UnitPrice from SalesItems table. a. Amt: [SalesItems]![Quantity]*[SalesItems]![UnitPrice] b. Remember to use Property Sheet to set the Format to Currency.

4) Click

to see the result and save the Query as Sale_Amount_Calculation_Problem9.

5) Select the CREATE tab. Select Query Design in the Queries box.

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6) Select Customers table, Sales table, Sale_Amount_Calculation_Problem9 query. Select Add, then Close.

7) Double-click CustomerID and CompanyName in the Customers table and Amt in the Sales_Amount_Calculation_Problem9 Query.

8) Click in the Show/Hide section of Design tab, select Group By for Customer ID and CompanyName, select Sum for Amt. 9) Format Amt as Currency.

10) Click

and save the Query as Total_Customer_Sales.

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c. Generate an email user name.

1) Select the CREATE tab. Select Query Design in the Queries box.

2) Select the Employees table, Add, then Close.

3) Double click EmployeesID. In the second column of design grid, use Builder in the Query Setup section of the DESIGN tab and type the following formula: a. EmailUserName: Left( [Employees]![EmployeeFirstName] ,1) & Left( [Employees]![EmployeeLastName] ,5) 4) Select OK. 5) Double click EmployeeLastName and EmployeeFirstName. Click Query as Employee_Email_Generator.

and save the

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d. Calculate the total sales for each month 1) Select the CREATE tab. Select Query Design in the Queries box.

2) Select Sales table, Add then Close.

3) Double click InvoiceID. In the second column of design grid, use Builder in the Query Setup section of the DESIGN tab and type the following formula:

Select OK. 4) Save the Query as Month_Sales.

5) Select the CREATE tab. Select Query Design in the Queries box.

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6) Double-click Month_Sales and Sale_Amount_Calculation Queries. Close.

7) Link two queries by dragging InvoiceID from Month_Sales query to InvoiceID of Sale_Amount_Calculation Queries.

8) Double click Month and Amt. Select , select Group By for Month and Sum for Amt. Click SumofAmt then Property Sheet in the Show/Hide section of DESIGN tab. Format Amt as Currency.

9) Click

e.

and save query as Total_Sales_per_Month

Determine which customer had the highest average sales amount.

1) Select the CREATE tab. Select Query Design in the Queries box.

2) Double-click Customers table and Sale_Amount_Calculation (not the Problem 9 version) query, Close.

3) Double click CustomerID, CompanyName, SumofAmt. Select . Select Avg for Amt in the Total row. Select Descending in the Sort row of Amt. Format the Amt as Currency.

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4) Click and find the customer that has the highest Average sale. Save query as Customer_Highest_Sales.

f. Calculate the total commission due to each employee. Use two queries to do these calculations.

1) Select the CREATE tab. Select Query Design in the Queries box.

2) Double-click Sales_Amount_Calculation_Problem9 query, Sales table, Close.

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3) Double-click EmployeeID, Amt. Select 4) Click

, select Sum for Amt. Format for Currency.

and save the query as Employee_Total_Sales.

5) Select the CREATE tab. Select Query Design in the Queries box.

6) Double-click Employee_Total_Sales query, Employees table, Close.

7) Double-click EmployeeID, EmployeeFirstName, EmployeeLastName. In the fourth column, use the Builder and type the following formula: a. Commission:0.05* [Employee_Total_Sales]![SumOfAmt] 8) Format the Commission as Currency under Property Sheet.

9) Click

and save the Query as Commission

Problems 10 to 14 Ellen Novotny started an online bookstore in 2023. You are Ellen’s best friend and promised to help her. Ellen asked you to create a small database to track the information on books and authors. You created the following tables: Author, Book, and Author_Book.

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The table, Author_Book, is a relationship table to link the Author table and Book table because of the many-to-many relationship between the two tables. That is, each author may write many books and each book may have multiple authors.

In general, each customer can purchase many books in a single transaction. Also, copies of the same book can be sold to different customers. Once an order is processed, the books are shipped right away.

Based on these tables you have (see below), help Ellen to extract the information she needs from the database.

10. Ellen asks you to give her a list of the books that each author wrote. Write a complete SQL statement to provide the information to Ellen, including author names, book titles, publishers and the years of publication.

Author Table Author ID AU-1 AU-2 AU-3 AU-4 AU-5 AU-6

Last Name Adams Brown Davis Newport Pham Sviokla

First Name Eric Jennifer Keith Kevin John Julia

Book Table Book ID Title B-1 Accounting Principles B-2 Cost Management B-3 B-4 B-5 B-6

Accounting Information Systems Individual Taxation 2017 Intermediate Accounting Advanced Accounting

Author_Book Table

Email Eric168@yahoo.com jenifferb@gmail.com keithd@gmail.com kevinn@hotmail.com johnpham@gmail.com jsviokla@yahoo.com

Phone number (714) 833-2419 (619) 596-0012 (212) 342-5680 (301) 947-7741 (617) 645-3647 (805) 498-1688

Area Financial Accounting Management Accounting Information Systems Taxation

Year 2021

Edition 8

Publisher Wiley

2022

3

McGraw-Hill

2022

2

McGraw-Hill

2023

6

Pearson

Financial Accounting Financial Accounting

2021

1

Wiley

2022

1

McGraw-Hill

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Author ID AU-1 AU-1 AU-2 AU-3 AU-3 AU-4 AU-5 AU-6 AU-6

Book ID B-2 B-5 B-6 B-2 B-3 B-2 B-4 B-1 B-6

Answer: SELECT

Author.[Last Name], Author.[First Name], Book.Title, Book.Year, Book.Publisher

FROM

Author, Book, Author_Book

WHERE

Author.[Author ID] = Author_Book.[Author ID]

AND

Book.[Book ID] = Author_Book.[Book ID]

ORDER BY

Author.[Last Name], Author.[First Name];

11. Ellen wants to know how many books each author wrote. Write a SQL statement to provide such information to Ellen.

Answer: SELECT

Author.[Last Name], Author.[First Name], COUNT(*) AS [Number of Books]

FROM

Author, Author_Book

WHERE

Author.[Author ID] = Author_Book.[Author ID]

GROUP BY

Author.[Last Name], Author.[First Name];

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Please note: The solutions of Novotny Bookstore can be found in an ACCESS file called “Novotny Bookstore – solutions” for instructors to use.

12. You are going to send emails to inform the customers that the books ordered have been shipped. Write a SQL statement to obtain the complete information on the book title(s), unit price(s) and the number of each book purchased to be sent to the customers.

Book Table Book ID Title B-1 Accounting Principles B-2 Cost Management B-3 B-4 B-5 B-6

Accounting Information Systems Individual Taxation 2017 Intermediate Accounting Advanced Accounting

Customer Table Customer ID C-1 C-2 C-3 C-4 C-5 C-6 C-7

Last Name Black Brown Easton Jennix Venable White Williams

Area Financial Accounting Management Accounting Information Systems Taxation

Year 2021

Edition 8

Publisher Wiley

2022

3

McGraw-Hill

2022

2

McGraw-Hill

2023

6

Pearson

Financial Accounting Financial Accounting

2021

1

Wiley

2022

1

McGraw-Hill

First Name Emily Jack Anderson May Judy Ashley Eric

Email Ewb2003@yahoo.com jackjack@gmail.com anderson.easton@gmail.com jennixm@hotmail.com Judy.Venable@gmail.com Ashley2015@yahoo.com Williams_e@yahoo.com

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Sales_Line_Item Sales Date Customer ID 9/1/2023 C-7 9/1/2023 C-7 9/1/2023 C-1 9/2/2023 C-5 9/2/2023 C-5 9/2/2023 C-3 9/2/2023 C-3 9/2/2023 C-3 9/3/2023 C-2

Book ID

Quantity

Unit price

B-3 B-1 B-6 B-2 B-5 B-2 B-6 B-4 B-1

1 1 30 60 25 1 1 1 1

$205 $221 $195 $199 $210 $245 $215 $160 $221

Answer: SELECT Customer.*, Book.Title, Book.Year, Sales_Line_Item.Quantity, Sales_Line_Item.[Unit Price] FROM

Book, Customer, Sales_Line_Item

WHERE

Book.[Book ID] = Sales_Line_Item.[Book ID]

AND

Customer.[Customer ID] = Sales_Line_Item.[Customer ID];

Please note: The solutions of Novotny Bookstore can be found in an ACCESS file called “Novotny Bookstore – solutions” for instructors to use.

13. Ellen wants to know how many copies of each book were sold. Write a SQL statement to obtain the necessary information you think Ellen wants.

Answer: SELECT Sold]

Book.Title, Book.Year, Book.Edition, SUM(Sales_Line_Item.Quantity) AS [Copies

FROM

Book, Sales_Line_Item

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WHERE

Book.[Book ID] = Sales_Line_Item.[Book ID]

GROUP BY

Book.Title, Book.Year, Book.Edition;

Please note: The solutions of Novotny Bookstore can be found in an ACCESS file called “Novotny Bookstore – solutions” for instructors to use.

14. Ellen wants to know the dollar amount of total sales made on September 1, 2017. Write a SQL statement to obtain the necessary information you think Ellen wants.

Answer: SELECT

[Sales Date], SUM(Quantity * [Unit Price]) AS [Total Sales]

FROM

Sales_LIne_Item

WHERE

[Sales Date] = #09/01/2023#

GROUP BY

[Sales Date];

Please note: The solutions of Novotny Bookstore can be found in an ACCESS file called “Novotny Bookstore – solutions” for instructors to use.

15. (Connect) The Cash Receipt table below contains seven attributes. Which of those could possibly be foreign keys?

Cash Receipt Table

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Remittance Advice # RA-220 RA-278 RA-276 RA-289

Date

Amount

Customer #

Check #

Invoice #

Cashier #

12/02/2023 12/23/2023 1/3/2024 1/7/2024

2549.90 699.90 1209.70 949.95

C-12 C-5 C-9 C-28

201 1457 392 2558

S-101 S-108 S-107 S-105

E-13345 E-13347 E-13345 E-13346

Answer: Customer #, Invoice #, and Cashier #. Since the attribute Check # refers to customers’ check numbers, it should not be a foreign key.

16. (Connect) A sales invoice typically includes the date of sale, salesperson, customer data, items included in the sale, and amount. Which foreign keys should be added to the following table to link all of these data elements?

Sales Table Invoice # Date Amount S-101 10/05/2023 2549.90 S-105 11/01/2023 949.95 S-107 11/02/2023 1209.70 S-108 11/06/2023 699.90 Answer: Salesperson #, Customer #, Inventory # (often is NOT if the relationship is many-tomany), Remittance Advice # (only if requires customers to pay at once) Problems 17-20 17. (Connect) Based on the two tables and the attributes below, write SQL commands for each question to retrieve the data from the database.

a. Write a query to find out how many customer records in the company’s database.

Answer: SELECT COUNT(CustomerNumber) FROM tblCustomer;

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b. List customers who live in New York.

Answer: SELECT CustomerNumber, CustomerName FROM tblCustomer WHERE CustomerState=’New York’; c. List customers with credit limits greater than $50,000.

Answer: SELECT CustomerNumber, CustomerName FROM tblCustomer WHERE CustomerCreditLimit > 50000; d. List sales transactions made in July, 2024.

Answer: SELECT InvoiceNumber, InvoiceDate, tblCustomer.CustomerNumber, CustomerName FROM tblSales, tblCustomer WHERE tblSales.CustomerNumber=tblCustomer.CustomerNumber AND InvoiceDate BETWEEN #7/1/2024# AND #7/31/2024#; e. Write a query to find out the total sales transactions made to each customer.

Answer: SELECT COUNT(InvoiceNumber) AS Total, tblSales.CustomerNumber FROM tblSales, tblCustomer WHERE tblSales.CustomerNumber=tblCustomer.CustomerNumber GROUP BY tblSales.CustomerNumber; 18. (Connect) Based on the three tables and the attributes below, write SQL commands for each question to retrieve the data from the database.

a. What are the foreign keys in the Sales table?

Answer: CustomerID, EmployeeID b. How many sales transactions were made in March 2024?

Answer:

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SELECT COUNT(InoviceID) FROM Sales WHERE InvoiceDate BETWEEN #3/1/2024# AND #3/31/2024#; c. Which sales transactions were made by the employee whose ID is ‘S2038’ in the system?

Answer: SELECT InoviceID, InvoiceDate, EmployeeID FROM Sales WHERE EmployeeID=‘S2038’; d. List the inventory items with purchase price larger than $6,500.

Answer: SELECT InventoryID, Name, PurchasePrice FROM Inventory WHERE PurchasePrice > 6500; e. Write a query to find out the dollar amount of each sales transaction.

Answer: SELECT SalesItems.InvoiceID, SUM([Quantity]*[UnitPrice]) AS Amount FROM Sales, SalesItems WHERE Sales.InvoiceID=SalesItems.InvoiceID GROUP BY SalesItems.InvoiceID; 19. (Connect) Identify the primary key of each table in the following partial database.

Author Table Author ID AU-1 AU-2 AU-3 AU-4 AU-5 AU-6

Last Name Adams Brown Davis Newport Pham Sviokla

First Name Eric Jennifer Keith Kevin John Julia

Book Table Book Title ID B-1 Accounting Principles B-2 Cost Management B-3 B-4 B-5 B-6

Accounting Information Systems Individual Taxation Intermediate Accounting Advanced Accounting

Email Eric168@yahoo.com jenifferb@gmail.com keithd@gmail.com kevinn@hotmail.com johnpham@gmail.com jsviokla@yahoo.com

Phone number (714) 833-2419 (619) 596-0012 (212) 342-5680 (301) 947-7741 (617) 645-3647 (805) 498-1688

Area

Year

Edition Publisher

Financial Accounting Management Accounting Information Systems

2021 2022

8 3

Wiley McGraw-Hill

2022

2

McGraw-Hill

Taxation Financial Accounting

2023 2021

6 1

Pearson Wiley

Financial Accounting

2022

1

McGraw-Hill

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Author_Book Table Author ID Book ID AU-1 B-2 AU-1 B-5 AU-2 B-6 AU-3 B-2 AU-3 B-3 AU-4 B-2 AU-5 B-4 AU-6 B-1 AU-6 B-6 Customer Table Customer ID C-1 C-2 C-3 C-4 C-5 C-6 C-7

Last Name Black Brown Easton Jennix Venable White Williams

Sales_Line_Item Sales Date Customer ID 9/1/2023 C-7 9/1/2023 C-7 9/1/2023 C-1 9/2/2023 C-5 9/2/2023 C-5 9/2/2023 C-3 9/2/2023 C-3 9/2/2023 C-3 9/3/2023 C-2

First Name Emily Jack Anderson May Judy Ashley Eric

Email Ewb2003@yahoo.com jackjack@gmail.com anderson.easton@gmail.com jennixm@hotmail.com Judy.Venable@gmail.com Ashley2015@yahoo.com Williams_e@yahoo.com

Book ID

Quantity

Unit price

B-3 B-1 B-6 B-2 B-5 B-2 B-6 B-4 B-1

1 1 30 60 25 1 1 1 1

$205 $221 $195 $199 $210 $245 $215 $160 $221

Solution: Table name Author Table Book Table Author_Book Table Customer Table Sales_Line_Item

Attribute(s) as the primary key Author ID Book ID Author ID Customer ID Customer ID

Book ID Book ID

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20. (Connect) Given the above partial database, indicate the table name(s) that are linked with the listed tables.

Solution: Table name Author Table Book Table Author_Book Table Customer Table Sales_Line_Item

linked with Author_Book Table Author_Book Table Author Table Sales_Line_Item Customer Table

Sales_Line_Item Book Table Book Table

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Chapter 7: Sales and Collections Business Process Multiple Choice 1. (LO 7-1) Which of the following is not an activity within the sales and collection process? a. Selling products and services b. Billing customers c. Managing accounts receivable d. Recording payments from customers e. All of these options are sales and collection activities Answer: E 2. (LO 7-1) The sales and collection process is the point of contact between the firm and which set of external business partners? a. Investors b. Customers c. Employees d. Vendors e. All of these options Answer: B 3. (LO 7-1) Which of the following sales and collection process activities can result in the creation of an account receivable? a. Receiving a sales order from a customer b. Shipping ordered products to the customer c. Issuing a quote to the customer d. Recording payment from the customer e. None of these options Answer: B 4. (LO 7-2) Which of the following describes message flows between pools? a. Orchestrations b. Sequence flows c. Choreography d. Intermediate events e. None of these options Answer: C 5. (LO 7-2, LO 7-3) Which of the following statements is true? a. Each pool must have a start event. b. Sequence flows are shown by arrows with a dashed line. c. Message flows are shown by arrows with a solid line. d. Each pool must have more than one swimlane. e. Both a and b are true.

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Answer: A 6. (LO 7-3) Which of the following is not a purpose of a subprocess in BPMN? a. Reducing complexity b. Presenting higher-level process descriptions c. Creating alternative process flows d. Developing a reusable model e. All of these options are purposes of subprocesses in BPMN Answer: C 7. (LO 7-3) What is the purpose of an intermediate error event? a. Indicates a change in flow due to a process exception b. Indicates the end of a process c. Indicates the start of a collapsed subprocess d. Describes the activities that will occur when there is not an error e. None of these options Answer: A 8. (LO 7-4) Which of the following is an example of a business rule implementing access controls? a. There shall be a physical count of inventory each quarter. b. User’s recording collections cannot modify sales records. c. The computer system shall generate an audit trail. d. Internal auditors shall be used. e. None of these options are business rules implementing access controls.

Answer: B 9. (LO 7-5) Which of the following is not part of the REA framework? a. Agents b. Type images c. Resources d. Events e. Activities Answer: E 10. (LO 7-6) How do you implement a one-to-many relationship in a relational database? a. Post a foreign key. b. Create a new table. c. Combine two fields to create a primary key. d. Create an association. e. None of these options.

Answer: A

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Use this diagram to answer Questions 11 through 32.

11. (LO 7-5, LO 7-6) Refer to the association marked with the number 1 in the preceding diagram. Which of the following is the best description of the association? a. Each employee participates in at least one sale. b. Each employee participates in a minimum of zero sales. c. Each employee participates in a maximum of one sale. d. Each employee participates in at least two sales. e. None of these is a description of the association.

Answer: B 12. (LO 7-5, LO 7-6) Refer to the association marked with the number 1 in the preceding diagram. Which of the following is the best description of the association? a. Each sale may involve multiple employees. b. Each sale may involve no employees. c. Each sale is associated with a minimum of one employee. d. Each sale is associated with a maximum of many employees. e. None of these is a description of the association.

Answer: C 13. (LO 7-5, LO 7-6) Refer to the association marked with the number 2 in the preceding diagram. Which of the following is the best description of the association? a. Only cashiers handle cash receipts. b. Each employee is associated with a maximum of one cash receipts. c. Each employee is associated with a maximum of many cash receipts. d. Each employee is associated with a minimum of one cash receipt. e. None of these is a description of the association.

Answer: C

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14. (LO 7-5, LO 7-6) Refer to the association marked with the number 2 in the preceding diagram. Which of the following is the best description of the association? a. Each cash receipt may involve multiple employees. b. Each cash receipt may involve no employees. c. Each cash receipt is associated with only one employee. d. Each cash receipt is associated with a maximum of many employees. e. None of these is a description of the association.

Answer: C 15. (LO 7-5, LO 7-6) Refer to the association marked with the number 3 in the preceding diagram. Which of the following is the best description of the association? a. Each customer participates in a maximum of one sale. b. Each customer participates in at least one sale. c. Each customer participates in a minimum of zero sales. d. Each customer eventually participates in at least two sales. e. None of these is a description of the association.

Answer: C 16. (LO 7-5, LO 7-6) Refer to the association marked with the number 3 in the preceding diagram. Which of the following is the best description of the association? a. Each sale is associated with a minimum of one customer. b. Each sale may involve multiple customers. c. Each sale is associated with a maximum of many customers. d. Each sale may involve no customers. e. None of these is a description of the association.

Answer: A 17. (LO 7-5, LO 7-6) Refer to the association marked with the number 3 in the preceding diagram. What is the best interpretation if the minimum multiplicity next to Customers is 0 instead of 1? a. Some customers don’t pay. b. Some customers place orders but don’t pick up their items. c. Some sales are made in cash and customer information is not recorded. d. Some customers never buy anything. e. None of these interprets this situation appropriately.

Answer: C 18. (LO 7-5, LO 7-6) Refer to the association marked with the number 4 in the preceding diagram. Which of the following is the best description of the association? a. Each customer pays in cash at the time of the sale. b. Each customer is associated with a maximum of many cash receipts. c. Each customer is associated with more than one cash receipt. d. Each customer is associated with a minimum of one cash receipt. e. None of these is a description of the association.

Answer: B

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19. (LO 7-5, LO 7-6) Refer to the association marked with the number 4 in the preceding diagram. Which of the following is the best description of the association? a. Each cash receipt may involve no customers. b. Each cash receipt is associated with only one customer. c. Each cash receipt may involve multiple customers. d. Each cash receipt is associated with a maximum of many customers. e. None of these is a description of the association.

Answer: B 20. (LO 7-5, LO 7-6) Refer to the association marked with the number 5 in the preceding diagram. Which of the following is the best description of the association? a. Each sale may involve a maximum of many inventory items. b. Each sale may involve a minimum of zero inventory items. c. Each sale involves one inventory item. d. Each sale may involve two inventory items. e. None of these is a description of the association.

Answer: A 21. (LO 7-4, LO 7-5) Refer to the association marked with the number 5 in the preceding diagram. Which of the following is the best example of a business rule that constrains the association? a. Sales are allowed if they include at many inventory items. b. Sales are prohibited if they include more than one inventory item. c. Sales must include at least one inventory item. d. Sales are allowed with the manager’s approval in advance. e. None of these is the best example of a business rule.

Answer: C 22. (LO 7-5, LO 7-6) Refer to the association marked with the number 5 in the preceding diagram. Which of the following is the best description of the association? a. Each inventory item must be sold at least once. b. Each inventory item could be sold many times. c. Each inventory item is associated with a minimum of one sale. d. Each inventory item is associated with a maximum of one sale. e. None of these is a description of the association.

Answer: B 23. (LO 7-5, LO 7-6) Refer to the association marked with the number 6 in the preceding diagram. Which of the following is the best description of the association? a. Each cash receipt is deposited into multiple cash accounts. b. Each cash receipt is associated with a minimum of zero cash accounts. c. Each cash receipt is associated with a maximum of many cash accounts. d. Each cash receipt is deposited into one cash account. e. None of these is a description of the association.

Answer: D

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24. (LO 7-5, LO 7-6) Refer to the association marked with the number 6 in the preceding diagram. Which of the following is the best description of the association? a. Each cash account could be associated with many cash receipts. b. Each cash account is associated with one cash receipt. c. Each cash account is associated with a minimum of one cash receipt. d. Each cash account is associated with a maximum of one cash receipt. e. None of these is a description of the association.

Answer: A 25. (LO 7-5, LO 7-6) Refer to the association marked with the number 7 in the preceding diagram.

Assume that customers pay for all sales in full at the end of the month. Which of the following is the multiplicity that should be found next to the cash receipts class? a. 0..* b. *..* c. 0..1 d. 1..1 e. 1..* Answer: C 26. (LO 7-5, LO 7-6) Refer to the association marked with the number 7 in the preceding diagram.

Assume that customers could be involved in many sales during the month and they pay for those sales in full at the end of the month. Which of the following is the multiplicity that should be found next to the sales class? a. 0..* b. *..* c. 0..1 d. 1..1 e. 1..* Answer: E 27. (LO 7-4, LO 7-5) Refer to the association marked with the number 7 in the preceding diagram.

Assume that customers could be involved in many sales during the month and they pay in full at the end of the month. Which of the following is the best example of a business rule that constrains the association? a. Customers are allowed to pay for sales on credit. b. Customers must pay for sales at the time of the sale. c. Customers are prohibited from paying for sales on credit. d. Customers may delay payment for a sale upon approval by the manager. e. None of these is an example of an appropriate business rule for the association.

Answer: A 28. (LO 7-5, LO 7-6) Refer to the association marked with the number 5 in the preceding diagram. What is the best description of the type of inventory that this company sells? a. High-value items such as automobiles b. Customized products

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c. Items identified by UPC (bar codes) d. Tickets to concerts e. None of these correctly describes the type of inventory Answer: C 29. (LO 7-5, LO 7-6, LO 7-7) Assume you are implementing a database from the preceding diagram. How many tables would the database include? a. 6 b. 7 c. 5 d. 4 e. You can’t tell from the information provided Answer: B 30. (LO 7-5, LO 7-6, LO 7-7) Assume you are implementing a database from the preceding diagram.

Which of these is the best way to implement the relationship identified by the number 3? a. Post the primary key of customers in sales as a foreign key. b. Post the primary key of sales in customers as a foreign key. c. Create a linking table between sales and customers. d. All of these are acceptable. e. None of these is acceptable.

Answer: A 31. (LO 7-5, LO 7-6, LO 7-7) Assume you are implementing a database from the preceding diagram.

Which of these is the best way to implement the relationship identified by the number 6? a. Post the primary key of cash in cash receipts as a foreign key. b. Post the primary key of cash receipts in cash as a foreign key. c. Create a linking table between cash and cash receipts. d. All of these are acceptable. e. None of these is acceptable.

Answer: A 32. (LO 7-5, LO 7-6, LO 7-7) Assume you are implementing a database from the preceding diagram.

Which of these is the best way to implement the relationship identified by the number 5? a. Post the primary key of sales in inventory as a foreign key. b. Post the primary key of inventory in sales as a foreign key. c. Create a linking table between sales and inventory. d. All of these are acceptable. e. None of these is acceptable.

Answer: C

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Answers to Discussion Questions 1. Managers are concerned about many aspects of the sales and collection process. In particular, they likely would collect product/inventory information about sales trends, customer information about product preferences and cumulative sales activity, employee information about sales productivity per employee or location, as well as sales by month, quarter, and year.

2. The standard example of businesses that collect cash before recording sales are magazines, but there are also many others. For example, airlines sell tickets before customers travel. Regardless of when the cash is collected, the class model remains basically the same. However, internal controls (and the business rules that implement internal controls) could change. The focus no longer is on the collection from the customer, but rather on the delivery of goods or services according to the agreed contract.

3. A simple BPMN model for a fast food restaurant:

A similar model for a traditional restaurant (a more complex model could also include initial activities of seating the customer, taking beverage order, etc.):

A model that incorporates reservations (could also use a generic intermediate event to show the wait until the time of reservation):

4. A collaboration diagram would show two pools: customer and restaurant, and the message flows between them. For a traditional restaurant (as shown above), the order of the message flows would change and the customers would pay after receiving their food.

5. There is no difference between the UML class diagrams for fast food versus traditional restaurants. In both cases, there is a one-to-one relationship between the sales event and the corresponding cash receipt. The difference in payment timing is so minor that it would not normally be shown. To add reservations to the model, you could add a commitment (reservations) event that precedes the sales event. Note that both these models include the customer class, but most restaurants do not track specific customers.

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In the model with reservations, each reservation is related to a minimum of 0 and a maximum of 1 sale; each sale is related to a maximum of one reservation but some sales take place without prior reservations.

6. Collaboration sales model for Amazon (note that there could be a loop involving the first 4 activities until the customer decides to checkout, plus the delivery is most likely a sub-process, since it would be much more complicated than the other activities in the process):

In a traditional brick and mortar store, there are no formal search, report, and select activities.

The customer presents items and checks out. So, the traditional model would be much simpler.

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7. Business rules for the sales process could include 1) payment must be made, 2) acceptable payment options, 3) handling of large bills (e.g., Starbucks employees place $20 bills and larger immediately in their safe), plus 4) a variety of practices to prevent theft – both by customers and employees.

8. The classes and associations below would be used in accounts receivable queries. For a balanceforward calculation, the query would simply sum sales and collections since the previous statement balance; for an open-invoice calculation, the query would list the specific sales and the corresponding receipts for each of those sales.

Answers to Problems Problem 7-1: Beach Dude a. UML Class Diagram shown below:

The minimum multiplicities between BD Products and Clothing Line are set to 0 by default, since it can be assumed that product items and clothing lines are defined before the links are defined.

The minimum multiplicities between Employees and Customers are set to 0 since some employees may not work with customers, and some customers may not have an assigned salesperson, yet. The student may make alternate assumptions but should document those assumptions.

Connect Solution a.1 Diagram Location A. B.

Class Name # Clothing Lines Beach Dude Products

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C. D. E. F.

Cash Cash Receipts Not a class in this Beach Dude diagram Customers

Connect Solution a.2 Diagram Location 1 2 3 4 5 6 7 8 9 10 11 12 13 14 15 16

Multiplicity 0..1 0..* 1..* 1..1 0..* 1..* 0..1 0..* 0..* 0..* 1..1 0..* 1..1 0..1 Not an association for the Beach Dude diagram so no multiplicity required Not an association for the Beach Dude diagram so no multiplicity required

b. See related CH 07 Beach Dude database solution posted on the Instructor Library. c. One way to determine the accounts receivable balances for each customer: c.1) Use the Customers and Sales tables. Sum the Invoice Total from Sales and Group By Customer #. c.2) Use the Customers and Cash receipts tables. Sum the Cash receipt amount and Group

By Customer #. c.3) Use the two queries outlined above. Join them by Customer #. Compute the difference between the Sum of Sales Amount and the Sum of Cash receipt amount to determine each Customer’s accounts receivable.

Problem 7-2: Bob White Karate School a. Context diagram

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b. BPMN Diagram (basic diagram; students should be encouraged to think about potential additions to model activities related to renewals):

Connect Solution Diagram Location A. B. C. D. E. F. G.

Class Name # Review programs and packages available Record student’s selections Inclusive Gateway Assign to Instructor Provide equipment, uniforms, insignia, etc.

Inclusive Gateway End Event

c. UML Class Diagram:

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Since each sale is related to only one cash receipt, the sale and cash receipt events are collapsed into one in this solution. While they might also be modeled as separate Sale and Cash Receipt events with a 1:1 relationship, there are no attributes in the list for a Cash Receipt event in this case. This model shows separate inventory, programs, and packages classes, but it would be easy to combine those 3 classes into one class with some modification to the attributes.

Connect Solution Diagram Location

Class Name or Multiplicity

A. B.

Packages of Lessons Programs

C. D. 1 2 3 4

Inventory (uniforms, sparring gear, etc.)

Students 0..* 0..1 0..* 0..*

5 6 7 8 9 10

0..* 0..* 0..* 1..1 0..1 0..*

11

0..1

d. Bob White Karate School Tables Cash [Cash account # (PK), Cash account balance]

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Inventory [Inventory item # (PK), Inventory item description, Inventory item price. Inventory item quantity on hand (QOH)] Packages [Private lesson package # (K), Private lesson package description, Private lesson package price, Instructor Type (FK)] Programs [Program # (PK), Program description, Program price] Sales [Sale # (PK), Sale amount, Sale date, Sale paid (Y/N), Credit card number for this sale, Date sale paid, Student # (FK), Employee/Instructor # (FK)], Program # (FK)] Employees [Employee/instructor # (PK), Employee name, Employee rank, Instructor type (FK)] Students [Student # (PK), Student current rank, Student name, Student original enrollment date, Employee/Instructor# (FK)] Instructor Types [Instructor Type (PK), Quantity of instructors of this type] Sales-Inventory [Sale # + Inventory item # (PK), Quantity of this inventory item purchased on this sale] Sales-Packages [Sale# + Private lesson package # (PK)] Problem 7-3: Beach Rentals a. UML Class Diagram:

a. Connect only Diagram Location A B C

Class Name or Multiplicity Neighborhoods Houses Renters

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D 1 2 3 4 5 6 7 8 9 10 11 12

Cash Receipts 0..* 0..* 1..1 0..* 1..1 1..* 0..* 1..1 1..1 0..* 0..* 1..1

b. Beach Rentals Tables: Resources Houses [house street address (PK), house zip code, number of bedrooms, neighborhood name (FK)] Cash [bank account # (PK), bank name, bank account balance] Events Rental contract [rental contract # (PK), rental contract begin date, monthly rent, rental contract duration in months, rent discount for 12 month contract, damage fee, house street address (FK), agent employee# (FK), (primary) renter number (FK)] Cash receipts [cash receipt# (PK), cash receipt $ amount, cashier employee# (FK) , renter number (FK), bank account# (FK), rental contract# (FK)] Agents BR Agent [agent employee# (PK), agent name, agent real estate license status, YTD rental commissions] Renters [renter number# (PK), renter name, renter bank and routing numbers, agent employee# (FK)] Cashier [cashier employee# (PK), cashier bonding status, cashier name] Type Images Neighborhood [neighborhood name (PK), rental surcharge amount, agent employee # (FK), city name (FK)] City [city name (PK), number of houses this city] Linking tables (Secondary Renters) Renter-Contract [rental contract # + renter number (PK)]

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c. See related Microsoft Access Solution on the Connect Instructor Library.

Problem 7-4: Beach Cities Rentals (past version, Connect Only) PR 7-4 Part 1 Diagram Location 1 2 3 4 5 6 7 8 9 10 11 12

Class Name or Multiplicity 0..* Inventory categories Customer types 1..* 0..* 1..1 0..1 Rental tickets Delivery trucks 1..1 0..* 1..1

PR 7-4 Part 2 Resources , rental inventory description, rental inventory hourly charge,

Rental Inventory =

Rental inventory # (PK),

Delivery Trucks =

Inventory category # (FK) Delivery truck # (PK), delivery truck description, delivery truck charge, delivery truck acquired date Cash account # (PK), cash account balance

Cash = Events Contracts =

Rental Reservations =

Rental Tickets =

Cash Receipts =

Rental inventory acquired on date

Contract# (PK), contract date, contract end date, contract minimum dollar amount, contract standard premium, Customer # (FK), employee # (FK) , customer’s credit card Rental reservation # Rental reservation date for this rental (PK), reservation, Contract # (FK), Employee # (FK) customer # (FK), (PK), rental ticket date, rental start time, rental end time, delivery Y/N, rental reservation # Rental ticket # (FK), Customer # (FK), employee # (FK), delivery Rental inventory # (FK), truck # (FK) Cash receipt # (PK), cash receipt date, cash Cash account # receipt amount,

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(FK), customer # (FK), employee # (FK) Agents Customers = Employees = Type Images

Customer # (PK), Customer type customer name, Employee # (PK), employee name,

(FK), YTD rentals by this customer

Inventory Categories =

Inventory category # (PK), inventory category description,

Customer Types = Linking Tables Rental ReservationInventory Category = Rental TicketsCash Receipts = rental ticket # + cash receipt #

Customer type (PK), number of customers of this type

Rental reservation #

Number of rental inventory items available in this category

+ inventory category # (PK)

(PK)

Chapter 7 Comprehensive Exercise - BAER BELLY BIKINIS’ SALES TO RETAILERS – Solution (Connect Only) 1. Develop the BPMN diagram for BBB’s sales process. a. The purpose of the model is to describe BBB’s current sales process in preparation for business expansion. b. Context diagram.

c. Basic process flows.

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The basic steps in the process are record order, produce products, ship products, and collect payments. The produce products can be modeled as a collapsed subprocess since it is more complicated than a single task. The basic process flow is allocated to lanes within the BBB pool to reflect the different departments involved in the sales process.

d. Student responses will vary with exceptions, errors, etc.

2. Prepare a UML Class Diagram of BBB’s sales process.

There are two primary agents: Retailer Customers and BBB Employees (you could also consider the Sales Representatives as agents). There are two events: Retailer Orders/Sales and Cash Receipts.

There are two resources: BBB Finished Goods Inventory and Cash. There are two type images: Fabric Colors and Inventory Types. There are two associations between Employees (Emp) and Retailer Orders/Sales indicating employee roles.

3. Use the UML Class Diagram and the list of attributes to create an Access database from the Excel data.

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4. Prepare queries. a. BBB second quarter sales revenue before shipping: $63,528 b. BBB second quarter sales revenue including shipping: $68,831 c. BBB accounts receivable at end of second quarter: $15,747.50 d. See solution database posted on the Connect Instructor Library for examples of queries.

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Chapter 8: Purchases and Payments Business Process Multiple Choice Questions 1. (LO 8-1) Which of the following is not an activity in the purchases and payments process? a. Request prices b. Receive items c. Pay for items d. Bill customers e. All are activities in the purchases and payments process Answer: D 2. (LO 8-1) Which activity results in an increase to accounts payable? a. Request prices b. Place purchase order c. Receive items d. Return rejected items e. Send payment Answer: C 3. (LO 8-2, LO 8-3) Choreography describes which of the following? a. Sequence of activities in a process b. Message flows between pools c. Process gateways d. Both (a) and (c) e. Both (b) and (c) Answer: B 4. (LO 8-4) Which of the following is not an example of an application control? a. Range checks ensure that purchases are limited to valid amounts. b. Employee making disbursements cannot modify purchase orders. c. System requires passwords. d. System creates audit trail documenting all changes. e. All are examples of application controls.

Answer: C 5. (LO 8-3) Which of the following describes the purpose of an intermediate timer event? a. Indicates receipt of a message b. Indicates branching c. Indicates delay d. Both (a) and (c) e. Both (b) and (c) Answer: C

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6. (LO 8-5) Which of the following is a resource in a purchases and payments structure model? a. Employee labor b. Receipt of goods c. Paying by check d. Inventory e. Supplier Answer: D 7. (LO 8-5) Which of the following is an agent in a purchases and payments structure model? a. Employee labor b. Receipt of goods c. Cash disbursement d. Inventory e. Supplier Answer: E 8. (LO 8-5) Which of the following is an event in a purchases and payments structure model? a. Cash b. Inventory c. Employee d. Cash disbursement e. None of these options Answer: D 9. (LO 8-5) Which of the following events would indicate recording of a purchase in the AIS? a. Issue Purchase Order b. Receive Goods c. Make Payment d. Transfer Inventory e. None of these options Answer: B 10. (LO 8-5) In a typical relational database supporting the purchase and payment process, which of the following tables is likely to have the most foreign keys? a. Employee table b. Supplier table c. Inventory table d. Cash disbursement table e. Cash table Answer: D Use the following diagram to answer Questions 11 through 27.

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11. (LO 8-5) Refer to the association marked with the number 1 in the preceding diagram. Which of the following is the best description of the association? a. Each employee participates in a minimum of zero purchases. b. Each employee participates in at least one purchase. c. Each employee participates in a maximum of one purchase. d. Only employees in the shipping and receiving department receive purchases. e. None of these are a description of the association.

Answer: A 12. (LO 8-5) Refer to the association marked with the number 1 in the preceding diagram. Which of the following is the best description of the association? a. Each purchase is received by multiple employees. b. Each purchase is received by one employee. c. Each purchase can be received by a maximum of many employees. d. Each purchase can be received by a minimum of zero employees. e. None of these are a description of the association.

Answer: B 13. (LO 8-5) Refer to the association marked with the number 2 in the preceding diagram. Which of the following is the best description of the association? a. Each vendor always receives multiple cash disbursements.

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b. Each vendor receives a minimum of zero cash disbursements. c. Each vendor receives a maximum of one cash disbursement. d. Each vendor is paid by check. e. None of these are a description of the association.

Answer: B 14. (LO 8-5) Refer to the association marked with the number 2 in the preceding diagram. Which of the following is the best description of the association? a. Each cash disbursement is made to many vendors. b. A cash disbursement can be made to zero vendors c. Each cash disbursement is made to a maximum of one vendor. d. Each cash disbursement is made to a minimum of zero vendors. e. None of these are a description of the association.

Answer: C 15. (LO 8-5) Refer to the association marked with the number 3 in the preceding diagram. Which of the following is the best description of the association? a. Vendors may receive many purchase orders. b. Vendors must receive at least one purchase order. c. Vendors receive a minimum of one purchase order. d. Vendors receive a maximum of one purchase order. e. None of these are a description of the association.

Answer: A 16. (LO 8-5) Refer to the association marked with the number 3 in the preceding diagram. Which of the following is the best description of the association? a. Each purchase order is issued to many vendors. b. Each purchase order is issued to zero vendors. c. Each purchase order is issued to a maximum of many vendors. d. Each purchase order is issued to a minimum of one vendor. e. None of these are a description of the association.

Answer: D 17. (LO 8-5) Refer to the association marked with the number 4 in the preceding diagram. Which of the following is the best description of the association? a. Each purchase order specifies a type of inventory. b. Each purchase order is associated with a maximum of many inventory items. c. Each purchase order is associated with a minimum of zero inventory items. d. Some purchase orders do not list inventory items. e. None of these are a description of the association.

Answer: B 18. (LO 8-5) Refer to the association marked with the number 4 in the preceding diagram. Which of the following is the best description of the association?

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a. Each inventory item is ordered one time. b. Each inventory item is ordered zero times. c. Each inventory item is ordered on a minimum of zero purchase orders. d. Each inventory item is ordered on a minimum of one purchase order. e. None of these are a description of the association.

Answer: C 19. (LO 8-5, LO 8-6) Refer to the association marked with the number 4 in the preceding diagram. Which of the following is the best way to implement the association in a relational database? a. Post the primary key of purchase orders as a foreign key in inventory. b. Post the primary key of inventory in purchase orders as a foreign key. c. Create a linking table with a concatenated primary key. d. Record the date of the purchase order in the inventory table. e. None of these are a description of the correct implementation.

Answer: C 20. (LO 8-5) Refer to the association marked with the number 5 in the preceding diagram. Which of the following is the best description of the association? a. Each inventory item is associated with a minimum of one purchase. b. Each inventory item is purchased one time. c. Each inventory item is purchased zero times. d. Each inventory item is associated with a minimum of zero purchases. e. None of these are a description of the association.

Answer: D 21. (LO 8-5, LO 8-6) Refer to the association marked with the number 5 in the preceding diagram. Which of the following is the best description of the association? a. Purchases increase the quantity-on-hand of inventory items. b. Each purchase includes a minimum of zero inventory items. c. Each purchase includes a minimum of two inventory items. d. A purchase may be associated with a maximum of one inventory item. e. None of these are a description of the association.

Answer: A 22. (LO 8-5) Refer to the association marked with the number 5 in the preceding diagram. Which of the following is the best way to implement the association in a relational database? a. Create a linking table with a concatenated primary key. b. Post the primary key of purchases as a foreign key in inventory. c. Post the primary key of inventory in purchases as a foreign key. d. Post the purchases primary key in inventory and the inventory primary key in purchases. e. None of these are a description of the correct implementation.

Answer: A

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23. (LO 8-5) Refer to the association marked with the number 6 in the preceding diagram. Which of the following is the best description of the association? a. Some employees are also vendor types. b. Employees only deal with authorized vendor types. c. Some employees are assigned to work with specific vendor types. d. Some vendor types are not issued purchase orders. e. None of these are a description of the association.

Answer: C 24. (LO 8-5) Refer to the association marked with the number 6 in the preceding diagram. Which of the following is the best way to implement the association in a relational database? a. Post the primary key of vendor types in employees as a foreign key. b. Post the primary key of employees as a foreign key in vendor types. c. Create a linking table with a concatenated primary key. d. The association does not require foreign keys. e. None of these are a description of the correct implementation.

Answer: B 25. (LO 8-5) Refer to the association marked with the number 7 in the preceding diagram. Which of the following is the best description of the association? a. Some vendors are not in a vendor type. b. Employees do not deal with vendors that are not in a vendor type. c. Vendors are classified by type. d. Each vendor type must contain at least one vendor. e. None of these are a description of the association.

Answer: C 26. (LO 8-5) Assume that you are drawing an activity (BPMN) diagram of the process. Which of the following is not true about your diagram? a. The issue purchase order task occurs before the receive purchases task. b. The purchases task could be modeled as a looping task to show multiple purchases following one purchase order. c. The process starts when a customer places a sales order. d. The process ends when the vendor is paid. e. All of these are true about the diagram.

Answer: C 27. (LO 8-5) Assume that you are drawing a collaboration activity (BPMN) diagram of the process. Which of the following would not be message flows on your diagram? a. Purchase order b. Receipt of the purchase c. Check/cash disbursement d. Inventory update e. All of these are message flows for the diagram.

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Answer: D Solutions to discussion questions 1. Business rules for Place Order, Receive Items, Assess Items, Place in Inventory, and Pay Supplier process steps are clearly segregation of duties rules. These rules are generally prohibited rules, since they describe what cannot take place in terms of separation of duties. The Place Order rule “Manager approval required for orders > $5,000” is a mandatory rule.

2. Wal-Mart’s vendor managed inventory affects their purchases and payments process by delaying purchase until the product is delivered to the store. This means in many cases that the products will be sold before Wal-Mart has to pay their vendor. In terms of process design, it means that Wal-Mart probably tracks inventory in the distribution center before it is purchased.

Thus, there must be some receiving event that precedes the purchase event.

3. Here is one possible model of the textbook purchase process:

4. Exhibit 8.5 shows a business that issues purchase orders and then receives goods. This would apply many types of organizations, including retailers, government entities, wholesalers, etc.

Businesses might use alternate models if they use a credit card and pick up their items when purchasing. Other businesses may purchase directly from vendors without purchase orders, such as the local convenience store getting deliveries from the Coca-Cola distributor.

5. Other possible type images for Exhibit 8.7 include a Purchase Types class to help define different types of purchases, an Employee Type image to assure that trained buyers are doing the purchasing.

6. The use of contracts would change the basic purchase activity flow in Exhibit 8.2 and 8.3. The first step would then be the contracting process itself, which could be modeled as a sub-process.

Other steps would remain the same. The UML class diagram would then include another commitment event to document the contracts, and then the Purchase Order event would link to the Contracts event.

For example, the BPMN could look like this. Alternately, there could be a task to check whether a contract exists. If yes, then branch directly to Place Purchase Order. If no, then branch to Contract for Items.

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The basic UML diagram would add a contract event as follows. This diagram assumes that each product is possibly related to multiple contracts and each contract is related to multiple products.

7. When two processes are integrated, such as the sales and purchase process, the resources and internal agents are typically shared across processes. Inventory is both purchased and sold.

Employees participate in both sales and purchases. The external agent and the events are relevant to one process only. Customers only participate in Sales events, and Suppliers only participate in Purchases events.

8. An accounts payable query would include the Suppliers agent (to whom the amounts are payable) and purchases and cash disbursements event. The logic is: for each supplier, sum the 8

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purchases. For each supplier, sum the cash disbursements. For each supplier, calculate the difference between the sum of purchases and the sum of cash disbursements.

Solutions to problems 1. Tablet Store Purchases a. UML Class Diagram

b. See associated Access database c. Sum purchases for each manufacturer. Sum cash disbursements to each manufacturer.

Subtract the sum of cash disbursements from the sum of purchases. Since the Purchases class combines Purchase Orders and Purchases, ensure that the sum of purchases is constrained to show only those purchases received.

2. Quick Jet, Inc. Purchases. a. Quick Jet context:

b. Basic BPMN activity model of Quick Jet Purchases, not including contract and lease negotiations:

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c. UML Class diagram:

C/D = cash disbursements Misc. Supplies = miscellaneous supplies d. Quick Jet tables listing Resources Cash [Cash account # (PK), Cash account balance] Planes [Plane # (PK), Plane miles since last maintenance, Plane Type (FK)]

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Events Plane Leases [Lease # (PK), Lease date, Lease monthly payment amount, Vendor # (FK), Employee # (FK), Plane# (FK)] Plane Maintenance Contract [Plane maintenance contract # (PK), Plane maintenance contract date, Plane maintenance contract duration] Plane Maintenance Orders [Plane maintenance order # (PK), Plane maintenance order date, Plane maintenance contract # (FK), Plane # (FK), Plane maintenance item performed on this order for this plane, Employee # (FK), Vendor #(FK), Check # (FK)] Misc. Supplies Purchases [Misc. supply purchase # (PK), Misc. supply purchase date, Plane # (FK), Employee # (FK), Vendor # (FK), Check # (FK)] Cash Disbursements [Check # (PK), Check amount, Check date, Date this misc. purchase billed by credit card company, Employee # (FK), Vendor # (FK), Account # (FK)] Agents Employees [Employee # (PK), Employee hire date, Employee Name, Employee type (FK)] Vendors [Vendor # (PK), Vendor Name, Vendor type (FK)] Type Images Plane Types [Plane type (PK), Plane type passenger capacity, Plane type range in miles] Employee Type [Employee Type (PK), Employee type description] Vendor Type [Vendor Type (PK), Number of vendors of this type, Vendor type description, Year-to-date (YTD) purchases from this vendor type] Linking Tables Leases-Planes [Lease # + Plane # (PK)] Leases-Cash Disbursements [Lease # + Check # (PK)] 3. BRMC Management Company a. BRMC UML Class Diagram

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b. BRMC Table Listing Resources 1. Apartment Complex [apartment_complex_address [PK], date constructed, total square footage, employee#[FK] (agent/manager)] 2. Apartments [complex address, apartment# [PK], apartment square footage, count of rooms in apartment, apartment category [FK]] Events 3. Maintenance Job [maintenance job# [PK], projected completion date of job, actual completion date of job, actual cost of this job, job type [FK], employee # [FK], contractor # [FK], building address [FK], apt# [FK]] 4. Rental Contract [rental contract# [PK], actual monthly rent, rental contract date, employee # [FK], complex address + apt # [FK]] Agents 5. Contractor [contractor # [PK], contractor name, contractor quality rating, phone] 6. Agent/Manager [employee# [PK], agent name, agent monthly salary] 7. Tenant [tenant ID# [PK], tenant name, tenant credit rating] Type Images 8. Job Type [job type [PK], standard cost for this job type, YTD $ spent on this job type] 9. Contractor Type [contractor type [PK], count of this type of contractor] 10. Apartment Category [apartment category# [PK], number of available apartments in this category] Linking Tables 11. Tenants – Rental Contract [tenant# [PK], rental contract#] 12

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12. Job Type – Contractor Type [job type [PK], contractor type] 13. Contractor Type – Contractor [contractor type [PK], contractor #] 14. Apartment Category – Building [apt category# [PK], complex address, standard monthly rent] 15. Job Type – Complex [complex address [PK], job type, YTD $ costs]

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Chapter 9: Conversion Business Process Multiple Choice 1. (LO 9-1) Which of the following is not an activity in the conversion process? a. Authorize production b. Issue raw material c. Perform work d. Transfer finished goods to customers e. All of these are activities in the conversion process.

Answer: D 2. (LO 9-1) Which of the following activities results in work-in-process moving to finished goods inventory? a. Authorize production b. Inspect work c. Complete production d. Issue raw material e. None of these options Answer: C 3. (LO 9-2, LO 9-3) Which of the following describes the purpose of a lane within a pool in BPMN? a. Indicates the start of the process b. Indicates the end of the process c. Identifies different activity flow options d. Distinguishes specific responsibilities for performing different tasks e. None of these options Answer: D 4. (LO 9-2, LO 9-3) Which of the following is not a purpose of using lanes to describe the conversion process? a. Document the sequence of activities in the process. b. Expose potential problems in the handoff between organizational units. c. Show important decision points, and identify responsibility for those decisions. d. Establish internal control activities, such as segregation of duties. e. All of these are purposes of lanes.

Answer: A 5. (LO 9-4) Which of the following is a business rule implementing access control for the conversion process? a. Employee authorizing production cannot modify inventory records. b. System must provide control numbers. c. System must default date to current date. d. System must create audit trail whenever records are changed. e. None of these options are access controls.

Answer: A 6. (LO 9-5) Consider a UML class diagram of the conversion process that uses the REA framework. Which of the following events begins a typical conversion process? Assign employees to departments. a. Authorize production.

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b. Issue raw material into work-in-process. c. Sell finished goods. d. None of these options.

Answer: B 7. (LO 9-5) Review Exhibit 9.8. Which of the following describes the purpose of the Labor Operations event? a. Add the direct labor costs to work-in-process inventory. b. Control the specific labor activities. c. Ensure that labor is performed. d. Identify production employees. e. None of these options.

Answer: A 8. (LO 9-5) Review Exhibit 9.8. Which of the following is a correct posting of a foreign key to implement the model in a relational database? a. Labor Operations primary key becomes a foreign key in Production Authorization. b. Products primary key becomes a foreign key in Bill of Material. c. Product Categories primary key becomes a foreign key in Employees. d. Products primary key becomes a foreign key in Product Categories. e. All of these options are correct.

Answer: B 9. (LO 9-1, LO 9-5) Review Exhibit 9.8. Which of the following describes the purpose of the Bill of Material class? a. Record the invoices from suppliers for materials purchased. b. Record the planned raw material contents of each finished good. c. Record the authorization of production. d. Describe the labor required for each finished good. e. None of these options Answer: B 10. (LO 9-5) Compare Exhibit 9.9 with Exhibit 9.10. Which of the following describes the differences between those two figures? a. Exhibit 9.10 includes tblLabor_Operations_Employees to implement the many-to-many relationship between tblEmployees and tblLabor_Operations. b. Exhibit 9.10 includes tblMaterial_Issue_Material to implement the many-to-many relationship between tblMaterial_Issue and tblMaterials. c. Exhibit 9.9 includes the minimum multiplicities to specify data integrity requirements. d. Exhibit 9.10 only shows maximum cardinalities between linked tables. e. All of these options are differences between the two figures.

Answer: E

Refer to the following integrated diagram, showing part of the purchases and sales processes linked to the conversion process, for Questions 11 through 25.

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11. (LO 9-5) Refer to the association marked with the number 1 in the preceding diagram. Which of the following is the best description of the association? a. Each supplier participates in a minimum of zero purchases. b. Each supplier participates in at least one purchase. c. Each supplier participates in a maximum of one purchase. d. Supplier is the internal agent in the purchase process. e. None of these is a description of the association.

Answer: A 12. (LO 9-5) Refer to the association marked with the number 1 in the preceding diagram. Which of the following is the best description of the association? a. Each purchase involves one supplier. b. Each purchase involves multiple suppliers. c. Each purchase involves a minimum of zero suppliers. d. Some purchases are made after a production authorization. e. None of these is a description of the association.

Answer: A 13. (LO 9-5) Refer to the association marked with the number 2 in the preceding diagram. Which of the following is the best description of the purpose of the association? a. The association links products to the corresponding bill of materials. b. The association links purchases to raw materials. c. The association links raw materials to the bill of materials. d. All of these descriptions are purposes of the association.

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e. None of these is a description of the purpose of the association.

Answer: C 14. (LO 9-5) Refer to the association marked with the number 2 in the preceding diagram. Which of the following is the best description of the association? a. Each bill of materials entry specifies one raw material. b. Each bill of materials entry specifies multiple raw materials. c. Each bill of materials is related to a minimum of zero raw materials. d. Each bill of materials is related to a maximum of many raw materials. e. None of these is a description of the association.

Answer: A 15. (LO 9-5) Refer to the association marked with the number 2 in the preceding diagram. Which of the following is the best description of the association? a. Each raw material is related to a minimum of zero bills of materials. b. Each raw material is related to a maximum of one bill of materials. c. A raw material item could be related to multiple bill of materials entries. d. A raw material item could be related to no bill of materials. e. None of these is a description of the association.

Answer: C 16. (LO 9-5) Refer to the association marked with the number 2 in the preceding diagram. Which of the following is the best way to implement the association in a relational database? a. Post the primary key of bill of materials as a foreign key in raw materials. b. Post the primary key of raw materials as a foreign key in bill of materials. c. Create a linking table between raw materials and bill of materials. d. The location of the foreign key is optional. e. None of these is the best way to implement the relationship.

Answer: B 17. (LO 9-5) Refer to the association marked with the number 3 in the preceding diagram. Which of the following is the best description of the purpose of the association? a. Links actual material costs to each product produced. b. Links actual labor costs to each product produced. c. Specifies planned material costs for each product. d. Specifies planned labor costs for each product. e. None of these is a description of the purpose of the association.

Answer: C 18. (LO 9-5) Refer to the association marked with the number 3 in the preceding diagram. Which of the following is the best description of the association? a. Each bill of materials is related to a minimum of zero products. b. Each bill of materials is related to a minimum of one product. c. Each bill of materials is related to a maximum of many products. d. Each bill of materials is not necessarily related to a product. e. None of these is a description of the association.

Answer: B

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19. (LO 9-5) Refer to the association marked with the number 3 in the preceding diagram. Which of the following is the best way to implement the association in a relational database? a. Post the primary key of bill of materials as a foreign key in products. b. Post the primary key of products as a foreign key in bill of materials. c. Create a linking table between products and bill of materials. d. The location of the foreign key is optional. e. None of these is the best way to implement the relationship.

Answer: B 20. (LO 9-5) Refer to the association marked with the number 4 in the preceding diagram. Which of the following is the best description of the purpose of the association? a. Shows that the conversion and purchases process are integrated via products. b. Shows that the conversion process is triggered by an order for a product. c. Links products produced by the conversion process to orders (by customers). d. Links products to subsequent cash receipts in the sales process. e. None of these is a description of the purpose of the association.

Answer: C 21. (LO 9-5) Refer to the association marked with the number 4 in the preceding diagram. Which of the following is the best description of the association? a. Each product is related to only one order. b. Each product can be related to many orders. c. Each product is related to a minimum of one order. d. Each product is related to a maximum of one order. e. None of these is a description of the association.

Answer: B 22. (LO 9-5) Refer to the association marked with the number 5 in the preceding diagram. Which of the following is the best way to implement the association in a relational database? a. Post the primary key of Employees as a foreign key in labor operations. b. Post the primary key of labor operations as a foreign key in Employees. c. Create a linking table between Employees and labor operations. d. The location of the foreign key is optional. e. None of these is the best way to implement the relationship.

Answer: C 23. (LO 9-5) Refer to the association marked with the number 5 in the preceding diagram. Which of the following is the best description of the association? a. Each labor operation is related to only one employee. b. Each labor operation is related to a maximum of many employees. c. Labor operations are related to a minimum of zero employee. d. Labor operations are related to a maximum of one employee. e. None of these is a description of the association.

Answer: B 24. (LO 9-5) Refer to the association marked with the number 6 in the preceding diagram. Which of the following is the best description of the purpose of the association? a. Authorizes the issue of raw materials.

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b. Controls the transfer of raw materials to work-in-process. c. Relates specific raw material issues to the controlling authorization. d. All of the above describe the purpose of the association. e. None of these describes the purpose of the association.

Answer: D 25. (LO 9-5) Refer to the association marked with the number 6 in the preceding diagram. Which of the following is the best description of the association? a. Each production authorization is related to a minimum of zero material issues. b. Each production authorization is related to a minimum of one material issue. c. Each production authorization is related to a maximum of one material issue. d. Each production authorization is related to a maximum of zero material issues. e. None of these is a description of the association.

Answer: A

Answers to Discussion Questions 1. There are several reasons that accountants should be concerned with the development of bills of material. Students should refer to Exhibit 4.1 in Chapter 4 that shows the roles of the accounting/finance function in business. In particular, the student should note the business management support roles, such as planning, budgeting and forecasting, cost management, and supply chain management. Additionally, in the performance measurement and management role, accountants need to understand the content of bills of material so they can prepare appropriate variance reports for management.

2. There are many types of businesses that use conversion processes to convert raw material into finished goods. For example, restaurants, car repair services, pharmaceutical companies, computer manufacturers, automobile manufacturers, wineries, breweries, gasoline refineries, etc., use variations of the conversion process. While all use raw material, labor, and overhead in the conversion process, there are some differences in information structure as well as the sequence of activities. Some processes follow a series of steps in which both labor and raw material are used; other processes introduce all the raw materials in the beginning and then apply labor after the raw material is available. Of course, organizations that use activity-based costing have somewhat different information structures than organizations using more basic allocation schemes.

3. The purchases and payments process would link to the conversion process through the raw material resource, since purchases increase the quantity of raw material on hand. The conversion process would link to the sales and cash receipts process through the finished goods inventory resource, since the conversion process increases and the sales process decreases finished goods quantities on hand. All three processes also share internal agents, employees.

The following UML diagram provides a simple example (without multiplicities). The resources, cash, raw materials inventory, finished goods inventory, are shared across processes. The Employees agent is related to every event, so it is also shared across processes. The two events and external agents are unique to processes, so the Suppliers agent and the Cash Disbursement and Purchase events are specific to the purchases process. The Raw Material Issue, Production

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Authorization, and Labor Operations events are specific to the conversion process. The Sales and Cash Receipts events and the Customer agent are specific to the sales process.

4. Indirect labor is part of overhead costs typically assigned in terms of either direct labor hours or direct labor dollars. The actual indirect labor costs would be recorded through the payroll process.

5. To implement activity-based costing, the organization needs to record usage of the cost driver for each activity. Thus, Exhibit 9.8 would have to include 3 additional events to record that information.

6. The integrated model, simplified, is shown below:

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7. Answers will vary. For example, the first rule for the Authorize Production step is obligatory; the other rules are prohibited. The first rule could be restated as a prohibited rule: A nonsupervisory partner must not authorize production > $5,000.

8. Comparing exhibits 9.7 and 7.20, one similarity is that both include resources, events, and agents. However, exhibit 9.7 has no external agent and no event affecting cash. The duality is between the authorization event and the related events recording material issue and labor operations. The main reason is that the conversion process describes changes in internal resources, raw material and finished goods (products) inventories, and the allocations of associated costs, but it does not show interactions with external parties.

Answers to Problems PR 9-1: The Rubber Duck Brewing Company Case.

PR 9-1 a. Rubber Duck brewing context.

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PR 9-1 b. Basic BPMN Diagram

PR 9-1 c. UML Class Diagram for Rubber Duck Brewing Company.

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PR 9-1 d. Table Listing for Rubber Duck Brewery.

Resources 1. Beer Ingredients [Ingredient number [ingred #] (PK), ingredient description, ingredient quantity-onhand [QOH]] 2. Brewed beer [Brewed beer name (PK), brewed beer description, brewed beer quantity on hand [QOH], Planned aging time] 3. Brewing equipment [Equipment item number [equip#] (PK), equipment item description] 4. Copper tanks [Copper tank number [tank#] (PK), copper tank capacity in gallons [gals], actual aging time, quantity of beer in this tank, brewed beer name(FK)] Events 5. Brew steps [Brew step number [brew step#] (PK), brew step description, recipe step # (FK), brew ord # (FK)] 6. Brew order [Brew order number [brew ord#] (PK), brew order date, brew quantity in gallons, [supervisor] emp # (FK), brewed beer name(FK)] Agents 7. Employee [Employee number [emp#] (PK), employee name, employee type (FK)] Types 8. Brewing recipe [Brewing recipe step number [recipe step #] (PK), brewing recipe step description, brewed beer name (FK), employee type (FK)] 9. Employee type [Employee type (PK), employee type description, number of employees of this type]

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Linking tables 10. Beer ingredients-recipe steps [Ingredient number [ingred #] + brewing recipe step number [recipe step #] (PK), standard quantity of this ingredient used in this recipe step] 11. Beer ingredients-brew steps [Ingredient number [ingred #] + brew step number [brew step#](PK), actual quantity of this ingredient used in this brew step] 12. Equipment-brew step [Equipment item # + brew step # (PK), actual time] 13. Equipment-recipe step [Equipment item # + Recipe step # (PK), planned time] 14. Employee-brew steps [Employee number [emp#] + brew step number [brew step#] (PK), time spent by this employee on this brew step] 15. Employee-Equipment [Employee number + Equipment number (PK), Date this employee qualified to operate this equipment] PR 9-1 e. Relational database in Access.

See the Instructor Library for the Access solution files. Screengrab shown below.

PR 9-2: Penny’s Pastries Case PR 9-2 a. Penny’s Pastries baking process context.

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PR 9-2 b. BPMN Diagram example for Penny’s Pastries.

PR 9-2 c. UML Class Diagram for Penny’s Pastries.

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PR 9-2 d. Table listing for Penny’s Pastries.

Resources 1. equipment [equipment# (PK), equipment description, equipment manufacturer] 2. finished product [finished product# (PK), finished product description, finished product QOH, finished product price, finished product number of calories] 3. ingredients [ingredient# (PK), ingredient description, ingredient cost, ingredient QOH, ingredient unit of issue] Events 4. Baking order [baking order# (PK), baking order date, emp#(FK)] 5. Baking step [baking step# (PK), total labor hours for this baking step, batch#(FK), recipe step#(FK)] 6. batch [batch# (PK), batch finish time, batch start time, qty of this baked product prepared in this batch, baking order#(FK), baked product#(FK), emp#(FK)] 7. issue [issue# (PK), issue date/time, emp#(FK), baking order#(FK)] Agents 8. employee [emp# (PK), employee name, employee pay rate] Type images 9. ingredient list [ingredient list# (PK), ingredient list description, finished product#(FK)]

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10. recipe step [recipe step # (PK), recipe step description, standard labor hours for this recipe step, finished product#(FK)] Linking tables 11. issue – ingredient [issue# + ingredient# (PK), qty of this ingredient issued on this issue#] 12. ingredient list – ingredient [ingredient list# + ingredient# (PK), qty of this ingredient required for this finished product] 13. recipe step – equipment [recipe step# + equipment# (PK), standard baking time for this recipe step with this oven] 14. baking step – equipment [baking step# + equipment# (PK), actual baking time for this baking step and this oven] 15. baking step – employee [baking step# + emp# (PK), employee hours] 16. baking order – finished product [baking order# + finished product# (PK), qty of this baked product ordered by this daily baking order] PR 9-3 (Connect Only) Ralph Wilson started his machine shop in Santa Ana, CA PR 9-3 Part 1 UML Diagram Questions 1. What is the best class name for class A? 2. What is the best class name for class B? 3. What is the best class name for class C? 4. What is the best class name for class D? 5. What is the best class name for class E? 6. What is the best class name for class F? 7. What is the best class name for class G? 8. What is the best multiplicity to replace the number 1 multiplicity?

9. What is the best multiplicity to replace the number 2 multiplicity?

10.What is the best multiplicity to replace the number 3 multiplicity?

11.What is the best multiplicity to replace the number 4 multiplicity?

12.What is the best multiplicity to replace the number 5 multiplicity?

13.What is the best multiplicity to replace the number 6 multiplicity?

14.What is the best multiplicity to replace the number 7 multiplicity?

15.What is the best multiplicity to replace the number 8 multiplicity?

16.What is the best multiplicity to replace the number 9 multiplicity?

17.What is the best multiplicity to replace the number 10 multiplicity?

14

Answer Bins Materials Materials issue Bill of Material None of these Racks Labor operations 0..1 1..* 0..* 1..* 1..* 0..* 1..1 0..* 0..* 0..*

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18.What is the best multiplicity to replace the number 11 multiplicity?

19.What is the best multiplicity to replace the number 12 multiplicity?

20.What is the best multiplicity to replace the number 13 multiplicity?

21.What is the best multiplicity to replace the number 14 multiplicity?

22.What is the best multiplicity to replace the number 15 multiplicity?

23.What is the best multiplicity to replace the number 16 multiplicity?

24.What is the best multiplicity to replace the number 17 multiplicity?

25.What is the best multiplicity to replace the number 18 multiplicity?

1..1 0..* 0..* 1..* 0..* 1..1 0..* 0..*

PR 9-3 Part 2 Resources Bins

Bin # (PK), Bin location,

Racks

Rack # (PK), Rack location, QOH of this finished good on this rack,

Materials

Material # (PK),

Finished products

Finished product # (PK), finished product price, finished product QOH, finished product standard cost

Material #

Material cost

(FK) Finished product #

(FK)

, Material description, Material QOH, Material special handling instructions

Events Materials issue

Material issue # (PK), Material issue date, Employee # (FK),

Production order

Production order # (PK), Production order date,

Production order #

(FK)

Quantity of this finished product ordered on this production order

, Employee # (FK), Finished product # (FK) Labor operations

Labor operations control # (PK), Labor operations date, , Labor plan control # (FK),

Agents 15

Production order #

Total labor hours for this labor operation step (FK)

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Employees

Employee # (PK), Employee name, Employee wage rate,

Employee type

(FK)

Type Images Employee types

(PK), Number of employees qualified for this employee type, Number of hours to qualify for this

Employee type employee type

Bill of materials

Bill of material # (PK), Bill of material created date,

Labor plan

Labor plan control #

Finished product #

(FK)

(PK), Labor plan step description, Standard labor hours, Standard labor rate,

Finished product # (FK), Employee type (FK) Linking Tables

Bill of Materials – Materials

Bill of material # + Material # (PK),

Materials issue – Materials

Material issue # + Material # (PK),

Labor operations – Employees

Quantity of this material issued on this material issue (PK), Start time for this Labor operations control None of these employee on this labor #+ options operation step, End time for this employee on this labor operation step

PR 9-3 Part 3 Required 1 Diagram Location A. B. C. D. E. F.

Quantity of this material planned for this bill of material

Task Name Sign Production Order Prepare Material Issue List Move Materials from Bins Perform Labor Operations Update Production Order Place Finished Products on Racks

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2a. Which of the following would be the best way to show that the production order was cancelled?

Place an END event after task A. Include an exclusive gateway after task A where one sequence flow goes directly to the END event.

Show a message flow coming into the WPP pool from a customer pool.

Add an intermediate boundary cancellation event to task A. 2b. Which of the following would be the best way to show that labor operations repeated until the products were completed?

Annotate the diagram to describe the repeating task.

Add an intermediate boundary event to task D. Change the task symbol to a looping activity symbol.

Add a gateway that redirects the sequence flow back to the beginning.

2c. Why does the diagram show a plus sign in the branching gateway?

To show that the two remaining tasks are added to the earlier tasks.

To show that the process flow branches both ways following the gateway.

To show that the process flow branches both ways before the gateway.

To show that the sequence flow is returning to lanes used earlier for additional activity.

2d. What is the best way to depict the document that the supervisor prepares in task A? Add a data object for the production order.

Add a message flow to link task A to a separate accounting pool.

The document is already implied by the name of task A. Add a new lane in the pool to show the documents created or used in the process.

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Chapter 10 see Integrated Project Instructor material

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Chapter 11 – Accounting Information Systems and Internal Controls Multiple Choice Questions 1. (LO 11-1) Based on SOX, which of the following sections is about assessing internal controls? a. 302 b. 401 c. 404 d. 906 Answer: C 2. (LO 11-1) SOX requires companies to use COSO or COSO ERM as the framework in evaluating internal controls. a. True b. False Answer: B 3. (LO 11-1) Controls that are designed to prevent, detect, or correct errors in transactions as they are processed through a specific subsystem are referred to as a. general controls. b. application controls. c. processing controls. d. Both b and c are correct. e. None of these options are correct.

Answer: B 4. (LO 11-2) Which of the following is not a component in the COSO 2013 internal control framework? a. Effective operations b. Control activities c. Risk assessment d. Control environment e. Monitoring Answer: A 5. (LO 11-2) Prenumbering of source documents helps to verify that a. multiple types of source documents have a unique identifier. b. all transactions have been recorded because the numerical sequence serves as a control. c. no inventory has been misplaced.

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d. documents have been used in order.

Answer: B 6. (LO 11-2) A field check is a(n) a. preventive control. b. detective control. c. corrective control. d. general control. e. output control.

Answer: A 7. (LO 11-2) Which is not an example of a batch total? a. Record count b. Financial total c. Hash total d. Exception total Answer: D 8. (LO 11-2) Backup is a preventive control. a. True b. False Answer: B 9. (LO 11-2) The computer sums the first four digits of a customer number to calculate the value of the fifth digit and then compares that calculation to the number typed during data entry. This is an example of a a. field check. b. parity check. c. check digit verification. d. batch total.

Answer: C 10. (LO 11-3), (LO 11-4) Which of the following statements is correct? a. SOX requires all public companies to use the COSO ERM framework to meet the requirements of section 404. b. Regarding IT control and governance, the COBIT framework is most commonly adopted by companies in the United States. c. ITIL is the best internal control framework for the high-tech industry. d. ISO 27000 series are best practices for IT service management.

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Answer: B 11. (LO 11-1) Based on SOX, which of the following sections is about corporate responsibility for financial reports? a. 101 b. 302 c. 404 d. 906 Answer: A 12. (LO 11-2) Based on COSO 2013, which of the following statements is not correct? a. Employees at any level of an organization play a role in internal control. b. Internal controls can provide reasonable assurance only. c. Internal control is a process consisting of ongoing tasks and activities. d. The responsibility of monitoring the effectiveness of internal controls belongs to the internal audit group.

Answer: D 13. (LO 11-2) Which of the following is not one of the five essential components in the COSO 2013 framework? a. Control environment b. Control assessment c. Control activities d. Monitoring activities Answer: B 14. (LO 11-2) Access control to ensure only authorized personnel have access to a firm’s network is a a. general control. b. process control. c. output control. d. input control.

Answer: A 15. (LO 11-4) The ISO 27000 series are a framework for a. IT governance. b. IT general controls. c. data management. d. information security management.

Answer: D

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16. (LO 11-2) Segregation of duty is a a. preventive control. b. detective control. c. corrective control. d. personnel general control.

Answer: A 17. (LO 11-2) The responsibility of enterprise risk management belongs to a. internal auditors. b. external auditors. c. controller. d. management.

Answer: D 18. (LO 11-2) Most input controls are designed to assess one field only. Which of the following input controls will need to examine a record to determine the control is effective or not? a. Range check b. Size check c. Completeness check d. Validity check Answer: C 19. (LO 11-2) Which of the following is a correct statement about COBIT 2019 framework? a. It is a framework for enterprise risk management. b. It focuses on providing guidance for information security. c. It is designed for information and technology governance and management. d. It is a framework for IT audit conducted by public accounting firms.

Answer: C 20. (LO 11-2) Which of the following is a correct statement about COSO ERM 2017 framework? a. It is a framework developed by the IT audit profession. b. It stresses the importance of having one department responsible for risk management. c. It focuses on evaluating effectiveness of internal controls. d. It enhances alignment among strategy setting, decision making, and performance through enterprise risk management.

Answer: D

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Discussion Questions 1. How has the Sarbanes-Oxley Act affected the audit profession and corporate governance of public firms?

SOX requires public companies registered with the SEC and their auditors to annually assess and report on the design and effectiveness of internal control over financial reporting. SOX also established the Public Company Accounting Oversight Board (PCAOB) to provide independent oversight of public accounting firms.

2. What are the components and principles of COSO ERM 2017 framework?

COSO ERM 2017 offers five components with 20 principles that are applied in the process of strategic decision-making through performance measurement, at all levels and across all functions of the organization. See below the components and principles of COSO ERM 2017.

5 Components

Governance & Culture

Strategy & Objective Setting

Performance Review & Revision Information Communication & Reporting

20 Principles 1. Exercise board risk oversight 2. Establish operating structures 3. Define desired culture 4. Demonstrate commitment to core values 5. Attract, develop and retain capable individuals 6. Analyze business context 7. Define risk appetite 8. Evaluate alternative strategies 9. Formulate business objectives 10. Identify risks 11. Assess severity of risks 12. Prioritize risks 13. Implement risk responses 14. Develop portfolio view 15. Assess substantial change 16. Review risk and performance 17. Pursue improvement in ERM 18. Leverage information and technology 19. Communicate risk information 20. Report on risk, culture, and performance

3. Two commonly used frameworks developed by COSO are COSO 2013 internal control framework and the COSO ERM 2017 framework. What are the differences between the two frameworks?

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COSO 2013 focuses on internal controls. It is a general framework with 17 principles to provide a benchmark for most companies to evaluate their internal controls. Internal control is an integral part of enterprise risk management. COSO developed the ERM framework to help companies evaluate risk and opportunity with a broader view on risk management to maximize firm value. `ERM identifies potential events that may affect the companies. ERM manages risk to be within the companies risk appetite. ERM provides reasonable assurance regarding the achievement of the firm’s objectives.

4. Use a few sentences to describe IT general controls and application controls. Give a few examples of these two types of controls.

IT general controls (ITGC) relate to enterprise-level controls over IT. Most general controls limit access to the IT systems and prevent unauthorized use.

Examples: Passwords, Anti-virus software, Disaster Recovery Planning, change management process.

IT application controls are activities specific to a subsystem’s or an application’s input, processing, and output. Examples: Closed-loop Verification, Validity Check, Batch Totals 5. What elements of COBIT framework would a manager be inclined to use as a guide for IT governance and management? Why would they be used?

COBIT provides a supporting tool set that bridges the gap among IT control requirements, technical issues, and business risks. The COBIT framework: • provides a business focus to align business and IT objectives; • defines the scope and ownership of IT process and control; • is consistent with accepted IT good practices and standards; • provides a common language with a set of terms and definitions that are generally understandable by all stakeholders; and • meets regulatory requirements by being consistent with generally accepted corporate governance standards (e.g., COSO) and IT controls expected by regulators and auditors.

6. ISO 27000 series serve different purposes from ITIL. Which one could be more important to accounting professionals and why?

ISO 27000 series could be more important to accounting professionals. ITIL is a framework focusing on IT infrastructure and IT service management. ISO 27000 series is a framework for information security management. ISO 27000 series, particularly ISO 27001 and ISO 27002, have become the most recognized and generally accepted sets of information security framework and guidelines. The main objective of the ISO 27000 series is to provide a model for establishing, implementing, operating, monitoring, maintaining, and improving an Information Security Management System (ISMS).

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7. Segregation of duties is an important internal control. What functions must be separated? If ideal segregation of duties is not economically feasible, what are some compensating controls that would help reduce the risk of fraud or error?

The general guideline for segregation of duties (SOD) is that transaction authorization, record keeping and asset custody should be separated from each other. If ideal segregation of duties is not economically feasible, supervision can be used to mitigate the risk posed by imperfect segregation of duties. The supervising individual might be a superior within the organization, or in the case of a small business the owner of the firm.

8. Use a flowchart to explain the risk assessment process.

9. There are three types of controls: preventive, detective, and corrective. List some examples of each type. Explain which type of control auditors would focus on while evaluating a company's effectiveness of controls and why.

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Preventive controls are designed to deter problems before they arise. Preventive controls require compliance with preferred procedures and thus stop undesirable events from happening. Examples: closed-loop verification, validity check. Detective controls find problems when they arise. These controls are procedures and techniques designed to identify undesirable events after they have already occurred. Examples: bank reconciliations, monthly trial balances. Corrective controls fix problems that have already occurred and been identified; These can include activities such as using backup files to recover corrupted data. Detective controls are often linked to accompanying corrective controls to remediate any issues that are discovered. Examples: Disaster Recovery Planning, periodic backups.

10. Describe the control activities in the COSO framework. Why are these control activities important for most firms?

Control activities are the policies and procedures that help ensure that necessary actions are taken to address risks to achieving the firm’s objectives. There are two categories of control activities: physical controls and IT controls. Physical controls are mainly manual but could involve the physical use of computing technology. IT controls involve processes that provide assurance for information and help to mitigate risks associated with the use of technology.

A firm must establish control policies, procedures, and practices that ensure the firm’s objectives are achieved and risk mitigation strategies are carried out. Control activities occur throughout a firm at all levels and in all functions.

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Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. The global economic crisis in years 2008 to 2010 has stimulated many boards of directors and executives to reevaluate how they assess and manage risks. Use a flowchart to describe the process of risk assessment.

2. A newly hired internal auditor discovered that immaterial thefts by employees are pervasive in the company; employees take books from the company’s library, tools from the company’s laboratories, supplies, products, etc. By interviewing with some of the employees, the internal auditor discovered that most employees thought their behavior was not detrimental to the company as each item did not have significant value. What should the company do to prevent this type of employee behavior?

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The company should set the tone at top and influence the control consciousness of its employees. Employees should be educated on integrity and ethical values of the company as well as the company’s policies. Ongoing monitoring can also be done to prevent and detect immaterial thefts.

3. The sales department of a company received several claims from its customers that their payments were not credited to their accounts. Investigation uncovered that the accounts receivable clerk has been stealing some of customer payments. What are some of the internal control procedures that could prevent and detect the problem?

Segregation of Duties. Record keeping and asset custody should be separated so that one person cannot have access to remitted payments and be responsible for recording the customers AR balances.

Send out monthly statements to customers to confirm their balances and reconcile differences.

4. (Connect) The information system of Carlsbad Bottle Inc. is deemed to be 90% reliable.

A major threat in the procurement process has been discovered with an exposure of $300,000. Two control procedures are identified to mitigate the threat. Implementation of control A would cost $18,000 and reduce the risk to 4%. Implementation of control B would cost $10,000 and reduce the risk to 6%. Implementation of both controls would cost $26,000 and reduce the risk to 2.5%. Given the information presented above and consider an economic analysis of costs and benefits only, which control procedure(s) should Carlsbad Bottle choose to implement?

Expected benefit of an internal control = Impact × Decreased Likelihood Control A: 300,000 × (10% − 4%) = 18,000 = 18,000 Control B: 300,000 × (10% − 6%) = 12,000 > 10,000 Control A&B: 300,000 × (10% − 2.5%) = 22,500 < 26,000 Carlsbad should implement control B. 5. Which internal control(s) would you recommend to prevent the following situations from occurring? a)

Authorization of a credit memo for a customer’s account (on receivables) when the goods were never actually returned.

Documents and records (must require a receiving report before authorizing a credit memo) b) Theft of funds by the cashier, who cashed several checks and did not record their receipt.

Segregation of duties (record keeping and asset custody) c) Inventory was stolen by receiving dock personnel. The receiving clerk claimed the inventory was sent to the warehouse but the warehouse clerk did not record properly.

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Supervision, independent verification, and documents and records to track custody of goods and determine responsibility. d) Writing off a customer’s accounts receivable balances as uncollectible in order to conceal the theft of subsequent cash collections.

Segregation of duties (transaction authorization and asset custody) e) Billing customers for the quantity ordered when the quantity shipped was actually less due to back-ordering of some items.

Documents and records (cross check the sales order and the packing slip to check whether the quantity ordered is the same as quantity shipped; bill a customer on quantity shipped) 6. (Connect) Which types of input controls would best mitigate the following threats? a) Posting the amount of a sale to a customer account that does not exist.

Authorization (for sales transactions) or the use of a validity check on the customer number. b) A customer entering too many characters into the five-digit zip code while making an online purchase, causing the server to crash.

Size Check c) An intern’s pay rate was entered as $150 per hour, not $15 per hour.

Reasonableness Check d) Approving a customer order without the customer’s address so the order was not shipped on time.

Completeness Check e) Entering the contract number of a critical contract as 13688 instead of 16388, which is a serious mistake to the company.

Check Digit Verification

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7. (Connect) The COSO 2013 internal control framework codifies 17 relevant principles associated with the five components of internal control. Match the following principles with the five components.

COSO Principles

COSO Components

a. Management establishes, with board oversight, structures, reporting lines, and appropriate authorities and responsibilities in the pursuit of objectives.

i.

Control environment

b. The organization deploys control activities through policies that establish what is expected and procedures that put policies into place.

ii.

Risk assessment

c. The organization considers the potential for fraud in assessing risks to the achievement of objectives.

iii.

Control activities

d. The organization holds individuals accountable for iv. their internal control responsibilities in the pursuit of objectives.

Information and communication

e. The organization obtains or generates and uses relevant, quality information to support the functioning of internal control.

Monitoring activities

f.

Answer: a. b. c. d. e. f.

v.

The organization evaluates and communicates internal control deficiencies in a timely manner to those parties responsible for taking corrective action, including senior management and the board of directors, as appropriate.

i iii ii i iv v

8. (Connect) Identify each of the following internal controls as primarily preventive, detective or corrective control. a. Limit access to petty cash funds.

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b. c. d. e.

Reconcile the petty cash fund before replenishing it.

Require two signatures on checks above a specified limit.

Enable hidden flags or audit trails on accounting software.

Examine credit card statements and corresponding receipts each month, independently, to determine whether charges are appropriate. f. Keep checks in a locked box or drawer and restrict the number of employees who have access to the key. g. Backup accounting records daily.

Answer: Internal Controls

Type of control

a. Limit access to petty cash funds.

Preventive control

b. Reconcile the petty cash fund before replenishing it.

Detective control

c. Require two signatures on checks above a specified limit.

Preventive control

d. Enable hidden flags or audit trails on accounting software.

Detective control

e. Examine credit card statements and corresponding receipts each month, independently, to determine whether charges are appropriate.

Detective control

f.

Preventive control

Keep checks in a locked box or drawer and restrict the number of employees who have access to the key.

g. Backup accounting records daily.

Corrective control

9. (Connect) Match the following internal controls with the categories of control activities.

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Internal Controls a. Separate handling cash (receipt and deposit) functions from record keeping functions (recording transactions in the accounts receivable subsidiary ledger).

i. Authorization

b. Require purchases, payroll, and cash disbursements to be authorized by a designated person.

ii. Segregation of duties

c. Require accounting department employees to take vacations.

iii. Supervision

d. Separate purchasing functions from payables functions.

iv. Accounting documents and records

e. Ensure that the same person isn’t authorized to write and sign a check.

v. Access control

f.

vi. Independent verification

When opening mail, restrictively endorse or stamp checks “For Deposit Only.”

g. Periodically reconcile the incoming check log against deposits. h. Require supervisors to approve employees’ time sheets before payroll is prepared. i.

List customer checks on a log before turning them over to the person responsible for depositing receipts.

Answer: a. b. c. d. e. f. g. h. i.

Control Activities

ii i vi ii ii v vi i iv

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10. (Connect) Match the following control frameworks with their main purposes.

Control Frameworks

Purposes

a. COSO 2013

i.

Expand internal controls to provide a broader view on risk management to maximize firm value

b. COSO ERM 2004

ii.

Provide management an information technology (IT) governance model that helps in delivering value from IT and understanding and managing the risks associated with IT.

c. COBIT 2019

iii.

Manage IT infrastructure and service delivery

d. ITIL

iv.

Provide a framework and guidelines for information security.

e. ISO 27000 series

v.

Improve quality of financial reporting through internal controls and corporate governance

Answer: a.

v

b.

i

c.

ii

d.

iii

e.

iv

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11. (Connect) The COSO ERM 2017 framework codifies 20 principles associated with the five components of enterprise risk management. Match the following principles with the five components.

COSO ERM Principles

COSO ERM Components

a. Report on risk, culture, and performance

i.

Governance and Culture

b. Review risk and performance

ii.

Strategy and Objective-setting

c. Pursue improvement in ERM

iii.

Performance

d. Exercise board risk oversight

iv.

Review and Revision

e. Attract, develop, and retain capable individuals

v.

Information, Communication and Reporting

f.

Prioritize risks

g. Define risk appetite h. Assess substantial change

Answer: a.

v

b.

iv

c.

iv

d.

i

e.

i

f.

iii

g.

ii

h.

iv

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12. (Connect) COBIT 2019 is a comprehensive framework for information and technology governance and management. This framework has five domains. Indicate the purpose of each domain is for governance or management.

COBIT domains a. Align, plan and organize b. Build, acquire and implement c. Deliver, service and support d. Evaluate, direct and monitor e. Monitor, evaluate and assess Answer: a.

Management

b.

Management

c.

Management

d.

Governance

e.

Management

Purpose

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Chapter 12 – Cybersecurity and Computer Fraud Multiple Choice Questions 1. (LO 12-2) (CISA exam, adapted) Authentication is the process by which the a. system verifies that the user is entitled to enter the transaction requested. b. system verifies the identity of the user. c. user identifies him- or herself to the system. d. user indicates to the system that the transaction was processed correctly.

Answer: B 2. (LO 12-2) (CMA exam, adapted) Data processing activities may be classified in terms of three stages or processes: input, processing, and output. An activity that is not normally associated with the input stage is a. batching. b. recording. c. verifying. d. reporting.

Answer: D 3. (LO 12-2) (CISA exam, adapted) To ensure confidentiality in an asymmetric-key encryption system, knowledge of which of the following keys is required to decrypt the received message? a. Private key b. Public key c. Both keys are required. d. Neither the private key nor the public key is required.

Answer: A 4. (LO 12-2) To authenticate the message sender in an asymmetric-key encryption system, which of the following keys is required to decrypt the received message? a. Sender’s private key b. Sender’s public key c. Receiver’s private key d. Receiver’s public key Answer: B 5. (LO 12-2) To ensure the data sent over the Internet are protected, which of the following keys is required to encrypt the data (before transmission) using an asymmetric-key encryption method? a. Sender’s private key b. Sender’s public key c. Receiver’s private key d. Receiver’s public key Answer: D

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6. (LO 12-3) Which of the following groups/laws was the earliest to encourage auditors to incorporate fraud examination into audit programs? a. COSO b. COBIT c. PCAOB d. SAS No. 99 e. Sarbanes–Oxley Act Answer: D 7. (LO 12-3) Incentive to commit fraud usually will include all of the following, except a. inadequate segregation of duties. b. financial pressure. c. personal habits and lifestyle. d. feelings of resentment. e. alcohol, drug, or gambling addiction.

Answer: A 8. (LO 12-7) (CPA exam, adapted) An information technology director collected the names and locations of key vendors, current hardware configuration, names of team members, and an alternative processing location. What is the director most likely preparing? a. Internal control policy b. System hardware policy c. System security policy d. Disaster recovery plan e. Supply chain management policy Answer: D 9. (LO 12-2) A message digest is the result of hashing. Which of the following statements about the hashing process is true? a. It is reversible. b. Comparing the hashing results can ensure confidentiality. c. Hashing is the best approach to make sure that two files are identical. d. None of the options are true.

Answer: C 10. (LO 12-4) Which one of the following vulnerabilities would create the most serious risk to a firm? a. Using open source software (downloaded for free) on the firm’s network. b. Employees recording passwords in Excel files. c. Employees writing instant messages with friends during office hours. d. Unauthorized access to the firm’s network.

Answer: D 11. (LO 12-1, LO 12-2, LO 12-6, LO 12-7) Which of the following statements is correct? a. A spam will send a network packet that appears to come from a source other than its actual source.

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b. Multi-factor authentication is less secure than requiring a user to always enter a password to access a network. c. Fault tolerance uses redundant units to provide a system with the ability to continue functioning when part of the system fails. d. SOC 1 reports provide the evaluations on a broader set of controls implemented by the service provider.

Answer: C 12. (LO 12-7) Which of the following can be considered as a good alternative to back up data and applications? a. Continuous monitoring b. Disaster recovery planning c. Business continuity management d. Cloud computing Answer: D 13. (LO 12-2) A digital certificate a. is used to certify public-key and private-key pairs. b. is a trusted entity to certify and revoke Certificate Authorities (CA). c. indicates that the subscriber identified has sole control and access to the private key. d. ensures that the symmetric-key encryption method functions well.

Answer: C 14. (LO 12-2) The symmetric-key encryption method a. is slow. b. is not appropriate for encrypting large data sets. c. solves problems in key distribution and key management. d. uses the same key for both senders and receivers for encryption and decryption.

Answer: D 15. (LO 12-3) The fraud triangle indicates which of the following condition(s) exist for a fraud to be perpetrated? a. Rationalization b. Pressure c. Legal environment d. Only (a) and (b) are correct e. (a), (b), and (c) are correct Answer: D 16. (LO 12-2) To prevent repudiation in conducting e-business, companies must be able to authenticate their trading partners. Which of the following encryption methods can be used for authentication purpose? a. Symmetric-key encryption method b. Asymmetric-key encryption method 3

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c. Both symmetric-key and asymmetric-key encryption methods are good for authentication.

Answer: B 17. (LO 12-3) Regarding GDPR, which of the following statements is/are correct? a. It is a regulation enforced by EU. b. It is to protect EU citizens’ personal data. c. It is not relevant to the companies in the United States. d. (a) and (b) are correct. e. (a), (b), and (c) are all correct.

Answer: D 18. (LO 12-2) Which organization created the Reporting on an Entity’s Cybersecurity Risk Management Program and Controls: Attestation Guide in 2017? a. SEC b. AICPA c. U.S. Congress d. Department of Homeland Security Answer: B 19. (LO 12-7) Business continuity management is a a. preventive control. b. detective control. c. corrective control. d. Two of these options are correct.

Answer: C 20. (LO 12-2) Encryption is a a. preventive control. b. detective control. c. corrective control. d. Two of these options are correct.

Answer: A 21. (LO 12-5) What is fault tolerance? a. A policy allowing employees to make mistakes. b. Using redundant units to continue functioning when a system is failing. c. An application that can detect mistakes and correct mistakes automatically. d. Two of these options are correct.

Answer: B 22. (LO 12-2) Comparing encryption with hashing, a. hashing process is reversible. b. encryption is used to ensure data integrity.

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c. hashing results are large data. d. encryption results are called cyphertext.

Answer: D 23. (LO 12-7) Disaster recovery plan is a a. preventive control. b. detective control. c. corrective control. d. Two of these options are correct.

Answer: C 24. (LO 12-2) Select a correct statement describing encryption or hashing process. a. Encryption process is reversible. b. Hashing results are called message digests. c. Hashing process could be used to obtain a digital signature. d. Symmetric-key encryption process is to maintain confidentiality. e. All of these statements are correct.

Answer: E 25. (LO 12-2) Select a correct statement regarding encryption methods. a. Most companies prefer using asymmetric-key encryption method for data transmission. b. Symmetric-key encryption method is used to authenticate trading partners. c. Only asymmetric-key encryption method can ensure confidentiality. d. Asymmetric-key encryption method is used to create digital signatures.

Answer: D 26. (LO 12-6) Why would a company need a SOC report? a. The external auditor needs to know the effectiveness of internal controls of the company’s service provider(s). b. The company wants to use it for marketing purposes. c. It could be required by a government agency to provide a SOC report. d. All of these options are correct.

Answer: D 27. (LO 12-6) Which of the following statements regarding SOC is correct? a. SOC 1 report is prepared for the general public to use. b. SOC 2 report is focused on the impact of the service provider’s controls on the user company’s financial statements. c. Type 1 reports are for a specific date. d. SOC 3 report is prepared for auditors and management to use. e. All of these options are correct.

Answer: C 5

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28. (LO 12-6) Which of the following frameworks could be used for SOC cybersecurity? a. NIST b. HIPPA c. PCI-DSS d. All of these options are correct. e. Two of these options are correct.

Answer: D 29. (LO 12-5) Using an uninterruptible power supply is a a. preventive control. b. detective control. c. corrective control.

Answer: C 30. (LO 12-5) Implementing a redundant array of independent devices (RAID) is a preventive control. a. True b. False Answer: B

Discussion Questions 1. Phishing is a type of social engineering. Give two examples of phishing.

An email that requests the victim to log into a website that looks legitimate but is actually controlled by the attacker. An attacker clones a legitimate website and distributes a broken link to victims in an attempt to convince them to enter sensitive information.

2. If social engineering is a common reason that confidential information was revealed, what needs to be done to prevent this from occurring?

User training is often employed to counter social engineering attacks. By teaching users the dangers of social engineering and establishing a policy governing the dissemination of any information like login data, the users will be much more knowledgeable if a social engineering attempt is made.

3. What is the goal of each of the general security objectives (e.g., confidentiality, integrity, availability, access control)? Why should a company care about these?

Confidentiality: the goal of confidentiality is for information to not be accessible to unauthorized individuals or processes. A company should care about keeping the confidential data of its clients, users, customers, and visitors private; due to the risks of litigation, regulation, reputation, and security."

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Integrity: the goal of data/information integrity is for information to be accurate and complete.

That is, it has not been degraded or impaired by unauthorized manipulation or hardware failure.

Companies should care about the integrity of the data/information that they use to support decision making.

Availability: Information and systems are available and accessible on demand. Conversely, companies should be concerned that only authorized users have access to systems and data.

Access Control: Limits access to systems and information to only those individuals, by nature of their job responsibilities, that require access to it. Companies must be very concerned about access controls enforcement, to maintain the CIA of the data.

4. There are restrictions on how U.S. companies store and share customer data. For health care providers, HIPAA is designed to protect patient data. A handful of states require companies processing customer payments to comply with PCI-DSS. Search the Internet for more information about these regulations and discuss the major requirements of each.

PCI-DSS and HIPAA both establish standards for protecting and disseminating personal identifiable information (PII). They establish frameworks for data security management that must be complied with to either participate in electronic card transactions or store electronic patient records. Standards cover topics such as establishing a secure infrastructure, monitoring network and security information, and guaranteeing access controls are established.

5. Consider the following scenarios and identify the incentive, opportunity, and rationalization that exist that would enable a person to commit fraud: a. A manager increases the value of inventory in the computer system so she can show higher cost of goods sold. As a result, she embezzles the additional income. b. A college student pirates a newly released movie over the Internet. c. An employee creates a new vendor account for his spouse and submits invoices for services that were never performed.

A. Incentive: Could be disgruntled employee, financial pressures, etc.

Opportunity: as manager, she has access to a higher level of programs in the system Rationalization: Mindset that excuses the fraud as “OK” or “Justified” B. Incentive: the student needs funds to pay college tuition, room and board bills.

Opportunity: The student gained access to the movie as it was mistakenly available online and was able to download it before it was pulled offline.

Rationalization: Mindset that excuses the fraud as “OK” or “Justified” C. Incentive: He and his spouse need funds for any number of reasons.

Opportunity: Employee has access to the vendor center due to a lack of access controls enforcement in the company.

Rationalization: Mindset that excuses the fraud as “OK” or “Justified”

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6. What are the differences between authentication and authorization?

Authentication ensures that users are who they claim to be. Authorization is the level of permission to interact with system resources granted to each individual.

7. Explain how to use the asymmetric-key encryption method to maintain confidentiality in transmitting a business document electronically?

1) The sender encrypts a challenge message with the receivers public key 2) Receiver decrypts with his own private key, answers the message, and sends the response encrypted with their own private key 3) Sender decrypts the message with the receivers public key and validates the challenge message 4) The process is reversed to authenticate the sender.

5) Either the sender (or the receiver) generates a symmetric key (called session key because it is valid for a certain timeframe only) to be used by both parties.

6) Use asymmetric-key encryption method to distribute the session key.

7) After both parties have the session key, use the session key to transmit confidential data or information. This is because using symmetric key for encryption is faster in data transmission.

8. What is hashing? Does it serve the same purpose as encryption? Why? Hashing is a one way process that turns a document (or a dataset) of any length into a key of fixed length. The process cannot be reversed and is used as part of validation of data integrity or to generate a message digest to encrypt as part of the digital signature process. Hashing does not serve the same purpose as encryption. Encryption is reversible (the cybertext can be decrypted) and the main purpose is for confidentiality.

9. How can data integrity be ensured when conducting e-business? Why is it critical to e-business?

Data integrity can be ensured by comparing a message digest created by the sender with that generated from the sent over document. If the two hashes match, then the message has not been altered.

10. The previous chapter identifies COBIT and ISO 27000 as information security frameworks. How do they relate to GTAG’s Vulnerability Assessment? What similarities and differences exist among these three?

The main objective of the ISO 27000 series is to provide a model for establishing, implementing, operating, monitoring, maintaining, and improving an Information Security Management System (ISMS). COBIT is a more general IT governance framework that considers the governance of a firm’s entire IT infrastructure. COBIT does not go into as much detail on security issues as ISO 27000, however, the two standards may be implemented together to improve corporate IT governance. GTAG’s Vulnerability Assessment is a vulnerability approach as opposed to a risk assessment process, where vulnerability management is a tactical short-term approach. COBIT 8

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and ISO 27000 are more risk assessment based, requiring a more comprehensive tong term approach that may take many months or years to implement.

11. Disaster recovery planning (DRP) and business continuity management (BCM) help businesses manage security risks. What similarities and differences exist between these two approaches?

A disaster recovery plan seeks to allow the business to quickly recover from a catastrophic event, while a business continuity plan is related to ensuring that the business can continue activities during conditions that would otherwise cause a service outage.

Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. Compare and contrast symmetric-key and asymmetric-key encryption methods in conducting ebusiness. Why do companies prefer one method over the other? If a company chooses to use both methods, what might be the reasons? How can the company truly use both methods for e-business?

Answer: Asymmetric key encryption is very slow but allows for only 2 keys to be needed per user.

Additionally, asymmetric key encryption can be used to authenticate users. Symmetric key encryption is much faster, but requires a separate key for every pair of users. In addition, these pairs must be physically distributed to users no matter how greatly dispersed. This is not an effective practice for an e-commerce company. Most companies will utilize both of these methods. The company will establish a connection to its users utilizing asymmetric key encryption and generate a symmetric session key to conduct all further business.

2. Many internal auditors and IT professionals believe wireless networks and mobile devices pose high risks in a firm’s network system. Collect information to examine whether this concern is valid. If so, identify the risks and the general controls to help reduce these risks.

Answer: A company should have all of its mobile devices require VPN’s into the company’s network if it allows them to connect at all. This can allow a mobile device to connect through an un-trusted wireless network. The company should also keep any of its own wireless networks separated physically from the wired more secure networks that business is conducted through.

3. Under PKI, Certification Authority (CA) plays a critical role in the success of maintaining information security. Search the Internet to find a few public firms that are CAs. Compare these firms and provide suggestions on how to choose a CA as part of information security management.

Answer: DigiCert: A large organization approved by several government organizations.

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VeriSign: Part of Symantec; a large public security firm that is a trusted in the security industry.

When selecting a PKI CA provider, it is important to focus on trustworthiness and proven history of security and confidentiality. In addition, the provider must possess sufficient resources to meet your needs. As always, third party service providers should have reports available to its customers providing third party assurance over the security of its systems.

4. (Connect) Match the descriptions with each encryption method.

Descriptions a. Good for large data sets b. Slow in processing c. Convenient for key distribution & key management d. Each user has a public-key and a private key e. Good for authentication

i. ii.

Encryption Method Symmetric-key encryption Asymmetric-key encryption

Answer: a. b. c. d. e.

i ii ii ii ii

5. (Connect) Match correct statement(s) with each term regarding system availability.

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Internal Controls a. Activities required to keep a firm running during a period of displacement or interruption of normal operations b. A process that identifies significant events that may threaten a firm’s operations and outline the procedures to ensure that the firm will resume operations if such events occur c. A service model in which a third-party service provider offers computing resources, including hardware and software applications, to cloud users over the Internet, and the service provider charges on a per-user basis d. A clearly defined and documented plan that covers key personnel, resources including IT infrastructure and applications, and actions required to be carried out in order to continue or resume the systems for critical business functions e. Using redundant units to provide a system with the ability to continue functioning when part of the system fails f. A device using battery power to enable a system to operate long enough to back up critical data and shut down properly during the loss of power Answer: a. b. c. d. e. f.

System Availability Terms i. Uninterruptible power supply ii. Fault tolerance

iii. Cloud computing

iv. Disaster recovery planning

v. Business continuity management

v iv iii iv ii i

6. (Connect) Identify the activities of vulnerability management and assessment.

Activities a. Prioritize vulnerabilities b. Design a risk response plan c. Monitor vulnerabilities d. Establish policy and requirements e. Identify vulnerabilities

i. ii.

Answer: a. b. c. d. e.

ii i i i ii

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Category Vulnerability management Vulnerability assessment

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7. There are computer fraud schemes in systems development life cycles (refer to Figure 12.6). Identify and discuss the oversight or weakness for each phase.

Answer: a. b. c. d. e.

Lack of authentication and/or role based access control Lack of consideration for security vulnerabilities Lack of code reviews Lack of enforcement of documentation and back-up procedures End-user access to source code

8. Internal auditors are often tasked with testing vulnerabilities. How would you suggest testing for system intrusion, logical access control, natural disasters, and intentional destruction of information?

Answer: System intrusion: • Broad Detection Range: Internal auditors should measure the ability of the system to detect different type of intrusions. o Work with a 3rd party IT team to try to hack the system.

• Economy in resource usage: Internal auditors should also measure the consumption of computer resources by the intrusion detection system.

• Resilience to stress: Auditors are supposed to look at operational impairment in the case of high computing activity.

Logical access control:  The company has formal policies and procedures for logical access, physical access and IT security.  Requests for New or Revised Access Form are approved by the Department Manager.  Administrator access to active directory, application and database is limited to authorized personnel.  Department Manager performs access review for applications and the active directory domain.  Event logging is activated and configured per policy.  All employees are required to have three things to access the system; something they have, know and are. Testing is done to see if system can be accessed without one of these three items.

Natural disasters:  The company should develop an IT disaster recovery plan. It begins by compiling an inventory of hardware (e.g. servers, desktops, laptops and wireless devices), software applications and data. The plan should include a strategy to ensure that all critical information is backed up.  Vendors should be able to provide “hot sites” for IT disaster recovery. These sites are fully configured data centers with commonly used hardware and software products. Subscribers may provide unique equipment or software either at the time of disaster or store it at the hot site ready for use.

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



It’s better for the company to have access to more than one facility. Hardware at an alternate facility can be configured to run similar hardware and software applications when needed. Assuming data is backed up off-site or data is mirrored between the two sites, data can be restored at the alternate site and processing can continue.

Agreement with another company of similar size in a different location to utilize their system as a database backup. Agreement could include doing the same for the “sister” company.

Intentional destruction of information:  Periodic testing and evaluation of the effectiveness of information security policies, procedures, practices, and security controls to be performed with a frequency depending on risk, but no less than annually.  A process for planning, implementing, evaluating, and documenting remedial actions to address any deficiencies in the information security policies, procedures, and practices of the organization  Procedures for detecting, reporting, and responding to security incidents  Plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the organization.  Frequent and regular tests to ensure information is present. Knowledge of this process could deter destruction of information.  Keeping important information with limited access. Or in a situation where two people must be present to access.  System Configuration Review: Internal auditors should conduct a review of how the system is configured. (GTAG, Auditing Application Controls, IIA) o “Review the three-way match system parameters” o “Query the underlying programming code of the application report generation process for appropriate logic” o “Rerun the query to compare the report to the one management generated” 9. Browse the Internet to identify some recent cases related to system availability. What are the risks and issues in system availability of these cases? Indicate possible controls to mitigate the risks.

Answer: Students’ answers may vary.

Typical risks are: • Unauthorized access to the system leads to system intrusion and data corruption.

• The more complicated the system, the longer it takes to restart it. Hence, outages that require system shutdown and restart can dramatically affect your ability to meet a challenging availability target.

• A support person who is called in afterhours could easily take an hour or two simply to arrive to diagnose the problem.

• Unsuspecting users opening e-mails that appear genuine and without viruses • From the Cisco article: “Analysts add that most of existing tools track individual pieces of hardware, or take samples of information flows rather than tracking every packet of data.

Because of Cisco’s central position in hardware plumbing, the information they have “gives 13

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you granularity that no one has ever had before,” said Zeus Kerravala, an analyst at ZK Research.”

Possible controls to mitigate risks: Test the Change Control Process Applications are always evolving to fit new business requirements and improve behavior. Even mission-critical applications change over time. Because the change control process is a large source of downtime-causing errors. A business- or mission-critical application must not go into production until it can be repeatedly performing error free change control.

Test Catastrophic Failure Before deploying new application, companies should make sure that the catastrophic recovery procedures are created work as expected. Is the recovery team ready? It must be trained, equipped, and well-rehearsed. The plan is not useful if the recovery plan is not effective.

Test for Resource Conflicts  Availability engineering requires in-depth consideration of an application's interactions with other system processes. Auditors must look at how a particular service is provided, evaluate all the ways some other application might interfere with the intended service, test for conflicts, and possibly consider design alternatives.  Update system belong the Secure E-mail Gateway (SEG) and educate employees through training to identify scams. Be clear about communicating how information will be requested and be consistent in following your own policies.  From Cisco article above: “Security is a key focus. One reason companies struggle in stopping network attacks is the constant changes in where they originate, which make it hard to keep a list of suspicious machines or internet addresses to block.  Cisco said its new technology makes it easier, instead, to enforce a “white list” of authorized systems, so that servers can only accept connections from approved devices and no others.” 10. Consider each of the following fraud cases. Identify the incentive, opportunity, and rationalization present in each case. a. An employee of a telecommunications firm’s payroll department moved to a new position within the department in which she no longer has privileged access to payroll accounts.

However, when changing positions, her access rights to the payroll accounts were left unchanged. An associate told her that he was starting a financial service business and needed some contact information. Using the privileged access rights that she had retained, the employee provided her associate with confidential information of many employees, including 401k account numbers, credit card account numbers, and social security numbers, which he then used to commit more than 100 cases of identity theft. The insider’s actions caused more than $1 million worth of damages to the firm and its employees. b. A database analyst of a major check authorization and credit card processing company went beyond his authorized computer access rights. The employee obtained his firm’s consumer information of 8.4 million individuals. The stolen information included names and addresses, bank account information, and credit and debit card information. He sold the data to telemarketers over a five-year period.

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c. An IT consultant working under contract for an offshore oil platform company was denied an offer for a permanent job with the same company. He then accessed the firm’s computer systems without approval and caused damage by impairing the integrity and availability of data. d. A manager responsible for payment authorization hired an offshore programmer to insert a couple of independent contractors to the vendor table of his company’s database. He then authorized payments to the independent contractors on fictitious services for personal gain.

He spent the stolen money on luxury items and extravagant purchases for himself, his family, and friends.

Answers: a.

Incentive: The insider’s action involves more than $1 million worth to the firms and its employees. The employee may be jaded that her new position no longer has privileged access to payroll accounts. This may have been felt as a demotion.

Opportunity: When changing positions, her access rights to the payroll accounts were left unchanged.

She realizes her access rights were not changed. She may not have received training that indicated this would be unacceptable behavior.

Rationalization: She was an employee of payroll department and hence she might feel it is not wrong to access to those payroll accounts. She may have felt she HAD to give this information to the associate if he was in a higher position of responsibility. b.

Incentive: He could sell 8.4 million consumers’ information to telemarketers over a five-year period.

Opportunity: The data analyst has been authorized with computer access rights to 8.4 million consumers’ information. The analyst was not authorized, but apparently had the capability to extend his computer access rights.

Rationalization: Being a database analyst, he might feel it is acceptable and justifiable to sell that information to external parties. He probably rationalized that if it was not secure enough to keep him out why would it matter if he sold the information. c.

Incentive: He was able to access the firm’s computer systems without approval and thus he was able to revenge the company for not offering a permanent job to him. Deny an offer of permanent employment after working as a consultant.

Opportunity: He was able to access the firm’s computer systems without approval and caused damage even as a contractor. Since he was an IT contractor he already know the companies systems well and had the capability to access the data.

Rationalization: As an IT consultant, he might feel it was easy for him to conceal his action and caused damage without being notice. He may have felt that the company deserved these actions since they did not value him. d.

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Incentive: He could authorize payments on fictitious services for personal gain and spent money for himself, his family and his friends. The incentive is the luxury items and extravagant purchases for himself, family, and friends.

Opportunity: He had the opportunity to authorize payments to the independent contractors on fictitious services. The opportunity arises from having access to an offshore programmer who can hack the system to input vendors in a way unrelated to him.

Rationalization: He might feel that he is the manager and would not be caught for fraudulent payment authorization. As a manager he may feel that he is authorized to use the funds however he sees fit as long as it appears that it is being used for business purposes. Or maybe he feels he deserves a better lifestyle and is currently underpaid.

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11. Match correct purposes, contents and users regarding SOC reports. LO 12-6 Purposes, Contents, and Users SOC reports a. Easy to read by the general public in a summary i.SOC 1 format on security, availability, processing integrity, confidentiality or privacy b. To assess governance, risk management and ii.SOC 2 compliance programs. c. Reports for a period of time iii.SOC 3 d. To provide a general understanding and for iv.Type 1 SOC reports marketing purposes e. To be used by the auditors and the management v.Type 2 SOC reports of the user company f. Reports for a specific date g. To be used by the management of a service organization, regulators, and others h. To examine security, availability, processing integrity, confidentiality or privacy policy and practice of the service organization Answers: a. b. c. d. e. f. g. h.

iii ii v iii i iv ii ii

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Chapter 12 – Cybersecurity and Computer Fraud Multiple Choice Questions 1. (LO 12-2) (CISA exam, adapted) Authentication is the process by which the a. system verifies that the user is entitled to enter the transaction requested. b. system verifies the identity of the user. c. user identifies him- or herself to the system. d. user indicates to the system that the transaction was processed correctly.

Answer: B 2. (LO 12-2) (CMA exam, adapted) Data processing activities may be classified in terms of three stages or processes: input, processing, and output. An activity that is not normally associated with the input stage is a. batching. b. recording. c. verifying. d. reporting.

Answer: D 3. (LO 12-2) (CISA exam, adapted) To ensure confidentiality in an asymmetric-key encryption system, knowledge of which of the following keys is required to decrypt the received message? a. Private key b. Public key c. Both keys are required. d. Neither the private key nor the public key is required.

Answer: A 4. (LO 12-2) To authenticate the message sender in an asymmetric-key encryption system, which of the following keys is required to decrypt the received message? a. Sender’s private key b. Sender’s public key c. Receiver’s private key d. Receiver’s public key Answer: B 5. (LO 12-2) To ensure the data sent over the Internet are protected, which of the following keys is required to encrypt the data (before transmission) using an asymmetric-key encryption method? a. Sender’s private key b. Sender’s public key c. Receiver’s private key d. Receiver’s public key Answer: D 1

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6. (LO 12-3) Which of the following groups/laws was the earliest to encourage auditors to incorporate fraud examination into audit programs? a. COSO b. COBIT c. PCAOB d. SAS No. 99 e. Sarbanes–Oxley Act Answer: D 7. (LO 12-3) Incentive to commit fraud usually will include all of the following, except a. inadequate segregation of duties. b. financial pressure. c. personal habits and lifestyle. d. feelings of resentment. e. alcohol, drug, or gambling addiction.

Answer: A 8. (LO 12-7) (CPA exam, adapted) An information technology director collected the names and locations of key vendors, current hardware configuration, names of team members, and an alternative processing location. What is the director most likely preparing? a. Internal control policy b. System hardware policy c. System security policy d. Disaster recovery plan e. Supply chain management policy Answer: D 9. (LO 12-2) A message digest is the result of hashing. Which of the following statements about the hashing process is true? a. It is reversible. b. Comparing the hashing results can ensure confidentiality. c. Hashing is the best approach to make sure that two files are identical. d. None of the options are true.

Answer: C 10. (LO 12-4) Which one of the following vulnerabilities would create the most serious risk to a firm? a. Using open source software (downloaded for free) on the firm’s network. b. Employees recording passwords in Excel files. c. Employees writing instant messages with friends during office hours. d. Unauthorized access to the firm’s network.

Answer: D 11. (LO 12-1, LO 12-2, LO 12-6, LO 12-7) Which of the following statements is correct? a. A spam will send a network packet that appears to come from a source other than its actual source.

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b. Multi-factor authentication is less secure than requiring a user to always enter a password to access a network. c. Fault tolerance uses redundant units to provide a system with the ability to continue functioning when part of the system fails. d. SOC 1 reports provide the evaluations on a broader set of controls implemented by the service provider.

Answer: C 12. (LO 12-7) Which of the following can be considered as a good alternative to back up data and applications? a. Continuous monitoring b. Disaster recovery planning c. Business continuity management d. Cloud computing Answer: D 13. (LO 12-2) A digital certificate a. is used to certify public-key and private-key pairs. b. is a trusted entity to certify and revoke Certificate Authorities (CA). c. indicates that the subscriber identified has sole control and access to the private key. d. ensures that the symmetric-key encryption method functions well.

Answer: C 14. (LO 12-2) The symmetric-key encryption method a. is slow. b. is not appropriate for encrypting large data sets. c. solves problems in key distribution and key management. d. uses the same key for both senders and receivers for encryption and decryption.

Answer: D 15. (LO 12-3) The fraud triangle indicates which of the following condition(s) exist for a fraud to be perpetrated? a. Rationalization b. Pressure c. Legal environment d. Only (a) and (b) are correct e. (a), (b), and (c) are correct Answer: D 16. (LO 12-2) To prevent repudiation in conducting e-business, companies must be able to authenticate their trading partners. Which of the following encryption methods can be used for authentication purpose? a. Symmetric-key encryption method b. Asymmetric-key encryption method 3

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c. Both symmetric-key and asymmetric-key encryption methods are good for authentication.

Answer: B 17. (LO 12-3) Regarding GDPR, which of the following statements is/are correct? a. It is a regulation enforced by EU. b. It is to protect EU citizens’ personal data. c. It is not relevant to the companies in the United States. d. (a) and (b) are correct. e. (a), (b), and (c) are all correct.

Answer: D 18. (LO 12-2) Which organization created the Reporting on an Entity’s Cybersecurity Risk Management Program and Controls: Attestation Guide in 2017? a. SEC b. AICPA c. U.S. Congress d. Department of Homeland Security Answer: B 19. (LO 12-7) Business continuity management is a a. preventive control. b. detective control. c. corrective control. d. Two of these options are correct.

Answer: C 20. (LO 12-2) Encryption is a a. preventive control. b. detective control. c. corrective control. d. Two of these options are correct.

Answer: A 21. (LO 12-5) What is fault tolerance? a. A policy allowing employees to make mistakes. b. Using redundant units to continue functioning when a system is failing. c. An application that can detect mistakes and correct mistakes automatically. d. Two of these options are correct.

Answer: B 22. (LO 12-2) Comparing encryption with hashing, a. hashing process is reversible. b. encryption is used to ensure data integrity.

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c. hashing results are large data. d. encryption results are called cyphertext.

Answer: D 23. (LO 12-7) Disaster recovery plan is a a. preventive control. b. detective control. c. corrective control. d. Two of these options are correct.

Answer: C 24. (LO 12-2) Select a correct statement describing encryption or hashing process. a. Encryption process is reversible. b. Hashing results are called message digests. c. Hashing process could be used to obtain a digital signature. d. Symmetric-key encryption process is to maintain confidentiality. e. All of these statements are correct.

Answer: E 25. (LO 12-2) Select a correct statement regarding encryption methods. a. Most companies prefer using asymmetric-key encryption method for data transmission. b. Symmetric-key encryption method is used to authenticate trading partners. c. Only asymmetric-key encryption method can ensure confidentiality. d. Asymmetric-key encryption method is used to create digital signatures.

Answer: D 26. (LO 12-6) Why would a company need a SOC report? a. The external auditor needs to know the effectiveness of internal controls of the company’s service provider(s). b. The company wants to use it for marketing purposes. c. It could be required by a government agency to provide a SOC report. d. All of these options are correct.

Answer: D 27. (LO 12-6) Which of the following statements regarding SOC is correct? a. SOC 1 report is prepared for the general public to use. b. SOC 2 report is focused on the impact of the service provider’s controls on the user company’s financial statements. c. Type 1 reports are for a specific date. d. SOC 3 report is prepared for auditors and management to use. e. All of these options are correct.

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28. (LO 12-6) Which of the following frameworks could be used for SOC cybersecurity? a. NIST b. HIPPA c. PCI-DSS d. All of these options are correct. e. Two of these options are correct.

Answer: D 29. (LO 12-5) Using an uninterruptible power supply is a a. preventive control. b. detective control. c. corrective control.

Answer: C 30. (LO 12-5) Implementing a redundant array of independent devices (RAID) is a preventive control. a. True b. False Answer: B

Discussion Questions 1. Phishing is a type of social engineering. Give two examples of phishing.

An email that requests the victim to log into a website that looks legitimate but is actually controlled by the attacker. An attacker clones a legitimate website and distributes a broken link to victims in an attempt to convince them to enter sensitive information.

2. If social engineering is a common reason that confidential information was revealed, what needs to be done to prevent this from occurring?

User training is often employed to counter social engineering attacks. By teaching users the dangers of social engineering and establishing a policy governing the dissemination of any information like login data, the users will be much more knowledgeable if a social engineering attempt is made.

3. What is the goal of each of the general security objectives (e.g., confidentiality, integrity, availability, access control)? Why should a company care about these?

Confidentiality: the goal of confidentiality is for information to not be accessible to unauthorized individuals or processes. A company should care about keeping the confidential data of its clients, users, customers, and visitors private; due to the risks of litigation, regulation, reputation, and security."

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Integrity: the goal of data/information integrity is for information to be accurate and complete.

That is, it has not been degraded or impaired by unauthorized manipulation or hardware failure.

Companies should care about the integrity of the data/information that they use to support decision making.

Availability: Information and systems are available and accessible on demand. Conversely, companies should be concerned that only authorized users have access to systems and data.

Access Control: Limits access to systems and information to only those individuals, by nature of their job responsibilities, that require access to it. Companies must be very concerned about access controls enforcement, to maintain the CIA of the data.

4. There are restrictions on how U.S. companies store and share customer data. For health care providers, HIPAA is designed to protect patient data. A handful of states require companies processing customer payments to comply with PCI-DSS. Search the Internet for more information about these regulations and discuss the major requirements of each.

PCI-DSS and HIPAA both establish standards for protecting and disseminating personal identifiable information (PII). They establish frameworks for data security management that must be complied with to either participate in electronic card transactions or store electronic patient records. Standards cover topics such as establishing a secure infrastructure, monitoring network and security information, and guaranteeing access controls are established.

5. Consider the following scenarios and identify the incentive, opportunity, and rationalization that exist that would enable a person to commit fraud: a. A manager increases the value of inventory in the computer system so she can show higher cost of goods sold. As a result, she embezzles the additional income. b. A college student pirates a newly released movie over the Internet. c. An employee creates a new vendor account for his spouse and submits invoices for services that were never performed.

A. Incentive: Could be disgruntled employee, financial pressures, etc.

Opportunity: as manager, she has access to a higher level of programs in the system Rationalization: Mindset that excuses the fraud as “OK” or “Justified” B. Incentive: the student needs funds to pay college tuition, room and board bills.

Opportunity: The student gained access to the movie as it was mistakenly available online and was able to download it before it was pulled offline.

Rationalization: Mindset that excuses the fraud as “OK” or “Justified” C. Incentive: He and his spouse need funds for any number of reasons.

Opportunity: Employee has access to the vendor center due to a lack of access controls enforcement in the company.

Rationalization: Mindset that excuses the fraud as “OK” or “Justified”

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6. What are the differences between authentication and authorization?

Authentication ensures that users are who they claim to be. Authorization is the level of permission to interact with system resources granted to each individual.

7. Explain how to use the asymmetric-key encryption method to maintain confidentiality in transmitting a business document electronically?

1) The sender encrypts a challenge message with the receivers public key 2) Receiver decrypts with his own private key, answers the message, and sends the response encrypted with their own private key 3) Sender decrypts the message with the receivers public key and validates the challenge message 4) The process is reversed to authenticate the sender.

5) Either the sender (or the receiver) generates a symmetric key (called session key because it is valid for a certain timeframe only) to be used by both parties.

6) Use asymmetric-key encryption method to distribute the session key.

7) After both parties have the session key, use the session key to transmit confidential data or information. This is because using symmetric key for encryption is faster in data transmission.

8. What is hashing? Does it serve the same purpose as encryption? Why? Hashing is a one way process that turns a document (or a dataset) of any length into a key of fixed length. The process cannot be reversed and is used as part of validation of data integrity or to generate a message digest to encrypt as part of the digital signature process. Hashing does not serve the same purpose as encryption. Encryption is reversible (the cybertext can be decrypted) and the main purpose is for confidentiality.

9. How can data integrity be ensured when conducting e-business? Why is it critical to e-business?

Data integrity can be ensured by comparing a message digest created by the sender with that generated from the sent over document. If the two hashes match, then the message has not been altered.

10. The previous chapter identifies COBIT and ISO 27000 as information security frameworks. How do they relate to GTAG’s Vulnerability Assessment? What similarities and differences exist among these three?

The main objective of the ISO 27000 series is to provide a model for establishing, implementing, operating, monitoring, maintaining, and improving an Information Security Management System (ISMS). COBIT is a more general IT governance framework that considers the governance of a firm’s entire IT infrastructure. COBIT does not go into as much detail on security issues as ISO 27000, however, the two standards may be implemented together to improve corporate IT governance. GTAG’s Vulnerability Assessment is a vulnerability approach as opposed to a risk assessment process, where vulnerability management is a tactical short-term approach. COBIT 8

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and ISO 27000 are more risk assessment based, requiring a more comprehensive tong term approach that may take many months or years to implement.

11. Disaster recovery planning (DRP) and business continuity management (BCM) help businesses manage security risks. What similarities and differences exist between these two approaches?

A disaster recovery plan seeks to allow the business to quickly recover from a catastrophic event, while a business continuity plan is related to ensuring that the business can continue activities during conditions that would otherwise cause a service outage.

Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. Compare and contrast symmetric-key and asymmetric-key encryption methods in conducting ebusiness. Why do companies prefer one method over the other? If a company chooses to use both methods, what might be the reasons? How can the company truly use both methods for e-business?

Answer: Asymmetric key encryption is very slow but allows for only 2 keys to be needed per user.

Additionally, asymmetric key encryption can be used to authenticate users. Symmetric key encryption is much faster, but requires a separate key for every pair of users. In addition, these pairs must be physically distributed to users no matter how greatly dispersed. This is not an effective practice for an e-commerce company. Most companies will utilize both of these methods. The company will establish a connection to its users utilizing asymmetric key encryption and generate a symmetric session key to conduct all further business.

2. Many internal auditors and IT professionals believe wireless networks and mobile devices pose high risks in a firm’s network system. Collect information to examine whether this concern is valid. If so, identify the risks and the general controls to help reduce these risks.

Answer: A company should have all of its mobile devices require VPN’s into the company’s network if it allows them to connect at all. This can allow a mobile device to connect through an un-trusted wireless network. The company should also keep any of its own wireless networks separated physically from the wired more secure networks that business is conducted through.

3. Under PKI, Certification Authority (CA) plays a critical role in the success of maintaining information security. Search the Internet to find a few public firms that are CAs. Compare these firms and provide suggestions on how to choose a CA as part of information security management.

Answer: DigiCert: A large organization approved by several government organizations.

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VeriSign: Part of Symantec; a large public security firm that is a trusted in the security industry.

When selecting a PKI CA provider, it is important to focus on trustworthiness and proven history of security and confidentiality. In addition, the provider must possess sufficient resources to meet your needs. As always, third party service providers should have reports available to its customers providing third party assurance over the security of its systems.

4. (Connect) Match the descriptions with each encryption method.

Descriptions a. Good for large data sets b. Slow in processing c. Convenient for key distribution & key management d. Each user has a public-key and a private key e. Good for authentication

i. ii.

Encryption Method Symmetric-key encryption Asymmetric-key encryption

Answer: a. b. c. d. e.

i ii ii ii ii

5. (Connect) Match correct statement(s) with each term regarding system availability.

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Internal Controls a. Activities required to keep a firm running during a period of displacement or interruption of normal operations b. A process that identifies significant events that may threaten a firm’s operations and outline the procedures to ensure that the firm will resume operations if such events occur c. A service model in which a third-party service provider offers computing resources, including hardware and software applications, to cloud users over the Internet, and the service provider charges on a per-user basis d. A clearly defined and documented plan that covers key personnel, resources including IT infrastructure and applications, and actions required to be carried out in order to continue or resume the systems for critical business functions e. Using redundant units to provide a system with the ability to continue functioning when part of the system fails f. A device using battery power to enable a system to operate long enough to back up critical data and shut down properly during the loss of power Answer: a. b. c. d. e. f.

System Availability Terms i. Uninterruptible power supply ii. Fault tolerance

iii. Cloud computing

iv. Disaster recovery planning

v. Business continuity management

v iv iii iv ii i

6. (Connect) Identify the activities of vulnerability management and assessment.

Activities a. Prioritize vulnerabilities b. Design a risk response plan c. Monitor vulnerabilities d. Establish policy and requirements e. Identify vulnerabilities

i. ii.

Answer: a. b. c. d. e.

ii i i i ii

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Category Vulnerability management Vulnerability assessment

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7. There are computer fraud schemes in systems development life cycles (refer to Figure 12.6). Identify and discuss the oversight or weakness for each phase.

Answer: a. b. c. d. e.

Lack of authentication and/or role based access control Lack of consideration for security vulnerabilities Lack of code reviews Lack of enforcement of documentation and back-up procedures End-user access to source code

8. Internal auditors are often tasked with testing vulnerabilities. How would you suggest testing for system intrusion, logical access control, natural disasters, and intentional destruction of information?

Answer: System intrusion: • Broad Detection Range: Internal auditors should measure the ability of the system to detect different type of intrusions. o Work with a 3rd party IT team to try to hack the system.

• Economy in resource usage: Internal auditors should also measure the consumption of computer resources by the intrusion detection system.

• Resilience to stress: Auditors are supposed to look at operational impairment in the case of high computing activity.

Logical access control:  The company has formal policies and procedures for logical access, physical access and IT security.  Requests for New or Revised Access Form are approved by the Department Manager.  Administrator access to active directory, application and database is limited to authorized personnel.  Department Manager performs access review for applications and the active directory domain.  Event logging is activated and configured per policy.  All employees are required to have three things to access the system; something they have, know and are. Testing is done to see if system can be accessed without one of these three items.

Natural disasters:  The company should develop an IT disaster recovery plan. It begins by compiling an inventory of hardware (e.g. servers, desktops, laptops and wireless devices), software applications and data. The plan should include a strategy to ensure that all critical information is backed up.  Vendors should be able to provide “hot sites” for IT disaster recovery. These sites are fully configured data centers with commonly used hardware and software products. Subscribers may provide unique equipment or software either at the time of disaster or store it at the hot site ready for use.

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



It’s better for the company to have access to more than one facility. Hardware at an alternate facility can be configured to run similar hardware and software applications when needed. Assuming data is backed up off-site or data is mirrored between the two sites, data can be restored at the alternate site and processing can continue.

Agreement with another company of similar size in a different location to utilize their system as a database backup. Agreement could include doing the same for the “sister” company.

Intentional destruction of information:  Periodic testing and evaluation of the effectiveness of information security policies, procedures, practices, and security controls to be performed with a frequency depending on risk, but no less than annually.  A process for planning, implementing, evaluating, and documenting remedial actions to address any deficiencies in the information security policies, procedures, and practices of the organization  Procedures for detecting, reporting, and responding to security incidents  Plans and procedures to ensure continuity of operations for information systems that support the operations and assets of the organization.  Frequent and regular tests to ensure information is present. Knowledge of this process could deter destruction of information.  Keeping important information with limited access. Or in a situation where two people must be present to access.  System Configuration Review: Internal auditors should conduct a review of how the system is configured. (GTAG, Auditing Application Controls, IIA) o “Review the three-way match system parameters” o “Query the underlying programming code of the application report generation process for appropriate logic” o “Rerun the query to compare the report to the one management generated” 9. Browse the Internet to identify some recent cases related to system availability. What are the risks and issues in system availability of these cases? Indicate possible controls to mitigate the risks.

Answer: Students’ answers may vary.

Typical risks are: • Unauthorized access to the system leads to system intrusion and data corruption.

• The more complicated the system, the longer it takes to restart it. Hence, outages that require system shutdown and restart can dramatically affect your ability to meet a challenging availability target.

• A support person who is called in afterhours could easily take an hour or two simply to arrive to diagnose the problem.

• Unsuspecting users opening e-mails that appear genuine and without viruses • From the Cisco article: “Analysts add that most of existing tools track individual pieces of hardware, or take samples of information flows rather than tracking every packet of data.

Because of Cisco’s central position in hardware plumbing, the information they have “gives 13

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you granularity that no one has ever had before,” said Zeus Kerravala, an analyst at ZK Research.”

Possible controls to mitigate risks: Test the Change Control Process Applications are always evolving to fit new business requirements and improve behavior. Even mission-critical applications change over time. Because the change control process is a large source of downtime-causing errors. A business- or mission-critical application must not go into production until it can be repeatedly performing error free change control.

Test Catastrophic Failure Before deploying new application, companies should make sure that the catastrophic recovery procedures are created work as expected. Is the recovery team ready? It must be trained, equipped, and well-rehearsed. The plan is not useful if the recovery plan is not effective.

Test for Resource Conflicts  Availability engineering requires in-depth consideration of an application's interactions with other system processes. Auditors must look at how a particular service is provided, evaluate all the ways some other application might interfere with the intended service, test for conflicts, and possibly consider design alternatives.  Update system belong the Secure E-mail Gateway (SEG) and educate employees through training to identify scams. Be clear about communicating how information will be requested and be consistent in following your own policies.  From Cisco article above: “Security is a key focus. One reason companies struggle in stopping network attacks is the constant changes in where they originate, which make it hard to keep a list of suspicious machines or internet addresses to block.  Cisco said its new technology makes it easier, instead, to enforce a “white list” of authorized systems, so that servers can only accept connections from approved devices and no others.” 10. Consider each of the following fraud cases. Identify the incentive, opportunity, and rationalization present in each case. a. An employee of a telecommunications firm’s payroll department moved to a new position within the department in which she no longer has privileged access to payroll accounts.

However, when changing positions, her access rights to the payroll accounts were left unchanged. An associate told her that he was starting a financial service business and needed some contact information. Using the privileged access rights that she had retained, the employee provided her associate with confidential information of many employees, including 401k account numbers, credit card account numbers, and social security numbers, which he then used to commit more than 100 cases of identity theft. The insider’s actions caused more than $1 million worth of damages to the firm and its employees. b. A database analyst of a major check authorization and credit card processing company went beyond his authorized computer access rights. The employee obtained his firm’s consumer information of 8.4 million individuals. The stolen information included names and addresses, bank account information, and credit and debit card information. He sold the data to telemarketers over a five-year period.

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c. An IT consultant working under contract for an offshore oil platform company was denied an offer for a permanent job with the same company. He then accessed the firm’s computer systems without approval and caused damage by impairing the integrity and availability of data. d. A manager responsible for payment authorization hired an offshore programmer to insert a couple of independent contractors to the vendor table of his company’s database. He then authorized payments to the independent contractors on fictitious services for personal gain.

He spent the stolen money on luxury items and extravagant purchases for himself, his family, and friends.

Answers: a.

Incentive: The insider’s action involves more than $1 million worth to the firms and its employees. The employee may be jaded that her new position no longer has privileged access to payroll accounts. This may have been felt as a demotion.

Opportunity: When changing positions, her access rights to the payroll accounts were left unchanged.

She realizes her access rights were not changed. She may not have received training that indicated this would be unacceptable behavior.

Rationalization: She was an employee of payroll department and hence she might feel it is not wrong to access to those payroll accounts. She may have felt she HAD to give this information to the associate if he was in a higher position of responsibility. b.

Incentive: He could sell 8.4 million consumers’ information to telemarketers over a five-year period.

Opportunity: The data analyst has been authorized with computer access rights to 8.4 million consumers’ information. The analyst was not authorized, but apparently had the capability to extend his computer access rights.

Rationalization: Being a database analyst, he might feel it is acceptable and justifiable to sell that information to external parties. He probably rationalized that if it was not secure enough to keep him out why would it matter if he sold the information. c.

Incentive: He was able to access the firm’s computer systems without approval and thus he was able to revenge the company for not offering a permanent job to him. Deny an offer of permanent employment after working as a consultant.

Opportunity: He was able to access the firm’s computer systems without approval and caused damage even as a contractor. Since he was an IT contractor he already know the companies systems well and had the capability to access the data.

Rationalization: As an IT consultant, he might feel it was easy for him to conceal his action and caused damage without being notice. He may have felt that the company deserved these actions since they did not value him. d.

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Incentive: He could authorize payments on fictitious services for personal gain and spent money for himself, his family and his friends. The incentive is the luxury items and extravagant purchases for himself, family, and friends.

Opportunity: He had the opportunity to authorize payments to the independent contractors on fictitious services. The opportunity arises from having access to an offshore programmer who can hack the system to input vendors in a way unrelated to him.

Rationalization: He might feel that he is the manager and would not be caught for fraudulent payment authorization. As a manager he may feel that he is authorized to use the funds however he sees fit as long as it appears that it is being used for business purposes. Or maybe he feels he deserves a better lifestyle and is currently underpaid.

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11. Match correct purposes, contents and users regarding SOC reports. LO 12-6 Purposes, Contents, and Users SOC reports a. Easy to read by the general public in a summary i.SOC 1 format on security, availability, processing integrity, confidentiality or privacy b. To assess governance, risk management and ii.SOC 2 compliance programs. c. Reports for a period of time iii.SOC 3 d. To provide a general understanding and for iv.Type 1 SOC reports marketing purposes e. To be used by the auditors and the management v.Type 2 SOC reports of the user company f. Reports for a specific date g. To be used by the management of a service organization, regulators, and others h. To examine security, availability, processing integrity, confidentiality or privacy policy and practice of the service organization Answers: a. b. c. d. e. f. g. h.

iii ii v iii i iv ii ii

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Chapter 13 – Monitoring and Auditing AIS Multiple Choice Questions 1.

(LO 13-1) A local area network (LAN) is best described as a(n) a. computer system that connects computers of all sizes, workstations, terminals, and other devices within a limited proximity. b. system that allows computer users to meet and share ideas and information. c. electronic library containing millions of items of data that can be reviewed, retrieved, and analyzed. d. method to offer specialized software, hardware, and data-handling techniques that improve effectiveness and reduce costs.

Answer: A 2. (LO 13-1) Which of the following network components is set up to serve as a security measure that prevents unauthorized traffic between different segments of the network? a. Switch b. Hub c. Firewall d. Virtual local area networks (VLANs) Answer: C 3. (LO 13-1) Unauthorized alteration of records in a database system would impair which of the following components of the CIA (related to security)? a. Confidentiality b. Integrity c. Availability d. Authorization Answer: B 4.

(LO 13-1) Which of the following is not a task performed by an operating system? a. Translate high-level languages to machine-level language. b. Manage job scheduling and multiprogramming. c. Support applications and facilitate their access to specified resources. d. Provide controlled access to data and process data.

Answer: A 5. (LO 13-1) Managers at a consumer products company purchased personal computer software from only recognized vendors and prohibited employees from installing nonauthorized software on their personal computers by enforcing a new end-user computing policy. To minimize the likelihood of computer viruses infecting any of its systems, the company should also a. restore infected systems with authorized versions. b. recompile infected programs from source code backups. c. institute program change control procedures. d. test all new software on a stand-alone personal computer.

Answer: D 1

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6.

(LO 13-1) Unauthorized alteration of records in a database system can be prevented by employing a. key verification. b. computer matching. c. regular review of audit trails. d. database access controls.

Answer: D 7. (LO 13-1) An organization is planning to replace its wired networks with wireless networks. Which of the following approaches provides the most secure wireless network? a. Implement wired equivalent privacy (WEP) protocol. b. Allow access to only authorized media access control (MAC) addresses. c. Disable the network interface card (NIC). d. Implement wi-fi protected access (WPA2).

Answer: D 8. (LO 13-3) The vice president of human resources has requested an audit to identify payroll overpayments for the previous year. Which would be the best audit technique to use in this situation? a. Test data b. Generalized audit software c. Integrated test facility d. Embedded audit module Answer: B 9.

(LO 13-2) Which of the following statements about CAATs is not correct? a. Parallel simulation attempts to simulate or reproduce the firm’s actual processing results. b. The test data technique uses a set of hypothetical transactions to examine the programmed checks and program logic in programs. c. The integrated test facility is a programmed module or segment that is inserted into an application program to monitor and collect data based on daily transactions. d. The embedded audit module may require the auditor to have a good working knowledge of computer programming and a solid understanding of IT risks that may exist in a system.

Answer: C 10. LO 13-3) Which of the following audit techniques should an IS auditor use to detect duplicate invoice records within an invoice master file? a. Test data b. Generalized audit software c. Integrated test facility d. Embedded audit module Answer: B 11. (LO 13-1) A group of computers, printers, and other devices connected to the same network and covering a limited geographic range is called a a. LAN. b. VAN. 2

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c. VPN. d. WAN. Answer: A 12. (LO 13-1) The most common security threats for wireless LANs include a. man-in-the-middle. b. system malfunction. c. social engineering. d. virus.

Answer: A 13. (LO 13-3) The test data technique uses a. a programmed audit module that is added to the system under review. b. a computer program to reprocess the firm’s actual data for a past period to generate simulated results. c. a set of input data to validate system integrity. d. an automated technique that enables test data to be continually evaluated during the normal operation of a system.

Answer: C 14. (LO 13-1) Which of the following is not one of the main purposes for a WAN? a. Provide remote access to employees and/or customers. b. Link two or more geographically dispersed sites within a company. c. Provide corporate access to the Internet. d. Securely connect a network to distant offices in a building by sending encrypted packets.

Answer: D 15. (LO 13-1) An operational database a. contains data that are volatile. b. covers the data of current and previous fiscal years. c. is updated before transactions are processed. d. contains data that are uploaded from a data warehouse.

Answer: A 16. (LO 13-1) What is the main purpose of using VPN today? a. Secure the data transmission between e-business trading partners. b. Examine the Internet traffic and to prevent DoS attacks. c. Maintain a secured data transmission or communication for remote access. d. None of these options are correct.

Answer: C 17. (LO 13-1) Select the correct statement(s) regarding network devices. a. Firewalls are used to screen and secure data transmitted among internal networks. b. Routers use IP addresses for data transmission over the Internet.

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c. Hubs are used for transmitting packets over internal networks. d. (a) and (b) are correct. e. (b) and (c) are correct.

Answer: E 18. (LO 13-1) Select a correct statement regarding routers. a. Routers are used for data transmission over internal networks. b. Routers use MAC addresses to pass the packets over the Internet. c. Routers and hubs using the same approach in transmitting packets. d. None of these options are correct.

Answer: D 19. (LO 13-1) Select a correct statement regarding database systems. a. Data mining is often used to analyze data in the data warehouse. b. A data warehouse is the operational database. c. A company’s ERP system is often the same as the data warehouse. d. Two of these statements are correct.

Answer: A 20. (LO 13-2) Which of the following is not a generalized audit software (GAS)? a. ACL b. SAP c. IDEA Answer: B

Discussion Questions 1. What are the main reasons for using a VPN? There are several reasons for an enterprise to use a VPN: a. The enterprise would like to connect widely dispersed offices without leasing a direct, private line from its service provider. The use of a VPN allows the company to securely simulate a WAN environment using the otherwise unsecure internet. b. The company would like geographically dispersed employees to be able to access the company network to work remotely. This can be particularly desirable for personnel such as outside sales representatives who, due to the nature of their jobs, are often on the road away from the secure corporate LAN. c. VPNs are cheaper than leased lines. d. Companies are able to maintain high levels of productivity as would be achieved using a LAN with a widely dispersed workforce.

2. Consider the computer attacks in the previous chapters. How would a VPN protect a user from one or more of them?

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The VPN encrypts data so that only the VPN can interpret it. So, if the data is intercepted by a hacker it will lack meaning.

3. We often use regression analyses in data mining. Are accountants required to understand data mining? Why? Data mining is becoming a requirement for accountants as investors are demanding continuous auditing. Continuous auditing relies on data mining to see if trends in ratios are shifting indicating that fraud could be occurring.

4. What is the main purpose of using firewalls? Search over the Internet to find its importance for cybersecurity. a. Firewalls are intended to prevent certain types of unwanted data packets from entering the enterprise’s network. This activity can prevent certain types of network intrusion such as a message bearing a telnet (an unsecure remote connection protocol) command. They are generally not sufficient to protect an enterprise network alone but can be an integral part of a company’s IT security plan. b. The main purpose of using a firewall is to prevent rejected data from entering or leaving a company’s private network. This is done by using accept and reject rules to filter the incoming or outgoing data. Firewalls can provide protection against cyber-attacks by protecting networks from malicious or unnecessary network traffic. “Firewalls can also prevent malicious software from accessing a computer or network via the internet. Firewalls can be configured to block data from certain locations (i.e., computer network addresses), applications, or ports while allowing relevant and necessary data through.” https://www.cisa.gov/uscert/ncas/tips/ST04-004 (accessed 12/8/2022) 5. Firewalls rely on a list of allowed and blocked services and locations. What would happen if a company's firewall rules were too weak? If the firewall rules were too strict? a. If a firewall’s rules were too weak, hackers could access the company’s servers, obtain, destroy, corrupt or take data. b. If a firewall’s rules were too strict, employees would not be able to efficiently complete their work, if at all, as their access would be so limited.

6. Are there differences among hubs, switches, and routers? a. Hubs, switches, and routers connect computers to other computers through ports, or connectors. b. Hubs are simple, cheap, and unintelligent. All data that is put in, is sent out to all other computers. Whatever response is made by the computer is sent back to the hub and sent to all other computers. c. Switches learn locations. Each data that enters the switch teaches it where it originated and is destined. Any response will only be sent to the location of origin. This location will be remembered for future use. This enhances efficiency. d. Routers are smart, complicated, and can serve as a firewall. They are programmed to understand, manipulate as needed, and route data. They learn locations just like switches.

They also perform Dynamic Host Configuration Protocol (DHCP) and Network Address Translation (NAT). During DHCP routers assign IP addresses externally and internally. NAT is how the router assigns IP addresses to external computers. It then only accepts responses

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from computers to which local computers initiated communication. This is how they serve as firewalls.

7. Identify a few critical security issues in using a wireless network. a. Eavesdropping b. Man-in-the-middle c. Masquerading d. Message modification e. Message replay f. Rogue access points g. Traffic analysis h. Denial of service attacks 8. Using a brute-force attack, hackers can crack the password to a WEP access point in about 5 minutes. WPA2 in about 2 days. What does this tell you about the security of wireless networks?

Wireless networks are only as secure as the complexity of the algorithms that protect their authentication and encryption.

9. Auditors are constantly developing new CAATs analyses to help them in the assurance process. Use a search engine to identify some of the techniques that are being used currently. a. Filter and Display Criteria b. Aging c. Expressions and Equations d. Join and Relate e. Gaps f. Trend Analysis g. Statistical Analysis h. Regression Analysis i. Duplicates j. Parallel Simulation k. Sort and Index l. Benford’s Law m. Summarization n. Matching o. Stratification p. Combination of One or More https://www.aicpastore.com/Content/media/PRODUCER_CONTENT/Newsletters/Articles_2 010/CPA/Jan/CAATS.jsp (accessed 7/7/2016) 10. When would an auditor prefer to conduct a black-box audit? A white-box audit? a. Black-box audits are preferential when an auditor is determining how well a network will hold up to an attack from an external source which knows nothing about the internal structure of the company.

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b. Auditors would prefer a white-box audit if there are suspicions of internal fraud or to determine weaknesses in the internal control environment.

11. Continuous auditing allows auditors to validate data and monitor transactions in near real-time.

What advantages does this provide to auditors? What are some potential problems with continuous auditing? a. Advantages i. Prevent and catch fraud early ii. Reduction of errors iii. Catch breakdown of internal controls and recommend response to management iv. Increase operational effectiveness v. Enhance compliance with laws and regulations vi. Increase management confidence in control effectiveness and financial information vii. Monitor transaction data in a timely manner viii. Understand critical control points, rules, and exceptions, ix.Performance of control and risk assessments in real or near real time x. Reduction of routine testing xi.Increase focus on investigation activities b.

Potential Problems i. Expensive ii. Alterations of previously audited data iii. Collusion of auditor due to regular engagement with client iv. A breakdown in independence due to formed relationship v. Disruptive of business operations 12. Auditing an accounting information system requires knowledge and skills in both accounting and computers. However, most auditors may not have sufficient expertise in the technical side of computing and information systems. Given today’s business environment, how much computer- and information systems-related knowledge and skills must an auditor have to be effective in performing auditing? a. Auditors need to have a working knowledge of the ERP system in which financials are audited i. If an auditor does not know the weaknesses of an ERP system, they will not be able to pinpoint where fraud may be occurring ii. Employees who use a specific system will know how to manipulate it well b. Auditors will need to know how to query and recreate queries of databases c. Auditors will need to understand strengths and weaknesses of the security of the information system and what are quality tests d. Auditors will need to understand how cloud-based technologies alter the workplace environment and security

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Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. (Connect) Match the descriptions with each type of network.

Descriptions a. This computer network covers a broad area (e.g., includes any network whose communications links cross metropolitan, regional, or national boundaries over a long distance). b. The Internet is a good example of this type of network. c. This type of network often uses Layer 2 devices like switches and bridges and Layer 1 devices like hubs and repeaters. d. The purpose of this type of network is mainly for remote access. e. This type of network comprises of two fundamental architectural components: stations and access points. f. This type of network has a large geographical range generally spreading across boundaries and often need leased telecommunication lines.

Answer: a. b. c. d. e. f.

i.

Network LAN

ii. WAN iii. VPN

iv. Wireless LAN

ii ii i iii iv ii

2. (Connect) Match correct descriptions with each network devices.

COSO ERM Principles Network Devices a. Using IP address to transport packets i.

Hubs b. Using MAC address to transport packets ii.

Switches c. Using rules to screen incoming and iii.

Firewalls outgoing packets d. Do not use source or destination iv.

Routers addresses to transport packets e. Always used for Internet transportation of packets f. Broadcast to all devices when transport packets for internal networks Answer: a. b. c. d. e. f.

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3. Match the continuous auditing alarms to flag the fraud schemes.

Fraud Scheme Continuous Auditing Alarms a. Operating expenses were illegitimately 1. Generate an alarm if the reclassified as capital expenditures, which allowance for doubtful improved the “expenditure-to-revenue” (E/R) accounts differs significantly from the last months ratio ratio by reducing the amount of expenses recorded in the current fiscal year. (i.e., to Accounts Receivable). b. Book values of acquired entities were 2. Benchmark key ratios (e.g., illegitimately reclassified as goodwill on the E/R) against industry averages books, which improved the E/R ratio by and generate an alarm when increasing the effective amortization period of there is a significant the amounts in question. discrepancy between the two. c. Excessively write down the assets included in 3. Create an alarm that the corporate acquisitions, which gave “the identifies increases in plant, false impression that expenses were declining property, equipment, and over time in relation to revenue (i.e., reducing goodwill that differ the E/R ratio and increasing net income from significantly from historical operations)”. averages. d. Allowance for doubtful accounts was 4. Create an alarm that underestimated (along with the corresponding simultaneously identifies (1) expense entry, bad debts expense) to falsely reductions in operating improve the E/R ratio. expenses that exceed the industry average and (2) increases in capital expenditures that exceed the industry average.

Answer: a. iv b. iii c. ii d. i

4. (CIA adapted) As an internal auditor, you have been assigned to evaluate the controls and operation of a computer payroll system. To test the computer systems and programs, you submit independently created test transactions with regular data in a normal production run. Identify advantages and disadvantages of this technique.

This is not the preferred method of testing the production system. The auditor has disrupted the integrity of the data system by entering what is essentially false data into the live database. The data that is entered is now part of the legal records of the company even though it is not real. This could be construed as fraudulent data entry. If the auditors were concerned about the production environment, they should have analyzed the real payroll transactions to determine if any of them would adequately fulfill the test objectives and monitored those real transactions. If tests still need to be entered, the auditors should utilize the Quality Assurance environment.

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5. Describe how an auditor would use each of the following audit techniques: ITF, parallel simulation, EAM, GAS. a. Integrated Test Facility: uses auditor live master files which are placed into the live client system. Test transactions are run so that only the auditor’s files are affected. b. Parallel simulation: is used to reprocess client data in the auditor’s GAS. The output is compared to the client’s actual output for verification. c. Embedded Audit Module: is used to continuously audit a client by embedding a sequence of code into the client’s system. This code monitors transactions and creates a log of suspicious items. https://www.aicpa.org/interestareas/frc/assuranceadvisoryservices/downloadabl edocuments/whitepaper_evolution-of-auditing.pdf (accessed 12/8/2022) d. Generalized Audit Software: is used for statistical analysis of data extracted directly from the client to identify exceptions for further testing or determine the likelihood of material misstatement in accounts.

6. Identify the key features of a continuous audit and the common techniques to implement the audit. a. Features i. Accessing and normalizing data from across the enterprise ii. Extracting large transactional volumes without negatively impacting system operations iii.Testing data and reporting results in a timely manner b. Common techniques i. Database Management Systems ii. Transaction logging and query tools iii. Data warehouses iv. Data mining v. Computer-assisted audit techniques (CAATs) 7. (CMA adapted) As chief executive auditor, Mallory Williams heads the internal audit group of a manufacturing company in southern Texas. She would like to purchase a CAAT tool to assist her group in conducting internal audit functions. She has asked you to prepare a report on the following tools: ACL, IDEA, Microsoft Visio, Oversight, and Tableau. In your report, identify key features, how an auditor would incorporate the tool into the audit, and recommend one or two of the tools for purchase. a. Tools for audit 1) ACL i. Manage projects across Audit, Risk, Compliance, Finance & IT; Visualization of risk and control analysis; Continuously monitor and analyze risks and controls ii. This would be used to manage the flow of audits as well as see where fraud may occur and monitor it 2) IDEA i. Big data analysis software able to analyze 100% of data quickly with integrity ii. This would be used to analyze the data about accounts 3) Microsoft Visio i. Flowchart preparation software 10

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ii. This would be used to document business processes to see where internal controls might breakdown 4) Oversight: i. A web-based expense analysis software enabling identification of fraud and waste though expense report, purchase card and account payable review ii. This would be used to see where expenses are being manipulated 5) Tableau i. Business intelligence software that helps “people to see and understand data” ii. This would be used to present concerning data to upper management b. Tools recommended for purchase 1) ACL would provide the most comprehensive support to the internal audit process 2) Visio would be a good tool for developing flow charts to understand processes and where internal controls have potential for breakdown

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Chapter 14: Reporting Processes and eXtensible Business Reporting Language (XBRL) Multiple Choice Questions 1. (LO 14-1) A subset of a data warehouse is called a a. small data warehouse. b. data mart. c. data martian. d. business intelligence.

Answer: B 2. (LO 14-1) A data lake may include a. an XBRL style sheet. b. process diagrams. c. a digital dashboard. d. both structured and unstructured data.

Answer: D 3. LO 14-2) American Airlines may use business intelligence to a. track the cost of snacks on its airplanes. b. monitor the cost of its pilots and flight attendants. c. track the cost of its airplane fuel. d. monitor prices on competitive routes. e. All of these options.

Answer: E 4. (LO 14-2) The computer-based technique to accumulate and analyze data to learn about a. a competitor is called b. business intelligence. c. data warehouse. d. digital dashboard. e. XBRL. Answer: A 5. (LO 14-2) The steps in business intelligence include a. analyze data for patterns, gather information, make decision. b. create data warehouse, query data warehouse, make decision. c. query data warehouse, create data warehouse, make decision. d. gather information, analyze data for patterns, make decision.

Answer: D 6. (LO 14-3) A digital dashboard tracks, in a user-friendly way: a. automobile speed.

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b. critical business failures. c. critical business processes. d. critical business markets.

Answer: C 7. (LO 14-4) XBRL facilitates business reporting of a. business processes. b. the XML language. c. financial and nonfinancial information. d. only financial information.

Answer: C 8. (LO 14-4) The first person to propose using XML as a means to electronically deliver financial information was a. Albert Gore. b. Charles Hoffman. c. Robert Byrd. d. Herb Hackett.

Answer: B 9. (LO 14-4) XBRL GL, or XBRL Global Ledger Taxonomy, is different from XBRL U.S. GAAP because it facilitates a. efficient communication between the firm and external parties. b. efficient communication within a firm. c. efficient communication with the supply chain. d. efficient communication with customers.

Answer: B 10. (LO 14-4) The stated advantages of XBRL GL do not include a. reporting independence. b. system independence. c. scalability. d. flexibility.

Answer: C 11. (LO 14-3) What is the mechanism called that firms may use to track their marketing efforts? a. XBRL b. Business intelligence c. Data analytics d. Digital dashboard Answer: D 12. (LO 14-4) XBRL assurance might include all but which of the following?

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a. The most current, standardized XBRL taxonomy is used. b. The XBRL tagging is accurate and complete. c. The reports generated using XBRL are complete and received on a timely basis. d. The XBRL tagging is useful to investors.

Answer: D 13. (LO 14-4) The XBRL style sheet is made in conformance with which standardized language? a. XML b. XSL c. XBRL GL d. XL Answer: B 14. (LO 14-4) Which body mandated that operating firms in its jurisdiction submit their financial reports using XBRL? a. FASB b. GASB c. SEC d. NYSE Answer: C 15. (LO 14-2) Which technique or tool is used to analyze data for business intelligence purposes? a. Data mining b. Decision support systems c. Data marts d. Big Data Answer: A

Discussion Questions 1. Using Exhibit 14.2 as a guide, name three internal and three external databases that you think should be included in a data warehouse for Bank of America, Wells Fargo or your local bank.

Support your answer.

Internal Databases might include the following: General Ledger Loan Portfolio (Including loan products) Vendor Database Potential Customer Database Current Customer Database (and related demographics) External Databases might include the following: General Economy Information (GDP, Interest Rates, etc.)

Focal Customer Demographics 3

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Banking/Finance Industry Information Data warehouses are made for different purposes. The databases proposed above presume an interest in selling new loan products to existing and potential customers. We get profitability information of the various loan products from the internal databases. We also get information on potential customers, economic and industry trends from the external databases. In sum, these databases can spot trends and opportunities for a bank.

2. Using Exhibit 14.2 as a guide, name three internal and three external databases that you think should be included in a data warehouse for your university. Support your answer.

Internal Databases might include the following: Student Recruitment Database Student Course Catalog Database Student Performance Database (include ACT, SAT, high school grades, college grades) External Databases might include the following: General Economy Information (GDP, Interest Rates, etc.)

Focal Student Demographics University Industry Information Data warehouses are made for different purposes. The databases proposed above presume an interest in gathering information to attract the highest quality students to a university. Getting information on recruitment means, scholarships, grades, and courses taken might all be helpful in attracting prospective candidates. Information can also be gleaned from external databases to learn trends of universities, students (via focal student demographics) and the general economy. All of this information might be helpful in attracting students to a university.

3. Name five items that you think would be included in a digital dashboard for ESPN or for Disney.

Why are these critical business processes for them?

A digital dashboard for ESPN might include the following:  Current viewership/subscribers (Last two weeks and trends from recent months)  Advertising Revenues (Last two weeks and trends from recent months)  Current game/conference contracts in progress  Current website hits/Fantasy Football, Baseball etc. game participation  Status of negotiations with various cable subscribers.

This dashboard is meant to capture the status of operations, advertising and new game revenues for ESPN. A similar solution might be rendered for Disney.

4. Who will rely on XBRL data for decision making? Why is assurance needed on XBRL data?

Support your answer.

XBRL might be used by investors, financial analysts, regulators, and creditors (banks, etc.).

As these various XBRL users rely on the information to make important decisions, it is important that the XBRL data be accurate. Thus, assurance is needed for XBRL data in addition to the financial statements underlying that XBRL data.

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5. Why is there a different XBRL taxonomy for each country, including XBRL Australia, XBRL Canada, XBRL Germany, XBRL Japan, XBRL-Netherlands, XBRL-US, and XBRL-UK? What would happen if there were only one XBRL taxonomy for all countries?

Different countries have different financial standards (IFRS, FASB, country-specific) and have various practices that are reflected in their XBRL taxonomy. Moreover, there are also tags and extensions that are company-specific to reflect the business model used by that particular company.

As financial standards converge toward a harmonized standard (such as IFRS), there is increasingly a chance that one XBRL standard emerge. However, since XBRL is also used for regulatory purposes (such as taxes, banking, etc.) that is country-specific, it is not realistic to expect that a single world-wide standard to emerge.

A sole XBRL taxonomy for all countries would allow users to be able to access data from around the world in a similar fashion, allowing economy of effort, etc.

6. How would the XBRL style sheets be different for financial analysts as compared to the Securities and Exchange Commission? How would XBRL style sheets be different for a firm’s web site as compared to bank loan officers?

Style sheets used by financial analysts would be used in models supporting earnings and cash flow predictions. The SEC, in contrast, would be more interested in protecting investors as well as disclosure and regulatory issues and providing fraud analysis. The style sheets supporting these models would thus be quite different.

The XBRL style sheet for a company web site might only access the highlights for the retail investor. In contrast, the XBRL style sheet for bank loan officers would attempt to assess ability to pay back a loan and would tailor their style sheet to access that information that allows them to monitor liquidity and solvency.

7. Why is XBRL needed in the financial community? In your opinion, why did the Securities and Exchange Commission mandate its usage? What does it provide that was not available before XBRL? XBRL is needed as a means to rapidly and efficiently information to the investing public, including all financial statement users. An explanation as to why the SEC might be interested is that it quickly and efficiently allows the SEC to gather data for its own usage to ensure that a thorough disclosure is available to the investing public.

8. Why would XBRL be used for internal uses such as management accounting? Hint: See Exhibit 14.5.

Just as information is useful for external purposes, XBRL allows management to collect an extensive amount of disaggregated that might be used for internal purposes. As the firm’s financial and non-financial information is automatically tagged by either the enterprise system (e.g. SAP) using XBRL GL or tagged manually by professionals knowledgeable of the business, this information might be used for managerial accounting purposes. Moreover, XBRL might be the means of organizing management accounting information.

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9. Why do companies need both internal and external databases in a data warehouse?

Firms work to collect data that will be useful in optimizing performance. Data helpful to address the questions or provide support for decisions can come from a variety of sources both internal and external to the firm. A data warehouse therefore, will keep data from internal and external databases in such a way as to be ready for the analyst to gather, analyze and provide important information that might be useful for decision making.

10. How is a digital dashboard different from a financial report?

A digital dashboard tracks a firm’s process or performance indicators or metrics to monitor critical performance. The data for the digital dashboard may come from the financial report but may also track other non-financial indicators as well.

Problems (Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. Using Exhibits 14.1 and 14.2 as guides, name four internal and four external databases that you think should be included in a data warehouse for marketing function of Procter and Gamble or the consumer packaged goods company with whom you are most familiar. Procter and Gamble has products like Gillette razors, Charmin Tissue and Head and Shoulders Shampoo. Why are these eight databases you recommend critical to the effective functioning of the marketing department to sell more products? Support your answer.

Internal Databases might include the following: General Ledger – to help determine basic profitability of various products Customer Database (and related demographics) – to learn more about who buys Point-of-Sale Sales Data (who purchases, where and at what price points) Inventory Data (What products are available for sale, which have new innovations, etc.)

External Databases might include the following: General Economy Information (i.e., GDP, Interest Rates, etc.)

Focal Customer Demographics (what are important product characteristics for the consumer) Competitor Information (e.g., Unilever, Nestle, Kraft, etc.)

Retail/Consumer Packaged Goods Industry Information 2. Which of the four predicted assurance needs do you believe is most critical to ensuring XBRL accuracy? Support your answer.

The four predicted assurance needs in the near future include the following:  The most current, standardized XBRL taxonomy is used,  The underlying financial and nonfinancial data that is used in XBRL tagging is reliable,  The XBRL tagging is accurate and complete, and  The reports generated using XBRL are complete and received on a timely basis.

While all are four are important and require assurance to ensure XBRL accuracy, the third one with assurance that the selection of the appropriate XBRL tags is appropriate and complete is arguably the most important to ensure XBRL accuracy.

Answers will vary.

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3. XBRL allows disaggregated data to be presented to interested external parties. Financial analysts often forecast earnings many years ahead and then suggest whether an investor should buy, sell or hold a stock. Which type of disaggregated data do you think financial analysts would be most interested in receiving when predicting one-year ahead earnings? Detailed sales data, detailed expense data, detailed asset data and/or detailed liability data? Support your answer. In your opinion, which disaggregated XBRL data would be most useful information in predicting whether an investor should buy, sell or hold a stock?

Answers will vary. It is arguable that to come with up with a forecast of earnings, the detailed sales and expense and cash flows data would be most relevant as they would most directly lead to predictions of year-ahead data. Of course, depending on the nature of the underlying company and the balance sheet implications of the company, the detailed asset and liability may also be of importance.

4. The effectiveness of data mining has been criticized by the Wall Street Journal. In one article, the author notes that academic studies have shown that by using data mining, analysts could accurately predict changes in the stock market based on either the population of sheep in Bangladesh, or the number of nine-year-olds at a given time, or whether it is smoggy on a given day.1 While the statistical correlation may be valid, there must be a logical reason that a particular factor will predict stock returns.

Required: a. Do you think these findings represent valid relationships or spurious correlations?

While there may be a statistical association between smoggy days and stock market returns, such an association is a spurious correlation. Common sense suggests that smoggy days do not predict stock market returns. b. What measures do you think might be valid predictors of stock market returns?

Macroeconomic forces and accounting earnings are associated with annual stock market returns. A company that produces incremental profits in the current or unexpected prospects of profits in the future years, those companies will generally experience positive stock returns.

5. XBRL touts as its primary advantage that it will increase efficiency for the firm and those interested in its business reports.

Required: a. How is XBRL more efficient for the firm that reports its business performance? Does the use XBRL GL in a firm’s accounting software make XBRL more or less efficient than when XBRL GL is not used?

XBRL in and of itself may not make the reporting company more efficient in how it codes the data. However, the ultimate ability of XBRL to put the XBRL database in one location and let others access it for their particular needs will make it more efficient.

1 http://online.wsj.com/article/SB124967937642715417.html, accessed May 2016

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The use of XBRL GL makes it so the company will only have to code its information once directly into the XBRL GL package. b. How is XBRL more efficient for those using its business reports for regulator, investing or other purposes?

The users (such as regulators, investors, etc.) simply need to develop a style sheet to extract their reports from various companies via the GL. Developing one style sheet for multiple companies is much more efficient than inputting specific numbers from many companies and then analyzing them separately. c. Are there any cases when it is less efficient to use XBRL? If XBRL is not an integral part of the financial reporting or if its tagging is an add-on process, it will certainly make the company less efficient.

6. How would Coca Cola use business intelligence to monitor Pepsi Cola’s operations in Russia?

What sources of data need to be gathered? How would it be analyzed?

Coca Cola could monitor Pepsi’s marketing campaigns, business operations, production, new factory production, capital expenditures, pricing structure, and sales (among other things) via its business intelligence. Business intelligence might be gathered using a web crawler, which systematically browses the Internet including such sources as press releases, internet chat rooms, web sites, google hits, blogs, annual reports of bottlers, electronic commerce web sites, etc.

Once the information has been gathered, the data should be analyzed to discern patterns or trends. Are prices of PepsiCo products increasing? Are they looking at new locations to build a factory, etc.? Based on the information gathered, decisions can then be made by Coca Cola as a strategic response to what Pepsi is doing in Russia.

7.

1.

2.

3.

4.

(Connect) There are four stated advantages of XBRL GL: Reporting Independent, System Independent, Consolidation, and Flexibility. Match the advantage with the characteristic of XBRL GL. XBRL GL offers an extensible, multinational solution that can exchange the data A. Reporting Independent required by internal finance, accountants, B. System independent and creditors. -- D C. Consolidation D. Flexibility Any developer can create import and export routines to convert information from any system to XBRL GL format. -- B Permits the representation of information using traditional summaries and through flexible links. --A XBRL GL can be used to combine the operations of multiple organizations. --C

8. (Connect) Match the description of these XBRL terms with their descriptions.

1. A document containing XBRL elements 2. Adds presentation elements to XBRL instance documents to make them -A more readable to people -- C

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3. Defines and describes each key data element (e.g., total assets, accounts payable, net income, etc.) -- D 4. Provides the underlying technical details of what XBRL is and how it works. – B

A. B. C. D.

XBRL Instance Document XBRL Specification XBRL Style Sheet XBRL Taxonomy

9. (Connect) Match the description with these business process terms.

1. A subset of the information from the data warehouse to serve a specific A. Business Intelligence purpose --B B. Data Mart 2. A computer-based information system C. Data Warehouse that facilitates business decisionD. Decision Support Systems (DSS) making activities. --D 3. A collection of information gathered from an assortment of external and operational (i.e., internal) databases to facilitate reporting for decision making and business analysis. --C 4. A computer-based technique for accumulating and analyzing data from databases and data warehouses to support managerial decision making. -A

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10. (Connect) The following Exhibit represents a digital cockpit (or dashboard) for Advanced Environmental Recycling Technologies.

Source: Based on http://www.ge.com/annual01/letter/cockpit/ The cockpit has fifteen items highlighted. Please answer the following questions.

The cockpit has 15 items highlighted. Identify which numbered item tracks or shows the following data: a. The sales of Advanced Environmental Recycling Technologies - 1 b. The detail of the sub-business - 9 c. The previous day’s orders - 1 d. The current AERT stock price - 15 e. The column reporting the date of the most recent update - 7 f. The “alerts” that need to be investigated further -4 g. The column reporting the current performance - 5 h. The conversion cost percentage - 3 11.Data mining is the process of using sophisticated statistical technique used to extract and analyze data from large databases to discern patterns and trends that were not previously known. The patterns we find are correlations, but not necessarily causation.

Every time we see a link between the occurrence of one event or action with another, we generally assume that one event or action caused the other. But simply linking one occurrence with another does not always prove that the result has been caused by the other.

For example, such data mining might suggest the following relationship between arcade revenue and computer science doctorates awarded in the USA, with a correlation of 0.985.

Richardson, Chang, Smith – Accounting Information Systems, 4th Edition – Chapter 14

Source: http://tylervigen.com/spurious-correlations which highlights information from the US Census Burau and National Science Foundation. Used with permission.

A. Is this simply a correlation? Or is there a possibility that computer science doctorates impacts total revenue generated by arcades or vice versa? Explain your answer.

This is simply a correlation and a reasonably high correlation between the two. While there does exist the possibility that computer science doctorates are playing or are writing better games that an arcade can use, there is no evidence of a direct link between the two.

Source: http://tylervigen.com/spurious-correlations which highlights information from the US Census Burau and National Science Foundation. Used with permission.

B. Is this simply a correlation? Or is there a possibility that the number of people who drowned was affected by the films Nicolas Cage appeared in? Explain your answer.

Richardson, Chang, Smith – Accounting Information Systems, 4th Edition – Chapter 14

This is simply a correlation. While some would say that Nicolas Cage is an influential and popular actor, there is no evidence of a causal impact between the two.

12.(Connect) Data mining is the process of using sophisticated statistical technique used to extract and analyze data from large databases to discern patterns and trends that were not previously known. The patterns we find are correlations, but we do not necessarily find causation.

Newspaper headlines often link one activity to another and imply causation, rather than a simple correlation or association. Jon Mueller, a professor at North Central College, suggests when describing a correlation between two variables that there are some acceptable ways to describe this relationship.

ACCEPTABLE TERMS for Correlations Get Have Linked More, more/ less, less Tied Connected/Related Tend

AVOID THESE TERMS WHEN DISCUSSING CORRELATION (but are acceptable when asserting causation) Cause Increase/decrease Benefits Impacts Enhances/undermines Effect/affect Improves/Boosts If > Then type statements (implies one-direction)

In light of these suggestions, evaluate each of these headlines as to whether they suggest a causal or non-causal relationship.

1. Facebook users get worse grades in college –Correlation (non-causal) 2. Link between over-indebtedness and obesity identified –Correlation (non-causal) 3. Kids' TV habits tied to poorer test scores ; TV -- any TV -- harms toddlers, study claims – Correlation (non-causal) 4. Recession causes increase in teen dating violence - Causal 5. Snooze or lose: Memory retention enhanced by sleep - Causal 6. Soda causes obesity, researchers assert - Causal 7. Disciplinarian parents have fat kids–Correlation (non-causal) 8. Social isolation may have a negative effect on intellectual abilities – Causal Source: http://jfmueller.faculty.noctrl.edu/100/correlation_or_causation.htm 13.(Connect) Data mining is the process of using sophisticated statistical technique used to extract and analyze data from large databases to discern patterns and trends that were not previously known. The patterns we find are correlations, but we do not necessarily find causation.

Newspaper headlines often link one activity to another and imply causation, rather than a simple correlation or association. Jon Mueller, a professor at North Central College, suggests when describing a correlation between two variables that there are some acceptable ways to describe this relationship.

Richardson, Chang, Smith – Accounting Information Systems, 4th Edition – Chapter 14

ACCEPTABLE TERMS for Correlations Get Have Linked More, more/ less, less Tied Connected/Related Tend

AVOID THESE TERMS WHEN DISCUSSING CORRELATION (but are acceptable when asserting causation) Cause Increase/decrease Benefits Impacts Enhances/undermines Effect/affect Improves/Boosts If > Then type statements (implies one-direction)

In light of these suggestions, evaluate each of these headlines as to whether they suggest a causal or non-causal relationship.

1. Obese girls less likely to attend college, research shows –Correlation (non-causal) 2. Migraine often associated with psychiatric disorders –Correlation (non-causal) 3. Your parents are correct, scholars report: Studying pays off - Causal 4. Tooth loss in elderly linked to mental impairment –Correlation (non-causal) 5. Eating fatty fish lowers risk of dementia - Causal 6. Political bias affects brain activity, study finds - Causal 7. Child anxiety link to ecstasy use –Correlation (non-causal) Source: http://jfmueller.faculty.noctrl.edu/100/correlation_or_causation.htm 14.

(Connect) Consider each of the following statements and state whether they are true or false.

1. XBRL allows tagging of highly disaggregated data --True 2. XBRL GL allows the representation of anything that is found in a chart of accounts, journal entries, or historical transactions – financial and nonfinancial. --True 3. XBRL style sheets take the instance documents and adds presentation elements to make them readable. --True 4. XBRL stands for eXtensible Base Reporting Language. --False 5. XBRL Instance Documents contain the actual dollar amounts or the details of each account. --True 6. XBRL for US GAAP has approximate 2,000 element labels or tags. --False 7. Assurance of XBRL is required by the Securities and Exchange Commission. --False 8. XBRL GL serves as a ledger using the XBRL standard for internal purposes. --True 9. XBRL GL does not allow consolidation of the financials of multiple organizations. --False 10. There is a specific XBRL style sheet required by financial analysts. --False

15.

For Cost of Goods and Services Sold: XBRL Tag Name: CostOfGoodsAndServicesSold Documentation/Description: The aggregate costs related to goods produced and sold and services rendered by an entity during the reporting period. This excludes costs incurred during the reporting period related to financial services rendered and other revenue generating activities.

For Dividends:

Richardson, Chang, Smith – Accounting Information Systems, 4th Edition – Chapter 14

XBRL Tag Name: Dividends Documentation/Description: Amount of paid and unpaid cash, stock, and paid-in-kind (PIK) dividends declared, for example, but not limited to, common and preferred stock.

16.

For Current Liabilities: XBRL Tag Name: LiabilitiesCurrent Documentation/Description: Total obligations incurred as part of normal operations that are expected to be paid during the following twelve months or within one business cycle, if longer.

For Cash: XBRL Tag Name: Cash Documentation/Description: Amount of currency on hand as well as demand deposits with banks or financial institutions. Includes other kinds of accounts that have the general characteristics of demand deposits. Excludes cash and cash equivalents within disposal group and discontinued operation.

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Chapter 15 Emerging Technologies: Blockchain and AI Automation Multiple Choice Questions 1. (LO 15-2) Ben goes to his bank to wire transfer $1,000 to his sister Jennifer. The role of the bank in this transaction is best described as a. miner. b. blockchain. c. middleman. d. consensus.

Answer: C 2. (LO 15-1) Which of the following statements is true? a. Because blockchain transactions are stored in chronological order, you may trace a block from an earlier transaction block to the most recent block in the blockchain. b. Both permissioned and public blockchains need miners to determine which transaction block should be added next. c. Ethereum is a private blockchain. d. Smart contract was introduced in Ethereum.

Answer: D 3. (LO 15-3) Which feature cannot be found in Bitcoin? a. Double spend b. Anyone can join and leave the Bitcoin network at any time c. Immutable history of transactions d. A new block is added every 10 minutes Answer: A 4. (LO 15-3) In the Ethereum network a. transaction fees are higher than Bitcoin. b. mining of Ether occurs at a constant rate. c. because a smart contract describes business rules and is also flexible for different industries, it can be modified to fit the business after a block is inserted to the Ethereum network. d. miner uses SHA256 to determine if a block is a valid block.

Answer: B 5. (LO 15-4) A selected set of organizations may run a blockchain node separately for keeping the transaction records. Administrators from the organizations establish the access rights and permissions for each participant. This type of blockchain is often called a. public blockchain. b. permissionless blockchain.

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c. private blockchain. d. consortium blockchain.

Answer: D 6. (LO 15-4) Which of the following statements is false? a. A distributed ledger contains many copies of the same ledger. b. A distributed ledger stores the same set of transaction records. c. Because a distributed ledger exists in a blockchain network, a computer consisting of all transaction records may crash and cause the syncing issue in the blockchain network. d. A transaction record cannot be added to the blockchain unless there is network consensus.

Answer: C 7. (LO 15-4) Which of the following statements is false? a. Hyperledger is an open source blockchain platform created by the Linux foundation. b. Hyperledger is a permissioned blockchain with capabilities of handling smart contracts. c. The main objective of Hyperledger is to achieve cross-industry collaboration with blockchain technology. d. Hyperledger is a public blockchain.

Answer: D 8. (LO 15-4) Which of the following statements is false? a. Private blockchain requires permission to join the network. b. Bitcoin uses smart contract to specify the business rules. c. In Ethereum, a new block is added every 12 to 15 seconds. d. Blockchain transactions are immutable.

Answer: B 9.

(LO 15-5) When we refer to smart contract in blockchain, we mean a. a contract that can be edited at any time for business rules. b. a digital copy of paper contract such as a Word file. c. a digital contract that can be distributed to the participants with all terms defined. d. a piece of software code that can be executed or triggered by business activities.

Answer: D 10. (LO 15-3) Which of the following is created mainly for cryptocurrency application? a. Ethereum b. Hyperledger c. Corda d. Bitcoin Answer: D 2

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11. (LO 15-1) What information does a block in the Bitcoin network not contain? a. The sender b. The receiver c. The quantity of Bitcoins to transfer d. a and b e. None, a block contains all of this information.

Answer: E 12. (LO 15-4) What is a requirement of the proof of authority algorithm? a. A few members have known identities. b. A portion of the miner’s blocks will be locked until it is validated. c. Large quantities of computer power are required to solve a complex mathematical problem. d. None of these are a requirement of the proof of authority algorithm.

Answer: A 13. (LO 15-7) Which of the following is not true with respect to artificial intelligence? a. AI is a broad field in computer science. b. AI is intelligence exhibited by machines rather than humans. c. AI began in the 1990s. d. AI is also called cognitive technologies. e. None of these is true.

Answer: C 14. (LO 15-8) Which of the following best describes the difference between artificial intelligence and machine learning? a. Machine learning is a subset of AI. b. Machine learning only applies to deep learning algorithms. c. AI and machine learning are the same thing. d. Machine learning requires less data than AI. e. None of these.

Answer: A 15. (LO 15-8) Which of the following best describes machine learning? a. Machine learning is driven by programming instructions. b. Machine learning is a different branch of computer science from AI. c. Machine learning is a technique where a software model is trained using data. d. Machine learning is the ability of a machine to think on its own. e. None of these.

Answer: C 16. (LO 15-8) Which of the following is not part of the virtuous cycle of machine learning?

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a. Model b. Learn c. Predict d. Data e. None of these.

Answer: A 17. (LO 15-9) Which of the following best describes artificial neural networks? a. Training a neural network involves the use of real-world data. b. Deep learning is required for a neural network. c. Neural networks consist of inputs, neurons or nodes, and outputs. d. Neural networks only have two layers. e. None of these.

Answer: C 18. (LO 15-8) Which of the following best describes deep learning? a. Deep learning is used to solve philosophical problems. b. Deep learning involves complex, multilayer neural networks. c. Deep learning is different from machine learning in fundamental ways. d. Deep learning provides more output values than machine learning. e. None of these.

Answer: B 19. (LO 15-9) Which of the following is not directly related to one of the five questions that machine learning/AI is best suited to answer? a. Which business strategy will be most successful? b. Is this firm a good merger candidate? c. What type of customer will like this new product? d. How much can we sell this product for? e. None of these.

Answer: A 20. (LO 15-10) Which of the following best describes supervised learning? a. The training data contain missing labels or incomplete data. b. The training data match inputs to nodes in the network. c. The training data contain input–output pairs. d. The training data only include input values. e. None of these.

Answer: C 21. (LO 15-10) Which of the following best describes unsupervised learning?

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a. The training data contain missing labels or incomplete data. b. The training data match inputs to nodes in the network. c. The training data contain input–output pairs. d. The training data only include input values. e. None of these.

Answer: D 22. (LO 15-10) Which of the following best describes semi-supervised learning? a. The training data contain some missing labels or incomplete data. b. The training data match inputs to nodes in the network. c. The training data contain input–output pairs. d. The training data only include input values. e. None of these.

Answer: A 23. (LO 15-10) Which of the following best describes reinforcement learning? a. The model determines how elements of the dataset are alike. b. The training data match inputs to nodes in the network. c. The training data contain input–output pairs. d. The model learns by trial-and-error. e. None of these.

Answer: D 24. (LO 15-11) Which of the following best describes a confusion matrix? a. It is a table summarizing the prediction results. b. It has as many rows and columns as classifications to predict. c. It can be used to calculate other performance metrics. d. All of these. e. None of these.

Answer: A 25. (LO 15-11) If a confusion matrix shows 46 TP, 6 FN, 500 TN, and 4 FP, what is the precision ratio? a. 0.90 b. 0.92 c. 0.98 d. 0.88 e. None of these.

Answer: B 26. (LO 15-11) If a confusion matrix shows 46 TP, 6 FN, 500 TN, and 4 FP, what is the recall ratio? a. 0.90 5

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b. 0.92 c. 0.98 d. 0.88 e. None of these.

Answer: D 27. (LO 15-11) If a confusion matrix shows 46 TP, 6 FN, 500 TN, and 4 FP, what is the accuracy ratio? a. 0.90 b. 0.92 c. 0.98 d. 0.88 e. None of these.

Answer: C 28. (LO 15-11) If a confusion matrix shows 25 TP, 5 FN, 1000 TN, and 5 FP, what is the precision ratio? a. 0.90 b. 0.92 c. 0.99 d. 0.83 e. None of these.

Answer: D 29. (LO 15-11) If a confusion matrix shows 25 TP, 5 FN, 1000 TN, and 5 FP, what is the recall ratio? a. 0.90 b. 0.92 c. 0.99 d. 0.83 e. None of these.

Answer: D 30. (LO 15-11) If a confusion matrix shows 25 TP, 5 FN, 1000 TN, and 5 FP, what is the accuracy ratio? a. 0.90 b. 0.92 c. 0.99 d. 0.83 e. None of these.

Answer: C

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Discussion Questions 1. Bitcoin was introduced in 2009. The total bitcoins that exist today is much more than the total bitcoin amount in 2009 or 2010. How can this happen?

Answer: A new block is being added to the blockchain roughly every 10 minutes. When a new block is added, the system awarded the successful miner with new bitcoins. Hence, the overall number of bitcoins grew at the speed of the system generated coins every 10 minutes.

2. Since bitcoin uses blockchain technology and is cheaper than the traditional way of doing business, why is bitcoin not an accepted by many government agencies?

Answer: One feature that led to the popularization of Bitcoin is that its transaction are anonymous. Bitcoin is a public blockchain which allows everyone to join the network and examine the transactions. However, the parties in the transaction records are represented by the addresses of the owners, not by the real identities. The government agencies forbid bitcoin payment since real identities are almost always required by these agencies.

3. Why is Ethereum a better choice over Bitcoin for business related applications?

Answer: Bitcoin is a peer-to-peer, cryptocurrency application. It only deals with bitcoin currency transactions. Ethereum, on the other hand, introduces smart contracts which incorporate business rules to transfer assets. Furthermore, since smart contracts are designed to be programmable, they are able to serve all kinds of industries. Obviously, Ethereum is a much better choice for business related applications.

4. What are the three types of blockchain? What are major differences amongst these blockchains?

Answer: public blockchain, private blockchain, and consortium blockchain.

Differences: public blockchain has no access restrictions to the viewing and participation in the blockchain network. This type of blockchain is not allowed in many industries, such as finance. In the financial industry, permission is usually required to join the network. This type of blockchain is called private blockchain or permissioned blockchain. Instead of using proof of work for validation in public blockchain, transaction data and validation are restricted in private blockchain. Consortium blockchain is a permissioned blockchain but the participants constitute multiple organizations. In addition, the consensus protocol is executed only on a limited set of trusted nodes for consortium blockchain.

5. You have been tasked with forming an audit and assurance team to work with companies that have adopted Blockchain technology. What skill sets will you emphasize when choosing your team members and why?

Answer: It is important for your team members to understand the terms mentioned in blockchain technology such as distributed ledger, mining, consensus, immutability, proof of work, proof of authority, Bitcoin, Ethereum, Hyperledger, and R3 Corda etc. In addition, Ethereum and other blockchain applications use smart contract to represent business rules. It is important for the audit and assurance team to understand how business rules are represented

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in smart contracts and to make sure that the business conduct is compliant with government agencies.

6. Recently, over 20% of companies surveyed indicated they were testing or considering artificial intelligence applications in their business but only 4% were actively using AI. Why do you think companies a) are interested in AI, and b) are having trouble implementing AI? The interest in AI follows from the belief that AI will increase revenues or reduce costs. The implementation problems could be several: lack of data, lack of data science skills, long development cycles.

7. Review the five basic questions that AI/machine learning can answer. Develop additional business questions for each question. a. Is this customer likely to buy? Is this transaction fraudulent? Should we hire this applicant? b. Is this user name and password suspicious? Is this contract risky? Are revenues for this store in line with other stores? c. What is the value of goodwill? How much is this used car worth? d. Which types of inventory will be attractive to this customer? Which types of songs would this person like? e. How much should we bet now? Where is the stock market going next?

8. Visit the websites of major accounting firms. Search for what they are doing with AI/machine learning? How do you think this will impact the accounting profession over the next 10 years?

Open-ended question, but the answer should address changing skillsets, changing mindsets.

9. Give examples of process automation applications.

Both analytic process automation and robotic process automation are examples of process automation. Alteryx is designed for analytic process automation. Alteryx can automate the processes of data extraction, filtering, blending, and analytics that enables computer and business professionals to manage and manipulate scientific/business data from various data sources. Applications such as UiPath, Blue Prism, Automate Anywhere and Power Automate are typical applications for robotic process automation (RPA). In general, RPA is a software technology automating any repetitive tasks for digital transformation.

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Chapter 16 – The Balanced Scorecard, Business Model Canvas, and Business Value of Information Technology Multiple Choice Questions 1. (LO 16-1) Which of the following is not a Balanced Scorecard perspective? a. Learning and growth b. Customer c. Business process d. Financial e. All of these are Balanced Scorecard perspectives.

Answer: E 2. (LO 16-1) Which of the following is not a type of business process in the Balanced Scorecard framework? a. Operations management b. Customer management c. Innovation d. Regulatory and social e. All of these are types of business processes.

Answer: E 3. (LO 16-2) Which of the following describes the purpose of a strategy map? a. A graphical description of expected cause-and-effect linkages among Balanced Scorecard perspectives b. A list of the company’s mission, vision, and values c. A representation of the company’s strategic priorities d. Both (a) and (b) e. Both (a) and (c) Answer: A 4. (LO 16-4) Which of the following does not describe a step in the Balanced Scorecard management process? a. Formulate the strategy b. Translate the strategy into strategic objectives c. Link objectives to operations d. Monitor performance and provide feedback e. All of these describe steps in the Balanced Scorecard management process.

Answer: E 5. (LO 16-3) Which of the following do not describe characteristics of enterprise IT? a. Enhance individual worker productivity b. Automate transaction processing c. Integrate processes 1

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d. Provide general customer service e. Monitor performance and support decision making Answer: A 6. (LO 16-3) Which of the following would be an example of network IT? a. Spreadsheets b. Email c. ERP systems d. CRM systems e. None of these options Answer: B 7. (LO 16-3) Which of the following is an example of function IT? a. Spreadsheets b. Email c. ERP systems d. CRM systems e. None of these options Answer: A 8. LO 16-5) Which of the following is not a role of IT in the Balanced Scorecard management process? a. Strategy development support b. Long-term budget forecasting c. Transaction processing d. Reporting e. All are roles of IT in the Balanced Scorecard management process.

Answer: E 9. (LO 16-1) What is one reason a Balanced Scorecard might be considered “balanced”? a. It includes four perspectives. b. It includes both leading and lagging performance indicators. c. It includes a large base. d. It is widely used by organizations around the world. e. All of these are reasons that it is balanced.

Answer: B 10.(LO 16-1, LO 16-2) Which of the following is the ultimate objective for the financial perspective in forprofit organizations? a. Brand image b. Productivity c. Growth d. Shareholder value e. None of these is the ultimate objective.

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Answer: D 11.(LO 16-1) Which of the following is part of an organization’s value proposition? a. Product price b. Product quality c. Product availability d. Brand image e. All of these are part of the value proposition.

Answer: E 12.(LO 16-1) Which of the following is a typical key performance indicator for the financial perspective? a. Process cost b. Satisfaction c. New customer acquisition rate d. Return on equity e. Change readiness Answer: D 13.(LO 16-1) Which of the following is a typical key performance indicator for the customer perspective? a. Process cost b. Satisfaction c. Process quality d. Return on equity e. Change readiness Answer: B 14.(LO 16-1) Which of the following is a typical key performance indicator for the process perspective? a. Return on equity b. Employee skills c. Market share d. Process cycle time e. Sales growth Answer: D 15.(LO 16-1) Which of the following is a typical key performance indicator for the learning and growth perspective? a. Return on equity b. Market share c. Process cost d. Sales growth e. Employee skills Answer: E 16.(LO 16-1) Information capital can include which of the following?

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a. b. c. d. e.

Employee ability to use technology Communications networks Accounting systems Computing hardware All of these are information capital.

Answer: E 17.(LO 16-6) Which of the following is the best description of Val IT? a. A Balanced Scorecard system b. A customer relationship management system c. An enterprise resource planning system d. A structured IT investment management system e. None of these describe Val IT. Answer: D 18.(LO 16-6) Which one of the following is not one of the four major questions that Val IT focuses on? a. Doing the right thing b. Doing things differently c. Doing things well d. Doing things the right way e. Getting the benefits Answer: B 19.(LO 16-6) In the Val IT framework, a program is which of the following? a. An IT governance practice b. An individual IT investment c. The description of a portfolio d. A collection of interdependent projects e. All of these are programs.

Answer: D 20.(LO 16-6) In the Val IT framework, portfolio management includes which of the following? a. Establishing strategic priorities b. Determining required characteristics of the portfolio c. Monitoring performance of the portfolio d. Setting program priorities under funding constraints e. All of these are portfolio management.

Answer: E 21.(LO 16-6) In the Val IT framework, investment management includes which of the following? a. Governs the Val IT framework b. Establishes strategic priorities c. Monitors portfolio performance d. Executes projects within authorized programs 4

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e. None of these are investment management.

Answer: D 22.(LO 16-6) Val IT is designed to work in concert with COBIT. Which of the following is true with respect to the roles of these two frameworks? a. Val IT focuses on delivering business value; COBIT focuses on managing risk. b. Val IT focuses on IT; COBIT does not. c. Val IT focuses on portfolio management; COBIT focuses on project management. d. Val IT focuses on financial performance; COBIT focuses on process performance. e. None of these is true about the two frameworks.

Answer: A 23.(LO 16-7) Which of the following is the first step in implementing Val IT? a. Forming programs of IT investments b. Making specific IT investments c. Recognizing problems with prior IT investments d. Assessing the readiness to change e. None of these is the first step.

Answer: C 24.(LO 16-7) Which of the following is the second step in implementing Val IT? a. Defining the ideal future state for IT investments b. Making specific IT investments c. Recognizing problems with prior IT investments d. Assessing the readiness to change e. None of these is the second step.

Answer: A 25.(LO 16-7) Which of the following is the third step in implementing Val IT? a. Defining the ideal future state for IT investments b. Making specific IT investments c. Recognizing problems with prior IT investments d. Assessing the readiness to change e. None of these is the third step.

Answer: D 26.(LO 16-7) Which of the following is the fourth step in implementing Val IT? a. Defining the ideal future state for IT investments b. Taking action to redefine processes, roles, and responsibilities c. Recognizing problems with prior IT investments d. Assessing the readiness to change e. None of these is the fourth step.

Answer: B 5

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27.(LO 16-8) Which of the following is not integrated in a business model? a. Internal controls b. Business strategy c. Information technology d. Organizational structure e. None of these Answer: A 28.(LO 16-9) In the business model canvas, a description of the value proposition should answer which of the following questions? a. What do we do for our customers? b. How do we produce our products? c. How much does it cost to produce our products? d. How do we reach our customers? e. How do we interact with our customers?

Answer: A 29.(LO 16-9) In the business model canvas, a description of the revenue streams should answer which of the following questions? a. What do we do for our customers? b. How much do we make by serving our customers? c. How much does it cost to produce our products? d. How do we reach our customers? e. How do we interact with our customers?

Answer: B 30.(LO 16-9) In the business model canvas, a description of the cost structure should answer which of the following questions? a. What do we do for our customers? b. How do we produce our products? c. How much does it cost to produce our products? d. How do we reach our customers? e. How do we interact with our customers?

Answer: C 31.(LO 16-9) In the business model canvas, a description of the key resources should answer which of the following questions? a. What do we need to produce our products? b. How do we produce our products? c. How much does it cost to produce our products? d. How do we reach our customers? e. How do we interact with our customers?

Answer: A

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32.(LO 16-9) In the business model canvas, a description of the key partners should answer which of the following questions? a. How do we produce our products? b. How much does it cost to produce our products? c. How do we reach our customers? d. Who helps us produce our products? e. How do we interact with our customers?

Answer: D 33.(LO 16-9) In the business model canvas, a description of the channels should answer which of the following questions? a. How do we produce our products? b. How much does it cost to produce our products? c. How do we reach our customers? d. How do we interact with our customers? e. How do we get our products to a particular customer segment?

Answer: E Discussion Questions 1. Consider a company that competes on price, such as Walmart, in comparison to a company that competes on other factors, such as Starbucks. Describe how their Balanced Scorecard objectives and the corresponding measures would differ across the four perspectives.

In answering this question, the students should recognize that the fundamental reason for differences between Wal-Mart and Starbucks is that they have different value propositions.

Wal-Mart aims to compete on price, while Starbucks competes on other value proposition factors, such as quality, availability, relationship, and brand image. Since Wal-Mart seeks low prices, their business processes must be structured to minimize costs. Starbucks, on the other hand, is more focused on creating a consistent customer experience at all its stores. Students should be encouraged to consider differences in the value proposition require differences in the importance of specific processes, as well as differences in the learning and growth perspective.

2. One criticism of the Balanced Scorecard is that it can lead to information overload by measuring too many performance indicators. Do you agree with this criticism? Why or why not?

Students should consider the impact of balanced scorecard measures in a multi-divisional, multilevel organization. Since the balanced scorecard typically requires measurement of performance along four perspectives, a multi-division organization could need to collect information on numerous measures to assess performance. However, the balanced scorecard also requires organizations to select the relatively few, most important, measures for each organizational element. Some divisions may only be responsible for managing one or two measures. So, while the possibility of information overload exists, the judicious use of the balanced scorecard should avoid the development of more measures than can be easily managed.

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3. If a company does not want to implement a formal Balanced Scorecard performance management system, is it still beneficial for the company to develop a strategy map? Why or why not?

Students should recognize that organizations do not need to implement a comprehensive system to measure performance to benefit from articulating their strategy in a strategy map.

The map is a communications tool that allows managers to discuss and clarify performance cause-and-effect relationships. This is especially true when the organization is considering changes. The strategy map augments capital budgeting techniques by placing proposed investments in the context of the organization’s strategy.

4. Some companies create a Balanced Scorecard by taking some current objectives and key performance indicators (KPIs) and assigning them to the four Balanced Scorecard perspectives.

Describe the advantages and disadvantages of that approach.

Students should recognize that any well-managed organization has formed objectives and key performance indicators. They need to know whether they are meeting their objectives. So, their existing systems already collect information about their key performance indicators. Thus, the advantages of using current objectives and KPIs are several. They exist, they are already measured, and systems do not need to be changed. Conversely, the disadvantages would relate to the way that the existing objectives and measures were developed. It is likely that they are not truly balanced in terms of leading and lagging indicators and internal and external perspectives. It is also possible that the organization has not clearly linked the KPIs in a series of cause-and-effect chains aligned with their overall strategy. Additionally, organizations may form KPIs based on the ease of collecting the information, rather than the true importance of the KPI to their strategy.

5. Does the Balanced Scorecard framework provide a performance measurement system or a performance management system? Why? The students could develop arguments for both: the balanced scorecard framework provides a performance measurement system as well as a performance management system. In truth, one requires the other. Measures provide feedback on the organization’s performance with respect to its objectives. This feedback allows management to improve what the organization is doing or, in some cases, revisit the strategy.

6. A biotech company is considering developing an IT system that will track the progress of its drug compounds through the Food and Drug Administration (FDA) approval process. Describe, as specifically as possible, how that IT initiative might affect performance across all four Balanced Scorecard perspectives.

The answer should describe a chain of cause and effect relationships. The biotech company investment in an IT system to track drug approval is an example of an investment to improve information capital (Learning & Growth Perspective). Such an investment would support the biotech company’s innovation processes (Internal Process Perspective) and allow them to manage resource allocation within that process. The innovation process links to elements of the 8

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biotech company’s value proposition, such as product availability, product quality, and product function. Successfully addressing those value proposition factors would attract new customers (Customer Perspective) and grow revenue (Financial Perspective), which in turn would increase shareholder value.

7. A company is developing key process indicators (KPIs) for the information capital aspect of its learning and growth. It is considering measuring the amount spent on information technology hardware and software as its measure. What advice would you give it about that choice?

Students should describe the strengths and weaknesses of using the amount spent on information technology and software as a KPI for the development of information capital (Learning & Growth Perspective). A strength of this KPI is that the investment should increase the organization’s information processing capability, and most organizations cannot improve their information systems without new investment. However, KPI weaknesses relate to whether the investments are aligned with the organization’s strategy. Do the amounts spent on IT technology and software address important requirements?

8. Outline a Balanced Scorecard for your business school. How would using your Balanced Scorecard system affect the management of the school?

It is more difficult to develop a balanced scorecard for a non-profit organization, since they do not have shareholders and customers in the for-profit sense. Students should start with defining the business school’s stakeholders and then describe elements of the value proposition that the school delivers. Then, they should describe the internal processes that deliver the school’s value proposition while also controlling costs. Finally, they should describe the kinds of investments in human capital, information capital, and organizational capital to support ongoing improvements to the internal processes.

9. Describe likely differences in a Balanced Scorecard between a for-profit company and a not-forprofit (or governmental) organization. Which perspectives are each organization more likely to focus on?

This question is closely related to the previous question. Students should recognize differences in stakeholders and goals of the stakeholders. For-profit shareholders seek increased value, but non-profit stakeholders have other objectives. So, students could argue that the two external perspectives would be substantially different. The two internal perspectives, however, could be similar.

10. The CEO of a midsized company is considering purchasing an ERP system but may not have fully considered the other changes that the company needs to make to maximize the value of the system. Using a Balanced Scorecard framework, create a strategy map that describes how the ERP system could benefit company performance with the right set of complementary changes.

ERP systems require complementary changes in business processes to create value. To make those changes, the organization could also need changes in human capital necessary to put the right people in place to make the best use of the system. These changes to the Learning & Growth Perspective would allow the organization to improve processes, which in turn allows 9

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improvements to the value proposition while controlling costs. Ultimately, the organization should see improvements to financial performance (Financial Perspective). The students strategy map should look something like the following:

11. Consider a large, Fortune 500 company. They are probably too complicated for one business model canvas. What advice would you give them about how to divide up their business into multiple business model canvases?

The answer depends on the company, but in general, the answer should address the homogeneity of the value proposition as well as the nature of the customer segment.

12. Name a company that sells to a mass market customer segment. What are some characteristics of that company’s products?

The answer depends on the company, but consumer goods, for example, sell to the mass market. These products usually compete on price, marketing, image, availability, and functionality. Think of toothpaste, breakfast cereal, etc.

13. Name a company that sells to a niche market customer segment. What are some characteristics of that company’s products?

Niche market retailers usually sell relatively few types of products to a specific customer segment. One example is Lululemon apparel; another is Harley Davidson motorcycles. Their products are designed to appeal to their target customer group, so the value proposition would focus on image and uniqueness but not price.

14. Name a company that segments their customer segment. What are some characteristics of that company’s products?

Segmented markets require different versions of the product line for each segment. Hotel chains offer different hotel brands to attract different customer segments. For example, Hilton

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owns Doubletree, Hilton Garden Inn, Hampton Inns, Embassy Suites, etc. Each brand provides a hotel designed to appeal to a customer segment based on price, features (such as suites), locations.

Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. The answer to this question depends on the company that the student chooses. Students will find that it is relatively easy to find financial and customer perspective information. We find that students can usually find an abundance of information on the company’s value proposition from the company’s press releases. It will take more work to find information on the company’s internal business processes, although the business press often describes business processes more completely than the company itself does in its financial statements (e.g., in the MD&A).

Perhaps the most difficult task is to find information about Learning & Growth. Again, the business press may be most helpful here.

2. As described above, it will be difficult to find specific information about these companies’ Learning & Growth investments. The students should be encouraged to think about the unique culture of their company and how that culture affects how the firm conducts its business processes. One other aspect that can generate discussion is the role of incentive compensation (investments in human capital) and how incentives affect employees’ alignment with company goals and commitment to improving business processes.

3. The answer to this question depends on the company selected. The main issue that affected Bank of America during the recent economic crisis related to mortgages, especially mortgage loans to customers that may not have been fully creditworthy. Goldman Sachs problems relate to how they marketed mortgage-backed securities to their customers and whether they knew the problems with those securities when they sold them to their customers, e.g., banks and investors. AIG, a large multi-national insurance company, was involved in the credit default swaps and collateralized debt obligations. These products were sold to customers to insure those customers against losses. Of course, when customers incurred substantial losses, AIG could not honor its insurance obligations, and the corresponding liquidity crisis led to U. S. government intervention to bail out AIG. In all these cases, the companies emphasized revenue generation without dealing with the corresponding risk. Thus, students should be encouraged to define where the companies should have considered the risk.

4. (Connect) The strategy map should look something like the following:

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Examples of measures are the following: Objectives a) Manage the product portfolio for superior innovation b) Acquire new customers c) Improve fixed asset utilization d) Lower cost of serving customers e) Grow revenue f) Create a climate of knowledge sharing g) Implement an IT infrastructure necessary to support growth h) Improve return on assets i) Increase market share j) Achieve just-in-time supplier capability

Example Measures New products added to portfolio; Number of products in portfolio Number of new customers; Sales to new customers Asset time available; Asset time in use Cost per customer served; Customers served per employee Revenue change in 1 year; Revenue change in 3 years Perception of access to shared knowledge; Number of internal online pages Extent to which IT infrastructure accomplishes optimal support; Number of employees with access Change in ROA over 1 year; Change in ROA over 3 years Increase in Market Share; Increase in Customers' Wallet Share Number of JIT suppliers; Average Delivery Time

5. (Connect) Here is one solution, although students could support other options:

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Initiatives

Purchase new, more efficient, production equipment Train employees

Renovate older retail stores Implement a business intelligence/ business analytics system Create new advertising campaign

Perspectives Internal Business Processes Learning & Growth Internal Business Processes

Performance measures

Number of product warranty claims; Percent of defective products Employee turnover; Employee Satisfaction Number of new customers; Sales Growth Percentage; Percent of repeat customers

Learning & Growth Internal Business Processes

This could support directly or indirectly all the measures Number of new customers; Sales Growth Percentage; Percent of repeat customers

6. Please note that assignments 6-10 that the vizilogi.com website requires a credit card for the free trial access. After 7 days there is a monthly fee. See the website for details. Select a prominent public company, such as Apple, Google, or Microsoft. Obtain recent annual reports and news articles about the company. Using that information, develop a business model canvas that describes their business. Start by defining their value proposition.

7. Use the company that you selected for problem 6. Identify examples of their key resources and explain how those might affect their business model performance.

8. Use the company that you selected for problem 6. Identify examples of their key activities and explain how those might affect their business model performance.

9. Use the company that you selected for problem 6. Identify ways that they use information technology in each building block of the canvas. Structure your answer like table 16.4 and be as specific as possible.

10. Use the company that you selected for problem 6. Find a direct competitor of that company.

Develop a business model canvas that describes the competitor’s business. Start by defining their value proposition. Examine differences in the two business model canvases. Which company is better? Why? Example solutions for Problems 6-10 The answer depends on the company selected but there are some sample business model canvases shown below. Other examples are available for free use at www.vizologi.com, which also offers an online tool that students can use to create canvases.

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Chapter 17: Justifying and Planning IT Initiatives Using Project Management Techniques Multiple Choice Questions 1. (LO 17-2) Which of the following is a question that companies should answer when preparing the business case for an IT investment? a. How much will it cost? b. What are the risks? c. What are the alternatives? d. How will success be measured? e. All of these.

Answer: E 2.

(LO 17-2) What is the first step in the economic justification process? a. Identify potential solutions. b. Assess the value proposition. c. Assess business requirements. d. Estimate costs. e. All of these.

Answer: C 3. (LO 17-2) Which of the following is a not an example of a complementary change necessary to allow an IT initiative to achieve its goals? a. Outsource the IT initiative. b. Retrain employees. c. Redefine job descriptions. d. Provide incentives for employees to make the change successfully. e. None of these.

Answer: A 4.

(LO 17-3) Which of the following is not an example of benefits of an IT investment? a. Increased revenues from access to new markets b. Decreased costs from automating manual tasks c. Facilitating employee work-from-home arrangements d. Allowing compliance with new federal regulations e. Reducing the number of inventory count errors f. All of these.

Answer: F 5.

(LO 17-3) Which of the following can be used to quantify benefits on an IT investment? a. Gathering expert opinions b. Benchmarking against competitor performance c. Comparing against the probability of future benefits if investment is forgone d. Conducting simulations 1

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e. All of these.

Answer: E 6. (LO 17-4) Which of the following are examples of direct costs of acquiring and implementing an IT investment? a. Cost of hiring consultants to assess system requirements b. Personnel costs of the project team c. Training costs of employees who will use the system d. Cost of new computer hardware necessary to run the system e. All of these are direct costs of acquiring and implementing an IT investment.

Answer: E 7.

(LO 17-4) Which of the following are not examples of operating costs for an IT investment? a. Costs of routine hardware replacements over time b. Cost of contract for help desk support c. Costs of disposal of electronics at end of life d. Costs of software license renewals e. All of these are examples of operating costs.

Answer: C 8.

(LO 17-5) Which of the following is not a category of IT initiative risk? a. Alignment b. Technological c. Financial misstatement d. Solution e. All of these are examples of IT initiative risk.

Answer: C 9. (LO 17-6) If an IT project costs $150,000 and returns net cash flows of $100,000 per year, what is the payback period? a. 1 year b. 1.5 years c. 2 years d. 2.5 years e. None of these.

Answer: B 10. (LO 17-6) If an IT project costs $150,000 and returns net cash flows of $100,000 per year, what is the accounting rate of return? a. 33 percent b. 50 percent c. 67 percent d. 75 percent e. None of these.

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Answer: C 11. (LO 17-2) What is the order of events for the economic justification process? a. Identify potential solutions → Assess business requirements → Estimate costs → Assess value. b. Assess business requirements → Estimate costs → Identify potential solutions → Assess value. c. Identify potential solutions → Estimate benefits → Assess business requirements → Assess value. d. Assess business requirements → Identify potential solutions → Estimate costs → Assess value. e. None of these.

Answer: D 12. (LO 17-7) Which methodology of systems development requires one phase be completed before the next phase begins? a. Agile model b. Waterfall model c. Scrum model d. Sequential model Answer: B 13. (LO 17-7) The IFAC suggested 10 core principles of effective information technology planning.

Which of the following is not one of those 10 core principles? a. Achievability b. Justifiable cost c. Reassessment d. Accountability Answer: B 14. (LO 17-10) Projects are considered challenged if they: a. are late, are over budget, or do not have the required features and functions. b. are canceled prior to completion. c. are delivered but never used. d. are completed early.

Answer: A 15. (LO 17-10) The triple constraints of project management do not include the constraint of: a. technical issues. b. time. c. cost. d. scope.

Answer: A

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16. (LO 17-10) The 100% rule suggests that before a PERT chart is done, a project manager must: a. make sure 100 percent of the project is funded. b. make sure the project team is devoted solely, or 100 percent, to the project. c. make sure that each person on the project team got 100 percent on his or her project management final exam. d. make sure 100 percent of the project tasks are defined.

Answer: D 17. (LO 17-10) The critical path in a PERT chart represents: a. the sequencing of tasks. b. the most important tasks of the whole project. c. the longest path of tasks needed for project completion. d. the tasks that must be completed without errors.

Answer: C 18. (LO 17-8) The Sarbanes–Oxley Act’s section 404 reports require management and auditors to report on: a. the financial condition of the firm. b. the quality of the project management planning. c. the academic background and experience of the company’s accounting leadership. d. the effectiveness of the internal controls of the company’s accounting information system.

Answer: D 19. (LO 17-9) In this chapter, projects are defined as: a. a series of tasks performed in a defined sequence. b. turning raw talent into an NFL-quality quarterback. c. turning blueprints from an architect into a completed building. d. merging two databases into one. e. address technical difficulties. f. none of these.

Answer: A 20. (LO 17-7) Which phase of the systems development life cycle would include describing in detail the desired features of the system? a. Analysis phase b. Design phase c. Planning phase d. Maintenance phase e. Implementation phase Answer: B

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Discussion Questions 1. An important first step in the economic justification process is to assess business requirements.

How would the Balanced Scorecard framework presented in Chapter 16 help companies assess their business requirements for IT? The balanced scorecard framework helps companies assess their business requirements for IT by placing the investment in a cause-and-effect structure. A strategy map could show how the proposed investment either reduces business process costs (the process perspective) or improve the organization’s value proposition and thereby lead to revenue growth (customer and financial perspectives). It also helps mitigate alignment risk by showing how the investment is consistent with the organization’s strategy. Additionally, it can reduce change risk by helping identify required training and employee incentives necessary to support the process changes necessary to make the IT effective.

2. Chapter 16 described three types of IT: function, network, and enterprise IT. Consider the diagram shown in Exhibit 17.2. Which type of IT is likely to have the greatest impact on business performance? Which type of IT would require the most complementary changes? Why? All three types of IT could affect business performance; however, the enterprise IT by its nature would seem most likely to have the greatest impact. Enterprise IT technologies restructure interactions within the organization as well as with external partners, while Network IT technologies simply allow people to communicate with one another, and Function IT technologies support single, standalone functions. Similarly, since Enterprise IT often results in changes to business processes, those technologies would require the most complementary changes.

3. The benefits of an IT initiative should be measured in comparison to the revenues and costs that will occur if the IT initiative is not implemented. What issues would a project team face when making this comparison? How does it affect the team’s assessment of risks?

The benefits of an IT initiative should be compared to the revenues and costs expected if the IT initiative is not implemented. The biggest issue faced in making this comparison is that an IT project is most likely to exceed expected costs while also failing to achieve expected benefits.

Thus, the evaluation team should carefully test the sensitivity to cost overruns as well as the failure to achieve benefits. In other words, the team should pay careful attention to project risk and financial risk.

4. Use Microsoft Excel to assess the NPV of an IT initiative. The initiative will require an initial investment of $250,000 in year zero and is expected to return $150,000 per year for the next 3 years. Assume a discount rate of 10 percent. What is the NPV? How does the NPV change if the discount rate is 15 percent? Describe how changes in the discount rate assumption can affect the NPV. EXCEL solution (using NPV function): =NPV(rate, return1, return2, return3)-initial Initial investment (made in year zero) Returned amount 1st year

–$250,000 $150,000 5

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Returned amount 2nd year Returned amount 3rd year Discount rate Discount rate NPV at 10% NPV at 15%

$150,000 $150,000 10% 15% $123,028 $92,484

Higher discount rates result in lower NPV 5. Use Microsoft Excel to assess the internal rate of return for an IT initiative. Suppose the initial investment is $60,000 in year zero. The returns on investment in dollars for the following 5 years are (a) $10,000, (b) $12,000, (c) $15,000, (d) $21,000, and (e) $26,000. Use the IRR function to compute the internal rate of return after 2, 4, and 5 years. Next, assume that the initial loan is for $70,000 at 8 percent and you are earning 16 percent on the annual returns. Use the MIRR function to calculate the internal rate of return. Is the annual rate of return higher when using the MIRR function than the IRR function? Under what circumstances would it be lower?

EXCEL solution (using IRR function and MIRR function) =IRR(initial, year1, year2, …)

Year 0 1 2 3 4 5

Cash Flows Cash Flows –60000 –70000 10000 10000 12000 12000 15000 15000 21000 21000 26000 26000

IRR after 2 years IRR after 4 years IRR after 5 years

–46.18% –1% 10%

–50.84% –6% 5%

MIRR

12.35%

8.93%

The MIRR would be lower if the reinvestment return is less than the finance rate 6. Consider two projects. Project 1 costs $262,000 and returns $60,000 per year for 8 years.

Project 2 costs $390,000 and returns $70,000 per year. Project 2 is determined to be less risky, so your company only requires an 8 percent minimum annual return compared to 10 percent for project 1. What is the NPV of each project? What is the absolute maximum that the company should consider investing in each project?

EXCEL solution (using PV function for PV of return per year) =PV(rate, nper, pmt)

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Project 1 Initial investment (made in year 0 (immediately) Return per year Number of years Discount rate PV of initial investment PV of 8 years annual return NPV

Project 2 –$262,000 $60,000 8 10%

–$390,000 $70,000 8 8%

($262,000.00) $320,095.57 $58,095.57

($390,000.00) $402,264.73 $12,264.73

Maximum initial investment –$320,095.57 –$402,264.73 The results would differ if the initial investment is assumed made during the 1st year rather than immediately.

7. Your company has just completed a major IT initiative and is reviewing the outcome. It notes that the project took 3 months longer than expected. As part of the project, the company wanted to use some automatic bar code readers, but the rate of correct bar code reads was below the expected rate. Although managers were worried about employee acceptance of the new system, it appears that the employees have embraced it and, as a result, are making it work better than expected. Refer to Exhibit 17.4 and identify how these results address the risk categories listed in the table.

The major IT initiative took longer than expected and the bar code readers did not work as well as expected. However, the employees unexpectedly embraced the change and made the technology work better than expected.

This situation provides an example of Project Risk (the project will not be completed on time) and Technological Risk (the technology will not deliver expected benefits). The technological risk is mitigated by employee commitment to the use of the technology. The project risk was not mitigated.

8. Moore’s law suggests that computing power for the same cost doubles every two-and-a-half years. A combination of Moore’s law and the commoditization of computer components has made it possible to buy a $500 computer today that is more powerful and portable than a similar offering that cost $2,000 just a few years ago. How does this affect planning for major IT projects?

Moore’s law suggests that costs will decrease and computing power will increase. The affects IT planning, since delays could reduce costs and option new technological options. It also suggests that current technology will become obsolete fairly quickly, so the payback should be over a short time frame.

9. Rank the ten core principles of effective information technology planning in order of importance in your opinion. Provide support for your top five important principles.

Answers will vary.

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While all of the core principles of effective planning are important, it could be argued that the following are the most important.  RELEVANT SCOPE — The overall scope of the planning phase should be established to facilitate formulation of effective strategies.  BENEFITS REALIZATION — Costs of implementation should be justified through both tangible and intangible benefits that can be realized. The expected benefits should be bigger than the costs.  ACHIEVABILITY — The planning phase should recognize the capability and capacity of the firm to deliver solutions within the stated planning timeframe.  ACCOUNTABILITY — Identification of those responsible for implementing the plan should be explicitly clear.  COMMITMENT — Management commitment to the plan’s implementation should be clear and evident.

The relevant scope helps us make sure there are bounds on the project. Basically, management knows what is needed to be done and will know when the project is complete.

Benefits realization makes sure that the project benefits are greater than the costs and there is still a reason to do the project.

Achievability makes sure we can do what we expect to do. That the results will actually be achievable.

Accountability suggests knowing who is in charge and who will be implementing the plan.

Having accountability is critical to an IT project, especially when follow up is needed by the project sponsor.

Having commitment from management for the project and a clear project sponsor is critically important to garner the necessary resources and buy-in from the company.

10. Imagine the role of the project sponsor when a leader of the accounting bookkeepers comes to complain that the new information system could possibly result in the loss of five bookkeeper jobs. The bookkeepers argue that they will get the union involved if needed to protect their jobs. What should the project sponsor do?

One possible direction the project sponsor could follow would be to explain that technology is continuing to change our world. To keep current positions, companies need to save where they can and this new technology allows the company to save money, yet keep some bookkeeper jobs, instead of having them outsourced to another company, or even India. While the loss of bookkeeper positions will be painful, especially for those who lose their jobs, keeping the company efficient and lean is also important for the company.

11. Explain the 100% rule. Assume you are telling your roommate about this rule and use an example that is relevant to him or her.

The 100% Rule, therefore, requires thorough and complete project planning, that is, during the planning phase, being able to define all of the tasks, including all of the internal, external, and interim tasks.

Perhaps a relevant example would be planning for a hiking trip and having every task planned in advanced, from packing a poncho to making sure food is included (as well as emergency provisions in case you get lost on your trip), to preparing for the weather (like rain).

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These same tasks are required during project management to make sure all contingencies are planned and scheduled to allow complete communication of the needed project support to the project sponsor. The more thorough the planning, the less cost and time overruns will be experienced even when the unexpected occurs.

12. Compare and contrast a PERT chart and a Gantt chart. How do they complement each other?

The PERT and the Gantt charts each have strengths and weaknesses. As was pointed out in the chapter, The PERT chart is sometimes preferred over the Gantt chart because it clearly illustrates task dependencies. On the other hand, the PERT chart can be much more difficult to interpret, especially on complex projects. When used together, they overcome these deficiencies and complement each other.

13. Using the 15-15 Rule as a guide, when would a project manager and/or project sponsor proceed with completion of a project even if it is both 15 percent over budget and 15 percent off the initial schedule?

The 15-15 Rule states that if a project is more than 15 percent over budget or 15 percent off the desired schedule, it will likely never recoup the time or cost necessary to be considered successful. If the project is mission critical or related to a key competency of the company, it will likely be completed even if it is over budget and 15 percent off the initial time schedule.

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Problems (Note – Problems with “Connect” in parentheses below are available for assignment within Connect.)

1. Please see related EXCEL spreadsheet for details on calculations. a. Analysis not considering risks Cost Element Acquisition Cost (new software and implementation) Operating Cost (annual licenses, upgrades, support) Training

Year 0

Year 1

Year 2

Year 3

$50,000

$50,000

$50,000

$5,000

$5,000

$5,000

Average

$400,000

$10,000

Total

$400,000 $50,000 $5,000

$150,000 $25,000

Lost productivity during implementation

$20,000

Totals

$430,000

$55,000

$55,000

$55,000

$55,000

$595,000

Year 0

Year 1

Year 2

Year 3

Average

Total

Increase sales by 5%

$200,000

$300,000

$300,000

$266,667

$800,000

Improve inventory turnover by 10%

$100,000

$150,000

$150,000

$133,333

$400,000

$300,000

$450,000

$450,000

$400,000

$1,200,00 0

Year 0

Year 1

Year 2

Year 3

Average

Total

Net Benefits

($430,000)

$245,000

$395,000

$395,000

$345,000

$605,000

Payback = Initial investment/average net benefits initial investment

$430,000

Average net benefits

$345,000

Benefits

Totals

$0

Net Benefits

Payback

1.25

NPV

$415,942.90

IRR

55%

Accounting rate of return (total) Accounting rate of return (annual)

$20,000

years at 10%

80.23% 80.23%

b. Analysis consider risks that benefits will not be achieved 10

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Cost Element Acquisition Cost (new software and implementation) Operating Cost (annual licenses, upgrades, support) Training

Year 0

Year 1

Year 2

Year 3

Average

$400,000

$10,000

Total

$400,000 $50,000

$50,000

$50,000

$5,000

$5,000

$5,000

$50,000 $5,000

$150,000 $25,000

Lost productivity during implementation

$20,000

Totals

$430,000

$55,000

$55,000

$55,000

$55,000

$595,000

Year 0

Year 1

Year 2

Year 3

Average

Total

75% chance increase sales by 5%

$150,000

$225,000

$225,000

$200,000

$600,000

25% chance increase sales by 3% 75% chance to improve inventory turnover by 10% 25% chance to improve inventory turnover 5%

$30,000

$45,000

$45,000

$40,000

$120,000

$75,000

$112,500

$112,500

$100,000

$300,000

$12,500

$18,750

$18,750

$16,667

$50,000

$255,000

$382,500

$382,500

$340,000

$1,020,00 0

Year 0

Year 1

Year 2

Year 3

Average

Total

($430,000)

$200,000

$327,500

$327,500

$285,000

$425,000

Benefits

Totals

$0

Net Benefits Net Benefits

$20,000

Payback = Initial investment/average net benefits initial investment

$430,000

Average net benefits

$285,000

Payback

1.51

NPV

$268,934.90

IRR

40%

Accounting rate of return (total) Accounting rate of return (annual)

years at 10%

66.28% 22.09%

c. The value proposition for SlowRider, Inc. should discuss the costs, benefits, and risks of the BI investment outlined above. Based on the financial measures and risk analysis shown above, SlowRider should pursue the project. However, this analysis has not considered whether SlowRider’s employees will be willing to change (change risk) or whether this investment is consistent with SlowRider’s strategy (alignment risk). Additionally, the sensitivity analysis is limited.

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2. Please see related EXCEL spreadsheet for details on calculations.

Year 0 System costs Training costs RFID tags at $.15 RFID tags at $.10 after 2 years Total costs with tags at $.15 Total costs with tags at $.10 at 2 years

Year 1

Year 2

Year 3

Year 4

Year 5

$30,000

$30,000

$30,000

$30,000

$30,000

$400,000 $25,000 $30,000

$30,000

$20,000

$20,000

$20,000

$425,000

$30,000

$30,000

$30,000

$30,000

$30,000

$425,000

$30,000

$30,000

$20,000

$20,000

$20,000

0

$150,000

$150,000

$150,000

$150,000

$150,000

Net at $.15 per tag Net at $.10 per tag after 2 years

–$425,000 –$425,000

$120,000 $120,000

$120,000 $120,000

$120,000 $130,000

$120,000 $130,000

$120,000 $130,000

a.

1) Payback period at $.15 per tag initial investment average increase in cash flow at $.15 per tag payback

$425,000 $120,000 3.54

years

Savings

2) NPV 3) IRR 4) ARR = average income/initial cost

$80,483.65 12.7% 28.24%

b.

1) payback period 2) NPV 3) IRR 4) ARR

3.42 Or 3.37* $104,273.37 14.46% 29.6%

years

*The payback period for case B can be computed as 3 years + .46 ($60,000 amount remaining/$130,000 payback in year 4) or 3.41 ($430,000 total investment/$126,000 average yearly dollar return) c.

Potential risks are those listed in Exhibit 17.4. There is a risk that the project is not aligned with their strategy. There is a risk that the project will not generate expected financial and other benefits. There is a risk that the project will not be completed on time and on budget. There is a risk that Beach Dude’s employees will not accept the change. There is the technological risk that the technology will not work as expected. The students’ solutions should provide examples or situations in which those risks might occur.

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3. a. One stated goal for Starbucks Digital Ventures is to “enhance the customer experience.”

On its face, that is clearly a difficult goal to measure. Starbucks provides it digital ventures services, e.g., online content, free Wi-Fi, to customers at the retail outlets for free. Thus, there is no direct revenue connection and improvements to customer satisfaction resulting in sales growth are hard to measure. Additionally, customers are influenced by the human interaction with baristas and various forms of marketing in general, so it is difficult to identify the cause of sales increases unambiguously. It is also possible that certain customers who visit Starbucks to take advantage of free internet access could crowd out higher paying customers. Consequently, the digital ventures services could reduce sales; however, it is inherently difficult to measure lost sales. b. Despite the problems outlined above, Starbucks indicates that it does measure ROI on its digital ventures. For examples, Starbucks creates special offers via its digital services and then tracks how many customers take advantage of those special offers.

Additionally, it uses data about customer preferences to structure special offers that the customer is most likely to be interested in. Finally, Starbucks expects that there is a strong correlation between the time that customers spend in the store and the amount that they spend per visit. By using the special offers, coupons, QR codes, etc., it can track whether or not their expectations are true.

4.

Initial investment Discount rate

Project Information

$100,000 10%

Year Initial 1 2 3 4 5

Project 1 ($100,000) 30,000 30,000 30,000 30,000 30,000

Project 2 ($100,000) 0 20,000 20,000 50,000 75,000

Average Total

$30,000 $150,000

$33,000 $165,000

$13,723.60 3.33 15.2%

$12,274.99 3.03 13.3%

$30,000 20,000

$33,000 20,000

a. NPV Payback years IRR b. Accounting rate of return: Annual benefits Depreciation

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Net annual income Initial investment ARR

10,000 $100,000 10%

13,000 $100,000 13%

Although the depreciation expense affects the income statement, it is not relevant for this analysis, since we've already considered the initial investment. c.

When the discount rate increases to 15%, the net present value of both projects decreases and Project 2 now has a negative NPV of approximately –$5,800. Project 1 remains the preferred project when considering NPV, although the NPV for Project 1 is marginal (approximately $564). The IRR for Project 1 is approximately equal to the discount rate and the IRR or Project 2 is below the discount rate. d.

When the discount rate decreases to 6%, the net present value of both projects increases.

The NPV for Project 2 now exceeds the NPV for Project 1, although the IRR and payback periods for both projects remain unchanged. A lower interest rate makes Project 2 more attractive. e.

For technology investments, it is common to see a delay before realizing benefits, so Project 2 seems the more likely scenario.

5.

Cloud system Cloud system cost per month Number of months Loss on old equipment New computers

$1,500 36 $2,000 $2,200

Alternative system initial investment Loss on old equipment New computers

$40,000 $2,000 $2,200

Discount rate a. Comparing alternatives PV cloud system PV alternate Net savings alternate system Alternative is best solution b.

Alternative system upgrade Cloud system cost

10%

($46,486.85) at 10% discount rate ($40,000.00) Assuming immediate expenditure $6,486.85 Other costs do not differ and are not relevant

$15,000 At year 3 $1,200 Per month for 3 years beginning month 37.

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PV cloud system for 72 mos.

Total cloud system PV

The future value at 3 years is the same as the ($74,071.77) PV of the first 3 years ($74,071.77)

PV alternate initial investment PV upgrade at 3 years Total alternative PV

($40,000.00) ($11,269.72) ($51,269.72)

Net savings alternate

$22,802.05 Total PV alternative minus total PV cloud system.

6.

Each alternative IT initiative carries risk of failing to achieve the respective benefits and exceeding the estimated costs.

Match the description of risk with each risk term.

1.

2.

3.

4.

The solution will not generate projected benefits. – B. Solution Risk The solution is not aligned with the strategy of the firm. – C. Alignment Risk The project will not be completed on time within budget. – A. Project Risk The solution will not deliver expected financial performance. – D. Financial Risk

7.

After identifying relevant risks, the project team often employs risk-minimization techniques to lessen the probability or impact of the risk.

Match the description/example of the risk mitigation technique with the type of risk being mitigated.

1. Ensure active top management support for the project – B. Project Risk 2. Use sensitivity analyst to consider likely alternative benefit levels – D. Solution Risk 3. Ask Microsoft to demonstrate that their software can meet the system requirements – C. Technological Risk 4. Give employees adequate incentive to use the new IT – A. Change Risk 8.

Match the description of these financial metrics to their terms.

1. The average annual income from the IT initiative divided by the initial investment cost – A. Accounting Rate of Return 2. The sum of the present value of all cash inflows less the sum of the present value of all cash outflows – C. Net Present Value

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3. The discount rate (return) that makes a project’s net present value equal to zero – B. Internal Rate of Return 4. The amount of money necessary to recoup a project’s initial investment – D. Payback Period

9.

Project benefits may come from a variety of sources.

Match the examples of these project benefits to their terms.

1. The new system will be able to identify additional products that customers might be interested in. –A. Revenue Enhancement 2. Installing an accounting system that supports international financial standards will lower the cost when international financial standards are required – D. Cost Avoidance 3. A supply chain system will help us source cheaper sources of raw materials to build our projects.

– C. Cost Savings 4. Adding tracking information to shipments was important to not lose sales to competitors. – B 10.

Which of these projects costs would be considered to be acquisition costs and which would be considered to be operating costs?

1. Hardware Replacement – Operating Costs 2. Help Desk Support – Operating Costs 3. Software Upgrade – Operating Costs 4. Development – Acquisition Costs 5. Initial Training – Acquisition Costs 6. Ongoing Training – Operating Costs 7. Maintenance Contracts – Operating Costs 8. Project Management – Acquisition Costs

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11.

There are several approaches to quantifying expected project benefits. Which of the following use simulation, external benchmarks, real option theory or expert opinion to help with the quantification?

1. Software that allows you to consider the impact under a variety of assumptions – Simulation 2. Compare and contrast the results with projects of competitors or similar firms – External Benchmarks 3. Sophisticated financial analysis comparing the probability of achieving expected benefits – Real Option Theory 4. Consulting with a seasoned consultant to establish a likely benefit – Expert Opinion 12.

A firm is considering two projects. Both have an initial investment of $1,000,000 and pay off over the next five years in this fashion. The cost of capital is 6%.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Option 1 –1,000,000 1,000,000 0 0 0 100,000

Option 2 –1,000,000 250,000 250,000 250,000 250,000 250,000

a. Which of these has a faster payback period? b. Which of these options has a higher net present value? c. Which of these options has a higher internal rate of return (IRR)?

Option Option 1 Option 2 Option 2

13.

A firm is considering two projects. Both have an initial investment of $1,000,000 and pay off over the next five years in this fashion. The cost of capital is 8%.

Year 0 Year 1 Year 2 Year 3 Year 4 Year 5

Option 1 –1,000,000 1,000,000 100,000 200,000 300,000 400,000

Option 2 –1,000,000 500,000 500,000 400,000 300,000 200,000

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Option 1

Option 2

a. Which of these has a faster payback period? b. Which of these options has a higher net present value? c. Which of these options has a higher internal rate of return (IRR)?

Option Option 1 Option 1 Option 1

14. As part of effective IT planning in systems development life cycle, a return on investment (ROI) calculation may be performed as part of the economic feasibility analysis. Often, many of the benefits from a new information system may be intangible benefits (e.g. system is easier to use or system enhances customer service, etc.) that are hard to quantify in an income statement.

How would you suggest this be included in the economic feasibility analysis?

Sometimes ROI is computed only using hard dollars and may underestimate the total return. In order to include the intangible benefits, it may be important to clearly state what advantages are expected to occur and why they are expected to occur. If there is a quantifiable benefit, it should be real clear that this is just an estimate and how the estimate was derived. Intangible benefits are often the most important returns, so in our view, they should be included in the analysis.

15. In the chapter, we discussed an example of Starbucks using the systems development life cycle to develop the capability to analyze what type of pastries sell best with its various hot and cold drinks. Now, let’s suppose that NASDAQ requires all of the firms trading on the exchange to report their financial statements not only using GAAP but also International Financial Reporting Standards (IFRS). Since Starbucks’ current system cannot handle the IFRS requirements, the financial reporting system must be modified. Using Starbucks as an example, explain what types of activities would occur in each of the five phases of the systems development life cycle in preparation for reporting financial results according to IFRS. Starbucks is traded on NASDAQ, so we’ll use them as the focal company to answer this question.

The planning phase of the SDLC begins with a business need for a new or better information system. In the case of Starbucks, if they hope to continue to list on NASDAQ and NASDAQ requires IFRS as well, it would appear that a future business case is not needed.

The analysis phase of the SDLC involves carefully analyzing the needs of the end user and refining project goals into carefully defined functions and operations of the intended system. A system that reports U.S. GAAP (FASB) standards in addition to IFRS, the analysis is relatively clear. However, it is important to build in some flexibility so that perhaps the system would be useful for financial preparers to do a what-if analysis to show how various transactions would affect both the financials under U.S. GAAP (FASB) and IFRS. Starbucks may also want to consider the functionality of the system to make sure it is user friendly, etc.

The design phase of the SDLC involves describing in detail the desired features of the system that it uncovered in the analysis phase. Starbucks should design the needed features in in detailed screen layouts, business rules, process diagrams, pseudo code and other documentation to ensure that it is user friendly and gets the needed information in as efficient a

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manner as possible. The design should also ensure that it meets NASDAQ standards and the reports needed for that formatting.

Implementation: The implementation phase of the SDLC involves development, testing and implementation of the new proposed system. The Starbucks systems developers write the computer code and test it. Maintenance: The maintenance phase of the SDLC is the final phase of the SDLC and includes making changes, corrections, additions, and upgrades (generally smaller in scope) to ensure the system continues to meet the business requirements that have been set out for it. The Starbucks system has continuous and regular maintenance to ensure that it meets the NASDAQ requirements for IFRS. 16. Accountants generally do not have all of the necessary systems analyst and systems development skills needed to develop accounting information systems. Why should you be interested in project management of an accounting information system?

Understanding the various phases of the SDLC and what systems analysts and systems designers may help accountants to communicate their needs to those designers. Systems analysts and designers may also not understand the important need of internal controls associated with financial reporting systems. To the extent that accountants can understand the system and help design that system, they can help address those internal controls.

Not surprising, there is quite an active and potentially lucrative market for those that have both accounting and systems skills. To the extent this interests you and jobs are available, it may make sense to take further courses in this area and prepare for a career as an IT auditor, among other designations discussed in chapter 1.

17. For your personal consulting business, you decide to set up an accounting information system to help with taxes as well as to help monitor your revenues and expenses. You’ve heard that the QuickBooks is easy to set up, so you buy it, install it on your computer, enter in recent transactions and begin to use it.

Required: 1. Explain one or two ways you could be a user of this accounting information system. (Hint: Use the discussion in the text considering the role of accountants in accounting information systems.)

As a user of the AIS, disaggregating the sources of revenues and expenses would be of critical importance. Also consistent with one of the themes for chapter 1, that accountants are business analysts, helping businesses to address subsequent business opportunities.

2. Explain one or two ways you could be a manager of this accounting information system.

(One possibility: What practices do you employ to make sure your system is safe.)

As you manage the AIS, you may want to establish certain practices to ensure the information in the system is accurate. This might include doing cash reconciliations between the AIS and the bank. You may want to ensure only certain individuals can access these accounts, or that it is not accessible from the Internet by others, etc.

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Richardson, Chang, Smith – Accounting Information Systems, 4th Edition – Chapter 17

3. After a few months, you decide to expand your QuickBooks with additional modules (payroll, inventory, etc.). Access the QuickBooks website (http://quickbooks.intuit.com) and consider one or two ways you could be a designer of your accounting information system.

You have many choices to consider on what modules are added and what functionality they have with the overall accounting systems. These choices affect the overall functionality of the system and add capabilities that may aid in the overall, efficient running of the business.

18. Brainstorm a list of reasons why 84% (including 53% challenged + 31% failed) of the information technology projects either failed or were challenged in 2021. Consider specifics of each of the elements of the triple constraints model and any other common delays including the challenges of working with programmers, software and hardware suppliers and vendors, etc. What is the best way to overcome these issues and decrease the number of projects failed or challenged?

Potential Reasons For Failed or Challenged IT Project Scope creep?

Incomplete work breakdown structure.

Lack of consistent use of PERT and Gantt charts Improper communication between business users, systems analysts, systems designers and programmers.

Unanticipated costs.

Unanticipated problems with the software.

Improper training Lack of training Lack of desired functionality Lack of Project Sponsor to get needed resources Use of the work breakdown structure where 100% of the tasks are identified and use of the PERT and Gantt planning tools, all would be helpful. A strong project sponsor that gets the needed resources for the project would ensure company support.

19. The PERT chart below represents the tasks to be done to implement a system. Can you think of other steps that should be included? Is there adequate time for training given the Technology Acceptance Model’s recommendation to focus on perceived usefulness and perceived ease of use? What is the critical path for this project?

(Comp: Insert Chapter 15 Pert Chart in Problems here) It seems like more steps need to be taken to get user acceptance. Have they had enough time for the initial analysis of the business needs (or is that assumed to be already done)? Is there enough time for user acceptance? What happens at node 12? Do they have a further time period to test it out or it expected to be used? Will the old system be running at the same time to allow a transition period?

The critical path, or longest path, is node 1 to 2 to 3 to 5 to 6 to 7 to 11 to 12.

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20. Consider the Triple Constraint figure in Figure 15.3. Why is quality included in that figure even if it is not a triple constraint? Why is quality a concern (or not a concern based on your point of view) for the project manager and project sponsor?

While the triple constraints do need to be carefully addressed, some level of quality must be met to be useful to the firm, to gain user acceptance and actually be used. While oft times the focus for the project manager is that a project must be completed by a certain date or for a certain amount of money (cost) or both. But in many cases, just as important is that the deliverable (or result) of your project must also meet some minimum specifications (quality) to meet the firm’s intended purposes.

21. (Connect) We discussed 10 core effective information technology planning principles.

Match the description of each with each their respective principle.

1. The planning phase should support and 3. An appropriate planning horizon should complement the business strategy of be developed – C. Relevant Timeframe the firm – A. Alignment 4. The overall scope of the planning phase 2. Costs of implementation should be should be established to facilitate commensurate with the tangible and formulation of effective ways to intangible benefits expected to be address the business needs – B. realized – D. Benefits Realization Relevant Scope 22. (Connect) We discussed 10 core effective information technology planning principles.

Match the description of each with each their respective principle.

1. The resulting plan that comes out of the the evolving business strategy of the firm. – C. Reassessment planning phase should be communicated widely – B. Awareness 4. The planning phase should provide a 2. The planning phase should recognize means to measure and monitor project the capability and capacity of the firm performance and a means of to deliver solutions within the stated communicating success to both planning timeframe – A. Achievability stakeholders both inside and outside 3. The plan should be periodically the firm. – D. Measurable Performance reassessed to ensure it is relevant to

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Richardson, Chang, Smith – Accounting Information Systems, 4th Edition – Chapter 17

23. (Connect) There are five phases in the systems development life cycle (SDLC).

Match the description of each phase to the correct phase.

1. The phase of the SDLC that involves a complete, detailed analysis of the systems needs of the end user as well as a proposed solution. – A. Analysis Phase 2. The phase of the SDLC that involves development, testing, and implementation of the new proposed system. – C. Implementation Phase 3. The phase of the SDLC that involves describing in detail the desired features of the system that were uncovered in the analysis phase. – B. Design Phase 4. The final phase of the SDLC that includes making changes, corrections, additions, and upgrades (generally smaller in scope) to ensure the system continues to meet the business requirements that have been set out for it. – D. Maintenance Phase 5. The phase of the SDLC that summarizes the business needs with a high-level view of the intended project. – E. Planning Phase

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24. (Connect) For each of the following, please define these as either Work Breakdown Structure, Triple Constraint, 100% Rule or 15-15 Rule.

1. The process of identifying all tasks needed to complete a project. – Work Breakdown Structure 2. Three factors that constrain information technology and other projects: cost, scope, and time – Triple Constraint 3. A rule requiring 100 percent planning of all tasks, including all of the internal, external, and interim tasks. – 100% Rule 4. A rule suggesting that if a project is more than 15 percent over budget or 15 percent off the planned schedule, it will likely never recoup the time or cost necessary to be considered successful. At this point a decision needs to be made on if or how to proceed from that point. – 15-15 Rule

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