Chapter 1 – Discussion Questions

1. Discuss the differences between internal and external users of information and
their needs and demands on an information system. Historically, which type of
user has the firm catered the most?
Internal users are persons who utilize financial information within a company, as
opposed to external users who use accounting data outside of the company. Internal
users, also known as primary users, are those that run and manage a company's day-to-
day business activities and who utilize financial data to confirm past results and make
adjustments for future decisions, such as directors, managers, and employees. External
users, such as governmental units, are those who use accounting information for
decision making, investment planning, and assessing a business's financial status.
Internal users are the most well-served by the firm, as they are also essential to
operating smoothly and successfully and planning for the future.

2. Comment on the level of detail necessary for operations management, middle

management, and stockholders.
For stockholders, the level of detail required is significantly aggregated. To plan and
control operations, middle management takes considerable more precise details. At the
operations management level, highly detailed information is required to conduct day-to-
day business processes and activities.

3. Distinguish between financial and nonfinancial transactions. Give three examples

of each.
Financial Transactions affects the accounts in the financial statements, e.g. purchase of
an airline ticket, payment of a bond payable, use of equipment-depreciation.
Nonfinancial transactions include business events that do not impact the financial
statements, e.g. appointment of new staff, a book checked out by a student in a school
library, status reports of research and development projects.

4. Why have re-engineering efforts been made to integrate AIS and MIS?
Managers in all areas required data both from AIS as well as the MIS. Reengineering
efforts have been made to connect AIS and MIS in order to minimize report production
process, resulting in more efficient and cost-effective reporting. Data that is inconsistent
and unreliable can emerge from a lack of coordination between the two datasets.

5. Do you think transaction processing systems differ significantly between service

and manufacturing industries? Are they equally important to both sectors?
The sole difference between the transaction processing systems is the types of data
components collected. Data regarding business processes is necessary for both the
service and manufacturing industries. While a manufacturing company may collect
information on the amount of scrap generated at a particular workstation, a service
company, such as a public accounting firm, must gather information on the number of
hours worked by employees to check cash balances. Both types of industries depend
greatly on transaction processing systems.
6. Discuss the difference between the financial reporting system and general ledger
system.
The general ledger system summarizes all of the transaction cycle activity and general
journal entries. It provides most of the input in the financial reporting system. The
financial reporting system communicates information from the general journal system to
the external user.

7. Discuss how the elements of efficiency, effectiveness, and flexibility are crucial to
the design of an information system.
AIS places importance on efficiency. The cost of gathering and providing data should not
exceed the benefits. Furthermore, the software should be performed in a way that puts
the fewest number of burden on the system as possible. In order for a system to be
functional, it must process the appropriate data and disseminate the obtained
information to the appropriate users. The ability to respond to change is vital, especially
in financial reporting systems where reporting requirements and standards are always
changing.

8. Discuss what is meant by the statement, ‘‘The accounting system is a conceptual

flow of information that represents the physical flows of personnel, raw materials,
machinery, and cash through the organization.’’
This statement means that the accounting system is a representation of the operations
of a firm. As machines operate, workers perform their duties, raw materials are
transferred into finished goods and cash flows are exchanged between suppliers and
customers, the accounting system must be continuously updated to accurately reflect
these actions. This conceptual flow is crucial because it allows management to view in
summary and in detail the financial effects of these operations on the firm.

9. Discuss why it is crucial that internal auditors report solely to the uppermost level
of management (either to the chief executive officer or the audit committee of the
board of directors) and answer to no other group.
Internal auditors are in charge of finding and detecting fraud within the organization.
Internal auditors may be afraid to lose their employment if they blow the whistle on such
activities if management level workers are engaged. As a result, internal auditors should
report to the board of directors so that they don't have to worry about top management
retaliating for their actions.

10. Discuss how conceptual and physical systems differ and which functions are
responsible for each of these systems.
The physical system represents the means of completion of task, meanwhile the
conceptual system represents the logic and decision rules to be used. To execute the
conceptual system, a selection of alternatives (physical systems) may be provided. The
accountant is important in the conceptual system design; but, due to the technical nature
of the solution, system designers may dominate the physical design tasks. However if
the accountant merely serves as an advisor, he or she should still be involved in the
process.
Chapter 2 – Discussion Questions

1. Discuss the flow of cash through the transaction cycles. Include in your
discussion the relevant subsystems and any time lags that may occur.
From sales made to clients, cash flows into the company. The sales order processing
subsystem of the revenue cycle captures the intent of customers to trade cash for
services or product produced. Typically, sales are made on credit whereas the cash
receipts subsystem of the revenue cycle captures the actual receipt of cash. Depending
on the credit terms and promptness of payment by the customer, the lag between the
sales order processing subsystem and the cash receipts subsystem may be days,
weeks, or months. The cash inflow allows the organization to purchase raw materials,
pay workers, and buy capital assets necessary to manufacture the product (or to provide
services). The raw materials requirements are determined by the production planning
subsystem of the conversion cycle. These requirements trigger orders being placed
through the purchases/accounts payable subsystem of the expenditure cycle. For credit
sales, the cash is ultimately released once the goods are received (or services are
performed) and an invoice has been received. The lag between receiving goods and
disbursement of cash may be days or weeks. Cash is also disbursed to employees,
typically after services are rendered by the employees. The lag is usually no more than
one-half a month for salaried employees and as short as one-half a week for hourly
wage earners. The payroll subsystem of the expenditure system captures these
disbursements to employees.

2. Explain whether the cost accounting system primarily supports internal or

external reporting.
Initially, the cost accounting system was used for the valuation of inventory and cost of
goods sold reported to external users; however, the valuable use of cost accounting data
for budgeting, cost control, performance reporting, and management decision making
have proved to be crucial internal support.

3. Discuss the role of the conversion cycle for service and retailing entities.
The conversion cycle activities for service and retailing entities include planning the
items to purchase or the services to produce, planning the workforce to accomplish the
necessary tasks (extremely crucial in-service entities), and directing the workforce in
performing the service or selling the good.

The conversion cycle

activities for service and
retailing entities include
planning the items to
purchase or the services to
produce, planning the
workforce to accomplish the
necessary tasks (extremely
crucial in-service
entities), and directing the
workforce in performing the
service or selling the
good
4. Can a turnaround document contain information that is subsequently used as a
source document? Why or why not?
Yes. For instance, the remittance advice of a bill that is returned with the payment
serves as a source document for the cash receipts transaction processing system. Thus,
the product document becomes a source document.

5. Would the writing down of obsolete inventory be recorded in a special journal or

the general journal? Why?
This type of transaction is recorded in the general journal since it is nonrecurring,
infrequent, and not similar to other types of transactions.

6. Are both registers and special journals necessary? Why?

The term journal is appropriate when the information needs to be ultimately posted to the
general ledger. Registers may be used to keep logs of information that may support, but
 do not specifically get posted to the general ledger, such as a raw materials receipts
register or a shipping log.

7. Discuss the relationship between the balance in the accounts payable general
ledger control account and what is found in the accounts payable subsidiary
ledger.
The balance in the general ledger is considered a control account. This amount is an
aggregated number representing the total amount owed to creditors listed in the
accounts payable journal. The accounts payable subsidiary ledger details the exact
amount owed to each creditor. The sum of the amounts owed to each creditor listed in
the accounts payable journal should equal the corresponding control total in the general
ledger. Thus, the accounts payable subsidiary ledger is a detailed breakdown of the
summary control total of accounts payable in the general ledger.

8. What role does the audit trail play in the task of confirmation?
Confirmation is most typically used for confirming the accounts receivable account as
reported on the balance sheet. The audit trail is used to trace from the general ledger
accounts receivable control account to the subsidiary account, and then to specific
customer accounts. A sample of the customer accounts is then selected for confirmation.

9. If an organization processes transactions that have independent (unique) data

needs, what type of system would work best (all else being equal)?
Real-time processing is better suited to systems that process lower transaction volumes
and those that do not share common records.

10. Are large batch sizes preferable to small batch sizes? Explain
Small batches have the advantage of fewer transactions to sort through for error
detection, but they are not processed as efficiently. Further, computing facilities and
constraints might dictate whether multiple small batches may be processed throughout
the day or whether a single large batch is processed at night when the computing
facilities have excess capacity. (Multiple small batches may still be processed in the
evening.
Chapter 3 – Discussion Questions
1. Distinguish between ethical issues and legal issues.
Legal standards are those standards that are set forth in governmental laws.
Ethical standards are based on the human principles of right and wrong. Ethical
issues are not governed by a set of rules and thereby are not punishable by law.
Legal issues have a set of rules on which they are based and are punishable by
law if those rules are not adhered by.
2. Some argue against corporate involvement in socially responsible behavior
because the costs incurred by such behavior place the organization at a
disadvantage in a competitive market. Discuss the merits and flaws of this
argument.
3. When a company has a strong internal control structure, stockholders can expect
the elimination of fraud. Comment on the soundness of this statement.

4. How has the Sarbanes-Oxley Act had a significant impact on corporate

governance?
The Sarbanes-Oxley Act requires public companies to strengthen audit
committees, perform internal controls tests, make directors and officers
personally liable for the accuracy of financial statements, and strengthen
disclosure. The purpose is to address a series of perceived corporate misconduct
and alleged audit failures and to strengthen investor confidence in the integrity of
the U.S. capital markets.
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?
6. According to SAS 78/COSO, the proper segregation of functions is an effective
internal control procedure. Comment on the exposure (if any) caused by
combining the tasks of paycheck preparation and distribution to employees.
7. Explain the five conditions necessary for an act to be considered
fraudulent.
8. Distinguish between exposure and risk.
In general terms, risk is the possibility of loss. Risk exposure is a measure of
possible future loss (or losses) which may result from an activity or occurrence.
Risk is the probability, i.e. the chance that an event or situation will come to pass,
and mainly lead to a loss or an undesired outcome, whereas, exposure is the
extent to which the risk can have an effect.
9. Explain the characteristics of management fraud.
10. Distinguish between a shell company fraud and pass through fraud.