Chapter 7 Self-Test

Internal controls guarantee the accuracy and reliability of the accounting records.
A. True
B. False
B. False
Which of the following is not an element of the fraud triangle?
A. Rationalization
B. Financial pressure
C. Segregation of duties
D. Opportunity
C. Segregation of duties
Which one of the following is not a primary component of an internal control system?
A. Risk assessment
B. Information and communication
C. Monitoring
D. Rationalization
D. Rationalization
Which of the following is a reason why an organization establishes a system for internal control?
A. To safeguard its assets
B. To increase efficiency of operations
C. To ensure compliance with laws and regulations
D. All of these answer choices are correct.
D. All of these answer choices are correct
Segregation of duties reduces the risk of errors and irregularities.
A. True
B. False
A. True
Collusion occurs when two or more people are responsible for a single task.
A. True
B. False
B. False
Which of the following statements is correct?
A. Control is most effective when two or three people are given responsibility for the same task.
B. The person who has custody of assets should not perform the record keeping for the assets.
C. The person who has custody of assets should also perform the record keeping for the assets.
D. It is often a waste of company resources to have an employee perform independent internal verification.
B. The person who has custody of assets should not perform the record keeping for the assets.
Internal auditors
A. are hired by CPA firms to audit business firms.
B. are employees of the IRS who evaluate the internal controls of companies filing tax returns.
C. evaluate the system of internal controls for the companies that employ them.
D. cannot evaluate the system of internal controls of the company that employs them because they are not independent.
C. evaluate the system of internal controls for the companies that employ them.
Which of the following is not a principle of internal control?
A. Segregation of duties
B. Documentation procedures
C. Collusion between employees
D. Bonding of employees
C. Collusion between employees
Under which of the following do computer programs that limit unauthorized access to certain files fall?
A. Human resource controls
B. Independent internal verification
C. Documentation procedures
D. Physical controls
D. Physical controls
Of which of the following is obtaining insurance protection against dishonest employees an example?
A. Documentation procedures
B. Bonding
C. Establishing responsibility
D. Segregation of duties
B. Bonding
Reasonable assurance rests on the premise that
A. the costs of establishing controls should not exceed their expected benefit.
B. bonding will prevent employees from stealing.
C. employees are basically honest people.
D. a system of internal controls will prevent errors.
A. the costs of establishing controls should not exceed their expected benefit.
Which one of the following statements is correct?
A. Internal auditors are company employees who evaluate the effectiveness of the company’s system of internal control on a continuous basis.
B. External auditors are company employees who evaluate the effectiveness of the company’s system of internal control on a continuous basis.
C. The public accountants conducting annual audits are responsible for continuous evaluations of a company’s system of internal control.
D. Only large companies employ internal auditors and utilize a system of internal controls.
A. Internal auditors are company employees who evaluate the effectiveness of the company’s system of internal control on a continuous basis.
For what purpose are physical controls used in a business?
A. To enhance the accuracy and reliability of its accounting records and to safeguard its assets
B. To prevent fraud
C. To produce accurate financial statements
D. To deter employee dishonesty
A. To enhance the accuracy and reliability of its accounting records and to safeguard its assets.
Which one of the following is not one of the principles of internal control?
A. Establishment of responsibility
B. Documentation procedures
C. Financial performance measures
D. Independent internal verification
C. Financial performance measures
Which one of the following is not a physical control?
A. Safes and vaults to store cash
B. Independent bank reconciliations
C. Locked warehouses for inventories
D. Bank safety deposit boxes for important papers
B. Independent bank reconciliations
Which of the following was not a result of the Sarbanes-Oxley Act?
A. Companies must file financial statements with the Internal Revenue Service.
B. All publicly traded companies must maintain adequate internal controls.
C. The Public Company Accounting Oversight Board was created to establish auditing standards and regulate auditor activity.
D. 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.
A. Companies must file financial statements with the Internal Revenue Service.
Which one of the following control activities is relevant when a company uses a computerized (rather than manual) accounting system?
A. Establishment of responsibility
B. Segregation of duties
C. Independent internal verification
D. All of these answer choices are correct.
D. All of these answer choices are correct.
Handly Inc. permits only designated personnel such as cashiers to handle cash receipts. What principle is being applied?
A. Segregation of duties
B. Establishment of responsibility
C. Independent internal verification
D. Rotation of employees
B. Establishment of responsibility
Aptara Construction Supplies has a cashier who is also the accounts receivable clerk for the company. Which internal control principle is violated?
A. Rotating employee duties
B. Establishment of responsibility
C. Segregation of duties
D. Documentation procedures
C. Segregation of duties
Which internal control principle is most important in a control system for handling cash receipts?
A. Physical controls
B. Documentation procedures
C. Independent internal verification
D. Segregation of duties
D. Segregation of duties
Which one of the following is not a control procedure used for over-the-counter receipts?
A. Use of a cash register where the amount rung up is clearly visible to the customer
B. Pre-numbered checks are used to buy supplies
C. Providing the customers with an itemized receipt
D. A cash register’s tape is locked in the register and only a supervisor can access it
B. Pre-numbered checks are used to buy supplies
All disbursements, even incidental amounts, must be paid by check.
A. True
B. False
B. False
Which of the following is an effective internal control over cash disbursements?
A. The use of prenumbered checks
B. The storage of blank checks in a secure place
C. The separation of authorization of checks and the actual writing of the checks
D. All of these answer choices are correct.
D. All of these answer choices are correct
An authorization form which is prepared for each expenditure in most medium and large organizations is
A. invoice.
B. voucher.
C. receiving report.
D. purchase order.
B. voucher
Deposits in transit are added to the cash balance per books on the bank reconciliation.
A. True
B. False
B. False
For which item below might a bank issue a credit memorandum to a depositor’s account?
A. An NSF check
B. Interest earned
C. Monthly service charges
D. Outstanding checks
B. Interest earned
For which of the following might a bank issue a debit memorandum to a depositor’s account?
A. Interest earned
B. Collection of a note receivable
C. Deposits in transit
D. Monthly service charges
D. Monthly service charges
For which of the following will an adjusting entry be required as the result of a bank reconciliation?
A. Outstanding checks
B. Deposits in transit
C. Bank errors
D. NSF checks
D. NSF checks
Which of the following will not require an adjusting entry?
A. NSF checks
B. Book errors
C. Bank service charges
D. Deposits in transit
D. Deposits in transit
Which one of the statements below is true?
A. Both deposits in transit and outstanding checks are deducted from the balance per the bank statement during the bank reconciliation process.
B. Both deposits in transit and outstanding checks are added to the balance per the bank statement during the bank reconciliation process.
C. Deposits in transit are deducted from the balance per the bank statement, and outstanding checks are added to the balance per the bank statement during the bank reconciliation process.
D. The deposits in transit are added to the balance per the bank statement, and outstanding checks are deducted from the balance per the bank statement during the bank reconciliation process.
D. The deposits in transit are added to the balance per the bank statement, and outstanding checks are deducted from the balance per the bank statement during the bank reconciliation process.
As used in a bank reconciliation, how are deposits in transit handled?
A. Deducted from the book balance
B. Added to the book balance
C. Added to the bank balance
D. Deducted from the bank balance
C. Added to the bank balance
Why should a bank reconciliation be prepared?
A. To make sure the actual cash balance is the same as the cash received from customers
B. To make sure employees have not committed fraud
C. To explain any difference between the depositor’s balance per books and the balance per bank
D. To explain any difference between the bank deposits and the checks written
C. To explain any difference between the depositor’s balance per books and the balance per bank.
A company’s monthly bank statement shows a collection of a note receivable by the bank in the amount of $500. Which of the following is one part of the journal entry needed to record the note collection by the company?
A. Credit to Cash for $500
B. Credit to Note Expense for $500
C. Credit to Notes Receivable for $500
D. Debit to Notes Receivable for $500
C. Credit to Notes Receivable for $500
If cash is restricted as to its use, and is expected to be used within the next year, how is it reported?
A. Included in the Cash and Cash Equivalents line on the balance sheet
B. Reported as a current liability on the balance sheet
C. Reported as a noncurrent asset on the balance sheet
D. Reported as a current asset separate from Cash and Cash Equivalents on the balance sheet
D. Reported as a current asset separate from Cash and Cash Equivalents on the balance sheet.
On which financial statement(s) will cash be reported?
A. Income statement, balance sheet, and the statement of cash flows
B. Balance sheet and the statement of cash flows
C. Income statement and the statement of cash flows
D. Only the statement of cash flows
B. Balance sheet and the statement of cash flows
Which of the following items in a cash drawer at November 30 is not reported as cash on the November 30 balance sheet?
A. Money orders
B. Coins and currency
C. A customer check dated December 1
D. A customer check dated November 28
C. A customer check dated December 1
Which statement correctly describes the reporting of cash?
A. Cash can be combined with cash equivalents if it is restricted.
B. The petty cash fund is a cash equivalent.
C. Cash is listed first in the current assets section of the balance sheet.
D. Restricted cash funds cannot be reported as a current asset.
C. Cash is listed first in the current assets section of the balance sheet.
Avoiding paying bills too early is an effective cash management principle.
A. True
B. False
A. True
Which of the following would not be an example of good cash management?
A. Providing discounts to customers to encourage early payment
B. Investing temporary excess cash into the stock of a small company
C. Carefully monitoring payments so that payments are not made too early
D. Employ just-in-time inventory methods to keep inventory low
B. Investing temporary excess cash into the stock of a small company
Which of the following is not a basic principle of cash management?
A. Keep inventory levels low
B. Grant customers as much time as they want to pay their receivables
C. Delay the payment of liabilities
D. Invest idle cash
B. Grant customers as much time as they want to pay their receivables.
Which of the following is not a basic principle of cash management?
A. Increase collection of receivables
B. Keep inventory levels high
C. Delay payment of liabilities
D. Invest idle cash
B. Keep inventory levels high
With respect to cash management, most companies try to
A. keep as much spare cash on hand as possible in case of emergency.
B. keep a lot of cash in a non-interest-bearing checking account because that type of account has the lowest fees.
C. invest idle cash, even if only overnight.
D. invest idle cash in illiquid investments because this will generate the greatest return.
C. invest idle cash, even if only overnight.
The financing section of a cash budget shows the expected repayment of borrowed principal and interest.
A. True
B. False
A. True
Expected payments for direct materials will be listed in the __________ section of a cash budget.
A. Cash receipts
B. Cash disbursements
C. Cash investments
D. Financing
B. Cash disbursements
Which of the following is not one of the sections of a cash budget?
A. Cash receipts section
B. Cash disbursements section
C. Financing section
D. Cash from operations section
D. Cash from operations section
When is the petty cash fund replenished?
A. When the fund reaches a minimum level
B. When there is not enough cash to cover future withdrawals
C. When the internal auditor is coming to check the fund’s management
D. When the fund reaches a minimum level and when there is not enough cash to cover future withdrawals
D. When the fund reaches a minimum level and when there is not enough cash to cover future withdrawals.
A check is written to replenish a $100 petty cash fund when the fund contains $3 of cash and $94 of receipts. Which of the following is one part of the entry to be used in recording the check to replenish?
A. Cash Over and Short will be debited for $3
B. Petty Cash will be debited for $94
C. Cash will be credited for $94
D. Petty Cash will be credited for $3
A. Cash Over and Short will be debited for $3
When replenishing the petty cash fund, which of the following accounts will not be involved in the accounting entry?
A. Petty cash
B. Cash
C. Various expense and asset accounts
D. All of these answer choices are correct.
A. Petty cash