Deck 4: Cash and Internal Controls

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Question
Managers of the company act as stewards or caretakers of the company's assets.
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Question
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.
Question
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.
Question
Common types of financial statement fraud include creating fictitious revenues from a fake customer,improperly valuing assets,and mismatching revenues and expenses.
Question
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
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
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
The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.
Question
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
The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions.
Question
One benefit of internal control is greater reliance by investors on reported financial statements.
Question
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
Effective internal controls ensure a company's success and survival.
Question
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
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
Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client.
Question
The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls.
Question
Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients.
Question
A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB).
Question
Separation of duties occurs when two or more people act in coordination to circumvent internal controls.
Question
When customers pay for services with a check,the company should debit Accounts Receivable and credit Service Revenue.
Question
When a company pays for services received using a credit card,it should credit Accounts Payable.
Question
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
When customers pay for services with a debit card,the company should debit Cash and credit Service Revenue.
Question
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
Recording all cash receipts as soon as possible is considered a good internal control.
Question
Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control.
Question
Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.
Question
A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records.
Question
A check outstanding will cause the bank's cash balance to be higher than the company's cash balance.
Question
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
A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.
Question
Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts.
Question
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
When a company pays for services received using a check,it should credit Accounts Payable until the check is paid by the bank.
Question
Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance.
Question
Common examples of cash equivalents are money market funds,Treasury bills,and certificates of deposit.
Question
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
Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors.
Question
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
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
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
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
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
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
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
Only transactions involving cash affect a company's cash flows.
Question
The petty cash fund represents cash on hand and is used to pay for minor purchases.
Question
Cash is typically reported as a current asset in the balance sheet.
Question
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
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
A company's cash is reported in two financial statements - income statement and statement of cash flows.
Question
Investing activities include cash investments in long-term assets and investment securities.
Question
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
Investing activities include cash transactions involving revenue and expense events during the period.
Question
A company's operating cash inflows less operating cash outflows generally equals the reported amount of net income in the income statement.
Question
Earnings quality is the ability of net income to report the true underlying performance of the company.
Question
A company's free cash flows equal operating cash flows plus financing cash flows during the period.
Question
Investing activities include transactions designed to raise cash or finance the business.
Question
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
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
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
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
Which of the following is not an example of preventive controls?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Reconciliations.
Question
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
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
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
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
The components of internal control do not directly include:

A)Risk assessment.
B)Inflation adjustment.
C)Monitoring.
D)Control activities.
Question
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
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
Which of the following is an example of detective controls?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Reconciliations.
Question
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
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
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
Which element of the fraud triangle do companies have the greatest ability to eliminate?

A)Motive.
B)Rationalization.
C)Opportunity.
D)Intelligence.
Question
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
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
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
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.
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Deck 4: Cash and Internal Controls
1
Managers of the company act as stewards or caretakers of the company's assets.
True
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.
True
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.
True
4
Common types of financial statement fraud include creating fictitious revenues from a fake customer,improperly valuing assets,and mismatching revenues and expenses.
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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.
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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.
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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.
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8
The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.
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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.
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10
The internal control component of information and communication relates to the effectiveness of accurately measuring and communicating business transactions.
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11
One benefit of internal control is greater reliance by investors on reported financial statements.
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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.
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13
Effective internal controls ensure a company's success and survival.
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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.
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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.
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16
Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client.
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17
The control environment refers to the overall top-to-bottom attitude of the company with respect to internal controls.
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18
Auditors of public companies can perform the full range of audit and nonaudit consulting services for their audit clients.
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19
A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB).
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20
Separation of duties occurs when two or more people act in coordination to circumvent internal controls.
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21
When customers pay for services with a check,the company should debit Accounts Receivable and credit Service Revenue.
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22
When a company pays for services received using a credit card,it should credit Accounts Payable.
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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.
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24
When customers pay for services with a debit card,the company should debit Cash and credit Service Revenue.
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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.
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26
Recording all cash receipts as soon as possible is considered a good internal control.
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27
Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control.
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28
Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.
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29
A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records.
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30
A check outstanding will cause the bank's cash balance to be higher than the company's cash balance.
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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.
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32
A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.
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33
Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts.
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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.
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35
When a company pays for services received using a check,it should credit Accounts Payable until the check is paid by the bank.
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36
Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance.
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37
Common examples of cash equivalents are money market funds,Treasury bills,and certificates of deposit.
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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.
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39
Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors.
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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.
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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.
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Unlock for access to all 174 flashcards in this deck.
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k this deck
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.
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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.
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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.
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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).
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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.
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47
Only transactions involving cash affect a company's cash flows.
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48
The petty cash fund represents cash on hand and is used to pay for minor purchases.
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49
Cash is typically reported as a current asset in the balance sheet.
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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.
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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.
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52
A company's cash is reported in two financial statements - income statement and statement of cash flows.
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53
Investing activities include cash investments in long-term assets and investment securities.
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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.
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Unlock for access to all 174 flashcards in this deck.
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k this deck
55
Investing activities include cash transactions involving revenue and expense events during the period.
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56
A company's operating cash inflows less operating cash outflows generally equals the reported amount of net income in the income statement.
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57
Earnings quality is the ability of net income to report the true underlying performance of the company.
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58
A company's free cash flows equal operating cash flows plus financing cash flows during the period.
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59
Investing activities include transactions designed to raise cash or finance the business.
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k this deck
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.
Unlock Deck
Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
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Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
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Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
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Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
64
Which of the following is not an example of preventive controls?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Reconciliations.
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Unlock for access to all 174 flashcards in this deck.
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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.
Unlock Deck
Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
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Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
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Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
Unlock Deck
Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
69
The components of internal control do not directly include:

A)Risk assessment.
B)Inflation adjustment.
C)Monitoring.
D)Control activities.
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Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
Unlock Deck
Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
Unlock Deck
Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
72
Which of the following is an example of detective controls?

A)Separation of duties.
B)Physical controls.
C)Proper authorization.
D)Reconciliations.
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Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
Unlock Deck
Unlock for access to all 174 flashcards in this deck.
Unlock Deck
k this deck
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.
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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.
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76
Which element of the fraud triangle do companies have the greatest ability to eliminate?

A)Motive.
B)Rationalization.
C)Opportunity.
D)Intelligence.
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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.
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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.
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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.
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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.
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Unlock Deck
Unlock for access to all 174 flashcards in this deck.