Deck 4: Internal Control and Cash

Question 1

Managers must control the operations of their business. A plan of internal control is designed to help management maintain control of a business and its operations. What are the key elements of a plan of internal control?

Answer 1

Internal control is defined as an organizational plan and all related measures that a business adopts to optimize the use of resources, prevent and detect error and fraud, safeguard assets and records, and ensure accurate and reliable accounting records.

Question 2

Business risks are risks that companies will not achieve its objectives.

Answer 2

True

Question 3

The Canadian Securities Commission developed a strategy incorporating some of the SOX rules for Canadian public companies. Discuss what requirements were incorporated into the Certification of Discloser in Issuers' Annual and Interim filings.

Answer 3

These requirements included:
-the CEO and CFO certification that they have evaluated the effectiveness of their internal controls over financial reporting, their conclusions must be included in the annual MD&A section
-required disclosure of each material weakness related to the internal controls over financial reporting
-annual certification of the disclosure controls and procedures, including their effectiveness plus any other conclusions
This list is not exhaustive but does attempt to introduce the key points.

Question 4

Which of the following is a limitation of internal control?

A) safeguarding company assets
B) accurate and reliable accounting records
C) operational efficiency
D) employee collusion

Question 5

Who has the primary responsibility for establishing and maintaining a company's system of internal control?

A) the company's top management
B) the company's internal auditors
C) the company's external auditors
D) the company's shareholders

Question 6

One way to guard against a hacker reading a message sent from one company to another over the Internet is to use:

A) a firewall
B) encryption
C) an intrusion protection device
D) an incident response procedure

Question 7

The controller is the chief accounting officer in an organization.

Question 8

Identify and briefly describe the two most common types of fraud that impact financial statements.

Question 9

For effective internal control in an organization, the treasurer should have custody of the cash, and the controller should account for the cash.

Question 10

E-commerce creates risks such as computer viruses and stolen credit card numbers.

Question 11

Fraudulent financial reporting is a type of fraud than impacts on financial statements. Why do managers undertake this type of fraudulent activity?

Question 12

Define internal control. Who is responsible for establishing an effective system of internal control? What are two major constraints of any system of internal control?

Question 13

Training people thoroughly is an element of which characteristic of internal control?

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

Question 14

Internal control procedures include: proper approvals, unlimited access, adequate records and safeguard controls.

Question 15

The fraud triangle includes: motive, opportunity and rationalization.

Question 16

Phishing refers to a program that enters program code into your computer without your consent.

Question 17

Which characteristic will not be found in an effective system of internal control?

A) a combination of duties
B) a separation of duties
C) competent, reliable, and ethical personnel
D) documents and records

Question 18

For effective internal control in an organization, who should keep the inventory records?

A) accountant
B) treasurer
C) sales persons
D) inventory warehouse supervisor

Question 19

All of the following are purposes of internal control except:

A) to safeguard assets
B) to ensure accurate and reliable accounting records
C) to encourage adherence to company policies
D) to promote operational inefficiency

Question 20

The most common form of management fraud is earnings management.

Question 21

In a bank reconciliation, a bank error:

A) must be added to the bank balance on the bank statement
B) must be deducted from the bank balance on the bank statement
C) may be added or deducted from the bank balance on the bank statement
D) may be added or deducted from the bank balance in the general ledger

Question 22

Which of the following items will not cause a difference between the book balance and the bank balance?

A) deposits in transit
B) bank collections
C) cancelled cheques
D) outstanding cheques

Question 23

In a bank reconciliation, a book error:

A) may be added or deducted from the bank balance in the general ledger
B) may be added or deducted from the bank balance on the bank statement
C) must be added to the bank balance in the general ledger
D) must be deducted from the bank balance in the general ledger

Question 24

In a bank reconciliation, there might be items which have been recorded by the company that have not yet been recorded by the bank. Examples of such items would include:

A) NSF cheques
B) deposits in transit
C) bank collections
D) bank service charges

Question 25

In a bank reconciliation, outstanding cheques are:

A) added to the bank balance on the bank statement
B) added to the bank balance in the general ledger
C) deducted from the bank balance on the bank statement
D) deducted from the bank balance in the general ledger

Question 26

If the balance on the bank statement does not equal the balance in the company's Cash account, then you can conclude that:

A) the company accountant made an error in the accounting process
B) the bank made an error
C) both the company accountant and the bank made errors
D) there are some reconciling items that, when identified, will explain the differences between the balances

Question 27

In a bank reconciliation, bank service charges are:

A) added to the bank balance on the bank statement
B) deducted from the bank balance on the bank statement
C) added to the bank balance in the general ledger
D) deducted from the bank balance in the general ledger

Question 28

An audit represents the examination of an organization's financial statements excluding its accounting system and controls.

Question 29

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

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

Question 30

In each of the following situations, identify the internal control weakness as well as the business's potential problem, and suggest a solution.
a. Susan Scandal purchases supplies for Fraud Fortress 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, Susan takes an inventory of the supplies on hand and notifies the accounting department of the amount for the adjusting entry for supplies used.
b. Jim Devious, an accounting clerk, is responsible for opening the mail, recording and depositing cash receipts, and preparing the monthly bank reconciliation. Jim has not taken a vacation in over five years.
c. The law firm of Dewey, Cheatem & Howe has been extremely busy in recent months. The firm 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.

Question 31

In a bank reconciliation, a deposit in transit is:

A) added to the bank balance in the general ledger
B) added to the bank balance on the bank statement
C) deducted from the bank balance in the general ledger
D) deducted from the bank balance on the bank statement

Question 32

Differentiate between the role of an external and internal auditor.

Question 33

Proper separation of duties in an organization is an effective method of preventing fraud.

Question 34

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

Question 35

When preparing a bank reconciliation, which of the following items would be subtracted from the bank balance on the bank statement?

A) deposits in transit
B) bank service charges
C) EFT cash payments
D) outstanding cheques

Question 36

Which of the following, when prepared correctly, ensures that all cash transactions have been accounted for and that the bank and book records of cash are correct?

A) bank reconciliation
B) bank statement
C) bank remittance
D) setting up a lock-box system

Question 37

Identify and briefly describe the five components of internal control

Question 38

When preparing a bank reconciliation, which of the following items would be added to the book balance?

A) EFT payments
B) deposits in transit
C) NSF cheques
D) EFT cash receipts

Question 39

To maintain effective internal control, employees responsible for handling cash should not have access to the accounting records.

Question 40

The person to whom a cheque is drawn is referred to as the payer.

Question 41

In a bank reconciliation, interest revenue is:

A) added to the bank balance on the bank statement
B) deducted from the bank balance on the bank statement
C) deducted from the bank balance in the general ledger
D) added to the bank balance in the general ledger

Question 42

If a bank statement included a bank collection and related interest revenue, the journal entry to record this reconciling item would include a:

A) debit to Note Receivable
B) credit to Cash
C) debit to Cash
D) debit to Note Payable

Question 43

Which of the following does not require a journal entry for a bank reconciliation?

A) outstanding cheques
B) bank service charge
C) collection by the bank of a note receivable
D) NSF cheque returned by the bank

Question 44

If a bank statement included an EFT payment of $670 for insurance, the journal entry to record this reconciling item would include a:

A) debit to Cash for $670
B) debit to Accounts Payable for $670
C) credit to Cash for $670
D) credit to Prepaid Insurance for $670

Question 45

In a bank reconciliation, a bank collection is:

A) added to the bank balance on the bank statement
B) deducted from the bank balance on the bank statement
C) added to the bank balance in the general ledger
D) deducted from the bank balance in the general ledger

Question 46

If a bank statement included an NSF cheque for $450, the journal entry to record this reconciling item would include a:

A) debit to Cash for $450
B) credit to Cash for $450
C) credit to Accounts Receivable for $450
D) debit to Accounts Payable for $450

Question 47

If the bank records a deposit of $50 as $150, the error would be shown on a bank reconciliation as:

A) a deduction from the book balance of $100
B) an addition to the book balance of $100
C) a deduction from the bank balance of $100
D) an addition to the bank balance of $100

Question 48

In a bank reconciliation, an NSF cheque is:

A) added to the bank balance on the bank statement
B) deducted from the bank balance in the general ledger
C) added to the bank balance in the general ledger
D) deducted from the bank balance on the bank statement

Question 49

In a bank reconciliation, items recorded by the bank but not yet recorded by the company include:

A) bank collections
B) deposits in transit
C) outstanding cheques
D) deposits in transit and outstanding cheques

Question 50

If a bank reconciliation included deposits in transit amounting to $1,500, the journal entry to record this reconciling item would include:

A) no entry is required
B) a credit to Accounts Receivable for $1,500
C) a debit to Cash for $1,500
D) a credit to Cash for $1,500

Question 51

If a bank reconciliation included $600 of outstanding cheques, the journal entry to record this reconciling item would include:

A) a credit to Cash of $600
B) a debit to Cash of $600
C) a credit to Accounts Payable of $600
D) no entry is required

Question 52

Which of the following items below may be made to reconcile a book balance to a bank balance?

A) a deposit in transit
B) an EFT receipt
C) outstanding cheques
D) an addition or subtraction to correct a bank error, as appropriate

Question 53

If a bookkeeper mistakenly recorded a disbursement of $63 instead of the correct amount of $36, the error would be shown on the bank reconciliation as a:

A) $36 addition to the books
B) $36 deduction from the books
C) $27 addition to the books
D) $27 deduction from the books

Question 54

If a bookkeeper mistakenly recorded a disbursement of $48 instead of the correct amount of $84, the error would be shown on the bank reconciliation as a:

A) $36 addition to the books
B) $36 deduction from the books
C) $48 addition to the books
D) $48 deduction from the books

Question 55

In a bank reconciliation, an EFT cash payment is:

A) deducted from the bank balance in the general ledger
B) added to the bank balance in the general ledger
C) deducted from the bank balance on the bank statement
D) added to the bank balance on the bank statement

Question 56

What is an example of an item recorded by the company but not yet recorded by the bank?

A) an electronic funds transfer
B) a deposit in transit
C) a service charge
D) an NSF cheque

Question 57

If the bank records a deposit of $3,300 as $330, the error would be shown on a bank reconciliation as:

A) a deduction from the book balance of $2,970
B) a deduction from the bank balance of $2,970
C) an addition to the bank balance of $2,970
D) an addition to the book balance of $2,970

Question 58

If the bookkeeper mistakenly records a deposit of $360 as $630, the error would be shown on the bank reconciliation statement as a:

A) $270 deduction from the bank balance
B) $270 deduction from the book balance
C) $270 addition to the book balance
D) $270 addition to the bank balance

Question 59

If the bookkeeper mistakenly records a deposit of $530 as $350, the error would be shown on the bank reconciliation statement as a:

A) $180 deduction from the book balance
B) $180 deduction from the bank balance
C) $180 addition to the bank balance
D) $180 addition to the book balance

Question 60

In a bank reconciliation, an EFT cash receipt is:

A) added to the bank balance on the bank statement
B) added to the bank balance in the general ledger
C) deducted from the bank balance in the general ledger
D) deducted from the bank balance on the bank statement

Question 61

The journal entry for a note collected by the bank with interest requires a debit to Cash and a credit to both Note Receivable and Interest Revenue.

Question 62

The following data have been gathered for Rocky Candi Corporation for the month ended September 30, 2014. Prepare a bank reconciliation based on the following information:

Question 63

Once the bank reconciliation has been completed, journal entries must be made for the book side of the reconciliation.

Question 64

Prepare a bank reconciliation for Living Life Company as of September 30, 2014, based on the following information. (Hint: you will need to compute Living Life Company's cash balance per books as of September 30, 2014 using the data below.)

Question 65

In a bank reconciliation, interest revenue earned on a chequing account would be deducted from the book balance.

Question 66

Prepare any journal entries based on the following data regarding the bank reconciliation prepared by Corruption Company on July 31, 2014.
a. A customer's cheque for $260 was returned with the bank statement and stamped NSF.
b. Outstanding cheques amount to $650.
c. Service charges for July per bank statement are $25.
d. Cheque #925 for $3,250 for office equipment was erroneously recorded by the bookkeeper as $2,350.
e. The bank erroneously credited Corruption Company's account for a $575 deposit made by Bribe and Bilk Inc.
f. A deposit ticket correctly prepared for $695 appeared on the bank statement as a deposit for $965.
g. Cheque #930 for $900 for rent expense was erroneously recorded by the bookkeeper as $90.

Question 67

A petty cash system facilitates:

A) payments of all business expenses by cash
B) payments of all business expenses by cheque
C) payment of small business expenses by cash
D) receipt of small invoices from customers in cash

Question 68

In a bank reconciliation, adjustments to the bank balance always require preparation of journal entries.

Question 69

When preparing a bank reconciliation, deposits in transit are added to the balance shown on the bank statement.

Question 70

The journal entry for an NSF (nonsufficient funds) cheque involves a debit to Accounts Payable.

Question 71

To control payments for purchases of invoices, the following would not be presented as supporting documents for approval:

A) purchase order
B) invoice
C) receiving slip
D) cancelled cheque

Question 72

Bank charges are deducted from the ending bank balance in the general ledger when preparing the bank reconciliation.

Question 73

Prepare a bank reconciliation for Big Blue Company for November 30, 2014 using the following information:

Question 74

What is a bank reconciliation? Why is it important to prepare a bank reconciliation every month when the bank statement is received from the bank?

Question 75

All of the following are controls over cash received in a store except:

A) the customer should be able to see the amounts entered into the register
B) the clerk must have access to the cash register tape
C) it should be a requirement that a receipt be given to the customer
D) the cash drawer should open only when the sales clerk enters an amount on the keys

Question 76

The cost of printing cheques should be deducted from the bank side of a bank reconciliation.

Question 77

Prepare a bank reconciliation dated December 31, 2014, for Welcome Inc. based on the following information.

Question 78

Prepare the bank reconciliation and adjusting entries for Mac Moose Company for April 30 , 2014 using the following information:

Question 79

Outstanding cheques are deposits you have recorded but the bank has not.

Question 80

Outstanding cheques are added to the ending bank balance on the bank statement when preparing the bank reconciliation.