Deck 4: Internal Controls, Accounting for Cash, and Ethics

Question 1

Which of the following statements accurately describes a fidelity bond?

A) Procedures to provide reasonable assurance that the objectives of a company are accomplished
B) Proper procedures for processing transactions.
C) Insurance that the company buys to protect itself from loss due to employee dishonesty
D) Guidelines or policies that limit the actions of different levels of management

Answer 1

C
Explanation: Employees in a position of trust should be bonded.

Question 2

Following the February bank reconciliation, the accountant made an entry that increased accounts receivable and decreased cash by $150. This entry may have been used to record:

A) an NSF check received by Kincaid from a customer.
B) the collection of an account receivable by Kincaid that is part of a deposit in transit.
C) bank charges owed by Kincaid to the bank.
D) the collection of an account receivable by the bank that has been deposited in Kincaid's account.

Answer 2

A
Explanation: When a company discovers an NSF check, it reduces its cash account and increases accounts receivable while it attempts to collect on the check.

Question 3

Which internal control procedure addresses the idea that the likelihood of employee fraud or theft is reduced if collusion is required to accomplish it?

A) Separation of duties
B) Physical controls
C) Fidelity bonding
D) Use of prenumbered documents

Answer 3

A
Explanation: Separation of duties reduces the ability of a single employee to commit fraud without the assistance of other employees.

Question 4

Which of the following is an internal control procedure used to safeguard a company's assets?

A) Timely deposits of cash receipts into a checking account
B) Separation of duties
C) Reconciliation of the bank statement
D) All of these answer choices are correct.

Question 5

Which of the following is not an internal control procedure for the control of cash receipts?

A) Immediate preparation of records of all cash receipts
B) Customers should be given written receipts for all monies paid
C) All cash should be deposited frequently
D) Use of prenumbered checks

Question 6

What documentation issued by a bank increases a company's checking account balance at the bank?

A) Credit memo
B) Debit memo
C) Balance sheet
D) Certified check

Question 7

A review of the bank statement and accounting records of the Blake Company revealed the following items: Which of the item(s) would be added to the unadjusted bank balance to determine the true cash balance?

A) Item numbers 3 and 3
B) Item number 2
C) Item numbers 3, 4, and 6
D) Item number 3

Question 8

Which of the following statements concerning internal controls is true?

A) Internal administrative controls are designed to limit the amount of funds spent on investments.
B) Strong internal controls provide reasonable assurance that the objectives of a company will be accomplished.
C) Internal accounting controls are limited to the policies and procedures used to protect the company from embezzlement.
D) The control procedure, separation of duties, prohibits the employment of a husband and wife or other closely related parties within the same company.

Question 9

Which of the following is not one of the purposes of an internal control system?

A) Safeguarding the company's assets
B) The evaluation of performance
C) The assessment of the degree of compliance with company policies and public laws
D) Ensuring that the company is using the most effective marketing plan

Question 10

Which of the following is not a generally recognized internal control procedure?

A) Establishment of clear lines of authority
B) Having employees covered by a fidelity bond
C) Requiring regular vacations for certain employees
D) Customer service comment cards

Question 11

At March 31, Cummins Co. had a balance in its cash account of $10,400. At the end of March the company determined that it had outstanding checks of $900, deposits in transit of $600, a bank service charge of $20, and an NSF check from a customer for $200. The true cash balance at March 31 is:

A) $10,100
B) $10,180
C) $10,380
D) $9,880

Question 12

Which of the following is not a typical form associated with a bank checking account?

A) Signature card
B) Bank statement
C) Debit memo
D) Deposit ticket

Question 13

Chester Company has established internal control policies and procedures in order to achieve the following objectives:
1) Effective evaluation of management performance.
2) Assure that the accounting records contain reliable information.
3) Safeguard the company's assets.
"4) Assure that employees comply with company policy.
Which of these objectives are achieved by accounting controls?"

A) Objectives 1 and 2
B) Objectives 2 and 3
C) Objectives 3 and 4
D) All four objectives

Question 14

The April 30 bank statement for Trimble Corporation shows an ending balance of $34,351. The unadjusted cash account balance was $28,250. The accountant for Trimble gathered the following information: There was a deposit in transit for $4,240.
The bank statement reports a service charge of $39.
A credit memo included in the bank statement shows interest earned of $95.
Outstanding checks totaled $10,935.
The bank statement included a $650 NSF check deposited in April.
What is the true cash balance as of April 30?

A) $27,656
B) $27,006
C) $31,801
D) $31,896

Question 15

A review of the bank statement and accounting records of the Blake Company revealed the following items: Which of the item(s) would be subtracted from the company's unadjusted book balance to determine the true cash balance?

A) Item numbers 2 and 4
B) Item numbers 2, 4, and 5
C) Item numbers 1 and 4
D) Item numbers 1, 2, 4, and 5

Question 16

Which of the following is not a motive for the embezzlement of cash by employees?

A) Cash is the common unit of measurement.
B) Ownership of cash is difficult to prove.
C) Cash has universal appeal.
D) Small quantities of high denomination can represent significant amounts of value.

Question 17

For which of the following bank reconciliation adjustments would an adjusting journal entry not be necessary?

A) An error in which the company's accountant recorded a check as $235 that was written correctly for $253.
B) A check for $37 deposited during the month, but returned for non-sufficient funds.
C) An error in which the bank charged the company $83 for a check that had been written by another account holder.
D) All of these answer choices would require adjusting journal entries.

Question 18

Which of the following is not considered an accounting control?

A) Requiring employees to take vacations
B) Performance evaluations
C) Bonding of employees
D) Use of prenumbered documents

Question 19

Effective internal controls for cash include:

A) disbursements made by prenumbered check.
B) cash deposited in the bank on a timely basis.
C) written cash receipts given to customers as evidence of payment.
D) all of these answer choices are correct.

Question 20

In establishing a strong internal control system at Banks Company, management is concerned with administrative controls. Administrative controls include:

A) performance evaluation.
B) accuracy of the recording procedures.
C) keeping cash in a safe.
D) maintenance of accurate inventory records.

Question 21

On September 30, the bank statement of Fine Company showed a balance of $7,800. The following information was revealed by comparing the bank statement to the cash balance in Fine's accounting records: (1) deposits in transit amounted to $3,150
(2) outstanding checks amounted to $6,200
(3) a $550 check was incorrectly drawn on Fine's account
(4) NSF checks returned by the bank were $750
(5) bank service charge was $29
(6) credit memo for $75 for the collection of one of the company's account receivable
Based on the above information, the true cash balance was:

A) $5,346.
B) $5,300.
C) $4,596.
D) $7,096.

Question 22

How will a certified check be treated in a company's bank reconciliation?

A) As a deduction to the company's unadjusted book balance.
B) As an increase to the bank's unadjusted bank balance.
C) As a deduction to the bank's unadjusted bank balance.
D) There is no adjustment when preparing the bank reconciliation.

Question 23

Which of the following is not a primary role of an independent auditor?

A) Assume legal and professional responsibilities to the public
B) Advise client on tax strategies
C) Determine whether a company's financial statements are materially correct
D) All of these answer choices are correct.

Question 24

Jasper Company accepted a check from Harp Company as payment for services rendered. Jasper's bank statement revealed that the Harp check was an NSF check. What effect will the entry to record the NSF check have on the accounting equation of Jasper Company?

A) Option A
B) Option B
C) Option C
D) Option D

Question 25

The bank statement for Tetra Company contained the following items: a bank service charge of $10; a credit memo for interest earned, $15; and a $50 NSF check from a customer. The company had outstanding checks of $100 and a deposit in transit of $300. Assuming that the unadjusted bank balance was $500, what is the unadjusted book balance?

A) $745
B) $455
C) $700
D) $800

Question 26

In a company's bank reconciliation, an outstanding check is a check that:

A) has been issued by the company but has not been presented to the bank for payment.
B) is guaranteed for payment by the bank.
C) has been presented to the bank for payment but has not been reported on the bank statement.
D) has been written for an amount that is greater than the balance in the account holder's bank account.

Question 27

While performing its monthly bank reconciliation, the bookkeeper for the Mosaic Company discovered that a check written for $421 for advertising expense was recorded in the firm's books as $241. Which of the following shows the effect of the correcting entry on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 28

In the reconciliation of the June bank statement, a deposit made on June 30 did not appear on the June bank statement. In preparing the bank reconciliation, this deposit in transit should be:

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

Question 29

Owen Company's unadjusted book balance at June 30 is $9,700. The company's bank statement reveals bank service charges of $45. Two credit memos are included in the bank statement: one for $900, which represents a collection that the bank made for Owen, and one for $50, which represents the amount of interest that Owen had earned on its interest-bearing account in June. Based on this information, Owen's true cash balance is:

A) $9,700.
B) $10,695.
C) $10,550.
D) $10,605.

Question 30

While preparing its bank reconciliation, Maynard Company determined that its bank had collected a $650 account receivable for the company and deducted a $25 collection fee. Which of the following shows the effect of this transaction on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 31

Which of the following is not a procedure to maintain internal controls over cash payments?

A) A receipt should be provided to each cash customer.
B) Checks should be properly authorized with approval signatures.
C) All checks should be prenumbered.
D) Voided checks should be defaced and retained.

Question 32

The bank statement for Tetra Company contained the following items: a bank service charge of $10; a credit memo for interest earned, $15; and a $50 NSF check from a customer. The company had outstanding checks of $100 and a deposit in transit of $300. The entry to record the customer's NSF check will:

A) increase the Accounts Receivable balance.
B) decrease the Cash account.
C) decrease equity.
D) increase the Accounts Receivable balance and decrease the Cash account balance.

Question 33

Which document issued by a bank reflects a transaction that decreases a company's checking account balance?

A) A debit entry
B) A debit memo
C) A credit memo
D) A reconciling entry

Question 34

In preparing the April bank reconciliation for Oscar Company, it was discovered that on April 10 a check was written to pay delivery expense of $45 but the check was erroneously recorded as $54 in the company's books. The correction the error of this error would increase:

A) delivery expense and decrease cash by $45.
B) cash and decrease delivery expense by $9.
C) delivery expense and decrease cash by $9.
D) cash and decrease delivery expense by 54.

Question 35

While performing its monthly bank reconciliation, the bookkeeper for the Grace Corporation noted that a deposit of $990 (received from a customer on account) was recorded in the company books as $900. Which of the following shows the effect of the correcting entry on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 36

In a bank reconciliation, a customer's NSF check included with the bank statement is:

A) deducted from the company's cash balance to get the true cash balance.
B) added to the bank's cash balance to get the true cash balance.
C) deducted from the bank's cash balance to get the true cash balance.
D) added to the company's cash balance to get the true cash balance.

Question 37

Rainey Company's true cash balance at October 31 is $5,710. The following information is available for the bank reconciliation: Outstanding checks, $600
Deposits in transit, $450
Bank service charges, $90
The bank had collected an account receivable for Rainey Company, $1,000
The bank statement included an NSF check written by one of Ramsey's customers for $600.
Based on this information Rainey's unadjusted book balance at October 31 is:

A) $5,870.
B) $5,400.
C) $6,400.
D) $5,490.

Question 38

Duke Company's unadjusted bank balance at March 31 is $2,300. The bank reconciliation revealed outstanding checks amounting to $500 and deposits in transit of $400. Based on this information, Duke's true cash balance is:

A) $2,200.
B) $2,000.
C) $2,700.
D) $2,400.

Question 39

While performing the monthly bank reconciliation, the bookkeeper for Avon Company made the adjusting entry for a bank service charge of $20. Which of the following correctly shows the effect of the entry on the financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 40

Keatts Company's bank statement included an NSF check written by one of its customers. What effect will the entry to recognize the NSF check have on the company's financial statements?

A) Option A
B) Option B
C) Option C
D) Option D

Question 41

Indicate whether each of the following items regarding internal control is true or false.
_____ a) Accounting controls are composed of procedures designed to safeguard assets and ensure accounting records contain reliable information.
_____ b) Administrative controls concern the reliability of the financial statements and the accuracy of the company's records.
_____ c) Whenever possible, the functions of authorization, recording and custody should be exercised by the same dependable employee.
_____ d) Cash is most susceptible to embezzlement at the points of receipt and disbursement.
_____ e) Even a well-designed internal control system cannot prevent collusion by employees.

Question 42

Indicate whether each of the following statements regarding internal controls is true or false.
_____ a) Separation of duties is an internal control feature that requires different individuals to perform the following functions: authorization, recording, and custody of assets.
_____ b) Under proper internal controls, the person who collects customer payments should also maintain the records of cash receipts.
_____ c) Under proper internal controls, those who are given authority should bear the corresponding responsibility.
_____ d) One of the basic rules of internal control is to require some employees to take regular vacations.
_____ e) A fidelity bond is a form of insurance that companies ask employees to buy to protect the company from loss due to employee dishonesty.

Question 43

Indicate whether each of the following statements regarding internal controls is true or false.
_____ a) Internal controls are used to provide reasonable assurance that the objectives of an enterprise will be accomplished.
_____ b) Internal controls can be divided into accounting controls and administrative controls.
_____ c) The mechanics of internal control systems do not vary from company to company.
_____ d) Accounting controls are concerned with the evaluation of performance and the assessment of the degree of compliance with company policies and public laws.
_____ e) Administrative controls are composed of policies and procedures that are designed to safeguard the assets and to assure that accounting records contain reliable information.

Question 44

The most favorable audit opinion that a company can receive is a(n):

A) adverse opinion.
B) unqualified opinion.
C) disclaimer of opinion.
D) qualified opinion.

Question 45

Even a good system of internal controls can be overridden by collusion among employees.

Question 46

Which of the following statements about materiality is not true?

A) Materiality is different for each company.
B) A material error would change the opinion of the average prudent investor.
C) Any error greater than $5,000 is considered material in a financial statement audit.
D) Material misstatements should not exist in order for a company to receive an unqualified audit opinion.

Question 47

Policies and procedures designed to reduce the opportunities for fraud are often called:

A) Internal controls.
B) Asset source transactions.
C) Accounting standards.
D) Financial systems.

Question 48

Which of the following is not a common feature of ethical misconduct?

A) The capacity to rationalize
B) The existence of pressure leading to an incentive
C) The assistance of others
D) The presence of an opportunity

Question 49

If the financial statements cannot be relied upon because they contain one or more material departures from GAAP, the auditor will issue the following type of audit opinion:

A) Qualified opinion.
B) Disclaimer.
C) Adverse opinion.
D) Unqualified opinion.

Question 50

Indicate whether each of the following statements regarding internal controls is true or false.
_____ a) Cash receipts should be deposited in a bank when they reach a predetermined level of materiality.
_____ b) To improve operating efficiency, a company should make most of its disbursements in currency instead of checks.
_____ c) Supporting documents are required when checks are presented to the check signer.
_____ d) Supporting documents should not be marked "paid" until the check clears the bank.
_____ e) All spoiled and voided checks should be shredded.

Question 51

A savings account or certificate of deposit that imposes a substantial penalty for early withdrawals should not be classified as Cash on the balance sheet.

Question 52

Separation of duties in an organization should be required to reduce the likelihood of theft.

Question 53

Indicate whether each of the following statements is true or false.
_____ a) Debit memos in a bank statement describe transactions that increase the depositor's assets.
_____ b) Credit memos in a bank statement describe transactions that act to increase the bank's liabilities.
_____ c) Service fees charged by a bank appear on bank statements as credit memos.
_____ d) Deposits in transit appear on the bank statement as credit memos.
_____ e) Outstanding checks do not appear on the bank statement.

Question 54

Which of the following is not a principle of the AICPA Code of Professional Conduct?

A) Due Care
B) Objectivity and Independence
C) Integrity
D) Conservatism

Question 55

Requiring separation of duties in a business eliminates the need for the work of one employee to serve as a check on the work of other employees.

Question 56

Internal controls that assess degree of compliance with company policies are classified as administrative controls.

Question 57

Which of the following is not a component of the fraud triangle?

A) Reliance
B) Rationalization
C) Opportunity
D) Pressure

Question 58

A well-designed system of internal controls will eliminate employee theft and fraud in a company.

Question 59

Indicate whether each of the following statements about the auditor's role in financial accounting is true or false.
_____ a) The proper conduct of an audit guarantees the accuracy of all figures on the financial statements.
_____ b) The financial statement audit is a detailed review of a company's financial statements and documents.
_____ c) The primary responsibility of the independent accounting firm is to the public.
_____ d) The most favorable type of audit report is called a qualified opinion.
_____ e) The ultimate responsibility for the financial statements lies with management of the company rather than the independent accounting firm.

Question 60

An audit is useful to financial statement users because it:

A) Guarantees that the financial statements are accurate and correct.
B) Guarantees that management has not been involved in misappropriation of assets.
C) Provides reasonable assurance that the financial statements do not have material misstatements.
D) Assures users that confidentiality is maintained.

Question 61

Preparing a bank reconciliation is a requirement to obtain an unqualified audit opinion, but is not an important internal control for a business.

Question 62

After adjusting entries have been made related to a bank reconciliation, the book balance will be equal to the true cash balance.

Question 63

A bank statement debit memo describes a transaction that increases a customer's account balance.

Question 64

The usual form for a bank reconciliation begins with the ending cash balance shown on the bank statement and reconciles it to the ending cash balance on the company's books.

Question 65

The internal controls of a business are designed to reduce the probability of occurrence of fraud.

Question 66

An error is considered material if it would trigger an IRS audit.

Question 67

Most companies strive to receive an unqualified audit opinion.

Question 68

The governance of a corporation includes the roles and responsibilities of the board of directors, managers, shareholders, and auditor.

Question 69

All adjustments to the unadjusted cash balance on a bank reconciliation require adjusting entries; however, adjustments to the bank statement balance do not require adjusting entries.

Question 70

In preparing a bank reconciliation, typical adjustments to the bank balance are deposits in transit and outstanding checks.

Question 71

All entries made related to bank reconciliations include an expense or revenue account.

Question 72

The true cash balance can only be determined if both the unadjusted bank balance and the unadjusted cash balance are known.

Question 73

For a business, Cash generally includes currency, customers' checks, and some savings accounts.

Question 74

Certified public accountants are obligated to act in a way that serves the public interest.

Question 75

In preparing a bank reconciliation, typical adjustments to the book balance include bank service charges, customer NSF checks, and certified checks.

Question 76

A business learns about customers' NSF checks through debit memos that are included with the bank statement.

Question 77

The ethical standards for certified public accountants only require that such accountants comply with applicable laws and regulations.

Question 78

After the check is signed, the third employee is the one who records the check in the company's records and examines the appropriate supporting documents.

Question 79

The primary focus of financial statement audits is the discovery of fraud.