Deck 4: Cash and Internal Controls

Question 1

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.

Answer 1

B

Question 2

Which of the following is an example of detective controls?

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

Answer 2

D

Question 3

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.

Answer 3

A

Question 4

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 5

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 6

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 7

Separation of duties refers to:

A) Making each manager personally responsible for his/her department.
B) Keeping functions across different departments separate.
C) Preventing top management and lower-level employees from interacting.
D) Individuals who have physical responsibility for assets should not also have access to accounting records.

Question 8

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 9

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

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

Question 10

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 11

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 12

The components of internal control do not directly include:

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

Question 13

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 14

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 15

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 16

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 17

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 18

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 19

Which employees have an impact on the operation and effectiveness of internal controls?

A) Upper management.
B) Mid-level managers.
C) Lower-level employees.
D) All employees.

Question 20

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 21

Which of the following would NOT represent good controls over cash receipts?

A) Record all cash receipts as soon as possible.
B) The employee that receives cash and checks should also deposit them in the bank.
C) Open mail each day and make a list of checks received with the amount and payer's name.
D) Verify cash receipts by comparing the bank deposit slip with the accounting records.

Question 22

Which of the following would NOT represent good controls over cash disbursements?

A) Make all disbursements, other than very small ones, by check, debit card, or credit card.
B) Require only one signature for checks, especially larger ones.
C) Authorize all expenditures before purchase and verify the accuracy of the purchase itself.
D) The employee who authorizes payment should not also be the employee who prepares the check.

Question 23

Which of the following is NOT a reason why a bank reconciliation is necessary?

A) The company has transactions that the bank has not recorded.
B) Petty cash has a low balance.
C) The bank has transactions that the company has not recorded.
D) Reconciliations provide a control over cash.

Question 24

Which of the following is correct with respect to a bank reconciliation?

A) Subtract interest earned from the bank's balance.
B) Add service charge to the company's balance.
C) Subtract NSF checks from the company's balance.
D) Add deposits outstanding to the company's balance.

Question 25

Which of the following would NOT represent good controls over cash disbursements?

A) Periodically check amounts shown in the debit card and credit card statements against purchase receipts.
B) The employee verifying the accuracy of the debit card and credit card statements should not also be the employee responsible for actual purchases.
C) Set maximum purchase limits on debit cards and credit cards.
D) Employees responsible for making cash disbursements should also be in charge of cash receipts.

Question 26

Which of the following would not be considered good internal control for cash receipts?

A) Allowing customers to pay with a debit card.
B) Requiring the employee receiving cash from customers to also deposit the cash into the company's bank account.
C) Recording cash receipts as soon as they are recorded.
D) Allowing customers to pay with a credit card.

Question 27

On May 31, Money Corporation's Cash account showed a balance of $10,000 before the bank reconciliation was prepared. After examining the May bank statement and items included with it, the company's accountant found the following items: What is the amount of cash that should be reported in the company's balance sheet as of May 31?

A) $9,860.
B) $9,650.
C) $10,130.
D) $10,410.

Question 28

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 29

Cash may not include:

A) Foreign currency.
B) Money orders.
C) Accounts receivable.
D) Undeposited customer checks.

Question 30

Which of the following would NOT be recorded as a cash sale?

A) Customer who pays with a check.
B) Customer who pays with a debit card.
C) Customer who pays with a credit card.
D) A customers who buys on account.

Question 31

Which of the following would NOT need to be accounted for in a bank reconciliation?

A) Deposits outstanding recorded by the company but not the bank.
B) Interest earned recorded by the bank but not the company.
C) NSF checks recorded by the bank but not by the company.
D) Checks written by the company and recorded by the bank.

Question 32

The following information was taken from the bank reconciliation for Mooner Sooner Inc. at the end of 2012: Bank balance: $8,000
Checks outstanding: $5,800
Note collected by the bank: $1,500
Service fee: $20
Deposits outstanding: $4,000
NSF check (bad check) returned for $300
What is the correct cash balance that should be reported in Mooner Sooner's balance sheet at the end of 2012?

A) $10,200.
B) $7,400.
C) $6,200.
D) $6,160.

Question 33

Cash transactions that have been recorded by the company but not the bank include:

A) NSF checks.
B) Interest earned.
C) Service fees.
D) Deposits outstanding.

Question 34

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 35

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 36

Common examples of cash equivalents include all of the following except:

A) Money market funds.
B) Treasury bills.
C) Certificates of deposit.
D) Accounts receivable.

Question 37

McGregor Company allows customers to pay with credit cards. The credit card company charges McGregor 3% of the sale. When a customer uses a credit card to pay McGregor $200 for services provided, McGregor would:

A) Debit Cash for $200.
B) Credit Service Revenue for $194.
C) Debit Service Fee Expense for $6.
D) Credit Service Revenue for $206.

Question 38

Which of the following is considered cash for financial reporting purposes?

A) Accounts receivable.
B) Investments with maturity dates greater than three months.
C) Checks received from customers.
D) Accounts payable.

Question 39

Cash transactions recorded by the bank but not yet recorded by the company include all of the following except

A) Service fees.
B) Interest earned.
C) Checks outstanding.
D) NSF checks.

Question 40

A customer purchased a $2,000 item at ApplianceWorld, paying with a credit card. ApplianceWorld is charged a 2% fee by the credit card company. When recording this sale, ApplianceWorld would:

A) Debit Accounts Receivable for $2,000.
B) Credit Sales Revenue for $2,000.
C) Credit Sales Revenue for $1,960.
D) Credit Unearned Revenue for $2,000.

Question 41

When preparing a bank reconciliation, a deposit outstanding would be:

A) Added to the company's cash balance.
B) Added to the bank's cash balance.
C) Subtracted from the company's cash balance.
D) Subtracted from the bank's cash balance.

Question 42

The following data were obtained from the bank statement and from the process of reconciling it: Bank service charges = $20
Deposit outstanding = $150
Interest earned on the bank account = $10
Checks outstanding = $400
Which items should be deducted from and added to the bank balance in completing the reconciliation?

A) Deduct checks outstanding; add service charges and deposit outstanding.
B) Deduct interest earned; add deposit outstanding.
C) Deduct checks outstanding; add deposit outstanding.
D) Deduct deposit outstanding; add checks outstanding.

Question 43

The statement of cash flows reports cash flows from the activities of:

A) Operating, purchasing, and investing.
B) Borrowing, paying, and investing.
C) Financing, investing, and operating.
D) Using, investing, and financing.

Question 44

Which of the following is NOT involved in the replenishment of the petty cash fund?

A) Transactions related to vouchers will be recorded.
B) Management will verify that the total of all vouchers equals the amount of cash missing from the petty cash fund.
C) Weekly payroll checks will be recorded.
D) Management will withdraw cash from the bank and place it in the petty cash fund.

Question 45

After preparing a bank reconciliation, a check outstanding for the payment of advertising would be recorded with:

A) A debit to Advertising Expense.
B) A debit to Cash.
C) A credit to Advertising Expense.
D) No entry is needed.

Question 46

Cash flows from investing activities do not include:

A) Borrowing.
B) The purchase of equipment.
C) The sale of land.
D) The purchase of a building.

Question 47

At the time a $400 petty cash fund is being replenished, the company's accountant finds vouchers totaling $350 and petty cash of $50. The vouchers include: postage, $100; business lunches, $150; delivery fees, $75; and office supplies, $25. Which of the following is not recorded when recognizing expenditures from the petty cash fund?

A) Debit Postage Expense, $100.
B) Debit Supplies, $25.
C) Credit Petty Cash, $350.
D) Debit Petty Cash, $350.

Question 48

Cash flows from investing do not include cash flows from:

A) Lending.
B) The sale of equipment.
C) Borrowing.
D) The purchase of a building.

Question 49

The balance shown in the August bank statement of Colt Company was $23,200. After examining the August bank statement and items included with it, the company's accountant found: What is the amount of cash that should be reported in the balance sheet as of August 31?

A) $20,700.
B) $17,200.
C) $18,700.
D) $22,200.

Question 50

After preparing the bank reconciliation, an NSF check would result in which of the following when recording the adjustment to the company's cash balance?

A) Debit to Service Fee Expense.
B) Credit to Accounts Payable.
C) Credit to Service Revenue.
D) Debit to Accounts Receivable.

Question 51

Which of the following is NOT correct regarding the reporting of cash?

A) Cash is reported in both the balance sheet and the statement of cash flows.
B) Cash flows from buying and selling investments and long-term productive assets are called operating cash flows.
C) Cash flows from transactions with stockholders and creditors are called financing cash flows.
D) Net cash flows reported in the statement of cash flows should equal the change in cash reported in the balance sheet.

Question 52

Cash flows from financing activities include:

A) Lending.
B) Salaries paid.
C) The sale of land.
D) Dividends paid.

Question 53

Investing cash flows would include which of the following?

A) Payment of cash dividends to stockholders.
B) Purchase of office supplies with cash.
C) Purchase of a building with cash.
D) Cash sales to customers.

Question 54

Operating cash flows would exclude:

A) Payment of employee salaries.
B) Receipt of cash from customers.
C) Payment of dividends.
D) Payment for advertising.

Question 55

After preparing a bank reconciliation, the collection of a note by the bank on a company's behalf would be recorded with:

A) A credit to Notes Receivable.
B) A credit to Cash.
C) A debit to Notes Receivable.
D) A credit to Accounts Receivable.

Question 56

A company's cash balance is reported in which two financial statements?

A) Income statement and statement of cash flows.
B) Balance sheet and statement of cash flows.
C) Income statement and balance sheet.
D) Balance sheet and statement of stockholders' equity.

Question 57

A minor amount of cash kept on hand to pay for small purchases is referred to as a:

A) Petty cash fund.
B) Cash receipts fund.
C) Cash payments fund.
D) Cookie jar fund.

Question 58

After preparing a bank reconciliation, the service fee charged by the bank would be recorded with:

A) A credit to Service Fees Expense.
B) A debit to Cash.
C) A credit to Service Fees Revenue.
D) A debit to Service Fees Expense.

Question 59

Which of the following is correct regarding a petty cash fund?

A) Petty cash fund represents cash on hand at the business for quick access.
B) Petty cash fund is used for minor purposes.
C) When cash from this fund is taken out, it should be replaced with a voucher.
D) All of the above are correct.

Question 60

The balance in the Colt Company's Cash account on August 31 was $19,700, before the bank reconciliation was prepared. After examining the August bank statement and items included with it, the company's accountant found: What is the amount of cash that should be reported in the balance sheet as of August 31?

A) $20,700.
B) $17,200.
C) $18,700.
D) $22,200.

Question 61

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

Question 62

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 63

Issuing common stock for cash is considered a(n):

A) Operating cash flow.
B) Investing cash flow.
C) Financing cash flow.
D) Not a cash flow.

Question 64

Providing services to customers on account is considered a(n):

A) Operating cash flow.
B) Investing cash flow.
C) Financing cash flow.
D) Not a cash flow.

Question 65

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 66

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

Question 67

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

Question 68

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

Question 69

Terastar Corp. reports the following amounts for 2012 and 2013: $$\begin{array} { | c | c | c | c | c | } \hline & \begin{array} { c } \text { Net } \\\text { Income }\end{array} & \begin{array} { c } \text { Operating } \\\text { Cash Flows }\end{array} & \begin{array} { c } \text { Investing } \\\text { Cash Flows }\end{array} & \begin{array} { c } \text { Financing } \\\text { Cash Flows }\end{array} \\\hline 2012 & \$ 10,000 & \$ 15,000 & - \$ 8,000 & \$ 10,000 \\\hline 2013 & 12,000 & 19,000 & - \$ 10,000 & - 6,000 \\\hline\end{array}$$ What is the amount of Terastar's free cash flows for 2013?

A) $3,000.
B) $13,000.
C) $9,000.
D) $7,000.

Question 70

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 71

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

Question 72

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

Question 73

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

Question 74

Payment of dividends to stockholders is considered a(n):

A) Operating cash flow.
B) Investing cash flow.
C) Financing cash flow.
D) Not a cash flow.

Question 75

Terastar Corp. reports the following amounts for 2012 and 2013. What is the trend in free cash flows relative to net income?

A) Both are increasing.
B) Net income is trending upward and free cash flows are trending downward.
C) Both are decreasing.
D) Net income is trending downward and free cash flows are trending upward.

Question 76

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 77

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

Question 78

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 79

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

Question 80

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.