Solutions Manual for Accounting Information Systems Connecting Careers, Systems, and Analytics 1st E

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CHAPTER 1 Accounting as Information Learning Objectives 1. Explain how accounting affects both the demand for and supply of information.

2. Compare traditional transaction-based accounting systems to process-based information systems.

3. Explain management’s relationship to information and information systems.

4. Describe the relationship between accounting and data analytics.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. C

12. C

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.1

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.3

2. D

13. C

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 1.3

3. A

14. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 1.3

4. D

15. A

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 1.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 1.3

5. A

16. B

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 1.2

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.3

6. B

17. D

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 1.2

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Reporting, Section: 1.3

7. C

18. B

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 1.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.4

8. C

19. C

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Reporting, Section: 1.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.4

9. B

20. C

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Reporting, Section: 1.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.4

10. A

21. D

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.4

11. B LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Reporting, Section: 1.3

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Student answers will vary. For example: (1):

(2):

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LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Communication, AICPA AC: Reporting, Section: 1.1

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DQ2. The reality of accounting is that there is a circular flow of cause and effect. What we see here is both demand and supply of information, often in real time due to advances in technology.

(1) From the bottom up, the model shows the supply of information from preparers to users. Economic activity results in accounting judgments, as accountants must make judgment calls of what most accurately reflects the business reality of the economic exchange within the confines of a financial reporting framework like GAAP or IFRS. Recall from your financial accounting course: These judgment calls may involve the use of accounting estimates and the selection of accounting policies.

Examples of estimates are establishing a fair value for an intangible asset such as goodwill or determining the allowance for doubtful accounts. Here is an extract from Facebook’s 2020 10K report: “Estimating fair value requires judgment and use of estimates such as discount rates, forecast cash flows, holding period, and market data of comparable companies, among others.”

An example of the selection of an accounting policy is the recognition of revenue on a gross or net basis. Here is an example from Facebook’s 2020 10K report: “Gross vs. Net in Revenue Recognition For revenue generated from arrangements that involve third-party publishers, there is significant judgment in evaluating whether we are the principal, and report revenue on a gross basis, or the agent, and report revenue on a net basis. In this assessment, we consider if we obtain control of the specified goods or services before they are transferred to the customer, as well as other indicators such as the party primarily responsible for fulfillment, inventory risk, and discretion in establishing price. The assessment of whether we are considered the principal or the agent in a transaction could impact our revenue and cost of revenue recognized on the consolidated statements of income.”

These judgments affect the usefulness of information, and then users’ decisions. Good judgments lead to economic prosperity and a more prosperous society. Accounting professionals serve the public interest.

(2) We can also look at the arrows in reverse by emphasizing the demand for information, which starts at the top of the model with users seeking information about economic activity to facilitate decision-making.

Examples include the demand to know profits, inventory levels, cash flows, etc. The practice of accounting has consequences, as the decisions that users made based on accounting information results in economic activity, and we have a circular flow starting from the bottom of the model again.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 1.1

DQ3.

(1) The overriding purpose of a business is to make a profit and generate enough cash flow to continue operations. Without the profit motive, it would not be a business (at least not for very long). Social responsibility should be at the forefront of businesses’ minds as they decide on their strategic plans and objectives. However, businesses, whether they are socially responsible or not, must make profit to survive.

(2) Student answers will vary but examples include: Resources: 4 Solutions Manual

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Raw materials and manufacturing capabilities A partnership with an existing backpack fabrication company RFID tags and RFID middleware Systems developers, designers, etc. to build mobile app and supporting systems.

Outputs: Completed backpacks with RFID sensors embedded in liner Pencil cases, book covers, etc. with integrated RFID tags.

Stand-alone RFID tags to attach to individual items Mobile app for configuring your daily schedule and items needed.

(3) Seed money will be needed to begin manufacturing, though a partnership with an existing backpack fabrication company would be easier. Revenues will include sales of backpacks and items that are scannable.

The app will be included with the backpack sale, though a free app with ads is available for download as well in the mobile app store. It provides calendaring and packing list features without the scanning capabilities.

Revenues are generated through ad sales.

LO 1, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 1.1

DQ4. A business process is group of related business events (also called business activities) intended to accomplish the strategic objectives of the business. We can decompose a business process into business events.

A business event in a business process is an activity performed by the business, e.g., “take customer order” (Hint: the description of each business event includes at least a verb and a noun). Examples of business events: take customer order, hire employee, pay employee, pay vendor; declare dividends, pay dividends, get a loan, pay a loan installment, order equipment, receive equipment, acquire a competitor.

For the acquisition of supplies, a simple business process with three business events could be as follows: • Event 1: Order supplies from vendor • Event 2: Receive supplies from vendor • Event 3: Pay vendor for supplies LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 1.1

DQ5. The AIS involves a subset of all business data, which makes it one part of a firm’s overall information system. While we have many business events or activities in an organization, the AIS uses only the data from business events that result in an economic exchange of resources. Accounting filters the firm’s data and limits it to the data reflected in an accounting transaction. What makes AIS unique are aspects such the need for compliance with regulations such as SOX, the need to generate information for financial decision making support, and the need to use it to implement internal controls, among other things.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.1

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DQ6. Student answers will vary.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 1.2

DQ7. The information system, with inputs, processing, storage and outputs, provides information on how well (or not) the business processes are functioning towards achievement of the firm’s strategic objectives. In a process-based system, the accounting system is part of the overall information system. It is not a stand-alone system. A process-based system stores data about all business events of interest to the firm, including nonfinancial and nonaccounting data. The reports generated by a process-based system are more flexible in format, and provide diverse information, depending on their purpose. They include standard accounting reports.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.2

DQ8. Student answers will vary but examples include: 1. Repay employee’s student loans, with amounts depending on levels of performance (human resources).

2. Buy sustainably sourced products (raw materials and supplies).

3. Recycle or reuse supplies (supplies).

4. Volunteer for community services (employees).

5. Conduct responsible research using alternative methods to animals (R&D).

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 1.2

DQ9. Student answers will vary but examples include: 1. Reduce energy consumption in manufacturing.

2. Reduce water usage in manufacturing.

3. Protect manufacturing workers (like welders) from harmful omissions.

4. Manufacture sustainable products.

5. Track carbon footprint.

6. Reduce raw material waste.

7. Eliminate use of harmful products.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 1.2

DQ10. At this stage, as students have not yet covered ERP systems, the conceptual focus will most likely be on how the business processes determine the information system, because the information system captures the data about the business processes, in addition to helping execute the business processes. Without business processes to generate business activities or events, there would be no need for an information system!

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Students who may have taken an MIS course that includes ERP systems may look at it from the perspective of an ERP system dictating business processes to achieve “best practices.” However, some could argue that for some processes this would be fine (e.g., standardizing acquisition and payment processes), but that it could stifle innovation for conversion processes. Firms could lose their competitive advantage if their value-add activities are the same as those of their competitors, as they would not be differentiating themselves.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.2

DQ11. (1) Planning includes (a) developing a strategic plan to create a sustainable competitive advantage, (b) planning business processes focused on achieving strategic goals, (c) identifying key profit drivers and developing benchmark metrics for them, (d) identifying opportunities and assessing their risk, and (e) forecasting future performance.

(2) Implementation includes (a) operationalizing the strategic plan by dividing high-level business processes into smaller processes and activities, (b) assigning employees to perform the activities, (c) motivating employees to maximize their performance, and (d) embedding internal controls in processes and systems to prevent and detect errors and fraud.

(3) Control by monitoring includes (a) evaluating the results of an activity or an entire business process to see whether they meet expectations, (b) evaluating the operating results to see if the business processes are achieving the organization's objectives, (c) monitoring key performance indicators and comparing them to benchmarks, (d) auditing processes, systems, controls, and transactions, and (e) comparing actual performance and metrics to forecasts and budgets.

(4) Changing and improving processes includes (a) changing plans and expectations or changing an activity or a process so that actual results meet expectations, (b) prosecuting occupational fraudsters to the full extent of the law and sending a message of zero tolerance for fraud to management and other employees, and (c) improving internal controls to decrease opportunities for errors and fraud.

Management plans and implements processes to achieve its strategic objectives. The business events and activities embedded in the business processes create data of interest to the firm. The database management system (DBMS) captures the data for storage in the database. The data is processed and retrieved in the form of reports, dashboards, and queries. Management uses the information retrieved from the information system (including financial accounting information and cost accounting information) to monitor the business processes to ensure that they do what they are supposed to do. If things go wrong, management takes corrective action to change the business processes, business activities or internal controls. The result is more planning, implementation, monitoring, and changing and improving processes, and the cycle continues.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 1.3

DQ12.

Student answers will vary.

Quality information for a business is the degree of fit of the information for a particular purpose in a specified task setting. The information should meet overall expectations for its intended use, subject to cost versus benefit considerations.

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My choice of a fundamental characteristic is faithful representation or accuracy, meaning that the information must correspondent with the facts or occurrences it represents, and be complete, unbiased and free of material error or misstatement.

My choice of an enhancing characteristic is timeliness, which relates to the speed at which the information can be available and still be quality information.

Fundamental characteristics are primary, and enhancing characteristics are secondary. The fundamental characteristics make information more useful when compared to enhancing characteristics.

If information is a faithful representation of the financial results and condition of an organization (the financial statements), this is a primary characteristic because, regardless of the enhancing characteristics, like issuing the financial statements on time, materially inaccurate financial statements are of no use to decision makers.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 20 min., AACSB: Reflective Thinking, AICPA AC: Systems and Process Management, Section: 1.3

DQ13. Student answers will vary but will likely include Excel, SQL databases, querying, and visualization (Tableau, Power BI, etc.).

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 15 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.4

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.1. Take customer order (information event) 2. Collect payment from customer (operating event) 3. Print customer receipt (information event) 4. Bake scone for order (operating event) 5. Deliver scone to customer at counter (operating event) 6. Customer completes text message survey (information event) LO 1, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 1.1

A2.

Business Event/Activity

Business Process Approach

Traditional Accounting Cycle(s)

1. Ship goods to credit customer

Sales and collection

Revenue/accounts receivable

2. Pay hourly employees for the week

Acquisition and payment

Payroll

3. Sell goods for cash

Sales and collection

Revenue

4. Order a new factory machine

Acquisition and payment

N.A. Nonaccounting event

5. Receive raw materials from vendor

Acquisition and payment

Expenditures/Accounts payable

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6. Receive payment from credit customer

Sales and collection

Accounts receivable

7. Take out loan to pay for new factory machine

Acquisition and payment

Financing

8. Pay a dividend to shareholders

Acquisition and payment

Financing

9. Manufacture a product

Conversion

Production/cost accounting

10. Write off uncollectible account

Sales and collection

Accounts receivable

11. Issue new common stock

Acquisition and payment

Financing

LO 2, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 1.2

A3.

Type of Quality Characteristic

Field(s) that failed

How to fix

Consistency

ID

There should be three leading 0s (ID 239)

Confirmatory value

Date

The date was misstated; you can verify that there are not 31 days in April (ID 000240)

Understandability

Item

PBC should be spelled out “Peanut Butter Cookies” (ID 000241)

Completeness

Customer Last Name

The last name is missing (ID 000242)

LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Reporting, Section: 1.3

A4.

Answer Information Situation

Characteristic

1.

At the beginning of the COVID-19 pandemic, the United States was behind many other countries in testing people for the coronavirus.

News reports said that people with symptoms struggled for access to tests, often in vain. The lack of testing availability resulted in reports of COVID cases that bore no resemblance to the reality of how much the virus had really spread. Consequently, there was fear and uncertainty.

B. Relevance

2.

This characteristic strongly factors into the reason for reporting land and buildings at historical cost in a company’s Balance Sheet, even though this value may bear no resemblance to the fair market value of the asset.

F. Faithful representation

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3.

In the income statement of a company, sales transactions included in the revenue amount are those, and only those, that reflect revenue earned during the reporting period—no more and no less.

A. Completeness

4.

In the management decision to replace a long-haul transportation truck used for the past 10 years, inclusion of information about the original cost of the truck in a report has no ________ (fill in the characteristic).

B. Relevance

5.

Disney World provides guests with Magic Bands, which are wristbands that collect data on who the guests are, where they are, what rides they go on, and what they buy. Disney characters greet children wearing the bands by name. Magic Bands provide Disney with an incredible amount of data about guest profiles and preferences.

Information like this can help Disney improve decision making for optimal management of its resorts.

C. Predictive value

6.

Alicia’s Accessories is developing a proprietary big data system called Just-in-Time. The intention of the system is to continuously monitor and improve operations, products, marketing, sales, and employee training and to improve competitive advantage. The data comes from the company’s point-of-sale systems, inventory systems, promotions, customer feedback and surveys, and loyalty programs. Just-in-Time provides information every 30 minutes at headquarters for immediate decision making. Operational glitches get immediate attention.

E. Timeliness

7.

According to the magazine Fast Company, not making the content of business websites available to people with disabilities means potentially losing around $500 million in spending power. This amount does not include losses from lawsuits. Fast Company provides examples of business that were sued for failing to offer an ADA-compliant website: Domino’s and Beyoncé’s Parkwood Entertainment.

D. Understandability

8.

Oil and gas companies consistently apply the same industry-specific accounting standards to their financial statements, and so there should be a high level of __________ (fill in the characteristic) within that industry.

H. Comparability

9.

A company with information about a probable and material lawsuit must report it in the notes to its financial statement. An attempt to withhold this information indicates bias and not ________ (fill in characteristic).

A. Completeness

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10.

Financial statements include information on cash flows, so that financial analysts and investors can evaluate the accuracy of their past predictions.

G. Confirmatory value

11.

Financial analysts and investors use past financial statements as a basis to chart performance trends and make predictions about future performance, including profitability and cash flow, for business valuation purposes.

C. Predictive value

LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 20 min., AACSB: Ethics, AICPA AC: Reporting, Section: 1.3

A5.

Business Event

O, F, or I?

Related Information Event

Related Decision Activity

1. Ship goods to a credit customer

O

Retrieve a report that compares shipment date to delivery date and shows time taken for successful delivery.

Monitor efficiency and effectiveness of couriers.

2. Pay hourly employees for the week

O

Retrieve overtime report for the week.

Decide whether we are overworking employees.

Decide whether to hire more employees to meet future demands.

3. Return a defective product to the supplier

O

Print a report on defective product returns for the quarter.

Identify substandard vendors.

4. Order a new factory machine

I

Print a report on unauthorized purchases.

Identify unauthorized fixed asset purchases.

5. Receive raw materials from a vendor

O

Generate a report that shows acceptance of deliveries that do

Identify unauthorized raw material purchases.

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not have an approved purchase order or quantities accepted that differ from the purchase order information.

Identify shipments of incorrect items and/or quantities.

6. Pay an invoice received from a vendor

O

Retrieve a report that shows a matching of goods received with goods ordered and paid for.

Check that we only pay for authorized and delivered purchases.

7. Take out a loan to pay for a new factory machine

F

Retrieve monthly report of cash flows.

Check that we have enough cash on hand to meet our obligations.

8. Pay a dividend to shareholders

F

Report of shareholders and their shareholding at date of record check numbers and amounts.

Check that dividends are correctly paid

9. Manufacture a product

O

Report on number of units and cost per unit produced this month compared the prior month and the same month last year.

Monitor the efficiency and effectiveness of the production process.

10. Write off an uncollectible account

O

Generate accounts receivable age analysis.

Monitor the effectiveness of collection of accounts receivable.

11. Issue new common stock

F

Generate a report of number of shares sold and descriptive statistics about issue.

Decide whether we met projections for cash inflow from issue.

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LO 1-4, Blooms: Application, Difficulty: Medium, TOT: 30 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 1.1-4

A6. 1.

• •

Receive shipment of raw materials from vendor Pay vendor for raw materials

2.

1. Request raw materials 2. Authorize purchase of raw materials 3. Order raw materials from vendor 4. Receive shipment of acceptable raw materials from vendor—accounting transaction 5. Pay vendor for raw materials—accounting transaction The accounting transactions are the same!

3.

• • • •

Monitor raw material quality by vendor Monitor vendor complaints (could indicate fraud) Monitor aging of outstanding vendor orders Monitor late payments to vendors

LO 1-4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.1-4

A7.

Business Event

Business Process

1. Buy an espresso machine

A. Acquisitions and payments processes

2. Transfer the receipts from today from your mobile payment app to your pop-up's bank account

C. Marketing, sales, and collections processes

3. Sell your first latte

C. Marketing, sales, and collections processes

4. Pay your friends who worked as baristas at the end of the week

A. Acquisitions and payments processes

5. Pay for pour-over coffee filters

A. Acquisitions and payments processes

6. Pay a fair-trade coffee provider for beans they delivered last week

A. Acquisitions and payments processes

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7. Prepare batches of cold brew to steep overnight the night before it is sold

B. Conversion processes

8. Order a custom chalkboard sign from an Etsy shop for your daily menus

A. Acquisitions and payments processes

9. Make a macchiato for a customer

B. Conversion processes

10. Order milk from a local dairy farm’s stall at a farmer’s market that will be delivered next Tuesday

A. Acquisitions and payments processes

11. Bake scones to sell the next day

B. Conversion processes

12. Send your customer an e-receipt via text message

C. Marketing, sales, and collections processes

LO 4, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 1.4

A8. Student answers will vary. Here are a few ways each piece of information can demonstrate the successes and failures of the pop-up: 1. Total number of coffees sold (including all types)

Can be used to forecast the need for ingredients, paper products (cups, napkins, etc.), as well as times for the coffee shop to be opened – should they be opened at 6 a.m., or do customers usually come in later in the day? Is there a time of day that more cups are sold (i.e., more customers) and times of the day where there are no sales?

This might determine if you just need one barista during certain times of the day, and three at different hours to balance out the demand for their work based on the time of the day that the coffee is sold.

2. Total amount earned (before depreciation)

Can be used with 3 and 5 to determine profits. PROFIT would be $6,334.00.

3. Cost of all ingredients and supplies purchased

You need to sell at least 606 cups of coffee to break even on the ingredient cost. If divided by 30 days of operation, you would need to sell an average of 21 cups of coffee a day.

4. Cost of initial fixed assets (like espresso machine)

Using 2, 3, 4, and 5 to determine recovery on initial investment. Pop-up already earned enough to cover equipment purchase – it is out of the red after one semester.

5. Cost of paying baristas

You have employed two students who were making $12 per hour (job creation). You can use wages paid to baristas to determine net profit.

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6. Average wait time (length of line)

Long waits mean the pop-up was popular. Use this information to see if you need to employ more baristas to cut the wait time and potentially increase the flow of customers if they don’t see a long line.

7. Total number of students who had finals during this time

Can be used with 8 to see what percentage of students were customers. This could also help with marketing materials – should you do more student friendly deals to bring more students into the store?

8. Total number of customers

Can be used with 7 to see what percentage of students were customers. Create a “loyalty program” to track your return customers to see if you are bringing in new business or returned business and how to attract new business while keeping the current clientele happy and coming back.

LO 3-4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.3-4

A9. (1) You will need the following information to make the inventory decision: • • •

Transaction information for each of the stores, divided by the store location.

The transaction information needs to include the type of popsicle that was purchased.

Your past inventory order for that store.

(2) How to use the information: • • • • •

Use the current sales to estimate which flavors are most popular for that location.

Prepare a forecast by the usage of the sales information to predict the future purchases by those customers.

Utilize the past inventory order to see what has been ordered in the past and what has been used from that inventory.

If there are items that were purchased last month, that were not used in this month’s sales (per the sale transaction file), and are nonperishable, they should not be ordered this month.

If the location ran out of a certain popsicle flavor, check last month’s order and increase the raw materials purchased for this month.

LO 1-4, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 1.1-4

A10.

List A

List B

Answer

A. The practice of accounting

1. Input into an information system

10

B. Sales and collection processes

2. No connection with business events

8

C. Conversion processes

3. Profits not declared or paid as dividends

11

D. Data

4. Order raw materials from vendor

1

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E. Acquisition and payments processes

5. Inputs of resources into a business

4 and 5

F. Output

6. Information or Product

6

G. Cost versus benefit

7. Timeliness and verifiability

14

H. Misperception(s) about accounting

8. Acquire and retain customers

2 and 12

I. Both enhancing characteristics of information quality

9. Business event

7

J. Information quality

10. Serves the public interest and promotes prosperity

7 and 13

K. Take customer order

11. Combine resources to add value

9

L. Retained earnings

12. Rigid black or white rules; no flexibility in accounting choices

3

13. Accessibility 14. There is no match for this term to phrase LO 1-4, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 1.1-4

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CHAPTER 2 Risks and Risk Assessments Learning Objectives: 1. Describe the nature of risk.

2. Classify risks into different risk categories.

3. Determine the quantitative value of risk.

4. Explain how businesses respond to risk.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. A

14. B

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

2. C

15. C

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

3. C

16. B

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

4. D

17. B

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

5. C

18. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

6. C LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

19. D

7. C

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

20. B

8. D

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

21. B

9. C

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

22. C

10. A

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

23. C

11. A

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

24. D

12. B

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

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LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

Chapter 2

25. C

13. C

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

26. D LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. IT risk is an important consideration in risk management and involves threats and vulnerabilities to the information technology resources used by an organization. These include the risk of intentional or accidental damage, theft, unauthorized access, unauthorized changes, and disruption or interruption of systems. All of these could cause significant loss or damage and may disrupt business operations to the extent that the organization cannot meet its objectives.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

DQ2. While the general view of risk is that it is bad, a business that proactively identifies risk can manage it. Risk often drives innovation. There is a trade-off between risk and return. A company that takes on significant risk may have a competitive advantage over a company that avoids that risk. Think of modern-day innovators like Elon Musk, Mark Zuckerberg, Steve Jobs, and Jeff Bezos. Without taking significant risks, their companies would not be the success stories that make them household names.

If a company wants to be at the forefront of its industry, it must be willing to accept calculated risk.

Without risk, there would be no innovation.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

DQ3. Enterprise risk management (ERM) is a formal process for enhancing risk management in an organization. It is a comprehensive process for planning, organizing, and managing a company’s risks.

ERM performs risk assessments to address each part of the organization’s risk – no matter how large or small the risk. The “E” in ERM means it is top-down, enterprise-wide process to manage all the risks that may impact the organization in its mission to meet its strategic objectives. This is an “entity-level” risk management approach.

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Communication, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

DQ4. These two crashes resulted from an identifiable internal risk—the risk of poor design of the plane with the potential outcome of plane crashes. This risk statement maps to the operational risk category, which occurs during day-to-day operations and causes a breakdown in business activities. Operational risks can stem from organizational, technology, process, and/or human failures. The company suffered a tremendous loss of reputation and material financial losses due to loss of sales revenues, lawsuit costs, and stock price declines. However, reputational risk (an external risk) and financial risk (an internal risk) would be secondary to operational risk (an internal risk) because a breakdown in operations was the principal driver for the terrible outcome in this case.

LO 2, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

DQ5. “Compliance risk is the threat posed to a company's financial, organizational, or reputational standing resulting from violations of laws, regulations, codes of conduct, or organizational standards Solutions Manual

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of practice.” Source: Deloitte, https://www2.deloitte.com/us/en/pages/finance/articles/cfo-insightscompliance-risks.html.

An example of compliance risk is “non-compliance with Sarbanes–Oxley Act (SOX)” with the possible outcome of fines, legal costs, and/or imprisonment. SOX does not apply only to Wall Street corporations. Under Title VIII, Section 802 (a), it unlawful to hide, destroy, or alter any records or objects [emphasis added] with the intent of obstructing a federal investigation.

John Yates was a commercial fisherman working in the Gulf of Mexico when a federal agent inspected his ship. The agent discovered undersized red grouper on his ship—a violation of U.S. regulations for federal conservation. The federal agent gave Yates instructions to separate the grouper from the other fish. Instead, Yates ordered his crew to throw the grouper overboard. Consequently, Yates was prosecuted under SOX for the following transgression: “…knowingly alters, destroys, mutilates, conceals, covers up, falsifies, or makes a false entry in any record, document, or tangible object [emphasis added] with the intent to impede, obstruct, or influence a federal investigation.” The tangible object was the grouper. Yates was convicted and sent to prison.

Source: Legal Dictionary, Sarbanes Oxley Act. https://legaldictionary.net/sarbanes-oxley-act/.

LO 2, Blooms: Comprehension, Difficulty: Medium, TOT: 15 min., AACSB: Communication, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

DQ6. These outcomes resulted from an identifiable internal risk—the risk of poor maintenance of transmission lines with the potential outcome of causing wildfires. This risk statement maps to the operational risk category, which occurs during day-to-day operations and causes a breakdown in business activities. Operational risks can stem from organizational, technology, process, or human failures. The company suffered a tremendous loss of reputation and material financial losses due to liabilities from the wildfires, and the company declared bankruptcy. Reputational risk (an external risk), the physical risk of wildfires (an external risk), and financial risk (an internal risk) would be secondary to operational risk (an internal risk) because a breakdown in operations was the principal driver for the deadly and destructive outcomes in this case.

LO 2, Blooms: Comprehension, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

DQ7. No, it is not 100% controllable. Because businesses have limited resources — equipment, space, people, and budgets — it is impossible to eliminate 100% of every risk. Also, while internal risk can be forecast with some reliability, this is not the case with external risk, which is much more difficult to forecast.

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

DQ8. Information technology (IT) is propelling massive changes in how a business functions, and at a very fast pace. Technology provides new opportunities, including new ways to manage risk, while also creating significant risks related to its use. For this type of company, technology risk is a crucial consideration in risk management at the entity level and involves threats and vulnerabilities to the IT resources used by an organization. These include the risk of intentional or accidental damage, theft, unauthorized access, unauthorized changes, and failure, disruption or interruption of systems, which puts the business model at significant risk.

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External threats, resulting in significant external risks for platform companies are compliance risk (e.g., privacy laws), strategic risk, and physical risk. If the technology platform is not functioning, the existence of the business is at risk. Assessing the severity of technological risk, such as cybersecurity, is crucial to business success and survival.

LO 3, Blooms: Comprehension, Difficulty: Medium, TOT: 15 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

DQ9. The colors of the heat map in this risk matrix convey data-driven meaningful information. This image is divided into a grid. Within each rectangle of the grid, the heat map shows the relative intensity (hotness, coldness, or somewhere in between) of values by assigning each value a color to represent it.

The rectangles that are highest in risk value—relative to the other—have a “hot” color (in this case red), while those that are lower in their risk value show a “cold” color (in this case green).

Ranking of risks in order: 1st. Risk E, medium likelihood, high impact, hottest color.

2nd. Risks D and A ranked equally. D has medium likelihood and medium impact, while A is a combination of medium-high likelihood and medium-low impact. These respective combinations give D and A the same color.

3rd. Risk C is low likelihood and high impact.

4th. Risk B is medium likelihood and low impact—it has the most green in it.

LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

DQ10. Likelihood: Medium low or low because of system of good internal control Impact: Low because only around 4% of sales impact accounts receivable.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 3 min., AACSB: Ethics, Section:2.3

DQ11. Board members and executives are responsible for addressing risk. They must calculate the likelihood and impact that a certain risk can impose on the success of the business and decide on the optimal risk response, which means accepting the risk, mitigating the risk, transferring the risk or avoiding the risk.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

DQ12. Before a business takes any action to address a risk, it is an inherent risk. Inherent risk is the natural level of risk in a business process or activity if there were no controls or other response in place.

It is the gross risk or risk before mitigation with controls or by other means.

In a risk assessment, we identify and prioritize the inherent risk. After assessing risk, firms choose a risk response by deciding how to deal with each risk. The remaining level of risk after implementing a risk response is residual risk. Residual risk is the risk that a process or activity would pose when controls or other risk responses are in place.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

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DQ13. Accept, mitigate, transfer, or avoid risk.

When an inherent risk is present and the firm chooses not to act, they have chosen to accept the risk. Companies usually accept the risk when it is very small or unlikely to happen. It is selfinsurance. Example: A business rents out coastal vacation houses that it owns. Management decides that it is too expensive to insure the houses against flood damage and accepts the risk.

The firm mitigates the risk internally by implementing controls over business processes and activities or using other mitigation tools to reduce the risk. Example: The internal auditor of a company that manufactures small tools discovers that some employees in the factory are putting the tools in their pockets and taking them home. A risk assessment shows that this practice has had a significant impact on gross profit. Management installs cameras in the factory and implements other controls to reduce the risk.

Transferring the risk involves the shifting the risk through contractual means to a third party. As with mitigating risk with internal controls, transferring the risk comes with associated costs, like insurance expenses. Examples: (1) A trucking company insures its vehicles and takes out extra liability insurance to protect the business against reckless driving by its employees that causes damage or harm. (2) A business rents out coastal vacation houses that it owns. Management decides to insure the houses against flood damage and transfers the risk.

To avoid risk a firm will eliminate the source of the risk, like closing stores in a particular high-risk geographical location. Avoiding risk is usually associated with events of significant impact that are highly likely to occur. Example: A business rents out coastal vacation houses that it owns. It decides to sell certain houses in an area that is prone to flooding in hurricane season.

LO 4, Blooms: Comprehension, Difficulty: Medium, TOT: 20 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1. Student answers will vary. Examples of answers are: Issue

Outcome/Potential Impact

The door to one of the machines is propped open, even though it has a sign “keep closed” Some employees are not wearing hard hats in hard-hat zones Some employees are taking shortcuts around the machines and not following the clearly marked lines on the ground, showing where it is safe to walk

Solutions Manual

may result in

Inappropriate access to the machine might occur.

may result in

Injuries to the employees as they might hit their head on a low hanging item.

The forklift driver might not see the employee, as they are not supposed to be walking in certain areas.

may result in

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An employee was eating a bag of chips while changing the machine settings

may result in

A piece of duct tape is used to hold one of the machine pieces together

may result in

Chapter 2

Sanitation and health violations occur if food is found outside of the break room.

Food outside of the breakroom might invite unwanted critters to the plant.

Injury to the employee, as the piece might fall off at any moment. Danger to the facility if the piece falls off and breaks something else.

LO 1, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

A2.

Risk Statement 1. Because wiring from suppliers does not meet specifications, it will be necessary to return the wiring to the suppliers for a refund.

2. Because working conditions for employees in the factory are not safe, there may be legal consequences like compensation for lost wages, medical bills, and production delays in the event of accidents.

3. Because of sales staff members lacking knowledge about the features and benefits of the new service the company is selling, prospective customers are confused and don’t subscribe to the service, resulting in decreased sales revenues.

4. Because of poor strategic planning, the business may not meet its earnings forecasts and may therefore suffer financial losses, reputational loss, and a decrease in its stock price.

5. If product reliability test failures exceed 5%, the resulting schedule delay to fix failures would exceed two weeks, causing increased cost and customer dissatisfaction.

6. Poor short-term financial forecasts may result in cash flow issues, negatively impacting the company’s credit rating and its ability to borrow at a reasonable cost.

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Business Process Purchases and payments

Business Function(s) Purchasing

Conversion

Production operations

Sales and collections

Sales

Impacts all business processes

Board of directors and executives; all functional areas

Conversion

Production operations

Purchases and payments

Treasury management

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7. Customer data theft caused by defective system changes could result in significant financial fraud losses due to fines, loss of customers, and regulatory sanctions.

8. Returns by customers in a superstore are at risk of being diverted, with the returned goods never reaching the warehouse, resulting in inventory shrinkage.

9. Because of inadequate background checks, an employee with a criminal background may be hired, with the potential for losses from fraud or theft in the workplace.

10. Because of inadequate timekeeping, employees could be paid for time not worked, resulting in fictitious costs and reduced profits.

Chapter 2

Purchases and payments

Information technology

Sales and collections

Customer service

Purchases and payments

Human resources

Purchases and payments

Payroll

LO 1, Blooms: Application, Difficulty: Medium, TOT: 30 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1

A3.

Risk Scenario 1. Employees are required to work from home, remotely, if there is no need for a physical presence in the workplace. Because managers cannot supervise employees in person, the employees may not be as productive as when they are on the premises, resulting in much lower productivity for the same cost to the organization.

2. Because of COVID-19, walk-in customers, the main revenue source for the business, can no longer come to the store due to the shutdown.

The CFO arranges to borrow money from a bank at a higher-thanusual rate of interest in an attempt to bridge the gap in the revenue stream. She is concerned about the company’s ability to repay the loan principal by the due date specified in the debt agreement.

3. At a university, in an effort to ensure that the football program starts the season, the board of trustees mandates a restart of face-to-face classes before the rate of infection from the virus has decreased in that state. The board proposes mandatory monitoring of the health of faculty and students through the use of an app, testing, distancing in class and on campus, and mask wearing. The university faces a risk of lawsuits by faculty and students who are infected by the virus on campus, regardless of the precautions, resulting in a financial loss due to settlements and legal fees.

4. A commercial diving school continues to run its certification program during the COVID-19 pandemic. It uses an app for instructors and students to mandatorily report on their health conditions every Solutions Manual

Risk Category Operational

Financial

Strategic

Compliance

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three days. Administration discloses to colleagues, without permission, that an instructor has reported an underlying condition of concern. The instructor rightly claims that the school has breached the law (HIPAA) by disclosing his medical condition to colleagues.

5. A member of the executive team at a major corporation has joked on social media about the coronavirus and mocked people infected with the virus. He also used a racial slur against an Asian man who responded to one of his posts. The public relations department is trying to manage the public outrage resulting from the executive’s posts.

Reputational

LO 2, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.2

A4. Student answers about priority will vary. The correct notecard answers and an example of a student’s prioritization answer are: Risk A customer receiving the wrong order may result in an upset customer.

A customer posting a negative review on the social media page may result in reputational damage.

A customer returning a used/damaged laptop sticker and demanding a full refund may result in a loss of revenue.

A customer suffering an allergic reaction to the glue on the sticker may result in an upset customer and a possible lawsuit.

A customer providing a fake credit card number may result in loss of revenue.

Note Card Letter E

Priority 5

B

2

D

4

C

3

A

1

LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

A5. Student answers about likelihood, impact, risk score, and manager reasoning may vary. The answers for priority should be as shown below.

Risk Likelihood Important influencers 3 with contracts to publish content only on this platform leaving the site may result in significant revenue loss due to lower customer traffic.

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Impact 2

Risk Score 6

Manager Reasoning Influencers could take customers away. However, many of our customers will find other channels to follow, which will keep them on the platform even if an influencer leaves.

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Priority 3

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An influencer making offensive remarks during a live stream may result in reputational damage to the site.

4

4

16

A lack of proper security processes may result in a hacker stealing customer information such as names and credit card numbers.

4

5

20

Since live streaming is usually unscripted and unedited, an influencer can state something that is against the belief system at the platform. The company could face a potential lawsuit, but it is more likely that the influencer will be sued.

While the company has site security in place, there is always a possibility of the hackers getting through. It would be detrimental if customer information was released, resulting in huge reputational impact. The company could face a significant lawsuit.

Chapter 2 2

1

LO 3, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.3

A6.

1. You cancel your plans and stay up all night cramming. You risk being tired during the test, but you think you can cram enough to just maybe pull this off.

2. You cancel your plans and study for two hours before your normal bedtime and get a good night’s rest. Maybe that is going to be enough.

3. You go to dinner but come home right after to study the rest of the night. You think you can manage both.

4. You go to dinner and stay out with your friends afterward. It is going to be what it is going to be, and it is too late for whatever studying you can do to make any difference anyway.

5. You tell your friends you are sick and tell your professor you are too sick for class the next day.

You schedule a makeup exam for next week and spend adequate time studying for it.

6. You pay someone else to take your license and go take the exam for you. (Note: It happens, although this is a terrible idea. Never do this! It is unethical and the consequences may be severe.)

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Mitigation

Mitigation

Mitigation

Acceptance

Avoidance; Mitigation

Transfer; this is an unethical answer, but it is a loose example of transferring a risk using a contract.

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LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.4

A7. Student answers will vary. Below are some examples of best possible answers. This question is an opportunity to show students that there often are not wrong answers in business. It takes critical thinking to come up with best possible solutions.

1. Biometric screening at the door. Using fingerprints to enter the room will prevent unauthorized personnel from using someone else’s badge to enter. This is a type of risk mitigation.

2. Removing the desks and chairs and banning food and drinks from the server room. This is a type of risk avoidance.

3. Replacing the outlets, making sure the fire safety plan is in place. This is a type of risk mitigation.

LO 1-4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1-4

A8 to A10.

Student answers will vary significantly.

A8.

1. Possible issues: Mild winter Single source of flour No visibility into planting techniques Wheat diseases 2. Examples of risk statements: A mild winter may result in an inability to acquire ingredients for products.

A mild winter may result in a bad harvest that ruins wheat and makes it hard to get flour.

A lack of wheat crop may result in a breakdown in the supply chain.

Wheat disease may result in inability to create products.

A9. Most likely categories: Most risk statements will fall into either physical (weather) or operational.

A10. Demonstrating form prioritization: Students should demonstrate an ability to use critical thinking to rank risks. Proper risk formula [impact x likelihood = risk score] should be used. Understanding that the higher the risk score, the higher the priority should be demonstrated.

LO 1-4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, Management, Section: 2.1-4

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CHAPTER 3 Risk Management and Internal Controls Learning Objectives: 1. Distinguish among the three functions of internal controls.

2. Characterize a control by its location and implementation method.

3. Explain the three lines of defense to ensure effectiveness of internal controls.

4. Describe the importance of frameworks in an internal control environment.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 13. C

1. D LO 1, BT: E, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA: AC: Systems and Process Management, Section: 3.1

2. B LO 1, BT: S, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

3. D LO 1, BT: A, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

4. B LO 1, BT: K, Difficulty: Medium, TOT:2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

5. D LO 1, BT: A, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

6. B LO 1, BT: K, Difficulty: Medium, TOT:2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

7. D LO 1, BT: K, Difficulty: Medium, TOT:2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

8. C LO 2, BT: K, Difficulty: Easy, TOT:2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.2

9. C LO 2, BT: K, Difficulty: Easy, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.2

10. D LO 2, BT: A, Difficulty: Easy, TOT: 1 min., AACSB: Technology and Data Analytics, AICPA AC: Systems and Process Management, Section: 3.2

11. C LO 2, BT: A, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.2

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LO 3, BT: K, Difficulty:/Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

14. B LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

15. A LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

16. D LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

17. A LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

18. D LO 3, BT: K, Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

19. D LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

20. D LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

21. B LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis and Management, Section: 3.3

22. A LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

23. C LO 4, BT: C, Difficulty: Difficulty: Medium, TOT: 2 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

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12. D

24. C

LO 2, BT: A Difficulty: Medium, TOT:2 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 3.2

LO 4, BT: K, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.3

ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Segregation of duties is a preventive control that lessens the risk of error and fraud by ensuring that at least two people are responsible for the different parts of a business event or activity. The work of one employee acts as a check on the work of another employee. For separation of accounting duties, management should, if cost beneficial, structure work assignments to separate the following three activities: • •

•

Authorizing transactions and decisions; Recording data about business activities, such as preparing source documents, inputting data into the information system, and data in maintaining accounting records, files, and databases; and Having custody of assets such as cash, inventory, tools, fixed assets, and supplies.

LO 1, BT: A, Difficulty: Easy, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

DQ2. Preventive controls are internal controls that management implements to keep problems from happening. Examples are computer passwords, access controls, employee screening, and training.

Detective controls alert management of a preventive control that has not worked as intended. They find errors and fraud after they have occurred. Examples are cash counts, bank reconciliations, and inventory counts.

Corrective controls are the procedures that a company uses to correct a detected problem and prevent it from happening again. Examples are quarantining a computer virus and implementing segregation of duties after detecting a fraud.

LO 1, BT: K, Difficulty: Easy, TOT: 5 min., AACSB: N/A, AICPA AC: Systems and Process Management, Section: 3.1

DQ3. Management override is when a human circumvents the designed controls and exploits the gap in the controls that humans create. A real-life example comes from SEC Accounting and Auditing Enforcement Release No. 1,287 (Guilford Mills, Inc.). It describes a fraudulent financial reporting case in which the controller entered false journal entries by debiting accounts payable and crediting cost of goods sold. The effect was to understate accounts payables and significantly increase gross profit and net income.

LO 1, BT: C, Difficulty: Easy, TOT:5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

DQ4. Continuous monitoring leverages technology to provide regular insights into how a control or process is performing. It allows management to track business processes continually, to ensure that they are functioning as intended and to identify any anomalies, should the processes deviate from intended levels of performance and effectiveness. Continuous monitoring helps management to operationalize overall risk management. It is proactive rather than reactive at identifying problems.

Example: Identifying payments to vendors without a matching purchase order and receiving report.

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LO 2, BT: A, Difficulty: Medium, TOT:5 min., AACSB: Knowledge, AICPA AC, Section: 3.2

DQ5. Manual controls require a physical interaction by a human. Examples are reviewing documentation, signing a physical paper, entering data into a system, etc. Automated controls – once created – occur without the intervention of a human. Examples include data flow from one system to another, automatic calculations, auto populating the financial reports with information from the AIS, security access for networks, etc. Generally, automated controls are more reliable because they are not subject to human error or manipulation.

LO 2, BT: A, Difficulty: Medium, TOT:5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.2

DQ6. Answers will vary based on the student’s perspective about whether the original conviction was an overreach or an adequate move to protect the public.

LO 2, BT: E, Difficulty: Hard, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 3.2

DQ7. Student answers will vary. The new model is designed to depict the structure of interactions and responsibilities between management, internal audit, and to achieve more effective collaboration and alignment. The new model clearly defines roles and communication lines, including where collaboration is appropriate. It should make it easier for businesses to take a proactive, principlesbased approach to risk management.

LO 3, BT: C, Difficulty: Medium, TOT: 5 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 3.3

DQ8. The control environment is the most important because has a downstream effect on the other components. It is the foundation for the other components because top management sets the overall tone for the firm. If the tone at the top is poor, it has a negative impact on the other components.

LO 3, BT: E, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 3.2, 3.3

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.There is a lack of separation of duties over Accounts Payable. Josephine has too many incompatible duties. For separation of accounting duties, management should structure work assignments to separate the following three activities: o Authorizing transactions and decisions, o Recording accounts payable transactions, and o Having custody of assets such as cash (which includes checks).

• Josephine is authorizing payments to vendors, • She is recording accounting entries and has control over Accounts Payable records, and • She has access to the checks for payments to vendors.

The consequences could be payments to fictitious vendors and loss of company assets. These duties need to be separated, and other employees should be preparing supporting documentation, authorizing payments, and taking physical possession of checks.

LO 1, BT: E, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1

A2.

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(B) Internal Control C A E B D

LO 1-2, BT: A, Difficulty: Hard, TOT:10 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1, 3.2

A3.

Term Second line of defense Board of directors Managing risk External Audit Regulators Support on risk-related matters Third line of defense Internal audit Risk management and compliance First line of defense Management Independent advice

Location D A C G G D E E D C C F

LO 3, BT: A, Difficulty: Medium, TOT:10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 3.3

A4.

1. COSO Internal Control—Integrated Framework 2. SEC 3. SOX 4. COSO Internal Control—Integrated Framework 5. SOX

LO 4, BT: E, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.4

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A5.Portia’s Ports is already on track to be prepare for a public offering. Based on SEC regulations, the ERM Team should adopt an internal control framework. If you compare Portia’s Ports’ current operations to the COSO Internal Control—Integrated Framework, the control environment, risk assessment, control activities, and monitoring activities are already well-aligned with the COSO framework. The ERM Team should adopt this framework and do an in-depth analysis to identify any gaps while also reviewing SOX regulations closely for what requirements they need to meet before the IPO. LO 4, BT: E, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.4

A6.

LO 4, BT: E, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.4

A7.Only # 4 is “yes”; the remainder are “no.”

The control environment, or the tone at the top, is exceptionally poor, and indicates a significant risk of fraud, for the following reasons: • High turnover in CFO position is troubling. The CFO is responsible for financial reporting and this high turnover, with no explanation, is a red flag for financial statement fraud.

• There is strong potential for losses arising from violations of laws and regulations. There should have been disclosure of potential losses arising from the Medicare lawsuit. The allegation of falsification of records is significant.

• Executive compensation is dependent on financial performance, and this creates an incentive to overstate earnings.

• The CEO appears to dominate and intimidate the Board and employees with his autocratic management style.

• Executives use company assets for personal reasons without disciplinary action. This sets a poor example for everyone else in the firm.

• Risk assessment is poor.

• There are strong indications that financial statements may be fraudulently misstated. These situations are troubling: The CEO said that “I am not an accountant,” and that he did not understand “why I am expected to know what the accountants do.” There is also no evidence Solutions Manual

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of the Board questioning the reasonableness of the financial statements or of the audit committee raising issues about the financial reporting process or the system of internal control. Adding to concerns is the evidence that the CEO tried to circumvent general accepted accounting practices by coercing his employees to tamper with the financial statements.

The instructor may want to tell the students that this question comes from real information from the HealthSouth financial statement fraud case.

LO 4, BT: E, Difficulty: Medium, TOT: 10 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.4

A8.

Question 1: Control objectives: Operation, Reporting, Compliance Components with downstream impact: 1. Control environment, 2. Risk assessment, 3. Control activities, 4. Information and communication, 5. Monitoring Question 2: 1. a. A. Operations, H. Reporting, E. Compliance b. B. Risk assessment 2. a. A. Operations, H. Reporting b. D. Information and communication 3. a. A. Operations objective b. F. Control activities 4. a. A. Operations, H. Reporting, E. Compliance b. G. Control environment (setting the tone) 5. a. A. Operations b. C. Monitoring 6. a. E. Compliance b. F. Control activities 7. a. A. Operations, H. Reporting, E. Compliance b. G. Control environment 8. a. A. Operations, H. Reporting b. C. Monitoring LO 1-4, BT: E, Difficulty: Medium, TOT: 15 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 3.1-3.4

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Chapter 4

CHAPTER 4 Software and Systems Learning Objectives: 1. Summarize the characteristics and components of information systems.

2. Identify technologies used by startups and small businesses.

3. Explain how growing businesses enhance their systems.

4. Describe the features of and implementation considerations for an enterprise resource planning (ERP) system.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. C

10. C

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.2

2. D

11. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.3

3. D

12. C

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.3

4. B

13. C

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.3

5. A

14. D

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.3

6. C

15. B

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

7. B

16. C

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

8. C

17. D

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

9. B

18. B

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. The four main types and their functions are: •

•

•

•

Transaction processing systems: Support day-to-day business activities, including both financial and non-financial transactions (recall information events like placing an order).

These are also called operational systems. Used by workers for basic operations.

Management information systems: Provide information to assist in routine management activities. Uses data from transaction processing systems. The AIS is a type of management information system. Used by managers.

Decision support systems: Provide information to assist in solving non-routine problems and support long-range planning. Used by upper-level managers, such as senior managers or directors.

Executive support systems: A subset of decision support systems specifically designed for long-range, strategic decision making. Used by executive leadership.

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

DQ2. Accounting systems are transaction processing systems. As this system collects the data that is created, it must be fast, available, and ensure integrity of the data. Performance and availability are critical as users must be able to access the system any time it is necessary, and the system needs to be able to handle any level of volume from customers. Also, the information created by the data must be accurate, so it is important that the integrity of the data is not comprised.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

DQ3. Batch professing is different from real-time processing due to the way it processes transactions later. Because the transactions are processed later, any databases may not be updated for several hours. With real-time processing, transactions are processing immediately, which then updates the databases. There are three main benefits of batch processing. First, processing can be scheduled to minimize the impact on key operational systems. Second, the processing schedules are easy to maintain. Third, data processed through batches tends to have less errors due the pre-established steps and schedules.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

DQ4. Accounting software packages like QuickBooks are popular because small businesses do not have the resource advantage of larger companies and must be able handle many of the same responsibilities with fewer people. These packages help businesses with basic business payments, such as managing and paying bills, and handling payroll functions, including time tracking and inventory management. They are also a general ledger where businesses record their journal entries. By using these packages, small business owners can track the financial health of their business and make better financial decisions by using general ledger data to create pre-designed reports for users. QuickBooks and other vendors also offer an online product that allows access to the financial information of the business when they are away working remotely.

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.2

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DQ5. Segregation of duties: Because small businesses have fewer employees, it is hard to enforce proper segregation of duties and incompatible functions are frequently combined, increasing the risk of errors and fraud.

Physical access: It is important that computers and other hardware (external hard drives, printers, etc.) are located in safe areas where physical access is controlled. In small businesses, especially startups, many employees use their personal devices for work. Controls can be especially difficult to enforce when employees take personal devices home for use outside of business hours. For example, a stolen laptop could mean a loss of work that might never be recoverable and a loss of proprietary company information.

Logical access: Smaller business often cannot afford to implement complex, sophisticated security measures, so many small businesses must deal with logical access issues on a regular basis, which can result in unauthorized access to systems.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.2

DQ6. The three main systems approaches are centralized, decentralized, and distributed. A centralized system is where all users are connected to one central location that all users can access. All the business processing occurs, and the information is stored in that location. Decentralized systems utilize multiple locations connected to a central site. The outside locations process data, summarize it, and communicate the data back to the central site. Distributed systems are like decentralized system; however, it no longer has a central site that connects to all the outside locations. In a distributed system, users have access to all the data, depending on their access privileges, and all users are inner connected throughout the business.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.3

DQ7. Student answers should focus on the basic definitions of centralized, decentralized, and distributed systems. They should also outline the advantages and disadvantages of each system, and how those could impact the current environment. They should also include examples of how each system is used, and cover the various risks presented in the chapter, including how those risks could impact the decision making.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.3

DQ8. Student responses will differ based on their selection of a specific case. Here is a sample response: Case: USA Waste acquired Waste Management for $20 billion.

Why the implementation failed: Together, the two companies had around 300 difference AS400 mainframe systems in different locations. When they became a single entity, there wasn’t a scalable IT infrastructure system to support the single, larger company. The following year, the entire senior management team was removed and a new executive team was deployed to clean up the IT mess left behind.

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How management could have been prevented the failure: There was inadequate planning. Executives should have done their due diligence and they should have found out about the absence of a scalable architecture prior to the merger happening.

Source: https://www.zdnet.com/article/promises-promises-a-look-at-waste-managements-caseagainst-sap/ Another case of what can go wrong is Banco Sabadell’s acquisition and integration of Lloyds Banking Group’s Spanish business, TSB. Source: https://www.raconteur.net/finance/mergers-acquisitions/failed-mergers-acquisitions/ LO 3, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.3

DQ9. As the ERP system moves up in size, it can handle a larger number of transactions which will require larger databases and systems. All those items will require an organization to invest a larger amount of money for the installation and the time to install the system increases as well. If the wrong sized ERP is chosen, the organization will spend more money than necessary, the system will take too long to install, and the project will probably fail.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

DQ10. The three different ways are: 1. Out of the box (also known as off the shelf): The software will work immediately when implemented and the expectation is that the business will adapt its processes to match the software’s pre-existing configuration.

2. Configurable: This software can have some custom add-ins provided by the vendor, and the customer can implement them, if they are useful to the organization.

3. Customizable: The software functionality and workflows are custom made for the business.

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

DQ11. ERP systems were developed to automate and integrate all or many of an organization’s business processes. The ideal state is one that reflects best practices and functions as single software system, using one application and a single database to share data across the enterprise, a unified interface, and real-time access to information. The results are integrated information flows. Adopting firms expect ERP systems to improve operating performance and therefore financial performance. ERP was developed to manage and automate all aspects of an organization’s business operations, including sales and distribution, materials, human resources, production planning, purchasing, sales, customer relationships, supply chain, product life-cycle, business intelligence and accounting. Networks are used to connect an ERP system to the IT systems of vendors and customers. This allows different functional areas within the organization to communicate with one another and with customers and vendors more effectively.

The successful implementation of an ERP system should lead to significant benefits such as reduced labor, better cash flow management, increased accounts receivable turnover, fewer bad debts, more timely reporting, reduced inventory, tightened supply chain links, improved production scheduling, Solutions Manual

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reduced manufacturing costs, reduced order processing time, improved customer service, and consequently, an increase in competitiveness, profitability and stock prices. However, a history of failures show that the successful implementation and integration rate remains an issue as implementation is expensive and complex.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

DQ12. Student responses will vary based on their selection of a specific case. Here is a sample student response: MillerCoors contracted with the Indian firm HCL Technologies to implement a new ERP system.

MillerCoors had recently purchased new breweries that were running seven different versions of ERP software. Management decided that it needed one system. The rollout of the new software was a disaster and led to numerous systems disruptions. Two years later, MillerCoors and HCL had sued and counter sued each other for breach of contract. The filings revealed that MillerCoors sued on the basis that HCL’s software was not adequate to meet the demands of the business. In HCL’s response, they claimed that they delivered the software as requested and that management at MillerCoors did not clarify their business needs, and that they had not requested the necessary functions in the software contract. Examination of the contract showed that the MillerCoors legal team had used standard service contracts in the HCL negotiations. The lawsuit was eventually settled out of court. After taking over the operations of the new breweries, it appears that management of MillerCoors was not prepared for the monumental task of integrating all of the disparate systems into one main system. Management should have better planning and they should have specifically tailored their software requests in the contract to their needs.

Source: http://www.cio.com/article/2429865/enterprise-resource-planning-10-famous-erp-disastersdustups-and-disappointments.html.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

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A1.1. OLTP 2. OLAP 3. OLAP 4. OLTP 5. OLAP

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SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

A2.

Activities

Processing Options

1. Parts sold daily at a small locally owned auto parts store

Batch

2. Filling prescriptions at a drugstore

Real-time

3. Daily ATM deposits

Batch

4. Weekly customer address updates

Batch

5. Daily credit card transactions

Batch

6. Monthly bill generation

Batch

7. Twice-per-day payment method updates

Batch

8. Tickets for a concert

Real-time

9. Point-of-sales transactions

Real-time

10. Biweekly payroll

Batch

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1

A3.1. Unauthorized physical access 2. Inadequate segregation of duties 3. Unauthorized physical access 4. Unauthorized logical access 5. Unauthorized physical access 6. Inadequate segregation of duties 7. Inadequate segregation of duties 8. Unauthorized logical access 9. Unauthorized logical access LO 2, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section 4.2

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A4.

Needs

Software

1. Show differences between sales by cookie type.

Excel

2. Generate income statements.

QuickBooks

3. Create a pivot table to summarize data.

Excel

4. Run a query on the average sales per month.

Access

5. Create job-based access criteria for the accounting system.

GAP

6. Update the rate of pay for employees.

QuickBooks

7. Create a graph showing which products are the most profitable.

8. Create a new process for counting cash in cash registers.

Excel

9. Add new vendor information for making a payment.

QuickBooks

GAP

LO 2, Blooms: C, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section 4.2

A5.1. Lowest probability of business disruption: Centralized: If the system crashes, the whole system goes down and users cannot access the data.

Decentralized: If the system is disrupted, it can remain active if at least one of the servers continues to operate. There is a lower risk of complete disruption than a centralized system. One central server failure causes a part of system to fail, not the whole system.

Distributed: A distributed system is safe from the independent failure of components and there is unlikely to be a disruption.

2. Lowest maintenance costs: Centralized: Most affordable to maintain with only one central location Decentralized: Higher maintenance costs than a centralized system because there are more locations to maintain.

Distributed: Highest maintenance costs as the newest technology of the three.

3. Most scalable (in terms of growth of system): Centralized: Low rating in terms of scalability. Cannot be scaled to the extent of decentralized systems.

Decentralized: Moderately scalable. Added hardware and software can lead to increase in performance of the entire system.

Distributed: Extremely scalable as it has evolved from the other systems.

4. Most efficiency in processing large volume of transactions: Centralized: Longer access times for users who are far from the central server. Bottlenecks can happen when traffic spikes.

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Decentralized: Processing and access time to the data is faster because there are more central servers and also nodes in regions where user activity is high. Minimal problem of performance bottlenecks because the processing load is balanced across the system.

Distributed: Processing and access to data is very fast because users share ownership of the data and systems resources.

LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.3

A6.

Software

Method of Adoption

1. SAP

C. Customizable

2. Quicken

A. Out of the box

3. SAGE300

B. Configurable

4. Excel

A. Out of the box

5. Salesforce

B. Configurable

6. Apache

B. Configurable

7. Oracle PeopleSoft Benefits Admin

C. Customizable

8. SAS Viya

B. Configurable

9. Microsoft Windows

A. Out of the box

LO 4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.4

A7.1. Budget overrun, In-house development 2. Copyright infringement, Third-party purchase 3. Data breach, Both 4. Technical risk, In-house development 5. External risk, In-house development 6. Business disruption, Third-party purchase LO 1 & 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.1 & 4

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A8.

Client Criteria 1. Centralized system

6. Ease of implementation 7. Minimal technical expertise requirements

Matching System(s) A. Stand-alone desktop, B. SaaS, C. Onsite ERP B. SaaS B. SaaS B. SaaS A. Stand-alone desktop, B. SaaS, C. Onsite ERP B. SaaS B. SaaS

8. Data security

B. SaaS

9. Access from anywhere, at any time, and from any device

B. SaaS, C. Onsite ERP

10. Most flexibility and scalability

B. SaaS

2. Low initial upfront cost 3. Low maintenance costs 4. Minimal updating of the system 5. Ability to monitor financial performance

The client should choose SaaS as it meets all the criteria.

LO 2 - 4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section 4.2-4

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CHAPTER 5 Data Storage and Analysis Learning Objectives 1. Differentiate between data elements and data types.

2. Explain how data is stored.

3. Summarize the five characteristics of big data.

4. Apply data analytics to accounting problems.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. A

10. C

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.3

2. C

11. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.3

3. C

12. A

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Technology and Tools, Section: 5.3

4. C

13. B

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.3

5. A

14. C

LO 1, Blooms: Comprehension, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA AC: Technology and Tools, Section: 5.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.3

6. D

15. C

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.4

7. C

16. B

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.4

8. C

17. B

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.4

9. B

18. B

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.4

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Knowing how to use unstructured data will help accounting professionals add value for their employers and clients. By not using unstructured data and ignoring around 80% of the data out there, accountants will forgo opportunities to provide valuable insights and solve problems in innovative ways.

LO 1, Blooms: Application, Difficulty: Medium, TOT: 3 min., AACSB: Analytic, Technology, AICPA AC: Technology and Tools, Section: 5.1

DQ2. Key differences include: 80% of business data is unstructured.

Most business decisions are based on only 20% of a company’s data (structured).

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1

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DQ3. The key data elements, in order from largest to smallest, are: Data Element Databases: Files: Records: Fields: Bytes (characters): Bits:

are composed of files are composed of records are composed of fields are composed of bytes are composed of bits the smallest element in a computer system

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 3 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1

DQ4. Since most reports for accounting purposes are created from structured data that is stored in relational databases—including data warehouses and data marts—knowing how data is linked and where the data is stored gives an accounting professional comfort that they are using accurate information. Querying data using SQL is a highly sought-after skill for accounting professionals.

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.2

DQ5. a. Volume is the quantity and scale of data generated every second. b. Velocity is the speed at which speed data changes and is processed. c. Variety is the diversity of data created or collected and is categorized into two types—structured and unstructured. d. Veracity is the extent to which data can be trusted for insights. e. Value is the usefulness, worth or degree of importance of the results of the analysis.

Value is the most important of the 5Vs because data isn’t useful to a company unless it can be converted into valuable or useful information to aid decision-making. If the result of the analysis is not useful, why bother doing the analysis at all?

LO 3, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.3

DQ6. Answers will vary by student. Examples include: 5Vs Volume Velocity Variety

Solutions Manual

Challenges Standard tools like Excel and Access aren’t equipped to handle large sets of data.

Companies can find it overwhelming to deal with the speed of data creation and its arrival in their systems.

Many companies are not equipped to handle the types of unstructured data they have and use manual processes of accessing and reviewing files instead of leveraging advanced technology to organize, manage, and query unstructured data.

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Because of high velocity and variety, unstructured data will be prone to many imprecisions and inaccuracies.

While companies may capture large quantities of big data, they can lack the capabilities to interpret how to turn that data into useful information.

Veracity Value

LO 3, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.3

DQ7. Descriptive analytics tell us what has already happened by looking at historical data and condensing it into smaller, more meaningful bits of information. It is easy to access to this data and visualize in software tools like Tableau. It addresses questions like: “What happened?”

“How many times did this happen?”

“When did it happen?”

-

Example: A report comparing the amount invoiced by vendors for last year and this year, by quarter.

Diagnostic analytics provide insight into why something happened. These procedures drill down into data on a granular level and often consist of looking at the data sets in a variety of ways to identify trends or investigate causes. Diagnostic analysis uses historical data. Accountants use it to troubleshoot issues and investigate them by drilling down to the root cause. It addresses questions like: “Why did this happen?”

“Where did this come from?”

“How can we avoid this problem in future?”

-

Example: Analysis of the computer login data for employees to see who is logging into their computer outside of the expected work week hours.

Predictive analytics use statistical modeling and algorithms to predict what is likely to happen. These require assumptions and provide possible outcomes based on those assumptions. Predictive analytics cannot tell you what will happen in the future; it can only forecast what might happen using probabilities by logically predicting outcomes using statistical modeling and predictive algorithms. This analysis uses historical and live data. It addresses questions like: “What is likely to happen?”

“Should we make this decision?”

-

Example: Connect a dashboard to a live database to show risks in real-time to predict logins that may result in fraudulent activity or external access to the network.

Prescriptive analytics answer the question of what we should do. It is the most advanced and sophisticated form of analytics and requires cutting-edge technology and advanced programming to design. It is costly to implement. The analyst develops the decision-making protocol by using historical data to train the program on what to do in a real-time situation. It uses the three previous analytics types for insights and uses live, historical, and external data. It answers the question: Solutions Manual

“What should we do?

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Examples will vary by student: Create a program that uses advanced algorithms to test the potential outcomes of every new login into the system to determine whether there is a high risk of a malicious login. If it determines a high-risk login, the login is blocked, and the program sends a message to the IT team notifying them of the potential threat.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.4

DQ8. Student examples will vary. Create a trend analysis for sales taxes paid in different states to identify and investigate anomalies: An online company sells goods in all 50 states. Sales tax penalties for underpayment can be severe. This is diagnostic data analysis.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.4

DQ9. Student answers will vary.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Communication, AICPA AC: Technology and Tools, Section: 5.4

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.

Unstructured Data Item A photo of an inventory item that the firm sells A bar code that is assigned to an item in the company’s warehouse Results of X-rays and MRIs in a doctor’s office Satellite and topographical imagery of land and buildings that a business owns in 30 states Scripts of calls from the customer call center Scanned copy of a paper notification that our overdraft limit has been increased Facebook posts of customer complaints about poor service Text messages about products the firm ordered Survey data about a new product that the firm sells Patient symptoms during a doctor's visit

Database Tables(s) 1. E. Product List or G. Inventory 2. G. Inventory 3. A. Patients 4. B. Property 5. D. Customers 6. C. Banks 7. D. Customers 8. J. Purchase Orders 9. E. Product List or G. Inventory 10. A. Patients

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1

A2.

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1. A 2. C 3. B 4. D LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1

A3.

1. Stock IDs 6117 and 6119 2. Customer IDs 602, 603 and 605 3. Customer ID 604, Zebo LLC, received discounts on Stock IDs 6116 ($1,000), 6121 ($1,998) and 6115 ($2,000).

4. No, it appears that Stock ID 6120 ordered by Lillianna Fiala has not been delivered.

5. The following columns are found in at least two tables and create a relationship between these tables: Customer ID Order ID Stock ID LO 2, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.2

A4.

(1) (2) (3) (4)

production database query structured data data warehouse

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 3 min., AACSB: Communication, AICPA AC: Technology and Tools, Section: 5.2

A5.

1. Variety: Storing different varieties of data such as unstructured and structured data of different types, including photos, text files, and tables of profile information, creates a challenge for a business.

2. Volume: The number of users and sales multiplied by all the different types of information being stored means Pizza Palace is creating and receiving large volumes of data every year.

3. Value: Cost-benefit analyses to determine if the results of the analytic are worth the resources needed to create it is an example of determining whether the data and the analytic have value.

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4. Velocity: Receiving multiple types of data (map locations, orders, profiles, payments, etc.) and moving a sale from point-of-sale through front door delivery in less than 40 minutes demonstrates how quickly data is received.

5. Veracity: Typos and slang are examples of data issues that must be cleansed or reformatted before a data analytic tool can be reliable. If the data is left dirty, the tool will miss many instances of phrases because of typos. This makes the data unreliable until it is cleansed.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 25 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.3

A6. To answer the question of when Mirabel Enterprises began to see the decline in maintenance contract renewals, the best form of analysis is descriptive analytics. These procedures tell us what has already happened by looking at historical data and condensing it into smaller, more meaningful bits of information. This data is easy to access and easy to visualize in tools like Tableau.

To answer the question of whether there are indicators that point to why Mirabel Enterprises has experienced the decline in maintenance contract renewals, the best form of analysis would be diagnostic analytics. These procedures drill down into data on a granular level and often consist of looking at the data sets in a variety of ways to identify trends or investigate causes, once again using historical data.

LO 1-4, Blooms: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1-4

A7. Descriptive analytics. “What happens when we send collections emails during peak marketing?” is an example of a descriptive question of “what already happened”.

LO 1-4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1-4

A8.

1. Descriptive. It answers the question “What happened?”

2. Descriptive. It answers the question “What happened?”

3. Diagnostic. It answers the question “Why did it happen?” by looking for a trend in the results.

LO 1-4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 5.1-4

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Chapter 6

CHAPTER 6 Designing Systems and Databases Learning Objectives: 1. Outline the systems development life cycle (SDLC) stages.

2. Compare and contrast Waterfall and Agile systems development methodologies.

3. Distinguish among different types of modern databases.

4. Design relational database tables by using an entity relationship diagram (ERD).

5. Construct queries to retrieve data and answer business questions.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. C

9. A

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.1

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.3

2. B

10. C

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.1

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.3

3. D

11. B

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.1

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.4

4. B

12. A

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.1

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.4

5. D

13. B

LO 2, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.2

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.4

6. C

14. D

LO 2, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.2

LO 5, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.5

7. A

15. B

LO 2, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.2

LO 5, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.5

8. D

16. C

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.3

LO 5, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.5

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Alicia’s Accessories can use parallel, phased, or pilot implementation. It should not use direct cutover for this situation. Student answers will vary but should discuss the cost and risk profile of their selected choice: Parallel: High costs and low risk Phased: Moderate costs and moderate risk Pilot: Moderate costs and moderate risk LO 1, BT: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis, and Management, Section: 6.1

DQ2. Student answers will vary.

Direct cutover means low cost and high risk if the new system fails because customer orders may go unfulfilled as production would be at a standstill.

Parallel implementation means lower risk and high cost to keep both systems going.

Phased implementation for manufacturing raw cookie dough is not feasible because the nature of the product does not allow for modules.

Pilot implementation, with moderate cost and risk, would be a good option as a few pilot factories could go live first and issues resolved before full rollout.

LO 1, BT: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.1

DQ3. Student responses will vary but should focus on corporate culture, appetite for risk, and the nature of the development project. The advantages and disadvantages of Waterfall versus Agile will impact their responses, such as: • Agile strengths: In-person team, creative developers, new system with room for creativity and flexibility.

• Agile weaknesses: Must be able to manage risks in real time and may not be conducive to decentralized, virtual work, as has needed to occur during the COVID-19 pandemic. Agile excels when teams can meet frequently (in-person).

• Waterfall strengths: Predefined system requirements and regulatory specifications.

• Waterfall weaknesses: Because of its linear nature, it is difficult to respond to in real-time to risks and change. Risks can mount as managers don’t respond to mitigate risks until the project is completed.

LO 2, BT: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.2

DQ4. Student answers will vary but should include the project description strengths for the chosen methodology: Agile strengths: In-person team, creative developers, new system with room for creativity and flexibility.

Waterfall strengths: Predefined system requirements and regulatory specifications.

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LO 2, BT: C, Difficulty: Easy, TOT: 3 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.2

DQ5. A user defines a class and assigns objects that are placed “within” the class. When a user queries a class, all objects in the class will be returned. Unlike relational databases, users are unable to query individual items in an object-oriented database. Objects can belong to more than one class.

LO 3, BT: Comprehension, Difficulty: Easy, TOT: 3 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.3

DQ6. Relational databases traditionally require a database administrator to manually add space to the database as needed. NoSQL databases have increased scalability. Many NoSQL databases will automatically scale as the data sets grow larger.

LO 3, BT: Comprehension, Difficulty: Easy, TOT: 3 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.3

DQ7. Conceptual, logical, and physical ERDs represent three levels of an ERD. While all the three levels show entities with attributes and relationships, they differ in their purposes and their target audiences.

•

•

•

Conceptual ERDs show the business objects that should be in a system and the relationships between them, without cardinalities. They present an overall picture of the system by defining the entities that exist, but not the tables. Business analysts use conceptual models.

Logical ERDs provide more detail than a conceptual ERD by defining explicitly the columns or attributes of each entity. They do not show the primary and foreign keys. Business analysts use conceptual models.

Physical ERDs represent the design blueprint for a relational database. A physical data model expands the logical data model by assigning each column with type, length, etc. and shows how that data should be structured in the database. These ERDs are used by the designers and includes identification of primary keys and foreign keys.

LO 3, BT: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.3

DQ8. Relationships indicate associations between tables, and they show how things of significance are related. We navigate the relationships by using keys. The foreign key (FK) is a primary key from one table that ‘visits’ another table. The foreign key must match to an existing primary key, a database rule known as referential integrity. This controlled redundancy allows linking of tables, creating the physical relationship between them.

LO 4, BT: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.4

DQ9. Accounting is a data-driven profession. All accounting professionals work with data and they will need to interact with databases to extract the information they need. SQL is the tool that connects the user to the data in the database. It is a ubiquitous database language used to store, query, and access data. You will often be asked to “show me the data” to support a position you may take. You need to know how to get that data.

As an auditor, for example, you can use SQL to retrieve a client’s data and display the information results from that data in a variety of formats for audit purposes.

SQL allows you to be more productive, or else you may have to wait days or weeks for IT to extract the data for you. SQL also allows you to aggregate data in seconds and perform other data analytics tasks.

LO 5, BT: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.5

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DQ10. Student answers will vary. Examples include: • • • • •

Selecting and extracting data matching specified criteria, such inventory quantities on hand in excess of quantities sold over a specified time period Deleting records from the database based on established criteria, such as deleting approved vendors who are inactive Creating a report that shows which countries your inventory items are sourced from Creating a report that shows unfilled orders from customers Creating a report that shows the average cost price for manufacturing a batch of cookie dough

LO 5, BT: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.5

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.1. Requirements definition 2. systems model 3. graphical user interface (GUI) 4. requirements definition 5. conceptual design 6. technical architecture specifications LO 1, BT: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.1

A2.1. B. Economic feasibility: This fact states the benefits of the project.

2. A. Technical feasibility: This fact states the talent availability of building and supporting the project.

3. C. Operation feasibility: This fact states how the project will integrate with existing company systems.

4. B. Economic feasibility: This fact states the costs of the project.

Yes, this project passes the feasibility test.

LO 1, BT: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.1

A3.1. development 2. design 3. testing 4. implementation 5. planning 6. analysis 7. testing 8. planning 9 . design 10. maintenance LO 1, BT: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.1

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A4.1. B. Product owner 2. A. Business stakeholder 3. C. Scrum master 4. D. Core team member LO 2 BT: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.2

A5.Rachael: Did you hear that the client wants us to change the layout on the login page? We finished that weeks ago. They should have said something when they saw that product increment.

You: That is true. But John, our product owner, is meeting with them tomorrow. He knows we need to continue to timebox our work and focus on the essential parts of the app.

Rachael: Yeah, changing layouts isn’t essential. John should add that to the product backlog. We can work on that during the next sprint if we have time.

You: Exactly. Otherwise, we are going to miss our deadlines due to scope creep. John wouldn’t let that happen. That is not part of our Agile principles.

LO 2 BT: Knowledge Difficulty: Easy, TOT: 3 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.2

A6.

Description 1. Set, based on predefined scope of project 2. Create a bare-bones application or system that performs at a minimal level and then iterate to improve it 3. Measured against the project plan and well documented 4. Measured by whether the project delivery is on time, within budget, and to scope 5. Well defined prior to starting development 6. More flexible in that it can be set or alternatively based on feedback from each iteration 7. Typically not available until at least the testing stage 8. Linear and inflexible, with each stage of the project completed before the next stage begins 9. Normally available in early phases of the project Solutions Manual

Schedule and budget

Waterfall or Agile?

Waterfall

Goal

Agile

Metrics for progress

Waterfall

Metrics for success

Waterfall

Scope

Waterfall

Schedule and budget

Agile

Availability of working product or system Stages

Waterfall

Availability of working product or system

Agile

Attribute

Waterfall

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10. Measured by whether the project meets end-user requirements 11. Create a completed application or system 12. Iterative and flexible, with the ability to move forward and backward across stages if necessary 13. Measured against a minimal level of performance with minimal documentation 14. Undefined prior to starting with development

Chapter 6

Metrics for success

Agile

Goal

Waterfall

Stages

Agile

Metrics for progress

Agile

Scope

Agile

LO 2 BT: Knowledge Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.2

A7.Part 4: Students may find it difficult to clearly identify the answers to parts 1, 2, and 3. This is because many DBMS are hybrids or multi-purpose systems. While terms like “structured” and “unstructured” data are clear academically, in the real world, students will find these concepts are often blurred and difficult to navigate.

Selected DBMS

Part 1: Databases Supported

Part 2: Data Supported

Part 3: Languages Used

Oracle

Hybrid: Oracle is an RDBMS for relational databases. It supports some features of object-relational data, but it is not a fully objectoriented database system.

Structured data and sometimes unstructured data.

SQL

Microsoft SQL Server

Relational: Microsoft SQL Server is an RDBMS for relational databases. SQL Server is an example of a pure relational database.

Structured data.

SQL

MongoDB

NoSQL: MongoDB is an open-source DBMS for document-oriented databases. Documentoriented databases are a type of NoSQL database.

NoSQL, Object-oriented, or document-oriented are all correct answers.

Structured data and unstructured data.

MongoDB focuses on JSON files.

Primarily Java MongoDB provides drivers for supporting additional languages including: Python, PHP, Perl, JSON, Java, Ruby, Scala, C, C#, .Net, and more.

Amazon DynamoDB

NoSQL: DynamoDB is a Structured data and NoSQL DBMS. It a hybrid of unstructured data a relational database style Chapter 6 – Designing Systems and Databases

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Java C#

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primarily in JSON files.

Python Perl PHP Ruby Erlang JavaScript

Part 5: Because of the difficulty in navigating technology like this, businesses are often confused about which systems and databases to adopt. Specialists are hired to assist with system migrations and database designing. The complexity of both data and the technology to support it create challenges for companies of all sizes.

LO 3, BT: Analysis, Difficulty: Hard, TOT: 30 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 6.3

A8.Customer_Order table: Order_No (PK) Order_Date Customer_ID (FK) Total_Price Order_Details table: Order_No (PK) (FK) Pizza_Code (PK) (FK) Order_Qty Pizza table: Pizza_Code (PK) Pizza_Name Unit_Price Customer table: Customer_ID (PK) Customer_Name Customer_Address Customer_Phone LO 3-4, BT: Application, Difficulty: Medium TOT: 20 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 6.3 and 6.4

A9. 1.

Table 1: General Journal Entries JE_No

JE_Date

Account_Name

Account_No

Debit

Credit

Explanation

1

7/1/20XX

Cash

1001

5,000

0

Credit sale

1

7/1/20XX

Accounts Receivable

1004

70,000

0

Credit sale

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1

7/1/20XX

Sales

4001

0

75,000

Credit sale

2

7/1/20XX

Cost of Goods Sold

5001

40,000

0

COGS

2

7/1/20XX

Inventory

1030

0

40,000

COGS

3

7/2/20XX

Accounts Payable

2001

8,000

0

Paid invoice

3

7/2/20XX

Cash

1001

0

8,000

Paid invoice

2. Three columns taken together uniquely identify a row: JE_No in combination with JE_Date and Account_No. Explanation: At the beginning of the second fiscal year, the first journal entry number will reset to 1, so JE_No cannot be used to uniquely identify a row. In addition, each journal entry results in multiple rows with the same JE_No and the same date. In fiscal year 2 and subsequent fiscal years, the JE_Date, in combination with JE_No and Account_No will uniquely identify rows in this flat-file table.

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3.

Table A: Transaction Listing JE_Number

JE_Date

Explanation

1

7/1/20XX

Credit sale with down payment

2

7/1/20XX

Cost of goods sold

3

7/2/20XX

Payment of invoice

Table B: Transaction Details JE_Number

JE_Date

Account_No

Amount

1

7/1/20XX

1001

5,000

1

7/1/20XX

1004

70,000

1

7/1/20XX

4001

(75,000)

2

7/1/20XX

5001

40,000

2

7/1/20XX

1030

(40,000)

3

7/2/20XX

2001

8,000

3

7/2/20XX

1001

(8,000)

Table C: Chart of Accounts Account_No

Account_Name

1001

Cash

1004

Accounts receivable

1030

Inventory

2001

Accounts payable

4001

Sales

5001

Cost of goods sold

Each transaction in the transaction listing must have more than one transaction detail, and each transaction detail must belong to one and only one transaction (i.e., journal entry).

Each transaction detail line item must have one and only one general ledger account number, and each general ledger account number may have zero or more transaction detail line items.

LO 4, BT: Application, Difficulty: Hard, TOT: 30 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 6.4

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A10. 1. A customer is billed and invoiced immediately upon acceptance of goods delivered to

them.

Each sales transaction must have an invoice.

Each invoice must be for one or more inventory product types.

Each customer can have zero or more sales transactions.

Each inventory product type can be sold to zero or more customers.

Each customer can buy zero or more inventory product types.

2. Tables: Customer, Credit_Sales, Inventory, Credit_Sales_Line_Items Customer Customer_ID

Customer Name

239

M Corp

467

Z Inc

567

A Corp

Credit_Sales Invoice_Number

Invoice_Date

Customer_ID

345

6/3/20XX

567

346

6/12/20XX

467

347

6/13/20XX

239

Credit_Sales_Line_Items (in case some professors or students include this as it is a table in the database) Invoice_Number

Inventory_ID

Qty

345

567835CT

1000

345

489352AZ

200

345

156783MI

500

346

567835CT

1200

347

913784ME

600

347

489352AZ

120

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Inventory Inventory_ID

Inventory_Name

Unit_Selling_Price

156783MI

Circuit Board 224M Circuit Board 221L Micro Chip Ax1

64

Graphics Card VXG2

20

489352AZ 567835CT 913784ME

48 125

3. ERD

LO 4, BT: Application, Difficulty: Hard, TOT: 45 min., Technology, AICPA AC: Systems and Process Management, Section: 6.4

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Get complete Order files download link below htps://www.mediafire.com/file/f3w4bcjcxx779k3/SM+Accoun�ng+Informa�on+Systems+Connec�n g+Careers,+Systems,+and+Analy�cs+1e+Arline+Savage,+Danielle+Brannock,+Alicja+Foksinska.zip/file

If this link does not work with a click, then copy the complete Download link and paste link in internet explorer/firefox/google chrome and get all files download successfully.

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A11.

LO 4, BT: Application, Difficulty: Hard, TOT: 25 min., Technology, AICPA AC: Systems and Process Management, Section: 6.4

A12.

1. Correct 2. Incorrect 3. Incorrect LO 5 BT: Application, Difficulty: Medium TOT: 3 min., Technology, AICPA AC: Technology and Tools, Section: 6.5

A13. A left outer join includes all records in the left table and only the matching records in the right table.

Left outer join: Employee ID E9250682 is not included in Table A, is included in Table B, and does not show in Table C. Similarly, Employee ID E0285011 is included in Table A, but not in Table B, and is included in Table C. LO 5 BT: Application, Difficulty: Medium TOT: 5 min., Technology, AICPA AC: Technology and Tools, Section: 6.5

A14.

1. SELECT | FROM | WHERE | = 2. SELECT | Annual_Salary | WHERE | = | Kelly Arnold 3. SELECT | First_Name | Last_Name | FROM | WHERE | Annual_Salary | 100,000 LO 5 BT: Application, Difficulty: Medium TOT: 3 min., Technology, AICPA AC: Technology and Tools, Section: 6.5

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CHAPTER 7

Emerging and Disruptive Technologies Learning Objectives: 1. Explain how businesses identify risks and opportunities associated with emerging and disruptive technologies.

2. Identify business opportunities provided by disruptive technologies.

3. Apply the principles of robotic process automation (RPA) to accounting use cases.

4. Identify the fundamental principles and technologies of blockchain.

5. Explain blockchain’s relevance to accounting professionals.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. A

11. C

LO 1, BT: Comprehension, Difficulty: Easy TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.1

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.4

2. C

12. C

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.1

LO 4, BT: Comprehend, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.4

3. C

13. A

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section:7.1

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.4

4. B

14. B

LO 2, BT: Knowledge C, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section:7.2

LO 5, BT: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.5

5. C

15. C

LO 2, BT: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.2

LO 5, BT: Analysis, Difficulty: Medium, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.5

6. C

16. A

LO 2, BT: Comprehension C, Difficulty: Easy, TOT: 1 min., AACSB: N/A, AICPA AC: Technology and Tools, Section: 7.2

LO 5, BT: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.5

7. B

17. B

LO 2, BT: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.2

LO 5, BT: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.5

8. C

18. B

LO 3, BT: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.3

LO 5, BT: Analysis, Difficulty: Medium, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.5

9. A

19. A

LO 3, BT: Application, Difficulty: Medium, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.3

LO 5, BT: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.5

10. D LO 4, BT: Comprehend, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.4

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Knowledge of these new technologies will help accounting professionals add value for their employers and clients. It costs time and money and can require considerable effort to learn new technologies. There is also the challenge of accountants moving outside of their comfort zones.

However, a lack of knowledge will result in accountants foregoing opportunities to provide valuable insights and to be at the forefront of solving business problems in innovative ways. Companies rely on accounting professionals to be trusted advisors when making decisions about implementing new technology and identifying the associated risks and internal controls.

LO 1, BT: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.1

DQ2. When a new technology enters the market but is not yet being regularly used by companies, it is called an emerging technology. Not every emerging technology becomes disruptive, because not all of them are successful. As these emerging technologies continue through their lifecycles, they will either fail—and not be widely adopted—or become widely used throughout companies. As more companies adopt, the innovation becomes a disruptive technology which changes the way companies function.

Disruptive technologies force companies to adapt their operations to stay competitive.

LO 1, BT: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.1

DQ3. Student answers will vary and could include opportunities for companies like Lyft and Uber, involving changes to public transportation with a shift to on-demand transportation and self-driving vehicles performing deliveries.

LO 1, BT: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.1

DQ4. PwC: Emerging and Disruptive Technology Services Technology Artificial intelligence (AI) and its subset, Machine learning Augmented reality

Blockchain

Drones Internet of things (IoT)

Robotics

Solutions Manual

Real-World Examples “Hospitals using a library of scanned images to quickly and accurately detect and diagnose cancer.”

“AR-enabled smart glasses help warehouse workers fulfill orders with precision, airline manufacturers assemble planes and electrical workers make repairs.”

“Microsoft, Oracle, SAP and Salesforce have all announced blockchain initiatives…. Using blockchain in concert with enterprise resource planning platforms will enable companies to streamline processes, facilitate data sharing and improve data integrity.”

“A ‘bee-like’ drone that surveys property and regularly returns to its ‘hive’ to charge.”

“Improving facilities management—whether room energy use, overall environmental conditions or even determining when trash bins need emptying.” “…assembly, machining (especially those requiring high levels of precision and dexterity), materials handling/packaging, and materials transport.”

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“VR is already being used to give medical students greater access to operating theaters, where there are restrictions on the number of observers.”

Virtual reality (VR)

References: PwC: https://www.pwc.com/gx/en/issues/technology/essential-eighttechnologies.html?fbclid=IwAR0zaleHDNDLr0igYzvwZxDHhZIv_54TcciYmdhORaEVuouGvFdV_g60xhc and related links from this webpage.

LO 2 and 5, BT: Application, Difficulty: Medium, TOT: 30 min., AACSB: N/A, AICPA AC: Technology and Tools, Section: 7.2 and 7.5

DQ5. Student answers will vary.

LO 3, BT: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.3

DQ6. Student answers will vary.

LO 3, BT: Analysis, Difficulty: Medium, TOT:10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.3

DQ7. Student answers will vary.

LO 4, BT: Analysis, Difficulty: Medium, TOT:10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.4

DQ8. An external auditor cannot just assume that that data from a blockchain is reliable and must still consider general and application internal controls covering the blockchain system. It is an automated process without manual controls. The auditor must also assess how reliable the consensus protocol is for transaction approval. Another crucial consideration is for the auditor to understand how blockchain transactions are reported in the financial statements. Auditors must satisfy themselves that the financial statements are not materially misstated with regard to these transactions.

Risks associated with blockchain transactions include: • Incorrect reporting in the financial statements • Undisclosed related party transactions • Linked to a side agreement outside of the blockchain • Fraudulent transactions • Unauthorized transactions • Illegal transactions LO 5, BT: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: N/A, AICPA AC: Technology and Tools, Section: 7.5

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DQ9. Deloitte: Trends in Emerging and Disruptive Technologies Technologies Tech-enabled strategy platforms using advanced data analytics, automation, artificial intelligence and machine learning Connected robots, cobots (they work shoulder-toshoulder with humans as a collaborative worker), and drones in the supply chain; connected cameras working with artificial intelligence Machine learning-based data management and advanced connectivity with 5G

Impact Example(s) Continuous identification of strategic forces and monitoring the execution and outcomes of business strategy

Use Case Example Deloitte, to monitor impact of regulation and technology changes on the services they provide

A more efficient and safer supply chain

Pactiv Evergreen uses the IoT, visualization tools, and advanced data analytics to increase equipment effectiveness in its factories

Boosts real-time data capabilities and decrease in data latency (speed of transfer of data)

Blockchain

Includes tracking and monitoring supply chains; confirming accounting transactions based on smart contracts and preventing fraud; automated recordkeeping Used to gain insights into customers and use that data to create and provide intelligent products

AT&T has used machine learning to transform the way it finds, organizes and uses data. For example, it has blocked 6.5 billion robocalls to its customers, prevented fraud in its stores, and significantly reduced data latency Cargill and a global bank completed the world’s first trade-finance deal in 2018 using a shared blockchain system

Artificial intelligence

Estee Lauder uses a chatbot powered by an AI facial recognition program to interact with customers on Facebook Messenger to choose and buy lipstick

References: Deloitte: https://www2.deloitte.com/content/dam/insights/articles/6730_TT-Landing-page/DI_2021Tech-Trends.pdf.

Deloitte (2019). The Potential of Disruptive Technologies for Consumer Products Companies. https://view.deloitte.nl/disruptive-technologies-in-the-consumer-products-industry.html.

LO 1-3 and 5, BT: Analysis, Difficulty: Medium, TOT: 30 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.1, 7.2, 7.3, 7.5

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SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.

1. D. Robots and cobots 2. B. Internet of Things 3. A. VR 4. C. Drones 5. D. Robots and cobots 6. E. Blockchain 7. F. RPA 8. C. Drones 9. D. Robots and cobots LO 1-4, BT: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.1,7.2, 7.3, and 7.4

A2. Student responses will vary but may include: • •

•

•

• • •

Accounting has many processes that are high volume with regard to transactions, repeatable, structured, and rule-based that lend themselves to robotic process automation.

Robotic process automation (RPA) reduces the cycle time for performing repetitive internal audit tasks or certain types of control testing. It can also evaluate a larger sample of transactions or even the entire population.

RPA in accounts receivable reduces the possibility of human error when it comes to drafting the profitability index of the company. It can manage the days of sales outstanding and automate a consistent response with a red flag for human investigation of problems.

RPA in accounts payable allows for the automation of invoice processing and approvals. The three-way matching process of purchase order to receiving document to vendor invoice automated with a red flag for human investigation of problems.

Bank reconciliations. RPA can download bank statements, validate all transactions and the balances, create journal entries, and reconcile the bank account with the general ledger.

Intercompany reconciliations. RPA automatically approves all transactions that match and notifies a human of discrepancies.

Employee travel and expense reimbursement: RPA extracts data from submitted reimbursement requests and compares the data to company policies and regulatory requirements. It notifies the accounting department and the employee when there is any violation.

LO 3, BT: Application, Difficulty: Medium, TOT: 20 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 7.3

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A3. A, B, and E all involve tasks that can be accomplished by software to automate and manage digital workflows. The software or perhaps even macros (such as those used in Microsoft Excel) can be developed by RPA programmers. This is possible because consistently performed tasks (manual data entry or copy and paste commands) based on simple rules and the use of uniform templates that have been adopted and are used frequently. Choices C and D could be automated but would not yield the workflow productivity gains that A, B, and E automation offer. The situation described by part C takes only three auditors two weeks a year and there are only 10 contracts to review. It is not going to have a major impact on the audit department to automate this. Situation D involves unique communications.

While the creation of the email could be automated, there would still be a manual element, which makes it less impactful to automate. Choice F is also a unique situation with little cause for automation.

Every engagement is different and will have a different amount and format of communication.

LO 3, BT: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: technology, AICPA AC: Technology and Tools, Section: 7.3

A4. Any variation of these steps is acceptable. Students should demonstrate an understanding that the IF relates to finding a new red flag and the THEN relates to sending an email alert, including the data for the transaction, to the finance department, and the ELSE is nothing. Their wording can vary if they demonstrate this point.

(1) IF a red flag is indicated AND the red flag is new THEN send alert with transaction data to the finance employees; ELSE nothing LO 3, BT: Application, Difficulty: Medium, TOT: 15 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 7.3

A5. This type of blockchain would be classified as a consortium blockchain because it allows a consortium of organizations to collaborate and leverage information to improve workflows, accountability, and transparency among participants. Compared to public and private blockchains, a consortium blockchain still allows for transaction privacy, with a selected group of participating members controlling the network and setting the rules. Its permissions structure is more complex than for a private blockchain, as individual organizations still want to keep certain transactions private.

Benefits to the company include improved tracking of cargo, better accountability by all participants, and increased transparency because participants can share more data. Rather than allowing anyone with an Internet connection to participate in reviewing the transactions, like in a public blockchain, or having a single company in full control of the process like in a private blockchain, a consortium blockchain provides multiple pre-approved distributed nodes for the process.

As a distributed ledger system, a blockchain consortium allows individual organizations to leverage network effects for their own specific needs by streamlining common business processes to all consortium members. Consortium members have access to not only their own data, but also to the shared data contributed by other members. It can also expedite payments between members.

LO 4 and 5, BT: Analysis, Difficulty: Medium, TOT: 30 min., AACSB: N/A, AICPA AC: Technology and Tools, Section: 7.4 and 7.5

A6.

1. Data validity 2. Data retention Solutions Manual

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3. Data integrity 4. Data security 5. Data transparency LO 5, BT: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: N/A, AICPA AC: Technology and Tools, Section: 7.5

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CHAPTER 8 Documenting Systems and Processes Learning Objectives: 1. Explain the goals of documenting systems and processes.

2. Differentiate among various documentation techniques.

3. Show how a flowchart illustrates a system or business process.

4. Summarize how a data flow diagram (DFD) shows the flow of data in a system.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. D

10. D

LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-1

LO 3, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-3

2. B

11. A

LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-1

LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 1 min, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 8-3

3. A

12. C

LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 8-1

LO 3, Bloom’s: Knowledge, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-3

4. C

13. B

LO 1, Bloom’s: Application, Difficulty: Medium, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-1

LO 3, Bloom’s: Knowledge, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-3

5. D

14. A

LO 1, Bloom’s: Application, Difficulty: Medium, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-1

LO 3, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, FC: Systems and Process Management, Section: 8-3

6. C

15. C

LO 1, Bloom’s: Application, Difficulty: Medium, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-1

LO 4, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-4

7. B

16. D

LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: System and Process Management, Section: 8-2

LO 4, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-4

8. C

17. A

LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 8-2

LO 4, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC:, Systems and Process Management, Section: 8-4

9. C LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-2

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Documentation helps to describe the processes and systems within an organization. The company will use documentation to fulfill regulatory requirements, troubleshoot system issues, help train employees, assist auditors in testing processes, and highlight improvement opportunities.

Documentation is also used to help build complex systems and support the ongoing continuity and maintenance of systems.

LO 1, Bloom’s: Application, Difficulty: Medium, TOT: 8 min, AACSB: Communication, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 8-1

DQ2. User documentation is the best choice to capture how to resolve system errors. User documentation focuses on the system content, which helps users be successful at using the system. It is the best choice because other types of documentation focus on issues other than system errors. For example, operator documentation focuses on how to execute the program and is used by computer operators. Program or systems documentation is primarily used to document the system's design and logic.

LO 1, Bloom’s: Analysis, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-1

DQ3. Student answers will vary, but the most common answer will be using the horizontal org chart at the creation of the startup company. The common reason will be due to the small number of employees and levels of management. Once an organization chart is chosen, it can be changed based on the needs of the organization. Suppose an organization moved from tall to flat. In that case, it could cause layoffs in the organization's middle and upper management areas because it is "flattened," and fewer management level personnel are needed throughout the organization. Changing from flat to tall could mean that the organization needs more management through the environment and could lead to increased hiring or internal opportunities for current employees.

LO 2, Bloom’s: Evaluation, Difficulty: Hard, TOT: 15 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-2

DQ4. An auditor could ask various types of questions, depending on the type of audit being conducted and the items in-scope for the audit. For example, an IT auditor could ask: 1. Does the company have a documented access control process, or does it use tapes to back up data?

2. How many times during the year is inventory counted physically and matched with the system count?

3. Is the inventory count conducted outside regular business hours?

4. Has management implemented controls specific to fraud? Has fraud been reported during the year?

5. Is there a check request form? How many people sign it before a check is issued?

6. Who is the employee’s direct supervisor, and how many people are in their team/department?

LO 2, Bloom’s: Application, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, AICPA AC: Systems and Process Management, Section: 8-2

DQ5. The primary purpose of a narrative description is to capture employees' responsibilities at a detailed level. Narratives are also used to document the process and controls that align with those responsibilities. Narratives are used to facilitate the transfer of knowledge between employees and Solutions Manual

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provide documentation for an audit by outlining the business area's processes and procedures.

Narratives should be updated as often as necessary to ensure that the information capture is up to date and accurately reflects the environment's current state LO 2, Bloom’s: Application, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Resource and Process Management, Section: 8-2

DQ6. Flowcharts are detailed diagrams that outline processes within an organization. The information within a flowchart includes all the parties that interact with the process and show the process from beginning to end. Organizations use them to help plan out projects, communicate new processes to all impacted parties, and identify ways to make the process more efficient. They are also used to identify control failures or lack of adequate controls within the process.

LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 8-3

DQ7. No, all the common shapes do not have to be used with a flowchart. The steps within the process will determine the shapes to be used and what is needed to capture the correct detail level. The type of flowchart being created will also drive the shapes used. Some examples of shapes used in every flowchart are start/end, process, and flowlines.

LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-3

DQ8. (A) Database represents the data storage used in the process. Examples include a database of tickets sold for a sporting event, or the items sold by a clothing store.

(B) Decision represents a question that must be answered for the process to continue. Examples include a question about whether an order is "up-sized," or if a customer will pay with cash or a card.

(C) Document represents a record that is an input or output of the process. Examples include a receipt, a report, or an invoice.

(D) Manual operation represents a manual step within the process. Examples include a customer service rep manually entering customer information, or a controller reviewing and signing checks each day.

LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 15 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-3

DQ9. A Level 2 DFD is used to present the most significant detail level, as it is the only level that will show the use of subprocesses with the system details. A Level 1 DFD highlights the system's primary functions, while a Level 0 DFD shows the high-level overview of how data flows through the process. A Level 0 DFD does not capture the storage of data within the process.

LO 4, Bloom’s: Analysis, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-4

DQ10. Student answers will vary, but they should focus on using flowcharts as a diagram to outline a business process and the use of DFD to outline the flow of information within a process. They will need to ensure that all system functionality or process steps are accounted for, and those items are named.

Both flowcharts and DFD focus on the typical uses, and you do not create a flowchart or DFD for any unique circumstances. Students should also note that it is essential that an individual understands a system or process before they start the documentation process. If they are unable to understand, they should ask for the involvement of subject matter experts to help with the process.

LO 3 and 4, Bloom’s: Analysis, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-3 and 8-4

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SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.

Documentation 1. Operator documentation 2. Program documentation 3. Systems documentation 4. User documentation

Elements B, F, J D, G E, H A, C, I

LO 1, Bloom’s: Application, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-1

A2.

Employee

Type of Documentation

1. Call center employee

D. User documentation

2. Systems developer

C. Systems documentation D. User documentation

3. Accounting clerk 4. IT auditor 5. System administrator 6. NOC associate 7. CFO 8. Programmer

C. Systems documentation C. Systems documentation A. Operator documentation D. User documentation B. Program documentation

LO 1, Bloom’s: Application, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 8-1

A3. 1. Suspicious transaction IDs: 10017, 10018, 10019, 10021, 10023 2. These transactions have the location “Naperville, IL,” which is Dylan’s and his team’s location on the organizational chart. They show “travel” in the explanation. It is unlikely that Dylan is traveling and staying at a hotel next to his home office.

3. These truncations have the approver “Matthew Tildon.” According to the organizational chart, Dylan’s supervisor is “Lea Leminski.”

LO 2, Bloom’s: Analysis, Difficulty: Medium, TOT: 15 min, AACSB: Ethics, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 8-2

A4.Taking Drive-Thru Orders When taking an order, you should: 1. Greet the customer with “Welcome to MacDonald’s. May I take your order?”

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2. Take the order, and then ask “Will that be all?”

3. When the customer has finished ordering, verify that the order is correct by asking: “Is your order correct on the screen?” Make sure they respond. This is especially important when customers request changes to a standard product, such as “no bacon” on a bacon, egg and cheese bagel.

4. Tell the customer what their total is and say “Thank you.”

Payment-Taking Window When the customer arrives at your window, you should: 1. Greet them with a smile.

2. Repeat the order and the total amount of the order to the customer.

3. Take the cash or other payment type, like debit card, credit card or/and gift certificate 4. Return their change/card and the receipt 5. Tell them to have a nice day before they leave.

6. You are responsible for having the correct amount of cash in your register by the end of your shift.

Food Pick-up Window For each order, you should: 1. Gather all the drinks while the customer drives up to the window.

2. Greet the customer and smile.

3. Ask the customer to verify that their order is correct.

4. Tell them what their drinks are and then hand them to the customer.

5. Gather the food bag(s). It is your responsibility to ensure that all the food is in the bag before handing it to the customer.

5. Repeat their food order while handing their bag(s) to them.

6. Say thank you with a smile and tell them to enjoy their meal.

7. Handing out free food results in termination of employment.

LO 1 and 2, Bloom’s: Application, Difficulty: Medium, TOT: 15 min, AACSB: Analytic, AICPA AC: Systems and Resource Management, Section: 8-1, 8-2

A5. Student answers will vary but should include the major events in the following sample process flowchart.

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LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 15 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-3

A6. Student answers will vary, but here are basic examples: 1. Start Process -> Purchasing department orders computer -> Receiving department receives computer ->Receiving department inspects computer to ensure it was the item ordered and it is not damaged -> Receiving department transfers computer to the warehouse -> Warehouse manager enters computer into inventory-> Stop Process 2. Start Process -> Customer reviews menu -> Customer orders breakfast -> Does Customer want scrambled or over-medium? -> Does Customer want coffee or orange juice? -> Order is entered > Customer pays for order -> Order is cooked -> Customer receives order -> Stop Process 3. Start Process -> App is opened on phone -> Search for concert -> Open concert -> Review ticket options -> Select tickets -> System processes ticket request -> Invoice is presented for payment > Customer pays invoice -> Tickets are delivered to customer via email -> Stop process.

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LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 15 min, AACSB: Analytic, AICPA AC: Systems and Process Management, AICPA PC: Communication, Section: 83

A7. Student answers will vary, but common examples of controls would be a review of the customer details for missing information or information that is inaccurate, a check to ensure that the email to the customer was sent and received, a review of the database to ensure that the information collected was accurately reflected in the database. Delete any duplicates, update address changes, and identify bad debts.

LO 4, Bloom’s: Application, Difficulty: Medium, TOT: 10 min, AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 8-4

A8. This is a Level 0 DFD. It includes only a single process, external entities, and data flows. There are no included data stores in this DFD. LO 4, Bloom’s: Application, Difficulty: Medium, TOT: 20 min, AACSB: Analytic, AICPA AC; Systems and Process Management, Section: 8-1

A9. Because this narrative includes human interaction with a system, and the data is only flowing between those two parties, a process flowchart is the best option for visualizing the narrative. Student flowcharts may vary, but an example is provided. Swim lanes should include the customer and the ATM system, and there should be two decision shapes (authentication and fund availability).

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LO 3 and 4, Bloom’s: Analysis, Difficulty: Medium, TOT: 20 min, AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 8-3, 8-4

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CHAPTER 9 Human Resources and Payroll Processes Learning Objectives: 1. Explain the relationship between human resources and payroll.

2. Evaluate the employee onboarding process.

3. Evaluate the employee termination process.

4. Assess the payroll processing process.

5. Connect the data in the underlying system and database to important reports and data analytics.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. C

9.

LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

LO 3, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communications, AICPA Systems and Process Management, Section: 9.3

2. B

10. D

LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

LO 3, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.3

3. C

11. C

LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

LO 3, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.3

4. B

12. D

LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

LO 4, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.4

5. D

13. D

LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

LO 4, Bloom’s: Comprehension, Difficulty: Easy, TT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 9.4

6. A

14. C

LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.2

LO 4, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.4

7. A

15. A

LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.2

LO 4, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.4

8. C

16. D

LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.2

LO 4, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.4

17. A

19. D

LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytics, AICPA AC: Technology and Tools, Section: 9.5

LO 5, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.5

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18. B LO 3, Bloom’s: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytics, AICPA AC: Technology and Tools, Section: 9.5

ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. The major activities of an HR department include: • Recruiting and hiring employees • Training and developing employees • Determining salaries and benefits o Compensation o Employee benefits (medical and life insurance, retirement, and more) o Paid time off and leaves • Monitoring and evaluation o Performance evaluations • Transitioning employees o Voluntary and involuntary termination o Retirement • Updating and maintaining employee main table LO 1, Bloom’s: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

DQ2. In the past, HR was highly administrative, focused on paperwork and compensation tasks. When companies move administrative HR activities to an outsourced model, they are managed by a thirdparty vendor. An outsourced model frees up the company’s HR team to perform more value-driven tasks, such as: • Increasing the company’s competencies through strategic hiring and training •

Promoting workforce innovation, creativity, and flexibility throughout the company

•

Developing and supporting new approaches to the work model, such as remote work, career development planning, and inter-company mobility options like rotational programs that allow employees to experience different parts of the business

LO 1, Bloom’s: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

DQ3. It is not mandatory for HR to be segregated from payroll. HR owns the data (it updates and maintains employee main table) used by the finance department to process payroll. It is best practice to divide payroll responsibilities between the two teams and set up a structure where they work together. Segregating HR and payroll helps ensure segregation of duties as an internal control activity to mitigate payroll error and fraud risks. Payroll preparation should also be separate from payroll authorization, check signing, and payroll distribution.

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Another best practice is for the finance department to process payroll, with the input data coming from the HR team, and the accounting information system housing the payroll data. Since HR personnel are trained to work with employees and handle sensitive, confidential, and legal HR issues, it makes sense for that area to focus on those tasks. Payroll personnel better understand the financial information system and accounting regulations to effectively manage that process.

LO 1, Bloom’s: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 9.1

DQ4. Student answers should focus on the main activities of recruiting/hiring, training and developing, supervision, job assignments, salaries and benefits administration, monitoring and evaluation, and employee transitions. The examples will vary, but should include reviewing applications and conducting interviews, discussing job offers, interaction at new hire, ongoing training opportunities, helping with updates to tax forms (W2), annual performance reviews, promotions, and transitions within and away from the organization.

LO 1, Bloom’s: Application, Difficulty: Medium, TOT: 10 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

DQ5. Credible background checks are important because they help identify potential employees with a poor work history or a criminal record. For example, a financial organization would not want to hire a person for a cashier position when that person has been convicted of fraud. Performing background checks on prospective employees helps mitigate the organization's risk of future losses associated with fraud or other types of theft.

LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, Section: 9.2

DQ6. The HR department can help new hires by providing opportunities to socialize, orientate to the company and its culture in a personalized first day experience and by ongoing training and engagement with employees. These efforts can help decrease turnover levels, which can help stabilize the organization, increase team morale, and lower training and employee turnover costs.

LO 2, Bloom’s: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Communications, AICPA AC: Systems and Process Management, Section: 9.2

DQ7. The employee termination process involves the removal of an employee from active employment status because of resignation, firing, retirement, or death. In the case of resignation, the employee’s supervisor notifies HR immediately after receiving the employee’s notice. For firings, HR is involved to help mitigate the risk of a retaliatory ex-employee filing a lawsuit. Because HR is strategically involved in the entire termination process, they play a key role in this process. HR can assist by guiding conversations, answering questions from the departing employee and their leadership, and minimizing potential damages. HR also acts as a facilitator to implement controls ensuring company policy and procedures are enforced. HR can also assist with activities that include reclaiming company assets from the departing employee, terminating employee access to systems, and administering retirement or death benefits to the appropriate beneficiaries.

LO 3, Bloom’s: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 9.3

DQ8. See Table 9.2 in the chapter for a sample list. There are several common risks within this process.

These risks exist regardless of industry or the size of the organization. Examples include:

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When involuntary terminations do not follow legal regulations, it may result in a wrongful termination lawsuit, requiring costly litigation and reputational damage. Control: Department manager to complete an employee termination checklist authorized by HR. Submit the checklist to HR along with the status change form.

If proper access controls do not exist, terminated employees may continue to have access to company systems, resources, and physical locations, which could cause breaches, data losses, financial losses, and reputational damage. Control: Immediately disable access to systems upon employee termination.

Terminated employees with access to a corporate credit card can charge unauthorized expenses to the company, resulting in financial liability for the company. Control: Collect corporate credit cards in possession of the employee during the exit interview.

Employee turnover may result in the loss of valued, high-performing employees. Control: Reasons for voluntary termination are documented during the exit interview, followed by investigation if necessary.

Employee records remaining active in the payroll system for a terminated employee may result in fraudulent payments. Control: HR conducts an independent review of the payroll administrator’s employee record status to validate it is no longer active.

Terminated employees with knowledge of secret or sensitive information about operations, clients, customers, strategy, and more may result in market share loss, financial losses, and customer losses.

Control: A noncompete agreement is signed by the employee during the exit interview.

LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 15 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.3

DQ9. Student answers will vary. They should focus on various ways that a termination can be initiated (voluntary resignation, involuntary firing, retirement, and death), and how each of those ways can cause different actions to be taken by employees, managers, HR, payroll, facilities, and accounting.

Those various groups must be involved to separate duties for control purposes. Those controls help to ensure that no single group or person has too much ownership over the process. The system of checks and balances mitigates errors in executing all the steps necessary to complete the termination of an employee.

LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 10 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 9.3

DQ10. Student answers will vary, but they could focus on the review of the systems used by managers to create a log of employee actions. They could also create a control that requires management to obtain the approval of HR before terminating any employee. They could also require training on exit interviews and make it mandatory that an HR employee be present for exit interviews.

LO 3, Bloom’s: Application, Difficulty: Medium, TOT: 10 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.3

DQ11. By integrating the information systems from these processes, an organization can create a single source for HR and payroll data. This in turn, will reduce data redundancies, improve data consistency, accuracy, and integrity, minimize the efforts needed for data collection, and provide streamlined and quick access to data for business users.

LO 4, Bloom’s: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 9.4

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DQ12. (1) Record gross wages—an expense to the company—less employee payroll deductions, which are liabilities (payables) of the company until paid to third parties (such as the government: i.e., U.S. Treasury, Social Security Administration, State Revenue departments.) The balance (net pay) is a credit to wages payable. Debit the expense and credit the liabilities.

(2) Record the company’s share of payroll taxes—an expense to the company and liabilities (payables) for each type of tax until paid to tax authorities. Debit the expense and credit the liabilities.

(3) Record the company’s payroll benefits expense owing to third parties and the resulting liabilities until paid. Debit the expense and credit the liabilities.

(4) Record the accrual for future employee time off for vacation and other paid time off. Debit the expense and credit the liability.

(5) Pay the liabilities. Debit the liabilities and credit cash.

LO 4, Bloom’s: Application, Difficulty: Medium, TOT: 10 min., AACSB: None, AICPA AC: Reporting, Section: 9.4

DQ13. Student answers will vary. They should focus on reporting covering the number of new hires, any hiring violations, number of open positions, compliance penalties, and control failures. They could use the reports to help mitigate the risk of error and fraud related to new hire activities, identify budgeting issues, identify opportunities for training, identify opportunities for control improvements, and decrease the time needed to fill new positions. They should explain that these reports can also be used to demonstrate that appropriate controls are in place, which supports the position of the managers.

LO 2, Bloom’s: Application, Difficulty: Medium, TOT: 10 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 9.5

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.

Process

Activity

1. Employee administration

C. Train employees F. Manage employee evaluations B. Track employee vacation days G. Record time worked for hourly employees A. Administer insurance for employees

2. Time management

3. Benefit administration

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D. Administer healthcare benefits for employees E. Administer flexible spending accounts for employees LO 1, Bloom’s: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.1

A2.

1.

2.

3.

4.

5.

6.

7.

8.

Risk(s) Potential excess capacity and expense due to over-hiring.

Violating employment laws for hiring may result in lawsuits, fines, legal penalties, or reputational damage.

Inconsistencies in offers extended for similar positions.

Violating employment or privacy laws may result in lawsuits, fines, legal penalties, or reputational damage.

New hires failing to understand their duties, obligations, and company policies may result in misunderstandings and negative impacts on productivity.

New hires failing to understand their duties, obligations, and company policies may result in misunderstandings and negative impacts on productivity.

Inefficiencies in dealing with paper documentation.

Potential labor regulation compliance issues.

Loss of important documentation and information.

Control Establish and enforce departmental budgets, including employee headcount and expenses.

Require that only human resources extends offer letters.

Require vendors with access to confidential information to have an internal control report or perform other vendor risk management procedures prior to engagement.

Streamline job descriptions. Ensure that they are current and communicated to the employee upon hire.

Aggregate the policies and require one top management approval signature for process efficiency.

Require electronic PDF signatures to eliminate the scanning/filing process.

Implement a formal process for internal/external job posting and recruitment.

Require back up of the shared drive, per compliance-related retention requirements for human resource files.

LO 2, Bloom’s: Analysis, Difficulty: Medium TOT: 15 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, Section: 9.2

A3.1.

Student answers will vary, but they should capture at least five of the following key steps: a) b) c) d) e)

Manager: Sends email before new hire starts HR: Hosts new hire orientation HR: Escorts new hire to desk IT: Brings laptop IT: Assists with first time login

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f) New hire: Accesses email g) New hire: Reviews onboarding and training documentation h) New hire: Starts first audit engagement Example flowchart:

2.

Ways the process can be improved include: a) b) c) d)

Having a formal meeting between manager and new hire on the first date of work Assigning a “buddy” to assist new hire through training and onboarding materials Setting a firm deadline for completion of training and onboarding materials Establishing the new hire’s first project before they start and communicating that information to them on their first day, so they know what to expect e) Having a team member assist the new hire in locating and understanding how to complete training materials on the company intranet f) Performing an annual assessment of onboarding and training to ensure documentation, such as the list of training videos, is up to date LO 2, Bloom’s: Analysis, Difficulty: Medium, TOT: 30 min., AACSB: Reflective Thinking, AICPA AC: Systems and Process Management, Section: None

A4.Hours worked:

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1.

2.

LO 4, Bloom’s: Application, Difficulty: Medium, TOT: 30 min., AACSB: Reflective Thinking, AICPA AC: Reporting, Section: 9.4

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A5.

Control 1. Complete a payroll processing checklist.

2. Review and approve the payroll journal before the distribution of payments.

3. Mail annual tax report (W-2) to each employee for tax filing purposes.

4. Conduct an independent review of employees receiving paychecks by comparing the list to other credible employee listings, such as an active company directory.

5. Provide a payroll calendar to employees.

6. Review and sign payroll checks.

7. Reconcile the list of employees receiving W-2s to the employee main table to account for all employees.

8. Distribute payroll expense reports to department managers for explanations of significant variances.

9. Perform changes to personal information directly via an online portal.

10. Review and remit payments for payroll withholdings on a timely basis to government agencies.

Control Owner Payroll manager HR manager Payroll manager HR manager

Payroll manager Payroll manager/controller Controller Payroll manager/department manager Employee/HR manager Accounting manager

LO 4, Bloom’s: Analysis, Difficulty: Medium TOT: 30 min., AACSB: Reflective Thinking, AICPA AC: Systems and Process Management, Section: 9.4

A6.The overall business process maturity model level for the payroll business processes is Phase 3— Defined. The process will not achieve Phase 4—Optimized unless the company adopts an enterprisewide risk management approach and integrated control environment.

LO 4, Bloom’s: Comprehension, Difficulty: Medium, TOT: 10 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 9.4

A7.

Control 1. Provide notification of involuntary termination to the HR department the same day as notice is received.

2. Review and approve the payroll journal prior to distribution of payments.

3. Mail annual tax reports (W-2s) to employees for tax filing purposes.

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Potential Risks An involuntary termination that doesn’t follow legal regulations may occur.

Processing unauthorized payroll transactions may result in the misappropriation of assets.

Noncompliance with statutory requirements may result in fines, interest payments, and other penalties.

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4. Only the HR department only can extend offer letters for employment.

Violating employment laws for hiring may result in lawsuits, fines, legal penalties, or reputational damage.

5. The IT department removes systems access Terminated employees continuing to have for terminated employees in a timely manner. access to company systems could result in unauthorized changes and use of the system.

6. Collect corporate credit cards in possession Terminated employees who have access to a of the exiting employee during the exit corporate credit card can make unauthorized interview. purchases on behalf of the company.

7. Reconcile the list of employees receiving Noncompliance with statutory requirements W-2s to the employee main table to verify that may result in fines, interest payments, and the company accounts for all employees. other penalties.

8. Maintain a comprehensive employee New hires failing to understand their duties, obligations, and company policies may result handbook. in misunderstandings and negative impacts on productivity.

9. Employees make changes to employee Incorrect employee data may result in personal information directly via an online incorrect payments to the employee. portal.

10. Review new hire documentation before Employee records created for nonexistent employee record creation. employees may result in fraudulent payments.

LO 2-4, Bloom’s: Analysis, Difficulty: Medium, TOT: 20 min., AACSB: None, AICPA AC: Systems and Process Management, Section: None

A8.1. Analytic 1: A. Employee main table Analytic 2: E. Exit interview survey results Analytic 3: A. Employee main table (Turnover is calculated from terminated employees and active employees, whose status is found in the employee main table.)

2. Yes, Internal Audit should investigate this process further. The HR Facilitator “Max R.” has many “Unknown” and “blank” fields, which could indicate they are not following the correct exit interview process.

LO 3, Bloom’s: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Technology and Tools, Section: 9.3

A9. Student answers may vary between Phase 1—Limited and Phase 2—Informal. Different parts of the HR department are at different phases of maturity, which means some students may use the BPM model in combination with professional judgment to assign an average level of maturity. Others may choose to select the lowest phase present. Both are acceptable approaches to using the BPM model.

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Manic Automotive’s HR department seems to operate on an individual risk response approach, instead of a consistent top-down proactive approach. Some decisions are ad hoc and are often reactive. The business processes are not optimized because they lack a top-down, integrated risk approach.

LO 1-4, Bloom’s: Application, Difficulty: Medium, TOT: 10 min., AACSB: None, AICPA AC: Risk Assessment, Analysis and Management, Section: 9.1, 9.2, 9.3, 9.4

A10. Case reference: https://www.fraud-magazine.com/article.aspx?id=4294989126 1. A lack of segregation of duties provided the opportunity for Matthew to commit fraud by using ghost employees. HR owns the employee data that payroll uses, and Matthew was responsible for both HR and payroll functions. He could manipulate the data. He created timesheets for actual employees who were absent for the pay period or who had left the company.

Given that Matthew had complete control over HR and payroll and physical custody of the payroll checks (i.e., assets) for distribution to employees, he could falsify records, separate the checks for the ghost employees from the other checks in the batch, and forge endorsements on the backs of those checks to make them payable to himself.

Instead of educating workers about the benefits of direct deposit, Matthew saw it as an opportunity to commit fraud by using physical checks to pay them rather than a direct transfer of pay to their bank accounts.

2. Process improvements to mitigate the risk of payments to fictitious employees include: • • • • • • •

Board-approved policies and procedures for HR and payroll.

Completely separate the management of HR and payroll.

Only HR can update employee data, such as adding employees, terminating employees, pay rates, etc.

Create a timekeeping system that uses biometrics to prevent fictitious timesheets.

Complete a termination checklist for each termination to ensure that all related tasks are completed. Submit the checklist to HR. HR or CFO conducts an independent review of the payroll administrator’s employee record status for a terminated employee to validate it is no longer active.

Deposit salaries and wages directly into employees’ bank accounts.

LO 3-4, Bloom’s: Application, Difficulty: Medium, TOT: 25 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 9.3, 9.4

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CHAPTER 10 Purchasing and Payments Processes Learning Objectives: 1. Describe the relationship between the inventory purchasing and payments process, inventory management, and supply chain management.

2. Summarize the purchasing process for inventory and other goods or services.

3. Explain the fixed asset acquisitions process.

4. Evaluate the credit payments process.

5. Use the key data in the underlying database for reporting and insights.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. D

11. A

LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section: 10.1

LO 3, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section: 10.3

2. A

12. D

LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Systems and Process Management, Section: 10.1

LO 3, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section: 10.3

3. C

13. B

LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Systems and Process Management, Section: 10.1

LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section: 10.4

4. C

14. A

LO 1, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Systems and Process Management, Section: 10.1

LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Systems and Process Management, Section: 10.4

5. D

15. B

LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Systems and Process Management, Section: 10.2

LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section: 10.4

6. A

16. C

LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Risk Assessment, Analysis, and Management, Section: 10.2

LO 4, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section: 10.4

7. C

17. A

LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Risk Assessment, Analysis, and Management, Section: 10.2

LO 5, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section: 10.5

8. B

18. C

LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Risk Assessment, Analysis, and Management, Section: 10.2

LO 5, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section:10.5

9. A

19. C

LO 2, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Risk Assessment, Analysis, and Management, Section: 10.2

LO 5, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Risk Assessment, Analysis, and Management, Section: 10.5

10. B LO 3, BT: C, Difficulty: Easy, TOT: 1 min., AACSB: KNOWLEDGE, AICPA AC: Reporting, Section: 10.3

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Some business activities are not accounting transactions. For example, when an organization selects a vendors, it wants a vendor that can provide the correct product/service at the right price and in the right timeframe for organization. At this point, no product has been purchased, and therefore this business activity would not result in the recording of an accounting transaction.

LO 1, BT: C, Difficulty: Easy TOT: 3 min., AACSB: Knowledge, AICPA AC: Reporting, Section: 10.1

DQ2. The conversion processes are at the heart of the business. They are where the resources acquired are combined in some efficient, effective, and unique manner to stay ahead of the competition. If assets and services obtained during the acquisitions and payments process (PPE, inventory, and goods) are inadequate, excessive, defective, or unsuitable, for example, then the conversion process will deliver products and services that negatively impact sales, revenues, cost of goods sold, expenses due to writeoffs, profits, and/or cash flow. Similarly, labor resources are required to produce the outputs that a company sells to create revenue. Poor employees negatively impact the business is many ways. The revenue, sales and collection, and financing processes are used to generate cash flow adequate to continually feed all the other processes.

LO 1, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 10.1

DQ3. Inventory management is a critical component of the purchasing process. Inaccurate inventory levels can lead to unnecessary inventory orders or missed opportunities to order inventory at critical stages. Low inventory levels can lead to revenue loss and an organization’s inability to create finished goods. It can also impact workers who could be laid off or furloughed if they cannot run their production lines. When an organization has too much inventory, they run a higher risk of spoiled or obsolete inventory, which will result in expense write-offs without corresponding revenue, due to the inability to sell a product.

LO 1, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management , Section: 10.1

DQ4. Controls should exist over selecting vendors, managing vendors, ordering goods and services, and receiving goods. These controls help mitigate the risk of error or fraud within the production process and help ensure the process’s overall integrity.

LO 2, BT: C, Difficulty: Easy, TOT: 3 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 10.2

DQ5. Some of the data collected includes vendor information (ID, name, address, email, tax ID), purchase requisition numbers, purchase order numbers, receiving report numbers, quantities, item numbers, and item descriptions. The data could provide management with a comprehensive background on purchasing activities (such as goods received, filled purchase requisitions, backordered items, a full listing of vendors used for specific products or services) which can be used to improve the purchasing process.

LO 2, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA AC: Technology and Tools, Section: 10.2

DQ6. The fixed asset acquisition process is important because it helps document the associated asset’s service life accurately. Because fixed assets depreciate over time, this process matches the depreciation with the asset’s revenue generation during the recording period. An example of separation of duties Solutions Manual

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within a step would be during the receiving and tagging of an asset. During this step, the asset gets tagged by someone outside of the purchasing for segregation of duty purposes, which mitigates the risk of fraud.

LO 3, BT: AN, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, and Measurement, Section: 10.3

DQ7. The main risk to an organization from bid rigging would be excessive costs for the purchase or maintenance of fixed assets. Often the organization will pay more to obtain an item or maintain assets than if the bidding process was handled legitimately. An additional risk is employees who are actively performing duties that are not in the organization’s best interest. That risk can manifest itself in other employees’ decisions, which can cause additional harm to the organization.

LO 3, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Risk Assessment, Analysis, and Measurement, Section: 10.3

DQ8. Examples of controls include handling of the purchase order, receiving report, and invoice from the vendor by different groups (segregation of duties), the three-way match function to verify that products, quantities, and amounts are consistent before updating the AP sub-ledger, management verification of all supporting documentation before approval of the payment voucher, bank reconciliation, and reconciliation of the vendor statement and AP sub-ledger.

LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, and Measurement, Section: 10.4

DQ9. An organization can use data to understand its AP turnover and AP as a percentage of assets. It can be used to detect excessive time periods between the approval and recording of cash. It can pinpoint employees who are also fraudulently operating as vendors of the organization. An organization can also identify nonsequential invoice numbers, invoices that contain smaller numbers (like invoice #1) or contain characters that are not common in invoices (like invoice # 123A134), which can be signs of fraud.

LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Ethics, AICPA AC: Risk Assessment, Analysis, and Measurement, Section: 10.4

DQ10. A three-way match is an internal control activity. Prior to making a payment to a vendor for inventory or other assets, the supporting documents are matched to include verification of the vendor’s name, authorized prices, description of goods, and quantities. The documents matched are purchase orders, receiving reports, and vendor invoices. A three-way match of these documents minimizes the risk of duplicate payments, fictitious payments, incorrect payment amounts, incorrect vendors, and paying for goods not received or for goods received that were not ordered.

The three-way match can be manual or automated. In a non-ERP system, the three documents are accessed by manually querying each system (purchasing, shipping and receiving, and financials), and manually reviewing the results of each query against one another. In an ERP system, a three-way match can be performed automatically by reconciling data in the related interconnected tables.

LO 4, BT: AP, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, and Measurement, Section: 10.4

DQ11. Student answers may vary regarding table names, etc. Using Illustration 10.10 as a guide: Table named AP_Invoice: Each invoice must have one or more line items; each invoice can have zero payments (if unpaid) or only one payment (if that the business rule); and each invoice must have one and only one vendor.

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Table named AP_Payments: Each payment can be for one or more invoices, and each payment can only be to a single vendor.

Table named AP_Vendor: Each vendor can have zero or more payments; each vendor can have zero invoices (a new vendor has not invoiced the business yet) or one or more invoices; and each vendor can have zero purchase orders (a new vendor is created) or one or more purchase orders.

Table named AP_Invoice_LineItems: Each invoice line item is related to one and only one invoice; and each inventory line item is related to one and only one inventory item.

Table named PO_Purchase: Each purchase order has one and only one vendor; and each purchase order has one or more line items.

Table named PO_Purchase_LineItems: Each purchase order line item is related to one and only one purchase order; and each purchase order line item is related to only one inventory item.

Table named INV_Inventory: Each inventory item can have zero purchase order line items (new inventory item set up in system) or one or more purchase order line items (once inventory is ordered); each inventory item can have zero invoice order line items (new inventory item set up in system) or one or more invoice line items (once inventory is invoiced by vendor).

LO 5, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 10.5

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.Scenario 1. Yes, the transaction would be entered at the time the vendor invoice was received. It would also be entered when the payment was made on the invoice, reflecting the discount taken.

2/15 – Dr. $10,000 to inventory and Cr. $10,000 to accounts payable 2/24 – Dr. $ 10,000 to accounts payable and Cr. $9,800 to cash and purchase discount $200 Scenario 2. Yes, the transaction would be entered at the time the vendor invoice was received.

However, it would not be immediately entered when the payment voucher and remittance advice were received due to the payment voucher’s lack of management approval. That would need to be investigated before moving forward with the entry.

3/3 – Dr. $27,000 to inventory and Cr. $27,000 to accounts payable Scenario 3. Yes, the transaction would be entered at the time the vendor invoice was received. It would also be entered when the payment was made on the invoice, but it would not reflect the discount taken since the payment was made after the 15th day.

4/11 – Dr. $70,000 to inventory and Cr. $70,000 to accounts payable 4/29 – Dr. $70,000 to accounts payable and Cr. cash $70,000 LO 1, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Knowledge, AICPA AC: Reporting, Section: 10.1

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A2.Student answers will vary. Examples: 1. Managing inventory: (1) Using a purchase requisition form. (2) The employee creating the requisition cannot approve the purchase.

2. Purchasing—vendor selection and management: (1) Pricing/availability can only be requested from approved suppliers. (2) Pricing/availability can only be requested by personnel within the purchasing department.

3. Purchasing—placing orders: (1) Orders can only be made with approved suppliers. (2) Approved supplier list must be reviewed every month.

4. Receiving purchases: (1) Reject the inventory if there is no purchase order to match up to items received. (2) Reject the items if inventory received does not match the purchase order.

5. Paying for purchases: (1) Do not pay for any items which were not received by the warehouse. (2) All supporting documentation must be approved and received before the payment is made to the vendor.

LO 1, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, and Measurement, Section: 10.1

A3.

Control

Control Owner

1. Obtain vendor tax forms

Director or VP of operations

2. Allow only authorized personnel to access ordering programs

IT manager

3. Set limits on the amounts of purchases

Director or VP of operations

4. Create receiving locations at physical facilities

Facility manager

5. Train purchasing employees

HR manager

6. Prevent the owner of the vendor file from selecting vendors Purchasing manager 7. Prevent Receiving employees from authorizing purchases Director or VP of operations 8. Install cameras in the Receiving areas

Facility manager

9. Train Receiving employees

HR manager

10. Three-way match a purchase order, receiving report, and Accounts Payable manager vendor invoice LO 2, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 10.2

A4.1. There appears to be limited segregation of duties controls. Michael was able to approve invoices for vendors from other departments and could submit invoices for payment.

2. Weak internal controls within the AP department. Employees could request that checks be returned to them to be mailed to the vendor rather than the AP department mailing checks to the vendor.

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3. There is potential for Michael to create fictitious vendors due to his ability to create vendors.

4. Since Michael oversaw the men’s department’s budget, he could monitor the actual expenses compared to the budgeted numbers. This would enable him to hide fraudulent invoices in cost centers under budget and be subject to less review.

5. Poor management oversight. Michael was not following procedures, yet management took no action to stop this, which created opportunities for Michael to commit fraud.

New controls could include designated cost center owners, no returning of checks to employees, and increased review of all vendors.

LO 2, BT: AN, Difficulty: Medium, TOT: 10 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 10.2

A5.(1) receiving department (2) theft (3) fixed asset sub-ledger (4) detail (5) historical cost (6) authorization limits (7) capital expenditures (8) vehicles (9) depreciated LO 3, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 10.3

A6.

Control

Risk

Non-collusion affidavits

Fraudulent bidding

Periodically review physical assets

Improper use of the asset

Have management review accounting transactions

Fixed asset being expensed instead of being capitalized

Perform fixed asset reconciliations

Fixed asset being expensed instead of being capitalized

Initially approve fixed asset purchase

Fraudulent bidding or approval of nonbudgeted items

Enter assets into the main fixed asset file

Inability to properly track the asset

Tag fixed assets

Fixed asset being expensed instead of being capitalized

Have employee review and sign a code of conduct

Fraudulent bidding

Have management review acquisition agreements

Fraudulent bidding or approval of nonbudgeted items

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Acquisitions not being conducted in adherence with policy

LO 3, BT: AP, Difficulty: Medium, TOT: 10 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis, and Measurement, Section: 10.3

A7.Vendor Record 002 and Employee Record 006 Vendor Record 004 and Employee Record 018 Vendor Record 016 and Employee Record 023 LO 4 and 5, BT: C, Difficulty: Easy, TOT: 5 min., AACSB: Knowledge, AICPA AC: Systems and Process Management, Section: 10.4 and 10.5

A8.Student answers will vary but should include (a) Identification an appropriate fraud case and explains how it relates to purchases and payments processes. (b) Comprehensive description of the fraud case and includes references from ACFE report. (c) Explanation of how this fraud could have been mitigated by the organization.

Sample student solution, based on 2020 ACFE Report to the Nations: a. Fraud Case: Cash ‘Sandwiches’: ‘Brazen’ Fraud by Executives This fraud case is related to vendor/supplier bribes made to company executives at Turner Construction and Bloomberg L.P., the financial information and media company, through bribes, kickbacks and bid rigging for construction contracts. Executives at both companies gave contracts to specific contractors and vendors and in exchange for “cash, favors, or work on their homes”. The executives and contractors inflated the cost of their work by millions of dollars, defrauding the company. b. Top Executives at both Turner Construction and Bloomberg, L.P. were caught after nearly a decade of accepting bribes and kickbacks from specific contractors in exchange for construction performed at Bloomberg. Both companies were under investigation by the D.A., but the article doesn’t give any more details about the original source of information that led to the inquiries. “Among the conspirators, ‘sandwich’ was code for bribes or kickbacks” according to prosecutors.

On page 10 of the ACFE Report to the Nations, this type of fraud falls into third category, corruption, because the Bloomberg case includes bribery, illegal gratuities, and conflicts of interest. This category accounts for 43 percent of organizational fraud. The ACFE report states that the average duration of a fraud was 14 months (page 14). In the Bloomberg case, the fraud occurred for nearly a decade. c. It is difficult to mitigate the type of fraud conducted in this case because top executives participating in the fraud and colluding with contractors can override controls. An internal audit team that does not report to company executives would be one way to mitigate this type of fraudulent activity.

Source: https://www.nytimes.com/2018/12/11/nyregion/bloomberg-construction-fraud-kickbackcharges.html LO 1-5, BT: AN, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA AC: Risk Assessment, Analysis, and Management, Section: 10-1,10-2,10-3,10-4, 10-5.

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Chapter 11

CHAPTER 11 Conversion Processes Learning Objectives: 1. Describe the relationship between conversion processes, inventory, and supply chain management.

2. Explain how the cost accounting system records conversion expenditures that impact the financial statements.

3. Identify opportunities and challenges in digital manufacturing.

4. Explain how data generated by the AIS is converted to reporting and analytics.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. B

11. D

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.1

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.2

2. C

12. C

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.1

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.2

3. D

13. B

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.4

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.3

4. C

14. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 11.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.3

5. A

15. B

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 11.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.3

6. D

16. B

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 11.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.3

7. C

17. C

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 11.2

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.3

8. C

18. D

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.4

9. B

19. B

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 11.4

10. C

20. B

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 11.4

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Converting resources during the production processes is the heart of the business. It is important because this is where an organization uses assets obtained during the acquisition and payment process (PPE, inventory, goods, and services), plus the labor of employees, to produce the outputs that an organization uses to create revenue. The revenue is used to obtain assets that help to feed the process continually.

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 11.1

DQ2. It is critical that the managerial accountant is engaged with production management and provides the management with the necessary information to make correct decisions about what to produce and when to produce it. Inaccurate inventory level information can mask issues in an organization’s production process. If there are issues in production, products could be stuck in the production process and not completed in a timely manner. If that happens, work-in-process inventory can rise above normal levels. Inventory levels can also inform management if they are spending too much on the production of certain products. There can be a substantial financial impact on the organization when production resources are used to create a product that is not needed. For example, if SlapShot is using 75% of its production capacity to produce pucks when its customers need hockey sticks, then the inventory of pucks will climb, and customers will be unhappy because they cannot get the hockey sticks they need. Money was spent to produce a product, and no cash from revenue was being generated to help pay for new inputs to the process. This is in addition to the lost revenue because there is no inventory of hockey sticks for customers to purchase. When there is overproduction, the risk of obsolete inventory increases.

LO 1, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.1

DQ3. When a process is completed in a timely manner but does not work correctly, products may be defective. Also, if a process works correctly but is not completed, then products may not be available when needed. For an organization to operate at the highest level, production processes must work correctly and be done at the right time. This creates an environment where an organization can operate efficiently and cost-effectively and achieve higher returns on its investments.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.1

DQ4. An e-procurement system is an electronic procurement process that integrates into an ERP to automate the purchase of raw materials based on customer demand. It creates purchase requisitions and purchase orders using an electronic authorization process to meet predicted production needs, making the production process more efficient and effective.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.1

DQ5. The type of product produced is the main difference between job-order and process costing. In job-order costing, the business produces a unique product for each customer. Job-order costing captures the costs for each individual, unique product. In process costing, standardized products are produced, and the costs are captured at the process level instead of at the job level. The cost of the process is averaged by the number of units manufactured to calculate the cost per unit.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.2

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DQ6. Human resources is the part of the organization responsible for finding and hiring the people who help convert resources into products or services. The costs related to these employees are allocated to the cost of the product as direct labor if directly involved production, and indirect labor if they supervise, manage raw materials, or maintain production machinery. Without a good HR process, an organization will have trouble obtaining and keeping good employees, and without good employees, the execution of conversion processes would be ineffective and inefficient.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 11.2

DQ7. AI uses machine learning to understand past mistakes so the machine does not repeat them. AI is also used in robotic process automation (RPA) to help automate business processes involving repetitive and predictable tasks. This can help create a more efficient and effective process by eliminating human interaction, which decreases human error and increases productivity.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.3

DQ8. Students’ answers will vary but should address the idea that change is inherently difficult for people. It requires time and energy to focus on the change, and people don’t always understand the importance of change. They can be fearful of losing status, they may have had bad experiences with change, and their biases and emotions may increase resistance to change. Change is also disruptive.

People normally resist change in one of three ways: engaging in behaviors that produce errors, blaming the change for things that go wrong, or ignoring the change. Management might contribute to the problem through lack of support and poor communication. Management can mitigate resistance through good management support, involving people, providing training, managing expectations, and reducing fear, and showing that the change can provide new opportunities.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.3

DQ9. After a product is produced for the first time, a company can create a product's digital twin. Data is collected from the product as it is used, and that data is fed back to the digital twin, which analyzes the data and determines how the product can be improved.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.3

DQ10. Students’ answers will vary but should include (1) an explanation of how AI can be used to enhance digital manufacturing, (2) an appropriate use case, and (3) identification of appropriate resources and citations.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 30 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.3

DQ11. Disadvantages include: (1) It might be difficult to obtain warehouse data for cost accounting purposes; (2) inputting the same data into two systems is time-consuming and inefficient, and it increases the risk of error and fraud; (3) incorrect product cost data could result in incorrect pricing of products; (4) incorrect product cost data could result in financial statement misstatements.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.4

DQ12. A bill of materials is a list of the raw materials, steps, and parts required to manufacture a product.

A bill of operations is a list of sequential steps required to manufacture a product.

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 3 min., AACSB: None, Section: 11.4

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DQ13. The product table and the inventory table would be needed. Product ID would be a foreign key in the BOM table and a primary key in the product table. The BOM table would also pull data from the inventory table because inventory ID would be a foreign key in the BOM table and a primary key in the inventory table. BOM_TotalCost would be a calculated field in the BOM table because it allows you to create new data from your existing data.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.4

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.1. Product development > Production planning > Production scheduling > Manufacturing > Quality management. Inventory management should be involved through all of these processes.

2. Each of these areas produces the necessary output for the next area to operate correctly. The work from one department is used to build the work of the next department. For example, manufacturing will not have the correct resources to use when manufacturing cabinets without a bill of materials or operations list.

3. Answers may vary. Please refer to the control tables in each chapter section. Example controls include: a. Product development: (1) testing items throughout development and (2) management review of operations list. b. Production planning: (1) steering committee oversees resource allocation and (2) periodic management review of the production plan. c. Production scheduling: (1) limiting access to authorized employees and (2) periodic management review of the production schedule. d. Manufacturing: (1) periodic management review of production reports and (2) timely management review of job tickets. e. Quality management: (1) daily sample of items inspected for quality and (2) daily management review of findings and exceptions.

LO 1, LO 2, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.1

A2.

Control 1. The system analyzes standard and actual manufacturing costs and variances.

2. Annual review of employee performance is performed.

3. Access to the warehouse is limited to authorized employees only.

Solutions Manual

Control Owner Chief financial officer

Area Product cost management

Human resources director

All areas

Chief operating officer

Inventory management

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4. Inventory counts are completed on a monthly basis.

5. The system creates purchase requisitions and orders electronically based on customer demand.

6. Production decisions made by management must be based on sales forecasting, product profitability analysis, and inventory management.

7. The inventory records must be periodically reconciled to the control accounts in the general ledger and to the physical inventory on hand.

8. Documented policies and procedures for product safety and quality include roles and responsibilities of inspectors and the handling of exceptions.

9. Product costs are standardized and reviewed and revised regularly, in accordance with documented policies and procedures.

10. Policies and procedures related to the review, change, and authorization of existing bills of material, operations lists, and production schedules are clearly documented.

Chief financial officer Automated system control

Chapter 11 Manufacturing operations Inventory management

Chief executive officer

Production planning and scheduling

Chief financial officer

Inventory management

Chief operating officer

Quality management

Chief financial officer

Product cost management

Chief operating officer

Production planning and scheduling

LO 1-2, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: None, AICPA AC: Systems and Process Management, Section: 11.1-2

A3.

Term 1. Job-order costing 2. Activity-based costing 3. Direct materials 4. Conventional cost accounting 5. Indirect materials 6. Period costs 7. Product costs 8. Process costing Solutions Manual

Meaning Assigns cost or product to a unique job Allocates indirect costs to cost pools Materials that go directly into making a product Allocated indirect costs based on volume Materials used but not traceable to a product Expenses incurred but not part of the cost of a finished product Costs incurred to manufacture a product Assigns cost to a standardized product

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9. Direct labor 10. Manufacturing overhead

Chapter 11

Cost of employees directly used in production Costs related to fixed assets used in product production, utilities, indirect materials, indirect labor, etc.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 15 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 11.2

A4.

Activity-Based Costing Advantages Disadvantages 1. Difficult for smaller companies to 1. More accurate implement 2. Time consuming and complicated to 2. Identifies most profitable products identify cost drivers 3. Helps management focus on eliminating 3. Multiple resources must be engaged on a non-value adding activities regular basis to maintain accuracy LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.2

A5.Students’ answers will vary but could include: • High adoption cost • Data management issues • Connectivity issues • Integration with existing infrastructure • Lack of resources • Security concerns • Lack of documented strategy • Poor management support • Change resistance in the supply chain • Lack of internal subject matter experts LO 3, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.3

A6.Students’ answers will vary based on which tables they choose. See the following example.

1. Primary table: PROD_Product; secondary table: PROD_RawMaterialRequirements 2. PROD_Product has a one-to-many relationship with PROD_RawMaterialRequirements because one record in PROD_Product may be related to many records in the PROD_RawMaterialRequirements table.

3. PROD_Product has a mandatory relationship to PROD_RawMaterialRequirements.

4. PROD_Product primary key is Product_ID. 5. Product_ID connects PROD_Product and PROD_RawMaterialRequirements.

6. A product type must have one or more raw material requirements. A raw material requirement belongs to only one product type. Example: A chocolate chip cookie ChocChip (ProdID) + Flour (InvID) = one record that belongs to ChocChip (ProdID), but a chocolate chip cookie may have many raw materials (four, eggs, chips, etc.)

LO 4, Blooms: Analysis, Difficulty: Hard TOT: 30 min., AACSB: Analytic, Technology, AICPA AC: Systems and Process Management, Section: 11.4

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A7.1. The inventory table 2. The visualization would be more useful if it displayed the quantity of available products instead of the dollar value.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 3 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 11.4

A8.Product A Distance: Historical average distance traveled = 653 Post-implementation average distance traveled = 520 Distance traveled reduction = 20% Does not meet predictions.

Product A Labor Hours: Historical average hours labored = 89 Post-implementation average hours labored = 62 Hours labored reduction = 30% Does not meet predictions.

Product B Distance: Historical average distance traveled = 483 Post-implementation average distance traveled = 274 Distance traveled reduction = 43% Meets predictions.

Product B Labor Hours: Historical average hours labored = 79 Post-implementation average hours labored = 45 Hours labored reduction = 43% Does not meet predictions.

LO 4, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, Technology, AICPA AC: Systems and Process Management, Section: 11.4

A9.1. Ongoing review of the ingredient list, increased frequency of quality control review, increased management accountability for ongoing training.

2. Automated controls over refrigerator temperature, improved cooling systems, increased review of warehouse equipment.

3. Automated controls over mixing equipment, increased frequency of quality control review, updated employee training and procedures over the mixing equipment.

4. Increased review of warehouse equipment, increased frequency of quality control review, increased management accountability for ongoing training.

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5. Automated error handing over metal detection, increased frequency of quality control review, and increased maintenance cycles.

6. Automated controls over freezer equipment, increased frequency of quality control review, and increased maintenance cycles.

LO 1-4, Blooms: Application, Difficulty: Medium, TOT: 30 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 11.1-4

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Chapter 12

CHAPTER 12 Marketing, Sales, and Collections Processes Learning Objectives: 1. Describe the marketing, sales, and collections processes for business-to-consumer sales.

2. Evaluate the credit sales process and its related risks and controls.

3. Identify risks and controls related to revenue recognition in the sales process.

4. Assess the risks and controls related to the cash collections and accounts receivable processes.

5. Connect the ERP system and underlying database to potential reports and analytics.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. B

14. C

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.3

2. C

15. C

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.3

3. D

16. D

LO 1-3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.1-3

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.4

4. C

17. A

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.4

5. A

18. B

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.4

6. C

19. C

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 12.4

7. B

20. C

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.4

8. B

21. A

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.2

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.5

9. C

22. A

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.2

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.5

10. D

23. B

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.2

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 12.5

11. C

24. B

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LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.3

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.5

12. B

25. A

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.3

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 12.5

13. A LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.3

ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. The two types of sales are business-to-consumer (B2C) and business-to-business (B2B). In B2C sales, the customers are consumers that buy the product directly from an organization. In B2B sales, the customers are businesses who will resell the product on their shelves.

Examples: B2C sales: Archer Cabinets sells standard-sized cabinets directly to homeowner customers and contractors, who purchase the cabinets directly from the retail store for cash.

B2B sales: Archer Cabinets manufactures custom-built cabinets for large construction companies on credit with an upfront payment, for installation in new buildings that are for resale.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.1

DQ2. Student answers will vary. Customers can pay via (1) an advance payment, which occurs before the sale; (2) cash sale, which occurs at the time of sale; or (3) credit sale, which occurs after the sale.

A risk for an advance payment is that the company may not be able to deliver the goods or services and will need to refund the advance payment to the customer. Another risk could be recording an advance payment as sales revenue earned instead of as a deferred revenue liability, resulting in misstatement of the financial statements.

A risk for a cash sales transaction is that a cashier may pocket the cash without recording the sale, resulting in a loss of cash and unrecorded revenue.

A risk for a credit sale is that the customer may never pay and the company has to write off the amount.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.1

DQ3. Marketing drives sales, and sales drives cash collections. Cash is the lifeblood of an organization— especially cash flow from operations. Increased sales hopefully lead to increased profitability and increased cash flow! Profitability and cash flow are high on the radar of a CFO. LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.2

DQ4. It is important to have effective controls over credit sales because those controls help mitigate the risks associated with selling goods to customers with the expectation of payment in the future. The main risk is that a customer will take possession of the goods and never pay for them. Some of the controls include (1) only making credit sales to pre-approved customers, (2) setting parameters on credit scores, (3) reviewing payment history, (4) using numbered shipping documents that are all Solutions Manual

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accounted for subsequently, and (5) implementing documented and authorized policies and procedures for granting credit or increasing lines of credit for customers.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.2

DQ5. It is unlike that this is an error because a CFO should know revenue cannot be recognized until the performance obligation (acceptance of the product by the customer) has occurred; therefore, it is probably financial statement fraud. Sales revenue and accounts receivable are overstated, COGS is overstated, and inventory is understated because the product is still in inventory and belongs to Archtek regardless of its location. This would be management fraud, with Dallas potentially overriding internal controls over revenue recognition, making it more difficult to prevent the fraud.

LO 2-3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.2-3

DQ6. There are five steps in the revenue recognition model: (1) Identify the contracts with the customers; (2) identify the performance obligations within the contract; (3) determine the transaction price; (4) allocate the transaction price to the performance obligations in the contract; and (5) recognize revenue when the entity satisfies the performance obligations. Students should also reference materials from guidance such as the Roadmap to Understanding the New Revenue Recognition Standards at https://www.aicpa.org/interestareas/frc/accountingfinancialreporting/revenuerecognition/download abledocuments/frc_brief_revenue_recognition.pdf to outline specific actions taken and/or required to satisfy each step.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.3

DQ7. Over-time revenue recognition is chosen when revenue is recognized by measuring progress to determine the completeness of satisfying the performance obligation. Point-in-time revenue recognition is chosen when revenue is only recognized once the performance obligations are completely satisfied. The choice is made when the parties (buyer and seller) reach agreement on the terms of the contract. The choice will directly impact step 2 (identifying the performance obligations within the contract), step 4 (allocating the transaction price to the performance obligations in the contract), and step 5 (recognizing revenue when the entity satisfies the performance obligations).

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.3

DQ8. Students’ answers will vary but should include (a) identification an appropriate fraud case, (b) description of the fraud case and explanation of why it is revenue recognition fraud, (c) at least three other interesting facts and cite related references and sources, and (d) explanations of how the organization could have mitigated this fraud.

LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 20 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.3

DQ9. A false positive is a result that shows a positive connection to an attribute when that connection does not exist. Testing results are reviewed to gain feedback regarding the expected results. This feedback is used to update the testing parameters and logic to eliminate those results during the next iteration.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.4

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DQ10. Channel stuffing is the act of intentionally overinflating revenue by selling goods to customers or distributors that they are unable to resell. This inflates revenue in the financial statements until the goods are returned. Often, it’s performed close to year-end close so the revenue is inflated for the fiscal year and reduced once the goods are returned after fiscal year-end. An example for a cell phone manufacturer is shipping phones to a retail store like Target that were not ordered and the cell phone manufacturer recording them as revenue upon receipt.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.4

DQ11. Possible examples: (1) When a customer makes a payment for goods bought on credit, there will be an increase in cash and a decrease in the accounts receivable. (2) If a fixed asset is sold for cash, there will be an increase in cash and a decrease in the fixed asset account for that asset. (3) If a company issues new stock, there will be an increase in cash and an increase in equity for the common stock issued. (4) If a customer made an advanced payment on an order, there would be an increase to cash and an increase to deferred revenue because the goods have not been delivered.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.4

DQ12. A lockbox is a post-office box accessible by a company’s bank that its customers can use to submit payments. Payments submitted to the lockbox are processed and deposited in the company’s bank account. The documents created using a lockbox are a bank remittance report that shows each check received by a customer and a deposit slip that shows the amount deposited into the company’s bank account.

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.4

DQ13. Student answers will vary with regard to table names, etc. Using Illustration 12.19 as a guide: Table named INV_Inventory: Each inventory item can have zero sales order line items (for a new inventory item set up in system with no sales yet) or each inventory item has one or more sales order line items (once inventory is ordered); and each sales order line item must connect to one and only one inventory item.

Table named Sales_OrderLineItem: (1) Each sales order line item is related to one and only one sales order; and each sales order must have one or more sales order line items. (2) Each sales order line item must connect to one and only one inventory item. (3) Each inventory item can have zero sales order line items (for a new inventory item set up in system with no sales yet) or each inventory item has one or more sales order line items (once inventory is ordered).

Table named Sales_Order: (1) Each sales order is related to one and only one customer; and each customer has zero sales orders (when a new customer is created in the system) or one or more sales orders. (2) Each sales order must have one or more sales order line items; and each sales order line item connects to one and only one sales order. (3) Each sales order has zero or more shipments (if the business rule is that there can be partial shipments for sales orders); and each shipment must be connected to one and only one sales order. (4) Each sales order can have zero invoices (goods not shipped to customer) or else be related to one or more sales invoices (if shipping was piecemeal and different products were shipped at different times); and each sales invoice connects to one and only one sales order.

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Table named Shipment: Each shipment is connected one and only one sales order; and each sales order can have zero or many shipments.

Table named AR_Invoice: (1) Each sales invoice connects to one and only one sales order; and each sales order connects to zero or more sales invoices. (2) Each sales invoice must have one and only one customer; and each customer may have zero or more sales invoices.

Table named CRM_Customers: (1) Each customer can have zero or more sales orders; and each sales order must have one and only one customer. (2) Each customer can have zero sales invoices (a new vendor hasn’t invoiced the business yet) or one or more sales invoices; and each sales invoice connects to one and only one customer.

LO 5, Blooms: Analysis, Difficulty: Medium, TOT: 40 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.5

DQ14. Sales forecasts are used to plan for future activities. For example, sales forecasts are used by the production department to determine what products to produce and when. This drives what raw materials purchasing needs to acquire. Supply chain management oversees the flow of this information throughout the related business processes.

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.5

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.1. A college student purchases a cup of coffee at Starbucks. – B2C 2. Target purchases Starbucks coffee beans. – B2B 3. Starbucks purchases paper cups. – B2B 4. An honors society orders and receives 12 reusable coffee mugs on Starbucks’ website. – B2C 5. The chair of a nonprofit purchases bags of coffee beans at Starbucks for a silent auction gift basket. – B2C 6. A college student purchases a cup of coffee at Starbucks inside of Target. – B2C 7. A Starbucks manager buys paper towels from Target because the café ran out. – B2C 8. A Starbucks manager orders paper towels from a Bounty distributor. – B2B LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.1

A2. Security cameras covering cash registers.

Separate cash drawers for sales counter employees.

Inventory counts that identify missing inventory compared to sales receipts.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.1

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A3.

LO 2, Blooms: C, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.2

A4.

Control Activity 1. Review reports and data analyses for unusual trends or unexpected results 2. Match revenue transactions with approved customer orders 3. Examine customer returns around the cutoff period 4. Maintain a strong audit committee, board of directors, and control environment (the tone at the top) 5. Match sales invoice with shipping information and customer acknowledgement of fulfillment of seller obligations 6. Provide reporting hotline where whistleblowers remain anonymous 7. Automatically generate invoices and recognize revenue when the customer electronically signs to accept the shipment 8. Segregate billing function from shipping and accounts receivable functions 9. Sequence shipping documents and match them with customer billing

Candidate? Yes/No No Yes Yes No Yes No Yes No Yes

LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.3

A5.

Scenario Joe purchases Blizzard’s latest video game from Game Stop.

Game Stop orders a shipment of new video games from Blizzard, to resell Solutions Manual

Customer Payment Relationship Method Cash B2C payment Credit B2B payment

Debit Account Cash Accounts receivable

Credit Account Sales revenue Sales revenue

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on its shelves. It will pay for next month.

Blizzard orders a custom designed graphic for its new video game and pays at the time of the order. The designer promises to deliver by a certain date.

Jose pays for his monthly subscription to Blizzard’s latest online game.

Chapter 12

B2B

Advance payment

Cash

Deferred revenue

B2C

Advance payment

Cash

Deferred revenue

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.4

A6.

Control Activity A. Ensure that a policy for sales cutoff timing is documented and approved B. Create programming that calculates sales discounts C. Use standard sales contracts that are authorized by management D. Do automated matching of sales invoice quantities to shipping information and to the pricing in the sales contract E. Automated the creation of monthly statements for customers F. Implement a policy that states cash is not accepted and only cards can be used for payment G. Ensure that a policy for credit checks is documented and approved H. Check remittance advices against the daily remittance list I. Control access to the warehouse J. Automate the matching of the customer’s name on the sales order to a main data list for customers

Risk if the Control Is Missing Improper revenue recognition Loss of profit Customer dissatisfaction or loss of reputation and penalties Incorrect sales revenue and accounts receivable records and potential misstatement of financial statements Inflated revenue, incorrect customer accounts, customer dissatisfaction Loss of revenue resulting in financial loss

Unacceptable credit risks and excessive bad debts Incorrect accounts receivable records and potential misstatement of financial statements Customer dissatisfaction, complaints, and financial losses Fraudulent or inappropriate sales

LO 2-4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.2-4

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A7.

Attribute

Term

1. Customer name

Data

2. Customers with the same phone number 3. Average items sold per day

Analytic

4. Customer type description

Data

5. Product description

Data

6. Sales order aging

Report

7. Calculating sales ratios

Analytic

8. Service ID

Data

9. Amount billed by date

Report

10. Review of sales ratios

Analytic

11. Items currently out of stock

Report

12. Review of shipments without an invoice

Analytic

Report

LO 5, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Technology and Tools, Section: 12.5

A8.1. This is a credit sale to a business-to-business (B2B) customer. The accounting entries would be: 4/14 – Dr. $18,500 to AR and Cr. $18,500 to Sales 4/14 – Dr. $14,500 to COGS and Cr. $14,500 to Inventory 4/16 – Dr $17,945 to Cash and $555 to Sales Discount and Cr $18,500 to AR 2. This is an advance payment sale to a B2B customer. The accounting entries would be: 4/5 – Dr. $118,600 to Cash and Cr. $118,600 to Deferred Revenue 4/14 – Dr. $118,600 to Deferred Revenue and Cr. $118,600 to Sales 4/14 – Dr. $84,450 to COGS and Cr. $84,450 to Inventory 3. This is a cash sale to a business-to-consumer (B2C) customer. The accounting entries would be: 4/12 – Dr. $125 to Cash and Cr. $125 to Sales 4/12 – Dr. $75 to COGS and Cr. $75 to Inventory 4. This is a credit sale to a B2B customer. The accounting entries would be: 4/24 – Dr. $40,250 to AR and Cr. $40,250 to Sales 4/24 – Dr. $29,125 to COGS and Cr. $29,125 to Inventory 5/14 – Dr. $40,250 to Cash and Cr. $40,250 to AR

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Chapter 12

5. This is a credit sale to a business-to-business (B2B) customer. The accounting entries would not be entered in Q2, because while the order occurred in Q2, delivery and ownership of the goods and the payment took place in Q3.

LO 1-4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 12.1-4

A9.Product C in October 202X shows a significantly higher amount than the other products. This unusual sales activity should be investigated for risk of channel stuffing.

LO 1-5, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 12.1-5

A10. (1) sales order (2) business-to-consumer (B2C) (3) business-to-business (B2B) (4) advance payment (5) cash (6) credit sale (7) remittance advice (8) business-to-business (B2B) (9) picking request (10) controls (11) sales invoice (12) accounts receivable (13) financial LO 1-5, Blooms: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 12.1-5

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Chapter 13

CHAPTER 13 Financial Reporting Processes Learning Objectives: 1. Identify the role of the accounting information system in financial reporting.

2. Document the generation of financial statements within the accounting information system.

3. Explain how XBRL promotes reporting efficiency.

4. Describe when to use key management accounting reports.

5. Summarize the importance of data analytics and reporting for financial reporting decision making.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. C

14. A

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.3

2. A

15. B

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.3

3. B

16. D

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.3

4. B

17. A

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.1

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Reporting, Section: 13.4

5. D

18. C

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Risk Assessment, Analysis and Management, Section: 13.1

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 13.4

6. C

19. A

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.1

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 13.4

7. B

20. D

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.1

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.4

8. D

21. B

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 13.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.4

9. A

22. B

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Reporting, Section: 13.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.4

10. C

23. A

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.2

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 13.5

11. C

24. C

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Reporting, Section: 13.2

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Reporting, Section: 13.5

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12. B

25. C

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.2

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Communication, AICPA AC: Reporting, Section: 13.5

13. B

26. A

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.3

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Reporting, Section: 13.5

ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. The CFO oversees all financing-related activities. The controller reports to the CFO. They are crucial control owners for financial reporting. They collaborate to ensure financial reporting is efficient, effective, and controlled. Their goal is to ensure that the company is meeting financial reporting objectives.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Reporting, Section: 13.1

DQ2. Student answers should include an explanation of each of the four financial statement statements listed in the chapter (balance sheet, income statement, statement of cash flows, and statement of stockholders’ equity). As part of the explanation, student answers should include specific references to components of the statements, how they are used, and how those components align to the primary objective of producing financial statements that are useful to external users of the business.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 15 min., AACSB: Analytic, AICPA AC: Reporting, Section: 13.1

DQ3. Consolidated financial statements are the financial statements of a company (parent) and at least one subsidiary. The consolidated financial statements treat the parent and the subsidiaries as one company by eliminating all intercompany transactions and then aggregating the two sets of financial statements into one. When one company (parent) owns more than 50 percent of the voting stock in another company (subsidiary), it has control over that company. The parent company must report consolidated financial statements because of its controlling interest in the subsidiary.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA AC: Reporting, Section: 13.1

DQ4. A chart of accounts is a classification scheme to organize financial data and summarize financial measurements of assets, liabilities, and owners’ equity. The coding system is used to logically record, classify, store, and extract financial data. It is critical because it is the first step in the traditional financial accounting process, and it lists the numbers assigned to income statement and balance sheet accounts.

With the chart of account in place, accounting transactions are entered into the proper ledger accounts to classify and summarize the accounting data, which facilitates the preparation of the financial statements.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA AC: Reporting, Section: 13.2

DQ5. The first three steps in the financial statement process are (1) identify accounting transactions, (2) journalize the accounting transactions, and (3) post journal entries to ledgers. If any of these three steps fail, businesses could fail to document events that recognize revenues or expenses, audit trails would not be created, transactions would not be booked into journals or posted to ledgers. This would cause a failure of the process and the inability of the company to prepare its financial statements.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA AC: Reporting, Section: 13.2

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DQ6. Per AU-C 940.05, an ICFR is a process effected by those charged with governance, management, and other personnel, designed to provide reasonable assurance regarding the preparation of reliable financial statements in accordance with the applicable financial reporting framework and includes those policies and procedures. It is important for the maintenance of records to provide reasonable assurance that transactions are recorded as necessary to permit the preparation of financial statements. An organization must implement those controls to help mitigate risks over financial reporting and control costs.

ICFR is a subset of COSO internal controls.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Reporting, Section: 13.2

DQ7. XBRL is an open-standard markup language for business information, specifically electronic financial reporting. It is a global language for financial reporting, and the SEC has mandated the use of XBRL for SEC filings. It was adapted from XML and uses a classification system called a taxonomy. A tag is assigned to a piece of data called an element. XBRL tags associate the concepts in the taxonomy to a piece of data to make the electronic distribution, interpretation, extraction, and analysis of the data easier. It also uses XBRL instance documents to produce standardized financial statements.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.3

DQ8. Businesses can benefit from using XBRL because it creates unique identifiers for portions of financial reporting by using a standardized labeling system. The XBRL International Consortium creates XBRL standards, and anyone can use them. Many accounting software products are XBRL-enabled and can insert XBRL tags automatically into files, so companies do not have to write the code. It allows the accounting function to consolidate internal financial data from disparate systems within the organization more efficiently and effectively. It can also improve financial analyst and investor access to financial information.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.3

DQ9. The balanced scorecard is an internal assessment, improvement, and reporting process that ties a measurement system to an organization’s strategic plan. It provides key performance indicators to help management. The scorecard measures performance by combining financial measures with nonfinancial measures for a balanced perspective. It has four dimensions: (1) financial (cash flow); (2) customer (customer retention rates); (3) internal business processes (activities by function); and (4) learning and growth (number of hours employees spend in training).

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Analytic, AICPA AC: Reporting, Section: 13.4

DQ10. Student answers will vary but should include a tie between cost-effectiveness and either cost accounting, responsibility accounting, or balanced scorecards.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Reporting, Section: 13.4

DQ11. Student answers will vary but should cover all four dimensions: (1) financial (cash flow); (2) customer (customer retention rates); (3) internal business processes (activities by function); and (4) learning and growth (number of hours employees spend in training). The answers should go in-depth on the various KPIs for each of the four dimensions and call out KPIs that would closely align Julia’s Cookies’ business, stakeholders, employees, and processes. Answers may include: (1) Financial – sales revenue growth, sales margin, earnings per share, ROI. (2) Customer – average customer satisfaction Solutions Manual

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Chapter 13

rating, market share %, % of previous customers, % of on-time deliveries. (3) Process – capacity utilization, operating efficiency, machine downtime, scheduled downtime, unscheduled downtime, the average time to set up machines. (4) Learning and growth – hours of employee training, employee satisfaction, employee turnover, percentage of processes with real-time feedback, percentage of employees with access to real-time data, number of employee suggestions implemented.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Reporting, Section: 13.4

DQ12. A trial balance rollforward provides assurance that the general ledger data represents the full and accurate journal entries during the reporting period by recreating the ending trial balance and comparing it to the existing ending trial balance.

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Analytic, Section: 13.5

DQ13. Student answers should reference the application of the data analytic and include an example of how it is used in practice.

LO 5, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA AC: Technology and Tools, Section: 13.5

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.a. Timeliness – The reports need to be received in a timely manner to be usable. b. Comparability – Disparate systems could be mapped to use the same universal taxonomy.

Accuracy – The manual mapping may cause the data to be incomplete or erroneous. c. Understandability – Providing easy-to-understand data points in place of internal coding or labeling increases usability.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Reporting, Section: 13.1

A2.Account numbers may vary but must fall in the appropriate numeric ranges: 1. Cash on hand: 100–199 2. Sales returns and allowances: 500–575 3. Bad debts expense: 900–950 4. Inventory: 100–199 5. Allowance for doubtful accounts: 100–199 6. Cash sales: 500–575 7. Cost of goods sold: 900–950 8. Audit fees: 900–950 9. Interest revenue: 500–575 LO 2, Blooms: Comprehension, Difficulty: Medium, TOT: 10 min., AACSB: AICPA AC: Technology and Tools, Section: 13.2

A3.

Activity Solutions Manual

Step Name

Timing

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Receive an order for $5,000 of inventory

Close income summary Run quarterly trial balance Run finalized general ledgers balances Record payment for advertising that will start in one month Run statement of cash flows Make agreement to purchase a new warehouse Post debit entry to accounts payable and credit entry to cash Finalize adjusting entries and run GL balances Run statement of owners’ equity Close expense accounts Equipment is bought on a sales terms of 2/10 net 30

Chapter 13

Journalize the accounting transactions Journalize and post closing entries Prepare an unadjusted trial balance Prepare post-closing trial balance Journalize the accounting transactions Prepare financial statements Identify accounting transactions Post journal entries to ledgers

During reporting period

Prepare adjusted trial balance Prepare financial statements Journalize and post closing entries Journalize the accounting transactions

End of reporting period End of reporting period End of fiscal year

End of fiscal year End of reporting period End of fiscal year During reporting period End of reporting period During reporting period During reporting period

During reporting period

LO 2, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, and Management, Section: 13.2

A4.

Business Activity 1. The entire IT support team has access to all GL accounts.

2. Sales between intercompany departments are not identified.

3. Some transactions are not recorded in U.S. dollars.

4. It is discovered that quarterly taxes have not been paid for two straight quarters.

Solutions Manual

Risk Created by the Business Activity Unauthorized access to documents and other accounting-related records may result in their destruction, alteration, or loss.

Related party transactions may result in improper identification of the parties or incorrect recording of entries.

Financial statements that do not comply with GAAP may result in regulatory fines and penalties.

Violations of the SEC, IRS, and other reporting requirements, including loan covenants, may result in fines and other punitive actions.

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5. General ledger accounts do not have assigned account owners.

6. Because documents were not marked as paid, duplicate expenses were recorded for a period of three days.

7. Plans for a newly designed product are saved on a shared drive with no security.

8. The company benefits plan is canceled.

9. The monthly cost of vehicle insurance, paid in full as a yearly premium, was miscalculated.

10. Reviews of the inventory account are not occurring frequently.

Chapter 13

Reporting complexities may result in financial statements and other reports may be inaccurate, unreliable, or not issued in a timely manner.

Incorrect, fictitious, omitted, duplicative, or incorrectly recorded journal entries may result in misstated financial statements.

Unauthorized access to proprietary and confidential information may result in reputational damage or loss of competitive advantage.

Complex and non-routine accounting transactions may result in incorrect recording.

Accruals may be understated or overstated, and other adjusting entries may be incorrect.

Loss of assets due to fraud, theft, negligence, or destruction may result in a lack of proper reflection in the financial statements.

LO 2, Blooms: Application, Difficulty: Medium, TOT: 30 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, and Management, Section: 13.2

A5.1. <us-gaap:EuropeanCommissionFines contextRef="FD2017Q4YTD" decimals="-6" id="d16602969e974-wk-Fact-D431B4281DAE5E8BAE33013D08C16250" unitRef="usd">2736000000</us-gaap: EuropeanCommissionFines > 2. <us-gaap:CostofRevenues contextRef="FD2017Q4YTD" decimals="-6" id="d16602969e974wk-Fact-D431B4281DAE5E8BAE33013D08C16250" unitRef="usd">45853000000</us-gaap: CostofRevenues > 3. <us-gaap:TotalCostsandexpenses contextRef="FD2019Q4YTD" decimals="-6" id="d16602969e974-wk-Fact-D431B4281DAE5E8BAE33013D08C16250" unitRef="usd">127626000000</us-gaap: TotalCostsandexpenses > 4. <us-gaap:Incomefromoperations contextRef="FD2017Q4YTD" decimals="-6" id="d16602969e974-wk-Fact-D431B4281DAE5E8BAE33013D08C16250" unitRef="usd">26178000000</us-gaap: Incomefromoperations > 5. <us-gaap:Totalcostsandexpenses contextRef="FD2018Q4YTD" decimals="-6" id="d16602969e974-wk-Fact-D431B4281DAE5E8BAE33013D08C16250" unitRef="usd">109295000000</us-gaap: Totalcostsandexpenses> 6. <us-gaap:SalesandMarketing contextRef="FD2019Q4YTD" decimals="-6" id="d16602969e974wk-Fact-D431B4281DAE5E8BAE33013D08C16250" unitRef="usd">26018000000</us-gaap: SalesandMarketing LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.3

A6.(1) automate the process Solutions Manual

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(2) improve access to financial information (3) XML (4) taxonomy (5) XBRL International Consortium (6) suitable for any business (7) tags (8) element (9) XBRL instance document (10) consolidate financial information LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 13.3

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A7.1.

2. The VP of Sales 3. The direct materials area has the largest amount spent, and the direct labor costs have the largest variance. Both could be reviewed for cost savings.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA AC: Technology and Tools, Section: 13.4

A8.

Data Points

ERP Feature

Business Process

1. Job satisfaction

Talent Management

2. Customer retention 3. Cash flow 4. Product quality 5. Employee turnover

Customer Management Financial Reporting Production Talent Management

Human resources and payroll Marketing, sales, and collections Financial reporting Conversion Human resources and Payroll

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Balanced Scorecard Dimension Learning and growth Customer Financial Customer Learning and growth

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Accounting Information Systems, 1e Production

Conversion

Financial reporting

Financial reporting

Customer Management Training and Development

Marketing, sales, and collections Human resources and payroll

Chapter 13 Internal business processes Financial Customer Learning and growth

LO 4-5, Blooms: Analysis, Difficulty: Medium, TOT: 30 min., AACSB: Ethics, AICPA AC: Risk Assessment, Analysis, and Management, Section: 13.4-5

A9.The accounts receivable account does not roll forward. There is a $200,000 discrepancy between the journal entry activity and the ending balance (568,000 + 226,023 – 244,023 = 550,000 and not $750,000).

LO 5, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis, and Management, Section: 13.5

A10. 1. B 2. C 3. A 4. D LO 5, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis, and Management, Section: 13.5

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CHAPTER 14 Information Systems and Controls Learning Objectives 1. Describe the COBIT framework and its five domains.

2. Evaluate logical user access controls.

3. Explain how physical access controls protect equipment and systems.

4. Compare backup and recovery efforts.

5. Summarize the change management process.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. C

11. C

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.3

2. B

12. D

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.3

3. D

13. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.1

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.4

4. A

14. B

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, S AICPA AC: Risk Assessment, Analysis and Management, section: 14.1

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.4

5. A

15. B

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.4

6. C

16. C

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 14.4

7. B LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.2

8. C LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.2

17. B LO 5, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 14.5

18. C LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.5

19. C 9. A Solutions Manual

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LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.3

Chapter 14

LO 5, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.5

10. A LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.3

ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. IT governance is the process used to ensure effective and efficient use of IT to enable a company to achieve its goals and provide value to its investors. The important part in this definition is that IT governance is a process. It is not a department or state of existing; it is an ongoing effort by different parts of an organization to monitor and achieve important IT decisions that have an impact on the business operations. While minimizing risk is a part of IT governance, it is not the only focus. The methods used to identify and evaluate the performance of IT and bring value to the company are also important parts.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.1

DQ2. COBIT is the most widely used international standard for IT governance. The most recent version of COBIT is COBIT 2019. Its purpose is to assist companies in meeting regulatory compliance requirements, manage IT risks, and ensure alignment of IT strategies with organizational goals. COBIT 2019 IT has five domains, and the first domain focuses entirely on IT governance. This domain states that the board of directors or governing body of an organization must evaluate stakeholder needs and IT strategic options, create direction by prioritizing and making decisions about these options, and monitor these IT strategies for performance, progress, and compliance. Some of its objectives include frameworks, resource optimization, and being transparent with stakeholders.

The COSO Internal Control—Integrated Framework focuses on a control-based approach to assessing risk and providing assurance throughout an organization. Similarly, the COSO Enterprise Risk Management (ERM) Framework focuses on a risk-based approach to addressing risk from a strategic perspective. COBIT 2019 is a way to achieve COSO objectives, but only for IT controls. The main differences between the two COSO frameworks and COBIT 2019 are: Framework COSO Internal Control—Integrated Framework and COSO ERM Framework COBIT 2019

Organizational Focus Corporate governance

Organizational Level Strategic level

Control Scope

Audience

All internal controls

Management, board of directors, internal and external audit

IT governance

Operational level

Only IT-specific controls

IT managers, IT professionals, and internal and external audit

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 20 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.1

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DQ3. Physical control examples: Safes, doors, fences, gates, turnstiles, etc. using locks, passcodes, badges, biometrics to gain entrance to a physical location (e.g., facial recognition, fingerprints), video surveillance cameras, alarm systems, security guards, and motion detectors, badge card reader.

Logical control examples: username and password, passcode, personal identification number (PIN), fingerprints used as two-factor authentication methods, voice recognition software, retinal scanners, data encryption.

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.2

DQ4. Authentication is a control to ensure that someone trying to access the system, is who they claim to be. Example: Students and faculty gain access to the university system by inputting their usernames and passwords. The system recognizes a specific username and password combination and authenticates the login.

Once users are authenticated, authorization is the control that allows users to only see the information they are approved to access. In the case of students, they can only see information related to their personal situation, such as the courses for which they are registered and their own grades, and not those of their peers. A faculty member can see all the students in their classes and can access and change grades for only those students in their classes. Students and faculty have different access roles.

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.2

DQ5. Controls for physical data center security include: • Locating the data center in a safe location away from windows to mitigate the risk of break-ins • Continuously monitoring the inside conditions of the data center for security risks • Restricting access only to necessary personnel • Periodically reviewing who has access to the data center LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.3

DQ6. There are three basic types of backup strategies: Full backups copy all existing data in its entirety every time. Factors to consider: This is the slowest of the backup strategies and requires a lot of storage, as you are creating a full copy of your data every day.

Differential backups copy all data created since the most recent full backup in its entirety every time.

Differential backups are the middle ground of backup strategies. Factors to consider: They take a moderate amount of time and a moderate amount of storage space.

Incremental backups copy only new or updated data every time. Factors to consider: They are the cheapest and use the least amount of storage space.

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.4

DQ7. Disaster recovery relates specifically to the IT recovery plan. Internal controls for recovering systems and data discussed in this chapter include: • Backup strategies Solutions Manual

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• Backup cycles • Developing and maintaining a formal DR plan • Physical site backups LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.4

DQ8. Student answers will vary. One recent example could be Boeing’s 737 Max aircraft. Investigators identified at least three different software problems after two fatal crashes killed 346 people. These problems could have resulted from incorrect coding. These aircraft remained grounded for well over a year, causing significant cash flow and profitability issues for the company. The drop in the stock price was significant. One of the software issues involved a warning light to help tell pilots when the trim system (a part of the plane that can lift or lower the nose) was not working.

Source: problem

https://www.theverge.com/2020/2/6/21126364/boeing-737-max-software-glitch-flaw-

LO 5, Blooms: Analytic, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.5

DQ9. Normal changes follow the formal change management process to avoid the risk of mistakes.

Normal changes are for organizational benefit (such as efficiency) or to update information. A normal change follows a normal timeline to implementation. This is the most common type of change implemented in an organization.

An example of a regular change to coding would be a university prohibiting undergraduate students from registering for graduate classes. When a fast-track master’s program was created, there had to be a code change to allow a subset of the undergraduate students to register for graduate classes.

Emergency changes require immediate action to mitigate a significant risk such as a system outage, compliance issue, or security risk. The emergency change process differs from the regular change process as time is of the essence, and the change must be completed as soon as possible. For emergency changes, the process is shortened by excluding the model stage. The code goes straight from the testing stage into production. After the code is live, the IT analyst approves and documents their testing, normally within 24–48 hours.

An example would be a security patch to prevent a virus attack on the company. As another example, the COVID-19 pandemic rapidly increased user volume for Zoom, which in turn disclosed vulnerabilities, such as the ability for people to crash Zoom meetings. Zoom implemented a code change rapidly to address the situation.

LO 5, Blooms: Reflective Thinking, Difficulty: Medium, TOT: 20 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 14.5

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.Student answers will vary. Using creativity to tie the answers back to COBIT 2019 is key to this solution. Example answers include: “IT governance for an IT win.”

“COBIT covers you where COSO won’t.”

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“You can’t COSO without your COBIT.” “Controls. Confidence. COBIT.” “It’s not hot in here; that’s our backup site.”

Key topics students may leverage include: User access controls Authentication Change management environments Physical security Data center environments Data center backup sites Data backup strategies and cycles LO 1-5, Blooms: Knowledge, Difficulty: Easy, TOT: 15 min., AACSB: Communication, AICPA AC: Systems and Process Management, Section: 14.1-5

A2.

Employee Title Chief operations officer Tax accountant Accounting director Regional sales manager Public relations manager Internal auditor Compensation and benefits manager Marketing manager

Appropriate Role D. Read-only

B. Creator A. Administrator D. Read-only E. Denied access D. Read-only E. Denied access

E. Denied access

LO 2, Blooms: Application, Difficulty: Medium, TOT: 30 min., AACSB: Ethics, AIPCA AC: Systems and Process Management, Section: 14.2

A3. Student answers will vary. The following are some possible concerns: • Data center equipment is stored on the ground floor; the floors should be raised to prevent flood damage.

• The back entrance to the data center is a single door and does not use an access control vestibule.

• There is more than one entrance to the data center; best practice is to have only one controlled entrance.

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• The air vents are located above and not below; vents should be down low to circulate air through a raised floor.

• The data center hot backup site is located in Miami, which has a risk of hurricanes; best practice is to locate backup sites in low-risk geographic areas.

• Data backups for less critical systems are stored onsite; storing them offsite reduces the risk of data loss in the event that something happens to the headquarters building.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 14.3

A4.

1. Full backup 2. Incremental backup 3. Incremental backup 4. Differential backup 5. Differential backup 6. Full backup 7. Differential backup 8. Incremental backup 9. Full backup 10. Differential backup 11. Incremental backup 12. Full backup LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 15 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 14.4

A5.Answers will vary depending on individual students’ priorities. The goal is to see that students are using critical thinking to assess the importance of their data backups.

One possible answer: 1. Personal pictures and videos: B Local storage on laptop 2. Annual tax documents: C. External drive 3. Current class assignments: A. Cloud storage 4. Last semester’s research project, which you plan to submit with graduate school applications: C. External drive 5. Meeting minutes, which you take for an honors society where you are an officer: A. Cloud storage 6. Personal finance documents, which include your student loan and FAFSA information: A. Cloud storage Solutions Manual

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Sample explanation of reasons why each type of backup site was chosen: As a student who takes notes and writes papers on their laptop and school computer in the library, I prefer to have all of my documents available to me, so I can keep working, regardless of the technology that I use to complete my work. Sometimes my laptop’s battery dies, so I hop onto the school computers to keep working. Also, as someone who is involved in multiple clubs, I take notes during the meeting on my laptop or someone else’s – when I forget mine. I like to have these documents available, on hand, and I also like to share them with other members of the club.

I do enjoy capturing my memories with pictures and videos, but those can reside in one place, my computer. I don’t need them on hand. Also, every week I record my weekly spending in a spreadsheet where I budget everything for the month. I do that on Saturday morning, in front of my computer, so my financial documentation doesn’t have to be readily available Lastly, I file taxes once a year, and rarely look into those documents until March of each year. Saving them in a cold site makes sense to me, as I access them on an annual basis. Also, since the research project has already been turned in, and I won’t be applying to graduate school for one more year, I can safely store the project in a cold site, so it doesn’t get accidentally deleted on my laptop.

LO 4, Booms: Application,, Difficulty: Medium,, TOT: 25 min., AACSB: Technology, Reflective Thinking, AICPA AC: Technology and Tools, Section: 14.4

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A6.

Change #

Change Opened Date

Business Approver Date

IT Manager Approver Date

Implementati on Date

1

12/29/2021

1/5/2021

1/10/2021

1/13/2021

2

12/22/2021

12/25/2021

12/30/2021

3

12/21/2021

12/31/2021

4

12/20/2021

12/20/2021

5

12/20/2021

6

Type

Effective or Ineffective?

1/14/2021

Regular

Effective

12/30/2021

12/30/2021

Regular

Effective

1/3/2021

12/30/2021

1/4/2021

Regular

Ineffective

12/25/2021

12/22/2021

12/31/2021

Regular

Ineffective

12/23/2021

12/28/2021

12/27/2021

12/28/2021

Regular

Ineffective

12/20/2021

12/23/2021

12/24/2021

12/24/2021

12/24/2021

Regular

Effective

7

12/19/2021

12/19/2021

12/19/2021

12/23/2021

12/23/2021

Regular

Effective

8

12/18/2021

12/24/2021

12/29/2021

12/29/2021

12/30/2021

Regular

Effective

9

12/18/2021

12/18/2021

12/19/2021

12/20/2021

12/21/2021

Regular

Effective

10

12/31/2021

Emergency

Effective

11

12/18/2021

Regular

Effective

12

12/25/2021

Emergency

Ineffective

13

12/17/2021

Regular

Effective

14

12/31/2021

Emergency

Ineffective

15

12/16/2021

12/27/2021

12/24/2021

12/22/2021

12/28/2021

Regular

Ineffective

16

12/16/2021

12/21/2021

12/23/2021

12/27/2021

12/28/2021

Regular

Effective

17

12/15/2021

12/19/2021

12/19/2021

12/17/2021

12/21/2021

Regular

Ineffective

18

1/1/2022

Emergency

Ineffective

19

12/15/2021

12/20/2021

12/23/2021

12/22/2021

12/28/2021

Regular

Ineffective

20

12/15/2021

12/15/2021

12/16/2021

12/20/2021

12/20/2021

Regular

Effective

12/31/2021 12/18/2021

12/23/2021

12/23/2021

12/25/2021

PostImplement ation Review Date

1/1/2022

12/28/2021 12/25/2021

1/1/2022

1/2/2022

12/28/2021

12/28/2021 12/27/2021

1/4/2022

1/4/2022

1/5/2022

1/5/2022

LO 5, Blooms: Application, Difficulty: Medium,, TOT: 30 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 14.5

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Emergency Closed Date

12/29/2021

12/27/2021 12/31/2021

Change Closed Date

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Savage A7.

Priority 5

4

1

2

3

Accounting Information Systems, 1e

Request General ledger: Add $ to the front of each monetary amount. Currently, this is being manually added during reporting.

HR administrative system: Add nonbinary as a gender selection option. Currently, the only options are male and female.

Customer relationship management system: Add more memory. Currently, sales managers are unable to add more customers to the system.

Virtual signature application: Fix login issue.

Currently, customers cannot log in to sign contracts.

Backups/data protector: Rerun backup. One of the incremental backups did not finish last night.

Chapter 14

Type of Change Regular

Regular

Emergency

Emergency

Regular

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AIPCA AC: Systems and Process Management, Section: 14

A8.

Column 1 Also known as the “sandbox,” this is where developers design and test their coding.

Developer no longer has access to ensure segregation of duties.

User acceptance takes place here.

Outputs include testing documentation.

Outputs include live code in the system.

Outputs include initial code.

The business user or IT analyst no longer has access to the code to ensure segregation of duties.

Column 2 1. A. Test environment 2. B. Model environment C. Production environment 3. B. Model environment 4. A. Test environment 5. C. Production environment 6. A. Test environment 7. C. Production environment

LO 5, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 14.5

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Accounting Information Systems, 1e

Chapter 15

CHAPTER 15 Fraud Learning Objectives: 1. Identify the main types of fraud.

2. Describe the role of an accounting professional in fraud management.

3. Explain how to Identify, prevent, and detect asset misappropriation schemes.

4. Identify financial statement fraud and explain how to mitigate its risks.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. B

9. B

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.1

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 15.3

2. D

10. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 15.3

3. C

11. D

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.1

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 15.3

4. B

12. A

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.2

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 15.3

5. D

13. A

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.2

LO 4, Blooms: Application, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 15.4

6. A

14. C

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.2

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.4

7. C

15. B

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.2

LO 4, Blooms: Application, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 15.4

8. C

16. D

LO 2, Blooms: Comprehension, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.4

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Student responses will vary. When people are fighting for economic survival because of reduced financial well-being due the pandemic, they may be more inclined to take the opportunity to commit fraud if the financial pressure is significant enough. Opportunities for fraud may also increase as a result in a reduction of staffing levels or inability to maintain the internal control environment.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.1

DQ2. Student responses will vary. Internal fraud affects more than just the company. Individual employees may lose their jobs, investors may suffer as stock market prices shift in response to a fraud scandal or they may lose their savings if a company goes bankrupt. Retirement savings may be wiped out. Other companies such as vendors or customers may be negatively impacted which can result in their employees being laid off.

LO 1-4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.1-4

DQ3. The anonymous tip describes a possible occurrence of corruption. Robin may be involved in any of the corruption schemes: conflict of interest where she has a personal relationship at Blisst, illegal gratuities or commercial bribery where someone at Blisst is rewarding her for giving them the contracts, or economic extortion where Robin is demanding Blisst reward her for giving them the contracts.

LO 1, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.1

DQ4. Pressures resulting in misappropriation of assets are personal pressures. These frauds result in financial gain for the individual or individuals committing them. Examples include living beyond their means, greed or wanting to achieve individual performance metrics, inability to pay debts, personal financial losses, and unexpected financial needs (e.g., medical).

Financial statement fraud pressure occurs at the management or company level. Pressures to commit financial statement fraud could be the desire to appear more valuable to investors, the need to meet external benchmarks such as loan covenants, the need to meet targets for incentive compensation awards, or pressures filtering down from the top of the organization (tone at the top).

The difference is that for misappropriation of assets, the gain is for an individual and driven by an individual, or smaller groups of individuals. Financial statement frauds are driven by corporate-level pressures, and the gain is often first and foremost at a company or management level.

LO 2, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.2

DQ5. Opportunity is created when a company has poor or no internal controls, there is collusion—that is, more than one person working together—to circumvent the internal controls, or management overrides the internal controls. The side of the fraud triangle that a company can most easily influence is opportunity. Companies use internal controls to mitigate fraud opportunity, with many internal controls embedded in the AIS of an organization, making it critical for accountants and auditors to ensure the system of internal controls is effective and efficient.

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.2

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DQ6. Student responses will vary. Students are often surprised that external audit does not detect more frauds.

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.2

DQ7. The fraud category is asset misappropriation. The bookkeeper stole cash from the business bank account. The subcategory is fraudulent disbursements. The cash was in the bank and recorded in the accounting records. The fraudster wrote business checks for her personal benefit, thus reducing the bank account balance, a current asset on the balance sheet. The bookkeeper tried to cover up the fraud by debiting various legitimate expense accounts, which resulted in an overstatement of these expenses and an understatement of net income.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 15.3

DQ8. Student responses will vary. Example: “Sweetwater School District is being investigated for mismanagement and fraud. Evidence indicates they may have misappropriated assets and funds. The district used inaccurate financial information when increasing teacher’s pay by 3.75 percent and improperly reported finances when applying for a 2018 bond rating. The school borrowed from its own funds to pay for operating costs and was operating on a $30 million budget deficit. Methods used involved exploiting a financial information system that was not integrated. https://www.kpbs.org/news/2020/jun/23/long-awaited-report-finds-evidence-fraud-sweetwate/ ” LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.4

DQ9. Financial statement fraud frequently involves management because it often requires collusion or management override to circumvent controls. Unlike asset misappropriation and other fraud schemes, financial statement fraud benefits the company at large or its key stakeholders. They may benefit from bonuses or other compensation tied to company performance. However, they are not directly stealing assets from the company like other fraud schemes.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.4

DQ10. Capitalization is the recording of a cost as an asset and expensing it over its depreciable life.

Converting expenses into assets increases profits. Costs are recorded in one of two ways: (1) expensed in the current period’s income statement or (2) capitalized as an asset and expensed over more than one accounting period by depreciation or amortization. Capitalizing expenses is appropriate when a company can expect a future value from the acquisition that benefits the company over more than one accounting period.

Fraud schemes use the capitalization of expenses to overstate profits by improperly recording expenses, which would decrease profits, as assets, which delays recognition of the expense. Fraud schemes can also inappropriately record a cost that should be capitalized as an expense to understate profits.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.4

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SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.

Act A. A salesperson steals an iPhone from the display case B. A cashier pads their time sheet with unauthorized hours every shift C. An employee submits personal purchases as restaurant expenses D. An accounts payable clerk creates fraudulent disbursements of company checks E. Management inflates sales revenue by shipping unauthorized sales to customer

Concealment 5. Including it in the store inventory count when it’s not there 1. Falsifying timesheet entries

Conversion ii. Selling it online or at a local pawn shop

2. Creating fictitious receipts 3. Billing to a shell vendor

v. Receiving reimbursement to a personal bank account i. Cashing company checks to shell company’s bank account and transferring to personal bank account iii. Inflating company revenue on financial statements

4. Shipping at the end of the accounting period to cause returns to come back after end of accounting period

iv. Receiving a paycheck to a personal bank account

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.1

A2.

Perceived Pressure

Opportunity

Rationalization

1. Pressure from CEO to achieve “challenges” like unattainable income targets 2. Market pressures to recover from economic setbacks 3. Company underperforming and needing to increase earnings 4. Expected obedience 1. Tone at the top 2. No rotation of key accounting personnel 3. Internal audit doesn’t report to external audit committee 4. Internal audit used as consultants 5. Camaraderie among long-term employees created a difficult environment for others to speak out against inappropriate behavior 6. Insufficient internal audit oversight 1. “If I don’t do this, they may fire everyone in my division.”

2. “Everyone else is doing this.”

3. “If I speak up, I’ll get in trouble.”

4. “It is my duty to be loyal.”

LO 2 and 4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 15.2 and 4

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A3.

Expense Reimbursement Test Double dipping Duplicate expenses Inappropriate cash Late expense submissions

Transactions Identified 1129 1135 1125 1128 1127 1129 1128 1135

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 15.3

A4.Answers may vary. Some opportunities and controls are: Opportunity Recording cash receipts and making bank deposits are not segregated.

The couple oversees hiring and could hire friends or family resulting in collusion.

The couple is responsible for payroll and could falsify hours to overpay family or friends they have hired.

Money is kept in the safe for the entire week.

Control Segregation of duties between the couple and a parttime employee for bank deposits and cash receipt.

Have the couple manage cash receipts and one of the part-time employees perform bank deposits. Having part-time employees report daily records of sales to Ms. Conover separately from the records the couple maintain.

Ms. Conover being involved in the interviewing and hiring process. Applicants should be required to disclose if they have a relationship to the couple.

Ms. Conover overseeing payroll or outsourcing it to a third party. Ms. Conover’s involvement in interviewing and hiring can lessen this risk.

Bank deposits being made nightly.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Analytic, AICPA AC: Systems and Process Management, Section: 15.3

A5.1. (i) Fraud risk: (A) Asset misappropriation. There is a lack of segregation of duties between the bank reconciliation and checks which creates an opportunity for asset misappropriation fraud.

2. (i) Fraud risk: (A) Asset misappropriation. The lack of independent checks creates the opportunity for asset misappropriation fraud.

3. (i) Fraud risk: (B) Financial statement fraud. The high turnover could be indicative of financial statement fraud.

4. (i) Fraud risk: (B) Financial statement fraud. Management is most likely involved in financial statement fraud. A strained relationship with previous auditors could be the result of financial statement fraud by management.

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5. (ii) Not a fraud risk. Three-way match is a preventive control that mitigates fraud risk.

6. (i) Fraud risk: (B) Financial statement fraud. Aggressive accounting practices are used in financial statement fraud.

7. (i) Fraud risk: (B) Financial statement fraud. Reporting earnings but being unable to generate cash indicates the possible manipulation of the financial statements to reflect an overstatement of earnings.

LO 3-4, Blooms: Application, Difficulty: Medium, TOT: 15 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.3-4

A6.The investing public.

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.1

A7.This is financial statement fraud. Specifically, the press release mentions fictitious revenues by recording service prepayments and transactions that didn’t produce revenue as earned revenue.

Falsified business records were used for concealment.

LO 3-4, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.3-4

A8.Section 302 The Sarbanes-Oxley Act of 2002 (SOX) makes this responsibility a regulatory requirement for companies that are subject to SOX regulations. Management that produces inaccurate or fraudulent financial statements can face prison time and fines.

LO 4, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Ethics, AICPA AC: Systems and Process Management, Section: 15.4

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Chapter 15 – Fraud

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Chapter 16

CHAPTER 16 Cybersecurity Learning Objectives: 1. Describe the relationship between cybersecurity risks and the accounting profession.

2. Describe the characteristics of reconnaissance attacks.

3. Compare and contrast physical and logical access attacks.

4. Explain how hackers perform disruptive attacks.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. C

11. D

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.1

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.3

2. A

12. C

LO 1, BT: Knowledge, Difficulty: Easy , TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.1

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.3

3. D

13. D

LO 1, BT: Knowledge, Difficulty: Easy , TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.1

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.3

4. C

14. A

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.1

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.3

5. D

15. D

LO 1, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, BC: Process and Resource Management Perspectives, Section: 16.1

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.4

6. C LO 2, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, PC: Communication BC :Process and Resource Management Perspectives, Section: 16.2

16. A LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.4

17. D

7. C

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.4

LO 2, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.2

18. A

8. C

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.4

LO 2, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.2

19. D

9. B

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.4

LO 2, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.2

20. A

10. D

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.4

LO 2, BT: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.2

Solutions Manual

Chapter 16 – Cybersecurity

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Student answers will vary but should focus on how the CEO paid the ransom because he was uncertain how large the impact of the damages was at the time and the oil pipeline was an essential infrastructure to the entire eastern United States. Paying the ransom may encourage future criminals to perform ransomware attacks, as the probability of success seems more likely after seeing Colonial Pipeline pay.

LO 1, BT: Application, Difficulty: Medium, TOT: 15 min., AACSB: Communication, AICPA AC: Research, Section: 16.1

DQ2. Student answers will vary but should include a direct connection between the job posting they select and their accounting education.

LO 1, BT: Application, Difficulty: Medium, TOT: 20 min., AACSB: Communication, AICPA AC: Research, Section: 16.1

DQ3. Reconnaissance attacks find vulnerabilities in the network. Access attacks use those vulnerabilities to access the network and its content. Once inside the network, disruptive attacks are used to cause damage.

LO 2, BT: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 16.2

DQ4. Ping sweeps look for active hosts by communicating with IP addresses to test for responses. Port scans look for the types of communication occurring on the network by targeting ports that are active.

LO 2, BT: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 16.2

DQ5. IP spoofing can be used to disguise the identity of the attacker or to direct response transmissions to the victim’s IP address. If used to direct responses to the victim, IP spoofing can be used along with denial-of-service attacks to take down the victim’s server. The recipient will respond to the victim’s IP address located in the source address of the attacker’s packet and overload the victim’s server with requests or data.

LO 3, BT: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 16.3

DQ6. (1) Jose just provided Molly with the opportunity of polite tailgating. She may not even be an employee at Zanathru. (2) He circumvented the authorization internal control of scanning a badge to activate the elevator keypad. (3) Student answers may vary. For example, using turnstiles outside the elevator that allow only one person to pass through per badge scan would prevent polite tailgating.

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.3

DQ7. Logic bombs remain dormant on a system until a trigger activates the bomb, which can be a point in time or a system activity. They are difficult to prevent and detect until after they are activated.

Business continuity planning is an essential control for addressing the risk of logic bombs, which is a corrective control.

LO 4, BT: Knowledge, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.4

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Chapter 16 – Cybersecurity

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SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.1. No 2. Yes 3. Yes 4. No 5. No 6. Yes LO 1, BT: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.1

A2.1. fear, urgency 2. helpfulness 3. curiosity, fear 4. fear, urgency LO 2, BT: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.2

A3.The sender’s email address is @wellfargo.com, not @wellsfargo.com.

LO 2, BT: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.2

A4.Student answers will vary. An example of a password that will take more than 100 years to crack is Ratsspelledbackwardsisstar1!

LO 3, BT: Knowledge, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 16.3

A5.A distributed denial-of-service attack. The increased number of logins attempted and employees’ inability to login on September 24 indicates the system may have been being overloaded with fake login requests, which denied authorized users access to the system.

LO 4, BT: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Measurement Analysis and Interpretation, Section: 16.4

A6.1. Ransomware 2. Denial-of-service 3. Logic bomb LO 1-4, BT: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Risk Assessment, Analysis and Management, Section: 16.1–16.4

A7.1. Awareness and Training 2. Security Assessment and Authorization 3. Systems and Communications Protection 4. Physical and Environmental Protection 5. System and Communications Protection 6. System and Information Integrity 7. Risk Assessment 8. Identification and Authentication LO 1-4, BT: Analysis, Difficulty: Medium, TOT: 12 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 16.1–16.4

A8.1. on-path attack 2. brute-force attack 3. virus Solutions Manual

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4. phishing 5. eavesdropping LO 2-4, BT: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Systems and Process Management, Section: 16.2–16.4

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Chapter 17

CHAPTER 17 Data Analytics Learning Objectives: 1. Identify career opportunities for accounting professionals working with data.

2. Describe data analytics techniques that can explore data.

3. Evaluate data analytics techniques that explain changes over time.

4. Summarize advanced data analytics techniques that transform data into insights.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. B

9. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.3

2. C

10. D

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.3

3. C

11. B

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.3

4. D

12. A

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.1

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.3

5. B

13. C

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.4

6. D

14. A

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.4

7. B

15. B

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.4

8. D

16. A

LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.2

LO 3-4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.3-17.4

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ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. The main types of analysts are data engineers, data scientists, data analysts, business analysts or business intelligence analysts, and statisticians. They have numerous similarities in their expert understanding, such as data scientists and statisticians both needing an understanding of data and statistics. One of the main differences is the way they interact with data. For example, data engineers focus on the infrastructure and architecture so data can grow while data analysts are collecting and analyzing that data. Each analyst plays a critical role in helping a business understand the data they possess and how to use it to make decisions.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.1

DQ2. The four main platforms are (1) PwC’s Data Sieve, (2) KPMG’s Sofy Suite, (3) E&Y’s Helix, and (4) Deloitte’s Visual Decision Xccelerator (VDX). Data Sieve utilizes machine learning and natural language processing technologies to convert unstructured, semi-structured, and structured data into usable information. Sofy is cloud-based analytics that performs tax analytics, compliance, and transfer pricing that provides clients with in-depth, real-time insights around tax. Helix is an audit analytics platform that allows audit departments to use this tool on their general ledger, inventory data, trade payables.

VDX is a touch screen decision analysis tool that gives the client drill-down capabilities to be able to pinpoint any inefficiencies.

LO 1, Blooms: Comprehension, Difficulty: Easy, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.1

DQ3. If you have prepared your taxes using TurboTax, you know that the software asks you a series of questions and then tells you what to do based on your responses. TurboTax uses prescriptive analytics to tell you what to do. For example, if you say “Yes” to having dependents, then the software leads you to input data about each dependent and verifies whether each one qualifies as a dependent for tax purposes. It tells you whether or not you should take the standard deduction for a maximum refund or choose the itemized deduction approach and which schedules to complete. It uses machine learning to identify and recommend deductions. It tells you your total income tax obligation and how much you still owe or what your refund is.

Through machine learning and artificial intelligence, TurboTax learns from its millions of customers what the patterns and challenges are in taxes. The reference below provides this example to illustrate the use of prescriptive analytics and machine learning: “For example, if you are a florist, we could look at every other florist who has filed with TurboTax, evaluate the deductions used by these virtual peers, and then recommend appropriate approaches for your taxes. You could just say yes or no verbally to these suggestions, and then we could get it done.” https://medium.com/hivedata/using-ai-to-power-prosperity-during-tax-season-4cfa1d070f25 LO 1, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Research, Section: 17.1

DQ4. Anomaly detection, also known as outlier analysis, is used to help identify items, events, or observations that differ significantly from expectations or the majority of the data. Auditors are always interested in significant outliers as they may indicate fraud, internal control deficiencies, or misrepresentation in financial statements. An example from the Association of Certified Fraud examiners is the use of Benford’s Law, which relies on a predictable pattern for the distribution of Solutions Manual

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natural numbers. Auditors often use Benford’s Law to test payment amounts. For example, according to Benford’s Law, there is a 4.6% chance that a payment amount will have a 9 as its first digit. You find that 40% of the payments start with the number 9, and this will require further investigation. For example, purchase orders could be split up to circumvent approval limits. https://www.acfeinsights.com/acfe-insights/what-is-benfords-law LO 2, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Research, Section: 17.2

DQ5. The technique used in the process is called data summarization. Data summarization is critical because to make sense of data, it must be transformed into information. The transformation of data into information is part of the information value chain. Organizations use the information to help drive the creation of knowledge, and that knowledge is used to make decisions. Data summarization is a descriptive analytics technique that is used as a springboard for more advanced analytics. It simplifies the data by summarizing it into groups. Example: A trial balance summarizes and organizes data by account.

LO 2, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Research, Section: 17.2

DQ6. Linear regression identifies relationships, while forecasting predicts future occurrences.

However, forecasting can use a variety of statistical models, including regression.

LO 3, Blooms: Comprehension, Difficulty: Easy, TOT: 5 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.3

DQ7. Student responses will vary. An example is a manufacturing company experiencing unpredicted volatility in the supply of computer chips required to manufacture its products. Data analysts create a forecasting model to predict the supply of this part and its global price over the next 12 months. The objective is to improve production decision making.

LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Research, Section: 17.3

DQ8. The best way to determine a relationship between data is by using linear regression analysis.

Regression analysis predicts how one or more independent variables will impact a dependent variable and the relationship between them. It is important to note that regression analysis does not determine cause and effect but simply that a relationship may exist between the variables. Example: Auditors may use a regression model to estimate a reserve for loan losses to comply with FASB Standards Update 2016-13.

Source: https://www2.deloitte.com/us/en/pages/regulatory/articles/asu-2016-13-ceclreporting-proposal.html LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 15 min., AACSB: Analytic, AICPA AC: Research, Section: 17.3

DQ9. Student responses will vary. An example provided in The CPA Journal referenced below explains how network analysis can be used to detect collusive fraud. Collusion happens when people work together, making controls ineffective. The article provides three cases of fraud that could have been detected using network analysis. One of these cases involves revenue fraud schemes perpetrated at NutraCea, a manufacturer of health food products. The participants were the CEO, who intended to meet sales forecasts at any cost, the controller, the CFO, the director of financial services, a senior vice president, and a former COO.

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In one of the revenue fraud schemes, the CEO recorded fictitious sales of $2.6 million by conspiring with a customer, Bi-Coastal Pharmaceutical Corporation. The sale was financed through a $1 million loan from the former COO to Bi-Coastal, and the payment was made to NutraCea. The collusive scheme also resulted in Bi-Coastal’s president falsifying its financial statements to conceal the fraud. The article provides a network analysis illustration showing appropriate relationships, cautionary/suspicious relationships, and abnormal relationships. The auditors may have detected this fraud earlier by combining other red flag incidents and a poor control environment with network analysis. Network analysis provides red flags for potential fraud that auditors should investigate.

Source: Waddell, C. (2016, March). Using Network Analysis to Detect Collusive Fraud. The CPA Journal. https://www.cpajournal.com/2016/03/16/using-network-analysis-detect-collusive-fraud/ LO 4, Blooms: Analysis, Difficulty: Medium, TOT: 20 min., AACSB: Analytic, AICPA AC-Risk Assessment, Analysis and Management, Section: 17.4

DQ10. Example: Process-mining analytics reveal what did happen in a systems-based business process by using event log data to show what individuals, systems, and machines are doing in a visual format.

In other words, it visualizes event data and makes it easier to identify deviations in an expected process path.

Using descriptive analytics, we can analyze when we are processing payments to our suppliers. If we pay too soon, we are inefficient in managing working capital. If we take too long to pay, we may incur interest expenses or lose out on discounts. We can use the results of our descriptive analysis to dig into the data and determine reasons for paying too early or too late. For example, where are the bottlenecks occurring in the process? Why do we have outliers that differ significantly from expectations?

LO 1, 4, Blooms: Application, Difficulty: Medium, TOT: 20 min., AACSB: Reflective Thinking, AICPA AC: Risk Assessment, Analysis and Management, Section: 17.1, 17.4

DQ11. Examples: Descriptive: Use the data classification technique for age analysis of accounts receivable.

Diagnostic: Use variance analysis to show the difference between expected and actual costs of a product.

Predictive: Use regression analysis to determine standard costs for products or to predict employee turnover.

Prescriptive: Use machine learning to evaluate a new lease and assign it to the appropriate classification as a financing lease or operating lease to comply with GAAP. LO 1-4, Blooms: Synthesis, Difficulty: Hard, TOT: 30 min., AACSB: Reflective Thinking, AICPA AC: Risk Assessment, Analysis and Management, Section: 17.1–17.4

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS

A1.1. Statistician 2. Data scientist 3. Data engineer 4. Business intelligence analyst Solutions Manual

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5. Data analyst LO 1, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 17.1

A2.1. Monte Carlo simulation: Reinforcement learning 2. Clustering: Unsupervised learning 3. Forecasting: Either supervised or unsupervised learning 4. Process mining: Either supervised or unsupervised learning 5. Regression: Supervised learning 6. Network analysis: Either supervised or unsupervised learning 7. Classification: Supervised learning 8. Data summarization: None 9. Natural language processing (NLP): Either supervised or unsupervised learning 10. Geospatial analytics: Either supervised or unsupervised learning LO 1, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology and Tools, Section: 17.1

A3.1. Data summarization. The data is summarized by department and year to create the visualization.

2. The data is averaged on the turnover rate field during data summarization. The data in the sample average to the 16% of the bar chart in the visualization.

LO 2, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 17.2

A4.1. Data summarization. This data set was summarized by Customer_ID, and the SalesInvoice_Amount was summed to reach the total amount per customer.

2. Customer C_0013 has a substantially higher total amount than the average customer total, which is $16,172. An anomaly detection technique would likely identify this as an outlier.

LO 2, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 17.2

A5.1. Clustering 2. Unsupervised 3. Yes. The two yellow triangles are anomalies compared to the rest of the data.

4. Yes. These unusual journal entries were posted between 2:00 a.m. and 4:00 a.m. and are for large dollar amounts. The external audit team should investigate.

LO 2, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 17.2

A6.1. Hurricane activity is the independent variable.

2. Corporate revenue is the dependent variable.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA BB: Critical Thinking, AICPA AC: Technology and Tools, AICPA AC: Risk Assessment, Analysis and Management, AICPA FN: Risk Analysis, Section: 17.3

A7.One trade did not undergo pre-trade compliance review, and it went straight from being created to being placed. Another trade did not undergo a post-trade compliance review, and it went straight from order filled to accounting. Bypassing regulatory compliance reviews exposes the business to insider trading and other fraud risks.

LO 4, Blooms: Analysis, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 17.4

A8.

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1. Linear regression 2. Forecasting 3. NLP/sentiment analysis 4. Network analysis 5. Clustering, which is unsupervised 6. Monte Carlo simulation LO 2–4, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 17.2–17.4

A9.

1. Monte Carlo simulation 2. Forecasting 3. Monte Carlo simulation 4. Clustering 5. Network analysis 6. Process mining LO 2–4, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 17.2–17.4

A10. 1. Clustering 2. Regression 3. Classification 4. Anomaly detection 5. Sentiment analysis LO 2–4, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Technology and Tools, Section: 17.2–17.4

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CHAPTER 18 Data Visualization Learning Objectives: 1. Summarize the importance of user-centric design and storytelling in data visualization.

2. Apply fundamental design principles to data visualizations.

3. Evaluate visualization techniques for exploratory analysis.

4. Describe visualization techniques that are used to create explanatory stories.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. B

9. D

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA BC: Strategic Perspective, Section: 18.1

LO 3, Blooms: Application, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA AC: Reporting, Section: 18.3

2. D

10. B

LO 1, Blooms: Application, Difficulty: Easy, TOT: 1 min., AACSB: Analytic, AICPA PC: Project Management, Section: 18.1

LO 3, Blooms: Application, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA AC: Reporting, Section: 18.3

3. A

11. D

LO 1, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA BC: Project Management, Section: 18.1

LO 3, Blooms: Application, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA AC: Reporting, Section: 18.3

4. C

12. C

LO 1, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA PC: Project Management, Section: 18.1

LO 3, Blooms: Application, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA AC: Reporting, Section: 18.3

5. A

13. C

LO 2, Blooms: Application, Difficulty: Medium, TOT: 1 min., AACSB: Analytic, AICPA PC: Communication, Section: 18.2

LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA BC: Strategic Perspective A, Section: 18.4

6. C

14. D

LO 2, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA PC: Project Management, Section: 18.2

LO 4, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA PC: Project Management, Section: 18.4

7. A

15. A

LO 2, Blooms: Comprehension, Difficulty: Medium, TOT: 1 min., AACSB: Communication, AICPA PC: Project Management, Section: 18.2

LO 1, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA PC: Project Management, Section: 18.4

8. C LO 2, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA PC: Communication, Section: 18.2

ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Data visualization is the presentation of data in a graphical format for analysis and communication. This is where data comes to life, as data is turned into information, and the information is turned into a visualization, which is used to tell the story. Data visualization is important in a business Solutions Manual

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setting because it allows the reader to see trends and patterns more easily, as compared to analyzing numbers in a table. Data visualization helps reduce our cognitive load, so it helps people to quickly take in more information.

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 2 min., AACSB: Knowledge, AICPA BC: Strategic Perspective A, Section: 18.1

DQ2. The audit committee is an audience that needs to see very high-level information, similar to a CEO. They do not need decision-making level of detail. The type of information they should see about diversity and inclusion should be company-wide: • • • • •

Total employee headcount Overall employee distribution by gender and ethnicity Pay distribution by gender and ethnicity Turnover rated by gender and ethnicity Role distribution by gender and ethnicity (upper management, middle management, staff)

LO 1, Blooms: Synthesis, Difficulty: Medium, TOT: 5 min., AACSB: Communication, AICPA PC: Communication, Section: 18.1

DQ3. Student answers may vary based on interpretation but should reflect an understanding of the impact of colors, fonts, and icons. Examples: Blue: Julia’s Cookies sends the message of being a loyal company that one can trust.

Yellow: Julia’s Cookies sends a message of being a fun and happy company. This color grabs the reader’s attention. Julia’s Cookies wants the word “cookies” to stand out because it is the product that they sell.

Typography: The font chosen for “Julia’s” is a professional, formal style, while the font chosen for “Cookies” is more playful and eye-catching. This targets a larger market audience.

Iconography: The icons of cookies reinforce to the customer that the company sells cookies and also sends a message to someone who does not speak English that the company sells cookies; this is an icon a non-English-speaker would understand.

LO 2, Blooms: Application, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Measurement Analysis and Competition, Section: 18.2

DQ4. Color psychology is the study of color and human behavior related to the color. Color can also influence human perception of the quality of the product or service, or the emotion that color can provoke, as each color has positive and negative traits associated with it.

Examples: Red: Red is one of the primary colors and is most associated with energy and passion. Coca-Cola uses a red logo that embodies energy, excitement, passion, and family.

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Orange: Orange is a blend of red and yellow and is associated with joy and creativity. In business, orange evokes emotions of fun and adventure, such as the Nickelodeon logo.

Yellow: Yellow is used to highlight important information as it is bright and draws an audience’s attention.

LO 2, Blooms: Application, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Measurement Analysis and Competition, Section: 18.2

DQ5. White space provides a visual pause for the audience to absorb the message provided by a visualization. White space lowers an audience member’s cognitive load, creates easy-to-consume graphics, and improves the visual communication experience. It can improve comprehension, focus attention, increase interaction, create balance, and separate thoughts for the audience.

LO 2, Blooms: Application, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Measurement Analysis and Competition, Section: 18.2

DQ6. Student answers will vary depending on which companies they select and the availability of the latest quarterly results. An example of a student answer is the presentation of quarterly results for Amazon, found at https://ir.aboutamazon.com/quarterly-results/default.aspx, in which vertical bar charts are the most commonly used.

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LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Measurement Analysis and Interpretation, Section: 18.3

DQ7. Student answers will vary. A visualization can be misleading to the reader in many ways.

Examples of answers include: • • •

A bar chart can be misleading if the Y-axis (vertical axis) does not start at a zero baseline.

A line chart could be misleading if the dates are not in chronological order or if dates are missing.

A heatmap could be misleading if the color shades don’t reflect the quantitative values.

LO 3, Blooms: Knowledge, Difficulty: Easy, TOT: 2 min., AACSB: Knowledge, AICPA BC: Strategic Perspective A, Section: 18.3

DQ8. Results will vary by student, depending on their selection of charts and graphs. An example answer is the following figure, which is a heat map. This is a useful exploratory analysis as it shows the composition of risk within the data set. It’s easy to see which areas have a higher risk using the color legend of the heat map.

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LO 3, Blooms: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Measurement Analysis and Interpretation, Section: 18.3

DQ9. Student answers will vary. Some data points might include: • • • • • • •

Types of industries that the firm specializes in (insurance, banking, government, non-profit) Percentage of staff that are retained Number of years, on average, toward promotion Office locations of the firm Number of new staff that the firm will hire Average hourly salary of a staff member Types of services that the firm provides (tax, auditing, consulting)

LO 4, Blooms: Synthesis. Difficulty: Medium, TOT. 10 min, AACSB: Analytic, AICPA AC: Measurement Analysis and Interpretation, Section 18.4

DQ10. Overall, the software training had a positive impact on the employee feelings. Around 70% of employees who rated their emotions towards the new software as “not great” now have a more positive emotion towards it. There was also an increase of 21 employees who rated their feelings toward the new accounting software as “excited.”

LO 4, Blooms: Synthesis. Difficulty: Medium, TOT. 10 min, AACSB: Analytic, AICPA AC: Measurement Analysis and Interpretation, Section 18.4

DQ11. Answers will vary based on student selections. The following are examples of what the student submissions should include: Solutions Manual

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Example A:

This misleading visualization came from a major news outlet. The title of the visualization states it represents job loss by quarter, but the X-axis (horizontal axis) does not represent quarters. The X-axis consists of random months and years and the time periods are not consistent. Additionally, there is no Y-axis (vertical axis) label.

Example B:

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This example is an infographic visualization of the assets owned by the Walt Disney Company. In addition to being too busy, the use of colors is confusing. The amount of data presented in this infographic distracts from the story the visualization is trying to tell.

Example C: This example comes from a Google search for “pie chart.” There are too many slices for clarity and the colored legend is not in the same order as the clockwise colors of the pie chart, making it difficult to connect the legend to the pie chart.

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LO 1-4, Blooms: Synthesis. Difficulty: Medium, TOT. 10 min, AACSB: Analytic, AICPA: AC, Measurement Analysis and Interpretation, Section 18.4

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.Visualization A evokes positive emotions by the use of green for the budget line as that is the line that you want to stay under as much as possible. Visualization B evokes a negative emotion with the use of red, as that is a very hash color to use if the overall company was under budget, which is a positive message. The chart that should be used should be Visualization A, as staying under budget would be a positive message reinforced with the green color.

LO 1–2, Blooms: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: Strategic Perspective, Section: 18.1, 18.2

A2.Student answers may vary, but some examples of issues with this dashboard and related solutions include: • Busy presentation. Minimizing the number of visualization techniques utilized in a single dashboard.

• Lack of story. Ensuring each visualization technique relates to one another in a clear manner.

• Poor color theory. Colors are not associated with the information being presented.

LO 1–2, Blooms: Evaluation: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Measurement Analysis and Interpretation, Section: 18.1, 18.2

A3.Map B. This map creates a clear contrast of states that were profitable and ones that were not. Also, using a more saturated color of orange for the non-profitable states makes those states stand out and conveys an emotion of being bad.

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LO 1–3, Blooms: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA BC: Strategic Perspective, Section: 18.1–18.3

A4. (1) A. Vertical bar chart; B. Pie chart; C. Line chart; D. Tree map; E. Heat map (2) D. Line chart. The best chart to visualize the trend would be the line chart as a line chart is one to use when there is a time attribute in the data. The reader can quickly see the differences in the sales of cones during the warmer months of June through September.

LO 3, Blooms: Evaluation: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Measurement Analysis and Interpretation, Section: 18.3

A5.(1) Visualization A is a vertical bar chart, and Visualization B is a line chart.

(2) Visualization B, the line chart, is the better selection.

(3) Visualization B illustrates the story of time series data better than a bar chart. Line charts are ideal for relationship analysis, including changes over time. Bar charts are best for comparison and composition analysis.

Students may also comment on Visualization B including an accounting line by using color to indicate important information and gray to visually mute other departments. Visualization B also includes a simple summary with a reasoning and explanation, making the visualization a useful storyboard.

LO 3, Blooms: Evaluation: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Measurement Analysis and Interpretation, Section: 18.3

A6.A, D, F, and G These four points work together to explain the types of compliance violations throughout the organization, which is the purpose of the visualization for executive leadership on compliance.

LO 4, Blooms: Evaluation: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Measurement Analysis and Interpretation, Section: 18.4

A7.

1. Explanatory 2. Exploratory 3. Explanatory 4. Exploratory 5. Explanatory 6. Exploratory 7. Exploratory 8. Exploratory LO 1–4, Blooms: Knowledge, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA BC: Strategic Perspective A, Section: 18.1–18.4

A8.1. The executive management team should be given Dashboard C because it is a high-level overview that shows what they care about most, instead of detailed information.

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2. Department managers should be provided Dashboard A because it is a mid-level view they can use for regular performance reviews of their departments.

3. Staff accountants will find Dashboard B the most useful because it has very detailed information relevant to accounting professionals.

LO 1–4, Blooms: Evaluation: Medium, TOT: 10 min., AACSB: Reflective Thinking, AICPA AC: Measurement Analysis and Interpretation, Section: 18.1–18.4

A9.1. Visualization B, vertical bar chart 2. Visualization C, heat map 3. Visualization A, line chart LO 1–4, Blooms: Synthesis, Difficulty: Medium, TOT. 10 min, AACSB: Analytic, AICPA AC: Measurement Analysis and Interpretation, Section 18.1-–18.4

A10.

Scenario

Data Fields Needed

Visualization Technique Geospatial

1. In which state were the most items sold in the past year?

location_state num_Of_items transaction_date

2. Which day did Zolo make the most money from orders?

transaction_date order_amt

Line chart

3. What time of day should Zolo increase the number of in store associates due to increased transactions?

4. How much money, on average, does a rewards member spend at our stores compared to a nonrewards member?

5. What are the highest, lowest, and median order amounts in this data set?

transaction_ID transaction_hour

Line chart

order_amt rewards_member

Bar chart

order_amt

Box plot

LO 3– 4, Blooms: Knowledge, Difficulty: Easy, TOT: 15 min., AACSB: Knowledge, AICPA BC: Strategic Perspective A, Section 18.3, 18.4

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CHAPTER 19 Audit Assurance Learning Objectives: 1. Compare and contrast internal and external audit functions.

2. Describe the stages of an internal audit.

3. Summarize the internal audit testing process.

4. Summarize the outcome of control testing.

ANSWERS TO MULTIPLE CHOICE QUESTIONS 1. C

7. B

LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA BC: Governance Perspective, Section: 19.1

LO 3, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis and Management, Section: 19.3

2. C LO 1, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge A, AICPA AC: Reporting, Section: 19.1

3. A LO 1, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge A, AICPA AC: Systems and Process Management, Section: 19.1

4. C LO 2, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge A, AICPA AC: Systems and Process Management A, Section: 19.2

5. C LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Reporting A, Section: 19.2

6. D LO 2, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Reporting, Section: 19.3

8. C LO 3, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Section: 19.3

9. B LO 3, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Application, AICPA AC: Reporting, Section: 19.3

10. D LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Reporting, Section: 19.4

11. B LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Analysis, AICPA BC: Governance Perspective, Section: 19.4

12. A LO 4, Blooms: Knowledge, Difficulty: Easy, TOT: 1 min., AACSB: Knowledge, AICPA AC: Reporting, Section: 19.4

ANSWERS TO DISCUSSION AND RESEARCH QUESTIONS DQ1. Answers will vary based on the student’s perspective about whether the original conviction was an overreach or an adequate move to protect the public.

LO 1, Blooms: Evaluation, Difficulty: Medium, TOT: 10 min., AACSB: Ethics, AICPA PC: Ethical Conduct A, Section: 19.1

DQ2. If external auditors do not validate the work they rely on from the internal audit department, they may not have an accurate view of the company’s financial statements. Internal audit could manipulate testing to provide inaccurate results to external audit to cover for the company’s financial Solutions Manual

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misstatements. For this reason, external audit can only rely on work of the internal audit department if they adequately verify the accuracy and reliability of the internal auditors’ work.

LO 1, Blooms: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Reflective Thinking, AICPA PC: Collaboration, Section: 19.1

DQ3. Some benefits of including interns and staff auditors in the audit planning stage are: a. Interns and staff auditors are in the unique position to provide fresh eyes to the company. b. The more involved new hires are in the audit planning stage, the faster they will ramp up on the company’s risk environment and audit processes. c. Investing in new hires can create a sense of value for interns and staff auditors which can increase their likelihood of staying at the company for a longer period.

LO 2, Blooms: Application, Difficulty: Medium, TOT: 5 min., AACSB: Reflective Thinking, AICPA PC: Decision Making, Section: 19.2

DQ4. Receiving a list of requests without introduction or context may feel more like receiving a list of demands. The natural reaction would be to feel defensive or offended. An audit kickoff meeting is the first step in building a relationship between the internal auditors and the auditee. Keeping the auditee involved in the audit process from the very beginning, and making their voice feel valued by the internal auditors, sets a positive tone for the engagement. Auditees are more like to be proactive about remediating audit findings when they are invested in the process.

LO 2, Blooms: Analysis, Difficulty: /Medium, TOT: 5 min., AACSB: Communication, AICPA PC: Communication, Section: 19.2

DQ5. Tests of controls focus on whether a control is well designed and operating effectively. Tests of controls do not identify misstatements or errors in the underlying data. They identify whether there is an opportunity for misstatements or errors to occur based on whether the control is designed correctly and operating effectively.

Substantive procedure checks the underlying data for misstatements or errors. These procedures don’t assess the internal control environment. The presence of misstatements or errors may indicate a fault in the internal controls, but do not target identifying those faults.

Using both approaches provides assurance that (1) there are controls in place to mitigate risks that are functioning properly, and (2) there are no misstatements in the business’ data. Without both perspectives, the audit may overlook significant risks to the company and provide inaccurate audit findings. Just because a control exists and is operating doesn’t mean the underlying data is accurate – collusion and management override may result in misstatements the auditors need to detect.

LO 3, Blooms: Knowledge, Difficulty: Medium TOT: 10 min., AACSB: Knowledge, AICPA AC: Measurement Analysis and Interpretation, Section: 19.3

DQ6. The first step of testing a business process is to learn about it. Until the internal auditors understand what a business function does—and how—they are unable to plan their tests. Auditors must understand the purpose of the business function and see firsthand how they perform their job to identify existing controls, or the lack thereof.

LO 3, Blooms: Application, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Research, Section: 19.3

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DQ7. The better the relationship between the audit team and the business, the more likely it is that the business will (1) be honest with the audit team and (2) be motivated to implement audit recommendations.

LO 4, Blooms: Application, Difficulty: Medium, TOT: 5 min., AACSB: Communication, AICPA PC: Communication, Section: 19.4

SOLUTIONS TO APPLICATION AND ANALYSIS QUESTIONS A1.4. Opinion is the most impacted section of the audit filing. Students’ reasons will vary but should include an explanation that audit testing determines whether the audit team believes the client’s financial statements are fairly presented in all material aspects.

LO 1, Blooms: Analysis, Difficulty: Medium, TOT: 5 min., AACSB: Analytic, AICPA AC: Reporting, Section: 19.1

A2.The manager should contact the company’s internal audit department.

LO 1, Blooms: Knowledge, Difficulty: Medium, TOT: 1 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis and Management, Section: 19.1

A3.

Audit Stage Planning Fieldwork Wrap-up Reporting Follow-up

Deliverable 3 5 2 1 4

Business Involvement D E A B C

LO 2, Blooms: Knowledge, Difficulty: Medium, TOT: 10 min., AACSB: Knowledge, AICPA AC: Reporting, Section: 19.2

A4.1. Text to Columns 2. LEFT 3. CONCAT LO 3, Blooms: Application, Difficulty: Medium, TOT: 10 min., AACSB: Technology, AICPA AC: Technology, Section: 19.3

A5.1. Human resources audit: Yes. This is an opportunity for continuous auditing because the audit is performed every year, the audit testing is data heavy, and fraud testing is a high priority to the company.

2. Change management audit: Yes. This is an opportunity for continuous auditing because it is a high priority for the audit committee and management. It also is data focused testing, and internal audit already has access to the data.

3. Fraudulent claims: Yes. This is an opportunity for continuous auditing because it is a new priority with anticipated ongoing requests from the audit committee. Internal audit already has access to the system and can establish continuous audits that provide key metrics and results for the leader of the internal audit department to report regularly at quarterly audit committee meetings.

4. Accounts payable post system implementation audit: No. This is a one-time ask that is focused on providing a review of the design and operating effectiveness of internal controls related to a recently Solutions Manual

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implemented system. This review focuses on providing the accounts payable department with useful feedback on ways to improve their new system. There is no reason to make this a continuous audit process.

5. User access SOX audit: Yes. This is an opportunity for continuous monitoring because it will alleviate internal auditors devoting excessive time to manual efforts that can be completed more efficiently via automation and data analytics. This will free up auditors to perform more value focused tasks such as strategically focused audit projects. SOX audits are always a great prospect for continuous auditing due to their task focused and repetitive nature.

LO 3, Blooms: Analysis, Difficulty: Hard, TOT: 15 min., AACSB: Analytic, AICPA AC: Risk Assessment, Analysis and Management, Section: 19.3

A6.1. This is a test of controls—specifically application controls in the system.

2. This is a substantive procedure.

3. This is a test of controls—specifically application controls in the system.

4. This is a test of controls—specifically a manual control.

5. This is a substantive procedure.

6. This is a substantive procedure.

LO 3, Blooms: Knowledge, Difficulty: Medium/Hard, TOT: 5 min., AACSB: Knowledge, AICPA AC: Measurement Analysis and Interpretation, Section: 19.3

A7.1. Expenses: Continuous monitoring 2. Call wait times: Continuous monitoring 3. Cybersecurity: Continuous auditing 4. Physical security: Continuous auditing LO 4, Blooms: Knowledge, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA AC: Risk Assessment, Analysis and Management, Section: 19.4

A8.Any four of the following • • • • • • •

The warehouse being audited The timing of the audit The date range in scope The audit team members The key players (auditee) The risks and business processes The controls being tested

LO 2, Blooms: Application, Difficulty: Medium, TOT: 5 min., AACSB: Knowledge, AICPA PC: Project Management, Section: 19.2

A9.Walkthroughs of the system and building – test of controls; inquiry Reperformance of inventory counts – test of controls; reperformance LO 3, Blooms: Knowledge, Difficulty: /Medium, TOT: 5 min., AACSB: Knowledge, AICPA AC: Measurement Analysis and Interpretation, Section: 19.3

A10. Follow-up focuses on the business’ response to the audit findings—the remediation. Internal auditors will follow-up on the three bullet points in the remediation plan: •

Delegate responsibility for weekly inventory counts on a rotational basis where no single employee performs weekly inventory counts more than two times per month.

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Require management approval for all changes to inventory levels within the inventory management system.

Require management to review and approve each of the six weekly inventory count documents separately.

LO 4, Blooms: Synthesis, Difficulty: /Hard, TOT: 5 min., AACSB: Analytic, AICPA AC: Measurement Analysis and Interpretation, Section: 19.4

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