Financial and Managerial Accounting, 8e (Wild)
Chapter 6 Cash, Fraud, and Internal Controls
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 losses due to operating activities.
3) Maintaining adequate records is an important internal control principle.
4) Clearly establishing responsibilities and assigning all accounting activities to one person is an
important principle of internal control.
5) Cash registers, time clocks, and scanners are examples of technologies that can improve
internal control.
6) An internal control system consists of the policies and procedures companies use to protect
assets, ensure reliable accounting, promote efficient operations, and uphold 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.
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.
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) Internal control systems are subject to 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 individuals collaborate to thwart separation of duties.
14) Separation of duties involves dividing responsibility for a transaction or a series of related
transactions between two or more individuals or departments.
15) The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock is
traded on an exchange to document and verify the system of internal controls.
16) Harsh penalties exist for violators of the Sarbanes-Oxley Act (SOX) – sentences up to 25
years in prison with severe fines.
17) Human fraud is driven by the triple-threat of fraud: Opportunity, collusion, and
rationalization.
18) Cash equivalents are short-term highly liquid investment assets that are readily converted to
a known cash amount, and have maturities of one year.
19) Liquidity refers to a company’s ability to pay its long-term obligations.
20) Money orders, cashier’s checks, and certified checks are all examples of cash.
21) Basic bank services such as bank accounts, bank deposits, and checking contribute to the
control of cash.
22) The payee is the person who signs a 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.
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.
30) When evaluating the days’ sales uncollected ratio, generally the higher the receivables
balance, the better the ratio.
31) Internal control of cash receipts aims to ensure that all cash received is properly recorded and
deposited.
32) A voucher system is a set of procedures and approvals designed to control cash payments
and the acceptance of liabilities.
33) After the petty cash fund is established, the Petty Cash account is not debited or credited
again unless the amount of the fund is changed.
34) If the Cash Over and Short account has a credit balance at the end of the period, the amount
is commonly reported as miscellaneous revenue.
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 payments begins when a company incurs a liability that
will result in eventual payment of cash.
37) A voucher system establishes procedures for verifying, approving, and recording liabilities
for eventual cash payment.
38) Assigning 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 payments
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.
41) A debit balance in the Cash Over and Short account reflects an expense and is reported on
the income statement as part of miscellaneous expenses.
42) The Petty Cash account is a separate bank account used for small amounts.
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 checking account balance 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.
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 in transit, and bank service charges are added to the beginning
balance of the bank statement to determine the adjusted bank balance.
54) Proper internal control would require that a department manager inform the purchasing
department of its needs for additional merchandise by preparing and signing a purchase
requisition which lists the merchandise requested to be purchased.
55) An invoice is an itemized statement of goods prepared by the customer, listing the customer’s
name, items sold, sales prices, and terms of sale.
56) Approved vouchers are recorded in a journal called the voucher register.
57) A receiving report is a document used within a company to notify the appropriate persons
that ordered goods have been received and to describe the quantities and condition of the goods.
58) When a voucher system is used, an invoice approval is not needed as long as the purchase is
evidenced by an invoice and purchase order.
59) In order to streamline the purchasing process, department managers should place orders
directly with suppliers.
60) A purchase order is a document the purchasing department sends to the vendor to place an
order.
61) Which of the following is not one of the policies and procedures that make up an internal
control system?
A) Protect assets.
B) Ensure reliable accounting.
C) Guarantee a return to investors.
D) Uphold company policies.
E) Promote efficient operations.
62) Managers place a high priority on internal control systems because the systems assist
managers in all of the following except:
A) Promoting efficient operations.
B) Protecting assets.
C) Upholding company policies.
D) Ensuring reliable accounting.
E) Assuring that no loss will occur.
63) The principles of internal control include:
A) Separate recordkeeping from custody of assets.
B) Maintain minimal records.
C) Use only computerized systems.
D) Bond all employees.
E) Require automated sales systems.
64) Principles of internal control include all of the following except:
A) Apply technological controls.
B) Maintaining security by having one person track and record assets.
C) Perform regular and independent reviews.
D) Separate recordkeeping from custody of assets.
E) Divide responsibilities for related transactions.
65) A properly designed internal control system:
A) Lowers the company’s risk of loss.
B) Insures profitable operations.
C) Eliminates the need for an audit.
D) Requires the use of non-computerized systems.
E) Is not necessary if the company uses a computerized system.
66) A company’s internal control system:
A) Eliminates the company’s risk of loss.
B) Monitors company and employee performance.
C) Eliminates human error.
D) Eliminates the need for audits.
E) Eliminates the need for managers’ certification of controls.
67) Two clerks sharing the same cash register is a violation of which internal control principle?
A) Establish responsibilities.
B) Maintain adequate records.
C) Insure assets.
D) Bond key employees.
E) Apply technological controls.
68) Which internal control principle prescribes the use of pre-numbered printed checks?
A) Technological controls.
B) Maintain adequate records.
C) Perform regular and independent reviews.
D) Establish responsibilities.
E) Divide responsibility for related transactions.
69) The impact of technology on internal controls includes:
A) Reduced processing errors.
B) Elimination of the need for regular audits.
C) Elimination of the need to bond employees.
D) Elimination of separation of duties.
E) Elimination of fraud.
70) Internal control policies and procedures have limitations not including:
A) Human error.
B) Human fraud.
C) Cost-benefit principle.
D) Collusion.
E) Establishing responsibilities.
71) Internal control systems are:
A) Developed by the Securities and Exchange Commission for public companies.
B) Developed by the Small Business Administration for non-public companies.
C) Developed by the Internal Revenue Service for all U.S. companies.
D) Required by Sarbanes-Oxley (SOX) to be documented and certified if the company’s stock is
traded on an exchange (a public company).
E) Required only if a company plans to engage in interstate commerce.
72) Cash, not including cash equivalents, includes:
A) Postage stamps.
B) Customer checks, cashier checks, and money orders.
C) IOUs.
D) Two-year certificates of deposit.
E) Money market funds.
73) Cash equivalents:
A) Are short-term, highly liquid investment assets.
B) Include 6-month certificates of deposit.
C) Include checking accounts.
D) Are recorded in petty cash.
E) Include money orders.
74) Cash equivalents:
A) Include savings accounts.
B) Include checking accounts.
C) Are readily converted to a known cash amount.
D) Include time deposits.
E) Have no immediate value.
75) Cash equivalents meet all of the following criteria except:
A) Readily convertible to a known cash amount.
B) Short-term investments purchased within 3 months of their maturity dates.
C) Have a market value that is not sensitive to interest rate changes.
D) Short-term U.S. treasury bills.
E) More liquid than cash.