Deck 4: Internal Control Cash

Question 1

One of the elements of the fraud triangle is opportunity.

Answer 1

True

Question 2

All of the following are examples of a weak control environment EXCEPT:

A)a domineering CEO.
B)a weak or conflicted Board of Directors.
C)lax ethical practices.
D)proper segregation of duties.

Answer 2

D

Question 3

Opportunity in the fraud triangle arises from:

A)weak control environment.
B)improper segregation of duties.
C)improper access to assets.
D)all of the above.

Answer 3

D

Question 4

The type of fraud committed by company managers, who make false and misleading entries in the books in order to improve a company's financial statements, is called:

A)misappropriation of assets.
B)fraudulent financial reporting.
C)embezzlement.
D)collusion.

Question 5

Fraudulent financial reporting:

A)involves employee overstatement of expense reimbursement requests.
B)involves bribes and kickbacks.
C)involves stealing assets from the company.
D)deceives financial statement users.

Question 6

Fraud is a major problem in many businesses throughout the world.

Question 7

________ is the element in the fraud triangle that results from weak internal controls.

A)Motive
B)Opportunity
C)Rationalization
D)Reasoning

Question 8

________ is the most common fraud, but ________ is the most expensive fraud.

A)Fraudulent financial reporting; misappropriation of assets
B)Misappropriation of assets; fraudulent financial reporting
C)Misappropriation of assets; cooking the books
D)Cooking the books; misappropriation of assets

Question 9

The two most common types of fraud impacting the financial statements are:

A)fraudulent financial reporting and e-commerce fraud.
B)misappropriation of assets and embezzlement.
C)fraudulent financial reporting and misappropriation of assets.
D)cooking the books and fraudulent financial reporting.

Question 10

In most reported fraud cases, fraudsters exhibit one or more behavioral red flags. Which of the following is NOT one of these behavioral red flags?

A)financial difficulties
B)unusually close associations with vendors
C)unusually close associations with customers
D)living within one's means

Question 11

An environment with strong internal controls can be circumvented with collusion.

Question 12

The type of fraud committed by employees of an entity, who steal money from the company and cover it up through erroneous entries in the books, is called:

A)misappropriation of assets.
B)fraudulent financial reporting.
C)pishing.
D)collusion.

Question 13

The three main components of the fraud triangle are:

A)rationalization, opportunity and greed.
B)opportunity, motive and lack of ethics.
C)motive, opportunity and rationalization.
D)none of the above.

Question 14

The longer a perpetrator has worked for an organization, the lower the fraud losses tend to be.

Question 15

Perpetrators of fraud usually commit fraud for their own short-term economic gain.

Question 16

An employee claims that he overstated expense reimbursement requests to have extra money for his wife and children because "Everyone is doing it." This is an example of:

A)opportunity.
B)motive.
C)rationalization.
D)understanding.

Question 17

What is fraud?

A)Fraud is the intentional misrepresentation of facts made for the purpose of persuading another individual to act in a way that causes injury or damage to that individual.
B)Fraud is the misappropriation of assets.
C)Fraud is untruthful financial reporting.
D)all of the above

Question 18

A weak control environment might allow top management to have the opportunity to commit fraud.

Question 19

One of the most common types of fraud that impacts the financial statements is the misappropriation of assets.

Question 20

Fraudulent financial reporting is the only type of fraud that involves making false or misleading entries in the books of the company.

Question 21

Which of the following are examples of the misappropriation of assets?

A)An employee overstates an expense reimbursement request after a company trip.
B)An employee theft of inventory.
C)A kickback scheme in the purchasing function.
D)all of the above

Question 22

Internal control is a plan of organization and system of procedures, implemented by company ________ and the ________, designed to accomplish five objectives.

A)internal auditors, employees
B)external auditors, management
C)management, board of directors
D)external auditors, board of directors

Question 23

What is the purpose of fraudulent financial reporting?

A)Net income and total assets are understated so managers can receive their bonuses.
B)Net income and total assets are overstated so managers can receive their bonuses.
C)A company can borrow money that would not otherwise be available.
D)B and C

Question 24

Small companies cannot have internal controls since they do not have enough employees to segregate duties.

Question 25

Background checks should be conducted only for employees who will handle cash.

Question 26

Smart hiring practices and separation of duties are part of the control environment.

Question 27

The objectives of internal control do NOT include:

A)compliance with standards of social responsibility.
B)safeguarding assets.
C)promoting operational efficiency.
D)compliance with legal requirements.

Question 28

Which of the following statements regarding fraud is INCORRECT?

A)Fraud violates the rights of many for the temporary betterment of a few and for the ultimate betterment of no one.
B)Motive, opportunity, and rationalization are elements that make up virtually every fraud.
C)The perpetrators of fraud usually do so for their own short-term economic gain.
D)Misappropriation of assets is a type of fraud that is committed by company managers who make false and misleading entries in the books in order to improve a company's financial results.

Question 29

Fraudulent financial reporting is also called:

A)the fraud triangle.
B)a misappropriation of assets.
C)cooking the books.
D)investigative reporting.

Question 30

In order to maximize profits, a proper system of internal controls provide clear policies that result in fair treatment that applies to customers only.

Question 31

Access to sensitive data files in a business should be protected by using either passwords or data encryption.

Question 32

The Sarbanes-Oxley Act of 2002:

A)requires public companies to issue an internal control report.
B)requires an outside auditor to evaluate the soundness of a public company's internal controls.
C)allows an accounting firm to both audit a public client and also provide certain consulting services for the same client.
D)A and B

Question 33

Enron Corporation committed fraudulent financial reporting by

A)reporting expenses as plant assets.
B)overstating profits through bogus sales of nonexistent assets with inflated values.
C)bribing employees of the Securities and Exchange Commission.
D)all of the above

Question 34

Collusion is the method used to defeat an internal controls system.

Question 35

The primary way that fraud and unintentional errors in financial statements are prevented is by external auditors.

Question 36

Which is NOT an objective of an internal control system?

A)safeguarding of assets
B)compliance with company policies
C)compliance with legal requirements
D)risk assessment

Question 37

Outside auditors are responsible for establishing and maintaining adequate internal controls for each company they audit.

Question 38

The primary way that fraud is prevented, detected, or corrected is through a proper system of:

A)ethical standards and a code of ethics.
B)policies developed by upper management.
C)internal control.
D)internal and external audits.

Question 39

The Sarbanes-Oxley Act created the American Institute of Certified Public Accountants to oversee the audits of public companies.

Question 40

Ways in which a company can limit access to only those persons or departments that have custodial responsibilities include:

A)keeping the supply of unused checks under lock and key.
B)processing the company's cash payments through a lock-box system.
C)allowing persons who have record-keeping responsibilities to be part of the receiving function.
D)all of the above.

Question 41

For companies that are too small to hire enough employees to properly separate duties,the key to good internal control is getting the owner to perform which of the following duties:

A)approving all transactions.
B)reconciling the monthly bank account or making bank deposits.
C)reconciling the monthly bank account and making bank deposits.
D)The owner should not perform any of the above duties.

Question 42

Smart hiring practices include:

A)background checks.
B)clear job descriptions.
C)proper training and supervision.
D)all of the above.

Question 43

________ rearranges messages by a mathematical formula making the message impossible to read by someone who does not know the code.

A)Encryption
B)Firewall
C)Security wall
D)Access device

Question 44

The components of internal control do NOT include:

A)control environment.
B)risk assessment.
C)control procedures.
D)safeguard assets.

Question 45

Three key duties that must always be separated under a good system of internal controls are:

A)asset handling, record keeping and transaction approval.
B)asset handling, hiring and safeguarding of assets.
C)asset handling, recordkeeping and safeguarding of assets.
D)record keeping, transaction analysis and transaction approval.

Question 46

Internal control procedures do NOT include:

A)smart hiring practices.
B)adequate records.
C)limited access.
D)control environment.

Question 47

The "tone at the top" refers to:

A)a component of the control environment.
B)a concept that applies only to large corporations.
C)owners and top managers behaving honorably to set a good example for employees.
D)A and C.

Question 48

The control environment does NOT include:

A)a corporation's code of ethics.
B)prohibition of bribes and kickbacks.
C)risk assessment.
D)prohibition of transactions that involve a conflict of interest.

Question 49

A company has a policy that all checks over $5,000 need to have the signature of the owner in addition to the signature of the bookkeeper. This is an example of:

A)limited access.
B)proper approvals.
C)adequate records.
D)encryption.

Question 50

A fidelity bond is a(n):

A)employment contract for a specified period of time.
B)insurance policy that reimburses a company for any losses due to employee theft.
C)contract prohibiting former employees from working for a competitor.
D)promise by a company to safeguard customers' personal information.

Question 51

Creating bogus websites for the purpose of stealing unauthorized data is a(n):

A)encryption device.
B)phishing expedition.
C)computer virus.
D)Trojan horse.

Question 52

E-commerce pitfalls include all of the following EXCEPT:

A)stolen credit card numbers.
B)phishing expedition.
C)encryption.
D)trojan horses.

Question 53

An internal control system can be circumvented by:

A)collusion, encryption and management override.
B)collusion, management override and segregation of duties.
C)collusion, management override and human limitations.
D)nothing, if it is a good internal control system.

Question 54

Internal controls are designed to accomplish five objectives that include compliance with legal requirements, promote operational efficiency, safeguard assets, encourage employees to follow company policy and:

A)prevent misappropriation of assets.
B)prevent collusion.
C)prevent fraud.
D)ensure accurate, reliable accounting records.

Question 55

The objectives of internal control do NOT include:

A)safeguard assets.
B)encourage employees to follow company policy.
C)ensure accurate, reliable accounting records.
D)strong control environment.

Question 56

The general rule that all major groups of transactions should be supported by either hard copy documents or electronic records is part of the control procedure of:

A)limited access.
B)segregation of duties.
C)adequate records.
D)proper approvals.

Question 57

The Public Company Accounting Oversight Board was created to oversee the:

A)SEC.
B)management of public companies.
C)audits of public companies.
D)American Institute of Certified Public Accountants.

Question 58

Which is NOT a component of comparisons and compliance monitoring?

A)control environment
B)budgets
C)audits
D)all of the above

Question 59

Which statement about internal controls is FALSE?

A)Public companies must issue a report on internal control.
B)Outside auditors must evaluate and report on the soundness of a company's internal controls.
C)The Public Company Accounting Oversight Board oversees the audits of public companies.
D)Because reports on internal control are issued with the financial statements, an accounting firm may both audit a public client and provide certain consulting services for the same client.

Question 60

A malicious program that enters program code without consent and performs destructive actions in the victim's computer files or programs is a(n):

A)encryption device.
B)phishing expedition.
C)computer virus.
D)fidelity bond.

Question 61

When preparing a bank reconciliation, which of the following items should be added to the book balance?

A)EFT receipts
B)deposits in transit
C)collection of note receivable by bank
D)both EFT receipts and collection of a note receivable by the bank

Question 62

Johnny Company deposited $25,000 in its bank on the same day as, but after the bank prepared Johnny Company's bank statement. The deposit should appear on the bank reconciliation as a(n)________ and is called a(n):

A)addition to the bank balance; outstanding deposit
B)addition to the bank balance; deposit in transit
C)subtraction from the bank balance; deposit in transit
D)subtraction from the bank balance; outstanding deposit

Question 63

List and briefly discuss the five objectives of internal control.

Question 64

For each of the following situations, indicate which internal control procedure Johnson Company has violated:
1. Since they are costly, background checks are not done for the employees.
2. Purchases of items on credit do not need the approval of the purchasing department.
3. All hard copies of documents are shredded after one month and electronic records are deleted after two months.
4. The company does not prepare operating or cash budgets.
5. The accountant receives the checks from customers in payment of amounts due and records the cash receipts.
6. There are no locks in the area where inventory is stored.
7. The hiring, firing and pay adjustments are made by the foremen in the manufacturing area.

Question 65

List the five internal control procedures.

Question 66

Examples of internal control procedures do NOT include:

A)proper segregation of duties.
B)adequate records.
C)proper approvals.
D)risk assessment.

Question 67

There are three parties to a check. The person who signs the check is the:

A)maker.
B)payee.
C)draftee.
D)promisee.

Question 68

All items on the bank side of the bank reconciliation need to be recorded in the company's books.

Question 69

The bank reconciliation can be used to control cash in a bank account.

Question 70

All of the following will appear on the bank statement EXCEPT for:

A)checks paid and deposits made before the cutoff date on the bank statement.
B)book errors.
C)checks paid and deposits made after the cutoff date on the bank statement.
D)B and C.

Question 71

The person performing the bank reconciliation should have no other cash duties.

Question 72

When preparing a bank reconciliation:

A)deposits in transit are added to the bank balance.
B)service charges are subtracted from the bank balance.
C)outstanding checks are subtracted from the book balance.
D)book errors are subtracted from the bank balance.

Question 73

Differences between the bank statement and the company's Cash account are primarily the result of a time lag in recording transactions.

Question 74

Which statement is FALSE?

A)The bookkeeper should not handle incoming checks from customers.
B)Cashiers should not have access to the accounting records.
C)The treasurer's department should be in charge of cash handling as well as signing and approving checks.
D)The accounting department should be in charge of record keeping and depositing customers' checks.

Question 75

Deposits that have been recorded on the company's books, but have not yet been recorded by the bank are:

A)nonsufficient funds deposits.
B)outstanding deposits.
C)deposits in transit.
D)electronic funds deposits.

Question 76

Which of the following is NOT a way to circumvent a strong system of internal control?

A)management override
B)collusion
C)mandatory vacations
D)employee negligence

Question 77

Alpha Company has an account at First Bank. Alpha writes a check payable to Beta Company. In this transaction, Beta Company is the:

A)payee.
B)payer.
C)drawer.
D)maker.

Question 78

The person to whom a check is paid is referred to as the maker.

Question 79

Outstanding checks are checks that have been paid by the bank, but are not yet recorded on the company's books.

Question 80

Which statement is FALSE?

A)Sales to customers should be approved by a separate credit department.
B)Purchases on credit should be approved by a separate purchasing department.
C)Transactions with a large dollar amount should be approved by the Board of Directors or top management.
D)The firing of employees should be handled by the department where the employee works.