Exam 2019, answers PDF

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Special Examination Paper - Semester 1 2019 Department of Accounting

Student ID Number:

Subject Code:

ACCT20007

Subject Name:

Accounting Information: Risks & Controls

Reading Time:

15 minutes

Writing Time:

3 hours

This paper has 26 pages (including this page) Authorised Materials: Unmarked non-electronic dictionaries Instructions to Invigilators: Candidates are permitted to use pen, pencil or highlighter to annotate questions in the exam booklet during reading time but must not commence writing in the answer space. This examination booklet is not to be removed from the examination venue. Instructions to Students: • This examination paper consists of five (5) questions worth 90 marks in total. Some questions have multiple parts. You must answer all parts of all questions. • This examination paper represents 60 percent of the total assessment for this subject. • Answer all questions in the space provided in this examination paper. • You are permitted to use pen, pencil or highlighter to annotate questions in the exam booklet during reading time but must not commence writing in the answer space. • Clearly label the front page of this examination paper with your student number. • This examination paper is not to be removed from the examination venue and must be submitted intact. • Failure to submit this examination booklet intact with your student number clearly indicated may result in an examination mark of zero (0).

Paper to be held by Baillieu Library: NO Examiners use only Question

1

2

3

4

5

Total

Mark

21

16

12

8

33

90

Score

1

Question 1

[1 + 1 + 1 + 2 + 2 + 3 + 2 + 4 + 2 = 21 Marks]

Consider the following extract of an E-R diagram for Matt’s Magnificent Manufacturing (MMM) Enterprise Resource Planning software.

Using the diagram as your reference, Circle the correct answer (direction of the relationship is as per question, entity 1 to entity 2): a. The relationship between Sales Forecast and Production Order is: a. One to One b. One to Many c. Many to One d. Many to Many [1 Mark]

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b. The relationship between Schedule Details and Production Operations is: a. One to One b. One to Many c. Many to One d. Many to Many [1 Mark] c. The relationship between Purchase Requestion and BOM is: a. One to One b. One to Many c. Many to One d. Many to Many [1 Mark] d. In the Schedule details entity, two attributes are missing. What are those attributes? Explain how you identified those attributes.

Attribute 1: Operations ID Attribute 2: Schedule IDs Reason: Foreign keys from the data stores with relationships ½ Mark each for attribute, 1 mark explanation

[2 Marks] e.

What is the missing verb that describes the interaction (relationship) within the cardinality between Purchase Requisition and Production Order? Explain with reference to the diagram.

Verb: Derives from, triggered by etc.

1 Mark explanation, 1 Mark word.

½ Marks if word is reading from right to left not normal left to right.

[2 Marks]

3

f.

Assume MMM uses SAP what technology (or application) would be used to create the purchase requisition and how does the technology (application) work.

It would be created via a MRP run

It is calculated based on the BOM for the items contained in the PO multiped by Quantity

Inventory on hand not reserved would use be deducted.

[3 Marks] g. The diagram above is an extract of MMM’s ER-Diagram. Identify one other entity that would be used in the expenditure cycle that Making Muesli Great’s ER-Diagram would link to and the relationship(s) with entities shown in the diagram.

Open question, answers could include Purchase Order (linked to PR) Production Schedule (related to Producton Order) and Sales (linked to sales forecast) 1 mark for entity 1 mark for argument.

Beware secondary or later links, like Accounts payable, even Inventory

[2 Marks]

4

h. Assume that MMM uses SAP as their Enterprise Resource Planning Software, outline (narrate) the process that would use the ER-Diagram outlined above. Your answer should describe the steps in which the individual entities shown in the diagram are either updated, or the data within them are used.

This process if effectively the sales forecast and purchase requestion.

The sales forecast is used to trigger the production order which is approved by production staff.

The PO triggers two sub processes.

One is updating the production schedule, by creating a new schedule for the PO based on the list of operations wich than updates the production schedule. The second is the creation of a PR based on the PO The PR is generated with reference to the BOM which identifies what materials are needed, less raw materials currently on hand.

[4 Marks]

5

i.

What entity/entities would provide data that feeds into the balance sheet accounts of MMM? Explain why with reference to the diagram.

The only one is raw materials

As this would be part of the inventory line item.

Additional answers should be penalised.

[2 Marks]

6

Question 2

[4 + 4 + 4 + 4 = 16 Marks]

a) The use of a Blockchain (a distributed ledger) establishes the rights and obligations of a transaction within the purchase process, reducing the risk of fraud. Do you agree with this statement? Explain why / why not? [4 marks]

Blockchain provides a robust view of ownership, generally documented as a part of the transaction and available for review. However, it may be less straightforward in establishing the right and obligations associated with it. There are still limitations as the blockchain technology does not seem to be suited in capturing nuance and interpretation such as third party warehousing (where the ownership of goods is with an organisation but the organisation does not necessarily have an unimpeded access to the warehouse where goods are stored) and consignment inventory (where the goods’ ownership are with the supplier but the goods itself is available for use by the retailer). In a general purchase process, once a product is sold to a customer, recording the shipping of the product and goods receipt allows for the recording of the transfer of ownership of the product. Once the ownership has transferred, the customer has a right to the product and simultaneously, an obligation to pay for the product. However, in situations, for instance, from a consignment inventory perspective, this may not be as clear. Imagine a retailer who agrees to carry the product of a supplier as consignment inventory. At this point in time, the blockchain will still record the ownership of the product to belong to the suppliers; however, the retail now has the right to sell that product without the obligation to pay for the product, until the product is sold. Blockchain is gaining traction especially in the area of collectibles and artwork. It helps with having a record of the owner of a particular artwork and also potentially reducing the possibility of a fake artwork being sold as original (may not have the block associated with it).

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b) Explain how a three-way match of Purchase Orders, Goods Received Reports and Invoices helps ensures that management assertions regarding the Occurrence and Completeness of Accounts Payable are achieved.

Occurrence compltness / validity Compltness = compltness

Both direction reconciliation, ensures that all PO have been acted on, Goods received and Invoices are real. Look at ensuring that the process is both complete PO to GR to Invoice and valid in reverse order.

1 Mark for matching assertions to VAC – 3 marks for explanation.

[4 Marks]

8

c) Wayne Enterprises is a small retail business of 6 employees plus the owner Wayne. Wayne has recently restructured the business so that two employees work in the warehouse accepting and sending all deliveries and recording inventory movements, another two employees send and receive all invoices, as well as make and receive payments. The final two employees are sales staff, Wayne overseas purchases. Wayne claims in structuring the business this way he has segregated duties, do you agree with him? Why / Why not?

No, do not agree with him, (1 Marks) why he has integrated functions has not segregated custody from reporting. 3 marks for my not segregated, better marks should explain how segeration would be handled.

[4 marks]

9

d) “Since functional area specialists (e.g., managers in the sales, procurement, or production departments) best understand the nature of transactions within their area, they should be allowed to change the Chart of Accounts at any time as long as the changes are limited to the accounts affected by their department’s transactions.” Do you agree with this statement? Explain why or why not.

Disagree While functional staff understands the nature of transactions best, the COA should be maintained centrally to avoid the creation of an excessively long COA (containing duplication of similar accounts) and prevent the loss of financial statement comparability between accounting periods.

Agree If restricted to their own department transactions may be coded for internal purposes (via cost centres for example) for departmental reporting needs. In doing so cross-organisational functionality can be maintained if other parts of the account string are are maintained centrally

[4 marks]

10

Question 3

[2 + 3 + 3 + 4 = 12 Marks]

Matt’s Fine Good, is a specialty food retailer. Matt, the owner, has just discovered that staff member receiving incoming shipments has not been counting the goods being delivered, entering details as per the delivery docket. Matt estimates that around 1 in 20 inbound shipments contain errors. a) Would this be considered a systemic or random error? Explain why.

Systematic – all DD are entered as GR

[1 Marks] b) What document would be incorrect in the first instance because of this error? Moreover, what Information Quality Goal(s) would be impacted? Explain why.

Goods received.

Validity – the goods received do not match what is economically occurring – particularly if recording type of items that have not been received. Accuracy – if recording incorrect quantities.

C(D) is possible but highly unlikely as this would require receiving item, not on the DD not just incorrect qty the type of item, eg. Red socks not listed rather than red socks listed with Qt 5 and received 6.

[3 Marks]

11

c) How would this error impact the financial statements? Identify what accounts would be affected and in what direction.

Inventory would be misstated

The direction could be over or under – depending on if Supplier sent more goods or less goods.

1 Mark inventory – 1 Mark for both directions with explanation (0.5 if just stated)

[3 Marks] d) Identify another transaction cycle that would be impacted by this problem. Your answer should identify what decisions will be most impacted and the flow on effects of these decisions on subsequent processes and the reports.

Sales most logical as inventory checks could fail if inventory is overstated. This may result in sales being recorded that can not be earned. 1 Mark for another process (can not be the purchase cyle ) 2 marks for the reason 1 mark for impact on statement.

[4 Marks]

12

Question 4

[4 + 4 = 8 Marks]

a) Discuss how the use of an ERP system (e.g., SAP) enhances the completeness of the sales process within an organisation. Use an example from the GBI case to support your answer.

2 Marks for theory aspect 2 Marks for SAP Example

Up to 3 marks can be awarded for either if a particularly good answer to a maximum of 4 for the question.

[4 marks]

13

b. Authorization is regarded as an important control. How can the use of an ERP system (e.g., SAP) enforce proper authorization? Use an example from the GBI case to support your answer.

2 Marks for theory aspect 2 Marks for SAP Example

Up to 3 marks can be awarded for either if a particularly good answer to a maximum of 4 for the question.

[4 marks]

14

Question 5

( 2 + 3 + 4 + 4 + 7 + 7 + 1 + 2 + 3 = 33 Marks)

Lyle’s Shop and Office fittings manufactures and installs office and shop fittings. It two product ranges, the first a “standard” range of products for fast and cost-effective solutions, products in this range are normally kept in stock and can be installed quickly. The second range is an executive range which it manufactures to order. The standard range is of higher quality and finish, and a higher price. The manager of Lyle’s Shop and Office fittings recently conducted an internal audit of accounts receivable and noticed that several of its regular larger customers recently exceed their credit limit. The manager did note that these customers order from the executive range. While this has not led to an increase in bad debts, the manager is concerned that it has increased the risk of bad debts in the future. The manager has come to you asking for help on identifying the issue for the excess accounts receivable. The manager has also noted that they occasionally get a customer complaining about delays in receiving an order confirmation. The manager has provided you with a flowchart of the sales process, they note that all data entry is numeric only. As the issue is with existing customers and not new customers, you do not need to analyse the credit application process. Required

Review the diagram on the next page and answer the questions that follow.

15

a. Identify any economic events in the process, as depicted in the diagram. If there is no economic event, then identify a business event depicted in the diagram. Your answer should explain why the event you identified is an economic or business event.

Two main BE – update sales Orders and invoice customers. The actual economic events are (cash and shipping inventory) are not specifically shown in the diagram.

[2 marks] b. Duality relationships link economic events. What is the economic event linked by duality to the economic event identified in (b) above? Explain the relationship. If you identified a business event in (b), then identify the economic events in the transaction cycle the business event relates to.

Ship inventory Receive Payment

1 mark for an explanation.

[3 marks] c. Outline the advantages and disadvantages of having a customer manager approve and set credit limits for new customers. You should refer to information quality goals.

2 marks for pros and cons. Pros – independent, thus less likely to be subject to outside influences, therefore more valid.

Cons – Slows process, thus the risk of completeness if not done.

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2 marks Pro /Cons broken down into 1 mark for pro/con one mark for explaining how it impacts VAC

[4 marks] d. Identify another present control in the diagram (i.e. not the customer manager setting credit limits). Explain how the control addresses the risk it is designed to reduce,

how information quality is enhanced as a result of the control, including financial statement impacts.

1 Mark for control (plenty of them) 1 mark for risk 1 mark for VAC 1 mark for statement impacts.

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[4 marks] e. In regard to customers exceeding credit limits. i)

Identify and describe a weakness in the process (as shown in the diagram) could lead to customers exceeding credit limits. Your answer should identify any information quality risks that could impact the financial statements.

ii) What additional control could the manager implement to reduce this risk? Explain how the control minimises the weakness identified. Your answer should include what additional data (if any) would be needed for this control to work.

When a credit check is done, AR is not up to date due to the delay in issuing invoices. This increases the risk that customers may not pay. This leads to validity issues AR overstated, Sales Overstated.

When do credit checks also check for SO not yet processed? In doing so uses up to date information.

4 marks for i) 3 marks for ii)

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[7 marks] f.

In regard to customers receiving a late sales order confirmation. i)

Identify and describe a weakness in the process (as shown in the diagram) could lead to customers receiving a delayed sales order confirmation. Your answer should identify any information quality risks that could impact the financial statements.

ii) What additional control could the manager implement to reduce this risk? Explain how the control minimises the weakness identified. Your answer should include what additional data (if any) would be needed for this control to work.

20

Lost paperwork Completeness event issue Risk order not processed or similar No impact on financial statements

Open to answers, but the obvious one would be a direct entry into the computer at customer premises.

4 marks for i) 3 marks for ii)

21

[7 marks]

22

g. Other than customer complaints or bad debts (or similar) specify a performance measure that could be used to evaluate the improvements after the introduction of the control you recommended for either (e) or (f).

Mark as per control recommendation. – does it measure the change.

[1 mark] h. Explain how the performance measure selected in (g) above relates to the process objectives.

Must show it measures improvement in the process to help achieve the goal

[2 marks]

23

i.

Describe how the performance measure selected in (h) would be calculated. Your answer should include what data is needed and where it would come from.

1.5 Marks for the calculation – mark on does it make sense for the control does it measure the recommendation. 1.5 marks for explaining how the data is collected, for full marks must be available or explain how it will be collected.

[3 marks]

24

Additional Space Please reference what question you are answering both here and in the margin next to the question it relates to.

25

Additional Space Please reference what question you are answering both here and in the margin next to the question it relates to.

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