Question 1

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

Accepted Answer

Payment of dividends to stockholders falls under the category of financing cash flow as it involves the distribution of profits to the owners of the company. It does not affect the operating cash flow or investing cash flow of the company. Therefore, option C is the correct choice. Option A and B are incorrect as they do not apply to the payment of dividends. Option D is also incorrect as it is a cash flow event.

Question 2

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

Accepted Answer

Auditors are prohibited from providing certain nonaudit services to their audit clients, such as internal audit, actuarial, and certain types of consulting services. However, auditors can still provide some nonaudit services, such as tax preparation and advice, to their audit clients as long as they follow certain rules and guidelines.

Question 3

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.

Accepted Answer

Separation of duties involves dividing tasks and responsibilities among different individuals to prevent the risk of fraud or errors. In this example, separating the task of receiving cash from the task of depositing it in the bank account reduces the risk of theft or mishandling of funds.

Question 4

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

Accepted Answer

This statement is true as one of the primary responsibilities of managers is to ensure that the company's assets are properly managed and utilized. They have a fiduciary duty to act in the best interests of the company and its shareholders, which involves both protecting and growing the company's assets.

Question 5

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

Accepted Answer

The internal control component of information and communication is focused on the accuracy and effectiveness of measuring and communicating business transactions, including financial information.

Question 6

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

Accepted Answer

Issuing common stock for cash is a financing activity as it involves raising funds from external investors. The cash received from the issuance of common stock will be reported under the financing activities section of the statement of cash flows.

Question 7

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

Accepted Answer

The Sarbanes-Oxley Act, or SOX, is not known as Generally Accepted Accounting Principles (GAAP). GAAP refers to a set of accounting standards and guidelines that companies must follow in the preparation of their financial statements. SOX, on the other hand, is a law that was enacted in response to financial scandals and is intended to protect investors and ensure the integrity of financial reporting by public companies.

Question 8

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.

Accepted Answer

Section 404 of the Sarbanes-Oxley Act does indeed require that a company's management document and assess the effectiveness of all internal control processes that could affect financial reporting.

Question 9

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

Accepted Answer

The control environment includes factors such as management's commitment to ethical behavior, the company's organizational structure, and the workplace culture. It sets the tone for the effectiveness of the company's internal controls.

Question 10

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.

Accepted Answer

This statement is true. The PCAOB was established under the Sarbanes-Oxley Act of 2002 and has the authority to establish and enforce auditing, quality control, ethics, independence, and other standards for public company audits.

Question 11

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?

Accepted Answer

The answer of Terastar Corp.reports the following amounts for 2012...

Question 12

Internal control is a company's plan to (1)improve the accuracy and reliability of accounting information and (2)safeguard the company's assets.

Accepted Answer

Internal control is a company's plan that aims to improve the accuracy and reliability of accounting information and prevent fraud and errors while safeguarding the company's assets. Therefore, the statement is true.

Question 13

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

Accepted Answer

These are indeed common types of financial statement fraud.

Question 14

Terastar Corp.reports the following amounts for 2012 and 2013. 
$$\begin{array} { | l | c | c | c | c | } 
\hline & \text { Net Income } & \text { Operating } & \text { Investing } & \text { Financing } \
\hline 2012 & \$ 10,000 & \$ 15,000 & - \$ 8,000 & \$ 10,000 \
\hline 2013 & 12,000 & 19,000 & - \$ 10,000 & - 6,000 \
\hline
\end{array}$$
What is the trend in free cash flows relative to net income?

Accepted Answer

The answer of Terastar Corp.reports the following amounts for 2012...

Question 15

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

Accepted Answer

The framework for designing an internal control system is provided by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), not the FASB.

Question 16

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

Accepted Answer

Separation of duties is a control principle that ensures no single individual has control over all aspects of a financial transaction, reducing the risk of errors or fraud. It is not specifically about auditors performing audit and nonaudit services.

Question 17

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.

Accepted Answer

This statement accurately reflects common risk assessment procedures in business.

Question 18

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

Accepted Answer

Internal control provides assurance and reliability in financial statements, which increases investor confidence and reliance on those statements.

Question 19

In response to corporate accounting scandals and to public outrage over seemingly widespread unethical behavior of top executives,Congress passed the Sarbanes-Oxley Act.

Accepted Answer

The Sarbanes-Oxley Act was passed in response to corporate accounting scandals and public outrage over unethical behavior by top executives.

Question 20

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

Accepted Answer

Providing services to customers on account does not involve any cash inflow or outflow, therefore it is not considered a cash flow.

Quiz 4: Cash and Internal Controls

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