Deck 4: Cash and Internal Controls

Question 1

The Sarbanes-Oxley Act is also known as Generally Accepted Accounting Principles.The Sarbanes-Oxley Act is also known as the Public Company Accounting Reform and Investor Protection Act of 2002 and commonly referred to as SOX.

Answer 1

False

Question 2

Separation of duties occurs when two or more people act in coordination to circumvent internal controls.This is the act of collusion.

Answer 2

False

Question 3

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

Answer 3

False

Question 4

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 5

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

Question 6

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 7

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.Auditors are prohibited from providing most nonaudit services,such as consulting,to their clients by the Sarbanes-Oxley Act.

Question 8

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

Question 9

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 10

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 11

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 12

Effective internal controls ensure a company's success and survival.Effective internal controls improve the company's likelihood of success and survival,but do not provide a guarantee.

Question 13

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

Question 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.

Question 15

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

Question 16

Separation of duties refers to auditors not being allowed to perform both audit and nonaudit services for the same client.Separation of duties is where individuals who have physical responsibility for assets should not also have access to accounting records.

Question 17

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

Question 18

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 19

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 20

A framework for designing an internal control system is provided by the Financial Accounting Standards Board (FASB).A framework for designing an internal control system is provided by the Committee of Sponsoring Organizations (COSO)of the Treadway Commission.

Question 21

When customers pay for services with a check,the company should debit Accounts Receivable and credit Service Revenue.The debit should be to Cash.

Question 22

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.This is an example of a timing difference.

Question 23

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 24

Opening mail and making a list of checks received once per week is considered a good internal control over cash receipts.These tasks should be performed each day.

Question 25

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.These are referred to as deposits outstanding.

Question 26

Common examples of cash equivalents are money market funds,Treasury bills,and certificates of deposit.

Question 27

Differences in the company's cash balance and the bank's cash balance occur because of either timing differences or errors.

Question 28

A bank reconciliation matches the balance of cash in the bank account with the balance of cash in the company's own records.

Question 29

When customers pay for services with a debit card,the company should debit Cash and credit Service Revenue.

Question 30

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 31

Allowing the employee who authorizes purchases to also prepare the check is an example of good internal control.A single employee should not perform both of these tasks.

Question 32

Companies should set maximum purchase limits on debit cards and credit cards as part of internal controls.

Question 33

Checks outstanding are checks the company has written that have not been subtracted from the bank's record of the company's balance.

Question 34

When a company pays for services received using a check,it should credit Accounts Payable until the check is paid by the bank.The credit is to the Cash account.

Question 35

A deposit outstanding will cause the bank's cash balance to be higher than the company's cash balance.The company's balance will be higher.

Question 36

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.Cash equivalents are included in the cash balance.

Question 37

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.Accounts receivable is a separately reported asset from cash.

Question 38

Recording all cash receipts as soon as possible is considered a good internal control.

Question 39

A check outstanding will cause the bank's cash balance to be higher than the company's cash balance.

Question 40

When a company pays for services received using a credit card,it should credit Accounts Payable.

Question 41

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.

Question 42

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 43

The petty cash fund represents cash on hand and is used to pay for minor purchases.

Question 44

Typically,the more volatile the company's trend in operating cash flows,the higher the operating risk of the company.

Question 45

A company's ratio of cash to noncash assets is calculated as the total cash balance divided by all noncash assets.

Question 46

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.The cash balance needs to be updated for items used to reconcile the company's cash balance.

Question 47

Investing activities include cash investments in long-term assets and investment securities.

Question 48

The three elements present in every fraud are commonly referred to as the ___________.

A)Triple threat
B)Three-way manipulation
C)Fraud triangle

Question 49

Investing activities include cash transactions involving revenue and expense events during the period.These are operating activities.

Question 50

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.

Question 51

Only transactions involving cash affect a company's cash flows.

Question 52

An advantage of a high ratio of cash to noncash assets is that the company has funds to pay obligations as they become due.

Question 53

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.Interest earned is initially recorded by the bank.

Question 54

The phrase "cooking the books" is commonly used to refer to:

A)The company's accounting records being thoroughly audited at the end of the year.
B)The company's financial statements being presented in a deceptive form.
C)The company's ability to provide timely financial information under operating pressure.

Question 55

Companies often have a high ratio of cash to noncash assets when they consistently pay dividends.Dividends represent the return of cash to stockholders and therefore reduce the balance of cash.

Question 56

Cash is typically reported as a current asset in the balance sheet.

Question 57

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 58

A company's cash is reported in two financial statements-income statement and statement of cash flows.Cash is reported in the balance sheet and in the statement of cash flows.

Question 59

Which element of the fraud triangle do companies have the greatest ability to eliminate?

A)Motive.
B)Rationalization.
C)Opportunity.

Question 60

Investing activities include transactions designed to raise cash or finance the business.These are financing activities.

Question 61

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.

Question 62

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 63

The components of internal control do not directly include:

A)Risk assessment.
B)Inflation adjustment.
C)Monitoring.

Question 64

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 other answers could include fraudulent reporting.

Question 65

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.

Question 66

Which of the following is an example of detective controls?

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

Question 67

The Sarbanes-Oxley Act requires that companies must:

A)Conduct customer surveys each year to ensure satisfaction with products and services.
B)Document internal controls and assess their adequacy each year.
C)Pay taxes owed to the Internal Revenue Service by the tax filing date.

Question 68

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 69

Under the Sarbanes-Oxley Act,management is responsible for:

A)Analysts' having positive comments about the company's operations.
B)The reliability of financial statements.
C)Increasing the company's stock price.

Question 70

A company's plans to minimize theft and enhance the accuracy of accounting information are referred to as:

A)Corporate controls.
B)Security controls.
C)Internal controls.

Question 71

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.

Question 72

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.

Question 73

The component of internal control that includes the formal procedures for reporting control deficiencies is:

A)Monitoring.
B)Information and communication.
C)Risk assessment.

Question 74

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.

Question 75

The component of internal control that includes the policies and procedures that help ensure that management's directives are being carried out is:

A)Monitoring.
B)Information and communication.
C)Risk assessment.
D)Control activities.

Question 76

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 other answers represent mandates of the Sarbanes-Oxley Act.

Question 77

The component of internal control that identifies internal and external factors that could prevent a company's objectives from being achieved is:

A)Monitoring.
B)Information and communication.
C)Risk assessment.

Question 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.

Question 79

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

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

Question 80

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.