AAT L4 Accounting Systems & Controls 4 — Questions and Answers
Question 1: The risk of fraud is greater when:
- Strong segregation of duties exists
- Management has strong ethical leadership
- One individual has control over all aspects of a transaction (lack of segregation) (Correct answer)
- Detailed monthly reconciliations are performed
Correct answer: One individual has control over all aspects of a transaction (lack of segregation)
Fraud risk increases significantly when one person has authority over multiple stages of a transaction — authorising, recording, and having custody of assets — with no independent check on their actions.
Question 2: The 'fraud triangle' identifies three conditions that typically need to be present for fraud to occur. These are:
- Greed, opportunity, and poor management
- Pressure (motive), opportunity, and rationalisation (Correct answer)
- Access, knowledge, and time
- Poor controls, dishonest staff, and weak management
Correct answer: Pressure (motive), opportunity, and rationalisation
The fraud triangle (Cressey) identifies three factors: pressure/motive (financial need or pressure), opportunity (weak controls or access), and rationalisation (justifying the behaviour). All three typically need to be present.
Question 3: Application controls in a computerised accounting system include:
- Backup procedures and disaster recovery
- Input validation checks (e.g., range checks, format checks) and sequence checks on transactions (Correct answer)
- Physical access controls on the server room
- Network security firewalls
Correct answer: Input validation checks (e.g., range checks, format checks) and sequence checks on transactions
Application controls are built into specific software applications: input validation (data type, range, and format checks), authorisation controls within the system, and completeness checks — they control individual transaction processing.
Question 4: Which of the following is an objective of an accounting system's output controls?
- Ensuring data is entered accurately the first time
- Ensuring that outputs (reports, invoices, financial statements) are complete, accurate, and distributed only to authorised recipients (Correct answer)
- Preventing unauthorised system access
- Keeping backup copies of all data
Correct answer: Ensuring that outputs (reports, invoices, financial statements) are complete, accurate, and distributed only to authorised recipients
Output controls ensure that system-generated outputs are complete, accurate, and secure; only authorised personnel should receive sensitive reports, and outputs should be reconciled to inputs to confirm completeness.
Question 5: A cost-benefit analysis of implementing a new control considers:
- Only the cost of the new software
- Whether the benefit of reducing the risk (e.g., value of prevented fraud or error) outweighs the cost of implementing and operating the control (Correct answer)
- The impact on the company's share price
- The number of staff required to perform manual checks
Correct answer: Whether the benefit of reducing the risk (e.g., value of prevented fraud or error) outweighs the cost of implementing and operating the control
Controls are only worthwhile if their benefits (risk reduction, fraud prevention, improved accuracy) exceed their costs (implementation, ongoing operation, staff time). A cost-benefit analysis guides this decision.
Question 6: When a company moves from a manual to a computerised accounting system, which of the following is a key data migration risk?
- The computer software will not produce any financial reports
- Historical data transferred may contain errors, duplicates, or incomplete records, resulting in inaccurate opening balances (Correct answer)
- The company will lose all existing customers
- Payroll cannot be processed after migration
Correct answer: Historical data transferred may contain errors, duplicates, or incomplete records, resulting in inaccurate opening balances
Data migration risks include: transferring incorrect, incomplete, or duplicate historical data; reconciliation problems on opening balances; and loss of audit trail. Thorough testing and validation before go-live are essential.
AAT L4 Accounting Systems & Controls 4
The risk of fraud is greater when: