91 VOCABULARY

Question 1

Accounting System

Answer 1

An accounting system is a set of processes, procedures, and software tools designed to capture, process, store, and analyze financial data. Accounting systems are crucial for maintaining accurate financial records, ensuring compliance with financial regulations, and producing financial statements and reports.

Question 2

Automation

Answer 2

Automation is the technology which allows machines to perform tasks once performed by humans via programmed commands, combined with automatic feedback control, to ensure proper execution of the instructions without human intervention.

Question 3

Blockchain

Answer 3

Blockchain is a digitized, decentralized, public ledger of all cryptocurrency transactions. Completed blocks are recorded and added to the chain in chronological order, allowing market participants to keep track of digital currency transactions without central recordkeeping.

Question 4

Check Digit

Answer 4

A check digit is a specific type of input control, consisting of a single digit at the end of an identification code that is computed from the other digits in a field. If the identification code is mis-keyed, a formula or algorithm will reveal that the check digit is not correct, and the field will not accept the entry.

For example, the formula for a seven-digit account number could be the sum of double, add, double, add, double, add, and subtracted from the next multiple of 10. In this case, 123456 would have a check digit of 0 and the full account number would be 1234560 (2 + 2 + 6 + 4 + 10 + 6 = 30; the next multiple of 10 is 30, so 30 - 30 = 0). If 1233560 is keyed instead of 1234560, the formula will not produce the proper check digit and the account number will be rejected.

There are many different formulas or algorithms for calculating check digits.

Question 5

COSO

Answer 5

The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is a joint initiative of the five private-sector organizations listed below and is dedicated to providing thought leadership through the development of frameworks and guidance on enterprise risk management, internal control, and fraud deterrence.

The Commission was sponsored by the American Institute of Certified Public Accountants (AICPA), the Institute of Internal Auditors (IIA), the Financial Executives Institute (FEI), the Institute of Management Accountants (IMA), and the American Accounting Association (AAA). COSO also sponsored a major research study on internal control.

Question 6

Data Redundancy

Answer 6

Data redundancy refers to the storage of the same item of data in two or more places (files) within an entity’s information system.

Question 7

Database

Answer 7

A database is a collection of interrelated information that can be used for a variety of purposes. A database is managed by a computer program called a database management system (DBMS).

Question 8

Database Management System (DBMS)

Answer 8

A DBMS (database management system) consists of computer program(s) for organizing, accessing, and modifying a database. It is a collection of programs that enables users to store, modify, or extract information from a database.

Question 9

Decision Making

Answer 9

The process of choosing between or among alternative courses of action is decision making. Decision making is future-oriented and, in general, for short-run decisions only variable costs, but not all variable costs, are relevant. Fixed costs must be considered when they will be altered by the decision. Relevant factors in the decision-making process include the following:

• The objective or goal whose achievement is desired (Why is this decision necessary?)
• The alternative courses of action identified
• The costs that are relevant to the decision (quantitative factors)
• Factors that cannot be expressed in dollars (qualitative factors, such as public or employee reaction to the decision)
  (Compare to decision-making process.)

Question 10

Data Processing System

Answer 10

A data processing system is a system for assembling, recording, classifying, storing, analyzing, and reporting data. The system can be manual, mechanical, or computerized. Electronic data processing (EDP) is often used to mean performing these tasks with a computer.

Question 11

Documentation

Answer 11

In computing, documentation is the instructions for operators, descriptions of procedures, and other descriptive material about a program or a system. These instructions can be classified as administrative, systems, or operating.

In systems analysis, documentation is the preparation and production of documents for system analysis, programming, and system operation. Good documentation is essential to system maintenance and modification.

In auditing, documentation is the use of documentary evidence to support or substantiate a claim or opinion. Documentary evidence (in an accounting sense) includes checks, invoices, contracts, and minutes of meetings. Documentary evidence may also include third-party documents such as bank statements or escrow account balances held by banks.

Question 12

Enterprise Resource Planning (ERP) System

Answer 12

An enterprise resource planning (ERP) system integrates all aspects of an organization’s activities into one accounting information system.

Question 13

Fair Market Value (FMV)

Answer 13

The fair value of an investment is the amount that the asset could reasonably expect to receive for it in a current sale between a willing buyer and a willing seller, that is, other than in a forced or liquidation sale. Fair value shall be measured by the market price if there is an active market for the investment. If there is no active market for the investment but there is a market for similar investments, selling prices in that market may be helpful in estimating fair value. If a market price is not available, a forecast of expected cash flows, discounted at a rate commensurate with the risk involved, may be used to estimate fair value. The fair value of an investment shall be reported net of the brokerage commissions and other costs normally incurred in a sale.

FASB ASC Glossary

For tax purposes, the fair market value is usually referred to as the sale price between a willing seller and a willing buyer when neither is compelled to buy or sell.

Question 14

Field Check

Answer 14

A field check is an edit check in which the characters in a field are examined to ensure they are of the correct field type (e.g., numeric data in numeric fields).

Question 15

Financial Statements

Answer 15

A financial statement is a structured representation of historical financial information, including related notes, intended to communicate an entity’s economic resources and obligations at a point in time or the changes therein for a period of time in accordance with a financial reporting framework.

Financial statements ordinarily refer to a complete set of financial statements as determined by the requirements of the applicable financial reporting framework.

Question 16

How can an accounting information system (AIS) contribute to effective decision-making and strategic planning?

By generating financial reports only

By providing an accurate, timely, and integrated view of an organization’s financial situation

By offering real-time data and analytics without the need for upgrades

By focusing solely on inventory management

Answer 16

An AIS is designed to offer an accurate, timely, and integrated perspective of an organization’s financial situation, which is crucial for making informed decisions and strategic plans.

The other answer choices are incorrect:

• “By generating financial reports only” is incorrect because an AIS goes beyond simply generating financial reports. While it does include financial reporting, it also provides various other functions, such as data collection, processing, and integration, which are essential for effective decision-making and strategic planning.
• “By offering real-time data and analytics without the need for upgrades” is incorrect because the provided information emphasizes the importance of reevaluating and upgrading the AIS to meet the demands of real-time data and analytics. AIS systems often require updates and upgrades to remain effective in rapidly evolving business environments.
• “By focusing solely on inventory management” is incorrect because an AIS encompasses a broader scope of financial data management and reporting, not just inventory management. It supports a comprehensive view of an organization’s financial situation, which includes accounting functions beyond inventory management.

Question 17

Information and Communication

Answer 17

“Information and Communication” is one of the key components of the COSO Internal Control – Integrated Framework.

Information is necessary for the entity to carry out internal control responsibilities to support the achievement of its objectives. Management obtains or generates and uses relevant and quality information from both internal and external sources to support the functioning of internal control.

Communication is the continual, iterative process of providing, sharing, and obtaining necessary information. Internal communication is the means by which information is disseminated throughout the organization, flowing up, down, and across the entity. It enables personnel to receive a clear message from senior management that control responsibilities must be taken seriously. External communication is twofold: It enables inbound communication of relevant external information and provides information to external parties in response to requirements and expectations.

Question 18

Information System

Answer 18

An information system is a collection of methods, practices, algorithms, and methodologies that transform data into information and knowledge desired and useful for individual and group users in organizations and other entities. It can involve a combination of work practices, information, people, and technologies organized to accomplish goals in an organization.

Question 19

Information and Communication

Answer 19

“Information and Communication” is one of the key components of the COSO Internal Control – Integrated Framework.

Information is necessary for the entity to carry out internal control responsibilities to support the achievement of its objectives. Management obtains or generates and uses relevant and quality information from both internal and external sources to support the functioning of internal control.

Communication is the continual, iterative process of providing, sharing, and obtaining necessary information. Internal communication is the means by which information is disseminated throughout the organization, flowing up, down, and across the entity. It enables personnel to receive a clear message from senior management that control responsibilities must be taken seriously. External communication is twofold: It enables inbound communication of relevant external information and provides information to external parties in response to requirements and expectations.

Question 20

Integrity (IT)

Answer 20

Integrity is the protection of data from unauthorized tampering. The system accomplishes its objectives in an unimpaired manner: processing is complete, accurate, timely, and free from unauthorized or inadvertent system manipulation.

Question 21

Management Information System (MIS)

Answer 21

A management information system (MIS) provides managers with the information they need for planning, organizing, decision making, and controlling the activities of the entity. The system may include the formal financial accounting records and can include many other information items needed by management.

Question 22

Operational Effectiveness

Answer 22

Operational effectiveness can refer to both a “macro” and a “micro” definition:

• Macro: Operational effectiveness on a macro level refers to whether or not an organization is performing its key processes and activities better than its competitors.
• **Micro: **From a process and internal control standpoint, operational effectiveness refers to whether or not a process or control is being performed correctly.

Question 23

Processing Integrity (Trust Services Criteria)

Answer 23

Processing Integrity (Trust Services Criteria)
The processing integrity criterion of Trust Services assesses whether the service organization’s system achieves its purpose (i.e., delivers the right data at the right price at the right time). Accordingly, data processing must be complete, valid, accurate, timely, and authorized.

Question 24

Privacy

Answer 24

Privacy is the right of an individual to self-determine the degree to which the individual is willing to share with others information about themselves that may be compromised by unauthorized exchange of such information among other individuals or organizations. It is the right of individuals and organizations to control the collection, storage, and dissemination of their information or information about themselves.

Question 25

Reasonableness Check

Answer 25

A reasonableness check is an edit check of logical correctness of the relationships among the values in an input data set, or the value of an input item with the values of a related data item in a master file. For example, a journal entry that debits selling expense and credits sales revenue is not logical, while a journal entry that debits accounts receivable and credits sales revenue is logical. A salary increase of $1 per month is not logical for any employee while a salary increase of $1,000 per month would only be logical for employees whose salaries were over a certain level.

Question 26

Real-Time Processing

Answer 26

Real-time processing is an e-business term that describes the situation where a user sends in transactions and awaits a response from a distant computer before continuing.

Question 27

Reconciliation

Answer 27

Reconciliation is an action to bring two related balances into agreement, to identify differences between two related balances (as, for example, the cash balance per the accounting records and the balance per the bank statement), and to detect errors or items that were included in the preparation of one balance omitted from the other. Reconciliation is also applied to any two balances that should agree (i.e., accounts payable or receivable per the accounting records and per the creditor/debtor, investment balances per the records and per the trustee, etc.).

Question 28

SOC 2 Type 1 Report

Answer 28

In a SOC 2® Type 1 report, the service auditor provides an opinion as to whether the service organization’s description “fairly presents” the system that was designed and implemented, and whether the controls were suitably designed to meet the criteria as of a specified date.

Question 29

SOC 2 Type 2 Report

Answer 29

In a SOC 2® Type 2 report, the service auditor provides an opinion on whether the service organization’s description “fairly presents” the system that was designed and implemented; the controls were suitably designed to meet the criteria; the controls operated effectively during the specified period of time; and the service organization is in compliance with the commitments in its statement of privacy practices, if the report covers the privacy principle.

Question 31

System and Organization Controls (SOC) Reports

Answer 31

SOC (system and organization controls) reports provide user management with information about the service organization’s internal controls to assist in assessing and addressing the risks associated with an outsourced service. The reports are intended to meet the needs of the user entities and the CPAs that audit the user entities’ financial statements in evaluating the effectiveness of the service organization’s controls on the user entities’ financial statements.

There are 3 categories of SOC reports: (See individual definitions for each type of report.)

• SOC 1®: Reports on the controls at a service organization that may be relevant to user entities’ internal control over financial reporting. Use of SOC 1 reports is restricted to the management of the service organization, user entities, and user auditors.
• SOC 2®: Based on the SysTrust and WebTrust principles, the purpose of the report is to evaluate a service organization’s information systems relevant to security, availability, processing integrity, confidentiality, or privacy. SOC® 2 reports contain sensitive information and are not shared outside the company.
• SOC 3®: Similar to a SOC 2 report, but this report does not detail the testing performed and is meant to be used as marketing material.

Question 32

Trust Services

Answer 32

Trust Services consist of professional attestation and advisory services based on principles and criteria that address the risk and opportunities of IT-enabled systems and privacy programs, including electronic commerce (e-commerce) systems. Trust Services principles and criteria are issued by the AICPA and the Canadian Institute of Chartered Accountants (CICA) and are organized into four broad areas: policies, communications, procedures, and monitoring.