AC 210 Test 2 - Ch. 5

Sarbanes-Oxley Act

A set of laws established to strengthen corporate reporting in the United States.

True or false: The person who has custody of an asset should also account for the asset. A person who performs both duties will best know what the balance should be in the accounting records.

false

Internal Control - Compliance

focus on adhering to laws and regulations

Internal Control - Operational

focus on completing work efficiently and effectively, and protecting assets by reducing the risk of fraud.

5 components of Internal Control - Control Activities

various employees responsibilities and duties to reduce risk

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

direct deposit

Good internal control over cash requires cashiers to ______.

give a cash register receipt to every customer restrict access to the cash register

5 components of Internal Control - Information and Communication

generate and communicate information about activities affecting the organization to support sound decision making

If the company's accountant mistakenly recorded a $58 deposit as $85, the error would be shown on the bank reconciliation as a(n) ______. Multiple choice question.

$27 deduction from the book balance

purchase order

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

outstanding checks deposits in transit

Bank reconciliations are needed to reconcile for ______. (Select all that apply.)

Which of the following is added to the bank balance on a bank reconciliation?

Deposits in Transit

Which of the following is added to the bank balance on a bank reconciliation?

Deposits in transit

Why might a bank statement and the company's records differ? (Select all that apply.)

Deposits were made at the end of the bank statement date in an ATM. Customer checks that bounced (NSF). Not all checks written cleared the bank.

The ______ component of an internal control system refers to the evaluation of internal controls to identify deficiencies

Monitoring Activities

The bank paid interest that the company has not recorded. The company made an error in recording a deposit. The bank made an error in recording a deposit made by the company. Deposits outstanding that have been recorded on the company's records, but not on the bank's.

What would cause a bank statement not to agree with the cash balance in the accounting records? (Check all that apply.) Multiple select question.

When are checks cleared?

When the money leaves your bank account

Deposits in transit are ______ on a bank reconciliation.

added to the bank balance

Deposits in transit are ______ on a bank reconciliation. Multiple choice question.

added to the bank balance

Internal control for cash is important because ______.

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

Internal Controls

consists of the actions taken by people at every level of an organization to achieve its objectives

5 components of Internal Control - Risk Assessment

continuously assess the potential for fraud and other risks

Outstanding checks written by the company should be a(n) ______ on the company's bank reconciliation.

deduction from the bank balance

5 components of Internal Control - Monitoring activities

evaluated often to determine whether it is working as intended

Fraudulent reporting by management includes ______.

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

Internal Control - Reporting

include producing reliable and timely accounting information for use by people internal and external to the organization

How do banks help businesses control cash?

independently verifying restricting access to cash documenting procedures

Bank reconciliations are needed to reconcile for ______.

outstanding checks deposits in transit

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

restricting access and providing documentation and independent verification

5 components of Internal Control - Control Environment

the attitude people in the organization hold regarding internal control

Which of the following are limitations in internal control systems? (Select all that apply.)

Collusion can exist making it impossible to completely prevent fraud. A control may not be implemented because the cost of the control may exceed the benefit of reducing the fraud or potential errors.

The ______ component of an internal control system refers to the activities completed by employees to reduce risks to an acceptable level. Multiple choice question.

Control Activities

3 Types of Fraud - Financial Statement Fraud

Involves misreporting amounts in the financial statements, usually to portray more favorable financial results than what actually exist.

3 Types of Fraud - Corruption

Involves misusing one's position for inappropriate personal gain

Which of the following is not an accurate statement about internal control?

It guarantees the management will behave ethically.

On a bank reconciliation, which of the following are typical reconciling items the bank would not know about because of time lags? (Select all that apply.) Multiple select question.

Outstanding checks Deposits in transit

After approval of a purchase has been obtained, the purchasing agent completes a prenumbered purchaseBlank 1Blank 1 purchase , Correct Unavailable orderBlank 2Blank 2 order , Correct Unavailable that identifies the supplier, the delivery location, and the approved quantity and cost

Purchase Order

3 Types of Fraud - Asset Misappropriation

Quite simply, theft (embezzlement); cash is usually the target, but other assets can be misappropriated.

receiving report

The document that indicates the date, quantity, and condition of the goods. It is then sent to the accounting department to notify that the purchase can be recorded.

Which of the following is an example of weak internal controls?

The mail-room clerk records daily cash receipts in the journal.

receiving report

This document indicates the date, quantity, and condition of the goods. It is then sent to the accounting department to notify the purchase can be recorded. Multiple choice question.

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

Controls from bank procedures

1. restricting access 2. documenting procedures 3. independently verifying

Financial Statement Fraud, Asset Misappropriation, Corruption

3 Types of Fraud

control environment, risk assessment, control activities, information and communication, monitoring

5 key components of Internal Control

While preparing the bank reconciliation for March, the accountant for ABC Company discovered that a $694 check in payment of an account payable had been entered incorrectly in the journal as $649. Which of the following is true?

An adjusting entry must be made to debit Accounts payable and credit Cash for $45.

Banks provide important controls surrounding a company's cash. These include which of the following? (Select all that apply.) Multiple select question.

Banks restrict access. Banks provide documentation. Banks provide statements that are used for independent verification.

Which of the following poses a high risk of theft because of its high volume and ease of portability?

Cash

fraud

an attempt to deceive others for personal gain

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

False

True or false: Strong internal control surrounding cash receipts requires the cashier to perform the following procedures: count the cash receipts, take the cash to the bank, and record the amount collected in the accounting records.

False

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

Purchase Order

A bank ______ is an important control because it provides independent verification of all cash transactions the bank has processed for the company. This internal report should be prepared by an employee whose duties are separate from recording and handling of cash.

Reconciliation

Counteract Incentives (Fines up to 5 million & 20 years in prison), Encouraging Honesty (Tip lines, whistle blower protection & Code of Ethics), Reduce Opportunities (audit committees & external auditors)

Sarbanes-Oxley Act Objectives

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

This document is compared to the internally generated documents of the voucher system to ensure the quantity and costs agree with what has been ordered and received. If all reconciles, the accounting department will record the purchase in the accounting records. Multiple choice question.

Supplier Invoice

purchase requisition

To request that the purchasing department order goods or services from a vendor. Establish Responsibility. Need to be requested by someone that is authorized to request.

In a bank reconciliation, interest revenue earned on the bank account balance is ______. Multiple choice question.

added to the book balance

5 common principles of internal control

1. Establish Responsibility 2. Segregate Duties 3. Restrict Access 4. Document Procedures 5. Independently Verify

A(n) ______ system involves the processing of purchases and payments made on account.

Voucher System

Deposits outstanding that have been recorded on the company's records, but not on the bank's. The company made an error in recording a deposit. The bank paid interest that the company has not recorded. The bank made an error in recording a deposit made by the company.

What would cause a bank statement not to agree with the cash balance in the accounting records? (Check all that apply.)

Electronic funds transfers Services charges Interest income

Which of the following are typical reconciling items on the book side of a reconciliation because the company did not know about these items until it got the bank statement? (Select all that apply.) Multiple select question.

Bank reconciliation

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. (Enter one word per blank.)