Deck 7: Internal Control

Question 1

Good internal control dictates that each employee should oversee only part of a transaction.

Answer 1

True

Question 2

In a small business, active involvement by the owner can be a practical substitute for the separation of some duties.

Answer 2

True

Question 3

The financial statements of nonpublic companies are not required to be audited by an independent CPA.

Answer 3

True

Question 4

Using bar codes to take a physical inventory is considered poor accounting practice.

Question 5

Merchandisers usually end their fiscal year during a slow season.

Question 6

The use of a cash register would be an example of a physical control.

Question 7

Internal control involves, in part, the protection of a company's assets.

Question 8

The periodic inventory system provides no means of identifying losses from spoilage, shoplifting, and theft.

Question 9

The review of a system of internal control by internal auditors relates most closely to the monitoring component of internal control.

Question 10

To assure an efficient system of internal control, management should authorize all transactions.

Question 11

Bonding provides a guarantee against theft.

Question 12

The taking of a physical inventory is an example of periodic independent verification.

Question 13

Cash and inventory are very vulnerable to theft.

Question 14

Under the perpetual inventory system, inventory losses can be identified more easily than under the periodic inventory system.

Question 15

Merchandisers usually take a physical inventory when the volume of goods is at its highest levels.

Question 16

Taking a physical inventory is not necessary under a perpetual inventory system.

Question 17

The use of prenumbered documents is important to a good system of internal control.

Question 18

The Sarbanes-Oxley Act of 2002 does not require any certification from a public company's chief executive officer about the company's system of internal control.

Question 19

A company's merchandise inventory should include damaged goods that can be sold at a reduced price.

Question 20

An understated ending inventory will produce an understated cost of goods sold.

Question 21

At the end of each day, the cashier should be the one responsible for comparing the amount on the cash register tape with the day's cash additions to the cash register.

Question 22

Under an effective system of internal control, errors occur only as a result of fraud or dishonesty.

Question 23

Invoices are documents prepared by a vendor and sent to the accounting department of its customers.

Question 24

A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.

Question 25

Merchandising companies do not need as good a system of internal control as service companies.

Question 26

An effective system of internal control requires that individuals take periodic vacations.

Question 27

Cash received through the mail need be handled by only one employee to achieve effective internal control.

Question 28

A remittance advice would be attached to a check authorization.

Question 29

A check authorization is a document that permits the issuance of a check to pay an invoice.

Question 30

The receiving department must compare goods received with goods purchased, as indicated on the purchase order.

Question 31

Management's regular assessment of its internal controls is called risk assessment.

Question 32

A purchase requisition is a document sent by a company to a vendor.

Question 33

The separation of duties is easier to accomplish in small companies than in large ones.

Question 34

The separation of duties feature of internal control can be negated when several employees are involved in a scheme.

Question 35

Management's authorization of transactions relates to a control activity in the accounting system.

Question 36

It is best that the receiving department not be given a copy of the purchase order or the invoice.

Question 37

Bonding means insuring a company against loss due to employee theft.

Question 38

It is unlikely that a company would want to bond its employees who handle cash or inventory.

Question 39

An effective system of internal control centralizes functions in a single, capable individual.

Question 40

Good internal control dictates that key employees be rotated among different jobs.

Question 41

In addition to keeping the records of a purchase transaction, the accounting department should prepare and mail checks in payment of invoices.

Question 42

Sound internal control activities dictate that the amount of cash on hand should be kept to a maximum.

Question 43

When a petty cash fund is established, the entry contains a debit to Cash.

Question 44

Another term for an invoice is a bill.

Question 45

One example of a periodic independent verification is the bank reconciliation.

Question 46

A check authorization would be prepared before a receiving report.

Question 47

When a petty cash fund is not replenished at the end of the accounting period, the adjusting entry would contain a credit to Petty Cash.

Question 48

Cash Short or Over would be debited for a shortage.

Question 49

When a petty cash fund is replenished, the entry requires a debit to Petty Cash.

Question 50

All systems of internal control are identical, and once established, do not need to be changed.

Question 51

Effective internal control requires a department to purchase supplies on its own.

Question 52

Proper control procedures can guarantee the prevention of theft.

Question 53

A formal request for a purchase from the requesting department of a business is known as a purchase requisition.

Question 54

Management is responsible for establishing a satisfactory system of internal control.

Question 55

The treasurer should prepare and sign a check only after a proper check authorization has been provided.

Question 56

A purchase order would be prepared after a purchase requisition.

Question 57

When a petty cash fund is replenished, the entry requires a credit to Cash.

Question 58

The amount in the petty cash fund plus the sum of the petty cash vouchers should at all times equal the amount shown in the Petty Cash account.

Question 59

In the financial statements, the balance of the Petty Cash account and the balance of main cash account are shown separately.

Question 60

The purchasing department prepares a purchase requisition addressed to the vendor (seller) containing instructions related to the items ordered.

Question 61

A traditional definition of internal control specifically includes all of the following features, except

A) reliability of accounting data.
B) detection of employee theft.
C) promotion of operational efficiency.
D) adherence to prescribed managerial policies.

Question 62

A company's merchandise inventory includes all of the following, except

A) goods in warehouses.
B) goods sold, but not yet delivered.
C) goods in transit from suppliers, if title has passed to the merchandiser.
D) goods in trucks between the warehouse and the store.

Question 63

A company's merchandise inventory includes all of the following, except

A) goods in possession, but which cannot be sold.
B) goods on shelves.
C) damaged goods that can be sold at a reduced price.
D) goods in storerooms.

Question 64

The petty cash voucher should be kept by the person being reimbursed.

Question 65

Which of the following is not a primary concern of internal control?

A) Fairness of financial statements
B) Accuracy of accounting records
C) Safeguarding assets
D) Efficiency of company operations

Question 66

A good system of internal control is designed to achieve each of the following, except

A) efficiency of operations.
B) reliability of financial reporting.
C) compliance with relevant laws and regulations.
D) attainment of target sales.

Question 67

A consequence of a separation of duties is that

A) operations become extremely inefficient because of constant training of employees.
B) more employees will need to be bonded.
C) theft by employees becomes impossible.
D) theft is possible only when several employees are involved.

Question 68

Each of the following is a feature of internal control, except

A) management planning.
B) periodic independent verification.
C) limited access to assets.
D) authorization of transactions.

Question 69

Internal control is weakened by all of the following, except

A) collusion.
B) separation of duties.
C) human error.
D) effects of changing conditions.

Question 70

All of the following are examples of internal control activities, except

A) bank reconciliation.
B) rotation of key personnel.
C) customer satisfaction surveys.
D) insistence that employees take earned vacations.

Question 71

Which of the following would not be found in a good system of internal control?

A) Requiring all employees to take earned vacations
B) Establishing a system of checks and balances
C) Having one person handle all the responsibilities of a department
D) Establishing an internal audit staff

Question 72

In a small business, because it is often cost-prohibitive to hire extra employees, the lack of certain separations of duties can best be overcome by

A) bonding the employees.
B) getting the owner actively involved.
C) hiring only honest employees.
D) holding one person responsible for a given set of transactions.

Question 73

Which of the following attributes of internal control would be violated if the chief accounting clerk wrote checks to pay accounts payable?

A) Adequate design of documents
B) Sound personnel procedures
C) Periodic independent verification
D) Separation of duties

Question 74

The bonding of employees is an example of which feature of a good system of internal control?

A) Authorization of transactions
B) Sound personnel policies
C) Separation of duties
D) Limited access to assets

Question 75

A very small company would have the most difficulty in implementing which of the following internal control activities?

A) Sound personnel procedures
B) Periodic independent verification
C) Limited access to assets
D) Separation of duties

Question 76

Under the perpetual inventory system, the entry to recognize inventory losses would contain a

A) debit to Cost of Goods Sold.
B) debit to Merchandise Inventory.
C) credit to Gross Margin.
D) credit to Cash.

Question 77

Each of the following is a feature of internal control, except

A) recording of all transactions.
B) a sound marketing plan.
C) sound personnel policies.
D) separation of duties.

Question 78

The Sarbanes-Oxley Act of 2002 requires all of the following to certify a public company's system of internal control, except for the

A) chief financial officer.
B) auditors.
C) stockholders.
D) chief executive officer.

Question 79

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

A) Surprise audits of cash on hand should be made occasionally.
B) The number of persons who have access to cash should be limited.
C) The functions of recordkeeping and keeping custody of cash should be combined.
D) All cash receipts should be recorded promptly.

Question 80

A physical inventory is usually taken

A) in the middle of the fiscal year.
B) at the peak of the busy season.
C) at the end of the fiscal year.
D) at December 31.