CHAPTER 5: SARBANES-OXLEY, INTERNAL CONTROL, AND
CASH
1. The Sarbanes-Oxley Act of 2002 applies to all publicly held companies.
a. True
b. False
2. The Sarbanes-Oxley Act of 2002 requires companies to maintain strong and effective internal
controls over recording transactions and preparing financial statements.
a. True
b. False
3. The Sarbanes-Oxley Act requires companies and their independent accountants to report on
the effectiveness of the company’s internal controls.
a. True
b. False
4. Employee fraud is the intentional act of deceiving an employer for personal gain.
a. True
b. False
5. All organizations face risks, and the assessment of these risks is necessary so that the
objectives of internal control can be achieved.
a. True
b. False
6. The internal control environment is enhanced by the hiring and retention of competent, honest
employees.
a. True
b. False
7. There are only two internal control objectives: to ensure accurate financial reports, and to
ensure compliance with applicable laws.
a. True
b. False
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
8. Separating the responsibilities for purchasing, receiving, and paying for equipment is an
example of the control procedure: separating operations, custody of assets, and accounting.
a. True
b. False
9. Adding a review of operations by an internal audit staff weakens internal control.
a. True
b. False
10. Information and communication are essential elements of an organization’s internal control.
a. True
b. False
11. Money orders are considered cash.
a. True
b. False
12. If a business has several bank accounts, it will have a separate record for each of them.
a. True
b. False
13. A customer’s check received in settlement of an account receivable is considered cash.
a. True
b. False
14. For a strong internal control system over cash, it is important to have the duties related to cash
receipts and cash payments divided among different employees.
a. True
b. False
15. A remittance advice is the notification accompanying the check issued to a creditor that states
the specific invoice being paid.
a. True
b. False
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
16. A voucher is a written authorization to make a cash payment.
a. True
b. False
17. A voucher system is an example of an internal control procedure over cash receipts.
a. True
b. False
18. A voucher is a form where pertinent data about a liability and the particulars of its payment are
recorded.
a. True
b. False
19. A voucher system is an example of an internal control procedure over cash payments.
a. True
b. False
20. In a computerized system, paid vouchers are transferred to a paid voucher file.
a. True
b. False
21. A voucher is the notification accompanying the check issued to a creditor that indicates the
specific invoice being paid.
a. True
b. False
22. Internal control is enhanced by combining the control of a transaction with the record-keeping
function.
a. True
b. False
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
23. For efficiency of operations and better control over cash, a company should maintain only one
bank account.
a. True
b. False
24. The bank informs the depositor of bank service charges by including a credit memorandum
with an monthly bank statement.
a. True
b. False
25. Bank customers are considered owners of the bank, so the bank shows their accounts as an
asset on the bank’s records.
a. True
b. False
26. A credit memorandum received with a bank statement means the company’s bank account has
been increased.
a. True
b. False
27. Depositing all cash, checks, etc. in a bank and paying with checks is an internal control
procedure over cash.
a. True
b. False
28. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash
balance per bank.
a. True
b. False
29. The bank section begins with the cash balance according to the bank statement and ends with
the adjusted balance.
a. True
b. False
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
30. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank
service charges is added to the cash balance per books.
a. True
b. False
31. In preparing a bank reconciliation, the amount of a canceled check omitted from the
depositor’s records is deducted from the cash balance per books.
a. True
b. False
32. The amount of the “adjusted balance” appearing on a bank reconciliation as of a given date is
the amount that is shown on the balance sheet for that date after all adjusting entries have been
entered.
a. True
b. False
33. The data needed to adjust a depositor’s books are shown in the “adjustments to the depositor’s
records” section of a bank reconciliation.
a. True
b. False
34. All bank memorandums reported on the bank reconciliation require entries in the depositor’s
accounts.
a. True
b. False
35. A bank reconciliation is an important part of the system of internal controls.
a. True
b. False
36. Outstanding checks are checks that have been issued but have not cleared by the bank.
a. True
b. False
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
37. The bank reconciles its statement to the depositor’s records.
a. True
b. False
38. The depositor reconciles the bank’s statement to the depositor’s records.
a. True
b. False
39. A check for $456 was erroneously charged by the bank as $654. In order for the bank
reconciliation to balance, you must subtract $198 from the bank statement balance.
a. True
b. False
40. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the cash
balance per books.
a. True
b. False
41. In preparing a bank reconciliation, the amount of outstanding checks is deducted from the cash
balance per books.
a. True
b. False
42. In preparing a bank reconciliation, the amount indicated by a credit memorandum for a note
receivable collected by the bank is added to the cash balance per books.
a. True
b. False
43. In preparing a bank reconciliation, the amount indicated by a debit memorandum for bank
service charges is deducted from the cash balance per bank.
a. True
b. False
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
44. A debit memorandum from the bank indicates that the bank has deducted an amount from the
depositor’s account.
a. True
b. False
45. A business that requires all cash payments be made by check cannot use a petty cash system.
a. True
b. False
46. When the petty cash fund is replenished, the petty cash account is adjusted for the total of all
expenditures made since the fund was last replenished.
a. True
b. False
47. Minimum cash balance maintained in the bank account is called line of credit.
a. True
b. False
48. Money market funds, commercial paper, and U.S. Treasury Bills are examples of cash
equivalents.
a. True
b. False
49. The purpose of the Sarbanes-Oxley Act of 2002 is to:
a. restore public confidence and trust in the financial statements of publicly held companies.
b. require all companies to prepare financial statements.
c. protect companies from demands of investors, stockholders, and creditors.
d. do all of these.
50. The Sarbanes-Oxley Act of 2002 requires companies and their independent accountants to:
a. report on the effectiveness of the company’s internal controls.
b. report on any fraud and theft detected in the company.
c. report on the state of the economy and likelihood of fraud.
d. report on the financial activities of the company.
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
51. The framework that has become widely accepted as the standard by which companies design,
analyze, and evaluate internal controls is the:
a. Internal Control – Integrated Framework by the Committee of Sponsoring Organizations.
b. Internal Control – Integrated Framework by the Congress of Special Offerings.
c. Internal Control Localized Structure by the Committee of Sponsoring Organizations.
d. Internal Control Localized Structure by the Congress of Special Offerings.
52. Internal controls are important because they:
a. deter fraud and prevent misleading financial statements.
b. eliminate fraud.
c. ensure that the company maintains a compensating balance.
d. guarantee accurate financial statements.
53. Which of the following reflects a weak internal control system?
a. All employees are well supervised.
b. A single employee is responsible for comparing a receiving report to an invoice.
c. All employees must take their vacations.
d. A single employee is responsible for the collecting and recording of cash.
54. Internal control consist of policies and procedures that .
a. involve cost-benefit considerations
b. deal with human element of controls such as, fatigue, carelessness, etc.
c. ensure public relations
d. ensure the accuracy of business information
55. Which of the following is a factor influencing about internal control environment?
a. management’s operating style.
b. organizational behavior.
c. mandatory vacations.
d. security measures.
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
56. , which constitute one of the most important elements of internal control, include
separating operations, custody of assets, and accounting.
a. Risk assessment
b. Control Procedures
c. Control environment
d. Monitoring
57. An element of internal control is:
a. risk assessment.
b. journals.
c. subsidiary ledgers.
d. controlling accounts.
58. Risks can be analyzed to:
a. assess their likelihood of occurring.
b. separate responsibilities for related operations.
c. observe employees’ behavior and the accounting system.
d. ensure compliance with reporting, legal, and regulatory requirements.
59. An element of internal control is:
a. generally accepted accounting principles.
b. control procedures.
c. special-purpose fund.
d. electronic funds transfer.
60. An element of internal control is:
a. business.
b. management.
c. monitoring.
d. personnel policies.
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
61. Which element of internal control observes employees’ behavior and the accounting system
for indicators of control problems?
a. Control environment
b. Risk assessment
c. Control procedures
d. Monitoring
62. Separating the custody of assets from accounting for assets is a part of which element of
internal control?
a. Information and communication
b. Monitoring
c. Control environment
d. Control procedures
63. Which of the following elements of internal control focuses on locating weaknesses and
improving control effectiveness?
a. Control environment
b. Risk assessment
c. Control procedures
d. Monitoring
64. When a firm uses internal auditors, it is adhering to which of the following internal control
elements?
a. Risk assessment
b. Control procedures
c. Monitoring
d. Information and communication
65. Which of the following of internal control deals with hiring, training, evaluation,
compensation, and promotion of employees?
a. Monitoring
b. Control environment
c. Risk assessment
d. Control procedures
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
66. Which of the following is considered as cash?
a. Commercial papers
b. Bonds
c. Checks
d. Equities
67. Which of the following is true of EFT?
a. It cost more than receiving cash payments through the mail.
b. It can process certain cash transactions at less cost than by using the mail.
c. It is easy to document purchase and sale transactions.
d. It means Effective Funds Transfer.
68. A voucher:
a. is received from customers to explain the purpose of a payment.
b. is normally prepared in the Accounting Department.
c. system is used to control cash receipts.
d. system is an internal control procedure to verify that the assets in the records are the ones
the company owns.
69. On the bank’s accounting records, customers’ accounts are normally shown as a(n):
a. revenue.
b. liability.
c. asset.
d. expenses.
70. A credit memorandum from the bank :
a. decreases a bank customer’s account.
b. is used to show a bank service charge.
c. shows that a company has deposited a customer’s NSF check.
d. shows the bank has collected a note receivable for the customer.
Chapter 5: Sarbanes-Oxley, Internal Control, and Cash
71. A check drawn by a depositor for $295 in payment of a liability was recorded in the
depositor’s book as $925. The $630 difference would be included on the bank reconciliation as
a(n):
a. addition to the cash balance per books.
b. addition to the cash balance per bank.
c. deduction from the cash balance per bank.
d. deduction from the cash balance per books.
72. A check drawn by a depositor for $915 in payment of a liability was recorded in the
depositor’s book as $195. What adjustment is required in the depositor’s accounts?
a. Decrease Accounts Payable; decrease Cash
b. Increase Cash; decrease Accounts Receivable
c. Increase Cash; increase Accounts Payable
d. Increase Accounts Receivable; decrease Cash
73. A bank reconciliation should be prepared periodically because:
a. the depositor’s records and the bank’s records are in agreement.
b. the bank has not recorded all of its transactions.
c. any differences between the depositor’s records and the bank’s records should be
determined, and any errors made by either party should be discovered and corrected.
d. the bank must make sure that its records are correct.
74. The bank reconciliation:
a. should be prepared by an employee who records cash transactions.
b. is part of the internal control system.
c. is for information purposes only.
d. is sent to the bank for verification.
75. Accompanying the bank statement was a debit memorandum for bank service charges. What
adjustment is required in the depositor’s accounts?
a. Increase Miscellaneous Expense; decrease Cash
b. Increase Cash; increase Other Income
c. Increase Cash; increase Accounts Payable
d. Decrease Accounts Payable; decrease Cash