ACC 210 Learnsmarts Chapter 5

Why might a bank statement and the company's records differ?

-not all checks written cleared the bank -customer checks that bounced (NSF) -deposits were made at the end of the bank statement date in an ATM

Match the internal control principle associated with each activity

1) Establish responsibility -> Just one employee receives cash2) Document procedures -> Cash receipts are summarized and their total is calculated3) Segregate duties -> A person different from whom receives the cash makes the deposit in the bank4) Independently verifies -> A company manger compares the cash count sheets with the bank deposit slips

A bank _____ is an internal report used to compare the bank statement with the company's cash records and should be prepared by an employee whose duties are separate from recording and handling of cash.

Reconciliation

deposits in transit occur when you make a deposit ______-

after the banks normal business hours

______ of duties is essential for safeguarding assets. The person who has custody of an asset should not also account for the asset. A person who performs both duties can steal the asset and hide the theft by making a bogus entry in the accounting records.

separation

nsf checks from customers should be a(n) on a bank reconciliation

subtracted from the book balance

Deposits in _____ are added to the ______ (bank/book) side of the bank reconciliation.

transit/ bank

A(n) _____ system is a process for approving and documenting all purchases and payments made on account.

voucher

Fraud is best defined as ______. a. misrepresenting oneself as another b. an attempt to deceive others for personal gain c. financial statement errors d. kickbacks e. deceitful actions of SOX

b

A weak system of internal ______ can lead to fraudulent financial statements. These procedures and policies help ensure that information entered into the accounting system and reported in the financial statements is accurate and complete.

control

A _______ deposit initiated by an EFT instructing a bank to transfer pay due to employees into the employees' bank accounts.

direct

An example of an EFT is _____.

direct deposit of employee paychecks

Which of the following would be added to your cash balance based on the information on your bank statement?

interest deposited

After approval of a purchase has been obtained, the purchasing agent completes a renumbered _______ that identifies the supplier, the delivery location, and the approved quantity and cost

purchase order

Fraudulent reporting by management includes ______. (Select all that apply.)

Improper assets valuation, recording fictitious revenues from a phantom customer and mismatching revenues and expenses

among the new requirements of SOX is those who willfully misrepresent financial results ________

face stiff fines and possible jail sentence

How do banks help businesses control cash?

independently verifying restricting access to cash documenting procedures

The fraud triangle contains three elements that must exist for accounting fraud to occur. The elements are: a. fear, greed, and satisfaction b. greed, larceny, and access c. motive, opportunity, and means d. incentive, opportunity, and rationalization

d

Which of the following is a violation of the principle of segregation of duties regarding cash received in person? a. Cashiers are responsible for the collection of cash and issuing a receipt at the point of sale b. A supervisor is responsible for collecting the cash at the end of each cashier's shift and depositing it in the bank c. Members of the accounting department are responsible for ensuring that the receipts from cash sales are properly recorded in the accounting system

d

A(n) ______ system controls the amount paid to others by limiting the total amount of money available for making payments.

imprest

violating loan covenants could lead to

paying higher interest ratesbeing forced to put up extra collateralrepaying the loan balance right away

In preparing your bank reconciliation, you notice that you recorded a deposit as $100 instead of $10. You should______.

subtract $90 from your cash and make an entry

service charges are ____ of bank reconciliation

subtracted from the books balance

A(n) ______ system is a process for approving and documenting all purchases and payments made on account.

voucher

electronic funds transfer discovered on the bank statement ______

will need to be adjusted on your records because your cash balance is affected

What is control activities?

work responsibilities and duties completed to reduce risks to an acceptable level

A company has a $10000 cash balance per its books. The bank statement has a balance of 9580. The bank reconciliation included 800 of deposits in transits, 500 of checks outstanding, a 100 NSF check from a customer, and a 20 bank service charge. Given the following reconciling items, the up-to-date cash balance equals_____?

$9880

Match Principle

Independent verification- the accounting department compares the cashier's count sheet to the cash register and to the bank deposit slip Document procedures- the accounting department records a journal entry for the cash recipts Segreation of duties- the accounting department does not have access to the cash

What is a control environment?

refers to the attitude of the people in the organization and their commitment to integrity

Which of the following are true regarding a bank statement.

-It lists all checks that have cleared the bank-It may include NSF checks-It includes interest earned-It may include service charges

THis month's bank statement shows interest earned of $45. How would this item be treated on the bank reconciliation

It would be added to the book balance

Good internal control over cash would include ______. (Check all that apply.) a. having the most senior employee handle all cash sales and record them in the accounting records b. having a person who does not deposit the cash reconcile the bank statement c. having fidelity bond that covers all employees who handle cash d. giving a cash register receipt to every customer

b, c, & d

Which of the following responsibilities should not be given to the accounting department? (Select all that apply.) a. recording the journal entry b. preparing the purchase order c. preparing the receiving report d. preparing the purchase requisition

b, c, & d

If a cashier rang up sales totaling $4,000, but had only $3,997 to deposit, which journal entry would be recorded? A debit to ______. a. cash of $3,997 and a credit to cash shortage of $3 and sales revenue of $4,000 b. sales of $4,000 and cash shortage of $3 and a credit to cash of $3,997 c. cash of $3,997 and cash shortage of $3 and a credit to unearned revenue of $4,000 d. cash of $3,997 and cash shortage of $3 and a credit to sales revenue of $4,000

d

If a company hires an auditor to check that the work done by others within the company is supported by documentation, this is part of the internal control procedure of a. restrict access b. segregation of duties c. document procedures d. independent verification

d

NSF checks stands for

non sufficient funds

Place the order of the steps in documenting and controlling purchases in a voucher system with the first step listed on the top and final step at the bottom.

request good or services by submitting a purchase requisition -prepare a purchase order after suppliers and prices have been approved -prepare a receiving report -prepare a supplier invoice and prepare the journal entry

To segregate duties involving cash receipts, specific responsibilities are assigned to various employees. Put the following steps in the correct chronological order.

-cashiers are responsible for collecting cash and issuing a receipt at the point of sale -a supervisor is responsible for collecting the cash at the end of each cashiers shift -members of the accounting department are responsible for ensuring that cash sales are properly recorded.

What are reasons internal controls can never completely prevent and detect errors and fraud?

-collusion -costs exceed benefits -human error

The purchasing system begins with an authorized employee completing a manual or electronic _____ which is then revised and approved by a supervisor before an order is placed with a supplier

Purchase requisition

True or False: An internal control goal for cash receipts is to ensure that the business documents the correct amount of cash received and safely deposits the cash into its bank account.

True

Which part of the Sarbanes- oxley (SOX) act may encourage employees to be honest:

Which part of the Sarbanes- oxley (SOX) act may encourage employees to be honest: Code of ethicsAnonymous tip lineWhistle- blower protection

A difference between an imprest payroll account and petty cash is petty cash is ______. a. not held at the bank b. a special account at the company's bank c. used for payroll d. better controlled

a

Each cash drawer is assigned to only one employee in a supermarket. This is an example of the internal control principle of ______. a. establishing responsibility b. segregating duties c. independent verifying

a

Those who willfully misrepresent financial results _____. a. face stiff fines and possible jail sentence b. face stiff fines but no jail time c. are tried by the SOX d. in automatic imprisonment

a

in a bank reconciliation interest revenue earned on the bank account balance is

added to the book balance

An example of an EFT is ______. a. a purchase requisition b. direct deposit of employee paychecks c. a remittance advice d. a voucher system

b

Anonymous information about questionable accounting matters sent to the audit committee through tip lines ______. a. increases the risk of fraud b. decreases the risk of fraud c. has no effect on fraud

b

Assigning sequential numbers to cash sales, so that the accounting staff can ensure that every sale has been recorded is required by the internal control principle of ______. a. restricting access b. documenting procedures c. establishing responsibilities d. segregating duties

b

Which of the following is NOT part of the fraud triangle? a. opportunity b. sustainability c. rationalization d. incentive

b

The company needs to record the reconciling items that are on the _____ side of the bank reconciliation.

book

A weak system of internal ______ provides the ______ to commit fraud. a. audits; rationalization b. loan covenants; incentive c. controls; opportunity d. financial statements; opportunity

c

A(n) ______ system involves the processing of purchases and payments made on account. a. cash receipts b. imprest c. voucher d. accounts payable e. reconcilitation

c

What is risk assessment?

evaluate the potential for fraud

if the cash collected is less than the amount per the cash register, then ______

cash shortage is debited

A loan ______ specifies terms of a loan agreement that, if broken, can allow the lender to renegotiate the terms of the loan or force repayment.

covenants

Which principles of internal control are incorrectly described? (Select all that apply.) a. segregate duties- do not make one employee responsible for all parts of a process b. independently verify- check others' work c. establish responsibility- assign each task to only one employee d. document procedures- prepare documents that show activities that have occurred e. restrict access- do not provide access to assets or information unless it is needed to fulfill the assigned task

d & e

What is monitoring activities?

evaluating the internal control system to see if working as intended

In a bank reconciliation, an outstanding check is _____

deducted from the bank balance

outstanding checks have already been_______-

deducted from your cash balance per your books but not the bank balance

outstanding checks written by the company should be an _______ on the company's bank reconciliation

deduction from the bank balance

the bank credited your account for a deposit that should have been deposited into another customer's bank account, not yours. this bank error should be a ______ on a bank reconciliation.

deduction from the bank balance

What is the order of steps in documenting and controlling purchases in a voucher system?

1. Request goods or services by submitting a purchase requisition 2. Prepare a purchase order after suppliers and prices have been approved 3. Prepare a receiving report 4. Prepare a supplier invoice and prepare the journal entry

deposits in transit is _____ to the bank balance no a bank reconciliation

Added

True or False: Internal controls prevent and detect all errors and fraud.

False

If a company hires an auditor to check that the work done by others within the company is supported by documentation, it is doing so under the principle of control activities referred to as: a. independent verification b. segregation of duties c. restrict access d. document precedures

a

Which of the following is not a significant objective of the Sarbanes-Oxley (SOX) Act? a. collect taxes for state and local governments b. encourage good character c. counteract incentives for fraud d. reduce opportunities for fraud

a

Which of the following is not a significant objective of the Sarbanes-Oxley (SOX) Act? a. conceal fraud b. reduce opportunities for fraud c. encourage good character d. counteract incentives for fraud

a

Which of the following statements about internal control is not correct? a. It guarantees the management will behave ethically b. It helps protect against the theft of assets c. It enhances the reliability of accounting information d. It promotes efficient and effective operations

a

Good internal control for cash receipts to be performed by the accounting department should include ______. (Check all that apply.) a. recording the cash receipts in the journal b. restricting access to cash by locking it up c. comparing cash register sales with the cash count sheets and bank deposit slip d. giving a cash register receipt to every customer e. completing bank deposits

a & c

Paying by check helps a business to control cash when the ______. (Check all that apply.) a. manager studies the documents supporting the payment before signing the check b. checks are deposited only at the company's bank c. checks are pre-numbered and written sequentially

a & c

The quality of financial reporting for publicly traded companies is improved through ______. (Check all that apply.) a. evaluating and reporting on the effectiveness of internal controls b. the preparation of financial statements by external auditors c. obtaining an external audit

a & c

A goal of the Sarbanes-Oxley Act is improving corporations' internal controls. Which of these may accomplish this goal? (Select all that apply.) a. External auditors must test the effectiveness of the company's internal controls. b. Marketing managers must determine whether the marketing team is submitting accurate sales and expense reports. c. An audit committee of independent directors oversees financial matters of the company. d. External auditors prepare a corporation's financial statements and audit them as well.

a, b, & c

Banks provide important controls surrounding a company's cash. These include which of the following? (Select all that apply.) a. Banks provide documentation b. Banks restrict access c. Banks provide statements that are used for independent verification d. Banks remove human error from the processing of cash

a, b, & c

The 3 categories of employee fraud is ______. (Check all that apply.) a. corruption b. financial statement fraud c. asset misappropriation d. GAAP e. SOX f. internal controls

a, b, & c

The Sarbanes-Oxley (SOX) Act provides increased regulations for _______. (Select all that apply.) a. corporate executives b. internal controls c. auditors d. the Internal Accounting Standards Board

a, b, & c

The benefits of internal control procedures are that they ______. (Check all that apply.) a. improve the efficiency and effectiveness of operations b. enhance the reliability of accounting information c. protect against theft of assets d. decrease a firm's taxes, which increases its available cash

a, b, & c

Business opportunities create incentives for fraud for which of the following reasons? (Select all that apply.) a. To attract business partners b. To satisfy loan covenants c. To enhance personal job security d. To increase equity financing

a, b, & d

SOX reduces the opportunities for fraud by requiring publicly-traded companies to _______. (Check all that apply.) a. evaluate and report on its internal controls b. have external auditors evaluate the companies' internal controls c. have their financial statements prepared by external auditors d. establish an audit committee of independent directors

a, b, & d

Which of the following are elements of good internal control over cash receipts? (Select all that apply.) a. Cash receipts are summarized and their total is calculated b. Two employees cannot share the same cash drawer c. A manager is responsible for handling all cash transactions d. A different employee deposits the cash at the bank

a, b, & d

At the end of the day, the cashiers rung up sales of $5,000 and counted on the cash count sheets and deposited $5,100, the accounting department would make a journal entry for the day's sales that includes _______. (Select all that apply). a. debit to cash for $5,100 b. credit to cash overage of $100 c. debit to cash overage of $100 d. debit to cash for $5,000 e. credit to sales of $5,000

a, b, & e

Good internal controls for cash receipts that should be performed by a supervisor include ______. (Check all that apply.) a. completing bank deposits b. comparing cash in registers with cash count sheets c. giving a cash register receipt to every customer d. recording the cash receipts in the journal e. restricting access to cash by locking it up

a, b, & e

Which of the following is not a change introduced by the Sarbanes-Oxley Act? a. Management evaluate and report on the effectiveness of internal control over financial reporting b. Publicly traded companies must have their financial statements audited twice c. Auditors must audit the internal controls of certain companies d. Public companies must have tip lines that allow employees to secretly submit concerns about questionable accounting or auditing practices

b

Which of the following is not an internal control for checks received through the mail? a. The mail clerk send the cash receipts list and the customers' remittance advices to the accounting department b. The accounting department counts the cash, prepares the deposit slip and deposits the cash in the bank c. The mail clerk gives checks and money orders to the person who makes the bank deposit d. The accounting department verifies the bank deposit by comparing the cash receipts list with the deposit slip from the bank

b

Some managers commit fraud because they are under great pressure to report a high net income to meet ______. (Select all that apply.) a. internal revenue service regulations b. loan covenant requirements c. financial analysts' earnings forecasts d. shareholders' expectations

b, c, & d

The Sarbanes-Oxley Act contains measures aimed at reducing both opportunities and incentives to commit fraud. Which of the following are designed to reduce the opportunity for fraud? (Select all that apply.) a. stiffer fines and prison terms b. internal control report from management c. stronger oversight by directors d. internal control audit by external auditors

b, c, & d

Additional mechanisms of internal control include ______. (Select all that apply.) a. a slow computer network b. anonymous hotlines c. bonding d. a sound marketing plan e. mandatory vacations

b, c, & e

Fraudsters may rationalize their actions ______. (Check all that apply.) a. by whistle blowing b. through a feeling of personal entitlement c. through a weak system of internal controls d. by convincing themselves their actions are justified e. are legitimate since they are underpaid

b, d, & e

An incentive to commit fraud may be caused by managers who receive bonus payments based on the strength of the company's reported ______. a. shares outstanding b. debt c. net income d. dividends

c

Physically looking up assets and electronically securing access to other assets and information is required by the internal control principle of ______. a. documenting procedures b. segregation of duties c. restricting access d. establishing responsibilities

c

The SOX Act requires the establishment of an audit committee that includes the: a. president of the company b. chief financial officer of the company c. independent directors d. company's external auditors

c

The use of sequentially numbered checks is an example of: a. establishment of responsibility b. segregation of duties c. document procedures d. independent verification

c