Accounting Information Systems, 7e—Test Bank, Chapter 3
Chapter 3—Ethics, Fraud, and Internal Control
TRUE/FALSE
1. The ethical principle of justice asserts that the benefits of the decision should be distributed
fairly to those who share the risks.
2. The ethical principle of informed consent suggests that the decision should be implemented so
as to minimize all of the risks and to avoid any unnecessary risks.
3. Employees should be made aware of the firm’s commitment to ethics.
4. Business ethics is the analysis of the nature and social impact of computer technology, and the
corresponding formulation and justification of policies for the ethical use of such technology.
5. Para computer ethics is the exposure to stories and reports found in the popular media
regarding the good or bad ramifications of computer technology.
6. Computer programs are intellectual property.
7. Copyright laws and computer industry standards have been developed jointly and rarely
conflict.
8. Business bankruptcy cases always involve fraudulent behavior.
9. Defalcation is another word for financial fraud.
10. The trend toward distributed data processing increases the exposure to fraud from remote
locations.
11. The external auditor is responsible for establishing and maintaining the internal control
system.
12. Segregation of duties is an example of an internal control procedure.
13. Of the three fraud factors (situational pressure, ethics, and opportunity), situational pressure is
the factor that actually facilitates the act.
14. Preventive controls are passive techniques designed to reduce fraud.
15. Ethical issues and legal issues are essentially the same.
16. Internal control systems are recommended but not required of firms subject to the Sarbanes-
Oxley Act.
17. Collusion among employees in the commission of a fraud is difficult to prevent but easy to
detect.
18. The Sarbanes-Oxley Act requires only that a firm keep good records.
19. A key modifying assumption in internal control is that the internal control system is the
responsibility of management.
20. Database management fraud includes altering, updating, and deleting an organization’s data.
21. While the Sarbanes-Oxley Act prohibits auditors from providing non-accounting services to
their audit clients, they are not prohibited from performing such services for non-audit clients
or privately held companies.
22. The Sarbanes-Oxley Act requires the audit committee to hire and oversee the external
auditors.
23. Section 404 requires that corporate management (including the CEO) certify their
organization’s internal controls on a quarterly and annual basis.
24. Section 302 requires the management of public companies to assess and formally report on
the effectiveness of their organization’s internal controls.
25. The objective of SAS 99 is to seamlessly blend the auditor’s consideration of fraud into all
phases of the audit process.
26. The fraud triangle represents a geographic area in Southeast Asia where international fraud is
prevalent.
27. Situational pressure includes personal or job related stresses that could coerce an individual to
act dishonestly.
28. Opportunity involves direct access to assets and/or access to information that controls assets.
29. Cash larceny involves stealing cash from an organization before it is recorded on the
organization’s books and records.
30. Skimming involves stealing cash from an organization after it is recorded on the
organization’s books and records
31. A check digit is a method of detecting data coding errors.
32. Input controls are intended to detect errors in transaction data after processing.
33. A run-to-run control is an example of an output control.
34. Shredding computer printouts is an example of an output control.
35. In a computerized environment, all input controls are implemented after data is input.
36. Spooling is a form of processing control.
Accounting Information Systems, 7e—Test Bank, Chapter 3
37. An input control that tests time card records to verify than no employee has worked more 50 hours in a
pay period is an example of a range test.
38. Systems that use sequential master files employ a backup technique called destructive update.
MULTIPLE CHOICE
1. Which ethical principle states that the benefit from a decision must outweigh the risks, and
that there is no alternative decision that provides the same or greater benefit with less risk?
a.
minimize risk
b.
justice
c.
informed consent
d.
proportionality
2. Individuals who acquire some level of skill and knowledge in the field of computer ethics are
involved in which level of computer ethics?
a.
para computer ethics
b.
pop computer ethics
c.
theoretical computer ethics
d.
practical computer ethics
3. All of the following are factors in the fraud triangle except
a.
Ethical behavior of an individual
b.
Pressure exerted on an individual at home and job related
c.
Materiality of the assets
d.
Opportunity to gain access to assets
4. Which characteristic is not associated with software as intellectual property?
Accounting Information Systems, 7e—Test Bank, Chapter 3
a.
uniqueness of the product
b.
possibility of exact replication
c.
automated monitoring to detect intruders
d.
ease of dissemination
5. For an action to be called fraudulent, all of the following conditions are required except
a.
poor judgment
b.
false representation
c.
intent to deceive
d.
injury or loss
6. One characteristic of employee fraud is that the fraud
a.
is perpetrated at a level to which internal controls do not apply
b.
involves misstating financial statements
c.
involves the direct conversion of cash or other assets to the employee’s personal
benefit
d.
involves misappropriating assets in a series of complex transactions involving third
parties
7. Forces which may permit fraud to occur do not include
a.
a gambling addiction
b.
lack of segregation of duties
c.
centralized decision making environment
d.
questionable integrity of employees
8. Which of the following best describes lapping?
a.
applying cash receipts to a different customer’s account in an attempt to conceal
previous thefts of funds
b.
inflating bank balances by transferring money among different bank accounts
c.
expensing an asset that has been stolen
d.
creating a false transaction
Accounting Information Systems, 7e—Test Bank, Chapter 3
9. Skimming involves
a.
stealing cash from an organization before it is recorded
b.
Stealing cash from an organization after it has been recorded
c.
manufacturing false purchase orders, receiving reports, and invoices
d.
A clerk pays a vendor twice for the same products and cashes the reimbursement
check issued by the vendor.
10. Who is responsible for establishing and maintaining the internal control system?
a.
the internal auditor
b.
the accountant
c.
management
d.
the external auditor
11. The concept of reasonable assurance suggests that
a.
the cost of an internal control should be less than the benefit it provides
b.
a well-designed system of internal controls will detect all fraudulent activity
c.
the objectives achieved by an internal control system vary depending on the data
processing method
d.
the effectiveness of internal controls is a function of the industry environment
12. Which of the following is not a limitation of the internal control system?
a.
errors are made due to employee fatigue
b.
fraud occurs because of collusion between two employees
c.
the industry is inherently risky
d.
management instructs the bookkeeper to make fraudulent journal entries
13. The most cost-effective type of internal control is
a.
preventive control
b.
accounting control
c.
detective control
d.
corrective control
14. Which of the following is a preventive control?
a.
credit check before approving a sale on account
b.
bank reconciliation
c.
physical inventory count
d.
comparing the accounts receivable subsidiary ledger to the control account
15. A well-designed purchase order is an example of a
a.
preventive control
b.
detective control
c.
corrective control
d.
none of the above
16. A physical inventory count is an example of a
a.
preventive control
b.
detective control
c.
corrective control
d.
feedforward control
17. The bank reconciliation uncovered a transposition error in the books. This is an example of a
a.
preventive control
b.
detective control
c.
corrective control
d.
none of the above
18. In balancing the risks and benefits that are part of every ethical decision, managers receive
guidance from each of the following except
a.
justice
b.
self interest
c.
risk minimization
d.
proportionality
19. Which of the following is not an element of the internal control environment?
a.
management philosophy and operating style
b.
organizational structure of the firm
c.
well-designed documents and records
d.
the functioning of the board of directors and the audit committee
20. Which of the following suggests a weakness in the internal control environment?
a.
the firm has an up-to-date organizational chart
b.
monthly reports comparing actual performance to budget are distributed to
managers
c.
performance evaluations are prepared every three years
d.
the audit committee meets quarterly with the external auditors
21. Which of the following indicates a strong internal control environment?
a.
the internal audit group reports to the audit committee of the board of directors
b.
there is no segregation of duties between organization functions
c.
there are questions about the integrity of management
d.
adverse business conditions exist in the industry
22. According to SAS 78, an effective accounting system performs all of the following except
a.
identifies and records all valid financial transactions
b.
records financial transactions in the appropriate accounting period
c.
separates the duties of data entry and report generation
d.
records all financial transactions promptly
23. Which of the following is the best reason to separate duties in a manual system?
a.
to avoid collusion between the programmer and the computer operator
b.
to ensure that supervision is not required
c.
to prevent the record keeper from authorizing transactions
d.
to enable the firm to function more efficiently
24. Cash larceny involves
a.
stealing cash from an organization before it is recorded
b.
stealing cash from an organization after it has been recorded
c.
manufacturing false purchase orders, receiving reports, and invoices
d.
A clerk pays a vendor twice for the same products and cashes the reimbursement
check issued by the vendor.
25. Which of the following is not an internal control procedure?
a.
authorization
b.
management’s operating style
c.
independent verification
d.
accounting records
26. The decision to extend credit beyond the normal credit limit is an example of
a.
independent verification
b.
authorization
c.
segregation of functions
d.
supervision
27. When duties cannot be segregated, the most important internal control procedure is
a.
supervision
b.
independent verification
c.
access controls
d.
accounting records
28. An accounting system that maintains an adequate audit trail is implementing which internal
control procedure?
a.
access controls
=b.
segregation of functions
c.
independent verification
d.
accounting records
29. Employee fraud involves three steps. Of the following, which is not involved?
a.
concealing the crime to avoid detection
b.
stealing something of value
c.
misstating financial statements
d.
converting the asset to a usable form
30. Which of the following is not an example of independent verification?
a.
comparing fixed assets on hand to the accounting records
b.
performing a bank reconciliation
c.
comparing the accounts payable subsidiary ledger to the control account
d.
permitting authorized users only to access the accounting system
31. The importance to the accounting profession of the Sarbanes-Oxley Act is that
a.
bribery will be eliminated
b.
management will not override the company’s internal controls
c.
management are required to certify their internal control system
d.
firms will not be exposed to lawsuits
32. The board of directors consists entirely of personal friends of the chief executive officer. This
indicates a weakness in
a.
the accounting system
b.
the control environment
c.
control procedures
d.
this is not a weakness
33. A shell company fraud involves
a.
stealing cash from an organization before it is recorded
b.
Stealing cash from an organization after it has been recorded
c.
manufacturing false purchase orders, receiving reports, and invoices
d.
A clerk pays a vendor twice for the same products and cashes the reimbursement
check issued by the vendor.
34. When certain customers made cash payments to reduce their accounts receivable, the
bookkeeper embezzled the cash and wrote off the accounts as uncollectible. Which control
procedure would most likely prevent this irregularity?
a.
segregation of duties
b.
accounting records
c.
accounting system
d.
access controls
35. The office manager forgot to record in the accounting records the daily bank deposit. Which
control procedure would most likely prevent or detect this error?
a.
segregation of duties
b.
independent verification
c.
accounting records
d.
supervision
36. Business ethics involves
a.
how managers decide on what is right in conducting business
b.
how managers achieve what they decide is right for the business
c.
both a and b
d.
none of the above
37. All of the following are conditions for fraud except
a.
false representation
b.
injury or loss
c.
intent
d.
material reliance
38. The four principal types of fraud include all of the following except
a.
bribery
b.
gratuities
c.
conflict of interest
d.
economic extortion
39. Control activities under SA 78/COSO include
a.
IT Controls, preventative controls, and Corrective controls
b.
physical controls, preventative controls, and corrective controls.
c.
general controls, application controls, and physical controls.
d.
transaction authorizations, segregation of duties, and risk assessment
40. Internal control system have limitations. These include all of the following except
a.
possibility of honest error
b.
circumvention
c.
management override
d.
stability of systems
41. Management can expect various benefits to follow from implementing a system of strong
internal control. Which of the following benefits is least likely to occur?
a.
reduced cost of an external audit.
b.
prevents employee collusion to commit fraud.
c.
availability of reliable data for decision-making purposes.
d.
some assurance of compliance with the Foreign Corrupt Practices Act of 1977.
e.
some assurance that important documents and records are protected.
42. Which of the following situations is not a segregation of duties violation?
a.
The treasurer has the authority to sign checks but gives the signature block to the
assistant treasurer to run the check-signing machine.
b.
The warehouse clerk, who has the custodial responsibility over inventory in the
warehouse, selects the vendor and authorizes purchases when inventories are low.
c.
The sales manager has the responsibility to approve credit and the authority to
write off accounts.
d.
The department time clerk is given the undistributed payroll checks to mail to
absent employees.
e.
The accounting clerk who shares the record keeping responsibility for the accounts
receivable subsidiary ledger performs the monthly reconciliation of the subsidiary
ledger and the control account.
43. Which of the following is not an issue to be addressed in a business code of ethics required by
the SEC?
a.
Conflicts of interest
b.
Full and Fair Disclosures
c.
Legal Compliance
d.
Internal Reporting of Code Violations
e.
All of the above are issues to be addressed
44. Which statement is not correct? The audit trail in a computerized environment
a.
consists of records that are stored sequentially in an audit file
b.
traces transactions from their source to their final disposition
c.
is a function of the quality and integrity of the application programs
d.
may take the form of pointers, indexes, and embedded keys
45. The correct purchase order number,is123456. All of the following are transcription errors except
a.
1234567
b.
12345
c.
124356
d.
123454
46. Which of the following is correct?
a.
check digits should be used for all data codes
b.
check digits are always placed at the end of a data code
c.
check digits do not affect processing efficiency
d.
check digits are designed to detect transcription and transposition errors
47. Which statement is not correct? The goal of batch controls is to ensure that during processing
a.
transactions are not omitted
b.
transactions are not added
c.
transactions are free from clerical errors
d.
an audit trail is created
48. An example of a hash total is
a.
total payroll checks–$12,315
b.
total number of employees–10
c.
sum of the social security numbers–12,555,437,251
d.
none of the above
49. Which statement is not true? A batch control record
a.
contains a transaction code
b.
records the record count
c.
contains a hash total
d.
control figures in the record may be adjusted during processing
e.
All the above are true
50. Which of the following is not an example of a processing control?
a.
hash total.
b.
record count.
c.
batch total.
d.
check digit
51. Which of the following is an example of input control test?
a.
sequence check
b.
zero value check
c.
spooling check
d.
range check
52. Which input control check would detect a payment made to a nonexistent vendor?
a.
missing data check
b.
numeric/alphabetic check
c.
range check
d.
validity check
53. Which input control check would detect a posting to the wrong customer account?
a.
missing data check
b.
check digit
c.
reasonableness check
d.
validity check
54. The employee entered “40” in the “hours worked per day” field. Which check would detect this
unintentional error?
a.
numeric/alphabetic data check
b.
sign check
c.
limit check
d.
missing data check
55. An inventory record indicates that 12 items of a specific product are on hand. A customer purchased
two of the items, but when recording the order, the data entry clerk mistakenly entered 20 items sold.
Which check could detect this error?
a.
numeric/alphabetic data checks
b.
limit check
c.
range check
d.
reasonableness check
56. Which check is not an input control?
a.
reasonableness check
b.
validity check.
c.
spooling check
d.
missing data check
57. A computer operator was in a hurry and accidentally used the wrong master file to process a
transaction file. As a result, the accounts receivable master file was erased. Which control would
prevent this from happening?
a.
header label check
b.
expiration date check
c.
version check
d.
validity check
58. Run-to-run control totals can be used for all of the following except
a.
to ensure that all data input is validated
b.
to ensure that only transactions of a similar type are being processed
c.
to ensure the records are in sequence and are not missing
d.
to ensure that no transaction is omitted
59. Methods used to maintain an audit trail in a computerized environment include all of the following
except
a.
transaction logs
b.
Transaction Listings.
c.
data encryption
d.
log of automatic transactions
Accounting Information Systems, 7e—Test Bank, Chapter 3
60. Risk exposures associated with creating an output file as an intermediate step in the printing process
(spooling) include all of the following actions by a computer criminal except
a.
gaining access to the output file and changing critical data values
b.
using a remote printer and incurring operating inefficiencies
c.
making a copy of the output file and using the copy to produce illegal output reports
d.
printing an extra hardcopy of the output file
61. Which statement is not correct?
a.
only successful transactions are recorded on a transaction log
b.
unsuccessful transactions are recorded in an error file
c.
a transaction log is a temporary file
d.
a hardcopy transaction listing is provided to users
62. Input controls include all of the following except
a.
check digits
b.
Limit check.
c.
spooling check
d.
missing data check
63. Which of the following is an example of an input error correction technique?
a.
immediate correction
b.
rejection of batch
c.
creation of error file
d.
all are examples of input error correction techniques
64. Which of the following is not an input control?
a.
Range check
b.
Limit check
c.
Spooling check
d.
Validity check
e.
They are all input controls