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Chapter 06 Reporting and Analyzing Cash, Fraud, and Internal
Controls Answer Key
True / False Questions
1.
A properly designed internal control system is a key part of systems design, analysis, and
performance.
2.
The use of internal controls provides a guarantee against a company’s risk of loss.
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3.
Maintaining adequate records is an important internal control principle.
4.
Establishing responsibilities and assigning both the recordkeeping and custody of assets
to one person are important principles of internal control.
5.
Cash registers, check protectors, time clocks and personal identification scanners are
examples of devices that can improve internal control.
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6.
An internal control system consists of the policies and procedures managers use to
protect assets, ensure reliable accounting, promote efficient operations, and urge
adherence to company policies.
7.
Insuring assets and requiring all accounting personnel to have CPA licenses are two
important principles of internal control.
8.
Because employees know that bonding is an insurance policy against loss from theft,
bonding does not generally discourage loss from theft.
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9.
According to good internal control policies, a person who controls an asset also maintains
that asset’s accounting records.
10.
Technologically advanced accounting systems rarely need monitoring for errors because
computers always process transactions correctly.
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11.
Internal control in technologically advanced accounting systems depends less on the
design and operation of the information system and more on the analysis of its resulting
documents.
12.
All internal control policies and procedures have limitations that usually arise from either
(1) human error or human fraud, or (2) the cost-benefit principle.
13.
Collusion is a form of fraud where two or more individuals collaborate to circumvent
separation of duties.
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14.
Separation of duties involves dividing responsibility for a transaction or a series of related
transactions between two or more individuals or departments.
15.
Cash equivalents are short-term highly liquid investment assets that are readily converted
to a known cash amount, and have maturities of one year.
16.
Liquidity refers to a company’s ability to pay its long-term obligations.
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17.
Money orders, cashier’s checks, and certified checks are all examples of cash.
18.
Effective cash management includes making efforts to pay bills on the earliest possible
day.
19.
One effective cash management principle is to invest excess cash beyond what is needed
for regular business in order to earn a return on the cash.
20.
Cash-only sales policies or offering early payment discounts are not considered effective
cash management policies.
21.
Basic bank services such as bank accounts, bank deposits, and checking contribute to the
control of cash.
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22.
The payee is the party to a check who signs the check, authorizing its payment.
23.
Electronic funds transfers (EFTs) are decreasingly used by companies due to the
inconvenience and high cost.
24.
Canceled checks are checks the bank has paid and deducted from the customer’s account
during the period.
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25.
A check involves 3 parties: a maker who signs the check, a payee who is the recipient, and
a bank on which the check is drawn.
26.
Signature cards, deposit tickets, checks, and bank statements are all examples of internal
control devices for banking activities.
27.
On a bank statement, deposits are listed as credits because the bank increases its liability
to the depositor when the deposit is made.
28.
The days’ sales uncollected ratio measures a company’s ability to manage its debt.
29.
The days’ sales uncollected ratio measures the liquidity of accounts receivable.
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30.
When evaluating the days’ sales uncollected ratio, generally the higher the receivables
balance, the better the ratio.
31.
Internal control of cash ensures that cash received is properly recorded and deposited.
32.
A voucher system is a set of procedures and approvals designed to control cash
disbursements and the acceptance of obligations.
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33.
Most large thefts occur from payment of fictitious invoices, which makes control of cash
disbursements especially important for companies.
34.
If the Cash Over and Short account has a credit balance at the end of the period, the
amount is reported as miscellaneous revenue.
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35.
The clerk who has access to the cash in the cash register should also have access to the
cash register tape or file.
36.
A voucher system’s control over cash disbursements begins when a company incurs an
obligation that will result in eventual payment of cash.
37.
A voucher system establishes procedures for verifying, approving, and recording cash
collections.
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38.
Assigning the responsibilities of purchasing, receiving, and paying for merchandise to one
department or individual is a way to streamline a voucher system.
39.
A voucher is an external document used to accumulate information to control cash
disbursements and to ensure that a transaction is properly recorded.
40.
Vouchers should be used for purchases of inventory and all other expenditures made
within a company.
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41.
A debit balance in the Cash Over and Short account reflects an expense and is reported on
the income statement as part of general and administrative expenses.
42.
The Petty Cash account is a separate bank account used for small amounts.
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43.
Since petty cash is concerned with such small amounts of cash, it is not necessary to
document all transactions with a petty cash receipt.
44.
Petty cash reimbursement requires a journal entry that involves a debit to the appropriate
expenses and a credit to Cash.
45.
The petty cash fund should be reimbursed when it is nearing zero and at the end of the
accounting period when financial statements are prepared.
46.
The entry to increase the balance in petty cash from $50 to $75 would include a credit to
Petty Cash of $25.
47.
A bank reconciliation explains any differences between the balance of a checking account
on the depositor’s records and the balance reported on the bank statement.
48.
Outstanding checks are checks the bank has paid and deducted from the customer’s
account during the month.
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49.
Deposits in transit are deposits made and recorded by the depositor but not yet recorded
on the bank statement.
50.
It is generally not necessary for businesses to reconcile their checking accounts since
banks keep accurate records and provide internal control support for cash.
51.
After preparing a bank reconciliation, adjustments must be made for items reconciling the
book
balance
.
52.
Outstanding checks, deposits in transit, deductions for bank fees, additions for interest,
and errors are all factors that can cause the bank statement balance for a checking
account to be different from the company’s checking account balance.
53.
Outstanding checks, deposits, and bank service charges are added to the beginning
balance of the bank statement to determine the adjusted bank balance.