Deck 5: Internal Controls: Ensuring the Integrity of Financial Information

Question 1

Recording the payment of an account payable twice will result in the

A) Overstatement of total assets and total liabilities
B) Understatement of total assets and total liabilities
C) Overstatement of total assets and understatement of total liabilities
D) Understatement of total assets and overstatement of total liabilities

Answer 1

B

Question 2

Which of the following is NOT a reason for problems occurring in the financial statements?

A) Fraud
B) Disagreement
C) Errors
D) Safeguards

Answer 2

D

Question 3

Recording the collection of accounts receivable by debiting Cash and crediting Revenue

A) Overstates cash
B) Understates owner's equity
C) Overstates assets
D) Overstates both cash and assets

Answer 3

C

Question 4

If the total amount for Rent Expense is inadvertently posted to Prepaid Rent at the end of the year, what will be the effect on the year-end financial statements?

A) Assets will be understated
B) Revenues will be overstated
C) Revenues will be understated
D) Revenues will be correctly stated

Question 5

A company purchased a two-year insurance policy on September 1, debiting Prepaid Insurance for the full amount. If no adjusting entry is made at the end of the year, how does this affect the year-end financial statements?

A) Overstates revenue
B) Overstates expenses
C) Overstates assets
D) Understates owner's equity

Question 6

Recording $130 of insurance expense as advertising expense will result in

A) An understatement of assets and an understatement of expenses
B) An overstatement of assets and an overstatement of expenses
C) An overstatement of assets and an understatement of expenses
D) None of these are correct

Question 7

Failure to record the used portion of supplies on hand during the month has the following effect on the financial statements prepared at the end of the month

A) Overstates liabilities
B) Understates net income
C) Overstates assets
D) Understates owner's equity

Question 8

Which of the following statements is true about errors in the financial statements of a company?

A) Errors are a result of intentional mistakes made while recording or posting transactions.
B) Errors are not intentional and when detected are immediately corrected.
C) Errors are not intentional and therefore do not need to be corrected.
D) Errors are usually an intentional attempt at fraud.

Question 9

A collection of an account receivable was erroneously recorded and posted as a debit to Cash and a credit to Consulting Fees Revenue. The journal entry to correct this error would be

A) A debit to Cash and a credit to Accounts Receivable
B) A debit to Accounts Receivable and a credit to Consulting Fees Revenue
C) A debit to Consulting Fees Revenue and a credit to Unearned Consulting Fees
D) A debit to Consulting Fees Revenue and a credit to Accounts Receivable

Question 10

A purchase of $1,600 of supplies for cash was incorrectly journalized and posted as a $1,600 debit to Supplies Expense and a $1,600 credit to cash. The entry to correct this error is

A) A $1,600 debit to Supplies on Hand and a $1,600 credit to Cash
B) A $1,600 debit to Supplies on Hand and a $1,600 credit to Supplies Expense
C) A $1,600 debit to Cash and a $1,600 credit to Supplies on Hand
D) A $1,600 debit to Accounts Receivable and a $1,600 credit to Supplies on Hand

Question 11

Which one of the following errors causes net income to be overstated?

A) Failure to record collection of an account receivable
B) Failure to record depreciation expense
C) Failure to accrue revenue earned but not billed
D) Failure to record fees received in advance that are earned by the end of the period

Question 12

If the total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year, what will be the effect on the year-end financial statements?

A) Revenues will be overstated
B) Revenues will be understated
C) Owner's equity will be overstated
D) Owner's equity will be understated

Question 13

Failure to record the expired amount of prepaid rent expense

A) Overstates expenses
B) Understates net income
C) Overstates owner's equity
D) Overstates liabilities

Question 14

If a company does NOT record accrued wages expense at the end of the year, how does this affect the year-end financial statements?

A) Overstates revenue
B) Overstates expenses
C) Overstates assets
D) Overstates owner's equity

Question 15

If the total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year, what will be the effect on the year-end financial statements?

A) Expenses will be understated
B) Owner's equity will be overstated
C) Net income will be overstated
D) All of these are true

Question 16

If the total amount for Rent Expense is inadvertently posted to Prepaid Rent at the end of the year, what will be the effect on the year-end financial statements?

A) Expenses will be overstated
B) Assets will be overstated
C) Revenues will be understated
D) Owner's equity will be understated

Question 17

Blake Co. provided $5,000 of consulting services to Simmons Co. for which they have not yet received payment. When Blake billed Simmons for the consulting services, Blake mistakenly journalized and posted the transaction as a $5,000 debit to Accounts Receivable and a $5,000 credit to Unearned Consulting Fees. The entry Blake needs to make to correct this error is

A) Debit Unearned Consulting Fees and credit Consulting Fees Earned for $5,000
B) Debit Unearned Consulting Fees and credit Accounts Receivable for $5,000
C) Debit Consulting Fees Earned and credit Accounts Receivable for $5,000
D) Debit Consulting Fees Earned and credit Unearned Consulting Fees for $5,000

Question 18

If rent for 2012 is paid in advance during 2011 but is mistakenly debited to Rent Expense in 2011,

A) Net income for 2011 will be overstated
B) There will be no error in 2011 net income
C) Net income for 2011 will be understated
D) The answer cannot be determined from the information given

Question 19

Recording Rent Expense as Wage Expense

A) Overstates income
B) Understates expenses
C) Understates owner's equity
D) None of these are correct

Question 20

Which one of the following errors causes net income to be understated?

A) Failure to record wages employees have earned but not yet been paid
B) Failure to record depreciation expense
C) Failure to record collection of accounts receivable
D) Failure to record revenue earned but not billed

Question 21

Which of the following statements is true about disagreements in the financial statements of a company?

A) Disagreements are a result of intentional mistakes made while recording or posting transactions.
B) Disagreements are not intentional and when detected are immediately corrected.
C) Disagreements result when different people arrive at different conclusions based on the same set of facts.
D) Disagreements are usually an intentional attempt at fraud.

Question 22

The internal control structure of a company is a system of policies and procedures established to

A) Safeguard assets
B) Promote operational efficiency
C) Ensure accurate accounting records
D) All of these are correct

Question 23

Which of the following requires that audit committee members be financially literate?

A) Securities Exchange Commission
B) Sarbanes-Oxley Act
C) Foreign Corrupt Practices Act
D) American Institute of Certified Public Accountants

Question 24

Which of the following is NOT one of the major safeguards in the financial reporting process?

A) Earnings management
B) Internal controls
C) Internal auditors
D) External auditors

Question 25

If an employee steals cash from a company and tries to cover up his/her actions by recording a fictitious debit to Insurance Expense and a credit to Cash, then

A) Expenses will be overstated
B) Expenses will be understated
C) Cash will be overstated
D) Cash will be understated

Question 26

All of the following are likely to be methods that could be used to conduct fraud EXCEPT

A) Overstating liabilities
B) Not recording various expenses
C) Creating fictitious invoices
D) Overstating receivables

Question 27

Which of the following is NOT one of the five basic categories of internal control?

A) Monitoring
B) Control environment
C) Control activities
D) Auditing system

Question 28

Which of the following is true about fraudulent accounting?

A) Fraudulent accounting is the result of unintentional errors in the accounting records.
B) Fraudulent accounting results when different people arrive at different conclusions based on the same set of facts.
C) Fraudulent accounting is the result of intentional errors in the accounting records.
D) None of these are true.

Question 29

The purpose of the audit committee within an organization is to

A) Regulate the internal control system
B) Be responsible for the external and internal auditors
C) Examine the financial statements to determine if they are free from material misstatement
D) Monitor operating results and financial records

Question 30

Which of the following requires that every company's annual report contain an internal control report?

A) Foreign Corrupt Practices Act
B) Securities Act of 1934
C) Internal Revenue Code
D) Sarbanes-Oxley Act

Question 31

If an employee steals cash from a company and successfully covers up his/her actions by recording a fictitious debit to Prepaid Advertising and a credit to Cash, then

A) Expenses will be understated
B) Net income will be overstated
C) Net income will be understated
D) Net income will be stated correctly

Question 32

Estimates are used in many instances when recording a company's results of operations. Which of the following would NOT require an estimate to be made?

A) Uncollectible accounts
B) Contract percentage of completion
C) Wages earned
D) Expected life of machinery

Question 33

The Sarbanes-Oxley Act requires that an internal control report be included in every company's annual report. Which one of the following is NOT one of the requirements of the internal control report?

A) Contain an assessment by management of the internal control structure
B) State the responsibility of management to maintain an adequate control structure
C) Describe in detail the internal controls of the company
D) Contain an independent assessment by an independent auditor of the reliability of internal controls

Question 34

If two different accountants were to estimate the percentage of customers who will NOT pay their accounts (bad debts), they could arrive at different estimates. These differing estimates would affect the financial statements. Such differences in assessing estimates are due to

A) Fraudulent financial reporting
B) Errors in accounts and ledgers
C) Disagreements in judgment
D) Lack of internal controls

Question 35

Which of the following is NOT usually considered a component of a company's control environment?

A) The organizational structure
B) The audit committee
C) The Foreign Corrupt Practices Act
D) Management's philosophy and operating style

Question 36

If an employee steals cash from a company and tries to cover up his/her actions by recording a fictitious debit to Prepaid Insurance and a credit to Cash, then

A) Expenses will be understated
B) Assets will be overstated
C) Assets will be understated
D) Assets will be stated correctly

Question 37

If an employee steals cash from a company and successfully covers up his/her actions by recording a fictitious debit to Accounts Payable and a credit to Cash, then

A) Liabilities will be overstated
B) Liabilities will be understated
C) Assets will be overstated
D) Assets will be understated

Question 38

Internal controls are designed to help and protect all of the following groups of people, EXCEPT

A) Creditors
B) Management
C) Investors
D) Tax collectors

Question 39

Which of the following are usually members of a company's audit committee?

A) Officers of the company
B) External auditors
C) Internal auditors
D) Members of the board of directors who are not officers of the company

Question 40

Which of the following is NOT one of the major concerns most companies have when they are designing internal controls?

A) The assets and records are safeguarded
B) The Securities and Exchange Commission's regulations are followed
C) Management policies are followed
D) The Foreign Corrupt Practices Act is complied with

Question 41

Which of the following groups of control activities are considered preventative controls?

A) Segregation of duties, proper procedures for authorizations, and physical control over assets and records
B) Adequate documents and records, independent checks on performance, and physical control over assets and records
C) Segregation of duties, adequate documents and records, and proper procedures for authorizations
D) Independent checks on performance, proper procedures for authorizations, and physical control over assets and records

Question 42

Which of the following are valid control procedures?

A) Segregation of duties
B) Adequate documents and records
C) Independent checks on performance
D) All of these are correct

Question 43

Which of the following is an example of an independent check on performance?

A) Every year, Doug is required to take one full week of vacation time.
B) Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank.
C) Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night.
D) John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions.

Question 44

Which of the following are the three functions that should be performed by separate departments or individuals?

A) Authorization, purchasing, and custody of assets
B) Record keeping, validation, and classifying
C) Record keeping, validation, and authorization
D) Authorization, record keeping, and custody of assets

Question 45

Which of the following is typically NOT a reason for managing reported earnings?

A) Meet external expectations
B) Desire for personal gain
C) Meet internal earnings targets
D) Income smoothing

Question 46

Which of the following groups of control activities are considered detective controls?

A) Segregation of duties and physical control over assets and records
B) Adequate documents and records and independent checks on performance
C) Segregation of duties and adequate documents and records
D) Independent checks on performance and physical control over assets and records

Question 47

Which of the following is generally NOT performed by an accounting clerk?

A) Recording monthly insurance expense
B) Making a payment on an account payable
C) Authorizing credit to customers
D) Authorizing dividends to be paid

Question 48

Which of the following is a characteristic of a well-designed document?

A) It is easily interpreted and understood.
B) It is formatted so that it can be handled quickly and efficiently.
C) It has been designed with all possible uses in mind.
D) All of these are characteristic of a well-designed document.

Question 49

Control activities can be defined as

A) The lines of authority and responsibility within a company.
B) The actions, policies, and procedures that reflect the overall attitudes of top management about control.
C) The members of a company's board of directors who are responsible for dealing with the external and internal auditors.
D) The policies and procedures used by management to meet their objectives.

Question 50

Which of the following is desirable in a good system of internal accounting control?

A) All accounting personnel in a company should be Certified Public Accountants
B) Appropriate forms, such as checks and sales invoices, should be prenumbered
C) To obtain the benefit of specialization, employees should not be rotated among jobs
D) Responsibility and authority for a given function should be shared among several employees

Question 51

Which of the following is NOT an objective of the accounting system?

A) Make sure a company only records profitable transactions
B) Make sure a company only records valid transactions
C) Make sure a company values transactions properly
D) Make sure a company records transactions in the proper time period

Question 52

Which of the following is an example of an adequate segregation of duties?

A) Every year, Doug is required to take one full week of vacation time.
B) Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank.
C) Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night.
D) John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions.

Question 53

Which of the following is an example of a proper procedure of authorization?

A) Every year, Doug is required to take one full week of vacation time.
B) Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank.
C) Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night.
D) John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions.

Question 54

If an external auditor suspects wrongdoing in financial statements, the concerns should be addressed to

A) The audit committee
B) The management of the company
C) The Securities and Exchange Commission
D) The board of directors

Question 55

Which of the following categories of control activities is NOT considered a preventative control?

A) Independent checks on performance
B) Physical control over assets and records
C) Adequate segregation of duties
D) Proper procedures for authorization

Question 56

Using independent reviewers, such as auditors, is an example of which type of accounting procedure?

A) Physical control over records
B) Adequate documents and records
C) Proper procedures for authorization
D) Independent checks on performance

Question 57

Which of the following is a poor internal accounting control feature?

A) Division of work
B) Combining accountability with custodianship
C) Rotation of personnel
D) Internal auditing

Question 58

Which of the following is an example of a physical control over assets and records?

A) Every year, Doug is required to take one full week of vacation time.
B) Greg is in charge of recording receipt of payments made to accounts receivable, while Susan is in charge of making deposits to the bank.
C) Every evening, Shellie makes a back-up file of all transactions recorded in the computer that day, burns the back-up file onto a CD and then locks the CD into a fire-proof vault for the night.
D) John, a clerk, is authorized to perform transactions as large as $5,000 but must maintain authorization from Andrea to perform larger transactions.

Question 59

Keeping marketable securities and cash in a fireproof vault is an example of which type of accounting procedure?

A) Physical control over records
B) Adequate documents and records
C) Proper procedures for authorization
D) Segregation of duties

Question 60

The control environment can be defined as

A) The lines of authority and responsibility within a company.
B) The actions, policies, and procedures that reflect the overall attitudes of top management about control.
C) The members of a company's board of directors who are responsible for dealing with the external and internal auditors.
D) The policies and procedures used by management to meet their objectives.

Question 61

As William is preparing the end of year financial statements, he has been asked to reconsider the timing of revenues and expenses in order to report less volatile earnings. This is an example of

A) Window dressing
B) Meeting internal targets
C) Income smoothing
D) Meeting external expectations

Question 62

Earnings management through strategic matching is best exemplified by

A) Changing the useful life of a depreciable asset.
B) Timing transactions such that large one-time gains and losses occur in the same quarter.
C) Changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements.
D) Capitalizing as assets expenditures that have no future economic benefit.

Question 63

Most companies that engage in earnings management typically do NOT go beyond which of the following activities on the earnings management continuum?

A) Strategic matching
B) Change in methods or estimates with full disclosure
C) Change in methods or estimates with little or no disclosure
D) Non-GAAP accounting

Question 64

As William is preparing the end of year financial statements, he has been asked to review the accrual judgments and estimates to see if the originally calculated net loss can be changed to a net profit. This is an example of

A) Window dressing
B) Meeting internal targets
C) Income smoothing
D) Meeting external expectations

Question 65

Excessive earnings management typically begins as a result of

A) a regulatory investigation.
B) pressure to meet the expectations of stakeholders.
C) a downturn in business.
D) a violation of generally accepted accounting principles.

Question 66

As William is preparing the end of year financial statements, he realizes that the earnings are not quite up to par for the large loan application that is being currently processed. He decides to stretch the assumptions just enough to be able to meet the requirements for the loan application. This is an example of

A) Window dressing
B) Meeting internal targets
C) Income smoothing
D) Meeting external expectations

Question 67

Which of the following items of the earnings management continuum is in the correct order?

A) strategic matching, change in methods or estimates with full disclosure, change in methods or estimates with little or no disclosures, non-GAAP accounting, fictitious transactions
B) strategic matching, change in methods or estimates with little of no disclosure, fictitious transactions, change in methods or estimates with full disclosure, non-GAAP accounting
C) non-GAAP accounting, change in methods or estimates with little or no disclosure, strategic matching, fictitious transactions, change in methods or estimates with full disclosure
D) change in methods or estimates with full disclosure, non-GAAP accounting, fictitious transactions, strategic matching, change in methods or estimates with little or no disclosure

Question 68

The Sarbanes-Oxley Act establishes

A) Independent oversight of auditors
B) Constraints on auditors
C) Constraints on company management
D) All of these are correct

Question 69

According to Sarbanes-Oxley, which one of the following services is an accounting firm permitted to provide to its audit client?

A) Bookkeeping or other services related to the accounting records or financial statements
B) Internal audit outsourcing services
C) Legal services and expert services unrelated to the audit
D) Opinions about the reliability of internal controls

Question 70

Earnings management through deceptive accounting is best exemplified by

A) Changing the useful life of a depreciable asset and fully disclosing it in the notes.
B) Timing transactions such that large one-time gains and losses occur in the same quarter.
C) Changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements.
D) Capitalizing as assets expenditures that have no future economic benefit.

Question 71

Earnings management through aggressive accounting is best exemplified by

A) Changing the useful life of a depreciable asset and fully disclosing it in the notes.
B) Timing transactions such that large one-time gains and losses occur in the same quarter.
C) Changing the interest rate used in accounting for leases without describing the change in the notes to the financial statements.
D) Capitalizing as assets expenditures that have no future economic benefit.

Question 72

The GAAP Oval best represents

A) The fact that only one true earnings number exists.
B) The flexibility managers have within GAAP to report one earnings number from among many possibilities.
C) The philosophy that earnings management within limits is ethical.
D) The fact that GAAP is not subject to interpretation.

Question 73

According to Sarbanes-Oxley, who are auditors required to report to and be retained by?

A) Chief Financial Officer
B) Audit committee
C) Chief Executive Officer
D) Internal auditors

Question 74

Recording as an asset expenditures that have no future economic benefit is an example of

A) Strategic matching.
B) Change in methods or estimates with full disclosure.
C) Non-GAAP accounting.
D) A fictitious transaction.

Question 75

Which of the following typically involves the use of non-GAAP accounting?

A) Delaying a transaction to be recorded in a more advantageous quarter
B) Changing an interest rate and disclosing it in the financial statements
C) Recording expenses as assets
D) Changing an interest rate but not disclosing it in the financial statements

Question 76

Which of the following groups on the earnings management continuum are always considered ethical?

A) Savvy transaction timing and aggressive accounting
B) Aggressive accounting and fraudulent reporting
C) Deceptive accounting and savvy transaction timing
D) There is not a clear definition as to which of these are ethical and which are not

Question 77

The Public Company Accounting Oversight Board

A) Establishes requirements for entry into the CPA profession
B) Conducts inspections of accounting firms
C) Reviews tax returns of public companies
D) Enforces compliance with the Foreign Corrupt Practices Act

Question 78

Fraud is

A) The deceptive concealment of transactions
B) The creation of fictitious transactions
C) Unintentional errors
D) Both the deceptive concealment of transactions and the creation of fictitious transactions

Question 79

The Public Company Accounting Oversight Board is NOT required to

A) Establish standards relating to the preparation of audit reports for public companies
B) Conduct inspections of accounting firms
C) Register all public accounting firms that provide audits for public companies
D) Enforce compliance with the Foreign Corrupt Practices Act

Question 80

As William is preparing the end of year financial statements, he notices that the numbers required for his personal bonus have not been met. He begins to review the estimates that he has made in order to possibly adjust some numbers to meet the requirements for his bonus. This is an example of

A) Window dressing
B) Meeting internal targets
C) Income smoothing
D) Meeting external expectations