Deck 7: Internal Control and Cash

Question 1

External auditors may examine internal controls as part of their evaluation of the financial statements.

Answer 1

True

Question 2

Risk assessment is one component of a good system of internal control.

Answer 2

True

Question 3

A good system of internal control does not require monitoring.

Answer 3

False

Question 4

Fraud is an unintentional act to misappropriate (steal) assets or misstate financial statements.

Question 5

Bonding means insuring a company against misappropriation of assets by employees.

Question 6

The Canada Business Corporations Act did not require corporations to maintain an adequate system of internal control until the United States passed the Sarbanes-Oxley Act.

Question 7

Requiring employees to take vacations is a weakness in a control activity because it does not promote operational efficiency.

Question 8

Background checks of prospective employees are not necessary when a company has an effective system of internal control.

Question 9

Only large companies need to be concerned with a system of internal control.

Question 10

Errors give rise to unintentional misstatements in the financial statements.

Question 11

Control activities are most effective when several people are responsible for a given task.

Question 12

The person responsible for making credit sales should be the vice-president of finance.

Question 13

An effective control activity results when at least two individuals are assigned to one cash drawer so that each can serve as check on the other.

Question 14

The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

Question 15

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

Question 16

External auditors are usually employees of the company.

Question 17

When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.

Question 18

The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

Question 19

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

Question 20

A good internal control system will help a company achieve reliable financial reporting, effective and efficient operations, and compliance with laws and regulations.

Question 21

A compensating balance is reported as a non-current asset.

Question 22

Electronic funds transfers never have to be recorded.

Question 23

The use of a bank account makes internal control over cash more difficult.

Question 24

Debit card and bank credit card transactions are considered cash.

Question 25

To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the person authorized to sign cheques.

Question 26

NSF cheques received are accounted for by adding them to the cash balance per books.

Question 27

A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled cheques.

Question 28

All documents should be prenumbered.

Question 29

Generally, only debt investments due within three months qualify as cash equivalents.

Question 30

Segregation of duties among employees eliminates the possibility of collusion.

Question 31

All reconciling items in determining the adjusted cash balance per books require the depositor to make adjusting journal entries to the Cash account.

Question 32

An NSF cheque that was received is recorded as an account receivable.

Question 33

Management only needs to know how much cash is available at the end of the month (when the bank reconciliation is prepared).

Question 34

Control over cash disbursements is improved if all expenditures are paid by cheque or through use of electronic funds transfers.

Question 35

The extent of internal control activities adopted by a company must be evaluated in terms of cost-benefit.

Question 36

An authorized signing officer should sign a cheque only after reviewing the appropriate supporting documentation.

Question 37

Deposits in transit require an adjustment to the cash balance per books.

Question 38

An example of segregation of duties is having a cheque signer record cash disbursements.

Question 39

The use of electronic funds transfers normally results in better control over cash.

Question 40

NSF cheques received from customers are debited by the bank to the depositor's account.

Question 41

All of the following are examples of a control activity except
(a)using prenumbered documents.
(b)reconciling the bank statement.
(c)insistence that employees work overtime.
(d)insistence that employees take vacations.

Question 42

Independent internal reviews should be done
(a)at the end of each accounting period.
(b)at the end of each month.
(c)periodically on a surprise basis.
(d)by the external auditor.

Question 43

All of the following are examples of a control activity except
(a)an extensive marketing plan.
(b)bonding of employees.
(c)segregation of duties.
(d)recording of all transactions.

Question 44

Internal auditors
(a)are hired by independent accounting firms to audit companies.
(b)are employees of the government who evaluate the internal controls of companies filing tax returns.
(c)evaluate the system of internal controls for the companies that employ them.
(d)cannot evaluate the system of internal controls of the companies that employ them because they are not independent.

Question 45

A company should plan the timing of major expenditures in light of its operating cycle.

Question 46

When the cash account has a credit balance in the general ledger, it is reported as a non-current liability.

Question 47

A basic principle of cash management is to increase the speed of paying liabilities.

Question 48

Cash restricted in use should be reported separately on the statement of financial position.

Question 49

Internal controls are concerned with all of the following except
(a)computerized systems of accounting.
(b)effective and efficient operations.
(c)ensuring reliable financial reporting.
(d)compliance with relevant laws and regulations.

Question 50

All of the following are examples of a control activity except
(a)limit access to assets.
(b)independent internal reviews.
(c)authorization of transactions.
(d)increasing the speed of collection on receivables.

Question 51

A cash budget will help determine if additional financing will be necessary.

Question 52

Which of the following is not a limitation of internal control?
(a)Cost of establishing control procedures
(b)The human element
(c)Use of a bank account
(d)The size of the company

Question 53

Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them
(a)increases the potential for errors and fraud.
(b)decreases the potential for errors and fraud.
(c)is an example of a control activity.
(d)reduces cost and maximizes benefit.

Question 54

A key principle of cash management is to increase the speed of collection on receivables.

Question 55

An employee who makes a sale, ships the goods and bills the customer violates which control activity?
(a)Authorization of transactions and activities
(b)Documentation
(c)Segregation of duties
(d)Human resource controls

Question 56

Physical controls are not designed to safeguard assets from
(a)natural disasters.
(b)employee theft.
(c)robbery.
(d)unauthorized use.

Question 57

Which one of the following is not a primary component of an internal control system?
(a)Control activities
(b)Delay payment of liabilities
(c)Risk assessment
(d)Control environment

Question 58

The custodian of a company asset should
(a)not be bonded.
(b)be someone outside the company.
(c)not have access to the accounting records for that asset.
(d)be an accountant.

Question 59

Idle cash should be reported as restricted cash.

Question 60

Internal controls may be limited by each of the following except
(a)the size of the business.
(b)the human element.
(c)bonding of employees.
(d)collusion.

Question 61

Which of the following is not a control activity over cash?
(a)Only designated personnel are authorized to handle cash.
(b)The same individual receives the cash and pays the bills.
(c)Surprise audits of cash on hand should be made occasionally.
(d)Access to cash is limited.

Question 62

If employees are bonded, it means that
(a)they are not allowed to handle cash.
(b)they have worked for the company for at least 10 years.
(c)they have been insured against misappropriation of assets.
(d)they are not allowed to take vacations.

Question 63

Which of the following is(are) considered cash?
(a)Debit cards only
(b)Debit cards and bank credit cards
(c)Bank credit cards only
(d)Debit cards and all types of credit cards

Question 64

Two employees at a retail store work the same cash register. You evaluate this situation as
(a)a violation of authorization of transactions and activities.
(b)a violation of segregation of duties.
(c)supporting the authorization of transactions and activities.
(d)supporting independent checks of performance.

Question 65

An accounts payable clerk also has cheque signing authority. Which control procedure is violated?
(a)authorization of transactions and activities
(b)independent checks of performance
(c)documentation
(d)segregation of duties

Question 66

Physical controls to safeguard assets do not include
(a)cashier department supervisors.
(b)vaults.
(c)safety deposit boxes.
(d)locked warehouses.

Question 67

The use of prenumbered cheques is an example of
(a)documentation.
(b)independent checks of performance.
(c)authorization of transactions and activities.
(d)segregation of duties.

Question 68

A system of internal control can only provide reasonable assurance, which is based on the belief that
(a)the system is infallible.
(b)the system can always detect errors and irregularities.
(c)the costs of establishing control activities should not be greater than their expected benefit.
(d)the human element is not important.

Question 69

Joe is warehouse custodian and also maintains the accounting records of the inventory held at the warehouse. Which control procedure is violated?
(a)documentation
(b)independent checks of performance
(c)segregation of duties
(d)authorization of transactions and activities

Question 70

Maximum benefit from independent checks of performance is obtained when
(a)it is made on a pre-announced basis.
(b)it is done by the employee possessing custody of the asset.
(c)discrepancies are reported to management.
(d)it is done at the time of the external audit.

Question 71

The use of electronic funds transfers
(a)normally results in better internal controls.
(b)does not require segregation of duties.
(c)eliminates opportunities for fraud.
(d)does not require proper authorization.

Question 72

The control activity related to not having the same person authorize and pay for goods is known as
(a)authorization of transactions and activities.
(b)independent checks of performance.
(c)segregation of duties.
(d)human resource controls.

Question 73

From an internal control standpoint, what type of controls are thorough background checks and bonding of employees?
(a)Physical controls
(b)Human resource controls
(c)Independent checks of performance
(d)Documentation

Question 74

Which of the following is not a good control activity over cash?
(a)Payments to creditors should be made in cash.
(b)There should be limited access to cash.
(c)The amount of cash on hand should be kept at a minimum.
(d)Cash should be deposited daily.

Question 75

Which one of the following items would not be considered cash?
(a)Foreign currency
(b)Money orders
(c)Coins
(d)Post-dated cheques

Question 76

When two or more people get together for the purpose of circumventing prescribed controls, it is called
(a)fraud prevention.
(b)collusion.
(c)a division of duties.
(d)bonding of employees.

Question 77

Control over cash disbursements is generally more effective when
(a)all bills are paid in cash.
(b)disbursements are made by the accounts payable subsidiary clerk.
(c)payments are made by cheque or electronic funds transfer.
(d)all purchases are made on credit.

Question 78

In large companies, independent checks of performance are often assigned to
(a)shift supervisors.
(b)management.
(c)internal auditors.
(d)external auditors.

Question 79

Which of the following is not a suggested procedure to establish a good control activity over cash disbursements?
(a)Pre-signed blank cheques
(b)Different individuals approve and make payments
(c)Blank cheques are stored with limited access
(d)The bank statement is reconciled monthly

Question 80

Ms. Greene has worked for Ambleside Inc. for 20 years without taking a vacation. An internal control activity that would address this situation would be
(a)human resource controls.
(b)authorization of transactions and activities.
(c)physical controls.
(d)documentation.