TRANSACTION PROCESSING

1. What three transaction cycles exist in all businesses?

The three transactions cycles that exist in all types of business are the following: (1) the
expenditure cycle, (2) the conversion cycle, and (3) the revenue cycle. These cycles affect the
majority of the firm’s economy.

2. Name the major subsystems of the expenditure cycle.

The Expenditure cycle has four major subsystems namely; (1) purchasing/accounts payable
system, (2) cash disbursements system, (3) payroll systems, and (4) fixed assets system.

3. Identify and distinguish between the physical and financial components of the expenditure
cycle.

The physical component of the expenditure cycle focuses on the acquisition of the goods or
services while financial component on the other hand is the event of paying or the cash
disbursement to the supplier.

4. Name the major subsystems of the conversion cycle.

Conversion cycle has two major subsystems namely; (1) production system (planning,
scheduling, and control of the physical product throughout the manufacturing process and
control) and (2) cost accounting system.

5. Name the major subsystems of the revenue cycle.

Revenue cycle has two major subsystems namely; (1) sales order processing system also
known as the physical component and (2) cash receipts system also known as financial
component.

6. Name the three types of documents.

The three types of documents are: (1) source documents, (2) product documents, and (3)
turnaround documents.

Source documents are used to capture and formalize transaction data that the transaction
cycles use for processing. Product documents are the result of transaction processing rather
than the triggering mechanism for the process. Turnaround documents are product documents
of one system that become source documents for another system.

7. Name the two types of journals.

Two types of journals are (1) special journals and (2) general journals. Special journals are
used to record specific classes of transactions that occur on high volume. General journals are
used to record nonrecurring, infrequent, and dissimilar transactions.

8. Distinguish between a general journal and journal vouchers.

A general journal is used to record nonrecurring, infrequent, and dissimilar transactions.
Oftentimes, general journals ae replaced with a journal voucher, which is written
authorizations prepared for every transactions that meet general journal requirements.

9. Name the two types of ledgers.

The two types of ledgers are (1) general ledger and (2) subsidiary ledger. The general ledgers
summarize the activity for each of the organization’s financial accounts. Subsidiary ledgers
contain details that support a particular control account.

10. What is an audit trail?

An audit trail is of utmost importance in the conduct of a financial audit. It is used in tracing
account balances contained in the financial statements back to source documents and the
economic events that created them.

11. What is the purpose of a digital audit trail?

The digital audit trail, like the paper trail, enables us to trace transactions from the financial
statement balance to the actual transaction, allowing us to: (1) compare balances, (2) perform
reconciliations, (3) select and trace samples of entries, and (4) identify, pull, and verify
specific transactions.

12. Distinguish between entity-relationship diagrams, data flow diagrams, and system

flowcharts.

A database entity relationship diagram (ERD) depicts the relationships between entity sets.
An entity in this context is an object, a data component. An entity set is a group of entities
that are related in some way. These entities can be given attributes to define their properties.
A data flow diagram (DFD) shows how information flows through a process or system. It
uses defined symbols to depict data inputs, outputs, storage points, and the routes between
each destination. They can be used to model an existing system or to analyze an existing one.
Finally, system flowcharts demonstrate how data flows through a system and decisions are
made to control events. This is demonstrated using symbols. System flowcharts are very
similar to data flow charts.

13. Distinguish between batch and real-time processing.

The concept of real-time data integration is to process information as soon as it is obtained.

Batch data-based integration, on the other hand, entails storing all data received until a certain
amount is collected and then processing it as a batch.

14. Why might an auditor use a program flowchart?

Flowcharts help auditors because they are a great tool for visualizing a company's intricate
systems, making them easier to use and taking up less time than lengthy, complex narratives.

15. How are system flowcharts and program flow charts related?
A type of flowchart that explains the operation of a complete system is a system flowchart. A
program flowchart, on the other hand, is a type of flowchart that illustrates how a certain
program resolves a specific task.

16. What is the purpose of the DBMS (Database Management System)?

Data is stored, retrieved, and analyzed using software called database management systems
(DBMS). Users can create, read, update, and remove data in databases using a DBMS, which
acts as an interface between them and the databases.

17. What are some of the more common uses of data codes in an accounting information
system?

Large amounts of complex information are condensed into data codes, making them
manageable. These codes also offer a way to be held accountable for the accuracy of the
transactions that are carried out. In addition, it is useful to locate distinctive transactions and
accounts in a file. Last but not least, it serves as a support for the audit function by offering a
strong audit trail.

18. What are role does the audit trail play in the task of confirmation?

Many different sorts of transactions are tracked and verified using audit trails. When an item's
accuracy needs to be checked, as it might during an audit, an audit trail is most frequently
used.

19. Distinguish flat-file model and database model.

Data is kept in a single table format using the flat file model. Data is kept in a multiple-table
structure using a database model. Database model offer greater flexibility, whereas flat files
offer less. Data consistency is provided by database systems; however it is not possible with
flat files.

20. What is task data dependency?

Task-data dependency is the user's inability to obtain additional information as needs

changes.

ETHICS, FRAUD, AND INTERNAL CNTROL

1. Distinguish between ethical issues and legal issues.

Legal issues are based on governmental law and punishable by law contrary to ethical issues
that are based on standards or moral values and are not punishable by law because it lacks
legal basis.

2. When a company has a strong internal control structure, stockholders can expect the
elimination of fraud. Comment on the soundness of this statement.

A strong internal control structure is an excellent deterrent to fraud. However, these barriers
are not impenetrable, especially when employees conspire and/or top management is
involved. A strong internal control structure combined with high employee morale and ethics
is the most effective deterrent to fraud.

3. Distinguish between employee fraud and management fraud.

Employee fraud is typically committed by non-management employees and is intended to

directly convert funds and other assets for the employee's personal gain. Weak internal
controls are usually present in cases of employee fraud. Management fraud, on the other
hand, is typically committed at a level higher than that to which internal controls generally
apply. These scams are typically hidden behind a web of transactions and are difficult to
unravel.

4. Discuss the Sarbanes-Oxley Act.

The Sarbanes-Oxley Act is the most important federal securities law, with provisions
addressing specific issues in capital markets, corporate governance, and the auditing
profession.

The Sarbanes-Oxley Act (SOX), enacted in 2002, was designed to prevent accounting
scandals. It attempted to prevent accounting fraud, boost public company financial reports'
credibility, and protect shareholders. It enacted new laws governing internal financial
reporting as well as new requirements for financial audits of publicly traded companies. One
of the most significant effects of the law was that it empowered boards over management.

5. If detective controls signal error flags, why shouldn’t these types of controls automatically
make a correction in the identified error? Why are corrective controls necessary?

As an automatic response, linking a corrective action to a detected error could arise in an

inaccurate action that causes an even worse problem than the original error. As a result, error
correction should be viewed as a separate control step that should be approached with
caution.

Corrective action is required. Internal controls are classified into three types: preventive,
detective, and corrective. Corrective controls are used to return the process to its pre-harmful
state.

6. Discuss the non-accounting services that external auditors are no longer permitted to
render to audit clients.

Auditing firms that are also hired to provide non-accounting services, such as actuarial
services, internal audit outsourcing services, and consulting, lack independence. They are, in
essence, auditing their own work. They are no longer allowed because auditors may not bring
to management's attention discovered problems that may have a negative impact on their
consulting fees.

7. Discuss whether a firm with fewer employees than there are incompatible tasks should rely
more heavily on general authority than specific authority.
Small businesses with fewer employees than incompatible tasks should place a greater
emphasis on specific authority. More management approvals of decisions and increased
supervision should be imposed to compensate for the lack of separation of duties.

8. According to SAS 78/COSO, the proper segregation of functions is an effective internal

control procedure. Please Discuss

Proper segregation of functions is an effective internal control procedure that organizations

should practice. If the cashier is the one who writes checks for disbursements and also the
one assigned to process the checks in the bank, no one would know if the cashier is writing
bigger amount than the actual or when the cashier is writing checks for “ghost suppliers”. On
the other hand, if the checks go directly to another person, then extra amounts or extra checks
will be then discovered.

9. Distinguish between exposure and risk.

Risk is essentially the possibility that an action or activity will result in a loss or an
undesirable outcome. The potential for damage to the company is referred to as exposure. In
layman's terms, risk is the likelihood that an event or situation will occur, resulting in a loss
or an undesirable outcome, whereas exposure is the extent to which the risk can have an
effect.

10. Explain the characteristics of management fraud.

It frequently goes undetected until irreparable damage or loss has occurred to the
organization. Management fraud does not usually involve the direct theft of assets.
Management fraud has three distinct characteristics: (1) the fraud is committed at levels of
management higher than those to which internal control structures are in place, (2) financial
statements are frequently used to create the illusion that an entity is healthier and more
prosperous than it is, and (3) if the fraud involves asset misappropriation, it is frequently
shrouded in a web of complex business transactions involving related third parties.

11. Why are the computer ethics issues of privacy, security, and property ownership of
interest to accountants?

Because of the nature of computer data files, unauthorized individuals can obtain information
without it being recognized as "missing" from its original location. Security is a concern
because its absence calls control into question from the standpoint of privacy. Furthermore, a
lack of security may allow unauthorized changes to data, distorting the information that is
reported. Property ownership raises concerns about the legitimacy of organizational software,
asset valuation, and revenue loss.

12. Explain why collusion between employees and management in the commission of a fraud
is difficult to both prevent and detect.

It is more difficult to detect collusion between employees and management because it is the
responsibility of management to detect and prevent fraud among their subordinates. It is also
difficult to prevent due to the possibility of management fraud.
13. Because all fraud involves some form of financial misstatement, how is fraudulent
statement fraud different?

Fraudulent statement fraud differs in that it involves financial misstatements in order to

present favorable financial statements, and the organization benefits rather than the company.

14. Explain the problems associated with lack of auditor independence.

In reality, auditors who lack independence jeopardize the integrity of financial markets and
the accuracy of information. Investors would be unwilling to lend money to a company if
they knew the audited data was performed by an untrustworthy auditor.

15. Why is an independent audit committee important to a company?

Independent audit committee is important to a company because the audit committee is in

charge of selecting and hiring an independent auditor, conducting an annual audit, reviewing
the audit report, and ensuring that deficiencies are addressed.

16. In this age of high technology and computer-based information systems, why are
accountants concerned about physical (human) controls?

Accountants are concerned about physical (human) controls because they connect the
physical controls to the human activities that initiate or use the outcomes of those tasks.
Every system requires actual human control every now and then.