Deck 8: Internal Control and Cash

Question 1

Which of the following statements is true of the Sarbanes-Oxley Act?

A) Accounting firms are allowed to provide both auditing services and a full range of consulting services to their public company clients.
B) Those who commit securities fraud must be sentenced to 10 years in prison.
C) All private and foreign companies must issue an internal control report evaluated by an outside auditor.
D) The Public Company Accounting Oversight Board oversees the work of auditors of public companies.

Answer 1

D

Question 2

Which of the following components of internal control consists of work performed by internal and external auditors?

A) monitoring of controls
B) information systems
C) control procedures
D) control environment

Answer 2

A

Question 3

Reducing expenses to increase operating profit is representative of ________.

A) safeguarding assets
B) following company policies
C) promoting operational efficiency
D) ensuring accurate, reliable accounting records

Answer 3

C

Question 4

External auditors evaluate company controls to ensure the financial statements are presented fairly, in accordance with Generally Accepted Accounting Principles.

Question 5

An information system is one of the five components by which a company can achieve its internal control objectives.

Question 6

Which of the following is a benefit provided by internal control?

A) It ensures timely collection of accounts receivables.
B) It ensures that collusion will never happen.
C) It guarantees that a business makes profit.
D) It promotes operational efficiency.

Question 7

Violators of the Sarbanes-Oxley Act may be sentenced to prison for making false sworn statements.

Question 8

The Sarbanes-Oxley Act was passed by the Public Company Accounting Oversight Board.

Question 9

Which of the following is an objective of internal control?

A) to encourage employees to follow company policies
B) to ensure timely payment of accounts payable
C) to ensure timely collection of accounts receivable
D) to guarantee that a business makes a profit

Question 10

Internal auditors are employees of the business who ensure that employees are following company policies and that operations are running efficiently.

Question 11

Which of the following statements about internal control is true?

A) Internal auditors ensure that the employees follow company policies.
B) The treasurer and controller have the same responsibilities.
C) External auditors are employees of the company.
D) The internal control procedures are known as the "tone at the top."

Question 12

Which of the following is a requirement of the Sarbanes-Oxley Act?

A) An outside auditor must evaluate the client's internal controls and report on the internal controls as part of the audit report.
B) The Public Company Oversight Board must conduct audits of public companies.
C) The accounting firm that audits a public client must also provide consulting services for the same client.
D) The Public Company Oversight Board must create new accounting standards.

Question 13

The Public Company Accounting Oversight Board oversees the work of auditors of public companies.

Question 14

The environment is the culture of a business, and it starts with the CEO or CFO and the top managers.

Question 15

Which of the following describes the environment in internal control?

A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to ensure that the accounting records are accurate.
B) The environment is the "tone at the top" of the business.
C) The environment is designed to ensure that the business earns profit.
D) A company must identify its risks.

Question 16

Internal control is an organizational plan that ensures that the financial statements are prepared and submitted on time.

Question 17

Which of the following is representative of safeguarding assets?

A) attaching electronic sensors to merchandise inventory
B) reducing expense to increase operating profit
C) increasing operating profit to increase net income
D) allowing company accountants to handle cash

Question 18

Which of the following is true of internal control?

A) A company's outside auditor is responsible for the company's internal control system.
B) One of the major purposes of internal control is to ensure that the assets are safeguarded.
C) Internal control procedures tend to diminish the importance of operational efficiency.
D) Internal controls are only necessary for public companies.

Question 19

Under the Sarbanes-Oxley Act, accounting firms are allowed to audit a public company and provide certain consulting services for the same client.

Question 20

The Sarbanes-Oxley Act requires all private companies in the United States to maintain an internal control system.

Question 21

Which of the following is an attribute of the internal control procedure-assignment of responsibilities?

A) To validate their accounting records, a company should have an audit by an external accountant.
B) The company should separate the custody of assets from accounting.
C) The external auditors will monitor internal controls.
D) Each position has clearly assigned responsibilities.

Question 22

Vaughn Services hires a new accountant to maintain its petty cash fund. Although the employee possesses an accounting degree, he/she had been previously convicted of embezzlement. Which internal control procedure needs to be addressed in the above situation?

A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents

Question 23

Which of the following is included in the internal control procedure-documents?

A) Mandatory vacations will improve internal control.
B) Separate the custody of assets from accounting.
C) The invoices and orders must be pre-numbered.
D) A company should purchase a fireproof vault to protect legal documents.

Question 24

Which of the following is an attribute of the internal control procedure-competent, reliable, and ethical personnel?

A) providing cross training to allow sales personnel to record revenue transactions
B) the need to train and supervise employees
C) monitoring of internal controls by external auditors
D) purchase of burglar alarms

Question 25

Burglar alarms, fire alarms, and security cameras improve internal control.

Question 26

Separating the custody of assets from accounting implies that the accountants must not handle cash and the cashier must not have access to the accounting records.

Question 27

A(n) ________ is a device that enables members of a local network to access the network while keeping nonmembers out of the network.

A) burglar alarm
B) firewall
C) fireproof vault
D) electronic sensor

Question 28

Campaign Services hired a new accounting manager. He signed a contract for a new accounting information system, but his position did not specify whether he was authorized to do so or not. In the above situation, which internal control procedure needs strengthening?

A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents

Question 29

Which of the following is true of the internal control component-information system?

A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to ensure that the accounting records are accurate.
B) Control procedures are designed to ensure that the business's goals are achieved.
C) Only authorized users have access to various parts of the information system.
D) The information system is the "tone at the top" or the culture of the business.

Question 30

Which of the following describes a firewall?

A) a malicious program that enters program code or destroys data without authorization
B) when two or more people cooperate together to defraud a company
C) a technique for protecting data
D) when a company defrauds its suppliers by making false claims

Question 31

The use of computer firewalls is an essential element of good internal controls for e-commerce.

Question 32

Which of the following is an issue that must be addressed in the internal controls for e-commerce?

A) burglar alarms
B) tone at the top
C) phishing expeditions
D) need for outside auditors

Question 33

At Cadmia Services, the cashier collects checks and cash from customers, and the junior accountant records the transactions in the journal. The controller approves the journal entries and bank reconciliations. The treasurer signs checks and approves contracts. Which internal control procedure is exemplified in the above situation?

A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents

Question 34

Cadmia Services hired a new clerk to keep custody of and maintain all the equipment in the equipment yard. The clerk has not yet been adequately trained on the maintenance needs of the equipment. In the above situation, which internal control procedure needs strengthening?

A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents

Question 35

Which of the following is an attribute of the internal control component-monitoring of controls?

A) Internal auditors monitor company controls to safeguard assets, and external auditors evaluate the controls to ensure that the accounting records are accurate.
B) Monitoring of controls is the "tone at the top" of the business.
C) Monitoring of controls is designed to ensure that the business's goals are achieved.
D) Monitoring of controls deals with identification and assessment of business risks.

Question 36

A pharmaceutical company testing drugs to determine possible side effects is a part of ________.

A) monitoring controls
B) information systems
C) control procedures
D) risk assessment

Question 37

At Radiant, Inc., the sales department is also responsible for recording cash transactions as it does not have a separate accounting department. In the above situation, which internal control procedure needs strengthening?

A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents

Question 38

Which of the following illustrates the internal control procedure-separation of duties?

A) Cashiers must not have access to accounting records.
B) External auditors will monitor internal controls.
C) Electronic devices must be installed to reduce theft.
D) The invoices and other documents must be pre-numbered.

Question 39

The controller at Horizon, Inc. needs new computers for the accounting department. However, there are no guidelines specifying whether the controller can approve purchases of office equipment. In the above situation, which internal control procedure needs strengthening?

A) assignment of responsibilities
B) competent, reliable, and ethical personnel
C) separation of duties
D) documents

Question 40

Which of the following describes the risk assessment component of internal control?

A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to ensure that the accounting records are accurate.
B) Risk assessment is the "tone at the top" of the business.
C) A company must identify its risks and take necessary steps to minimize them.
D) Risk assessment is designed to ensure that the business's goals are achieved.

Question 41

For the following situation, state whether it represents a strength or weakness in internal control and give the reason for your answer.
The bookkeeper opens the mail, makes the deposit, and makes the journal entries to record receipt of the cash and checks.

Question 42

Which of the following is described as a system where customers send their checks directly to a post office box that belongs to a bank?

A) an encryption system
B) an imprest system
C) a lock-box system
D) a firewall system

Question 43

Which of the following is a measure for discouraging theft for a retail store that accepts cash receipts over the counter?

A) A receipt is issued for each transaction to ensure that each sale is recorded.
B) At the end of the day, the sales clerk proves the cash by comparing the cash in the drawer against the machine's record of cash sales.
C) The sales clerk uses the machine tape to record the journal entry for cash receipts and sales revenue.
D) The store clerk deposits the cash in the bank.

Question 44

As long as the same person deposits customer checks and records the deposits into the journal, there will be good internal control over cash receipts.

Question 45

Which of the following is used by companies to separate cash duties and establish stronger control over cash receipts?

A) an encryption system
B) an imprest system
C) a lock-box system
D) a firewall system

Question 46

Which of the following is the basic internal control measure for cash?

A) keeping money in a bank account
B) checking for counterfeit bills
C) counting cash receipts twice
D) internal audit of cash procedures

Question 47

In a large company, the person who is responsible for comparing cash and the bank balance is the ________.

A) CEO
B) CFO
C) controller
D) treasurer

Question 48

Which of the following is not an appropriate internal control for cash receipts over the counter?

A) A receipt is issued for each transaction to ensure that each sale is recorded.
B) The store clerk deposits the cash in the bank.
C) At the end of the day, the manager proves the cash by comparing the cash in the drawer against the machine's record of cash sales.
D) The cash draw opens after the store clerk enters a transaction.

Question 49

As a part of the internal control over cash receipts by mail, the mailroom sends both the customer checks and the remittance advices to the accounting department.

Question 50

A system cannot be overcome or broken into if its internal controls are properly designed and structured.

Question 51

Which of the following is the last step in the daily control over cash receipts by mail?

A) A mailroom employee sends all customer checks to the treasurer who has the cashier make the bank deposit.
B) The controller opens the mail and sends the remittance advices to the accounting department.
C) The controller compares the records of the day's bank deposit amount from the treasurer and the debit to cash from the accounting department.
D) The accounting department prepares journal entries to cash and the customers' accounts.

Question 52

Two or more people working together to circumvent internal controls and defraud a company is known as ________.

A) encryption
B) firewall
C) collusion
D) separation of duties

Question 53

For strong controls over cash receipts, the checks to be deposited should be sent to the treasurer, and the remittance advices should be sent to the accounting department.

Question 54

Before any internal control procedure is initiated, which of the following questions must be primarily addressed by a company?

A) Will this put an end to theft?
B) Is this the best security money can buy?
C) How much benefit will be derived from the cost of the procedure?
D) Will this prevent accounting errors?

Question 55

For the following situation, state whether it represents a strength or weakness in internal control and give the reason for your answer.
The movie theater has the following policy. Tickets are sold by the cashier. The ticket stubs are collected by the ticket taker. The ticket stubs are stored in a locked box, and the accounting personnel match the number of ticket stubs to the number of tickets sold.

Question 56

For the following situation, state whether it represents a strength or weakness in internal control and give the reason for your answer.
Second National Bank requires mandatory vacations and job rotation.

Question 57

Regarding controls over cash receipts by mail, the accounting department should compare the bank deposit slip to the remittance advices.

Question 58

A basic principle of internal control over cash receipts is that the deposit of the cash and the recording of the receipts into the journal should be separated.

Question 59

Rearranging plain-text messages by a mathematical process is known as ________.

A) password
B) phishing
C) encryption
D) virus

Question 60

A point-of-sale terminal provides control over cash receipts over the counter.

Question 61

For good controls over cash payments, the person who orders goods from a supplier should always be different from the person who approves the payment.

Question 62

A key to strong control over petty cash is to ensure that several persons serve as custodian at one time.

Question 63

Which of the following statements describes a purchase order?

A) It is an order to purchase goods from a supplier.
B) It is a statement from the supplier showing the goods purchased and the amount due.
C) It is a report showing that the goods have been received in good condition, as ordered.
D) It is a document authorizing a payment to a supplier.

Question 64

Cash in the bank is more liquid than a petty cash fund.

Question 65

Evaluated Receipts Settlement is ________.

A) a streamlined process that bypasses paper documents altogether
B) a process that eliminates the need for separation of duties
C) a procedure that compresses the payment approval process into a single step by comparing the receiving report to the purchase order
D) an organizational plan and all the related measures adopted by an entity to safeguard assets, encourage employees to follow company policies, promote operational efficiency, and ensure accurate and reliable accounting records

Question 66

Which of the following is the first step in the purchasing and payment process?

A) The purchaser receives an invoice for the goods shipped by the supplier.
B) The purchaser sends a check to the supplier.
C) The purchaser sends a purchase order to the supplier.
D) The purchase receives the inventory and prepares a receiving report.

Question 67

A streamlined process that bypasses paper documents altogether and in which computers of retailers communicate directly with the computers of suppliers to automate routine business transactions is known as ________.

A) Real Time Gross Settlement
B) Electronic Data Interchange
C) Electronic Fund Transfer
D) Evaluated Receipts Settlement

Question 68

The journal entry to open a new petty cash fund includes a debit to the Petty Cash account and a credit to the Cash account.

Question 69

For the following situation, state whether it represents a strength or weakness in internal control and give the reason for your answer.
Baker Auto Supply purchases merchandise inventory from A & B Company. The accountant places the order, verifies receipt of the merchandise, and records the transaction in the general journal.

Question 70

Which of the following items must be examined by the controller or treasurer before signing a check?

A) the ledger
B) the purchase order
C) the confirmation report
D) the journal entry

Question 71

For the following situation, state whether it represents a strength or weakness in internal control and give the reason for your answer.
The mailroom employee opens all incoming mail. Customers' checks are sent to the treasurer, and remittance advices are sent to the accounting department. The controller compares the daily bank deposit amount from the treasurer and the daily debit to cash from the accounting department.

Question 72

Which of the following statements describes an invoice from a supplier?

A) It is an order to purchase goods from a supplier.
B) It is a statement from the supplier showing the goods purchased and the amount due.
C) It is a report showing that the goods have been received in good condition, as ordered.
D) It is a document authorizing a payment to a supplier.

Question 73

In a good internal control system, which of the following sets of documents is required for proper approval of a payment to a supplier?

A) a journal entry, a supplier invoice, and a description of the goods being purchased
B) a receiving report, an invoice, and a purchase order
C) a purchase order, a journal entry, and a price catalog
D) a supplier invoice, a bill of lading, and the supplier's financial statements

Question 74

A company check for payment must be signed by ________.

A) any employee of the company
B) a bank employee
C) an employee specifically authorized by the company
D) the external auditor

Question 75

A receiving report should be matched with the supplier invoice before a payment to the supplier is approved.

Question 76

For good controls over cash payments, the company officer approving a payment voucher should be the same as the person who ordered the goods, to ensure that the correct amount of cash is paid.

Question 77

Petty cash is a fund containing a small amount of cash that is used to pay for minor expenditures.

Question 78

Which of the following statements describes a receiving report?

A) It is an order to purchase goods from a supplier.
B) It is a statement from the supplier showing the goods purchased and the amount due.
C) It is a report showing that the goods have been received in good condition, as ordered.
D) It is a document authorizing a payment to a supplier.

Question 79

Which is the most liquid form of asset?

A) cash
B) accounts receivable
C) inventory
D) supplies

Question 80

Before signing a check, the controller or the treasurer should examine the purchase order, the invoice, and the receiving report to determine that the company received the goods and that the company is paying only for the goods received.