Deck 8: Internal Control and Cash

Question 1

It is necessary for the owners and top managers to demonstrate the importance of internal controls in order to expect the employees to take the controls seriously.

Answer 1

True

Question 2

External auditors are entirely independent of a business.

Answer 2

True

Question 3

It is poor planning to have employees rotate through jobs.

Answer 3

False

Question 4

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

A)The outside auditor must issue an internal control report for each public company.
B)The Public Company Oversight Board must conduct audits of public companies.
C)Accounting firms may not both audit a public client and provide certain consulting services for the same client.
D)The Public Company Oversight Board must create new accounting standards.

Question 5

The Sarbanes-Oxley Act has impacted Canadian companies in the following way.

A)More companies are using third party accounting services.
B)Public companies are borrowing exclusively through Canadian banks.
C)Public companies are relying solely on internal auditors to guarantee financial statements.
D)Public companies traded on U.S. stock exchanges must abide by the Sarbanes-Oxley Act.

Question 6

Encouraging operational efficiency is one aspect of internal control.

Question 7

Different people should perform various accounting duties to minimize errors and the opportunities for fraud.

Question 8

Safeguarding the assets the business uses in its operations is the sole purpose of an effective system of internal control.

Question 9

Keeping office supplies under lock and key is representative of:

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

Question 10

List at least five characteristics of an effective system of internal control. What is one inherent limitation/weakness of any system of internal control?

Question 11

One characteristic of an effective system of internal control is competent, reliable, and ethical personnel.

Question 12

Define internal control. Who is responsible for establishing an effective system of internal control? What is the major constraint of any system of internal control?

Question 13

Internal control is the organizational plan that companies use to protect their assets and records.

Question 14

Which one of the following is not a provision in the Sarbanes-Oxley Act?

A)Public companies must have their internal control evaluated by the external auditor.
B)Accounting firms cannot both audit and provide certain consulting services to a client.
C)Violators will receive a reprimand and further accounting training.
D)Auditors of public companies are overseen by an oversight board.

Question 15

Internal control is the organizational plan and related measures that:

A)encourages operational inefficiency.
B)prevents the safeguard of assets.
C)attempts to ensure accurate accounting records.
D)Eliminates errors and fraud.

Question 16

Internal control does not:

A)help safeguard the assets a business uses in its operations.
B)guarantee a company will not go bankrupt.
C)prevent and detect error and fraud.
D)promote operational efficiency.

Question 17

The sole purpose of systems of internal control is to detect fraud.

Question 18

The controller is responsible for cash management in an organization.

Question 19

Separation of authorization of transactions from custody of related assets is related to proper separation of duties.

Question 20

All of the following are purposes of internal control except to:

A)safeguard assets.
B)promote operational inefficiency.
C)prevent and detect error and fraud.
D)ensure accurate and reliable accounting records.

Question 21

All of the following are parts of the internal control characteristic referred to as separation of duties except separation of:

A)external auditors from accounting.
B)duties within the accounting function.
C)the custody of assets from accounting for those assets.
D)operations from accounting.

Question 22

Cashiers and mail room employees who handle cash do not have access to the accounting records. Accountants who record cash receipts do not have on opportunity to handle cash. This is an internal control feature illustrating proper separation of duties.

Question 23

Paying top salaries to attract top-quality employees is a part of which characteristic of internal control?

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

Question 24

In a large company, the treasurer is responsible for cash management.

Question 25

Persons who authorize transactions should not handle the related asset. This is an example of which characteristic of internal control?

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

Question 26

A ________ limits access to a local network.

A)computer-virus device
B)marker
C)firewall
D)point-of-sale terminal

Question 27

Internal controls are most effective when:

A)collusion is possible.
B)the organization is constantly changing.
C)the only asset a company has is cash.
D)employees at all levels adopt the goals and objectives of the organization.

Question 28

The employee who processes cash payments should have nothing to do with the approval process. This is a part of which characteristic of internal control?

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

Question 29

All of the following are pitfalls of E-commerce except:

A)stolen credit card numbers.
B)computer viruses.
C)reduced credit limits.
D)phishing.

Question 30

One method of achieving confidentiality in e-commerce is:

A)using an anti-computer-virus device.
B)deleting firewalls.
C)encryption.
D)using passwords.

Question 31

Separation of duties and responsibilities is essential in the control procedures for both cash receipts and cash disbursements.

Question 32

The requirement that a store manager approve all returns of merchandise is an example of which characteristic of internal control?

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

Question 33

Which of the following is not a component of internal control?

A)assigning to one individual the responsibility for accounting for and custody of assets
B)monitoring of controls via internal and external auditors
C)risk assessment to identify risk areas
D)effective control environment where importance of internal control is emphasized

Question 34

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

Question 35

Two or more employees working together to defraud a company is referred to as:

A)team work.
B)collusion.
C)embezzlement.
D)fraud.

Question 36

A Trojan hides inside a legitimate program and works like a virus.

Question 37

Designating a corporate controller is an example of which characteristic of internal control?

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

Question 38

Which of the following auditors are employees of the business?

A)income tax auditors
B)internal auditors
C)insurance auditors
D)external auditors

Question 39

The design of the system of internal controls is the responsibility of the external auditor.

Question 40

The treasurer of a business is:

A)the chief accounting officer.
B)responsible for cash management.
C)reports to the audit committee.
D)reports to the vice-president of production.

Question 41

Which of the following describes 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)A company must identify its risks.

Question 42

Before any internal control procedure is initiated, a question which should be addressed by the company is:

A)Will this stop all 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 all accounting errors?

Question 43

All of the following are documents used to control a bank account except a(n):

A)bank reconciliation.
B)signature card.
C)invoice.
D)deposit ticket.

Question 44

In each of the following situations, identify the internal control weakness as well as the business's potential problem, and suggest a solution.
a)The law firm of Douglas and Gere has been extremely busy in recent months. It needs another lawyer, but has not had the chance to hire one. In the meantime, one of the secretaries has been preparing briefs, writing up wills, and preparing the closing papers for various real estate deals.
b)Tobey Smith, an accounting clerk, is responsible for opening the mail, recording and depositing cash receipts, as well as preparing the monthly bank reconciliation. Tobey has not taken a vacation in over five years.
c)Carole Tobias purchases supplies for Darcey Company and stores them in a locked room for which she has the key. She is also responsible for distributing these supplies to employees upon request. At the end of each month, Carole takes an inventory of the supplies on hand and notifies the accounting department of the amount of the adjusting entry for supplies used.

Question 45

Which of the following describes the control environment?

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 control environment is the "tone at the top" of the business.
C)The control environment is designed to ensure that the business's goals are achieved.
D)A company must identify its risks.

Question 46

The cheques that have been paid by the bank on behalf of the depositor and included with the bank statement are called:

A)outstanding cheques.
B)deposited cheques.
C)cancelled cheques.
D)cheques in transit.

Question 47

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 48

If a customer's cheque that has been deposited is returned with the bank statement marked "insufficient funds (NSF)," it would appear on the bank reconciliation as a deduction from the ending book balance.

Question 49

Which of the following is a security procedure designed for e-commerce that rearranges text messages by a mathematical process?

A)Trojans
B)firewalls
C)encryption
D)phishing

Question 50

List and describe the components of internal control and control procedures.

Question 51

Internal and external auditors are part of which of the following components of internal control?

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

Question 52

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

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

Question 53

Service charge and interest on loan are both adjustments required to the bank balance on a bank reconciliation.

Question 54

The "adjusted bank balance" in a bank reconciliation is always equal to the bank statement balance plus all deposits in transit.

Question 55

Outstanding cheques in a bank reconciliation should include those cheques that are in the mail between customers and the business as of the bank statement date.

Question 56

A deposit in transit has been recorded by the bank but not the company.

Question 57

A system that relies on electronic communications, not paper documents, to transfer cash is known as:

A)electronic remittance.
B)electronic funds transfer.
C)electronic mail.
D)electronic imaging.

Question 58

The three parties to a cheque are the:

A)maker, payee, and bank.
B)bank, maker, and payor.
C)signer, depositor, and endorser.
D)bank, payee, and the government.

Question 59

An NSF cheque would be entered into the books by a debit to accounts receivable.

Question 60

An NSF cheque should be added to the bank balance on a bank reconciliation.

Question 61

Outstanding cheques are cheques:

A)not yet paid by the bank.
B)not yet deducted on the books.
C)not yet mailed by the payor.
D)that have been paid by the bank.

Question 62

All of the following are items that cause a difference between the bank balance and the book balance except:

A)cancelled cheques.
B)deposits in transit.
C)outstanding cheques.
D)NSF cheques.

Question 63

A cheque cashed by the payee for $2,200 was recorded in the company's accounting records for $220. On a bank reconciliation:

A)$1,980 will be added to the book balance.
B)$1,980 will be deducted from the book balance.
C)$1,980 will be added to the bank balance.
D)$1,980 will be deducted from the bank balance.

Question 64

If before reconciliation the balance on the bank statement does not equal the balance in the company's cash account:

A)the bookkeeper made a mistake.
B)the bank made a mistake.
C)both the bank and the bookkeeper made a mistake.
D)It is perfectly normal for the two balances to be different.

Question 65

A cheque for the cash purchase of supplies for $329 was recorded on the books as $239. On a bank reconciliation, this will appear as a(n):

A)addition to the book balance.
B)deduction from the book balance.
C)addition to the bank balance.
D)deduction from the bank balance.

Question 66

The following data are available for Dragon Boat Company for March: $$\begin{array} { | l | r | } \hline \text { Book balance, March } 31 & \$ 3,620 \\\hline \text { Service charges } & 50 \\\hline \text { Interest revenue } & 35 \\\hline \text { Note collected by bank } & 1,500 \\\hline \text { Cheque returned marked NSF } & 700 \\\hline\end{array}$$ What is Dragon's adjusted book balance on March 31 from the above data?

A)$4,405
B)$4,200
C)$3,150
D)$3,270

Question 67

The accountant for World Company discovered Central Bank had made an error on World's August 31 bank statement. The bank balance read $8,728, while the book balance showed $6,998. The accountant found that an August 23 cheque for $1,250 did not appear on the bank statement (thus representing an outstanding cheque). If this cheque is the only reconciling item, how much is the amount of the bank error?

A)$2,980
B)$1,250
C)$480
D)$1,730

Question 68

In a bank reconciliation, a $400 NSF cheque is:

A)deducted from the book balance.
B)added to the book balance.
C)deducted from the bank balance.
D)added to the bank balance.

Question 69

Park Place received a bank statement showing a balance of $1,400. What is the adjusted balance if there was a bookkeeper error of $100 in the depositor's favour, two outstanding cheques totalling $40, a service charge of $10, a deposit in transit of $150, and interest revenue of $26 earned by the depositor?

A)$1,110
B)$1,510
C)$1,636
D)$1,610

Question 70

The following data are available for Remas Designs for October: $$\begin{array} { | l | r | } \hline \text { Book balance, October } 31 & \$ 5,600 \\\hline \text { Outstanding cheques } & 584 \\\hline \text { Deposits in transit } & 2,500 \\\hline \text { Service charges } & 75 \\\hline \text { Interest revenue } & 25 \\\hline\end{array}$$ What is the adjusted book balance on October 31 for Remas Designs based on the above data?

A)$5,500
B)$5,550
C)$7,466
D)$4,966

Question 71

Marvin Gardens received a bank statement showing a balance of $1,300. What is the adjusted balance if there was a bookkeeper error of $150 in the depositor's favour, two outstanding cheques totalling $40, a service charge of $10, a deposit in transit of $150, and interest revenue of $26 earned by the depositor?

A)$960
B)$1,586
C)$1,560
D)$1,410

Question 72

Which of the following items used to reconcile cash does not require an adjusting entry?

A)bank service charge
B)interest earned
C)note collected by the bank
D)outstanding cheques

Question 73

The Candy Place received a bank statement showing a balance of $5,350. What is the adjusted balance if there was a bookkeeper error of $200 in the depositor's favour, two outstanding cheques totalling $720, a service charge of $15, a deposit in transit of $165, and interest revenue of $21 earned by the depositor?

A)$4,795
B)$4,995
C)$5,016
D)$4,601

Question 74

A bank reconciliation:

A)should be prepared by an employee who handles cash transactions.
B)is a formal financial statement.
C)is part of a sound internal control system.
D)is done only at the end of the fiscal year.

Question 75

The bank statement lists a $700 deposit as $70. On a bank reconciliation, the correction will appear as a(n):

A)addition to the bank balance.
B)deduction from the book balance.
C)addition to the book balance.
D)deduction from the bank balance.

Question 76

The following data are available for Matheson Avenue Retailers for April: $$\begin{array} { | l | r | } \hline \text { Book balance, April } 30 & \$ 1,400 \\\hline \text { Service charges } & 20 \\\hline \text { Interest revenue } & 800 \\\hline \text { Note collected by bank } & 1,000 \\\hline \text { Cheque returned marked NSF } & 300 \\\hline\end{array}$$ What is Matheson's adjusted book balance on April 30 from the above data?

A)$1,580
B)$2,880
C)$2,080
D)$1,380

Question 77

The Calder Company received a bank statement showing a balance of $60,300. Reconciling items included outstanding cheques of $1,450 and a deposit in transit of $8,500. What is the company's adjusted bank balance?

A)$60,300
B)$58,850
C)$68,800
D)$67,350

Question 78

A cheque for the cash purchase of supplies for $239 was recorded on the books as $329. On a bank reconciliation, this will appear as a(n):

A)addition to the book balance.
B)deduction from the book balance.
C)addition to the bank balance.
D)deduction from the bank balance.

Question 79

Which of the following would be a reconciling item on the bank side of the reconciliation?

A)collection of note receivable for $1,000
B)non-sufficient funds cheque for $75
C)service fee of $20
D)bank recorded a $2,000 deposit as $200

Question 80

A cheque issued to settle an account for $145 was recorded on the books as $1,450. On a bank reconciliation, this will appear as a(n):

A)addition to the book balance.
B)deduction from the book balance.
C)addition to the bank balance.
D)deduction from the bank balance.