Test bank auditing and assurance principles ch08 internal control and computer based information

Chapter Internal Control and CBIS 120 Internal Control and Computer Based Information Systems (CBIS) MULTIPLE CHOICE: In the weekly computer run to prepare payroll checks, a check was printed for an employee who had been terminated the previous week Which of the following controls, if properly utilized, would have been most effective in preventing the error or ensuring its prompt detection? a A control total for hours worked, prepared from time cards collected by the timekeeping department b Requiring the treasurer's office to account for the number of the pre-numbered checks issued to the CBIS department for the processing of the payroll c Use of a check digit for employee numbers d Use of a header label for the payroll input sheet ANSWER: A An auditor is preparing test data for use in the audit of a computer based accounts receivable application Which of the following items would be appropriate to include as an item in the test data? a A transaction record which contains an incorrect master file control total b A master file record which contains an invalid customer identification number c A master file record which contains an incorrect master file control total d A transaction record which contains an invalid customer identification number ANSWER: D Unauthorized alteration of on-line records can be prevented by employing: a Key verification b Computer sequence checks c Computer matching d Data base access controls ANSWER: D 121 Chapter Internal Control and CBIS In auditing through a computer, the test data method is used by auditors to test the a Accuracy of input data b Validity of the output c Procedures contained within the program d Normalcy of distribution of test data ANSWER: in In the preliminary survey the auditor learns that a department has several microcomputers Which of the following is usually true and should be considered planning the audit? a Microcomputers, though small, are capable of processing financial information, and physical security is a control concern b Microcomputers are limited to applications such as worksheet generation and not present a significant audit risk c Microcomputers are generally under the control of the data processing department and use the same control features d Microcomputers are too small to contain any built-in control features Therefore, other controls must be relied upon ANSWER: A The primary reason for internal auditing's involvement in the development of new computer-based sysstems is to: a Plan post-implementation reviews b Promote adequate controls c Train auditors in CBIS techniques d Reduce overall audit effort ANSWER: C B Which of the following is an advantage of generalized computer audit packages? a They are all written in one identical computer language b They can be used for audits of clients that use differing CBIS equipment and file formats c They have reduced the need for the auditor to study input controls for CBIS related procedures d Their use can be substituted for a relatively large part of the required control testing Chapter Internal Control and CBIS ANSWER: C The possibility of losing a large amount of information stored in computer files most likely would be reduced by the use of a Back-up files b Check digits c Completeness tests d Conversion verification ANSWER: 11 D Which of the following statements most likely represents a disadvantage for an entity that keeps microcomputer-prepared data files rather than manually prepared files? a It is usually more difficult to detect transposition errors b Transactions are usually authorized before they are executed and recorded c It is usually easier for unauthorized persons to access and alter the files d Random error associated with processing similar transactions in different ways is usually greater ANSWER: 10 B Processing simulated file data provides the auditor with information about the reliability of controls from evidence that exists in simulated files One of the techniques involved in this approach makes use of a Controlled reprocessing b Program code checking c Printout reviews d Integrated test facility ANSWER: 122 A An integrated test facility (ITF) would be appropriate when the auditor needs to a Trace a complex logic path through an application system b Verify processing accuracy concurrently with processing c Monitor transactions in an application system continuously d Verify load module integrity for production programs 123 Chapter Internal Control and CBIS ANSWER: 12 Where computer processing is used in significant accounting applications, internal accounting control procedures may be defined by classifying control procedures into two types: general and a Administrative b Specific c Application d Authorization ANSWER: 13 to B Checklists, systems development methodology, and staff hiring are examples of what type of controls? a Detective b Preventive c Subjective d Corrective ANSWER: 15 C The increased presence of the microcomputer in the workplace has resulted in an increasing number of persons having access to the computer A control that is often used prevent unauthorized access to sensitive programs is: a Backup copies of the diskettes b Passwords for each of the users c Disaster-recovery procedures d Record counts of the number of input transactions in a batch being processed ANSWER: 14 B B When an on-line, real-time (OLRT) computer-based processing system is in use, internal control can be strengthened by a Providing for the separation of duties between keypunching and error listing operations b Attaching plastic file protection rings to reels of magnetic tape before new data can be entered on the file c Making a validity check of an identification number before a user can obtain access to the computer files d Preparing batch totals to provide assurance that file updates are made for the entire input Chapter Internal Control and CBIS ANSWER: 16 A Given the increasing use of microcomputers as a means for accessing data bases, along with on-line real-time processing, companies face a serious challenge relating to data security Which of the following is not an appropriate means for meeting this challenge? a Institute a policy of strict identification and password controls housed in the computer software that permit only specified individuals to access the computer files and perform a given function b Limit terminals to perform only certain transactions c Program software to produce a log of transactions showing date, time, type of transaction, and operator d Prohibit the networking of microcomputers and not permit users to access centralized data bases ANSWER: 19 D One of the features that distinguishes computer processing from manual processing is a Computer processing virtually eliminates the occurrence of computational error normally associated with manual processing b Errors or fraud in computer processing will be detected soon after their occurrences c The potential for systematic error is ordinarily greater in manual processing than in computerized processing d Most computer systems are designed so that transaction trails useful for audit purposes not exist ANSWER: 18 C When auditing "around" the computer, the independent auditor focuses solely upon the source documents and a Test data b CBIS processing c Control techniques d CBIS output ANSWER: 17 124 D What type of computer-based system is characterized by data that are assembled from more than one location and records that are updated immediately? 125 Chapter Internal Control and CBIS a b c d Microcomputer system Minicomputer system Batch processing system Online real-time system ANSWER: 20 Company A has recently converted its manual payroll to a computer-based system Under the old system, employees who had resigned or been terminated were occasionally kept on the payroll and their checks were claimed and cashed by other employees, in collusion with shop foremen The controller is concerned that this practice not be allowed to continue under the new system The best control for preventing this form of "payroll padding" would be to a Conduct exit interviews with all employees leaving the company, regardless of reason b Require foremen to obtain a signed receipt from each employee claiming a payroll check c Require the human resources department to authorize all hires and terminations, and to forward a current computerized list of active employee numbers to payroll prior to processing Program the computer to reject inactive employee numbers d Install time clocks for use by all hourly employees ANSWER: 21 C Compared to a manual system, a CBIS generally Reduces segregation of duties Increases segregation of duties Decreases manual inspection of processing results Increases manual inspection of processing results a and b and c and d and ANSWER: 22 D A One of the major problems in a CBIS is that incompatible functions may be performed by the same individual One compensating control for this is the use of a Echo checks b A self-checking digit system Chapter Internal Control and CBIS c d Computer generated hash totals A computer log ANSWER: 23 A An unauthorized employee took computer printouts from output bins accessible to all employees A control which would have prevented this occurrence is a A storage/retention control b A spooler file control c An output review control d A report distribution control ANSWER: 27 C Which of the following methods of testing application controls utilizes a generalized audit software package prepared by the auditors? a Parallel simulation b Integrated testing facility approach c Test data approach d Exception report tests ANSWER: 26 C An organizational control over CBIS operations is a Run-to-run balancing of control totals b Check digit verification of unique identifiers c Separation of operating and programming functions d Maintenance of output distribution logs ANSWER: 25 D Which of the following processing controls would be most effective in assisting a store manager to ascertain whether the payroll transaction data were processed in their entirety? a Payroll file header record b Transaction identification codes c Processing control totals d Programmed exception reporting ANSWER: 24 126 D Which of the following is a disadvantage of the integrated test facility approach? 127 Chapter Internal Control and CBIS a b c d In establishing fictitious entities, the auditor may be compromising audit independence Removing the fictitious transactions from the system is somewhat difficult and, if not done carefully, may contaminate the client's files ITF is simply an automated version of auditing "around" the computer The auditor may not always have a current copy of the authorized version of the client's program ANSWER: 28 for B Totals of amounts in computer-record data fields which are not usually added for other purposes but are used only data processing control purposes are called a Record totals b Hash totals c Processing data totals d Field totals ANSWER: B 29 A hash total of employee numbers is part of the input to a payroll master file update program The program compares the hash total to the total computed for transactions applied to the master file The purpose of this procedure is to: a Verify that employee numbers are valid b Verify that only authorized employees are paid c Detect errors in payroll calculations d Detect the omission of transaction processing ANSWER: 30 D Matthews Corp has changed from a system of recording time worked on clock cards to a computerized payroll system in which employees record time in and out with magnetic cards The CBIS automatically updates all payroll records Because of this change a A generalized computer audit program must be used b Part of the audit trail is altered c The potential for payroll related fraud is diminished d Transactions must be processed in batches ANSWER: B Chapter Internal Control and CBIS 31 Generalized audit software is of primary interest to the auditor in terms of its capability to a Access information stored on computer files b Select a sample of items for testing c Evaluate sample test results d Test the accuracy of the client's calculations ANSWER: 32 A An accounts payable program posted a payable to a vendor not included in the on-line vendor master file A control which would prevent this error is a a Validity check b Range check c Reasonableness test d Parity check ANSWER: 33 128 A In a computerized sales processing system, which of the following controls is most effective in preventing sales invoice pricing errors? a Sales invoices are reviewed by the product managers before being mailed to customers b Current sales prices are stored in the computer, and, as stock numbers are entered from sales orders, the computer automatically prices the orders c Sales prices, as well as product numbers, are entered as sales orders are entered at remote terminal locations d Sales prices are reviewed and updated on a quarterly basis ANSWER: B 34 Which of the following is likely to be of least importance to an auditor in reviewing the internal control in a company with a CBIS? a The segregation of duties within the data processing center b The control over source documents c The documentation maintained for accounting applications d The cost/benefit ratio of data processing operations ANSWER: D 129 Chapter Internal Control and CBIS 35 For the accounting system of Acme Company, the amounts of cash disbursements entered into an CBIS terminal are transmitted to the computer that immediately transmits the amounts back to the terminal for display on the terminal screen This display enables the operator to a Establish the validity of the account number b Verify the amount was entered accurately c Verify the authorization of the disbursement d Prevent the overpayment of the account ANSWER: 36 Which of the following audit techniques most likely would provide an auditor with the most assurance about the effectiveness of the operation of an internal control procedure? a Inquiry of client personnel b Recomputation of account balance amounts c Observation of client personnel d Confirmation with outside parties ANSWER: 37 B C Adequate technical training and proficiency as an auditor encompasses an ability to understand a CBIS sufficiently to identify and evaluate a The processing and imparting of information b Essential accounting control features c All accounting control features d The degree to which programming conforms with application of generally accepted accounting principles ANSWER: B 38 Which of the following is not a major reason why an accounting audit trail should be maintained for a computer system? a Query answering b Deterrent to fraud c Monitoring purposes d Analytical review ANSWER: 39 D Adequate control over access to data processing is required to Chapter Internal Control and CBIS a b c d Prevent improper use or manipulation of data files and programs Ensure that only console operators have access to program documentation Minimize the need for backup data files Ensure that hardware controls are operating effectively and as designed by the computer manufacturer ANSWER: 40 D In studying a client's internal controls, an auditor must be able to distinguish between prevention controls and detection controls Of the following data processing controls, which is the best detection control? a Use of data encryption techniques b Review of machine utilization logs c Policy requiring password security d Backup and recovery procedure ANSWER: 42 A When testing a computerized accounting system, which of the following is not true of the test data approach? a The test data need consist of only those valid and invalid conditions in which the auditor is interested b Only one transaction of each type need be tested c Test data are processed by the client's computer programs under the auditor's control d The test data must consist of all possible valid and invalid conditions ANSWER: 41 130 B Which of the following procedures is an example of auditing "around" the computer? a The auditor traces adding machine tapes of sales order batch totals to a computer printout of the sales journal b The auditor develops a set of hypothetical sales transactions and, using the client's computer program, enters the transactions into the system and observes the processing flow c The auditor enters hypothetical transactions into the client's processing system during client processing of live" data d The auditor observes client personnel as they process the biweekly payroll The auditor is primarily 131 Chapter Internal Control and CBIS concerned with computer rejection of data meet reasonableness limits that fails to ANSWER: 43 Auditing by testing the input and output of a computer-based system instead of the computer program itself will a Not detect program errors which not show up in the output sampled b Detect all program errors, regardless of the nature of the output c Provide the auditor with the same type of evidence d Not provide the auditor with confidence in the results of the auditing procedures ANSWER: 44 A Which of the following is an acknowledged risk of using test data when auditing CBIS records? a The test data may not include all possible types of transactions b The computer may not process a simulated transaction in the same way it would an identical actual transaction c The method cannot be used with simulated master records d Test data may be useful in verifying the correctness of account balances, but not in determining the presence of processing controls ANSWER: 45 A A When the auditor encounters sophisticated computer-based systems, he or she may need to modify the audit approach Of the following conditions, which one is not a valid reason for modifying the audit approach? a More advanced computer systems produce less documentation, thus reducing the visibility of the audit trail b In complex comuter-based systems, computer verification of data at the point of input replaces the manual verification found in less sophisticated data processing systems c Integrated data processing has replaced the more traditional separation of duties that existed in manual and batch processing systems Chapter Internal Control and CBIS d Real-time processing of transactions has enabled the auditor to concentrate less on the completeness assertion ANSWER: 46 a D The program flowcharting symbol representing a decision is a a Triangle b Circle c Rectangle d Diamond ANSWER: 50 B A control to verify that the dollar amounts for all debits and credits for incoming transactions are posted to a receivables master file is the: a Generation number check b Master reference check c Hash total d Control total ANSWER: 49 B In a distributed data base (DDB) environment, control tests for access control administration can be designed which focus on a Reconciliation of batch control totals b Examination of logged activity c Prohibition of random access d Analysis of system generated core dumps ANSWER: 48 D If a control total were to be computed on each of the following data items, which would best be identified as hash total for a payroll CBIS application? a Net pay b Department numbers c Hours worked d Total debits and total credits ANSWER: 47 132 D An update program for bank account balances calculates check digits for account numbers This is an example of 133 Chapter Internal Control and CBIS a b c d An input control A file management control Access control An output control ANSWER: 51 A CBIS controls are frequently classified as to general controls and application controls Which of the following is an example of an application control? a Programmers may access the computer only for testing and "debugging" programs b All program changes must be fully documented and approved by the information systems manager and the user department authorizing the change c A separate data control group is responsible for distributing output, and also compares input and output on a test basis d In processing sales orders, the computer compares customer and product numbers with internally stored lists ANSWER: D 52 After a preliminary phase of the review of a client's CBIS controls, an auditor may decide not to perform further tests related to the control procedures within the CBIS portion of the client's internal control system Which of the following would not be a valid reason for choosing to omit further testing? a The auditor wishes to further reduce assessed risk b The controls duplicate operative controls existing elsewhere in the system c There appear to be major weaknesses that would preclude reliance on the stated procedures d The time and dollar costs of testing exceed the time and dollar savings in substantive testing if the controls are tested for compliance ANSWER: 53 A For good internal control over computer program changes, a policy should be established requiring that a The programmer designing the change adequately test the revised program b All program changes be supervised by the CBIS control group Chapter Internal Control and CBIS c d Superseded portions of programs be deleted from the program run manual to avoid confusion All proposed changes be approved in writing by a responsible individual ANSWER: 54 B Which of the following would lessen internal control in a CBIS? a The computer librarian maintains custody of computer program instructions and detailed listings b Computer operators have access to operator instructions and detailed program listings c The control group is solely responsible for the distribution of all computer output d Computer programmers write and debug programs which perform routines designed by the systems analyst ANSWER: 56 D Which of the following is not a technique for testing data processing controls? a The auditor develops a set of payroll test data that contain numerous errors The auditor plans to enter these transactions into the client's system and observe whether the computer detects and properly responds to the error conditions b The auditor utilizes the computer to randomly select customer accounts for confirmation c The auditor creates a set of fictitious customer accounts and introduces hypothetical sales transactions, as well as sales returns and allowances, simultaneously with the client's live data processing d At the auditor's request, the client has modified its payroll processing program so as to separately record any weekly payroll entry consisting of 60 hours or more These separately recorded ("marked") entries are locked into the system and are available only to the auditor ANSWER: 55 134 B Access control in an on-line CBIS can best be provided in most circumstances by a An adequate librarianship function controlling access to files b A label affixed to the outside of a file medium holder 135 Chapter Internal Control and CBIS c d that identifies the contents Batch processing of all input through a centralized, well-guarded facility User and terminal identification controls, such as passwords ANSWER: D 57 While entering data into a cash receipts transaction file, an employee transposed two numbers in a customer code Which of the following controls could prevent input of this type of error? a Sequence check b Record check c Self-checking digit d Field-size check ANSWER: 58 What is the computer process called when data processing is performed concurrently with a particular activity and the results are available soon enough to influence the particular course of action being taken or the decision being made? a Batch processing b Real time processing c Integrated data processing d Random access processing ANSWER: 59 B Reconciling processing control totals is an example of a An input control b An output control c A processing control d A file management control ANSWER: 60 C B A disadvantage of auditing around the computer is that it a Permits no assessment of actual processing b Requires highly skilled auditors c Demands intensive use of machine resources d Interacts actively with auditee applications ANSWER: A Chapter Internal Control and CBIS 61 the The completeness of computer-generated sales figures can be tested by comparing the number of items listed on the daily sales report with the number of items billed on actual invoices This process uses a Check digits b Control totals c Validity tests d Process tracing data ANSWER: 62 B On-line real-time systems and electronic data interchange systems have the advantages of providing more timely information and reducing the quantity of documents associated with less automated systems The advantages, however, may create some problems for the auditor Which of the following characteristics of these systems does not create an audit problem? a The lack of traditional documentation of transactions creates a need for greater attention to programmed controls at the point of transaction input b Hard copy may not be retained by the client for long periods of time, thereby necessitating more frequent visits by the auditor c Control testing may be more difficult given the increased vulnerability of the client's files to destruction during the testing process d Consistent on-line processing of recurring data increases the incidence of errors ANSWER: 64 B Which of the following controls would be most efficient in reducing common data input errors? a Keystroke verification b A set of well-designed edit checks c Balancing and reconciliation d Batch totals ANSWER: 63 136 D Creating simulated transactions that are processed through a system to generate results that are compared with predetermined results, is an auditing procedure referred to as a Desk checking b Use of test data 137 Chapter Internal Control and CBIS c d Completing outstanding jobs Parallel simulation ANSWER: 65 To obtain evidential matter about control risk, an auditor ordinarily selects tests from a variety of techniques, including a Analysis b Confirmations c Reprocessing d Comparison ANSWER: 66 D To ensure that goods received are the same as those shown on the purchase invoice, a computerized system should: a Match selected fields of the purchase invoice to goods received b Maintain control totals of inventory value c Calculate batch totals for each input d Use check digits in account numbers ANSWER: 68 C A major exposure associated with the rapidly expanding use of microcomputers is the absence of: a Adequate size of main memory and disk storage b Compatible operating systems c Formalized procedures for purchase justification d Physical, data file, and program security ANSWER: 67 B A Errors in data processed in a batch computer system may not be detected immediately because a Transaction trails in a batch system are available only for a limited period of time b There are time delays in processing transactions in a batch system c Errors in some transactions cause rejection of other transactions in the batch d Random errors are more likely in a batch system than in an on-line system ANSWER: B 138 Chapter Internal Control and CBIS 69 Which of the following is a computer test made to ascertain whether a given characteristic belongs to the group? a Parity check b Validity check c Echo check d Limit check ANSWER: B COMPLETION: 70 Although computerized data processing does not affect audit objectives, the auditor may need to modify the audit , given complex CBIS applications ANSWER: 71 In a batch processing system transactions are processed in groups, whereas in a real-time system transactions are entered as they and are processed as they are ANSWER: 72 , realthan batch processing INFORMATION CAPABILITY, COMPLEX A distinguishing feature of integrated data base systems is that many files are updated as transactions are processed ANSWER: 74 OCCUR, ENTERED Although powerful in terms of time systems are more systems ANSWER: 73 APPROACH SIMULTANEOUSLY systems, by eliminating the need to reenter data into the accounting system, reduce the incidence of processing errors; but, by reducing transaction documentation, these systems also require greater attention to proper controls over the of transactions ANSWER: ELECTRONIC DATA INTERCHANGE, INPUT 139 75 Chapter Internal Control and CBIS Input controls, processing controls, and output controls are categories of controls ANSWER: 76 Some entities require completing a prior to transaction input, in order to ensure consistency and completeness of recurring inputs ANSWER: 77 PASSWORDS Programmed controls for testing the validity of customer numbers, product numbers, employee numbers, and vendor numbers, as well as tests for reasonableness, are collectively referred to as controls ANSWER: 80 USER CONTROLS In on-line real-time systems the most effective means for assuring limited access to data bases is by the use of properly controlled ANSWER: 79 TRANSACTION LOG are manual control procedures applied by organizational units whose data are processed by data processing ANSWER: 78 APPLICATION INPUT EDITING In a system, users own their own data, whereas in _ systems, users share a single operating system housed in a central location ANSWER: FLAT FILE, MULTI-USER MATCHING: 81 Indicate by letter whether each of the listed auditing procedures is a general control test, an application control test, or a substantive audit test G = General control test A = Application control test S = Substantive audit test The auditor utilizes the services of the firm’s computer Chapter Internal Control and CBIS 140 audit specialist assist in testing controls over the electronic processing of customer remittances In testing the sales processing set of controls, the auditor has designed a set of transactions that include unauthorized sales prices, invalid customer numbers, and lack of credit authorization The auditor interviews the client’s information systems manager to clear exceptions detected when the auditor reviewed data processing job descriptions for incompatible functions The auditor confirmed a sample of customer accounts receivable to evaluate the correctness of year-end balances in customer accounts Using generalized audit software, the auditor reprocessed a sample of the client’s weekly payroll and compared the resulting output with the client’s payroll summary for the same period The auditor attempted to access the client’s computerized data files using the passwords of terminated employees By examining vendors’ invoices supporting debits to the account “Machinery and Equipment,” the auditor was able to gain satisfaction as to the account balance at year end The auditor examined authorizations and studied documentation relating to CBIS modifications made by the client during the year under audit The auditor examined and tested the client’s anti virus software for effectiveness 10 The auditor examined printouts from network monitoring software and observed data input for proper functioning of protocol controls and data encryption SOLUTION: A A G 141 Chapter Internal Control and CBIS 10 S A G S G G G PROBLEM/ESSAY: 82 For each of the following independent situations, identify the control weakness that permitted the error or fraud, and indicate how the weakness should be corrected A In a computerized sales processing system, numerous pricing errors appeared on customer invoices B Joshua Ness, a computer programmer for a bank, set up a demand deposit account in his name He then wrote a program subroutine that automatically transferred funds from accounts that had shown no activity for least three months to the newly-established at account C In a computerized payroll system, foremen, in collusion with employees, were able to inflate pay rates In addition, terminated employees were retained on the payroll and the fraudulent checks were endorsed by a foreman or employee and deposited in his or her personal account D After implementing a newly-designed EDI system with its vendors, Hilo Enterprises discovered numerous errors in type, pricing, and quantity of goods received versus goods ordered SOLUTION: A computer Computer did not verify selling prices A master list of current sales prices should be housed in the computer and updated as prices change The Chapter Internal Control and CBIS 142 should then be programmed to price the invoices B Ness was able to access data files for the purpose of establishing an unauthorized account Programmers should not have access to data files except for testing and debugging programs Moreover, formal authorization of new accounts should be a part of the internal control system C The foremen were able to alter pay rates and retain terminated employees on the payroll To correct this weakness, all new hires and terminations, as well as pay rate changes, should require authorization of the human resources department A current master list of employee numbers and pay rates should then be housed in the computer, and the computer programmed to perform validity tests of rates and numbers as payrolls are processed D Controls were not designed to prevent vendor errors Protocol controls should be installed to detect and log errors; and the EDI hardware should include an echo check that returns messages from the vendor’s computer to Hilo’s computer to verify correctness of orders received by the vendor  ... Chapter Internal Control and CBIS concerned with computer rejection of data meet reasonableness limits that fails to ANSWER: 43 Auditing by testing the input and output of a computer- based system... MULTI-USER MATCHING: 81 Indicate by letter whether each of the listed auditing procedures is a general control test, an application control test, or a substantive audit test G = General control test. .. Application control test S = Substantive audit test The auditor utilizes the services of the firm’s computer Chapter Internal Control and CBIS 140 audit specialist assist in testing controls over