ACCT Ch 5 Smart Book
True or false: Internal controls prevent and detect ALL errors and fraud.
False Reason: Internal controls can fail because of human error or fraud.
_______ checks written by the company that have not cleared the bank are subtracted from the _________ balance on a bank reconciliation. (Enter one word per blank.)
Outstanding bank
Which of the following is subtracted from the bank balance on a bank reconciliation?
Outstanding checks
When a check is presented to a bank for payment and the amount is deducted from the payer's account, the check is said to have _____the bank. (Enter one word per blank.)
cleared
Which of the following is not a significant objective of the Sarbanes-Oxley (SOX) Act? Conceal fraud Reduce opportunities for fraud Encourage good character Counteract incentives for fraud
Conceal fraud
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.)
Electronic funds transfers Services charges Interest income
Comparing two sets of records is called ______.
reconciling
Restricted cash is reported ______.
separately as an asset on the balance sheet
How do banks help businesses control cash? (Select all that apply.)
documenting procedures restricting access to cash independently verifying
The 3 categories of employee fraud are ______. (Select all that apply.)
financial statement fraud asset misappropriation corruption
A check that you have written has cleared the bank when ______.
funds have been withdrawn from your bank account to cover the check
A(n) ______ system involves the processing of purchases and payments made on account.
voucher
Employee _____ is often grouped into 3 categories: corruption, asset misappropriation, financial statement fraud. (Enter only one word per blank.)
fraud
The purchasing system begins with an authorized employee completing a manual or electronic ______ which is then reviewed and approved by a supervisor before an order is placed with a supplier.
purchase requisition
Which of the following control components are part of the framework used when analyzing an internal control system? (Check all that apply.)
risk assessment monitoring activities control activities information and communication control environment
A(n) ______ is a collection of documents prepared in the process of approving, processing and documenting all purchases and payment made on account.
voucher
Which of the following is not a significant objective of the Sarbanes-Oxley (SOX) Act? Reduce opportunities for fraud Encourage good character Counteract incentives for fraud Increase rationalization
Increase rationalization
A company has a $10,000 cash balance per its books. The bank statement has a balance of $9,580. The bank reconciliation included $800 of deposits-in transits, $500 of checks outstanding, a $100 NSF check from a customer, and a $20 bank service charge. Given the above reconciling items, the up-to-date cash balance equals
$9,880
Place the order of the steps in documenting and controlling purchases in a voucher system with the first step listed on the top and final step at the bottom.
1. Request that goods or services be ordered. 2. Order goods or services. Purchase order 3. Receive goods or services. Prepare a list of goods received. 4 Document procedures.Notify the accounting department so that it is prepared to record the purchase and liability.
Banks provide important controls surrounding a company's cash. These include which of the following? (Select all that apply.)
Banks provide documentation. Banks restrict access. 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
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.)
Deposits in transit Outstanding checks
Which of the following is NOT an accurate statement about internal control?
It guarantees the management will behave ethically. Reason: Internal control doesn't eliminate fraud or eliminate any other unethical behavior.
Why might a bank statement and the company's records differ? (Select all that apply.)
Not all checks written cleared the bank. Deposits were made at the end of the bank statement date in an ATM. Customer checks that bounced (NSF).
Which of the following are the steps involved in a petty cash system? (Select all that apply.)
Putting money into petty cash to establish a fund Paying money out to reimburse others Replenishing the petty cash fund
____________ cash must be reported separately on the balance sheet because it is legally or contractually required to be set aside for a specific purpose. (Enter one word per blank.)
Restricted
What would cause a bank statement not to agree with the cash balance in the accounting records? (Check all that apply.)
The company made an error in recording a deposit. The bank paid interest that the company has not recorded. Deposits outstanding that have been recorded on the company's records, but not on the bank's. The bank made an error in recording a deposit made by the company.
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 Reason: Because cash is valuable, portable, and owned by the person who possesses it, special care must be taken to safeguard all cash receipts.
In a bank reconciliation, the electronic funds transfer (EFT) received by the bank from a customer's note receivable owed to the company is ______.
added to the book balance Reason: The company is notified by the bank, which has already added the deposit to the bank balance, so that company can also add the deposit to its book balance.
Deposits in transit occur when you make a deposit ______.
after the bank's normal business hours
An advantage of direct deposits is they ______.
are convenient and efficient
Outstanding checks have already been ______.
deducted from your cash balance per your books but not the bank balance
A bank service charge should be a(n) ______ on a bank reconciliation.
deduction from the book balance Reason: Bank service charges are a deduction from the book balance. The company must make an entry to reduce its cash and record the expense for the bank service charge.
A ____ deposit is initiated by an EFT instructing a bank to transfer pay due employees into the employees' bank accounts. (Enter only one word per blank.)
direct
The benefits of internal control procedures are that they ______. (Check all that apply.)
enhance the reliability of accounting information protect against theft of assets improve the efficiency and effectiveness of operations
Cash ______ are short-term, highly ______ investments purchased within ______ of maturity.
equivalents; liquid; 3 months
The principles underlying the internal control system include ______. (Select all that apply.)
independently verify restricting access documenting procedures establishing responsibility segregating duties
A bank reconciliation is a(n) ______.
internal report prepared to compare the company's cash records with the bank statement
Which of these are cash equivalents? (Check all that apply.)
money market funds Reason: For companies, cash equivalents include money market funds, government Treasury bills, and other highly liquid investments.
A ______ cash system involves putting money into a fund, paying money out to reimburse others and putting money back into to replenish the fund. (Enter one word per blank.)
petty
The purchasing system begins with an authorized employee completing a manual or electronic purchase ____ form which is then reviewed and approved by a supervisor before an order is placed with a supplier. (Enter one word per blank.)
requisition
Which of the following are limitations in internal control systems? (Select all that apply.)
A control may not be implemented because the cost of the control may exceed the benefit of reducing the fraud or potential errors. Collusion (working together) can exist making it impossible to completely prevent fraud
A $250 bank deposit made on the last day of the month did not appear on this month's bank statement. How would this item be treated on the bank reconciliation?
It would be added to the bank balance. Reason: Deposits in transit should be added to the bank, not book, balance. The deposit was already added to the books back when the deposit was made. The bank has yet to record the deposit.
This month's bank statement includes a check from a customer that was marked NSF. How would this item be treated on the bank reconciliation?
It would be deducted from the book balance. Reason: The book balance must be decreased by the amount of the NSF check noted on the bank statement. The book's balance was originally increased when the check was deposited but since the check is marked NSF, the book's balance must be reduced.
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 Reason: The duty of approving price changes is segregated from the cashiers' duties to prevent the cashiers from collecting a different amount than the amount entered into the cash register. Restricting access is not applicable because the cashiers have access to both cash and the cash register (i.e., the accounting records).
Match each of the five principles of internal control with its description.
Segregate duties: Do not make one employee responsible for all parts of a process Establish responsibilities: Assign each task to only one employee in order to allow one to determine who is at fault for an error or theft Restrict access: Do not provide access to assets or information unless it is needed to fulfill the assigned task Document procedures: Prepare documents to show activities that have occurred Independent verify: Check others' work
Internal control for cash is important because ______. (Check all that apply.)
of the large volume of cash transactions the risk of cash-handling errors is significant cash is portable and is "owned" by whomever possesses it of the high risk of theft
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 Reason: Segregation of duties is essential to safeguarding a company's assets. The person who has access to assets should not have access to the accounting records.
Deposits in transit are ______ on a bank reconciliation.
added to the bank balance Reason: Deposits in transit are reconciling items on the bank side. The bank's balance needs to be increased by these deposits it has not yet recorded.
To segregate duties involving cash receipts, specific responsibilities are assigned to various employees. Put the following steps in the correct chronological order listing the first step at the top.
1. Cashiers collect cash and issue a receipt at the point of sale. 2. Supervisors take custody of the cash at the end of each cashier's shift and deposit it in the bank. 3. Accounting staff then ensure the receipts from cash sales are properly recorded in the accounting system.
In a bank reconciliation, interest revenue earned on the bank account balance is ______.
added to the book balance
Paying by check helps a business to control cash when the ______.
checks are prenumbered and written sequentially manager studies the documents supporting the payment before signing the check
Match the control component of an internal control system with the appropriate description.
Control environment: Refers to helping people in the organization to understand the importance of internal control Risk assessment: Refers to the continuous evaluation of the potential for fraud Control activities: Refers to the work responsibilities and duties completed to reduce risks to an acceptable level Information and communication: Refers to the documentation of activities that promote effective internal controls Monitoring activities: Refers to the evaluation of internal controls to determine if they are working as intended