8-1
Chapter 8
CASH 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 guaranteed protection against losses due to operating
activities.
3. Maintaining adequate records is an important internal control principle.
4. Proper internal control means that responsibility for a task is clearly established and assigned
to one person.
5. Technology such as cash registers, check protectors, time clocks and personal identification
scanners 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 urge adherence to company
policies.
7. The principles of internal control include: establish responsibilities, maintain adequate records,
insure assets, separate recordkeeping from custody of assets, and perform regular and
independent reviews.
8. Bonding does not discourage loss from theft because employees know that bonding is an
insurance policy against loss from theft.
9. Good internal control dictates that a person who controls an asset also maintains that asset’s
accounting records.
10. Technologically advanced accounting systems do not need monitoring for errors because
computers always process transactions correctly.
11. Internal control in technologically advanced accounting systems depends more on the design
and operation of the information system and less on the analysis of its resulting documents.
12. Two important limitations of internal control systems are (1) human error or human fraud,
and (2) cost-benefit.
13. Fraud does not include collusion, which is necessary to thwart separation of duties.
14. Separation of duties divides responsibility for a transaction or a series of related transactions
between two or more individuals or departments. Separation of duties reduces the risk of error
and fraud.
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 near-term obligations.
17. Money orders, cashier’s checks, and certified checks are examples of cash equivalents.
18. Basic bank services such as bank accounts, bank deposits, and checking contribute to the
control and safeguarding of cash.
19. The payee is the person who signs a check, authorizing its payment.
20. Electronic funds transfer (EFT) is the electronic transfer of cash from one party to another.
21. Cancelled checks are checks the bank has paid and deducted from the customer’s account
during the period.
22. A check involves 3 parties: the maker who signs the check, the payee who is the recipient,
and the bank on which the check is drawn.
23. Internal control devices for banking activities include signature cards, deposit tickets, checks,
and bank statements.
24. On a bank statement, deposits are listed as debits because the bank increases its cash account
when the deposit is made.
25. The days’ sales uncollected ratio measures a company’s ability to manage its debt.
26. The days’ sales uncollected ratio measures the liquidity of accounts receivable.
27. When evaluating the days’ sales uncollected ratio, generally the less time that money is tied
up in receivables the better.
28. Internal control of cash receipts aims to ensure that all cash received is properly recorded and
deposited.
29. A voucher system is a set of procedures and approvals designed to control cash
disbursements and the acceptance of obligations.
30. Control of cash disbursements is important for companies as most large thefts occur from
payment of fictitious invoices.
31. If the Cash Over and Short account has a debit balance at the end of the period, the amount is
reported as miscellaneous revenue.
32. The clerk who has access to the cash in the cash register should not have access to the cash
register tape or file.
33. A voucher system’s control over cash disbursements begins when a company incurs an
obligation that will result in eventual payment of cash.
34. A voucher system establishes procedures for verifying, approving, and recording obligations
for eventual cash disbursement.
35. To streamline a voucher system, procedures for purchasing, receiving, and paying for
merchandise can be performed by one department or individual.
36. A voucher is an internal document or file used to accumulate information to control cash
disbursements and to ensure that a transaction is properly recorded.
37. Vouchers should be used only for purchases. Other expenditures do not need to go through
the voucher system.
38. 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.
39. The Petty Cash account is a separate checking account used for small amounts.
40. All disbursements from petty cash should be documented by a petty cash receipt.
41. The journal entry for petty cash reimbursement involves a debit to the appropriate expenses
and a credit to Petty Cash.
42. 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.
43. The entry to increase the balance in petty cash from $50 to $75 would include a credit to
Petty Cash of $25.
44. 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.
45. Outstanding checks are checks the bank has paid and deducted from the customer’s account
during the month.
46. Deposits in transit are deposits made and recorded by the depositor but not yet recorded on
the bank statement.
47. It is not necessary for businesses to reconcile their checking accounts since banks keep
accurate records and provide internal control support for cash.
48. After preparing a bank reconciliation, adjustments must be made for items reconciling the
bank balance and items reconciling the book balance.
49. Factors that cause the bank statement balance for a checking account to be different from the
company’s checking account balance include: outstanding checks, deposits in transit, deductions
for bank fees, additions for interest, and errors.
50. The steps to reconcile the beginning balance of the bank statement to the adjusted bank
balance include adding outstanding checks, deposits, and bank service charges.
51. When merchandise is needed, a department manager must inform the purchasing department
of its needs by preparing and signing a purchase requisition which lists the merchandise needed
and requests that it be purchased.
52. An invoice is an itemized statement of goods prepared by the vendor listing the customer’s
name, items sold, sales prices, and terms of sale.
53. The voucher register is a journal that is used to record approved vouchers.
54. An invoice is a document that is 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.
55. When a voucher system is used, recording a purchase is initiated by an invoice approval and
a voucher, not an invoice.
56. In order to streamline the purchasing process, department managers should place orders
directly with suppliers.
57. A purchase requisition is a document the purchasing department sends to the vendor to place
an order.
58. The net method for recording purchases records the purchase invoice at its net amount of any
cash discount.
59. The Discounts Lost account represents the savings earned in taking advantage of purchase
discounts.
60. Under the net method an invoice for $2,000 with terms of 2/10, n/30 should be recorded with
a debit to Inventory and a credit to Accounts Payable of $2,000.
61. An internal control system consists of all of the following policies and procedures except
ones designed to:
A. Protect assets.
B. Ensure reliable accounting.
C. Guarantee a return to investors
D. Urge adherence to company policies.
E. Promote efficient operations.
62. Managers place a high priority on internal control systems because the systems assist
managers in the:
A. Prevention of avoidable losses.
B. Planning of operations.
C. Monitoring of company performance.
D. Monitoring of employee performance.
E. Assurance that no loss will occur.
63. The principles of internal control include:
A. Establish responsibilities.
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. Maintain minimal 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. When two clerks share the same cash register it 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. Pre-numbered printed checks are an example of which internal control principle?
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.