AC Chapter 5

Employee fraud

grouped into 3 categories: corruption, asset misappropriation, financial statement fraud.

SOX reduces the opportunities for fraud by requiring publicly-traded companies to ______. (Check all that apply.)

-establish an audit committee of independent directors -evaluate and report on its internal controls -have external auditors evaluate the companies' internal controls

The quality of financial reporting for publicly traded companies is improved through ______. (Check all that apply.)

-evaluating and reporting on the effectiveness of internal controls -obtaining an external audit

Some managers commit fraud because they are under great pressure to report a high net income to meet ______. (Select all that apply.)

-loan covenant requirements -financial analysts' earnings forecasts -shareholders' expectations

Among the requirements of SOX is those who commit fraud face ______. (Select all that apply.)

-possible jail time up to 20 years for each violation -stiff fines of up to $5 million plus repayment of fraud proceeds

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

-recording fictitious revenues from a phantom customer -mismatching revenues and expenses -improper asset valuation

Internal control for cash is important because ______. (Check all that apply.)

-the risk of cash-handling errors is significant -cash is portable and is "owned" by whomever possesses it -of the high risk of theft -of the large volume of cash transactions

ABC Company has the following amounts in its multiple-step income statement: revenues of $5,000, cost of goods sold of 2,000, operating expense of $2,000, and income tax expense of $200. What is the ABC Company's Income from operations?

1,000

A goal of the Sarbanes-Oxley Act is improving corporations' internal controls. Which of these may accomplish this goal? (Select all that apply.)

1. Marketing managers must determine whether the marketing team is submitting accurate sales and expense reports. 2. External auditors must test the effectiveness of the company's internal controls. 3. An audit committee of independent directors oversees financial matters of the company.

Each cash drawer is assigned to only one employee in a supermarket. This is an example of the internal control principle of ______.

establishing responsibility

Good internal control for checks received through the mail would include the mail clerk ______. (Select all that apply.)

1. giving checks and money orders to the supervisor who makes the bank deposit 2. sending the cash receipts list and the customers' remittance advices to the accounting department

Target has $400 of inventory on hand at the beginning of the month. During the month, the company buys $4,100 of merchandise and sells merchandise that had cost $3,000. At the end of the month, $1,300 of inventory is on hand. How much shrinkage occurred during the month?

200

Independently verifies

A company manager compares the cash count sheets with the bank deposit slip.

Segregate duties

A person different from whom receives the cash makes the deposit in the bank.

Which of the following is not a component of Net Sales?

COGS

Document procedures

Cash receipts are summarized and their total is calculated.

BetterBuy sells a computer from inventory for $599 on credit. BetterBuy originally bought the computer from IBM for $395 and uses the perpetual inventory system. How is the sale recorded in BetterBuy's journal entries?

Debit Accounts Receivable for $599, credit Sales for $599; debit Cost of Goods Sold for $395 and credit Inventory for $395.

Which principle of internal control enhances assurance that all transactions, checks and other business activities have been accounted for?

Document procedures

establish responsibility

Just one employee receives cash.

Merchandise costing $2,400 is sold for $3,400 on terms 2/30, n/60. If the customer pays within the discount period, what amount will be reported on the income statement as net sales and as gross profit?

Net Sales $3,332 Gross Profit $932

An example of an EFT is ______.

direct deposit of employee paychecks

shrinkage

Purchases+beg inv -sold items-end inv

Which parts of the Sarbanes-Oxley (SOX) Act may encourage employees to be honest? (Check all that apply.)

Requiring anonymous tip lines Providing legal protection to whistle-blowers Requiring a code of ethics

Cashiers at a supermarket have to talk to a manager before approving price changes at the register. Which internal control principle is being followed?

Segregate duties

If costs are rising, which of the following will be true?

The cost of goods sold will be greater if LIFO is used rather than weighted average

Which of the following are false?

When the value of inventory increases above the cost of inventory shown in the financial records, the inventory should be increased to the higher value.

A common principle of internal control is to ______.

assign each task to only one employee

When applying the lower of cost or market/net realizable value rule if the market value of goods in inventory is $50,000 and the cost of inventory is 76,000, the company should:

credit inventory for $26,000

Snarl Company has $10,000 in deposits in transit. This means that these deposits:

have been recorded by the company but not yet by the bank.

Which of the following are components of the fraud triangle? (Check all that apply.)

incentive opportunity rationalization

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 ______.

independent verification

The procedure of bank reconciliation is an example of which principle of internal control?

independent verification

is one of the 3 components of the fraud triangle that relates to taking advantage of weak internal controls.

opportunity

The services provided by a bank help business control cash by ______.

restricting access and providing documentation and independent verification