Q&A Hero

Q: An example of a hash total isa. total payroll checks-$12,315b. total number of employees-10c. sum of the social security numbers-12,555,437,251d. none of the above

Q: Each year, Holly's Best Salad Dressing, Inc. (HBSD) purchases 50,000 gallons of extra virgin olive oil. Ordering costs are $100 per order, and the carrying cost, as a percentage of inventory value, is 80 percent. The purchase price to HBSD is $0.50 per gallon. Management currently orders the EOQ each time an order is placed. No safety stock is carried. The supplier is now offering a quantity discount of $0.03 per gallon if HBSD orders 10,000 gallons at a time. Should HBSD take the discount?a. From a cost standpoint, HBSD is indifferent.b. No, the cost exceeds the benefit by $500.c. No, the cost exceeds the benefit by $1,000.d. Yes, the benefit exceeds the cost by $500.e. Yes, the benefit exceeds the cost by $1,120.

Q: Which of the following does not influence the length of time a hard copy report is retained? a. Statutory requirements. b. The number of copies in existence. c. The number of pages of the report. d. All of these factors influence the length of time a hard copy report is retained.

Q: Which of the following is true of the EOQ model? Note that the optimal order quantity, Q, will be called EOQ. a. If the annual sales, in units, increases by 20%, then EOQ will increase by 20%. b. If the average inventory increases by 20%, then the total carrying costs will increase by 20%. c. If the average inventory increases by 20% the total order costs will increase by 20%. d. The EOC is the same for all companies. e. If the fixed per order cost increases by 20%, then EOQ will increase by 20%.

Q: Which of the following would cause average inventory holdings to decrease, other things held constant? a. The purchase price of inventory items decreases by 50 percent. b. The carrying price of an item decreases (as a percent of purchase price). c. The sales forecast is revised downward by 10 percent. d. Interest rates fall. e. Fixed order costs double.

Q: 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.

Q: The correct purchase order number is123456. All of the following are transcription errors except a. 1234567 b. 12345 c. 124356 d. 123454

Q: If a company increases its safety stock, then its average inventory will go up. a. True b. False

Q: If a company increases its safety stock, then its EOQ will go up. a. True b. False

Q: Recalculation of hash totals is an example of a a. completeness test b. redundancy test c. both a. and b. d. neither a. nor b.

Q: A just-in-time system is designed to stretch accounts payable as long as possible. a. True b. False

Q: All of the following are disadvantages of the test data technique except a. the test data technique requires extensive computer expertise on the part of the auditor b. the auditor cannot be sure that the application being tested is a copy of the current application used by computer services personnel c. the auditor cannot be sure that the application being tested is the same application used throughout the entire year d. preparation of the test data is time-consuming

Q: All of the following are advantages of the test data technique except a. auditors need minimal computer expertise to use this method b. this method causes minimal disruption to the firm's operations c. the test data is easily compiled d. the auditor obtains explicit evidence concerning application functions

Q: Exhibit 28.1The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.Refer to Exhibit 28.1. What will be the total cost to Duckett of maintaining the optimal average cash balance, as determined by the Baumol model?a. $35,356b. $7,071c. $18,493d. $70,711e. $53,190

Q: When analyzing the results of the test data method, the auditor would spend the least amount of time reviewing a. the test transactions b. error reports c. updated master files d. output reports

Q: Exhibit 28.1The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.Refer to Exhibit 28.1. According to the Baumol model, what should be Duckett's average cash balance?a. $35,356b. $3,536c. $22,157d. $70,711e. $42,918

Q: Exhibit 28.1The Duckett Group is trying to determine its optimal average cash balance. The firm has determined that it will need $5,000,000 net new cash during the coming year. The fixed transaction cost of converting securities to cash is $50, and the firm earns 10 percent on its marketable securities investments.Refer to Exhibit 28.1. According to the Baumol model, what is the optimal transaction size for transfers from marketable securities to cash?a. $7,071b. $38,357c. $70,711d. $102,956e. $87,000

Q: Which test is not an example of a white box test? a. determining the fair value of inventory b. ensuring that passwords are valid c. verifying that all pay rates are within a specified range d. reconciling control totals

Q: Suppose Stanley's Office Supply purchases 50,000 boxes of pens every year. Ordering costs are $100 per order and carrying costs are $0.40 per box. Moreover, management has determined that the EOQ is 5,000 boxes. The vendor now offers a quantity discount of $0.20 per box if the company buys pens in order sizes of 10,000 boxes. Determine the before-tax benefit or loss of accepting the quantity discount. (Assume the carrying cost remains at $0.40 per box whether or not the discount is taken.)a. $1,000 lossb. $1,000 benefitc. $500 lossd. $500 benefite. $0 (The change would not affect profits.)

Q: All of the following concepts are associated with the black box approach to auditing computer applications except a. the application need not be removed from service and tested directly b. auditors do not rely on a detailed knowledge of the application's internal logic c. the auditor reconciles previously produced output results with production input transactions d. this approach is used for complex transactions that receive input from many sources

Q: Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180. In addition, the total estimated cash costs (transfers and carrying cost) for the firm, based on 16 transactions per year, are $5,760. On what opportunity cost of holding cash was this analysis based? a. 19.2% b. 10.4% c. 6.3% d. 12.1% e. 9.6%

Q: 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

Q: The black box approach to testing computer program controls is also known as auditing around the computer.

Q: Gemini Inc.'s optimal cash transfer amount, using the Baumol model, is $60,000. The firm's fixed cost per cash transfer of marketable securities to cash is $180, and the total cash needed for transactions annually is $960,000. On what opportunity cost of holding cash was this analysis based? a. 19.2% b. 10.4% c. 6.3% d. 12.1% e. 9.6%

Q: Humphrey's Housing has been practicing cash management for some time by using the Baumol model for determining cash balances. Some time ago, the model called for an average balance (C*/2) of $500; at that time, the rate on marketable securities was 4 percent. A rapid increase in interest rates has driven the interest rate up to 9 percent. What is the appropriate average cash balance now?a. $200b. $333c. $414d. $500e. $666

Q: 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.

Q: Halliday Inc. receives a $2 million payment once a year. Of this amount, $700,000 is needed for cash payments made during the next year. Each time Halliday deposits money in its account, a charge of $2.00 is assessed to cover clerical costs. If Halliday can hold marketable securities that yield 5 percent, and then convert these securities to cash at a cost of only the $2 deposit charge, what is the total cost for one year of holding the minimum cost cash balance according to the Baumol model?a. $7,483b. $187c. $3,741d. $374e. $748

Q: A salami fraud affects a large number of victims, but the harm to each appears to be very small.

Q: Which of the following is true of the Baumol model? Note that the optimal cash transfer amount is C*. a. If the total amount of cash needed during the year increases by 20%, then C* will increase by 20%. b. If the average cash balance increases by 20%, then the total holding costs will increase by 20%. c. If the average cash balance increases by 20% the total transactions costs will increase by 20%. d. The optimal transfer amount is the same for all companies. e. If the fixed costs of selling securities or obtaining a loan (cost per transaction) increase by 20%, then C* will increase by 20%.

Q: Spooling is a form of processing control.

Q: For some firms, holding highly liquid marketable securities is a substitute for holding cash because a marketable securities portfolio can accomplish the same objective as cash. a. True b. False

Q: Use of the integrated test facility poses no threat to organizational data files.

Q: The easier a firm's access to borrowed funds the higher its precautionary balances will be, in order to protect against sudden increases in interest rates. a. True b. False

Q: The integrated test facility (ITF) is an automated approach that permits auditors to test an application's logic and controls during its normal operation.

Q: The cash balances of most firms consist of transactions, compensating, precautionary, and speculative balances. We can produce a total desired cash balance by calculating the amount needed for each purpose and then summing them together. a. True b. False

Q: Input controls are programmed procedures that perform tests on master file data to ensure they are free from errors.

Q: The results of a parallel simulation are compared to the results of a production run in order to judge the quality of the application processes and controls.

Q: No Tree Too Tall, Inc. is planning to borrow $12,000 from the bank. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the effective rate of interest on the 10.19 percent add-on loan?a. 9.50%b. 10.19%c. 15.22%d. 16.99%e. 22.05%

Q: Tracing is a method used to verify the logical operations executed by a computer application.

Q: Tillyard Inc. requires a $25,000 1-year loan. The bank offers to make the loan, and it offers you three choices: (1) 15 percent simple interest, annual compounding; (2) 13 percent nominal interest, daily compounding (360-day year); (3) 9 percent add-on interest, 12 end-of-month payments. The first two loans would require a single payment at the end of the year, the third would require 12 equal monthly payments beginning at the end of the first month. What is the difference between the highest and lowest effective annual rates?a. 1.12%b. 2.48%c. 3.60%d. 4.25%e. 5.00%

Q: Darren's Hair Products, Inc. purchases supplies from a single supplier on terms of 1/10, net 20. Currently, Darren takes the discount, but she believes she could extend the payment to 40 days without any adverse effects if she decided not to take the discount. Darren needs an additional $50,000 to support an expansion of fixed assets. This amount could be raised by making greater use of trade credit or by arranging a bank loan. The banker has offered to loan the money at 12 percent discount interest. Additionally, the bank requires an average compensating balance of 20 percent of the loan amount. Darren already has a commercial checking account at this bank that could be counted toward the compensating balance, but the required compensating balance amount is twice the amount that Darren would otherwise keep in the account. Which of the following statements is most correct?a. The cost of using additional trade credit is approximately 36 percent.b. Considering only the explicit costs, Darren should finance the expansion with the bank loan.c. The cost of expanding trade credit using the approximation formula is less than the cost of the bank loan. However, the true cost of the trade credit when compounding is considered is greater than the cost of the bank loan.d. The effective cost of the bank loan is decreased from 17.65 percent to 15.38 percent because Darren would hold a cash balance of one-half the compensating balance amount even if the loan were not taken.e. If Darren had transaction balances that exceeded the compensating balance requirement, the effective cost of the bank loan would be 12.00 percent.

Q: The base case system evaluation is a variation of the test data method.

Q: Danby Design Inc. has approached the bank with its plan to borrow $12,000. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the approximate (nominal) rate of interest on the 10.19 percent add-on loan?a. 5.10%b. 10.19%c. 12.00%d. 20.38%e. 30.57%

Q: When using the test data method, the presence of multiple error messages indicates a flaw in the preparation of test transactions.

Q: Incorrectly recording sales order number 123456 as 124356 is an example of a transcription error

Q: Sunnydale Organics, Inc. harvests crops in roughly 90-day cycles based on a 360-day year. The firm receives payment from its harvests sometime after shipment. Due in part to the firm's rapid growth, it has been borrowing to finance its harvests using 90-day bank notes on which the firm pays 12 percent discount interest. If the firm requires $60,000 in proceeds from each note, what must be the face value of each note? a. $61,856 b. $67,531 c. $60,000 d. $68,182 e. $67,423

Q: The white box tests of program controls are also known as auditing through the computer.

Q: Maxwell Gardens requires a $100,000 annual loan in order to pay laborers to tend and harvest its organic vegetable crop. Maxwell borrows on a discount interest basis at a nominal annual rate of 11 percent. If Maxwell must actually receive $100,000 net proceeds to finance its crop, then what must be the face value of the note? a. $111,000 b. $100,000 c. $112,360 d. $89,000 e. $108,840

Q: Harris Flooring Inc. is planning to borrow $12,000 from the bank for new sanding machines. The bank offers the choice of a 12 percent discount interest loan or a 10.19 percent add-on, one-year installment loan, payable in 4 equal quarterly payments. What is the effective rate of interest on the 12 percent discounted loan? a. 10.7% b. 12.0% c. 12.5% d. 13.6% e. 14.1%

Q: Achieving batch control objectives requires grouping similar types of input transactions (such as sales orders) together in batches and then controlling the batches throughout data processing.

Q: In a computerized environment, all input controls are implemented after data is input.

Q: The Somerset Bank offered Blakemore Inc. the following loan alternatives in response to its request for a $75,000, 1-year loan. Alternative 1: 7 percent discount interest, with a 10 percent compensating balance. Alternative 2: 8 percent simple interest, with interest paid monthly. What is the effective annual rate on the cheaper loan? a. 8.00% b. 7.23% c. 7.67% d. 8.43% e. 8.30%

Q: The Arthos Group needs to borrow $200,000 from its bank. The bank has offered the company a 12-month installment loan (monthly payments) with 9 percent add-on interest. What is the effective annual rate (EAR) of this loan? a. 16.22% b. 17.97% c. 17.48% d. 18.67% e. 18.00%

Q: Shredding computer printouts is an example of an output control.

Q: Gladys Turner borrowed $12,000 from the bank using a 10.19 percent "add-on", one-year installment loan, payable in four equal quarterly payments. What is the effective annual rate of interest? a. 9.50% b. 10.19% c. 15.99% d. 16.98% e. 20.38%

Q: A run-to-run control is an example of an output control.

Q: The black box approach to testing computer applications require a detailed knowledge of the the program logic being tested.

Q: Faircross Farms harvests its crops four times annually and receives payment for its crop 90 days after it is picked and shipped. However, planting, irrigating, and harvesting must be done on a nearly continual schedule. The firm uses 90-day bank notes to finance its operations. The firm arranges an 11 percent discount interest loan with a 20 percent compensating balance four times annually. What is the effective annual interest rate of these discount loans? a. 11.00% b. 15.94% c. 11.46% d. 13.75% e. 12.72%

Q: Suppose that you're planning a vacation and borrow $2,000 from a bank for one year at a stated annual interest rate of 14 percent, with interest prepaid (a discounted loan). Also, assume that the bank requires you to maintain a compensating balance equal to 20 percent of the initial loan value. What effective annual interest rate are you being charged?a. 14.00%b. 8.57%c. 16.28%d. 21.21%e. 28.00%

Q: The black box approach to testing computer applications allows the auditor to explicitly review program logic.

Q: Input controls are intended to detect errors in transaction data after processing.

Q: Exhibit 27.1Your brother has just taken out a loan for $75,000. The stated (simple) interest rate on this loan is 10 percent, and the bank requires him to maintain a compensating balance equal to 15 percent of the initial face amount of the loan. He currently has $20,000 in his checking account, and he plans to maintain this balance. The loan is an add-on installment loan which he will repay in 12 equal monthly installments, beginning at the end of the first month.Refer to Exhibit 27.1. What is the nominal annual add-on interest rate on this loan?a. 10.00%b. 16.47%c. 18.83%d. 20.00%e. 24.00%

Q: Exhibit 27.1Your brother has just taken out a loan for $75,000. The stated (simple) interest rate on this loan is 10 percent, and the bank requires him to maintain a compensating balance equal to 15 percent of the initial face amount of the loan. He currently has $20,000 in his checking account, and he plans to maintain this balance. The loan is an add-on installment loan which he will repay in 12 equal monthly installments, beginning at the end of the first month.Refer to Exhibit 27.1. How large are your brother's monthly payments?a. $6,250b. $7,000c. $7,500d. $5,250e. $6,875

Q: A check digit is a method of detecting data coding errors.

Q: A truncation error is a form of transcription error.

Q: Which one of the following aspects of banks is considered most relevant to businesses when choosing a bank?a. Competitive cost of services provided.b. Size of the bank's deposits.c. Experience of personnel.d. Loyalty and willingness to assume lending risks.e. Convenience of location.

Q: A reasonableness check determines if a value in one field is reasonable when considered along with data in other fields of the record

Q: Campbell Computing Inc. currently has sales of $1,000,000, and its days sales outstanding is 30 days. The financial manager estimates that offering longer credit terms would (1) increase the days sales outstanding to 50 days and (2) increase sales to $1,200,000. However, bad debt losses, which were 2 percent on the old sales, would amount to 5 percent on the incremental sales only (bad debts on the old sales would stay at 2 percent). Variable costs are 80 percent of sales, and Campbell has a 15 percent receivables financing cost. What would the annual incremental pre-tax profit be if Bass extended its credit period?a. -$20,000b. -$10,000c. $0d. $10,000e. $20,000

Q: The three groups of application controls are batch controls, run-to-run controls, and audit trail controls.

Q: Exhibit 27.3Van Doren Housing expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Van Doren's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Van Doren wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.Refer to Exhibit 27.3. What are the incremental pre-tax profits from this proposal?a. $283,750b. $250,500c. $303,250d. $493,750e. $288,250

Q: Discuss what is involved in creating test data.

Q: Exhibit 27.3Van Doren Housing expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Van Doren's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Van Doren wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.Refer to Exhibit 27.3. What would be the incremental cost of carrying receivables if the change were made?a. -$108,750 (carrying costs would decline)b. $116,250c. $157,900d. -$225,000 (carrying costs would decline)e. $260,000

Q: Contrast the black box approach to IT auditing and the white box approach. Which is preferred?

Q: Exhibit 27.3Van Doren Housing expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Van Doren's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Van Doren wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.Refer to Exhibit 27.3. What would be the incremental bad debt losses if the change were made?a. $130,000b. $250,000c. -$250,000 (bad debt losses would decline)d. -$130,000 (bad debt losses would decline)e. $620,000

Q: Exhibit 27.3Van Doren Housing expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days dales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Also, Van Doren's cost of capital is 15 percent, and its variable costs total 60 percent of sales. Since Van Doren wants to improve its profitability, a proposal has been made to offer a 2 percent discount for payment within 10 days; that is, change the credit terms to 2/10, net 30. The consultants predict that sales would increase by $500,000, and that 50 percent of all customers would take the discount. The new DSO would be 30 days, and the bad debt loss percentage on all sales would fall to 4 percent.Refer to Exhibit 27.3. What would be the cost to Van Doren of the discounts taken?a. $116,750b. -$108,750c. $155,000d. $225,000e. $260,500

Q: Describe and contrast the test data method with the integrated test facility.

Q: Exhibit 27.2Reese Brothers Publishers Inc (RBP) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Since RBP wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent.Refer to Exhibit 27.2. What are the incremental pre-tax profits from this proposal?a. $181,250b. $271,750c. $256,250d. $206,500e. $231,250

Q: If input and processing controls are adequate, why are output controls needed?

Q: After data is entered into the system, it is processed. Processing control exists to make sure that the correct things happen during processing. Discuss processing controls.

Q: Exhibit 27.2Reese Brothers Publishers Inc (RBP) expects to have sales this year of $15 million under its current credit policy. The present terms are net 30; the days sales outstanding (DSO) is 60 days; and the bad debt loss percentage is 5 percent. Since RBP wants to improve its profitability, the treasurer has proposed that the credit period be shortened to 15 days. This change would reduce expected sales by $500,000, but it would also shorten the DSO on the remaining sales to 30 days. Expected bad debt losses on the remaining sales would fall to 3 percent. The variable cost percentage is 60 percent, and the cost of capital is 15 percent.Refer to Exhibit 27.2. What would be the incremental cost of carrying receivables if this change were made?a. $108,750b. -$116,250 (carrying costs would decline)c. $157,900d. -$225,000 (carrying costs would decline)e. $260,500