Deck 7: Fraud, Internal Control, and Cash

Question 1

Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.

Answer 1

False

Question 2

The separation of duties feature of internal control can be negated when several employees are involved in a scheme.

Answer 2

True

Question 3

Under an effective system of internal control, errors occur only as a result of fraud or dishonesty.

Answer 3

False

Question 4

The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

Question 5

Bonding means insuring a company against theft by employees.

Question 6

A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records.

Question 7

The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.

Question 8

In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.

Question 9

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

Question 10

An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other.

Question 11

Employees sometimes commit fraud because of personal financial problems caused by too much debt.

Question 12

The most important element of the fraud triangle is rationalization.

Question 13

The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

Question 14

Internal control is most effective when several people are responsible for a given task.

Question 15

Segregation of duties among employees eliminates the possibility of collusion.

Question 16

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

Question 17

Only large companies need to be concerned with a system of internal control.

Question 18

The safeguarding of assets is an objective of a company's system of internal control.

Question 19

When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.

Question 20

A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.

Question 21

Checks received in the mail should be immediately stamped "NSF" to prevent unauthorized cashing of the check.

Question 22

A bank reconciliation is generally prepared by the bank and sent to the depositor along with canceled checks.

Question 23

A cash budget contributes to more effective cash management.

Question 24

If a monthly cash budget is prepared properly, there will never be a cash deficiency at the end of any month.

Question 25

All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the cash account.

Question 26

Cash equivalents are highly liquid investments that can be converted into a specific amount of cash.

Question 27

Control over cash disbursements is improved if major expenditures are paid by check.

Question 28

Cash equivalents include money market accounts, commercial paper, and U.S. treasury bills held for ninety days or less.

Question 29

One example of a periodic independent verification is the bank reconciliation.

Question 30

The treasurer should prepare and sign a check only after authorization to issue a check has been provided.

Question 31

The petty cash fund eliminates the need for a bank checking account.

Question 32

Cash restricted in use should be separately reported on the balance sheet.

Question 33

A basic principle of cash management is to increase the speed of paying liabilities.

Question 34

An example of segregation of duties is having a check signer recording cash disbursements.

Question 35

For efficiency of operations and better control over cash, a company should maintain only one bank account.

Question 36

Sound internal control activities dictate that the amount of cash on hand should be kept to a maximum.

Question 37

Which of the following is not one of the main factors that contribute to fraudulent activity?

A) Opportunity.
B) Incompatible duties.
C) Financial pressure.
D) Rationalization.

Question 38

To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the employee authorized to sign checks.

Question 39

A petty cash fund is used to pay relatively large amounts.

Question 40

Electronic funds transfer (EFT) is a disbursement system that uses a telephone or a computer to transfer cash from one location to another.

Question 41

Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them

A) increases the potential for errors and fraud.
B) decreases the potential for errors and fraud.
C) is an example of good internal control.
D) is a good example of safeguarding the company's assets.

Question 42

A traditional definition of internal control specifically includes all of the following features except

A) adherence to prescribed managerial policies.
B) promotion of operational efficiency.
C) reliability of accounting data.
D) insistence that employees not take earned vacations.

Question 43

Internal auditors

A) are hired by CPA firms to audit business firms.
B) are employees of the IRS who evaluate the internal controls of companies filing tax returns.
C) evaluate the system of internal controls for the companies that employ them.
D) cannot evaluate the system of internal controls of the company that employs them because they are not independent.

Question 44

Internal controls are not designed to safeguard assets from

A) natural disasters.
B) employee theft.
C) robbery.
D) unauthorized use.

Question 45

Internal control is defined, in part, as a plan that safeguards

A) all balance sheet accounts.
B) assets.
C) liabilities.
D) capital stock.

Question 46

The principle of establishing responsibility does not include

A) one person being responsible for one task.
B) authorization of transactions.
C) independent internal verification.
D) approval of transactions.

Question 47

Which one of the following is not an objective of a system of internal controls?

A) Safeguard company assets.
B) Overstate liabilities in order to be conservative.
C) Enhance the accuracy and reliability of accounting records.
D) Reduce the risks of errors.

Question 48

The custodian of a company asset should

A) have access to the accounting records for that asset.
B) be someone outside the company.
C) not have access to the accounting records for that asset.
D) be an accountant.

Question 49

When two or more people get together for the purpose of circumventing prescribed controls, it is called

A) a fraud committee.
B) collusion.
C) a division of duties.
D) bonding of employees.

Question 50

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

A) Cost of establishing control procedures should not exceed their benefit.
B) The human element.
C) Collusion.
D) The size of the company.

Question 51

Each of the following is a feature of internal control except

A) an extensive marketing plan.
B) bonding of employees.
C) separation of duties.
D) recording of all transactions.

Question 52

All of the following are examples of internal control procedures except

A) using prenumbered documents.
B) reconciling the bank statement.
C) customer satisfaction surveys.
D) insistence that employees take vacations.

Question 53

From an internal control standpoint, the asset most susceptible to improper diversion and use is

A) prepaid insurance.
B) cash.
C) buildings.
D) land.

Question 54

Which one of the following is not an objective of a system of internal controls?

A) Safeguard company assets.
B) Enhance the accuracy and reliability of accounting records.
C) Fairness of the financial statements.
D) Reduce the risks of errors.

Question 55

Internal controls are concerned with

A) only manual systems of accounting.
B) the extent of government regulations.
C) safeguarding assets.
D) preparing income tax returns.

Question 56

All of the following requirements about internal controls were enacted under the Sarbanes Oxley Act except

A) independent outside auditors must attest to the level of internal control.
B) companies must develop sound internal controls over financial reporting.
C) companies must continually assess the functionality of internal controls.
D) independent outside auditors must eliminate redundant internal controls.

Question 57

Each of the following is a feature of internal control except

A) limited access to assets.
B) independent internal verifications.
C) authorization of transactions.
D) generic design of documents.

Question 58

A very small company would have the most difficulty in implementing which of the following internal control activities?

A) Separation of duties.
B) Limited access to assets.
C) Periodic independent verification.
D) Sound personnel procedures.

Question 59

A consequence of separation of duties is that

A) theft by employees becomes impossible.
B) operations become extremely inefficient because of constant training of employees.
C) more employees will need to be bonded.
D) theft is still possible when several employees are involved.

Question 60

Under the concept of establishment of responsibility, how many people should have the ultimate responsibility?

A) Everyone in the organization.
B) An individual and his/her supervisor.
C) Only one individual.
D) The CEO.

Question 61

If employees are bonded

A) it means that they are not allowed to handle cash.
B) they have worked for the company for at least 10 years.
C) they have been insured against misappropriation of assets.
D) it is impossible for them to steal from the company.

Question 62

Which of the following would not be included in the definition of cash?

A) Money on deposit in a bank.
B) Coins.
C) NSF checks.
D) Petty cash.

Question 63

The control principle related to not having the same person authorize and pay for goods is known as

A) establishment of responsibility.
B) independent internal verification.
C) separation of duties.
D) rotation of duties.

Question 64

Related selling activities do not include

A) ordering the merchandise.
B) making a sale.
C) shipping the goods.
D) billing the customer.

Question 65

A system of internal control

A) is infallible.
B) can be rendered ineffective by employee collusion.
C) invariably will have costs exceeding benefits.
D) is premised on the concept of absolute assurance.

Question 66

In large companies, the independent internal verification procedure is often assigned to

A) computer operators.
B) management.
C) internal auditors.
D) outside CPAs.

Question 67

Internal control measures

A) only apply to publicly traded companies.
B) are in place to safeguard assets.
C) can eliminate all irregularities in the accounting process.
D) All of these answer choices are correct.

Question 68

Ron Jones has been a trusted employee for over 10 years. He is responsible for ordering merchandise inventory, receiving the inventory items, and authorizing the payment for these items. Which internal control principle, if any, is being violated?

A) None, Ron has proven to be trustworthy and has enough experience to do a good job.
B) Documentation procedures.
C) Establishment of responsibilities.
D) Segregation of duties.

Question 69

Which of the following statements is correct?

A) Due to its liquid nature, cash is the easiest asset to steal.
B) A good system of internal control will ensure that employees will not be able to steal cash.
C) It takes two or more employees working together to be able to steal cash.
D) All of these answer choices are correct.

Question 70

An accounts payable clerk also has access to the approved supplier master file for purchases. The control principle of

A) establishment of responsibility is violated.
B) independent internal verification is violated.
C) documentation procedures is violated.
D) separation of duties is violated.

Question 71

Maximum benefit from independent internal verification is obtained when

A) it is made on a pre-announced basis.
B) it is done by the employee possessing custody of the asset.
C) discrepancies are reported to management.
D) it is done at the time of the audit.

Question 72

In a small business, the lack of certain separations of duties can best be overcome by

A) bonding the employees.
B) getting the owner actively involved.
C) hiring only honest employees.
D) holding one person responsible for a given set of transactions.

Question 73

What is the rationale for the internal control principle, segregation of duties?

A) History has shown that employees are generally dishonest and thus cannot be entrusted with performing related duties.
B) The work of one employee should, without duplication of effort, provide a reliable basis for evaluating the work of another employee.
C) Control is most effective when only one person is responsible for a give task.
D) Segregation of duties causes companies to hire more employees and thus it supports the economy.

Question 74

Two individuals at a retail store work the same cash register. You evaluate this situation as

A) a violation of establishment of responsibility.
B) a violation of separation of duties.
C) supporting the establishment of responsibility.
D) supporting internal independent verification.

Question 75

Sam's Grocery Store has the following policy. 'Only one cashier can have access to a cash drawer.' Which internal control principle supports this policy?

A) Documentation procedures.
B) Segregation of duties.
C) Physical controls.
D) Establishment of responsibilities.

Question 76

Joe is a warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates

A) documentation procedures are violated.
B) independent internal verification is violated.
C) segregation of duties is violated.
D) establishment of responsibility is violated.

Question 77

Related purchasing activities include

A) ordering, receiving, paying.
B) ordering, selling, paying.
C) ordering, shipping, billing.
D) selling, shipping, paying.

Question 78

Bonding involves all of the following except

A) The company obtains insurance protection against misappropriation of assets by a dishonest employee.
B) The insurance company screens employees before they are added to the policy.
C) The company informs employees that the insurance company will vigorously prosecute all offenders.
D) Employees do not commit inappropriate acts because of the threat of prosecution and their loyalty to the employer.

Question 79

Mrs. Smith has worked for Bosco Inc. for 20 years without taking a vacation. An internal control feature that would address this situation would be

A) human resource controls.
B) establishment of responsibility.
C) physical controls.
D) documentation procedures.

Question 80

Physical controls to safeguard assets do not include

A) cashier department supervisors.
B) vaults.
C) safety deposit boxes.
D) locked warehouses.