Accounting, 9e (Horngren)
Chapter 7 Internal Control and Cash
Learning Objective 7-1
1) Internal control is the organizational plan and all the related measures adopted by an entity to safeguard assets,
encourage employees to follow company policy, promote operational efficiency, and ensure accurate and reliable
accounting records.
2) Which of the following is TRUE of internal control?
A) A company‘s outside auditor is responsible for the company’s internal control system.
B) One of the major purposes of internal control is to ensure accurate, reliable accounting records.
C) Internal control procedures tend to diminish the importance of operational efficiency.
D) Internal controls are only necessary for large businesses.
3) Which of the following is NOT one of the purposes of internal control?
A) To encourage employees to follow company policy
B) To safeguard the company’s assets
C) To ensure accurate, reliable accounting records
D) To guarantee that a business makes a profit
4) Reducing expense to increase operating profit is representative of:
A) safeguarding assets.
B) following company policies.
C) promoting operational efficiency.
D) ensuring accurate, reliable accounting records.
5) Keeping office supplies under lock and key is representative of:
A) safeguarding assets.
B) following company policies.
C) promoting operations efficiency.
D) ensuring accurate, reliable accounting records.
6) Which of the following is NOT one of the benefits provided by internal control?
A) To reduce waste
B) To insure that better business decisions are made
C) To offer protection against theft
D) To reduce inefficiency
Learning Objective 7-2
1) Under the Sarbanes-Oxley Act, the outside auditor must issue an internal control report.
2) The Public Company Oversight Board oversees the work of auditors of public companies.
3) Under the Sarbanes-Oxley Act, accounting firms are prohibited from both auditing a client and providing certain
consulting services for the same client.
4) Under the Sarbanes-Oxley Act, violators may be sentenced to prison for securities fraud.
5) Which of the following is a requirement of the Sarbanes-Oxley Act?
A) The outside auditor must issue an internal control report for each public company.
B) The Public Company Oversight Board must conduct audits of public companies.
C) Accounting firms may not both audit a public client and provide certain consulting services for the same client.
D) The Public Company Oversight Board must create new accounting standards.
6) Sarbanes-Oxley was passed in response to which of the following?
A) The stock market crash of 2002
B) The savings and loan bailout
C) The accounting scandals of WorldCom and Enron
D) The mounting government deficit
7) Which is NOT a provision of Sarbanes-Oxley?
A) Accounting firms are allowed to provide both auditing services and a full range of consulting services to their
public company clients.
B) Those who commit securities fraud may be sentenced to 25 years in prison.
C) Public companies must issue an internal control report evaluated by an outside auditor.
D) Auditors of public companies are under the scrutiny of the Public Company Accounting Oversight Board.
Learning Objective 7-3
1) The control environment is one of the five components by which a company can achieve its internal control
objectives.
2) Risk assessment is the “tone at the top” of a business, starting with the owner and the top managers.
3) External auditors monitor company controls to safeguard assets and ensure that employees are following
company policies.
4) Internal auditors evaluate company controls to ensure the accuracy of financial statements.
5) Mandatory vacations and job rotation improve internal control.
6) Separation of duties limits fraud and promotes the accuracy of the account records.
7) Which of the following statements about internal control is FALSE?
A) Internal auditors insure that employees follow company policies.
B) The treasurer is the officer ultimately responsible for writing of checks.
C) External auditors are employees of the company.
D) The control environment is known as the “tone at the top.”
8) Internal and external auditors are part of which of the following components of internal control?
A) Monitoring controls
B) Information systems
C) Control procedures
D) Control environment
9) A pharmaceutical company testing drugs to determine possible side effects is a part of:
A) monitoring controls.
B) information systems.
C) control procedures.
D) risk assessment.
10) Before any internal control procedure is initiated, a question which should be addressed by the company is:
A) Will this stop all theft?
B) Is this the best security money can buy?
C) How much benefit will be derived from the cost of the procedure?
D) Will this prevent all accounting errors?
11) Which of the following is NOT a key element of good internal control?
A) Having competent, reliable and ethical personnel
B) Having periodic audits
C) Having a good working environment for employees
D) Having separation of duties
12) In a large company, the person who is responsible for writing checks is the:
A) CEO.
B) CFO.
C) controller.
D) treasurer.
13) Which of the following describes the control environment?
A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to
ensure that the accounting records are accurate.
B) The control environment is the “tone at the top” of the business.
C) The control environment is designed to ensure that the business’s goals are achieved.
D) A company must identify its risks.
14) Which of the following describes the internal control component risk assessment?
A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to
ensure that the accounting records are accurate.
B) Risk assessment is the “tone at the top” of the business.
C) A company must identify its risks.
D) Risk assessment is designed to ensure that the business’s goals are achieved.
15) Which of the following describes the internal control component monitoring of controls?
A) Internal auditors monitor company controls to safeguard assets, and external auditors evaluate the controls to
ensure that the accounting records are accurate.
B) Monitoring of controls is the “tone at the top” of the business.
C) Monitoring of controls is designed to ensure that the business‘s goals are achieved.
D) A company must identify its risks.
16) Which of the following describes the internal control procedure competent, reliable and ethical personnel?
A) The information system is critical.
B) A company must train and supervise high-quality employees.
C) External auditors monitor internal controls.
D) A company purchases burglar alarms.
17) Which of the following describes the internal control procedure assignment of responsibilities?
A) To validate their accounting records, a company should have an audit by an external accountant.
B) The company should separate the custody of assets from accounting.
C) The external auditors will monitor internal controls.
D) Have clearly assigned responsibilities for each position.
18) Which of the following describes the internal control procedure separation of duties?
A) Cashiers must not have access to accounting records.
B) External auditors will monitor internal controls.
C) The information system is critical.
D) Prenumber invoices and other documents.
19) Which of the following describes the internal control procedure documents?
A) Mandatory vacations will improve internal control.
B) Separate the custody of assets from accounting.
C) Prenumber invoices and other documents.
D) A company should purchase a fireproof vault.
20) Which of the following describes the internal control component information system?
A) Internal auditors monitor company controls to safeguard assets, and external auditors monitor the controls to
ensure that the accounting records are accurate.
B) Control procedures are designed to ensure that the business’s goals are achieved.
C) Only authorized users have access to various parts of the information system.
D) The information system is the “tone at the top” of the business.
21) In the following situation, which internal control procedure needs strengthening?
Hofstra Services hired a new clerk to keep custody of and maintain all the equipment in the equipment yard. That
employee has not yet been adequately trained on the maintenance needs of the equipment.
A) Assignment of responsibilities
B) Competent, reliable, and ethical personnel
C) Separation of duties
D) Documents
22) In the following situation, which internal control procedure needs strengthening?
The controller’s duties include approving bank reconciliations, approving general journal entries, hiring
administrative staff, and approving various types of administrative expenses. She needs new computer equipment
for the accounting office, but there are no guidelines specifying whether she can approve purchases of office
equipment.
A) Assignment of responsibilities
B) Competent, reliable, and ethical personnel
C) Separation of duties
D) Documents
23) In the following situation, which internal control procedure needs strengthening?
At Hofstra Services, the junior accountant collects checks and cash from customers and records the transactions into
the Journal. The controller approves the journal entries and bank reconciliations. The treasurer signs checks and
approves contracts.
A) Assignment of responsibilities
B) Competent, reliable, and ethical personnel
C) Separation of duties
D) Documents
24) In the following situation, which internal control procedure needs strengthening?
At Hofstra Services, the operations accountant is responsible for safeguarding and maintaining the pipe inventory
and also to record inventory transactions into the journal. A separate accounting clerk keeps records of the cash
receipts and payments. The treasurer signs checks and approves contracts.
A) Assignment of responsibilities
B) Competent, reliable, and ethical personnel
C) Separation of duties
D) Documents
25) In the following situation, which internal control procedure needs strengthening?
At Hofstra Services, the accounting clerk fills out unnumbered purchase order forms for purchases of supplies. An
operations engineer completes the form with a detailed description of the supplies being ordered, and the operations
manager approves the purchase and passes the purchase order back to the accountant for processing.
A) Assignment of responsibilities
B) Competent, reliable, and ethical personnel
C) Separation of duties
D) Documents
26) In the following situation, which internal control procedure needs strengthening?
Hofstra Services hired a new accountant to be responsible for the petty cash fund and the cash receipts. The newly
hired employee has an accounting degree and a criminal record.
A) Assignment of responsibilities
B) Competent, reliable, and ethical personnel
C) Separation of duties
D) Documents
27) In the following situation, which internal control procedure needs strengthening?
Hofstra Services hired a new accounting manager. He signed a contract for a new accounting information system,
but his position did not specify whether he was authorized to do so or not.
A) Assignment of responsibilities
B) Competent, reliable, and ethical personnel
C) Separation of duties
D) Documents
Learning Objective 7-4
1) If a system of internal controls is properly designed and structured, it cannot be overcome or broken into.
2) If a system of internal controls is too strict or complex, it may harm efficiency and not be cost-effective.
3) When designing a system of internal control, every procedure should be implemented strictly and properly,
regardless of the cost.
4) A strong computer firewall is an essential element of good internal controls for e-commerce.
5) Which of the following is NOT a problem that must be addressed in the internal controls for commerce?
A) Trojans
B) Stolen credit-card numbers
C) Phishing expeditions
D) Separation of duties
6) Which of the following is a security procedure designed for e-commerce?
A) Burglar alarms
B) Firewalls
C) Fireproof vaults
D) Secure inventory storage
7) A malicious program that enters program code or destroys data without authorization is an example of:
A) a password.
B) phishing.
C) encryption.
D) a virus.
8) Which of the following is a security procedure designed for e-commerce which rearranges text messages by a
mathematical process?
A) Trojans
B) Firewalls
C) Encryption
D) Phishing
9) Which of the following is a common tactic to overcome internal controls?
A) Encryption
B) Firewalls
C) Collusion
D) Separation of duties
10) Which of the following describes collusion?
A) When bogus websites acquire passwords and account numbers fraudulently
B) When two or more people cooperate together to defraud a company
C) When one employee steals from a company
D) When a company defrauds its suppliers by making false claims
Learning Objective 7-5
1) Cash is the most liquid of all company assets.
2) The cash balance in a company’s general ledger and the bank’s balance on the bank statement will generally be
different because of the time lag in recording transactions.
3) Which of the following is the most basic internal control for cash?
A) Keeping money in a bank account
B) Checking for counterfeit bills
C) Counting cash receipts twice
D) Internal audit of cash procedures
4) Which of the following is retained by the customer as proof of a deposit transaction?
A) A deposit receipt
B) A cancelled check
C) A bank reconciliation
D) A signature card
5) Which of the following must be signed by the person authorized to write checks drawn on a checking account at a
bank?
A) A signature card
B) A bank statement
C) A deposit ticket
D) A bank reconciliation
6) When a check is issued, the party being paid the cash is referred to as the:
A) payee.
B) maker.
C) bank signatory.
D) depositor.
7) When a check is issued, the party who is paying the cash is referred to as the:
A) payee.
B) maker.
C) bank signatory.
D) depositor.
Learning Objective 7-6
1) Journal entries must be made to record the reconciling items on the bank side of the reconciliation.
2) An outstanding check is a check issued by the company and recorded on its books, but not yet paid by its bank.
3) On a bank reconciliation, deposits in transit are subtracted on the book side of the reconciliation.
4) If the bank reconciliation includes a bank service charge, a journal entry is required which debits Cash and credits
Miscellaneous expense.
5) If the bank reconciliation includes a deposit in transit, a journal entry is required which includes a debit to cash.
6) If the bank reconciliation includes outstanding checks, no journal entries are required.
7) If the bank reconciliation includes a book error, no journal entries are required.
8) Journal entries that are necessitated by reconciling items on the book side of the reconciliation all include either a
debit to Cash or a credit to Cash.
9) If the bank reconciliation includes interest revenue, a journal entry is required which debits Cash and credits
Interest revenue.
10) In a bank reconciliation, a book error will be shown on the bank side of the reconciliation.
11) In a bank reconciliation, outstanding checks will be shown on the bank side of the reconciliation.
12) In a bank reconciliation, a deposit in transit will be shown on the bank side of the reconciliation.
13) In a bank reconciliation, an NSF check will be shown on the bank side of the reconciliation.
14) Which of the following is a benefit of online banking?
A) The business can reconcile to the bank’s balance at any time.
B) The bank reconciliation is not necessary.
C) The business can reduce their internal controls over cash receipts.
D) A company‘s book balance will always equal the bank’s balance.
15) Which of the following items will NOT appear on the book side of the reconciliation?
A) The bank collected a note receivable of $1,000.
B) A nonsufficient funds check of $75 was returned to the bank.
C) A deposit was in transit.
D) The bank charged a service fee of $20.
16) A check was written by a business for $205, but was recorded in the cash payments journal as $502. How
would this error be included on the bank reconciliation?
A) A deduction on the bank side
B) An addition on the book side
C) An addition on the bank side
D) A deduction on the book side
17) The bank recorded a $2,000 deposit as $200. How would this information be included on the bank
reconciliation?
A) A deduction on the bank side
B) A deduction on the book side
C) An addition on the book side
D) An addition on the bank side
18) The bank collected a note receivable of $1,000. How would this information be included on the bank
reconciliation?
A) An addition on the bank side
B) A deduction on the book side
C) An addition on the book side
D) A deduction on the bank side
19) A check of $75 deposited by a company was returned to the bank for nonsufficient funds. How would this
information be included on the bank reconciliation?
A) A deduction on the bank side
B) An addition on the bank side
C) An addition on the book side
D) A deduction on the book side
20) Check Number 6135 for $576 was incorrectly entered as $657. Which adjustment needs to be made?
A) Decrease the book balance.
B) Decrease the bank statement balance.
C) Increase the book balance.
D) Increase the bank statement balance.
21) Check Number 367 for $33.52 was incorrectly entered as $33.25. Which adjustment needs to be made?
A) Decrease the book balance.
B) Decrease the bank statement balance.
C) Increase the book balance.
D) Increase the bank statement balance.
22) The bank charged a service fee of $20. How would this information be included on the bank reconciliation?
A) A deduction on the bank side
B) An addition on the book side
C) A deduction on the book side
D) An addition on the bank side
23) Which of the following items found on a bank reconciliation does NOT require an adjusting entry?
A) Interest earned
B) A bank service charge
C) A note collected by the bank
D) Deposits in transit
24) Which of the following is TRUE about a bank reconciliation?
A) A bank reconciliation should not be prepared by an employee who handles cash transactions.
B) A bank reconciliation cannot be prepared with online banking.
C) A bank reconciliation is a financial statement.
D) A bank reconciliation guarantees that no errors have been made.
25) Which of the following items does NOT cause a difference in the bank balance and the book balance on a bank
reconciliation?
A) Nonsufficient funds checks
B) Outstanding checks
C) Deposits in transit
D) Canceled checks
26) The following information is available for Matt’s Unlimited Company for the current month. What is the
adjusted book balance on the bank reconciliation?
Book balance end of the month
$5,575
Outstanding checks
584
Deposits in transit
2,500
Service charges
75
Interest revenue
25
A) $7,466
B) $5,500
C) $5,550
D) $5,525
27) A company received a bank statement showing a balance of $62,300. Reconciling items were outstanding
checks of $1,450 and a deposit in transit of $8,500. What is the company’s adjusted bank balance?
A) $72,250
B) $60,850
C) $69,350
D) $70,850