Deck 7: Internal Control and Cash

Question 1

Bonding does not discourage loss from theft because employees know that bonding is an insurance policy against loss from theft.

Answer 1

False

Question 2

Money orders, cashier's cheques, and certified cheques are examples of cash equivalents.

Answer 2

False

Question 3

When used to monitor and control operations, internal control systems are a low priority for managers.

Answer 3

False

Question 4

A properly designed internal control system is a key part of systems design, analysis, and performance.

Question 5

The principles of internal control include: ensure transactions and activities are authorized, maintain records, insure assets, separate recordkeeping and custody of assets, and perform internal and external audits.

Question 6

Chequing accounts are sometimes called savings accounts.

Question 7

When preparing a bank reconciliation, adjustments are made to the bank side and not the ledger (book) side.

Question 8

Separation of duties divides responsibility for a series of transactions between two or more employees or departments. Despite the increased complexity, separation of duties reduces the risk of error and fraud.

Question 9

Cash equivalents are short-term investments that a company invests in to increase earnings.

Question 10

The use of internal controls provides guaranteed protection against losses due to operating activities.

Question 11

Cash consists of cash on hand and demand deposits. This includes coins, currency, and amounts on deposits in bank accounts, chequing accounts and some savings accounts.

Question 12

An internal control system is comprised of the policies and procedures companies use to protect assets, ensure reliable accounting, and promote efficient operations.

Question 13

Maintaining accurate records is an important internal control principle.

Question 14

Firewalls and encryption can be used as methods to eliminate some of the risks involved in e-commerce.

Question 15

Collusion occurs when a person embezzles money from a company and tries to hide the evidence.

Question 16

Risks involved in e-commerce include: credit card theft, computer viruses and impersonation.

Question 17

Internal control policies and procedures are standard across companies.

Question 18

Preventing unauthorized access to company resources is one of the most difficult and time-consuming tasks for internal control experts.

Question 19

When preparing a bank reconciliation, if the adjusted book balance and the adjusted bank balance are equal, then there is no need to have an external auditor test internal controls for the "cash" account.

Question 20

Liquidity measures how easily assets can be converted to another asset or be used to pay for services or obligations.

Question 21

If Cash Over and Short has a debit at the end of the period, the dollar amount represents miscellaneous revenue.

Question 22

Firms have the option of recording credit card expense as a discount from sales or as a selling expense.

Question 23

Outstanding cheques are cheques the bank has paid and deducted from the customer's account during the month.

Question 24

Basic services provided by banks such as bank accounts, deposit slips and cheques contribute to the control and safeguarding of cash.

Question 25

Small differences between cash sales and the amounts on the cash register are directly debited or credited to the cash account.

Question 26

The journal entry for petty cash reimbursement is a debit to various expenses and a credit to Petty Cash.

Question 27

Internal control over cash receipts ensures that all cash received is properly recorded and deposited.

Question 28

The Petty Cash account is a separate chequing account used for small amounts.

Question 29

All monies disbursed from petty cash should be documented by a petty cash receipt.

Question 30

At the end of the day, the cash register shows a balance of $635. The cash drawer has a balance of $650. The difference of $15 should be debited to miscellaneous expense.

Question 31

EFT is the use of electronic communication to transfer cash from one party to another.

Question 32

A cheque involves three parties: the maker, who signs the cheque, the payee, who is the recipient, and the bank, on which the cheque is drawn.

Question 33

The payee is the person who signs a cheque.

Question 34

It is not necessary for businesses to reconcile their chequing accounts since banks keep accurate records and provide internal control support for cash.

Question 35

Good internal control procedures for cash receipts imply that cash receipts by mail should be opened by an accounting employee who is responsible for recording and depositing receipts.

Question 36

The entry to increase the balance in petty cash from $50 to $75 would include a credit to Petty Cash of $25.

Question 37

Cash sales total $705 and the amount of cash in the register is $685. The shortage of $20 represents an expense.

Question 38

Maintaining a petty cash fund makes it possible to determine human fraud.

Question 39

The clerk who has access to the cash in the cash register should not have access to the register tape or file.

Question 40

The petty cash fund should be reimbursed at the end of the period even if the fund is not low on money.

Question 41

An NSF cheque for $17.50 would be recorded as a debit to Cash and a credit to Accounts Receivable.

Question 42

Credit cards do not remove the risk of bad debts to the business accepting payment by credit card.

Question 43

Z-Mart's quick assets are $147,000. With current liabilities of $143,000, Z-Mart's quick ratio is 1.03 to 1.

Question 44

The acid-test ratio is also called the quick ratio.

Question 45

A bank reconciliation results in creating an adjusted bank balance as well as an adjusted book balance.

Question 46

A bank reconciliation explains the difference between the balance of a chequing account on the customer's books and the balance on the bank statement.

Question 47

Factors that cause the bank statement balance of a chequing account to be different from the business chequing account balance include: outstanding cheques, deposits in transit, deductions for bank fees, additions for interest, and errors.

Question 48

Internal control devices for banking activities include signature cards, deposit slips, cheques, and bank statements.

Question 49

Quick assets include cash, inventory, and receivables.

Question 50

The quick ratio is a more accurate measure of a company's liquidity than the current ratio.

Question 51

The common rule of thumb is that a company's quick ratio should be at least 1.5 to 1.

Question 52

An internal control system is the policies and procedures that managers use to

A) Protect assets
B) Ensure reliable accounting
C) Promote efficient operations
D) Encourage adherence to company policies.
E) All of the above

Question 53

Cash, short-term investments, inventory, and receivables, are called quick assets.

Question 54

Omega Supply's current ratio is 2 to 1. Its quick ratio is.75 to 1. Omega Supply has a good credit risk because the ratios reveal no liquidity problem.

Question 55

Credit card is seen as an advantage by businesses because the cash is normally received quicker than with other forms of extended credit.

Question 56

The quick ratio is current assets divided by current liabilities.

Question 57

Bank service charges are treated as a reconciling item on the book side of a bank reconciliation.

Question 58

Banks normally use a flat rate fee for the processing of debit card transactions and a percentage fee for the processing of credit card transactions.

Question 59

An error made by the bank should result in a reconciling item on the book side of a bank reconciliation.

Question 60

The steps to reconcile the balance of the bank statement to the adjusted balance include adding outstanding cheques, deposits, and bank service charges to the bank balance.

Question 61

Cash equivalents

A) Include savings accounts
B) Include chequing accounts
C) Are short-term investments that a company invests their cash in to increase their earnings
D) Include savings and chequing accounts
E) All of the above

Question 62

Principles of internal control include:

A) Record purchases using the gross method.
B) Divide responsibilities for related transactions.
C) Perform regular and independent reviews.
D) Divide responsibilities for related transactions and perform regular and independent reviews.
E) All of the above

Question 63

Cash equivalents

A) Are readily convertible to a known cash amount
B) Include short-term investments purchased to increase earnings
C) Are often combined with cash as a single balance sheet item
D) Are readily convertible to a known cash amount and include short-term investments purchased to increase earnings
E) All of the above

Question 64

Policies and procedures used to promote efficient company operations are known as

A) Asset controls
B) Internal controls
C) Management controls
D) Cash controls
E) Inventory control

Question 65

Internal control procedures:

A) Eliminate the risk of loss.
B) Include policies and procedures to safeguard assets.
C) Prevent unavoidable losses.
D) Both eliminate the risk of loss and include policies and procedures to safeguard assets.
E) All of the above

Question 66

A good system of internal control

A) Encourages adherence to prescribed managerial policies
B) Promotes operational efficiencies
C) Eliminates the need for an audit
D) Both encourages adherence to prescribed managerial policies and promotes operational efficiencies
E) All of the above

Question 67

Limitations of internal control include

A) Human error
B) Human fraud
C) Cost-benefit standard
D) Human error and fraud
E) All of the above

Question 68

Risks involved in e-commerce include

A) Firewalls
B) Encryption
C) Missing documents
D) Computer viruses
E) All of the above

Question 69

Two clerks sharing the same cash register is a violation of which internal control principle?

A) Establish responsibilities
B) Maintain adequate records
C) Insure assets
D) Bond key employees
E) Apply technological controls

Question 70

Cash consists of

A) Postage stamps
B) Coins, currency, and chequing accounts
C) IOUs
D) Certificates of deposit
E) Coins, currency, chequing accounts, and certificates of deposit

Question 71

Cash receipts are the result of

A) Cash sales
B) Cash disbursements
C) Collection of accounts receivable
D) Collection of accounts payable
E) Cash sales and collection of accounts receivable

Question 72

The impact of technology on internal controls includes

A) Reduced processing error
B) Elimination of the need for regular audits.
C) Fewer hard copies of source documents
D) More efficient separation of duties
E) Reduced processing errors and fewer hard copies of source documents

Question 73

Internal control procedures for cash receipts require

A) Separation of custody of cash receipts from their recordkeeping
B) In-store cash sales be recorded on a cash register at the time of each sale
C) All cheques to be numbered in sequence
D) Separation of custody of cash receipts from its recordkeeping and in-store cash sales be recorded on a cash register at the time of each sale
E) All of the above

Question 74

Which of the following is NOT a principle of internal control?

A) Responsibilities should be clearly established
B) Adequate records should be maintained
C) Responsibility for related transactions should be divided
D) Assets should be insured and employees bonded
E) Audits should always be conducted by employees internal to the organization

Question 75

The owner of Zeke's Landscaping Designs just hired an office manager to handle all the office functions for him. Among other responsibilities, the office manager will handle key accounting functions such as processing customer payments, writing cheques to employees to pay the payroll, handle daily bank deposits at the bank, pay suppliers, and reconcile the company bank account bank reconciliations. What internal cash control practice is being overlooked by the owner?

A) Making daily cash deposits
B) Frequent preparation of bank reconciliations
C) Separation of cash payment from cash disbursement function
D) Ensuring all cash disbursements are tracked by making payments by cheque
E) Performing external audit

Question 76

Cash equivalents

A) Are short-term, highly liquid investments
B) Include 6-month certificates of deposit
C) Include chequing accounts
D) Are recorded in petty cash
E) Are short-term, highly liquid investments and include chequing accounts

Question 77

Managers place a high priority on internal control systems because the systems assist managers in the

A) Prevention of avoidable losses
B) Planning of operation
C) Monitoring of company performance
D) Monitoring of employee performance
E) All of the above

Question 78

An income statement account used to record cash overages and cash shortages arising from omitted petty cash receipts and from errors in making change is the

A) Cash Lost account
B) Bank Reconciliation account
C) Petty Cash account
D) Cash Over and Short account
E) Cash Receivable account

Question 79

Principles of internal control include:

A) Establish responsibilities.
B) Maintain adequate records.
C) Insure assets.
D) Bond key employees.
E) All of the above

Question 80

Prenumbered printed cheques are an example of which internal control principle?

A) Technological controls
B) Maintain adequate records
C) Perform regular and independent reviews
D) Technological controls and maintain adequate record
E) All of the above