MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER AREAS OF MANAGEMENT ADVISORY SERVICES – PART I I Questions Refer to page 20, par (a) Independent management consulting firms Examples of these firms are Accenture Consulting, Ernst & Young Consulting, First Investment Development, Inc (b) Public Accounting firms (c) Individual practitioners (d) Internal consulting groups (e) Research-oriented organizations Refer to pages 34 to 36 Refer to pages 17 and 18 (1) Manufacturing a Development of standard costing system b Application of just-in-time inventory system (2) Finance and Accounting a Improvement of general and cost accounting system b Capital investment analysis (3) Marketing a Evaluation and improvement of the distribution system b Assessment of the effectiveness of the firm’s marketing strategy (4) International operations a Market research b Logistics 2-1 Areas of Management Advisory Services – Part I Chapter (5) Procurement of materials and supplies a Logistics in ordering materials and supplies including choice of suppliers; quantity and quality decisions, receipt and issuance procedures, etc b Evaluation of system effectiveness and efficiency Refer to pages 21 to 27 II Multiple Choice Questions C C A B D 2-2 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER AREAS OF MANAGEMENT ADVISORY SERVICES – PART II I Questions Refer to pages 33 and 34 Refer to pages 34 to 36 Refer to pages 34 to 36 Refer to pages 36 and 37 Refer to page 38 Refer to page 39 Refer to page 39 to 44 II Multiple Choice Questions B D D B D D C D 3-1 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER PROFESSIONAL ATTRIBUTES OF MANAGEMENT CONSULTANTS I Questions Refer to page 49, par Refer to pages 49 to 65 Refer to pages 49 to 65 Some of the factors which affect the degree of competence required in a particular MAS engagement are the nature, difficulty or complexity of the engagement, the significance of the recommendations for which responsibility will be assumed by the CPA, and the role assumed by the CPA, i.e., as an analyst, advisor or a researcher The CPA may acquire competence and proficiency in MS through Education – formal or informal (e.g., attending courses offered by universities and colleges or professional or trade associations; reading, self-study) Experience (e.g., actual supervision) performance under more Research Consultation with CPAs and other professionals Refer to pages 58 – 59 Refer to pages 50 – 64 4-1 experienced Chapter Professional Attributes of Management Consultants Refer to pages 52 – 57 Refer to pages 59 – 61 10 Refer to pages 64 – 65 II Multiple Choice Questions D C A C B 10 B C B A C 11 12 13 14 15 4-2 B C D D D MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER MAS PRACTICE STANDARDS AND ETHICAL CONSIDERATIONS I Questions “Role” refers to the relationship of the CPA as a consultant to the client management and personnel The basic role of the CPA in performing MAS is to provide advice and technical assistance to the client Practice standards are necessary in the consulting practice in order to promote the highest quality of performance of the practitioner Refer to page 71, par Refer to page 71, par(s) and 5 Refer to page 72, par Refer to page 73, par Refer to page 74, par(s) to Refer to page 75, par(s) to Refer to page 75, par II Multiple Choice Questions D A C D D D C D D III Cases 5-1 Chapter MAS Practice Standards and Ethical Considerations Case Nondisclosure is not considered an acceptable alternative because it makes you an accessory to the fact Disclosure to the offending party only - with no action - may result in the destruction of part of the evidence Probably, the first step is to report the matter to the chairman of the board Circumstances, however, may require that the matter be referred to an external body such as the Securities and Exchange Commission, Justice Department, Bureau of Internal Revenue, or the shareholders Case The appropriate action depends on the type of company: Privately held company in which the president is the owner: Discuss the matter with the president who, as owner, can make the decision Company with several shareholders in which the president holds a controlling number of shares: Discuss the matter with the president If the president accepts the recommendation and resigns, the problem is resolved Otherwise, the matter should be discussed with the chairman of the board and the board of directors A large publicly held company: The tendency here is to step over the president and go directly to the chairman of the board This is unwise You have a responsibility to discuss it first with the president Case The honest and ethical solution is to tell it as it is The most tactful approach is to make a full disclosure to the president privately, pointing out the vast growth of the company and the tremendous changes in technology that have occurred since he, as controller, installed the system If he understands the danger in which he is putting himself with regard to a possible dissident shareholder, he probably will acquiesce and agree to go forward If he doesn’t, and this is a privately held company in which he has control, you have accomplished your task In a publicly held company, you may need to report the problem to the chairman of the board if the impact on the annual report is serious 5-2 MAS Practice Standards and Ethical Considerations Chapter Case Professional ethics requires that you accept only those engagements which are felt to be beneficial to the client Clearly, if the results of the study are favorable, the client will be benefited There is only a 50 percent chance, however, that this will result The question, therefore, is whether a 50 percent chance of benefit is sufficient to pursue the study Many consultants would answer yes to this question and accept the engagement because of the potential profit The consultant who faced this situation declined the engagement and suggested that the client should use the money set aside for the feasibility study to employ an advertising firm to help them sell the bonds This decision was justified by what the consultant thought was the client’s best interest Case Ethical conduct requires that you not misrepresent facts and never subordinate judgment to others Further, you should not serve a client under terms or conditions that might impair objectivity, independence, or integrity, and you should reserve the right to withdraw if conditions develop that interfere with successful conduct of the assignment The consultant who was faced with this situation refused to follow the direction of the president, and the president refused to pay the consultant’s fee The president wanted to use the consultant as a means for firing a vice president Ultimately, the fee was settled and no report was issued Case Professional ethics require honesty, integrity, and placing the interests of the client or prospective client ahead of personal interests The fact that this is an internal consultant, as opposed to an external consultant, makes no difference The internal consultant wrote the report based on the available facts and was discharged Case 5-3 Chapter MAS Practice Standards and Ethical Considerations This is considered an ethical issue because its solution involves the future of the consultant’s personal doctrine and nonprofessional associations as well as the effectiveness and integrity of the consultation process in which the consultant is about to engage The principles involved in this case are not uncommon Although accepting such engagements would not be in violation of the code of ethics, acceptance would be ethical only if the consultant’s relationship with the client firm were completely divorced from the consultant’s personal doctrine and the client was made aware of the consultant’s values These circumstances are not likely, and the consultant would be justified in declining such an engagement because of a conflict of norms Case This arrangement is not acceptable under professional ethics A consultant should not pay a fee or commission to obtain a client or franchise a business practice The fact that the client came first and the commission came second in this case makes no difference The commission is being paid to franchise a business practice The consultant who was faced with this situation accepted the engagement After it was completed and he had paid the fee to the public relations agency, it was discovered that the city manager’s brother owned the public relations agency This disclosure was made in conjunction with the city’s audit The consultant willingly cooperated with the attorney in prosecution of the case The matter was brought to the ethics committee and, while the consultant was in violation of the ethics code, he was discharged with a reprimand His willingness to assist in the prosecution and the fact that he was not prosecuted in the case were significant in this decision Case You are not in a good position from an ethical point of view Your position as a director provides you with a significant influence over the direction of the company As such, you have a responsibility to what is best for the company Your responsibility to the consulting firm is to secure employment to keep your people busy By being both director and consultant for the same company, you are in a position that creates a conflict of interest, which is in violation of the code of professional ethics 5-4 MAS Practice Standards and Ethical Considerations Chapter Another problem is your planned conduct in the upcoming board meeting It is not honest and ethical for you to remain silent when you have relevant information on a decision You have a responsibility to express your feelings about the proposed engagement even if it means losing the engagement The solution here is to resign from the board of directors and become an advisor to the chairman You should point out how you feel about the installation of the sophisticated system at this time An objective decision can then be made by the board on all the available facts 5-5 Chapter 27 Computer-based Data Processing II True or False False True False True False 10 False False False True False 11 12 13 14 15 True False False False False III Multiple Choice C A A D A 11 12 13 14 15 D A C A B 21 22 23 24 25 B C C D D 10 A C C C A 16 17 18 19 20 D C D C D 26 27 28 29 30 D C D C C 27-2 31 C MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER 28 FUNDAMENTALS OF MANAGEMENT INFORMATION SYSTEM I Questions A system is an array of interrelated activities and components designed to accomplish a particular objective in relation to an overall plan An “information system” refers to the network of all the methods used to communicate information within an organization A “management information system” is a set of data gathering, analysis and reporting activities designed to provide management with the information it needs to discharge its functions of planning, coordinating and controlling business operations The major information systems are: a Financial information system This is concerned with the flow of monetary or financial information through the organization The “accounting system” of the company is only part of the financial information system b Logistics information system This is concerned with the flow of information about the physical flow of goods (raw materials, goods in process, finished goods) through an organization c Personnel information system This is concerned with the flow of information about the people (top and middle management, rank and file) working in an organization II Multiple Choice D B D D 28-1 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER 29 ACCOUNTING INFORMATION SYSTEM I Question Examples of accounting sub-system are a Sales order processing and billing b Purchases and cash payments c Production and cost accounting d Payroll Examples of accounting procedures are those which are related to: a Sales, billing, cash receipts b Purchasing, cash disbursements c Timekeeping d Job-order costing Examples of accounting methods in accounting of production cost a Manual data processing b Electro-mechanical data processing c Electronic data processing II Multiple Choice 10 E E A C B C D B B D 11 12 13 14 15 16 17 18 19 20 D A B C B B D D D D 21 22 23 24 25 26 27 28 29 30 D D D D C A A B B C 29-1 31 32 33 34 35 36 37 38 39 40 D B B D B A B C B D 41 42 43 44 45 46 47 48 49 50 B B D A D D C D C D MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER 30 SYSTEMS CONTROLS AND SECURITY MEASURES IN AN ACCOUNTING INFORMATION SYSTEM I Matching Type G B C H F II Multiple Choice C B D C B 11 12 13 14 15 B C B C A 10 B D B B A 16 17 18 19 20 B A B D D 21 C 30-1 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER 31 SYSTEMS ENGAGEMENT I Questions The basic objective of systems and procedures work is to analyze the policies, procedures, methods, forms and equipment of a business firm in order to simplify and standardize office procedures The basic objective of an initial or preliminary survey is to obtain the necessary background information that will enable the consultant to define the systems problem and the objective of the engagement It is intended to isolate the problem factors, not to develop solutions The advantages of using charts and diagrams to organize information obtained in a survey in a systems survey are: a The overall system, specially interaction among controls is portrayed systematically and compactly b Analysis is facilitated because the flow of data can easily be seen c A graphic picture enables one to spot difficulties and weaknesses in the system d Comparison between present and proposed operations is facilitated The four most common data gathering methods are: a Interviews Information is gathered verbally through questions posed by the analyst b Questionnaires A set of questions regarding the system is prepared and sent to both current and potential users of the system for response 31-1 Chapter 31 Systems Engagement c Document review Information about the existing process is obtained through the review of records, forms, documents, reports and written policy manuals d Personal observation The analyst observes how processes are carried out and whether specified steps are actually followed II True or False True True True False False III Multiple Choice D D D D D 11 12 13 14 15 C D D A B 10 D A D B A 16 17 18 19 20 C B D B C 21 D 22 B 31-2 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER 33 EFFECTS OF COMPUTERS ON INTERNAL CONTROL I Questions A computer system does not affect the overall objectives of internal control These objectives remain intact irrespective of the method of data processing Computer systems often make these objectives more important to achieve, however, and the specific controls used to achieve basic internal control objectives may change Computer data processing changes the ways in which functions must be separated to maintain control For example, whereas in a manual system separate individuals may have been responsible for initiating and recording transactions, in a computer system a program may perform both functions It now becomes important to separate responsibility for running the program in production mode from responsibility for modifying and maintaining the program This separation may be enforced physically; for example, computer operations staff may be separated from program maintenance staff With minicomputers and microcomputers, however, physical separation of duties becomes increasingly difficult to implement The person entering data into the system often has the capability to alter the program being used to capture the data In these types of situations, softwarebased access controls become more important as a means of enforcing separation of duties When resources in a computer system are shared, it is often difficult to assign responsibility for the various functions that must be performed to acquired, protect, use, and maintain the resource For example, if data is shared, it may be unclear whether each user of the data should be allowed to assign access and modification rights to new users who potentially are untrustworthy Similarly, if data is corrupted, disputes may arise over who must take responsibility for correcting the consequential errors that have occurred 33-1 Chapter 33 Effect of Computers on Internal Control In an environment of end-user computing, three types of problems can arise when attempting to specify clear lines of authority and responsibility First, it is difficult to specify clearly the types of systems that end users can develop without top management approval Some types of end-user systems are critical to the ongoing success of the organization, and they should be vetted by top management Second, it is difficult to specify clear lines of authority and responsibility with respect to hardware and software acquisition Many end users have been especially creative in their efforts to circumvent the controls that have been put in place Third, it may be difficult to differentiate the responsibilities of end users from the responsibilities of data processing personnel in terms of the many functions that must be performed to design, implement, operate, and maintain systems Substantial power is vested in an organization’s data processing personnel They have the in-depth technical knowledge that allows them to design, implement, operate, and maintain the organization’s data processing systems In addition, it is difficult to implement effective and efficient internal controls that restrict the actions they can undertake A malicious data processing employee can wreak havoc Consequently, greater reliance must be placed on the personal integrity of the individuals employed in the data processing department In a computer system, the general authorizations are often embedded within a program Thus, auditors must examine and test programs to evaluate compliance with general authorizations Since specific authorizations relate to high-value and critical actions undertaken by the organization, they are often still embedded within manual systems or the manual subsystems in a computer system Thus, auditors perform traditional manual auditing procedures to evaluate compliance with these authorizations With growth of expert systems, however, specific authorizations are also becoming increasingly embedded within computer systems The primary impact of computer systems on the audit trail is that the audit trail may no longer be visible in hard-copy form Thus, the computer system must be designed to capture and store the information needed for audit trail purposes In a well-designed computer system, the audit trail can often be more extensive than the audit trail in a manual 33-2 Effect of Computers on Internal Control Chapter 33 system because the overheads associated with maintaining the audit trail in a computer system are less The audit trail is disappearing in the sense that it is no longer visible in hard-copy form There is no evidence, however, that the quality of audit trails has been undermined because computer systems have been implemented Indeed, the audit trails in computer systems can be very comprehensive because the overheads associated with maintaining the audit trail are low Computer systems affect the concentration of assets in an organization in three ways First, the organization’s major data files, which are critical assets, are stored at a small number of locations Second, the hardware and software, which may represent substantial investments, are also located in only a few places Third, substantial knowledge about the organization and its systems is vested in the data processing staff who design, implement, operate, and maintain the computer systems The primary effect of this concentration of assets on the system of internal controls is to increase the importance of the individual internal controls being in place and working The consequences of a control failure can be more serious 10 In a computer system, management supervision of employees is harder to implement Often the tasks performed by employees are technically complex and difficult for management to understand In addition, many of the tasks performed are not visible The effects of these tasks occur internally to the systems on which the employees work Employees also might be using a computer system at a remote location As a result, management are unable to physically observe their actions 11 Many independent checks are carried out in manual systems to ensure that employees are following the procedures needed to safeguard assets and preserve data integrity In a computer system, procedures for safeguarding assets and preserving data integrity are often embedded in a program Thus, auditors must focus on the procedures in place to ensure program code is authentic, accurate, and complete 12 As with manual systems, auditors must prepare reports on the assets held and compare the control totals in the reports with physical counts of the 33-3 Chapter 33 Effect of Computers on Internal Control assets that they undertake In a computer system, however, programs are used to prepare the reports for comparison purposes For example, a program sorts an inventory file by warehouse location and prepares control totals by inventory type Again, auditors must ensure that controls are in place to ensure the authenticity, accuracy and completeness of the programs used to prepare the control totals needed for comparison purposes 13 Compared to a manual systems environment, auditors face a greater number of controls to be evaluated in a computer systems environment These controls are also more complex and diverse Some controls have become important only with the emergence of computer technology; for example, the cryptographic controls used to preserve the integrity of controls in electronic funds transfer systems With the rapid evolution of computer technology, auditors find it increasingly difficult to keep up with the technology and to have sufficient understanding of the controls to be able to carry out a competent audit The ongoing, rapid evolution of computer technology also makes the evidence-collection task harder As a result of new technology, manual evidence-collection techniques may no longer be useful Inevitably the development of new automated audit evidence collection techniques lags the emergence of the technology Auditors must use some type of stopgap measure in the interim 14 The use of computers has two effects on the conduct of the evidence evaluation function First, given the increased complexity of computer control technology, it is also more difficult to evaluate the consequences of individual control strengths and weaknesses and to perform a global evaluation of the reliability of controls Second, because the consequences of control weaknesses are often more serious in a computer systems environment, auditors are under greater stress to make accurate assessments of the reliability of controls in computer systems 15 A control is a system that prevents, detects, or corrects unlawful events 16 We must focus on controls as a system because a failure to perform one function reliably may undermine the overall reliability of the control For example, if management does not check the log of failed passwords, attempts to enter a system illegally may not be detected 33-4 Effect of Computers on Internal Control Chapter 33 17 Controls reduce expected loses by (a) reducing the probability of events occurring that lead to a loss, and/or (b) reducing the amount of a loss if the loss does, in fact, eventuate II Multiple Choice C B D A B 11 12 13 14 15 C B C A A 10 C B A D C 16 17 18 19 20 A B A B D 21 D 22 D 23 B III Problems Problem The following controls might have prevented or detected Cruz’s activities: (a) Cash box control procedures should have been stronger It seems as if Cruz had free access to the cash box A log of deposits and withdrawals should have been kept, which might have triggered an investigation of Cruz’s activities (b) In the case of terminal having special access to privileges (such as supervisory terminals), a log of transactions should have been kept and examined regularly by an independent person (e.g., Cruz’s manager) (c) Accounts having little activity are always a special cause for concern in banks because of the possibility of fraud A sample of transactions for low activity accounts should have been investigated (d) Customer complaints should have been handled by a special section, not by Cruz Investigations of complaints should have detected Cruz’s activities 33-5 Chapter 33 Effect of Computers on Internal Control (e) Checking the correspondence between deposits and the documentation for two-year certificate accounts would have revealed that Cruz had not recorded deposits (f) Controls over the issue of passbooks should have been stronger Again, it seems that Cruz had easy access to new passbooks Periodically, the documentation supporting the issue of a new passbook should have been examined (g) Confirmation of customer account balances should have detected discrepancies between customer records and bank records Problem (a) General control features in most computer-based accounting systems are classified as follows: The plan of organization and operation of data processing activity The procedures for documenting, reviewing, testing, and approving systems or programs and changes thereto Controls built into the equipment (i.e., hardware controls) Controls over access to equipment and data files Other data and procedural controls affecting overall data processing operations Security controls address the physical security of data processing and disaster recovery (b) The purposes of the categories of application controls are as follows: Input controls are designed to provide reasonable assurance that data received for computer processing have been properly authorized and converted into machine-readable form and identified, and that data (including data transmitted over communication lines) have not been lost, suppressed, added, duplicated, or otherwise improperly changed Processing controls are designed to provide reasonable assurance that data processing has been performed as intended for the particular application (i.e., that all transactions are processed as authorized, that no authorized transactions are omitted, and that no unauthorized transactions are added) 33-6 Effect of Computers on Internal Control Chapter 33 Output controls are designed to ensure the accuracy of the processing result (such as account listings or displays, reports, magnetic files, invoices, or disbursement checks) and to ensure that only authorized personnel received the output Problem In auditing Nico Corporation, Rain may be able to rely on the well-known accounting software based on her previous experience Using a control copy, she can determine that an unmodified copy is being used In the case of Tower, Rain will have to perform extensive testing of the software or perform a code review or other tests of the design process to determine whether the software results in the financial statement assertions are valid Indeed, Tower’s need to be calling the developer on a regular basis should cause Rain some concern 33-7 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER OVERVIEW OF MANAGEMENT ADVISORY SERVICES (MAS) BY CPAs I Questions Among the primary factors that contributed to the emergence and growth of management consultancy are: Growth in size and complexity of business Difficulty in conducting and managing a business Greater competition among businesses so that new management techniques will have to be applied Recognition of the importance of accurate and timely information in decision-making Inability to have a complete line-up of professional management Small companies need management consultants to provide them with professional assistance because they are usually not in a position to hire a complete line-up of well-rounded management Owners and their executives are usually burdened with the responsibility of managing the day-to-day operations of the company so that not enough time is devoted to many staff services that are essential to the continuous growth and success of the business The objectives of management of a business organization are: Primary: To maximize the return on the investors’ capital and at the same time providing for the safety of such resources entrusted to them Secondary: To be able to discharge its social and legal responsibilities towards its employees, customers, the community and the government Refer to page 9, par(s) and 1-1 Chapter Overview of Management Advisory Services Refer to page 12 Refer to page 11 Refer to page 4, par Refer to pages and Refer to pages and 10 Refer to pages 10 and 11 II Multiple Choice Questions D C C D B 1-2 ... Refer to pages 21 to 27 II Multiple Choice Questions C C A B D 2-2 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER AREAS OF MANAGEMENT ADVISORY SERVICES – PART II I Questions Refer to pages... 39 to 44 II Multiple Choice Questions B D D B D D C D 3-1 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER PROFESSIONAL ATTRIBUTES OF MANAGEMENT CONSULTANTS I Questions Refer to page 49, par... decision can then be made by the board on all the available facts 5-5 MANAGEMENT CONSULTANCY - Solutions Manual CHAPTER ORGANIZATION AND MANAGEMENT OF THE MAS PRACTICE I Questions The qualifications