Chapter 7 ACC 201

Segregation of duties reduces the risk of errors and irregularities.

True

From an internal control standpoint, the asset most susceptible to improper diversion and use is

cash

Internal controls are concerned with

safeguarding assets.

Documentation Procedures

- Documents provide evidence that transactions and events have occurred. - Documents should be prenumbered and all documents should be accounted for. - Source documents for accounting entries should be promptly forwarded to the accounting department to help ensure timely recording of the transaction and event.

Fraud Triangle Elements

- Opportunity - Financial Pressure - Rationalization

Limitations of Internal Control

1. Internal control is designed to provide reasonable assurance that assets are properly safeguarded and that the accounting records are reliable. 2. The human element is a factor in every system of internal control. 3. The size of the business also may impose limitations on internal control. Small companies often find it difficult to segregate duties or to provide for independent internal verification.

Establishment of Responsibility

Control is most effective when only one person is responsible for a given task.

Which of the following is a reason why an organization establishes a system for internal control? To safeguard its assets. To increase efficiency of operations. To ensure compliance with laws and regulations. All of these answer choices are correct.

All of these answer choices are correct.

Which one of the following is not an objective of a system of internal controls? - Reduce the risks of errors. - All of these are objectives of internal control. - Enhance the accuracy and reliability of accounting records. - Safeguard company assets.

All of these are objectives of internal control.

Of which of the following is obtaining insurance protection against dishonest employees an example? Establishing responsibility Segregation of duties Documentation procedures Bonding

Bonding

Which item is a current asset? - Restricted cash that will not be used within the upcoming year. - Cash that will be used to close a plant in eighteen months. - Cash - regardless of whether it has a positive or negative balance. - Cash equivalents.

Cash equivalents.

Restricted Cash

Cash that is not available for general use but instead is restricted for a particular purpose.

Which of the following was not a result of the Sarbanes-Oxley Act? - Companies must file financial statements with the Internal Revenue Service. - All publicly traded companies must maintain adequate internal controls. - The Public Company Accounting Oversight Board was created to establish auditing standards and regulate auditor activity. - Corporate executives and board of directors must ensure that controls are reliable and effective, and they can be fined or imprisoned for failure to do so.

Companies must file financial statements with the Internal Revenue Service.

Financial Pressure

Employees sometimes commit fraud because of personal financial problems caused by too much debt.

Handly Inc. permits only designated personnel such as cashiers to handle cash receipts. What principle is being applied? Establishment of responsibility Independent internal verification Rotation of employees Segregation of duties

Establishment of responsibility

Internal auditors

Evaluate the system of internal controls for the companies that employ them.

Internal controls guarantee the accuracy and reliability of the accounting records.

False

Under which of the following do computer programs that limit unauthorized access to certain files fall?

Physical controls

Which one of the following is not one of the principles of internal control? Independent internal verification Establishment of responsibility Documentation procedures Financial performance measures

Financial performance measures

Opportunity

For an employee to commit fraud, the workplace environment must provide opportunities that an employee can exploit.

Human Resource Controls

Human resource control activities include the following: 1. Bond employees who handle cash. Bonding involves obtaining insurance protection against theft by employees. It contributes to the safeguarding of cash in two ways. 2. Rotate employees' duties and require employees to take vacations. These measures deter employees from attempting thefts since they will not be able to permanently conceal their improper actions. 3. Conduct thorough background checks. Many believe that the most important and inexpensive measure any business can take to reduce employee theft and fraud is for the human resources department to conduct thorough background checks.

Rationalization

In order to justify their fraud, employees rationalize their dishonest actions.

Which of the following is not one of the main factors that contribute to fraudulent activity? Incompatible duties. Opportunity. Financial pressure. Rationalization

Incompatible duties.

Fraud

Is a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

Internal Control

Is a process designed to provide reasonable assurance regarding the achievement of company objectives related to operations, reporting, and compliance.

Bank Reconciliation

Is the process of accounting for the differences between the balance appearing on the bank statement and the balance of Cash according to the company's records. Involves making additions to and subtractions from both balances to arrive at the adjusted cash balance.

Cash Controls

Just as cash is the beginning of a company's operating cycle, it is usually the starting point for a company's system of internal control. Cash is the asset most susceptible to improper diversion and use. Because of the large volume of cash transactions, numerous errors may occur in executing and recording cash transactions. To safeguard cash and ensure the accuracy of the accounting records for cash, effective internal control over cash is imperative. Cash consists of coins, currency (paper money), checks, money orders, and money on hand or on deposit in a bank or similar depository.

Which of the following would be deducted from the balance per bank on a bank reconciliation?

Outstanding checks.

Physical Controls

Physical controls relate to the safeguarding of assets and enhance the accuracy and reliability of the accounting records.

Which of the following is not an element of the fraud triangle? Financial pressure Segregation of duties Opportunity Rationalization

Segregation of duties

Ron Jones has been a trusted employee for over 10 years. He is responsible for ordering merchandise inventory, receiving the inventory items, and authorizing the payment for these items. Which internal control principle, if any, is being violated? - Segregation of duties. - Documentation procedures. - Establishment of responsibilities. - None, Ron has proven to be trustworthy and has enough experience to do a good job.

Segregation of duties.

Which of the following would be deducted from the balance per books on a bank reconciliation?

Service charges.

Cash Equivalents

Short-term, highly liquid investments that can be readily converted to a specific amount of cash and which are relatively insensitive to interest rate changes.

Segregation of Duties

The rationale for segregation of duties is that the work of one employee should, without a duplication of effort, provide a reliable basis for evaluating the work of another employee. Two common applications: - The responsibility for related activities should be assigned to different individuals. - The responsibility for record keeping for an asset should be separate from the physical custody of the asset.

Independent Internal Verification

This principle involves the review of data prepared by employees. To obtain maximum benefit from independent internal verification: 1. Companies should verify records periodically or on a surprise basis. 2. An employee who is independent of the personnel responsible for the information should make the verification. 3. Discrepancies and exceptions should be reported to a management level that can take appropriate corrective action.

All of the following bank reconciliation items would result in an adjusting entry on the company's books except - NSF check of customer. - fee for collection of note by bank. - interest earned. - deposits in transit.

deposits in transit.

The use of prenumbered checks is an example of

documentation procedures.

Having one person responsible for the related activities of ordering merchandise, receiving goods, and paying for them

increases the potential for errors and fraud.

A check returned by the bank marked "NSF" means

not sufficient funds.

Joe is a warehouse custodian and also maintains the accounting record of the inventory held at the warehouse. An assessment of this situation indicates

segregation of duties is violated.

Principles of Internal Control

•Establishment of responsibility •Segregation of duties •Documentation procedures •Physical controls •Independent internal verification •Human resource controls