Exam 7: Internal Control

Bonding provides a guarantee against theft.

All of the following are the goals of internal controls over merchandising transactions except

Invoices are documents prepared by a vendor and sent to the accounting department of its customers.

A check authorization would be prepared before a receiving report.

Using bar codes to take a physical inventory is considered poor accounting practice.

The receiving department must compare goods received with goods purchased, as indicated on the purchase order.

Magnolia Company has established a petty cash fund for small expenditures. In the journal provided, prepare the entries for the following transactions. (Omit explanations.)

The use of prenumbered documents is important to a good system of internal control.

Under a perpetual inventory system, is it necessary to take a physical inventory at the end of the period? Why or why not?

The periodic inventory system provides no means of identifying losses from spoilage, shoplifting, and theft.

Proper control procedures can guarantee the prevention of theft.

For each description below, state which document is being described. a. Document issued to permit the treasurer to make a payment b. Bill sent by the vendor to the purchaser c. Written request prepared by a department asking the purchasing department to make a purchase d. Document accompanying money put in the bank e. Document describing items in a shipment of goods delivered f. Document sent to a vendor requesting shipment of goods

As the controller of a large company, you notice that the Cash Short or Over account is consistently debited for fairly large sums of cash when the petty cash fund is replenished. You probably will want to

Otto Sounds, Inc., a specialty retailer of customized audio systems for automobiles, installed a perpetual inventory system in the second quarter of 20x3. The new system allowed the firm to adjust its merchandise inventories to sales patterns more effectively and to prepare monthly financial statements. Although the system led to an improvement in sales and income, the gross margin on the monthly income statements was falling below both management's expectations and the industry average. At the end of 20x8, a physical inventory revealed that actual merchandise inventory was considerably lower than the perpetual inventory records indicated. The merchandise inventories of some stores were off more than others, but all had deficiencies. What probably caused these losses and what steps could be taken to prevent them in the future?

A good system of internal control is designed to achieve each of the following, except

An effective system of internal control centralizes functions in a single, capable individual.

It is unlikely that a company would want to bond its employees who handle cash or inventory.

The taking of a physical inventory is an example of periodic independent verification.

Merchandisers usually end their fiscal year during a slow season.

Why is the separation of duties an important control activity in a good system of internal control?