Chapter 4

A good system of internal controls ______.

increases the likelihood of early fraud detection can still be compromised by management override is still subject to collusion

Requiring employees to take extended vacations enhances internal controls because it _____.

is more difficult to hide irregularities if an employee is absent from work for a period of time

An error, or other reporting problem, is _____ if knowing about it would influence the decisions of an average prudent investor.

material

The three elements typically present when fraud occurs are the availability of a(n) _____ ; the existence of some form of _____ leading to an incentive; and the capacity to _____.

opportunity pressure rationalize

Employing a public accounting firm to conduct an audit is an example of _____.

performance evaluation

Keeping a record of the serial number on a computer and the name of the individual who is responsible for the equipment is an example of a(n) _____ control.

physical

Companies prepare a bank _____ to explain the differences between the cash balance reported on the bank statement and the cash balance recorded in the depositor's accounting records.

reconciliation

The high ethical standards required by the accounting profession state "a CPA assumes an obligation of ______ above and beyond requirements of laws and regulations."

self-discipline

Certified public accountants (CPAs) who conduct financial audits are paid by ______.

the companies they audit

When preparing a bank reconciliation, the final total after all adjustments is called the _____ _____ balance.

true cash

A bank reconciliation normally begins with the _____ bank balance.

unadjusted

The bank statement is reconciled when the ______.

unadjusted bank balance is adjusted to equal the true cash balance true cash balance is the same when determined from two different perspectives unadjusted book balance is equal to the true cash balance

Ben Company had an unadjusted bank balance of $1,200. Ben determined that there were $200 of deposits in transit and $350 outstanding checks. Bank service charges amounted to $100. Based on this information, the company's true cash balance is ______.

$1,050 Reason: $1,200 unadjusted bank balance + $200 deposits in transit - $350 outstanding checks = $1,050 true cash balance. The bank service charge is already included in the unadjusted bank balance.

The bank statement for Boston company showed a beginning balance of $1,300 and an ending balance of $1,600. There were $400 of accounts receivable collections, $100 of deposits in transit and $300 outstanding checks. An NSF check amounted to $200. Based on this information, the company's true cash balance is ______.

$1400 Reason: $1,600 unadjusted bank balance + $100 deposits in transit - $300 outstanding checks = $1,400 true cash balance. The accounts receivable collection and the NSF check are already included in the unadjusted bank balance.

To calculate the true cash balance, ____ deposits in transit and ___ outstanding checks to or from the un-adjusted bank balance.

Add / Subtract

Internal control systems:

Are subject to collusion Can be circumvented, no matter how sophisticated

Which of the following are included in the primary roles of an independent auditor (CPA)?

Assumes both legal and professional responsibilities to the public as well as to the company paying the auditor. Determines if financial statements are materially correct, rather than absolutely correct. Presents conclusions in an audit report that include an opinion as to whether the statements are prepared in conformity with GAAP

What type of card shows the bank account number and the signatures of the people authorized to sign checks

Bank signature card

Savings accounts without substantial withdrawal penalties should be classified as ____.

Cash

Which of the following are internal control procedures specifically designed for the safekeeping of cash receipts?

Cash collected late in the day should be deposited in a night depository Minimize the amount of cash held on the business premises Deposit cash receipts in a bank in a timely manner

A _____ check is guaranteed for payment by a bank.

Certified

What is included in the definition of Cash?

Checking Accounts

The practice where two or more employees work together to thwart internal controls by covering for each other is called ___.

Collusion

Features of a strong internal control system include _____.

Compliance with applicable laws and regulations Safeguarding assets Reliable financial reporting

_____ rules restrict CPAs from voluntarily disclosing information they have acquired as a result of their financial audits.

Confidentiality

Bank statement ___ memos describe transactions that increase the customer's checking account balance.

Credit

Which of the following is not a primary role of an independent auditor (CPA)?

Determining if financial statements are absolutely correct. Reason: The auditor determines if financial statements are materially, not absolutely correct.

Which of the following statements about authority and responsibility are true?

Employees are motivated to work harder when they have the authority to use their own judgment. Employees are more likely to exercise reasonable caution when they are held responsible for their actions.

T/F: The only documents that are prenumbered for internal control purposes are checks.

False

True or false: The importance of ethical conduct for accountants is only addressed in the AICPA's Code of Professional Conduct.

False

A ____ bond provides insurance that protects a company from losses caused by employee dishonesty.

Fidelity

A policy that "employees at all levels are required to fly coach" is an example of ____ authority

General

Companies may decide to look to the ERM framework both to satisfy their ____ Control needs and to move toward a fuller ____ management process

Internal / Risk

For reporting purposes, savings accounts with substantial withdrawal penalties should be classified as ____.

Investments

What is not an internal control procedure commonly used to safeguard cash?

Keep all cash in one central location

Examples of physical controls include _____.

Keeping accounting records in a fireproof vault Unannounced counts conducted randomly to verify the presence of company-owned equipment

The goal of financial audit is to determine if financial statements are ____ correct.

Materially

What is the requirement of Article 1 of the AICPA code of Professional Conduct?

Members should exercise sensitive professional and moral judgments in all their activities.

Cash includes _____.

Money orders Checking accounts

Which of the following items would be subtracted from the adjusted book balance in the process of determining the true cash balance? -Accounts receivable collections -Earned interest -NSF checks _Bank service charges

NSF Checks Bank Service Charges

Name the components of the Fraud Triangle.

Opportunity Pressure Rationalization

To promote the hiring of employees with high levels of personal integrity, employers should

Perform background checks on job applicants. Screen job applicant using feedback from job interviews. Seek recommendations from prior employers and educators.

Which of the following statements are correct?

Period reviews should be conducted to ensure that employees are following the procedures outlined in the manual. Appropriate accounting procedures should be documented in a procedures manual.

Financial audits:

Provide reasonable assurance that statements are free from material misstatements caused by unintentional errors Provide reasonable assurance that statements are free from material misstatements caused by fraud

Prenumbered forms are used for _____.

Purchase orders Invoices Checks

Management's process of identifying potential risks that could result in misstated financial statements and developing actions to address those risks is identified as ____ ____ in the COSO framework

Risk Assessment

Why must cash be subject to strict internal controls?

Small quantities of cash can represent significant value. Cash has universal appeal. Rightful ownership of cash is difficult to prove.

What is usually included on a checking account deposit ticket?

The amount of currency being deposited The name of the account The account number

What usually appears on a written check?

The amount of the check The signature of the payor

Which of the following statements regarding financial statement audits are correct?

The audit fee may not be based on the outcome of the audit. Auditors must be CPAs.

Certified public accountants (CPAs) who conduct financial audits are paid by

The companies they audit

An adverse opinion is:

The most negative report an auditor can issue Rarely issued by auditors because public companies are required by law to follow GAAP When the financial statements do not present a fair picture of the company's status.

When duties are separated _____.

The work of one employee acts as a check on the work of another employee Collusion is necessary to commit fraud or theft

T/F: Holding too much cash can thwart profit maximization.

True

T/F: Ongoing training programs are essential to the maintenance of high quality personnel.

True

T/F: Requiring employees to take a two week vacation is an effective internal control procedure because it is more difficult to hide fraud or deceptive activities if an employee is absent from work for an extended period of time.

True

True Cash Balance =

Unadjusted Bank balance + deposits in transit - outstanding checks

What are internal control procedures specifically designed for the safekeeping of cash payments?

Use checks to make cash payment Prenumber checks Keep unused checks under lock and key

What is an example of separation of duties?

Using one person to approve a sales return and a different person to issue credit to the customer

A financial statement audit includes ______.

a detailed examination of a company's financial statements and the documents that support those statements tests of the reliability of the accounting system used to produce the financial reports

A checking account bank statement normally includes ______.

a list of customer deposits made during the period a list of checks drawn on the account during the period the balance in the account at the beginning of the period

A bank failed to give a customer credit for a $350 deposit. To calculate the true cash balance, the $350 must be ______ balance.

added to the unadjusted bank

Hiring quality employees enhances internal controls because they _____.

are able to perform tasks as expected are able to rotate jobs

Auditors ______ the companies they audit.

are paid by and can be fired by have a legal responsibility to investors of can sometimes be sued by investors of

Performance evaluations necessary _____.

because few people can evaluate their own performance objectively

Transactions that reduce a customer's checking account balance are described on bank statement _____ memos.

debit