Acct 206 Chapter 6 Internal Control and Accounting for Cash

Internal control systems: (Select all that apply) -are now under the control of the federal government and are, therefore, foolproof. -are subject to collusion. -have become so sophisticated that investors no longer have to worry about fraud. -can be circumvented, no matter how sophisticated.

-are subject to collusion. -can be circumvented, no matter how sophisticated.

An adverse opinion: (Select all that apply) -is the most negative report an auditor can issue -is the most favorable report an auditor can issue -is rarely issue by auditors because public companies are required by law to follow GAAP -occurs when the auditor is unable to determine whether the financial statements are in compliance with GAAP -occurs when the financial statements do not present a fair picture of the company's status

-is the most negative report an auditor can issue -occurs when the financial statements do not present a fair picture of the company's status -is rarely issue by auditors because public companies are required by law to follow GAAP

Internal control procedures designed for cash payments include: (Select all that apply) -keeping unused checks under lock and key -having one person conduct the duties of approving disbursements, signing checks, and recording transactions -maintaining checking accounts with only one bank -making payments with prenumbered checks

-making payments with prenumbered checks -keeping unused checks under lock and key

Financial audits: (Select all that apply) -provide reasonable assurance that statements are free from materials misstatements caused by unintentional errors -provide guarantees that financial reports are free from errors -are directed toward the discovery of fraud -provide reasonable assurance that statements are free from material misstatements caused by fraud

-provide reasonable assurance that statements are free from materials misstatements caused by unintentional errors -provide reasonable assurance that statements are free from material misstatements caused by fraud

Which of the following is normally included on a checking account deposit ticket? (Select all that apply) -the amount of currency being deposited -the signature of the president of the bank -the account number -the name of the account

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

Which of the following is normally included on a checking account deposit ticket? (Select all that apply) -the signature of the president of the bank -the amount of currency being deposited -the name of the account -the account number

-the name of the account -the account number

When duties are separated, (Select all that apply) -corruption is always deterred. -collusion is necessary to commit fraud or theft. -related duties can be performed by a single individual. -the work of one employee acts as a check on the work of another employee.

-the work of one employee acts as a check on the work of another employee. -collusion is necessary to commit fraud or theft.

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

credit

The journal entry required to recognize a non-sufficient funds (NSF) check would include a ___________________ (debit/credit) to the cash account and a ______________ (debit/credit) to the accounts receivable account.

credit; debit

The journal entry required to replenish a petty cash fund would include a ______________________ (debit/credit) to the cash account and a _____________________ (debit/credit) to the miscellaneous expense account.

credit; debit

Confidentiality rules prohibit accountants from disclosing information they have discovered in a financial audit: (Select all that apply) -to competitors -to news reporters -in a court of law -to the general public

-to competitors -to news reporters -to the general public

When a company replenishes a petty cash account, the amount of: (Select all that apply) -total assets decrease -net income is not affected -stockholders equity increases -cash flow from operating activities decreases

-total assets decrease -cash flow from operating activities decreases

Which of the following are internal control procedures specifically designed for the safekeeping of cash payments? (Select all that apply) -use checks to make cash payments -maintain large quantities of cash on hand to assure that there is always enough cash available to pay unexpected bills -keep unused checks under lock and key -prenumbered checks

-use checks to make cash payments -keep unused checks under lock and key -prenumbered checks

A bank reconciliation normally begins with the _____________________ bank balance.

unadjusted

What is the effect on the financial statements when the bank collected a $100 account receivable for Company ING? (Select all that apply) -Total equity will increase by $100 -Total assets will not be affected -Cash inflow of $100 -Total liabilities will decrease

-Total assets will not be affected -Cash inflow of $100

The journal entry required to recognize the establishment of a petty cash fund includes a ___________________ (debit/credit) to the petty cash account and a _________________ (debit/credit) to the cash account.

debit; credit

The bank statement for Boston Company showed a beginning balance of $1,400 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

$1,400 ($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 and, therefore, are not relevant to the computation.)

The accounting records for Butler Company showed an unadjusted book balance of $1,500. There were $400 of accounts receivable collections, $300 of outstanding checks, $200 NSF check, and a bank service charges of $100. Based on this information, the company's true cash balance is

$1,600 ($1,500 unadjusted book balance + $400 receivable collection - $200 NSF check - $100 service charge = $1,600 true cash balance. The deposits in transit did not affect the unadjusted book balance so it's not relevant.)

Which of the following are among the normal responsibilities for an independent auditor? (Select all that apply) -Assumes both legal and professional responsibilities to the public as well as to the company paying the auditor -Provides estimates of the market value of significant assets -Determines if financial statements are materially correct, rather than absolutely correct -Issues public reports that assess the quality of the management team -Presents conclusions in an audit report that includes an option as to whether the statements are prepared in conformity with GAAP

-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 includes an option as to whether the statements are prepared in conformity with GAAP

Which of the following items would be subtracted from the adjusting book balance in the process of determining the true cash balance? (select all that apply) -Earned Interest -Accounts Receivable Collections -Bank Service Charges -NSF Checks

-Bank Service Charges -NSF Checks

Which of the following are examples of physical controls? (Select all that apply) -Keeping accounting records in a fireproof vault -Unannounced counts conducted randomly to verify the presence of company-owned equipment -Developing a procedures manual -Requiring all employees to fly coach

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

From the following list, identify the items that normally appear on a written check. (Select all that apply) -The balance in the checking account -The payee's social security number -The amount of the check -The signature of the payor

-The amount of the check -The signature of the payor

Which of the following are normally included in a checking account bank statement? (Select all that apply) -A list of customer deposits made during the period -A list of outstanding checks -A list of checks drawn on the account during the period -The ending balance in the cash account -The balance in the account at the beginning of the period

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

Which of the following statements about a procedures manual are true? (Select all that apply) -Procedure manuals are ineffective in today's fast-paced environment -Once established, the procedures manual should not be changed -The procedures manual should be updated regularly -Periodic reviews should be conducted to ensure that employees are following the procedures outlined in the manual

-The procedures manual should be updated regularly -Periodic reviews should be conducted to ensure that employees are following the procedures outlined in the manual

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

False (Prenumbered forms are used for all important documents such as purchase orders, receiving reports, invoices, and checks)

Explains how requiring employees to take extended vacations enhances internal controls?

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

Which of the following is not an internal control procedure commonly used to safeguard cash? -Record cash receipts immediately -Give customers who pay cash written receipts -Keep all cash in one central location -Count the amount of cash on hand regularly

Keep all cash in one central location

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

True

(T/F) If auditors terminate a client relationship because of ethical or legal disagreements and they are subsequently contacted by a successor auditor, they may be required to inform the successor of the reasons for the termination.

True

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

True

(T/F) The framework established by The Committee of Sponsoring Organizations of the Treadway Commission (COSO) is the de facto standard for judging compliance with Sarbanes-Oxley internal control requirements.

True

Savings accounts with substantial withdrawal penalties should be classified as _______________________.

investments

Materiality is

a subjective measure that may fluctuate in the amount of dollars and/or the size of percentages

Checking accounts are __________________ accounts to a bank depositor.

asset

The integrity and ethical values of a company, including its code of conduct, involvement of the board of directors, and other actions that set the tone of the organization are features of the ______________________ _____________________ component of internal controls.

control environment

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

bank signature card

Which of the following assets is the most important in terms of being subject to strict internal controls?

cash

A(n) _________________ check is guaranteed for payment by a bank.

certified

A(n) _____________________ bond provides insurance that protects a company from losses caused by employee dishonesty.

fidelity

Deposits in transit are deposits that

have been added to the book balance, but have not been added to the bank balance.

An error, or other reporting problem, is material if knowing about it would

influence the decisions of an average prudent investor

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

performance evaluation

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

In 2004, COSO updated the framework to help entities design and implement effective *enterprise-wide approaches* to _____________________ management.

risk

A policy that states "investment decision are authorized at a division level, while hiring decisions are authorized at a departmental level" is an example of _____________________ authority.

specific

A company failed to record a $1,000 check that cleared the bank. To calculate the true cash balance,

subtract $1,000 from the unadjusted book balance.

The bank recorded a $2,300 deposit as a $3,200 deposit. To determine the true cash balance,

subtract $900 from the unadjusted bank balance.

Certified public accountants (CPA's) who conduct financial audits are paid by

the companies they audit

Expenses are recognized when

the petty ash fund is replenished.