CHAPTER 2 · Batch systems- It assembles transactions into
They represent sources of
Introduction to
Transaction Processing
KEY TERMS
· Access method - Technique used to locate records
and navigate through the database
· Accounting records - are documents, journal, or
ledger used in transaction cycles.
- Are key sources of information and
evidence used to prepare, verify, and/or
audit the financial statements.
· Alphabetic codes - are used for many of the same
purposes as numeric codes. Alphabetic character
may be assigned sequentially (in alphabetical order)
or may be used in block and group coding
techniques.
· Alphanumeric codes- Codes that allow the use of
pure alphabetic characters embedded within
numeric codes.
· Archive file - contains records of past transactions
that are retained for future reference. These
transactions form an important part of the audit
trail. Archive files include journals, prior-period
payroll information, lists of former employees,
records of accounts written off, and prior-period
ledgers.
· Audit trail - The accounting records described
previously provide an audit trail for tracing
transactions from source doc to the FS.
· Batch - Is a group of similar transactions (such as
sales orders) that are accumulated over time and
then processed together.
general to highly detailed.
groups for processing.
· Block code – a variation on sequential coding that
partly remedies the disadvantages; coding scheme
that assigns ranges of values to specific attributes
such as account classifications.
· Cardinality – the degree of the relationship
between two entities; the numeric mapping
between entity instances.
· Chart of accounts - Listing of an organization’s
accounts showing the account number and name.
·Conversion Cycle - Transforms input resources, raw
materials, labor, and overhead into finished products
or services for sale. Cycle composed of the
production system and the cost accounting system.
· Currency of information - problem associated with
the flat-file model because of its failure to update all
the user files affected by a change in status; may
result in decisions based on outdated information.
· Database Management System (DBMS) - is a
special software programmed to know which data
elements each user is authorized to access and deny
unauthorized requests of data. Its purpose is to
provide controlled access to database.
· Database model - Symbolic model of the structure
of, and the associations between, an organization’s
data entities.
- Refers to the particular method used to
organize records in a database. There are
three main models: Hierarchical, Network
and Relational.
· Data flow diagram - uses symbols to represent the
entities, processes, data flows, and data stores that
pertain to a system. DFDs are used to represent
systems at different levels of detail from very
and destinations for data. Systems analysts use DFDs
extensively to represent the logical elements of the
system. This technique does not, however, depict
the physical system. In other words, DFDs show what
logical tasks are being done, but not how they are
done or who (or what) is performing them.
- Use of a set of symbols in a diagram to
represent the processes, data sources, data
flows, and process sequences of a current
or proposed system.
· Data model - Blueprint for what ultimately will
become the physical database.
· Data storage- Efficient information system that
captures and stores data only once and makes this
single source available to all users who need it.
- Creates excessive storage costs of paper
documents and/or magnetic form.
· Data structure - constitute the physical and logical
arrangement of data in files and databases;
techniques for physically arranging records in a
database.
· Data updating - periodic updating of data stored in
the files of an organization.
- any changes or additions must be
performed multiple times.
· Deadlock - “wait” state that occurs between sites
when data are locked by multiple sites that are
waiting for the removal of the locks from the other
sites.
· Direct access structures - storage of data at a
unique location, known as an address, on a hard disk
or floppy disk.
· Entity relationship (ER) diagram - An entity
relationship model, also called an entity-relationship
(ER) diagram, is a graphical representation of entities
and their relationships to each other, typically used
in computing in regard to the organization of data
within databases or information systems.
· Expenditure cycle - expenditure cycle is a set of
purchasing decisions and actions. It's the repetitive
process of creating purchase orders and ordering
goods and services, receiving these items, approving
the invoices for these items and services, and paying
the invoices. Assume that your company periodically
buys office supplies.
· Flat-file approach - a single-view model that
characterizes legacy systems in which data files are
structured, formatted and arranged to suit the
specific needs of the owner or primary user of the
system; organizational environment in which users
own their data exclusively.
· Flat-file model - environment in which individual
data files are not related to other files.
· Group codes - Codes used to represent complex
items or events involving two or more pieces of
related data.
· Hashing structure - structure employing an
algorithm that converts the primary key of a record
directly into a storage address.
· Indexed random file - Randomly organized file
accessed via an index.
· Indexed structure- class of file structure that uses
indexes for its primary access method; there exists a
separate index that is itself a file or record
addresses; this index contains the numeric value of
the physical disk storage location for each record in
the associated data file.
· Journal- record of a chronological entry.
Documents that are the primary source of data.
· Journal vouchers - Accounting journal entries into
an accounting system for the purposes of making
corrections or adjustments to the accounting data.
For control purposes, all JVs should be approved by
the appropriate designated authority.
- special source document that contains a
single journal entry specifying the general
ledger accounts that are affected.
· Ledger- a book of accounts that reflects the
financial effects of the firm’s transactions after they
are posted from the various journals.
· Legacy systems - Large mainframe systems
implemented in the late 1960s through the 1980s.
· Logical key pointer - pointer that contains the
primary key of the related record.
· Master file – generally contains account data.
- Examples are general ledgers and subsidiary
ledgers. Data values in master files are
updated from transactions.
· Mnemonic codes - Alphabetic characters in the
form of acronyms that convey meaning.
· Organization - refers to the way records are
physically arranged on the secondary storage device.
· Physical address pointer- Contains the actual disk
storage location (cylinder, surface, and record
number) that the disk controller needs.
· Pointer structure - structure in which the address
(pointer) of one record is stored on the field on a
related record.
· Product Documents - are the result of transaction
processing rather than the triggering mechanism for
the process.
· Program flowchart - diagram providing a detailed
description of the sequential and logical operations
of the program.
- provide essential details for conducting IT
audits. Sometimes used by accountants to
verify the correctness of program logic.
· Real-time systems - Systems that process
transactions individually at the moment the
economic event occurs.
·Record layout diagrams - are used to reveal the
internal structure of the records that constitute a file
or database table. The layout diagram usually shows
the name, data type, and length of each attribute (or
field) in the record. This type of layout shows the
content of a record. Each data attribute and key field
is shown in terms of its name and relative location.
· Reference file - stores data that are used as
standards for processing transactions. For ex. The
payroll program may refer to a tax table to calculate
the proper amount of withholding taxes for payroll
transactions. Other reference files include price lists
used for preparing customer invoices, lists of
authorized suppliers, employee rosters, and
customer credit files for approving credit sales.
· Register - often used to denote certain types of
special journals. For example, the payroll journal is
often called the payroll register. We also use the
term register, however, to denote a log. For
example, a receiving register is a log of all receipts of
raw materials or merchandise ordered from vendors.
Similarly, a shipping register is a log that records all
shipments to customers.
· Relative address pointer - contains the relative
position of a record in the file.
· Revenue cycle - Cycle composed of sales order
processing and cash receipts (cash sales, credit sales
and the receipt of cash).

· Sequential access method - Method in which all
records in the file are accessed sequentially.
· Sequential codes- Represent items in some
sequential order (ascending or descending). These
numbers become transaction numbers. It alerts the
mgt. to the possibility of missing transactions.
· Sequential codes - Codes that represent items in
some sequential order.
· Sequential structure - a data structure in which all
records in the file lie in contiguous storage spaces in
a specified sequence arranged by their primary key.
· Source documents - Documents that capture and
formalize transaction data needed for processing by
their respective transaction cycles.
· System flowchart - portray the computer aspects
of a system. They depict the relationships between
input (source) data, transaction files, computer
programs, master files, and output report produced
by the system. It also describes the type of media
being used in the system, such as magnetic tape,
magnetic disks, and terminals.
· Task-data dependency - User’s inability to obtain
additional information as his or her needs change.
· Transaction file - a temporary file of transaction
records used to change or update data in a master
file. Sales orders, inventory receipts, and cash
receipts are examples of transaction files.
· Turnaround documents - product documents of
one system that become source documents for
another system.
· Virtual storage access method (VSAM) – structure
used for very large files that require routine batch
processing and a moderate degree of individual
record processing.
REVIEW QUESTIONS
1. What three transaction cycles exist in all
businesses?
⮚ Expenditure cycle- Acquisition of materials,
property, and labor in exchange for cash.
⮚ Conversion cycle- Cycle composed of the
production system and the cost accounting
system.
⮚ Revenue cycle- Cycle composed of sales
order processing and cash receipts
2. Name the major subsystems of the expenditure
cycle.
⮚ Purchases/ Accounts Payable system -
recognizes the need to acquire physical
inventory and places an order with the
vendor
⮚ Cash disbursements system - When the
obligation created in the purchases system
is due, the cash disbursements system
authorizes the payment, disburses the
funds to the vendor, and records the
transaction by reducing the cash and A/P
accounts.
⮚ Payroll system - collects labor usage data
for each employee, computes the payroll,
and disburses paychecks to the employees.
⮚ Fixed Asset system -processes transactions
pertaining to the acquisition, maintenance,
and disposal of its fixed assets.
3. Identify and distinguish between the physical
and financial components of the expenditure cycle.
⮚ Physical- the acquisition of goods or
services
⮚ Financial- the cash disbursement to the
supplier
4. Name the major subsystems of the conversion
cycle.
⮚ Production system - planning, scheduling,
and control of the physical product through
the manufacturing process.
⮚ Cost Accounting system - monitors the flow
of cost information related to production.
5. Name the major subsystems of the revenue
cycle.
⮚ Sales order Processing- preparing sales
orders, granting credit, shipping products
(or rendering of a service) to the customer,
billing customers, and recording the
transaction in the accounts
⮚ Cash Receipts - collecting cash, depositing
cash in the bank, and recording these
events in the accounts
6. Name the three types of documents.
⮚ Source Documents- docs being created at
the beginning (the source) of the
transaction
⮚ Product Documents- the result of
transaction processing rather than the
triggering mechanism for the process.
⮚ Turnaround Documents - are product
documents of one system that become
source documents for another system.
7. Name two types of journals.
⮚ Special journals and general journal
8. Distinguish between a general journal and
journal vouchers.
Firms use a general journal is to record
nonrecurring infrequent, and dissimilar transactions.
Oftentimes, general journals are replaced with a
journal voucher system. On the other hand, the
journal voucher is used to record summaries of
routine transactions, no routine transactions,
adjusting entries, and closing entries. It is a special
source document that contains a single journal entry
specifying the general ledger accounts that are
affected.
9. Name two types of ledgers.
⮚ General ledger and subsidiary ledger
10. What is an audit trail?
A trail that allows the auditor to begin with
a summary total found on the financial statements
and track it back to the individual transactions that
make up this total. Conversely, an auditor should be
able to track transactions to their final impact on the
financial statements.
11. What is the confirmation process?
The confirmation process involves
contacting selected customers to determine if
transactions recorded in the accounts actually took
place and that customers agree with recorded
balance.
12. Computer-based systems employ four types of
files. Name them.
⮚ Master files, which generally contains
account data.
⮚ Transaction files, which is a temporary file
used to update data in a master file.
⮚ Reference files, which stores data that are
used as standards for processing
transactions.
⮚ Archive files, which contains records of past
transactions that are retained for future
reference.
13. Give an example of a record for each of the four
file types found in computer-based system.
Master files correspond to general ledger
accounts and subsidiary ledgers. Ex. include accounts
receivable and customer subsidiary accounts,
accounts payable and vendor subsidiary accounts,
inventory, etc. Transaction files correspond to
general and special journals. Examples include the
general journal, sales journals, cash receipts
journals, payroll journals, etc. Reference files include
lists of vendors, delinquent customers, tax tables,
sales tax rates, discount rates, lists of customers
granted specific discounts, etc. Archive files are
typically composed of records that have been
processed but are retained for their history.
Examples include payroll transactions, sales
transactions, etc.
14. What is the purpose of a digital audit trail?
The digital audit trail, like the paper trail,
allows us to trace transactions from the financial
statement balance back to the actual transaction so
we may: (1) compare balances, (2) perform
reconciliations, (3) select and trace samples of
entries, and (4) identify, pull, and verify specific
transactions.
15. Give an example of how cardinality relates to
business policy.
Cardinality reflects normal business rules as
well as organizational policy. For instance, the 1:1
cardinality in the first example in Figure 2-12
suggests that each salesperson in the organization is
assigned one automobile. If instead the
organization’s policy were to assign a single
automobile to one or more salespeople that share it,
this policy would be reflected by a 1: M relationship.
16. Distinguish between entity relationship
diagrams, data flow diagrams, and system
flowcharts.
An entity relationship diagram is a
documentation technique used to represent the
relationship among activities and users in a system.
Data flow diagrams are the use of a set of symbols in
a diagram to represent the processes, data sources,
data flows, and process sequences of a current or
proposed system. System flowcharts are flowcharts
used to show the relationship between the key
elements—input sources, programs, and output
products—of computer systems.
17. What is meant by cardinality in entity
relationship diagrams?
In entity relationship diagrams, cardinality is
the numeric mapping between entity instances. An
entity relationship can be one-to-one, one-to-many,
or many-to-many. If we think of entities in the entity
relationship diagram as files of records, cardinality is
the maximum number of records in one file that are
related to a single record in the other file and vice
versa. It also reflects normal business rules as well as
organizational policy.
18. For what purpose are entity relationship
diagrams used?
Entity relationship diagrams are used to
model an organization’s database. It serves as a
blueprint for what ultimately will become the
physical database.
19. What is an entity?
Entities are physical resources
(automobiles, cash, or inventory), events (ordering
inventory, receiving cash, shipping goods), and
agents (salesperson, customer, or vendor) about
which the organization wishes to capture data.
20. Distinguish between batch and real-time
processing.
Batch processing occurs when similar
transactions are accumulated over time and
processed together. Real-time processing captures
each event or transaction and processes it before
engaging in another transaction. If transactions are
independent of one another, such as the processing
of daily cash receipts, then batch processing is
appropriate. If transactions are dependent on
another, such as credit sales, ticket sales, etc., then
real-time processing is more appropriate
21. What is a flat-file model?
A flat-file structure is a single-view model
that characterizes legacy systems in w/c data file are
structured, formatted, and arranged to suit the
specific needs of the owner or primary user of the
system. Such structuring, however, may omit or
corrupt data attributes that are essential to other
users, thus preventing successful integration of
systems across the organization.
22. Is a data flow diagram an effective
documentation technique for identifying who or
what performs a particular task? Explain.
A flowchart depicts the physical system and
illustrates what type of and where a task is
performed and who is performing it.
23. Is a flowchart an effective documentation
technique for identifying who or what performs a
particular task? Explain.
A flowchart is an effective documentation
technique for identifying who or what performs a
particular task since it depicts the physical system
and illustrates the type of and where a task is
performed and who is performing it.
24. How may batch processing be used to improve
operational efficiency?
A single transaction may affect several
different accounts. Some of these accounts,
however, may not need to be updated in real
time. In fact, the task of doing so takes time which,
when multiplied by hundreds or thousands of
transactions, can cause significant processing delays.
Batch processing of noncritical accounts, however,
improves operational efficiency by eliminating
unnecessary activities at critical points in the
process.
25 Why might an auditor use a program flowchart?
When testing an application program, the
auditor needs details about its internal logic
provided by the program flowchart to design the
audit tests.
26. How are system flowcharts and program
flowcharts related?
The system flowchart shows the
relationship between two computer programs, the
files that they use, and the outputs that they
produce. However, this level of documentation does 30. What information is provided by a record layout
not provide the operational details that are diagram?
sometimes needed. An auditor wishing to assess the Record layout diagrams are used to reveal
correctness of a program’s logic cannot do so from the internal structure of the records that constitute a
the system flowchart. A program flowchart provides file or database table. The layout diagram usually
this detail. Every program represented in a system shows the name, data type, and length of each
flowchart should have a supporting program attribute (or field) in the record.
flowchart that describes its logic.
31. In one sentence, what does updating a master
27. What are the three general problems file record involve?
associated with data redundancy? Updating a master file record involves
⮚ increased data storage since the same data changing the value of one or more of its variable
is stored in multiple files fields to reflect the effects of a transaction.
⮚ increased data updating since changes must
be made to multiple files 32. What is the purpose of the DBMS?
⮚ possibility of noncurrent data caused by The purpose of the DBMS is to provide
failure to update. controlled access to the database. The DBMS is a
special software that is programmed to know which
data elements each user is authorized to access.
28. What is task data dependency?
Another problem with the flat-file approach
33. Flat files limit data integration. Explain.
is the user’s inability to obtain additional information
Files are structured to suit the specific
as his or her needs change. This problem is called
needs of the primary user and such structuring may
task-data dependency. The user’s information set is
exclude certain data that may be useful to other
constrained by the data that he or she possesses and
users thus, preventing integration. Ex, data from the
controls. Users act independently rather than as
Accounting Department may be seen as useless by
members of a user community. In such an
other departments of the company, that is why
environment, it is difficult to establish a mechanism
integration is needed to explain why one aspect of
for the formal sharing of data. Therefore, new
the company doing to another party.
information needs tend to be satisfied by procuring
new data files. This takes time, inhibits performance,
34. What factor influences the decision to employ
adds to data redundancy, and drives data
real-time data collection with batch updating rather
management costs even higher.
that purely real-time processing? Explain.
Transaction volume is the key factor. Large-
29. What is the Database Model?
scale systems that process high volumes of
Organizations have overcome some of the
transactions are better with real time data collection
problems associated with flat files by implementing
with batch updating Master file records that are
the database model to data management. With the
unique to a transaction can be updated real time
organization’s data in a central location, all users
without causing delay.
have access to the data they need to achieve their
respective objectives. Access to the data resource is
35. What are the advantages of real-time data
controlled by a database management system
processing?
(DBMS).
 In real-time processing environment, the
master files are updated as soon as the transaction is
submitted and accepted into the system. Thus,
reports are more accurate since it is as current as
possible. Advantages include improved productivity,
reduced inventory, increased inventory turnover,
decreased lags in customer billing and enhanced
customer satisfaction because transaction
information is transmitted electronically, physical
source documents can be eliminated or greatly
reduced.
36. What are the advantages of real-time data
collection?
Certain transaction errors can be prevented
or detected and corrected at their source. The result
is a transaction file that is free from most of the
errors that plague older legacy systems.
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.
Cash flows into the firm from sales made to
customers. The sales order processing subsystem of
the revenue cycle captures the intent of customers
to exchange cash for services or goods
manufactured. Typically sales are made on credit.
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.
Cost Accounting System is one of the major
subsystems of Conversion Cycle. Cost Accounting
System monitors the flow of cost information related
to production. The information this system produces
is used for inventory valuation, budgeting, cost
control, performance reporting, and management
decisions, such as make-or-buy decisions. Therefore,
the Cost Accounting System primarily supports
internal reporting.
3. Discuss the role of the conversion cycle for
service and retailing entities.
Role of Conversion Cycle in Services and
Retailing Entities:
• Transaction cycles hold good for financial
transactions in accounting processes. To deal with
voluminous load of transactions on a daily basis,
these transactions are grouped together based on a
common share of characteristics into Transaction
cycles.
• Manufacturing companies convert raw materials
into finished goods through conversion cycle. A
company may be product based or service based.
The main concern during the whole business
scenario is the conversion of cash through
various stages and ultimately earning the profit.
• The cash disbursement process lies with
expenditure which a company makes to buy raw
material and fixed assets including the employees
which are indirectly or directly converted to
products or services which are offered to the
customers from which the company earns profit.
4. Can a turnaround document contain information
that is subsequently used as a source document?
Why or why not?
Yes. For example, 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. It is not necessary that
a source document is freshly prepared sheet at the
starting of a transaction. It may be possible that
some document which is already prepared may
serve as a source document at some stage. These
documents are known as turnaround documents.
These are product documents of one system serving
as a source document to some other system.
5. Would the writing down of obsolete inventory be
recorded in a special journal or the general journal?
Why?
The writing down of obsolete inventory is
recorded in the general journal since it is
nonrecurring, no repetitive, and not similar to other
types of transactions.
6. Are both registers and special journals
necessary?
Sometimes the terms are used
interchangeably, such as the sales journal is
sometimes called the sales register. 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 in 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 customers’ accounts. A sample of the
customer accounts is then selected for confirmation.
9. Explain how the magnetic audit trail functions.
In theory, the magnetic audit trail functions
the same as a manual audit trail. In practice, the
steps are slightly different. The archive file that
consists solely of valid transactions is the file to
which the accounts receivable subsidiary account
balances and transactions are traced. The customers
still need to be contacted for confirmation
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
11. Discuss why an understanding of legacy system
technologies is of some importance to
auditors.
Not all modern organizations use entirely
modern information systems. Some firms employ
legacy systems for certain aspects of their data
processing. When legacy systems are used to
process financially significant transactions, auditors
need to know how to evaluate and test them.
12. If an organization processes large numbers of
transactions that use common data records, what
type of system would work best (all else being
equal)?
Large-scale systems that process high
volumes of transactions often use real-time data
collection and batch updating. Master file records
that are unique to a transaction, such as customer
accounts and individual inventory records can be
updated in real time without causing operational
delays. Common accounts should be updated in
batch mode. Real-time processing is better suited to
systems that process lower transaction volumes and
those that do not share common records.
13. If an organization processes transaction 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.
14. What is the most striking difference between
the database model and the flat file model?
The most striking difference between the
database model and the flat-file model is the pooling
of data into a common database that all
organizational users share.
15. What is meant by the term single user view as it
applies to flat files, and why is this a problem?
The flat-file approach is a single-view
model. Files are structured, formatted, and arranged
to suit the specific needs of the owner or primary
user of the data. Such structuring, however, may
exclude data needed by other users, thus preventing
successful integration of data across the
organization.
16. Explain the similarity and difference between
the data update and information currency
problems associated with flat files.
Both require multiple periodic updating of
information. While data updating adds to the task
and cost of data management, Currency of
Information, on the other hand, results to decisions
based on outdated information.
17. Should an auditor wishing to assess the
adequacy of separation of functions examine a data
flow diagram or a system flowchart? Why?
The auditor should examine the system
flowchart since it depicts the separation of functions
and illustrates who is responsible for performing the
specific processing steps. The data flow diagram, on
the other hand, illustrates the logical system and is
too general because of the many physical designs
applicable.
18. Discuss some of the problems associated with
general ledger systems that do not have data
coding schemes.
Postings to ledger accounts will require
searching through the subsidiary files using lengthy
descriptions as the key making this slow and
inefficient because postings to the wrong accounts
will be common.
19. For each of the following items, indicate
whether a sequential, block, group, alphabetic, or
mnemonic code would be most appropriate (you
may list multiple methods; give an example and
explain why each method is appropriate):
a. State codes– Alphabetic code - since it
corresponds with the postal service abbreviation
b. Check number – Numeric, Sequential - because it
allows checks to have a specific number in case it
goes missing
c. Chart of accounts – Block - this coding allows a
whole class of items to be restricted to a specific
range
d. Inventory item number – Alphanumeric - the
alphabetic portion allows more possible
combinations while the numeric portion makes it
easily sorted and found
e. Bin number (Inventory warehouse location) –
Group - certain digits may be to represent which
warehouse, floor, rows and bin
f. Sales order number – Numeric, Sequential - since
it can be easily found out if something was missing
g. Vendor code – Alphanumeric - with the
alphabetic codes, the names will be more
meaningful and the numeric can be used for
distinguishment of those firms with similar name
h. Invoice number – Numeric, Sequential - can be
examine sequentially and gaps in the sequence can
mean that there are missing invoices
i. Customer number – Alphanumeric - with the
alphabetic codes, the names will be more
meaningful and the numeric can be used for
distinguishment of those customer with similar
name
MULTIPLE CHOICE
1. Which of the following is not an advantage of
real-time processing of files over batch processing?
a. shorter transaction processing time
b. reduction of inventory stocks
c. improved customer service
d. all are advantages
e. none of the above are advantages
Justification: Real-time systems process transactions
individually at the moment the event occurs;
therefore; no time lags exist between occurrence
and processing. Information is always up to date
thus giving the organization the ability to take
immediate action when responding to an event,
issue or scenario in the shortest possible span of
time.
- It could also give the organization the ability
to gain insights from the updated data to
detect patterns for possible identification of
either opportunities (improved productivity,
reduced inventory, increased inventory
turnover, decreased lags in customer billing
and enhance customer satisfaction) or
threats to the organization’s business.
2. Which statement is NOT true? Batch processing
a. is a subject to deadlocks when processing
common accounts
b. permits data to be edited in a separate computer
run
c. can use databases and flat files
d. can be initiated from a terminal
Justification: Batch processing system is completely
opposite to the rules of real-time processing system.
Batch processing does not deal with the data
dynamically while real-time processing does.
Therefore, whatever data is edited, it is not edited
on real-time basis and is definitely not dynamic
enough to react instantly.
- Deadlocks cannot happen because
transactions are sorted by type similarities
& are all process together at the same time.
3. Which is the least appropriate type of
transaction for a real-time system?
a. airline reservations
b. point-of-sale transactions
c. weekly processing of payroll checks
d. air traffic control system
e. all of the above are real-time systems
Justification: Real time processing demands dynamic
outputs depending upon the situation. It is the next
generation to batch processing and it processes the
data the moment it comes. Payroll system is not a
dynamic working of the system as it is fixedand is
required to run after specific intervals. It does not
need any dynamic functioning, thus, to be cost
effective we put payroll system under batch
processing.
- real time system can only do one
transaction at a time.
4. Which of the following statements is not correct?
a. the database approach uses one common
database to promote the concept of single user
view
b. database systems resolve task data dependency
c. the flat-file model encourages data redundancy
d. a primary goal of database systems is to minimize
data redundancy e. database systems provide
increased accessibility to data and data integration
Justification: The database system pools data into a
common database that is shared by all the users
thus, offering multiple user views in that database.
- If all data is integrated into a single
database, it can be damaged because of
electric failure or database is corrupted on
the storage media. Use of the same
program or one common database at a time
by many users sometimes lead to the loss of
some data.
5. Which of the following is NOT true of a turn-
around document?
a. it may reduce errors made by external parties
b. it is used as internal documents only
c. it is commonly used by utility companies (gas,
power, water)
d. it is both input and output document
Justification: Turn around documents are product
documents of one system that become source
documents for another system hence they are also
for external use. It contains important information
about a customer’s account to help the cash receipts
system process the payment.
6. A documentation tool used to represent the
logical elements of a system is a(n)
a. data flow diagram d. system flowchart
b. programming flowchart e. all of the above
c. entity relationship diagram
Justification: A. The data flow diagram (DFD) uses
symbols to represent the entities, processes, data
flows, and data stores that pertain to a system.
Systems analysts use DFDs extensively to represent
the logical elements of the system.
- D. A system flowchart is the graphical
representation of the physical relationship
among key elements of a system, which are
org’l dept., manual activities, computer
programs, hard-copy accounting records
(documents, journals, legers and files), and
digital records (reference files, transaction
files, archive files and master files).
7. Which of the following statements is not a true
statement?
a. Transactions are recorded on ledgers and are
posted to journals
b. Transactions are recorded in journals and are
posted to ledgers
c. Infrequent transactions are recorded in the
general journal
d. Transactions are recorded in special journal
Justification: in the accounting cycle, transactions
are first recorded in the journals followed by the
posting to the ledgers and not recorded on ledgers
then posted in journals.
8. Which of the following is true of the relationship
between subsidiary ledgers and general ledger
accounts?
a. The two contain different and unrelated data
b. The relationship between the two constitute part
of the audit trail.
c. All general ledger accounts have subsidiaries
d. The total of subsidiary ledger accounts usually
exceeds the total in the related general ledger
accounts
Justification: The relationship between subsidiary
and general ledger provides an audit trail from
financial statements to source documents. The
reason behind this is, the cumulative of the
subsidiary ledger balance must be equal to the one
mentioned in general ledger. This is one of the best
ways followed during audit trail. Subsidiary ledgers
contain information in detail about a transaction
whereas the general ledgers keep the summarized
view.
- The audit of AR often includes a procedure
called confirmation. With the information
from the subsidiary ledger the auditor can
confirm the transactions of the general
ledger.
9. Which statement is NOT correct?
a. Indexed random files are dispersed throughout
the storage device without regard for physical
proximity with related records.
b. Indexed random files use disk storage space
efficiently.
c. Indexed random files are efficient when
processing a large portion of a file at one time.
d. Indexed random files are easy to maintain in
terms of adding records
Justification: indexed random files are not efficient
structures for operations that involve processing a
large portion of a file. This might require a great deal
of access time because in doing so, an entire record
of files are to be accessed that are randomly
dispersed throughout the storage device.
- The indexed files have to be reorganized
from time to time get rid of deleted records
and improve performance that gets
gradually decreased with the addition of
new records.
10. A database deadlock
a. is a lock placed on a record to prevent it from
being accessed by other processes.
b. occurs when two records are accidentally assigned
the same primary key
c. occurs when a unique record is accessed by
several different processes simultaneously.
d. is none of the above
Justification: A database deadlock is a process that
places a lock on one or more of the records that
should be processed. But it will not lock all of them.
It is a disruptive condition that depends on how
records will be locked by the system.
- occurs when two or more transactions are
waiting for one or more to give up locks. It
happens when two or more transactions
are blocked from completion because one
holds or locks on resources that the other
transaction also needs. Thus, it is in a ‘wait’
state.
11. An invoice file would best be coded using a(n)
coding ___ scheme.
a. alphabetic b. mnemonic c. block d. sequential
Justification: The best coding schemes for chart of
accounts is Block Code. This scheme can be used to
represent whole classes with restrictions to specific
range. A well designed chart of account is the basis
of general ledger thus being important to a
company. More extensive chart of accounts gives
more precision to the value which is good for
internal or external users
12. Which statement is NOT correct?
a. Legacy systems do not process financially
significant transactions
b. Mainframes are exclusive to legacy systems, while
modern systems use only client-server model
c. Legacy systems may use database technology
d. All of the above are true
Justification: Legacy systems may process financially
significant transactions. When legacy system is used
to process financially significant transactions,
Auditors need to know how to evaluate and test
them.
13. A documentation tool that depicts the physical
flow of information relating to a particular
transaction through an organization is a(n)
a. ER diagram d. decision table
b. system flowchart e. data flow diagram
c. program flowchart
Justification: System flowcharts are the graphical
representation of the physical relationship among
key elements of a system. These elements are the
organizational departments, manual activities,
computer programs, hardcopy accounting records
and digital records in a transaction.
- Typically, a system flowchart shows only the
flow of documents, not physical assets.
14. A coding scheme in the form of acronyms and
other combinations that convey meaning is a(n)
a. sequential code c. alphabetic code
b. mnemonic code d. block code
Justification: Mnemonic codes are alphabetic
characters in the form of acronyms and other
combinations that convey meaning, whereas
sequential codes represent items in some sequential
order, block code is a variation on sequential coding
and alphabetic codes are used from many of the
same purposes as numeric codes.
- Mkgt means marketing, Acctg means
accounting.
15. In a hashing structure
a. pointers are used to indicate location of a record
with the same address as another record
b. two records can be stored at the same address
c. pointers are used to indicate the location of all
records
d. all locations on the disk are used for record
storage
Justification: A. Hashing structure employs an
algorithm that converts the primary key of a record
directly into a storage address. Hashing eliminates
the need for a separate index. By calculating the
address, rather than reading it from an index,
records can be retrieved more quickly.
- B. In hashing structure, surprisingly, it is
possible to store two records at a single
memory location. This feature seems to be
a little complicated but is very useful when
pointers are applied at appropriate
position. If a memory location contains two
records at a single location, a pointer is
appointed from first record which is
residing on the memory location to the next
record w/c is stitched along. If someone has
to access data of the second record of the
same position, he can easily trace through
the pointer attached.
16. An advantage of a physical address pointer is
that
a. it remains unchanged when disks are reorganized
b. it is easily recovered if it is inadvertently lost
c. it points directly to the actual disk storage
location
d. all of the above are advantages of the physical
address pointer
Justification: Physical address pointer contains the
actual disk storage location (cylinder, surface, and
record number) that the disk controller needs. This
physical address allows the system to access the
record directly without obtaining further
information.
- This method has the advantage of speed,
because it does not need to be manipulated
further to determine a record’s location.
17. Which statement is NOT correct? The virtual
storage access method
a. is used for very large files that need both direct
access and batch processing.
b. may use an overflow area for records.
c. provides an exact physical address for each
record.
d. is appropriate for files that require few insertions
or deletions.
Justification: The Virtual Storage Access Method
indexes do not provide an exact physical address for
a single record, but they identify the disk track on
which the record resides.
18. Which statement is true about hashing
structure?
a. The same address could be calculated for two
different records.
b. Storage space is used efficiently.
c. Records cannot be accessed rapidly.
d. A separate index is required.
Justification: different record keys may generate the
same (or similar) residual, which translates into the
same address. This is called a collision because two
records cannot be stored at the same location.
- A pointer is allocated rom first record to
second record which takes care of the
physical allocation of the elements on
physical storage.
19. Which of the following statements is not true?
a. Sorting records that are coded alphabetically
tends to be more difficult for users than sorting
numeric sequences.
b. Mnemonic coding requires the user to memorize
codes.
c. Mnemonic codes are limited in their ability to
represent items within a class.
d. Sequential codes carry no information content
beyond their order in the sequence.
 already produced goods travel in the cycle
Justification: The mnemonic coding scheme does till they are sold.
not require the user to memorize meaning; the code
itself conveys a high degree of information about the
item that is being represented.

20. The production subsystem of the conversion “YOU MAY BE

cycle includes all of the following EXCEPT
a. make-or-buy decisions on components part DISAPPOINTED
b. determining raw materials requirements
c. release of raw materials into production
IF YOU FAIL
d. scheduling the goods to be produced
BUT YOU’LL BE
Justification: The conversion cycle has 2 subsystems:
the production system that involves the planning,
DOOMED IF YOU
scheduling, and control of the physical product
through manufacturing process, and; the cost
DON’T TRY.”
accounting system monitors the flow of cost
information related to production. -Beverly Sills
- It is the expenditure cycle that decides
acquisition of materials.

21. Which statement is NOT true?

a. Manufacturing firms have a conversion cycle but
retail firms do not.
b. The conversion cycle includes the task of
determining raw materials requirements.
c. A payroll check is an example of a product
document of the payroll system.
d. A general journal may be replaced by a collection
of journal voucher.

Justification: In service and retail industry,

conversion cycle is not really formal and observable
but they still engage in conversion cycle activities
which includes readying of products and services for
market and the allocation of resources such as
depreciation, building amortization, and prepaid
expenses to the proper accounting period.
- difference lies is the input to the cycle and
output received. It has no concern with only
production environment. Conversion cycle
in the retail firm has a different face where