978-0134125053 Chapter 6 Part 1

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Financial Accounting, 4e (Kemp)

Chapter 6 The Challenges of Accounting: Standards, Internal Control, Audits, Fraud,

and Ethics

6.1 Understand the importance of US GAAP and how it differs from accounting standards in

other countries (IFRS)

1) For inventory costing purposes, GAAP and IFRS differ in that GAAP allows the use of FIFO,

whereas IFRS prohibits the use of FIFO.

Question Type: Concept

2) The process CPAs use to confirm that financial reports conform to GAAP is called a review.

Question Type: Concept

3) U.S. GAAP has been organized into what is called the Accounting Standards Codification.

Question Type: Concept

4) Currently, most European countries are using International Financial Reporting Standards.

Question Type: Concept

5) The U.S. is now using International Financial Reporting Standards instead of the old GAAP

system.

Question Type: Concept

6) IFRS is considered a principles-based system, while U.S. GAAP is considered a rules–based

system.

Question Type: Concept

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7) For accounting information to be useful it must be all of the following EXCEPT:

A) reliable.

B) understandable.

C) economical.

D) relevant.

Question Type: Concept

8) The government agency that approves U.S. GAAP is the:

A) Senate.

B) Department of Commerce.

C) Department of the Treasury.

D) Securities and Exchange Commission.

Question Type: Concept

9) U.S. GAAP’s overriding principles of accounting are written by the:

A) FASB.

B) SEC.

C) IRS.

D) IASB.

Question Type: Concept

10) IFRS are developed by the:

A) European Union.

B) Financial Accounting Standards Board.

C) International Accounting Standards Board.

D) International Monetary Fund.

Question Type: Concept

11) The International Accounting Standards Board was formed in:

A) 2001.

B) 1991.

C) 1981.

D) 1971.

Question Type: Concept

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12) In terms of valuation, U.S. GAAP generally uses ________, while IFRS generally uses

________.

A) market values, historical values

B) historical values, historical values

C) historical values, market values

D) market values, market values

Question Type: Concept

13) The process CPAs use to confirm that financial reports conform to GAAP is known as a(n):

A) examination.

B) audit.

C) review.

D) confirmation.

Question Type: Concept

14) Contingent liabilities are ________ under GAAP, and ________ under IFRS

I. Recorded if probable

II. Recorded if possible

III. Recorded if reasonably estimated

A) GAAP I and II; IFRS I or II

B) GAAP I or III; IFRS I and II

C) GAAP I; IFRS I and III

D) GAAP I and III; IFRS I

Question Type: Concept

15) Under US GAAP and IFRS, research and development costs are:

I. Research costs are expensed as incurred

II. Development costs are expensed as incurred

III. Research costs are capitalized and amortized over time

IV. Development costs are capitalized and amortized over time.

A) GAAP I and II; IFRS II and III

B) GAAP I and IV; IFRS III and IV

C) GAAP I and II; IFRS I and IV

D) GAAP II and III; IFRS II and III

Question Type: Concept

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6.2 Understand the importance and role of internal control

1) An organization’s employees are responsible for the design and implementation of the internal

control system.

Question Type: Concept

2) One objective of an internal control system is to safeguard the assets of a company.

Question Type: Concept

3) Ensuring compliance with laws and regulations is an example of what following GAAP can

do for a company.

Question Type: Concept

4) According to the text, there are three key elements that affect an organization’s internal control

system.

Question Type: Concept

5) Management and staff attitudes toward internal control are an important part of control

activities.

Question Type: Concept

6) The ongoing process that identifies and analyzes potential problems in an organization and

takes steps to reduce those problems is risk assessment.

Question Type: Concept

7) Separation of duties is part of the control environment of an internal control system.

Question Type: Concept

8) The delegation of authority and responsibility is part of the control environment of an internal

control system.

Question Type: Concept

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9) Two or more people must work together to commit fraud.

Question Type: Concept

10) A properly designed internal control system can guarantee that fraud will not occur.

Question Type: Concept

11) In large companies, it may not be cost effective to properly segregate duties.

Question Type: Concept

12) Internal control is a comprehensive system that helps an organization do all of the following

EXCEPT:

A) safeguard assets.

B) safeguard liabilities.

C) operate efficiently and effectively.

D) ensure compliance with applicable laws and regulations.

Question Type: Concept

13) Internal control systems:

A) are the same from company to company.

B) are regulated by the Securities and Exchange Commission.

C) vary from company to company.

D) guarantee the safeguard of assets.

Question Type: Concept

14) Which element of internal control deals with establishing procedures for things such as

handling of incoming checks?

A) Monitoring

B) Control environment

C) Control activities

D) Risk assessment

Question Type: Concept

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15) Which element of internal control deals with the oversight of the internal control system?

A) Monitoring

B) Control environment

C) Information and communication

D) Risk assessment

Question Type: Concept

16) Which element of internal control deals with the establishment of a company’s policies?

A) Control environment

B) Control activities

C) Information and communication

D) Risk assessment

Question Type: Concept

17) Which element of internal control deals with a company having large amounts of cash on

hand?

A) Control environment

B) Control activities

C) Information and communication

D) Risk assessment

Question Type: Concept

18) Properly supervising employees would be an example of what element of internal control?

A) Control environment

B) Control activities

C) Information and communication

D) Risk assessment

Question Type: Concept

19) Establishing a hierarchy to let all management and employees know what is going on in a

company would be an example of what element of internal control?

A) Risk assessment

B) Monitoring

C) Information and communication

D) Control environment

Question Type: Concept

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20) Details that support business transactions make up what is called:

A) internal control.

B) monitoring.

C) risk assessment.

D) an audit trail.

Question Type: Concept

21) Which of the following would NOT be considered a control activity?

A) Keeping accounting records

B) Having written job descriptions

C) Not having employees take vacations

D) Changing passwords regularly

Question Type: Concept

22) Which of the following would NOT be considered part of the control environment?

A) Having integrity and ethical values

B) Assessing chances of fraud

C) Having competent workers

D) Having a leadership philosophy

Question Type: Concept

23) Which of the following would NOT be considered part of monitoring in an internal control

system?

A) Having an audit trail

B) Assessing performance of the system

C) Locating weakness of the system

D) Management involvement

Question Type: Concept

24) Which of the following would be considered a part of control activities in an internal control

system?

A) Having large quantities of cash on hand

B) Separation of duties

C) Having a leadership philosophy

D) Locating weaknesses in an internal control system

Question Type: Concept

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25) Having security measures, proper authorization channels, and restricted access to assets is an

example of what element of internal control?

A) Control environment

B) Control activities

C) Information and communication

D) Risk assessment

Question Type: Concept

26) Which of the following items is NOT a limit to the effectiveness of internal control systems

in an organization?

A) Properly designed controls

B) Collusion

C) Costs exceed benefits

D) Overriding controls

Question Type: Concept

27) A disgruntled employee who convinces another to steal from the company is an example of:

A) collusion.

B) monitoring.

C) the control environment.

D) control activities.

Question Type: Application

28) A distracted employee who fails to properly follow procedures is an example of:

A) the control environment.

B) control activities.

C) monitoring.

D) internal control limitations.

Question Type: Application

29) Utilization of an electronic theft detection system is an example of:

A) security measures.

B) the control environment.

C) monitoring.

D) risk assessment.

Question Type: Application

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30) When a company has one person post cash receipts, and another person deliver the deposit,

this is an example of:

A) restricted access.

B) proper authorization.

C) separation of duties.

D) internal control limitations.

Question Type: Application

31) Requiring a manager to sign off on purchases of $100 or more is an example of:

A) restricted access.

B) proper authorization.

C) an audit trail.

D) internal control limitations.

Question Type: Application

32) A good internal control system does which of the following?

A) Guarantees the efficiency and effectiveness of operations

B) Reduces the risk of undetected errors

C) Provides absolute assurance that no errors will occur

D) Guarantees that fraud will be prevented

Question Type: Concept

33) Which of the following items is NOT a limit to the effectiveness of internal controls?

A) Poorly defined controls

B) Managers overriding controls

C) Not separating duties in departments

D) Making sure employees are less distracted on the job

Question Type: Concept

34) A company may be limited in their internal control procedures because the cost of hiring

enough people to implement the procedures:

A) outweighs the benefits of the system.

B) has nothing to do with the effectiveness of the internal control system.

C) can prevent collusion.

D) can limit employee distractions.

Question Type: Concept

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35) A requirement that customers receive a receipt is an example of:

A) monitoring.

B) information and communication.

C) control activities.

D) risk assessment.

Question Type: Application

36) A requirement that employees go on vacation is an example of:

A) monitoring.

B) information and communication.

C) control activities.

D) A and C are both correct.

Question Type: Application

37) An audit trail:

A) requires employees to take an annual vacation.

B) limits the number of employees who have access to company assets.

C) consists of business documents and records that provide evidence of transactions.

D) requires the use of security cameras and alarm systems.

Question Type: Concept

38) Risk assessment:

A) is an ongoing process.

B) identifies and analyzes risk.

C) varies from company to company.

D) includes all of the above.

Question Type: Concept