Question 1

LOS.int.entwide.cloud.syst.0010.wml
AICPA.120616BEC
LOS: LOS.int.entwide.cloud.syst.0010.wml
Lesson Reference: Introduction to Enterprise-Wide and Cloud-Based Systems
A client would like to implement a management information system that integrates all functional areas within an organization to allow information
exchange and collaboration among all parties involved in business operations. Which of the following systems is most effective for this application?
A decision support system.
An executive support system.
An office automation system.
An enterprise resource planning system.

Rationale
 A decision support system.
DSSs provide information to mid- and upper-level managers to assist them in managing non-routine problems and in long-range planning. Given that
this is not the intended focus of the proposed system this is not a good answer to this question.

Rationale
 An executive support system.
ESSs are a subset of DSS especially designed for forecasting and making long-range, strategic decisions; thus, these systems have a greater emphasis
on external data. Given that this is not the intended focus of the proposed system this is not a good answer to this question.

Rationale
 An office automation system.
These systems facilitate the work of clerical employees by providing information relevant to their day-to-day activities. Given that this is not the
intended focus of the proposed system this is not a good answer to this question.

Rationale
 An enterprise resource planning system.
ERPs provide transaction processing, management support, and decision-making support in a single, integrated package. By integrating all data and
processes of an organization into a unified system, ERPs attempt to eliminate many of the problems faced by organizations when they attempt to
consolidate information from operations in multiple departments, regions, or divisions. This is the correct answer since facilitating information
exchange and collaboration is the primary purpose of the proposed system.
Question 2
LOS.it.rsk.info.stms.0030.wml
tb.it.rsk.info.stms.006_17
LOS: LOS.it.rsk.info.stms.0030.wml
Lesson Reference: Risks and Controls in Computer-Based Accounting Information Systems
Difficulty: medium
Bloom Code: 3
Authorization in an automated system is likely to be
Parallel.
Tagged.
Unnecessary.
Automated.

Rationale
 Parallel.
Incorrect. This is a nonsense answer.

Rationale
 Tagged.
Incorrect. This is a nonsense answer.

Rationale
 Unnecessary.
Incorrect. Authorization is needed in automated systems.

Rationale
 Automated.
Correct! Authorization is often automated in online systems.
Question 3
LOS.bonds.0010.wml
AICPA.070709BEC-SIM
LOS: LOS.bonds.0010.wml
Lesson Reference: Bonds
Difficulty: easy
Bloom Code: 4
Which one of the following bond issues, with different terms and stated rates of interest, would have the highest interest rate risk, all other things being
equal?
10-year, 4% bonds.
10-year, 6% bonds.
30-year, 4% bonds.
20-year, 4% bonds.

Rationale
 10-year, 4% bonds.
This issue has a shorter maturity than bonds with the same stated rate. The shorter the maturity (and the higher the stated rate) the lower the risk
associated with the issue.

Rationale
 10-year, 6% bonds.
This issue has a shorter maturity than the 20-year and 30-year issues. Furthermore, the higher the stated rate, the lower the relative fluctuation with
changes in the market rate of interest.

Rationale
 30-year, 4% bonds.
This issue has the longest maturity (with the lowest stated interest rate). Therefore, it will have the highest interest rate risk.

Rationale
 20-year, 4% bonds.
This issues has a shorter maturity than the 30-year issue. With the same stated rate, the 30-year issue would have a greater interest rate risk due to its
longer maturity.
Question 4
LOS.it.syst.dev.imp.0020.wml
aicpa.tb.it.syst.dev.imp.001_2-18
LOS: LOS.it.syst.dev.imp.0020.wml
Lesson Reference: System Development and Implementation
Difficulty: medium
Bloom Code: 1
Which of the following conversion strategies is characterized by a manager removing the old system and installing the new system without the possibility of
reverting to the original?
Direct changeover
Phased implementation
Parallel conversion
Integrated test facility

Rationale
 Direct changeover
Correct! A direct changeover involves implementation of a new system without the possibility of reverting to the old system. It is often a risky strategy.

Rationale
 Phased implementation
Incorrect. In a phased implementation, the system is divided into modules that are brought on line one or two at a time.

Rationale
 Parallel conversion
Incorrect. This answer has the same meaning as a phased implementation conversion. In a parallel or phased implementation conversion, the system is
divided into modules that are brought on line one or two at a time.

Rationale
 Integrated test facility
Incorrect. This answer is not relevant to this question. An integrated test facility is used to test transactions as a part of validating a system. It is not a
conversion strategy.
Question 5
LOS.intro.prjct.rsk.0020.wml
AICPA.090538BEC-SIM
LOS: LOS.intro.prjct.rsk.0020.wml
Lesson Reference: Introduction and Project Risk
Difficulty: medium
Bloom Code: 2
The presence of risk for a portfolio of projects means:
More than one outcome is possible for any project.
Some projects will lose money.
Changes in tax rates are expected to affect all projects.
An inadequate number of projects is being undertaken to fully eliminate all risk.

Rationale
 More than one outcome is possible for any project.
Risk is the possibility of loss or other unfavorable result that derives from the uncertainty implicit in future outcomes. In the context of a portfolio of
projects, it is the uncertain outcome associated with any project.

Rationale
 Some projects will lose money.
Risk does not mean that some project will lose money, but rather that the outcome of all projects is uncertain. Risk is the possibility of loss or other
unfavorable result that derives from the uncertainty implicit in future outcomes, including the outcome of investments in projects.

Rationale
 Changes in tax rates are expected to affect all projects.
Risk does not derive from expected changes in tax rates that will affect all projects, but rather from the uncertainty as to the outcome of all projects.
Risk is the possibility of loss or other unfavorable result that derives from the uncertainty implicit in future outcomes. While expected changes in tax
rates may affect all projects, they are just one possible element of risk and the presence of risk does not mean that changes in tax rates are expected.

Rationale
 An inadequate number of projects is being undertaken to fully eliminate all risk.
Risk does not derive from having an inadequate number of projects to fully eliminate all risk; all risk cannot be eliminated from project undertakings. A
portfolio of diverse projects can reduce risk associated with projects, but it cannot eliminate risk, especially non-diversifiable risk, which derives from
the broad economic and political environment. Risk is the possibility of loss or other unfavorable result that derives from the uncertainty implicit in
future outcomes.
Question 6
LOS.intro.coso.int.ctrl.0040.wml
AICPA.130522BEC-SIM
LOS: LOS.intro.coso.int.ctrl.0040.wml
Lesson Reference: Introduction to COSO, Internal Control, and the COSO Cube
This fundamental component of internal control is the core or foundation of any system of internal control.
Control activities.
Control environment.
Information and communication.
Risk assessment.

Rationale
 Control activities.
Control activities are, "...the policies and procedures that ensure that actions are taken to address the risks related to the achievement of
management's objectives."

Rationale
 Control environment.
The control environment is, "...the core or foundation of any system of internal control."

Rationale
 Information and communication.
Information and communication enables an organization's people to identify, process, and exchange the information needed to manage and control
operations.

Rationale
 Risk assessment.
Risk assessment is, "...the process of identifying, analyzing, and managing the risks involved in achieving the organization's objectives."
Question 7
LOS.mang.cyber.risk.0010.wml
aq.mang.cyber.risk.005_2017
LOS: LOS.mang.cyber.risk.0010.wml
Lesson Reference: Managing Cyber Risk: Part I—Applying COSO Principles to Cyber Risk
Difficulty: easy
Assessments of cyber risk impact:
Should assess the timing and duration of impacts and be led by the IT steering committee in consultation with senior managers and IT
stakeholders.
Should assess the likelihood and severity of impacts and should be led by senior management in consultation with business and IT
stakeholders.
Should assess the timing and duration of impacts and be led by senior managers in consultation with business and IT stakeholders.
Should assess the likelihood and severity of impacts and should be led by the IT steering committee in consultation with senior
management and IT stakeholders.

Rationale
 Should assess the timing and duration of impacts and be led by the IT steering committee in consultation with senior managers and IT
stakeholders.
This answer is incorrect. Both clauses in this sentence are inaccurate.

Rationale
 Should assess the likelihood and severity of impacts and should be led by senior management in consultation with business and IT
stakeholders.
Correct! The initiative should assess likelihood and severity of impact and should be led by senior management in consultation with business and IT
stakeholders.

Rationale
 Should assess the timing and duration of impacts and be led by senior managers in consultation with business and IT stakeholders.
This answer is incorrect. The initiative should assess likelihood and severity of impact and should be led by senior management in consultation with
business and IT stakeholders.

Rationale
 Should assess the likelihood and severity of impacts and should be led by the IT steering committee in consultation with senior
management and IT stakeholders.
This statement is incorrect. The initiative should be led by senior management.
Question 8
LOS.it.bus.strat.0030.wml
tb.it.bus.strat.003_17
LOS: LOS.it.bus.strat.0030.wml
Lesson Reference: IT and Business Strategy
Difficulty: hard
Bloom Code: 3
An accountant at Holly Golightly Tattoos builds a spreadsheet to manage the customer database. Because of the rapid growth of the business, the
spreadsheet quickly becomes unmanageably complex. This problem illustrates which of the following issues?
Inadequate scope and scalability
Lack of strategic focus
Lack of strategic investment
Digitization

Rationale
 Inadequate scope and scalability
Correct! Inadequate scope and scalability is an example of creating a system that is too small for a much larger problem. The spreadsheet in this case
was an inadequate tool for addressing a much larger problem (i.e., customer relationship management).

Rationale
 Lack of strategic focus
Incorrect. While lack of strategic focus is likely also a problem at this business, the issue is better described as a scope and scalability problem.

Rationale
 Lack of strategic investment
Incorrect. While lack of strategic investment is likely also a problem at this business, the issue is better described as a scope and scalability problem.

Rationale
 Digitization
Incorrect. This issue is unrelated to digitization. Digitization concerns the transformation of nonelectronic data to electronic form. This is not at issue in
this example. There is no statement regarding how these data were managed previously.
Question 9
LOS.oth.reg.fram.gov.0010.wml
aq.oth.reg.fram.gov.003_2017
LOS: LOS.oth.reg.fram.gov.0010.wml
Lesson Reference: Other Regulatory Frameworks and Provisions
Difficulty: easy
Public company external audit firms must audit their clients':
Financial statements.
Internal controls.
Financial statements and internal controls.
Neither financial statements nor internal controls.

Rationale
 Financial statements.
Incorrect. It is only partially true; auditors must also audit the public company's internal controls.

Rationale
 Internal controls.
Incorrect. It is only partially true; auditors must also audit the public company's financial statements.

Rationale
 Financial statements and internal controls.
Correct! SOX requires the auditors of public companies to audit both their financial statements and their internal controls.

Rationale
 Neither financial statements nor internal controls.
Incorrect; auditors of a public company must audit both the financial statements and the internal controls.
Question 10
LOS.reasn.intnl.0030.wml
aq.bec.reasn.intnl.003_0319
LOS: LOS.reasn.intnl.0030.wml
Lesson Reference: Introduction and Reasons for International Activity
Difficulty: medium
If a country can produce 10 automobiles or 4 tractors using the same input resources, what is the opportunity cost of 1 tractor?
0.40 automobile
2.50 automobiles
1.00 tractor
10.00 automobiles

Rationale
 0.40 automobile
Incorrect. The opportunity cost of 1 tractor is not 0.40 automobile. In the context of comparative advantage, opportunity cost is the output of a good or
service given up as a result of choosing to produce another good or service. This incorrect answer results from computing the opportunity cost of 1
automobile, not 1 tractor. This calculation is the fraction of a tractor that would be given up (opportunity cost) to produce 1 automobile, 4/10 = 0.40
tractor.

Rationale
 2.50 automobiles
Correct. The opportunity cost of 1 tractor is 2.50 automobiles. In the context of comparative advantage, opportunity cost is the output of a good or
service given up as a result of choosing to produce another good or service. By producing 1 tractor the country gives up the ability to produce 2.50
automobiles (opportunity cost), calculated as 10/4 = 2.50 automobiles. As proof (or said another away), if the resources that produce 4 tractors could
produce 2.50 automobiles each, the total production would be 10 automobiles.

Rationale
 1.00 tractor
Incorrect. The opportunity cost of 1 tractor is not 1.00 tractor. In the context of comparative advantage, opportunity cost is the output of a good or
service given up as a result of choosing to produce another good or service. This incorrect answer does not reflect the opportunity cost of automobiles
in term of giving up production of 1 tractor.

Rationale
 10.00 automobiles
Incorrect. The opportunity cost of 1 tractor is not 10.00 automobiles. In the context of comparative advantage, opportunity cost is the output of a good
or service given up as a result of choosing to produce another good or service. This incorrect answer shows the opportunity cost of 4 tractors, not 1
tractor. Since the same input resources can produce 10 automobiles or 4 tractors, the production tradeoff clearly is not 1 tractor for 10 automobiles.
Question 11
LOS.accrt.rtrnappr.0020.wml
RMCB-0009
LOS: LOS.accrt.rtrnappr.0020.wml
Lesson Reference: Accounting Rate of Return Approach
Difficulty: medium
The Bread Company is planning to purchase a new machine which it will depreciate on a straight-line basis over a 10-year period. A full year’s depreciation
will be taken in the year of acquisition. The machine is expected to produce cash flow from operations, net of income taxes, of $3,000 in each of the 10 years.;
The accounting (book value) rate of return is expected to be 10% on the initial increase in required investment. The cost of the new machine will be
$12,000
$13,500
$15,000
$30,000

Rationale
 $12,000
This answer is incorrect. Cost is equal to $15,000.

Rationale
 $13,500
This answer is incorrect. Cost is equal to $15,000.

Rationale
 $15,000
This answer is correct.The accounting rate of return equals accounting net income over book value. The book value of the new machine would be its
cost. The $3,000 cash flow net of income taxes does not reflect the 10% straight-line depreciation. The solutions approach is to set up a formula in
which cost is equal to $3,000 minus depreciation (which is 10% of cost) divided by the 10% rate of return. The numerator is the expected increase in
accounting income. The denominator is the capitalization rate, 10%. Solving the formula indicates that the cost of the machine is $15,000.

Cost = $3,000 – .10 (cost) / .10

Rationale
 $30,000
This answer is incorrect. Cost is equal to $15,000.
Question 12
LOS.intro.prjct.rsk.0020.wml
RMCB-0068B
LOS: LOS.intro.prjct.rsk.0020.wml
Lesson Reference: Introduction and Project Risk
Difficulty: medium

The level of risk that concerns investors who supply capital to a diversified company is

(This question is CIA adapted)

Project risk (beta).

Rationale
 Project risk (beta).
The firm has a diversified set of projects and, therefore, a single project risk is not relevant.

Rationale
 Pure play risk (beta).
Pure play risk relates to a single project.

Rationale
 The standard deviation of project risk (betas).
The standard deviation of project risk does not adequately measure the risk of the portfolio.

Rationale
 The weighted-average of project risk (betas).
A diversified company can be thought of as an investment portfolio. The relevant risk for both management and investors is the weighted average of
project risk.
Question 13
LOS.ent.fraud.mgmt.0080
aicpa.aq.ent.fraud.mgmt.008_2-18
LOS: LOS.ent.fraud.mgmt.0080
Lesson Reference: Fraud Risk Management
Difficulty: medium
Bloom Code: 1
In a small public company that has few levels of management with wide spans of control, each of the following mitigates management override of controls
except
Establishing an effective and anonymous whistleblower program with which employees can feel comfortable reporting any irregularities.
Establishing a corporate culture in which integrity and ethical values are highly appreciated.
Having two officers who significantly influence management and operations.
Having an effective internal auditor function.

Rationale
 Establishing an effective and anonymous whistleblower program with which employees can feel comfortable reporting any irregularities.
Incorrect. Establishing a whistleblower program mitigates (i.e., reduces the likelihood) of a management override of controls.

Rationale
 Establishing a corporate culture in which integrity and ethical values are highly appreciated.
Incorrect. Establishing a corporate culture that includes integrity and ethical values mitigates (i.e., reduces the likelihood) of a management override of
controls.

Rationale
 Having two officers who significantly influence management and operations.
Correct! Having two officers who significantly influence management and operations will not mitigate (i.e., reduce the likelihood) of a management
override of controls. Hence, this is the correct answer.

Rationale
 Having an effective internal auditor function.
Incorrect. An effective internal auditor function will mitigate (i.e., reduce the likelihood) of a management override of controls.
Question 14
LOS.erm.cloud.computing.0020.wml
aq.erm.cloud.computing.001_2017
LOS: LOS.erm.cloud.computing.0020.wml
Lesson Reference: ERM for Cloud Computing
Difficulty: medium
Which of the following is most clearly not a type of IT outsourcing:
External, public cloud
Internal, public cloud
External, private cloud
Internal, private cloud

Rationale
 External, public cloud
This is incorrect. This is an example of outsourcing. An external cloud is managed outside of the entity.

Rationale
 Internal, public cloud
This is incorrect. A public cloud includes elements of outsourcing since it is shared resource. Therefore, although it is not strictly an example of
outsourcing, it does have elements of outsourcing. Therefore, this is not the best answer.

Rationale
 External, private cloud
This is incorrect. This is an example of outsourcing. An external cloud is managed outside of the entity but exclusively for the entity.

Rationale
 Internal, private cloud
Correct! This is not an example of IT outsourcing. An internal, private cloud is not shared and is wholly owned and managed within an entity.
Question 15
LOS.qual.int.mgmt.0020.wml
PERM-0012
LOS: LOS.qual.int.mgmt.0020.wml
Lesson Reference: Quality Management
Difficulty: medium
In the cost of quality, liability claims are examples of
Prevention costs.
Appraisal costs.
Internal failure costs.
External failure costs.

Rationale
 Prevention costs.
This answer is incorrect. Prevention costs are those associated with any quality activity designed to do the job right the first time.

Rationale
 Appraisal costs.
This answer is incorrect. Appraisal costs are costs associated with quality control and include testing and inspection.

Rationale
 Internal failure costs.
This answer is incorrect. Internal failures occur when substandard products are produced but discovered before shipment to the customer.

Rationale
 External failure costs.
This answer is correct. Liability claim costs are examples of costs incurred for products that do not meet requirements of the customer and have been
shipped to the customer.
Question 16
LOS.accrt.rtrnappr.0020.wml
AICPA.921139BEC-P2-AR
LOS: LOS.accrt.rtrnappr.0020.wml
Lesson Reference: Accounting Rate of Return Approach
Difficulty: easy
Bloom Code: 4
Lin Co. is buying machinery it expects will increase average annual operating income by $40,000. The initial increase in the required investment is $60,000,
and the average increase in required investment is $30,000. To compute the accrual accounting rate of return, what amount should be used as the
numerator in the ratio?
$20,000
$30,000
$40,000
$60,000

Rationale
 $20,000

The accounting rate of return (ARR) is calculated as:

ARR = Average annual incremental income/Initial (or Average) investment.

For the facts given, the equation would be: ARR = $40,000/$60,000 (or $30,000). Thus, the numerator is given as $40,000.

This answer ($20,000) is the difference between the investment cost ($60,000) and the increase in average annual operating income ($40,000). This
difference is not a meaningful number.

Rationale
 $30,000

The accounting rate of return (ARR) is calculated as:

ARR = Average annual incremental income/Initial (or Average) investment.

For the facts given, the equation would be: ARR = $40,000/$60,000 (or $30,000). Thus, the numerator is given as $40,000.

This answer ($30,000) is the average investment and occasionally is used as the denominator of accounting rate of return.

Rationale
 $40,000

The accounting rate of return (ARR) is calculated as:

ARR = Average annual incremental income/Initial (or Average) investment.

For the facts given, the equation would be: ARR = $40,000/$60,000 (or $30,000). Thus, the numerator is given as $40,000.

Rationale
 $60,000

The accounting rate of return (ARR) is calculated as:

ARR = Average annual incremental income/Initial (or Average) investment.

For the facts given, the equation would be: ARR = $40,000/$60,000 (or $30,000). Thus, the numerator is given as $40,000.

This answer ($60,000) is the initial cost of the investment. This number is usually the denominator of accounting rate of return.
Question 17
LOS.erm.gov.cult.0020
tb.erm.gov.cult.001_0818
LOS: LOS.erm.gov.cult.0020
Lesson Reference: ERM Governance and Culture
Difficulty: medium
Bloom Code: 3
The CEO of Duke & Duke has been known to yell at employees. When the board first hears about such behavior, the role of the board in relation to the CEO's
behavior is most likely to be to:
Determine if the board is independent of the CEO.
Define the organizational culture as risk averse.
Fire the CEO.
Discuss the CEO's behavior and challenge the CEO to overcome these issues.

Rationale
 Determine if the board is independent of the CEO.
Incorrect. The issue in this case is unrelated to independence from the CEO.

Rationale
 Define the organizational culture as risk averse.
Incorrect. The primary issue in this case is not the organizational culture. The focus is on the behavior of the CEO, which is secondarily related to the
organizational culture. In addition, who said that the company had a risk-averse culture?

Rationale
 Fire the CEO.
Incorrect. While it may be appropriate to fire the CEO for this behavior eventually, the evidence in the case does not support such an extreme action.

Rationale
 Discuss the CEO's behavior and challenge the CEO to overcome these issues.
Correct! This action is best supported by COSO's ERM framework. The board must challenge the CEO to address his or her behavior.
Question 18
LOS.oprtnl.actvt.meas.0010.wml
FINM-0063
LOS: LOS.oprtnl.actvt.meas.0010.wml
Lesson Reference: Operational Activity Measures
Difficulty: medium
Which of the following ratios is appropriate for the evaluation of accounts receivable?
Days’ sales outstanding.
Return on total assets.
Collection to debt ratio.
Current ratio.

Rationale
 Days’ sales outstanding.
This answer is correct because days’ sales outstanding provides a measure of the average age of accounts receivable.

Rationale
 Return on total assets.
This answer is incorrect because it represents a profitability measure.

Rationale
 Collection to debt ratio.
This answer is incorrect because it is not a commonly used ratio.

Rationale
 Current ratio.
This answer is incorrect because it is a measure of liquidity.
Question 19
LOS.coso.erm2.0030.wml
CGIC-0033B
LOS: LOS.coso.erm2.0030.wml
Lesson Reference: Internal Control Monitoring Purpose and Terminology
Difficulty: medium
According to the COSO framework, evaluators that monitor controls within an organization should have which of the following set of characteristics?
Competence and objectivity.
Respect and judgment.
Judgment and objectivity.
Authority and responsibility.

Rationale
 Competence and objectivity.
COSO indicates that the evaluator must have competence and objectivity.

Rationale
 Respect and judgment.
These are not the desired characteristics of an evaluator.

Rationale
 Judgment and objectivity.
These are not the desired characteristics of an evaluator.

Rationale
 Authority and responsibility.
These are not the desired characteristics of an evaluator.
Question 20
LOS.mcr.envrmt.0010.wml
AICPA.101077BEC-SIM
LOS: LOS.mcr.envrmt.0010.wml
Lesson Reference: Macro-Environmental Analysis
Difficulty: medium
Bloom Code: 2
Macro-environmental analysis is concerned with analysis of
economic market structure.
an industry.
the characteristics of a country or region.
A firm.

Rationale
 economic market structure.
Macro-environmental analysis is not concerned with analysis of economic market structure, but with the characteristics of a country or region.
Economic market structure defines the economic characteristic of a market for a good or service and can range from perfect competition to perfect
monopoly. Macro-environmental analysis considers the broad political, economic, social, and technological characteristics of a country or a region.

Rationale
 an industry.
Macro-environmental analysis is not concerned with analysis of an industry, but with the characteristics of a country or region. Analysis of an industry is
concerned primarily with the make-up of the industry and the nature of competitive forces in the industry. Macro-environmental analysis considers the
broad political, economic, social, and technological characteristics of a country or a region.

Rationale
 the characteristics of a country or region.
Macro-environmental analysis is concerned with analysis of the characteristics of a country or a region. Specifically, macro-environmental analysis
considers the broad political, economic, social, and technological characteristics of a country or a region.

Rationale
 A firm.
Macro-environmental analysis is not concerned with analysis of a firm, but with the characteristics of a country or region. Micro-analysis, including
SWOT analysis, would focus on the characteristics of a firm. Macro-environmental analysis considers the broad political, economic, social, and
technological characteristics of a country or a region.