Deck 5: Fraud, Internal Control, and Cash

Question 1

The fraud triangle identifies incentive,opportunity,and benchmarks as the requirements for a fraud to occur.

Answer 1

False

Question 2

The Grass is Greener Company borrows money from a bank.Part of the loan agreement requires Grass is Greener to maintain stockholders' equity of at least 40% of assets or otherwise to pay a higher interest rate.This requirement is referred to as a:

A) loan covenant.
B) credit rating.
C) bond rating.
D) call feature.

Answer 2

A

Question 3

Employee fraud includes all of the following categories except:

A) asset misappropriation.
B) corruption.
C) deception.
D) financial statement fraud.

Answer 3

C

Question 4

The components of an internal control system include control environment,risk assessment,control activities,information and communication,and rationalization.

Question 5

On a bank statement,deposits are listed as debits and cleared checks are listed as credits.

Question 6

When duties are properly segregated,the accounting department should compare the cash in the register with the cash count sheet.

Question 7

The Sarbanes-Oxley Act (SOX)grants legal protection to 'whistle-blowers.'

Question 8

The use of internal controls guarantees protection against losses due to fraud,errors,and inefficiencies.

Question 9

Internal controls include the policies and procedures a company implements to promote efficient and effective operations,protect assets,enhance accounting information,and adhere to laws and regulations.

Question 10

The Sarbanes-Oxley Act (SOX)requires external auditors to test the company's internal control system.

Question 11

Cash equivalents are short-term,highly liquid investments purchased within one year of maturity.

Question 12

From the creditor's perspective,what is the purpose of loan covenants?

A) To assist government agencies in examining financial statements
B) To help to ensure a company will be able to repay the loan
C) To aid in forecasting future revenues and expenses
D) To help to determine the amount of money lent to a company

Question 13

A good voucher system includes procedures and approvals designed to control cash payments.

Question 14

Cash that is legally or contractually required to be set aside for a specific purpose cannot be reported with Cash and Cash Equivalents on the balance sheet.

Question 15

A petty cash fund is a separate checking account used to reimburse employees for expenditures they have made on behalf of the organization.

Question 16

The incentive element of the fraud triangle includes reasons why top management may commit fraud such as enhancing job security and obtaining bigger paychecks.

Question 17

Employee fraud is often grouped into three categories,including corruption,asset misappropriation,and embezzlement.

Question 18

Internal control consists of the actions taken by people at every level of an organization to achieve its objectives relating to operations,reporting,and compliance.

Question 19

The entry recorded when the petty cash fund is replenished includes a debit to Petty Cash and a credit to Cash.

Question 20

A highly effective internal control should not be implemented if the cost is greater than the benefit.

Question 21

Which element is not part of the fraud triangle?

A) Sustainability
B) Incentive
C) Rationalization
D) Opportunity

Question 22

All of the following are requirements of the Sarbanes-Oxley Act (SOX)except:

A) evaluation and reporting on the effectiveness of internal control over financial reporting by management for all public companies.
B) evaluation and reporting on the effectiveness of internal control over financial reporting by external auditors only for large public companies.
C) establishment of an audit committee of independent directors to ensure the company's accounting, internal control, and audit functions are effective.
D) adoption of a code of ethics covering all employees.

Question 23

The objectives of a company's system of internal control include all of the following except:

A) completing work efficiently and effectively and protecting assets by reducing the risk of fraud.
B) producing reliable and timely accounting information for use by people internal and external to the organization.
C) ensuring the company's stock price provides a reasonable return to investors.
D) adhering to laws and regulations.

Question 24

Companies that must comply with the requirements of the Sarbanes-Oxley Act (SOX)include all:

A) U.S. companies.
B) companies that trade on U.S. stock exchanges.
C) U.S. companies that trade on U.S. stock exchanges.
D) foreign companies that trade on U.S. stock exchanges.

Question 25

The fraud triangle contains three elements that must exist for accounting fraud to occur.The elements are:

A) fear, greed, and satisfaction.
B) greed, larceny, and access.
C) motive, opportunity, and means.
D) incentive, opportunity, and rationalization.

Question 26

Which of the following is a set of regulations passed by Congress in 2002 in an attempt to improve financial reporting and restore investor confidence?

A) Enron Act
B) Federal Accounting Standards Board Act
C) Sarbanes-Oxley Act
D) Securities and Exchange Act

Question 27

Fraud is best defined as:

A) personal gain.
B) misrepresenting oneself as another.
C) deceitful actions of SOX.
D) financial statement errors.

Question 28

Internal controls are concerned with:

A) only manual accounting systems.
B) the extent of government regulations.
C) protecting against theft of assets and enhancing accounting information.
D) preparing income tax returns.

Question 29

Which of the following would overstate a company's net income?

A) Counting shipments of customers' orders as revenue before payment has been received.
B) Shipping goods to customers without receiving orders from those customers, and recording the transactions as revenue.
C) Accruing liabilities for marketing expenses before they are incurred.
D) Making an accrual adjusting entry for interest earned on a bond investment.

Question 30

Why was the Sarbanes-Oxley Act (SOX)enacted?

A) To bring GAAP closer to global financial reporting standards
B) The lack of significant corporate frauds during the late 1990s and early 2000s warranted less monitoring for external stakeholders
C) To improve the financial reporting and restore investor confidence
D) Accounting rules had become so complex that investors could no longer understand them

Question 31

Which of the following was passed by Congress in response to financial statement frauds that occurred in the early 2000s?

A) Federal Accounting Standards Board Act
B) Securities and Exchange Act
C) Sarbanes-Oxley Act
D) Clayton Act

Question 32

Considering current laws that deal with misstatements of financial results,which of the following statements is correct?

A) Managers found guilty can escape paying fines if they declare bankruptcy.
B) Managers can be sentenced to maximum jail terms of up to 20 years for each violation.
C) Managers found guilty may keep any bonuses or profits from the misrepresentation if their fines are less than such bonuses or profits.
D) Whistleblowers who secretly submit concerns about questionable accounting practices will be fired.

Question 33

Which of the following was not a change introduced by the Sarbanes-Oxley Act?

A) Limits on executive compensation for most companies
B) Stiffer fines and maximum jail sentences for willful misrepresentation of financial results
C) An external audit of the effectiveness of internal controls
D) Anonymous tip lines and legal protection to whistle-blowers

Question 34

A weak system of internal ______ provides the ______ to commit fraud.

A) controls; opportunity
B) audits; rationalization
C) financial statements; opportunity
D) loan covenants; incentive

Question 35

The Sarbanes-Oxley Act (SOX)requires the establishment of an audit committee that includes the:

A) president of the company.
B) chief financial officer of the company.
C) independent directors.
D) company's external auditors.

Question 36

Which of the following is not a significant objective of the Sarbanes-Oxley (SOX)Act?

A) Conceal fraud
B) Encourage good character
C) Counteract incentives for fraud
D) Reduce opportunities for fraud

Question 37

All of the following are requirements of the Sarbanes-Oxley Act (SOX)except:

A) tip lines that allow employees to secretly submit concerns about questionable accounting or auditing practices
B) fines of up to $5 million plus repayment of any fraud proceeds
C) evaluation and reporting on the effectiveness of internal control over financial reporting for large public companies by external auditors
D) evaluation and reporting on the effectiveness of internal control over financial reporting for all public companies by management with disclosure that management is not responsible for the internal control system

Question 38

Which of the following is not a change introduced by the Sarbanes-Oxley Act?

A) Management evaluate and report on the effectiveness of internal control over financial reporting.
B) Publically traded companies must have their financial statements audited.
C) The company's board of directors is required to establish an audit committee comprised of independent directors.
D) Public companies must have tip lines that allow employees to secretly submit concerns about questionable accounting or auditing practices.

Question 39

Which of the following is not a category of employee fraud?

A) Corruption
B) Asset misappropriation
C) Financial statement fraud
C) Internal controls

Question 40

Research has found that three factors exist when fraud occurs.Which of the following is not one of the three factors of the fraud triangle?

A) Incentive to commit fraud
B) Opportunity to commit fraud
C) Ability to rationalize the fraud
D) Lack of a code of ethics

Question 41

Criminally minded employees have been known to override internal controls or do which of the following to get around them?

A) Collude
B) Segregate duties
C) Disarm
D) Restrict access

Question 42

The use of passcodes is an example of which internal control principle?

A) Segregate duties
B) Restrict access
C) Document procedures
D) Independently verify

Question 43

The main purposes of internal controls include all of the following except:

A) prevention of error, theft, and fraud.
B) promotion of operational efficiency.
C) ensuring compliance with laws and regulations.
D) providing more favorable financial information.

Question 44

The purpose of internal controls includes all of the following except:

A) improving efficiency.
B) producing timely accounting information.
C) minimizing errors.
D) completely eliminating fraud.

Question 45

Which of the following is not a commonly used internal control?

A) Mandatory vacations
B) Anonymous hotlines
C) Bonding employees
D) Consolidating duties

Question 46

The evaluation of the internal control system to determine whether it is working as intended is referred to as:

A) the control environment.
B) information and communication.
C) risk assessment.
D) monitoring activities.

Question 47

All of the following are goals of internal control except:

A) reducing the risk of fraud.
B) producing reliable and timely accounting information for use by people internal and external to the organization.
C) minimizing the amount of income taxes that must be paid.
D) adhering to laws and regulations.

Question 48

Which of the following is not an example of internal control?

A) Use of passwords to restrict access to computer systems
B) Bonding employees
C) Periodic bank reconciliations
D) Customer satisfaction surveys

Question 49

The attitude that people in the organization hold regarding internal control is referred to as the:

A) control environment.
B) control atmosphere.
C) risk assessment.
D) monitoring activities.

Question 50

Which principle of internal control states that you should not make one employee responsible for all parts of a transaction?

A) Responsibility centers
B) Separation of duties
C) Restrict access
D) Procedure documentation

Question 51

Which of the following is not one of the control components that are part of the framework used when analyzing an internal control system?

A) risk assessment
B) control activities
C) information and communication
D) reconciliations

Question 52

Segregation of duties means that a company assigns responsibilities so that:

A) sufficient workers are available to cover all necessary jobs.
B) responsibilities for related activities are assigned to two or more people.
C) employees are restricted to jobs for which they have adequate training.
D) workers are divided into those who do the same tasks but on different days.

Question 53

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

A) Segregating duties
B) Restricting access to cash or information
C) Establishing responsibilities
D) Documenting procedures

Question 54

The principles of internal control include which of the following?

A) Use only computerized systems
B) Establish responsibility
C) Maintain perpetual inventory records
D) Eliminate fraud

Question 55

Which of the following is not a reason that a business needs an effective internal control system?

A) Ensure that work is completed efficiently and effectively
B) Produce reliable and timely accounting information for use by people external to the organization
C) Protect assets by reducing the risk of fraud
D) Identify ways to circumvent applicable laws and regulations

Question 56

Which of the following statement about internal control is not correct?

A) It guarantees the management will behave ethically.
B) It helps protect against the theft of assets.
C) It enhances the reliability of accounting information.
D) It promotes efficient and effective operations.

Question 57

If a company hires an auditor to check that the work done by others within the company is supported by documentation,it is doing so under the principle of control activities referred to as:

A) independent verification.
B) segregation of duties.
C) restrict access.
D) document procedures.

Question 58

The control components used by companies as a framework when analyzing their internal control systems include all of the following except:

A) control environment.
B) compliance.
C) monitoring activities.
D) risk assessment.

Question 59

The internal control principle related to assigning responsibilities so that one employee cannot make a mistake or commit a dishonest act without someone else discovering it is referred to as:

A) duplication of responsibility.
B) mandatory vacations.
C) segregation of duties.
D) rotation of duties.

Question 60

Common control principles include all of the following,except:

A) outsource work to third parties.
B) segregate of duties.
C) independently verify.
D) restrict access to assets and information.

Question 61

The cashier uses the cash register and its accompanying point-of-sale accounting system to perform three important functions.Which of the following is not one of those functions?

A) Document total cash sales
B) Document amount charged for each item sold
C) Segregate duties
D) Restrict access

Question 62

Which of the following is not a reason why it is especially important for companies to have internal controls over cash?

A) Most businesses accept remote sources of payment on account.
B) The volume of cash transactions is enormous.
C) Cash is portable.
D) There is a high risk of theft of cash.

Question 63

The cash count sheet determines all of the following except the:

A) cash shortage or overage, if any.
B) amount of cash available for deposit in the bank
C) amount of cash to be reported on the balance sheet.
D) amount of cash received.

Question 64

Each cash drawer is assigned to only one employee in a supermarket.This is an example of the internal control principle of:

A) establishing responsibility.
B) segregating duties.
C) independently verifying.
D) bonding employees.

Question 65

The customer typically explains the purpose of the payment using a(n):

A) remittance advice.
B) invoice.
C) purchase order.
D) check.

Question 66

If a cashier rang up sales totaling $4,000,but had only $3,997 to deposit,which journal entry would be recorded? A debit to:

A) Cash of $3,997 and Cash Shortage of $3 and a credit to Sales Revenue of $4,000.
B) Sales of $4,000 and Cash Shortage of $3 and a credit to Cash of $3,997.
C) Cash of $3,997 and a credit to Cash Shortage of $3 and Sales Revenue of $4,000.
D) Cash of $3,997 and Cash Shortage of $3 and a credit to Unearned Revenue of $4,000.

Question 67

The account Cash Overage is which type of account?

A) An asset account
B) A liability account
C) A miscellaneous revenue account
D) A miscellaneous expense account

Question 68

A cash register does not:

A) restrict access to cash.
B) document the amount of cash received for items sold.
C) summarize the cash register's total cash sales.
D) reconcile accrual accounting with cash accounting.

Question 69

When cash is received from a remote source,the accounting department then compares the total on the cash receipts list with the stamped deposit slip received from the bank.Which internal control principle is being met with this procedure?

A) Document procedures
B) Independently verify
C) Restrict access
D) Segregate duties

Question 70

Which of the following is not one of the internal control functions performed by a cash register?

A) Document the amount charged for each item sold
B) Perform the bank reconciliation
C) Restrict access to cash
D) Document the total cash sales

Question 71

Cashiers at a supermarket have to talk to a manager before approving price changes at the register.Which internal control principle is being followed?

A) Segregate duties
B) Establish responsibilities
C) Independently verify
D) Restrict access

Question 72

Physically locking up assets and electronically securing other assets and information is required by the internal control principle of:

A) restricting access.
B) establishing responsibilities.
C) segregation of duties.
D) documenting procedures.

Question 73

A company's cash receipts procedures include the following.Cashiers collect cash and issue a receipt at the point of sale.Supervisors take custody of the cash at the end of each cashier's shift and deposit it in the bank.Accounting staff then ensure the receipts from cash sales are properly recorded in the accounting system.Which internal control principle is most evident with these procedures?

A) Restrict access
B) Segregate duties
C) Document procedures
D) Independently verify

Question 74

Which of the following is not related to the segregation of duties for cash received in person?

A) Cashiers are responsible for the collection of cash and issuing a receipt at the point of sale.
B) A supervisor is responsible for collecting the cash at the end of each cashier's shift and depositing it in the bank.
C) Members of the accounting department are responsible for ensuring that the receipts from cash sales are properly recorded in the accounting system.
D) Members of the accounting department count the cash collected and deposit it in the bank.

Question 75

Which of the following statements concerning electronic funds transfers is not correct?

A) Businesses sometimes receive payments from customers via EFT.
B) An EFT occurs when a customer electronically transfers funds from his or her bank account to the company's bank account.
C) Because electronic funds transfers are deposited directly into the company's bank account, they require additional internal control procedures.
D) To process an EFT, the accounting department merely records journal entries to debit Cash and credit Account Receivable from each customer.

Question 76

Cash sales rung up by cashiers totaled $117,000.Cash in the drawer was counted and found to be $119,000.The journal entry to record the day's sales would include a:

A) debit to Cash for $117,000.
B) credit to Cash Overage for $2,000.
C) credit to Sales Revenue for $119,000.
D) debit to Sales Revenue for $117,000.

Question 77

If a cashier rang up sales totaling $5,096,but had $5,100 to deposit,which journal entry would be recorded?

A) A debit to Cash for $5,100, a credit to Cash Overage for $4, and a credit to Sales Revenue for $5,096.
B) A debit to Sales for $5,100, a debit to Cash Overage for $4, and a credit to Cash for $5,096.
C) A debit to Cash for $5,096, a debit to Cash Shortage for $4, and a credit to Sales Revenue for $5,100.
D) A debit to Cash for $5,096, a debit to Cash Shortage for $4, and a credit to Unearned Revenue for $5,100.

Question 78

When the cash count sheets for the day equal $10,100 and the cash register reports $10,200,the journal entry to record the sales will include a:

A) credit to Cash Shortage
B) debit to Cash Shortage
C) credit to Cash Overage
D) debit to Cash Overage

Question 79

Assigning sequential numbers to cash sales,so that the accounting staff can ensure that every sale has been recorded is required by the internal control principle of:

A) documenting procedures.
B) segregating duties.
C) establishing responsibilities.
D) restricting access.

Question 80

Which of the following is not a correct statement regarding the Cash Shortage account?

A) It account normally has a debit balance.
B) It is reported on the balance sheet.
C) It is reported as a miscellaneous expense.
D) If the recorded cash exceeds the cash counted, a shortage exists.