Deck 4: Internal Control Cash

Question 1

Fraud is a major problem.

Answer 1

True

Question 2

The type of fraud committed by company managers who make false and misleading entries in the books, making the financial results of the company appear better than they actually are, is called:

A) misappropriation of assets.
B) fraudulent financial reporting.
C) embezzlement.
D) collusion.

Answer 2

B

Question 3

The primary way that fraud and errors are prevented is by external auditors.

Answer 3

False

Question 4

The two most common types of fraud impacting financial statements are:

A) fraudulent financial reporting and e-commerce fraud.
B) misappropriation of assets and embezzlement.
C) fraudulent financial reporting and misappropriation of assets.
D) cooking the books and fraudulent financial reporting.

Question 5

The three main components of the fraud triangle are:

A) rationalization, opportunity and greed.
B) opportunity, motive and lack of ethics.
C) motive, opportunity and rationalization.
D) none of the above.

Question 6

________ is the most common fraud, but ________ is the most expensive fraud.

A) Fraudulent financial reporting, misappropriation of assets
B) Misappropriation of assets, fraudulent financial reporting
C) Misappropriation of assets, cooking the books
D) Cooking the books, misappropriation of assets

Question 7

According to a recent survey taken by the Association for Certified Fraud Examiners (ACFE), occupational fraud and abuse results in losses equal to approximately ________ of total business revenue.

A) 45%
B) 10%
C) 6%
D) an unknown amount

Question 8

Perpetrators of fraud usually commit fraud for their own short-term economic gain.

Question 9

An employee states that he committed fraud because he was "underpaid and overworked." This is an example of:

A) opportunity.
B) motive.
C) rationalization.
D) understanding.

Question 10

________ is the element in the fraud triangle results from either critical need or greed on the part of the perpetrator.

A) Motive
B) Opportunity
C) Rationalization
D) Reasoning

Question 11

Fraudulent financial reporting:

A) is committed by lower level employees of a company.
B) makes the company appear in poor financial condition.
C) deceives investors and creditors.
D) involves stealing cash or inventory from the company.

Question 12

Sharon is the receptionist and office manager for The Best Construction Company. Sharon handles all of the office duties including billing, cash receipts, payroll, depositing checks and preparing the monthly bank reconciliation. She also prepares all of the checks for disbursements and is an authorized signer on all checks under $25,000. For checks above this amount, two signatures are required. She has been a trusted employee of The Best Construction Company for many years, but still makes just a small amount above minimum wage. She is even the godmother to two of the owner's children and often watches them while their parents go on exotic vacations. Sharon is such a good employee that she rarely takes vacations. Since the owner trusts her completely, he concentrates on the construction business and leaves all of the office work to Sharon. He would never interfere with her work since he has very little accounting knowledge. Sharon has recently become a grandmother and enjoys buying her grandchildren expensive toys and clothes. She has just bought a new Hummer for herself and an exclusive condo in the Virgin Islands.
What are the three elements of the fraud triangle? Which element(s) of the triangle are present in this case? Explain briefly.

Question 13

An environment of weak internal controls can lead to fraud.

Question 14

Fraud is the ultimate unethical act in business because:

A) the perpetrators usually do so for their own short-term economic gain at the expense of others.
B) fraud is illegal.
C) fraud violates the rights of many for the temporary betterment of a few.
D) of all of the above.

Question 15

Several large frauds occurred in 2001 and 2002. Which of the following was NOT a consequence of these frauds?

A) Arthur Anderson, LLP was convicted of fraud but was allowed to stay in business.
B) There were adverse market reactions throughout the world.
C) Thousands of jobs were lost when Enron and WorldCom went out of business.
D) There was a loss of confidence in the financial reporting system.

Question 16

One of the main elements of the fraud triangle is rationalization.

Question 17

One of the most common types of fraud that impacts the financial statements is the misappropriation of assets.

Question 18

Which of the following is a true statement regarding fraud?

A) Fraud is committed when an error is made.
B) Fraud does not occur in not-for-profit organizations.
C) The expansion of e-commerce has caused fraud to decrease.
D) Most businesses surveyed had experienced fraud.

Question 19

The type of fraud committed by employees of an entity who steal money from the company and cover it up through erroneous entries in the books is called:

A) misappropriation of assets.
B) fraudulent financial reporting.
C) embezzlement.
D) collusion.

Question 20

Fraudulent financial reporting is committed by company managers.

Question 21

Internal control is so critical to a company that Congress passed the:

A) Sarbanes-Oxley Act of 2002.
B) Kemp-Oxley Act of 2002.
C) Economic Stimulus Law of 2010.
D) Public Company Accounting Oversight Board Act of 2002.

Question 22

A fidelity bond is a(n):

A) employment contract for a specified period of time.
B) insurance policy that reimburses a company for employee theft.
C) contract prohibiting former employees from working for a competitor.
D) promise by a company to safeguard customers' personal information.

Question 23

The Sarbanes-Oxley Act of 2002:

A) requires companies to switch external auditors every two years.
B) requires companies to consider adopting a system of internal controls.
C) prohibits external auditors from auditing a public client and providing consulting services to the client.
D) created the Securities and Exchange Commission.

Question 24

Which is NOT an objective of an internal control system?

A) Safeguarding of assets
B) Compliance with company policies
C) Compliance with legal requirements
D) Risk minimization

Question 25

The Public Company Oversight Board was created to oversee:

A) the SEC.
B) the audits of non-profit organizations.
C) the audits of public companies.
D) the FASB.

Question 26

Smart hiring practices and separation of duties is part of the control environment.

Question 27

Small companies cannot have internal controls since they do not have enough employees to segregate duties.

Question 28

Internal control is a plan of organization and system of procedures implemented by company ________ and the ________ designed to accomplish five objectives.

A) internal auditors, employees
B) external auditors, management
C) management, board of directors
D) employees, board of directors

Question 29

The objective of internal control that minimizes waste, which lowers costs and increases profits is:

A) operational efficiency.
B) asset safeguards.
C) cost minimization.
D) reliable accounting records.

Question 30

All employees should have a background check before being hired, and should be properly trained and supervised.

Question 31

Internal controls are designed to accomplish five objectives-comply with legal requirements, promote operational efficiency, safeguard assets, encourage employees to follow company policy and:

A) prevent embezzlement.
B) prevent collusion.
C) ensure accurate, reliable external audits.
D) ensure accurate, reliable accounting records.

Question 32

The primary way that fraud is prevented and detected is through a proper system of:

A) checks and balances.
B) management directives.
C) internal control.
D) internal and external audits.

Question 33

External auditors are responsible for maintaining a company's system of internal controls.

Question 34

Access to sensitive data files should be protected by passwords and data encryption.

Question 35

SOX created the Public Company Accounting Oversight Board to oversee the audits of public companies.

Question 36

Collusion is the method widely used to defeat the adequate segregation of duties.

Question 37

A system of handling cash receipts by mail whereby customers remit payments directly to the bank, rather than through the company's mail is a(n):

A) imprest system.
B) lock-box system.
C) phishing system.
D) online banking system.

Question 38

Requiring employees to take annual vacations is a part of which characteristic of internal control?

A) Assignment of responsibilities
B) Separation of duties
C) Proper authorization
D) Competent and reliable personnel

Question 39

The basic attributes of internal control are the same for a sophisticated IT system and a manual system.

Question 40

Exception reporting is used in operating and cash budgets to keep company profits and cash flow in line with management's plans.

Question 41

When determining what duties need to be segregated:

A) it is not necessary to separate the accounting department from the operating departments.
B) it is not necessary to separate the receiving of cash from the recording of cash.
C) it is necessary to separate the owner from the cash receipts function.
D) it is necessary to separate the cash disbursements function form the bank reconciliation function.

Question 42

For each of the following situations, indicate which internal control procedure ABC company has violated:
_____ 1. Since they are costly, background checks are not done for the employees.
_____ 2. Purchases of items on credit do not need the approval of the purchasing department.
_____ 3. All hard copies of documents are shredded after one month and electronic records are deleted after two months.
_____ 4. The company does not prepare operating or cash budgets.
_____ 5. The accountant receives the cash and records the cash receipts.
_____ 6. There are no locks in the area where inventory is stored.
_____ 7. The hiring, firing and pay adjustments and made by the department foremen.

Question 43

Proper separation of duties and physical safeguards to protect assets from theft are part of a company's:

A) information system.
B) control procedures.
C) control monitoring.
D) personnel maintenance.

Question 44

A company's comparisons and compliance monitoring:

A) should include cash budgets, which are the budgets of future period's net income.
B) can contain "rolling" budgets which are constantly updated .
C) should include internal auditors who are completely independent of the business.
D) should contain adequate hiring practices.

Question 45

________ rearranges messages by a mathematical formula making the message impossible to read by someone who does not know the code.

A) Encryption
B) Firewall
C) Security wall
D) Access device

Question 46

A malicious program that enters program code without consent and performs destructive actions in the victim's computer files or programs is a(n):

A) encryption device.
B) phishing expedition.
C) computer virus.
D) Trojan horse.

Question 47

Hints of where fraud, mistakes or financial harm can occur in a company is called:

A) the control environment.
B) risk assessment.
C) control procedures.
D) the tone at the top.

Question 48

A company has a policy that all checks over $5,000 need to have the signature of the owner in addition to the signature of the bookkeeper. This is an example of:

A) limited access.
B) proper approvals.
C) adequate records.
D) encryption.

Question 49

Smart hiring practices and separation of duties includes:

A) background checks only on top-level management.
B) vague job position descriptions.
C) payment of competitive salaries
D) the preparation of operating budgets.

Question 50

The rule that all major groups of transactions should be supported by hard copy documents or electronic records is part of the control procedure of:

A) limited access.
B) segregation of duties.
C) adequate records.
D) proper approvals.

Question 51

The "tone at the top":

A) is a component of the control procedures.
B) starts with low level employees.
C) means that owners and top managers must behave honorably to set a good example for employees.
D) is set by the PCAOB.

Question 52

Which is NOT a component of comparisons and compliance monitoring?

A) Proper approvals
B) Operating budgets
C) Audit
D) Exception reporting

Question 53

An internal control system can be circumvented by:

A) collusion, encryption and management override.
B) collusion, management override and segregation of duties.
C) collusion, management override and human limitations.
D) nothing, if it is a good internal control system.

Question 54

There are five components of internal control. Match the following examples to the correct internal control component.

Question 55

Creating bogus websites for the purpose of stealing unauthorized data is a(n):

A) encryption device.
B) phishing expedition.
C) computer virus.
D) Trojan horse.

Question 56

The information system component of internal control:

A) ensures that every system that processes accounting data should have the ability to capture transactions as they occur.
B) monitors controls.
C) offers hints of where fraud or errors could occur.
D) ensures that the IT department has adequate control procedures in place to ensure that no one can hack into the company's database.

Question 57

Three key duties must always be separated under a good system of internal controls:

A) asset handling, record keeping and transaction approval.
B) asset handling, hiring and safeguarding of assets.
C) asset handling, recordkeeping and safeguarding of assets.
D) record keeping, transaction analysis and transaction approval.

Question 58

E-commerce pitfalls include all of the following EXCEPT:

A) stolen credit card numbers.
B) phishing expedition.
C) encryption reporting.
D) trojan horses.

Question 59

When a company is determining its risk assessment:

A) the risks for all companies in the same industry must be the same.
B) the risks will offer hints of where fraud or mistakes may arise.
C) it must report the risks to the SEC.
D) it must report the risks to the PCAOB.

Question 60

Explain why separation of duties is such an important procedure for safeguarding assets. Provide two examples of this control procedure.

Question 61

Deposits that have been recorded on the book, but have not yet been recorded by the bank are:

A) nonsufficient funds deposits.
B) outstanding deposits.
C) deposits in transit.
D) electronic funds deposits.

Question 62

The bank reconciliation can be used to control cash.

Question 63

Alpha Company has an account at First Bank. Alpha writes a check payable to Beta Company. In this transaction, Alpha Company is the:

A) payee.
B) payer.
C) drawer.
D) maker.

Question 64

With online banking, a company still needs to wait until the bank statement is received before they can complete the bank reconciliation.

Question 65

Every adjustment on the bank side of the bank reconciliation needs to be recorded in the books.

Question 66

Differences between the amount of cash reported on a company's bank statement and the balance in the company's cash account before the bank reconciliation are primarily due to:

A) errors in the accounting process by the company.
B) errors made by the bank.
C) differences between the cash basis and accrual basis of accounting.
D) the timing difference in recording transactions.

Question 67

All of the following will appear on the bank statement EXCEPT for:

A) Electronic funds transfers (EFT).
B) beginning and ending cash balance.
C) cash receipts and cash payments.
D) deposits in transit.

Question 68

There are three parties to a check. The person or company to whom the check is paid is the:

A) maker.
B) payee.
C) draftee.
D) promissee.

Question 69

The person performing the bank reconciliation should not have any other cash duties.

Question 70

Banks require each person authorized to sign on an account to provide a(n) ________ which protects against forgery.

A) confirmation card
B) signature card
C) authorization form
D) online transfer form

Question 71

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

A) EFT receipts
B) Deposits in transit
C) Collection items
D) Both EFT receipts and collection items

Question 72

Which of the following items can be added or subtracted from the bank balance when preparing the bank reconciliation?

A) Service charges
B) Bank errors
C) Deposits in transit
D) Outstanding checks

Question 73

The person to whom a check is paid is referred to as the drawee.

Question 74

Sharon is the receptionist and office manager for The Best Construction Company. Sharon handles all of the office duties including billing, cash receipts, payroll, depositing checks and preparing the monthly bank reconciliation. She also prepares all of the checks for disbursements and is an authorized signer on all checks under $25,000. For checks above this amount, two signatures are required. She has been a trusted employee of The Best Construction Company for many years, but still makes just a small amount above minimum wage. She is even the godmother to two of the owner's children and often watches them while their parents go on exotic vacations. Sharon is such a good employee that she rarely takes vacations. Since the owner trusts her completely, he concentrates on the construction business and leaves all of the office work to Sharon. He would never interfere with her work since he has very little accounting knowledge. Sharon has recently become a grandmother and enjoys buying her grandchildren expensive toys and clothes. She has just bought a new Hummer for herself and an exclusive condo in the Virgin Islands.
What are the five basic control procedures for any class of transactions? Using these five basic control procedures, what can be done to strengthen the internal control procedures for The Best Construction Company?

Question 75

There are two records of a business's cash-the cash account in the company's general ledger and the bank statement.

Question 76

Differences between the bank statement and the company's Cash account are primarily the result of a time lag in recording transactions.

Question 77

When preparing a bank reconciliation:

A) deposits in transit are added to the bank balance.
B) service charges are subtracted from the bank balance.
C) outstanding checks are deducted from the book balance.
D) book errors are subtracted from the bank balance.

Question 78

Outstanding checks are checks that have been recorded by the bank, but are not yet recorded on the books.

Question 79

Herbert Company deposited $25,000 in its bank on the same day as, but after the bank prepared Herbert Company's bank statement. The deposit should appear on the bank reconciliation as a(n) ________ and is called a(n) ________.

A) addition to the bank balance; outstanding deposit
B) addition to the bank balance; deposit in transit
C) deduction to the bank balance; deposit in transit
D) deduction to the bank balance; outstanding deposit

Question 80

In a bank reconciliation, a NSF check is:

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