Deck 4: Cash and Internal Controls

Question 1

Managers of the company act as stewards or caretakers of the company's assets.

Answer 1

True

Question 2

The Public Company Accounting Oversight Board (PCAOB)has the authority to establish standards dealing with auditing,quality control,ethics,independence,and other activities relating to the preparation of audited financial reports.

Answer 2

True

Question 3

An example of separation of duties would be not allowing an employee who receives cash to also be responsible for depositing that cash in the bank account.

Answer 3

True

Question 4

Common types of financial statement fraud include creating fictitious revenues from a fake customer,improperly valuing assets,and mismatching revenues and expenses.

Question 5

Management needs to monitor the internal control system,just like any other system.Any control deficiencies spotted by employees should be reported immediately to management.

Question 6

The amount of cash reported in a company's balance sheet includes currency,coins,and balances in savings and checking accounts,as well as items acceptable for deposit in these accounts,such as checks received from customers.

Question 7

In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives,Congress passed the Sarbanes-Oxley Act.

Question 8

The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.

Question 9

Risk assessment procedures include periodic reviews of internal controls,assessing management's oversight of the internal control,developing solutions to known cases of internal control failures,and determining whether each division or operation within a company is meeting its objectives.

Question 10

The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions.

Question 11

One benefit of internal control is greater reliance by investors on reported financial statements.

Question 12

Internal control is a company's plan to (1)improve the accuracy and reliability of accounting information and (2)safeguard the company's assets.

Question 13

Effective internal controls ensure a company's success and survival.

Question 14

The amount of cash reported in a company's balance sheet includes items acceptable for deposit in bank accounts,such as checks received from customers.

Question 15

Section 404 of the Sarbanes-Oxley Act requires that a company's management document and assess the effectiveness of all internal control processes that could affect financial reporting.

Question 16

Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client.

Question 17

The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls.

Question 18

Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients.

Question 19

A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB).

Question 20

Separation of duties occurs when two or more people act in coordination to circumvent internal controls.

Question 21

When customers pay for services with a check,the company should debit Accounts Receivable and credit Service Revenue.

Question 22

When a company pays for services received using a credit card,it should credit Accounts Payable.

Question 23

Cash receipts of the company that have not been added to the bank's record of the company's balance are referred to as checks outstanding.

Question 24

When customers pay for services with a debit card,the company should debit Cash and credit Service Revenue.

Question 25

An NSF check is an example of a cash transaction that is initially recorded by the bank and later by the company after notification.

Question 26

Recording all cash receipts as soon as possible is considered a good internal control.

Question 27

Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control.

Question 28

Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.

Question 29

A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records.

Question 30

A check outstanding will cause the bank's cash balance to be higher than the company's cash balance.

Question 31

Whether a customer uses cash,a check,or a debit card to make a purchase,the company records the transaction as a cash sale.

Question 32

A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.

Question 33

Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts.

Question 34

The amount of cash reported in a company's balance sheet includes the balance of accounts receivable if cash collection is highly likely in the near future.

Question 35

When a company pays for services received using a check,it should credit Accounts Payable until the check is paid by the bank.

Question 36

Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance.

Question 37

Common examples of cash equivalents are money market funds,Treasury bills,and certificates of deposit.

Question 38

An example of a bank error that causes the company's balance and bank's balance of cash to differ is the purchase of supplies with a check.

Question 39

Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors.

Question 40

The amount of cash reported in a company's balance sheet does not include cash equivalents,defined as short-term investments that have a maturity date no longer than three months from the date of purchase.

Question 41

Occupational fraud:

A)Is the use of one's occupation for personal enrichment through the deliberate misuse or misapplication of the employing organization's resources.
B)Occurs in only a few organizations and generally involves minor amounts.
C)Will be prevented when companies employ an auditor.
D)Is committed only by lower-level employees.

Question 42

Which of the following does not represent a major provision of the Sarbanes-Oxley Act?

A)Nonaudit services.
B)Quarterly financial statements.
C)Auditor rotation.
D)Corporate executive accountability.

Question 43

The final step in reconciling the bank's cash balance and the company's cash balance is to update the company's cash balance for the items used to reconcile the bank's cash balance.

Question 44

Under the provisions of the Sarbanes-Oxley Act,corporate executives:

A)Have limited responsibility for financial statements.
B)Must personally prepare the company's financial statements.
C)Must personally certify the company's financial statements.
D)Are not allowed to view the company's financial statements.

Question 45

The petty cash fund should have just enough cash to make minor expenditures over a reasonable period (such as a week or a month).

Question 46

Interest earned on a bank account is an example of a cash transaction recorded by the company and then later by the bank after notification.

Question 47

Only transactions involving cash affect a company's cash flows.

Question 48

The petty cash fund represents cash on hand and is used to pay for minor purchases.

Question 49

Cash is typically reported as a current asset in the balance sheet.

Question 50

The statement of cash flows reports a company's cash inflows and cash outflows related to (1)operating activities, (2)investing activities,and (3)financing activities.

Question 51

Generally,when a company's net income and free cash flows trend in the same direction over time,earnings are believed to have higher quality.

Question 52

A company's cash is reported in two financial statements - income statement and statement of cash flows.

Question 53

Investing activities include cash investments in long-term assets and investment securities.

Question 54

What key piece of legislation was passed in response to corporate accounting scandals by Enron,WorldCom,and others?

A)Sarbanes-Oxley Act.
B)1933 Securities Act.
C)1934 Securities Exchange Act.
D)Regulation Fair Disclosure.

Question 55

Investing activities include cash transactions involving revenue and expense events during the period.

Question 56

A company's operating cash inflows less operating cash outflows generally equals the reported amount of net income in the income statement.

Question 57

Earnings quality is the ability of net income to report the true underlying performance of the company.

Question 58

A company's free cash flows equal operating cash flows plus financing cash flows during the period.

Question 59

Investing activities include transactions designed to raise cash or finance the business.

Question 60

Under the provisions of the Sarbanes-Oxley Act,auditors must do which of the following?

A)Provide nonaudit services for their clients.
B)Audit public companies whose chief executives worked for the audit firm in the preceding year.
C)Be hired by company management.
D)Maintain working papers for at least seven years following an audit.

Question 61

Having an independent party assess each year the adequacy of the company's internal control procedures is an example of which detective control?

A)Separation of duties.
B)Reconciliations.
C)Performance reviews.
D)Audits.

Question 62

What is the concept behind separation of duties in establishing internal controls?

A)The company's financial accountant should not share information with the company's tax accountant.
B)Duties of middle-level managers should be clearly separated from those of top executives.
C)Employee fraud is less likely to occur when access to assets and access to accounting records are separated.
D)The external auditors of the company should have no contact with managers while the audit is taking place.

Question 63

Checking actual outcome of individuals or processes against their expected outcome is an example of which detective control?

A)Separation of duties.
B)Reconciliations.
C)Performance reviews.
D)Employee management.

Question 64

Which of the following is not an example of preventive controls?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Reconciliations.

Question 65

Having management periodically determine whether the amount of physical assets of the company match the accounting records is an example of which detective control?

A)Separation of duties.
B)Reconciliations.
C)Performance reviews.
D)Employee management.

Question 66

Giving only management the right to make purchases over a certain amount is an example of which preventive control?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Employee management.

Question 67

Fraudulent reporting by management could include:

A)Fictitious revenues from a fake customer.
B)Improper asset valuation.
C)Mismatching revenues and expenses.
D)All of the above.

Question 68

Which of the following best describes the goal of internal controls?

A)Ensuring the business is profitable.
B)Enhancing the health of employees.
C)Improving the accuracy and the reliability of financial information.
D)Ensuring the compliance with tax regulations.

Question 69

The components of internal control do not directly include:

A)Risk assessment.
B)Inflation adjustment.
C)Monitoring.
D)Control activities.

Question 70

Which of the following is NOT a design feature of effective internal controls?

A)Allow greater reliance by investors on reported financial statements.
B)Prevent fraudulent or errant financial reporting.
C)Ensure the company's price advantage over competitors.
D)Prevent misuse of company funds by employees.

Question 71

Which employees are the ones who must take final responsibility for the establishment and success of internal controls?

A)Top executives.
B)Mid-level managers.
C)Lower-level employees.
D)All employees.

Question 72

Which of the following is an example of detective controls?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Reconciliations.

Question 73

Keeping supplies in a locked room with access allowed only to authorized personnel is an example of which preventive control?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Employee management.

Question 74

The Sarbanes-Oxley Act (SOX)mandates which of the following?

A)Increased regulations related to auditor-client relations.
B)Increased regulations related to internal control.
C)Increased regulations related to corporate executive accountability.
D)All of the above.

Question 75

Allowing only certain individuals to have passwords to conduct online purchases is an example of which preventive control?

A)Separation of duties.
B)Physical controls.
C)E-commerce controls.
D)Employee management.

Question 76

Which element of the fraud triangle do companies have the greatest ability to eliminate?

A)Motive.
B)Rationalization.
C)Opportunity.
D)Intelligence.

Question 77

The act of collusion refers to:

A)Top management and lower-level employees working together to share information necessary for effective internal controls.
B)Two or more people acting in coordination to circumvent internal controls.
C)Management working with an auditor to prevent occupational fraud.
D)Middle-level managers taking full responsibility for effective internal controls.

Question 78

A framework for designing an internal control system is provided by the:

A)Committee of Sponsoring Organizations.
B)Financial Accounting Standards Board.
C)Securities and Exchange Commission.
D)International Accounting Standards Board.

Question 79

Providing employees with appropriate guidance to ensure they have the knowledge necessary to carry out their job duties is an example of which preventive control?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Employee management.

Question 80

The three elements of the fraud triangle are:

A)Motive.
B)Rationalization.
C)Opportunity.
D)All of the other answers are elements of the fraud triangle.