Chapter 08 Cash and Internal Controls
MULTIPLE CHOICE QUESTIONS
1)
A properly designed internal control system is a key part of systems design, analysis, and
performance.
A)
True
B)
False
2)
The use of internal controls provides a guarantee against losses due to operating activities.
A)
True
B)
False
3)
Maintaining adequate records is an important internal control principle.
A)
True
B)
False
4)
Clearly establishing responsibilities and assigning all accounting activities to one person is an
important principle of internal control.
A)
True
B)
False
5)
Cash registers, time clocks, and personal identification scanners are examples of technologies that
can improve internal control.
A)
True
B)
False
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.
A)
True
B)
False
7)
Insuring assets and requiring all accounting personnel to have CPA licenses are two important
principles of internal control.
A)
True
B)
False
8)
Because employees know that bonding is an insurance policy against loss from theft, bonding does
not generally discourage loss from theft.
A)
True
B)
False
9)
According to good internal control policies, a person who controls an asset also maintains that
asset’s accounting records.
A)
True
B)
False
10)
Technologically advanced accounting systems rarely need monitoring for errors because computers
always process transactions correctly.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
13)
Collusion is a form of fraud where individuals collaborate to thwart separation of duties.
A)
True
B)
False
14)
Separation of duties involves dividing responsibility for a transaction or a series of related
transactions between two or more individuals or departments.
A)
True
B)
False
15)
The Sarbanes-Oxley Act (SOX) requires managers and auditors of companies whose stock is
traded on an exchange to document and certify the system of internal controls.
A)
True
B)
False
16)
Harsh penalties exist for violators of the Sarbanes-Oxley Act (SOX) – sentences up to 25 years in
prison with severe fines.
A)
True
B)
False
17)
Human fraud is driven by the triple-threat of fraud: Opportunity, collusion, and rationalization.
A)
True
B)
False
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.
A)
True
B)
False
19)
Liquidity refers to a company’s ability to pay its long-term obligations.
A)
True
B)
False
20)
Money orders, cashier’s checks, and certified checks are all examples of cash.
A)
True
B)
False
21)
Basic bank services such as bank accounts, bank deposits, and checking contribute to the control of
cash.
A)
True
B)
False
22)
The payee is the person who signs a check, authorizing its payment.
A)
True
B)
False
23)
Electronic funds transfers (EFTs) are decreasingly used by companies due to the inconvenience and
high cost.
A)
True
B)
False
24)
Canceled checks are checks the bank has paid and deducted from the customer’s account during the
period.
A)
True
B)
False
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.
A)
True
B)
False
26)
Signature cards, deposit tickets, checks, and bank statements are all examples of internal control
devices for banking activities.
A)
True
B)
False
27)
On a bank statement, deposits are listed as credits because the bank increases its liability to the
depositor when the deposit is made.
A)
True
B)
False
28)
The days’ sales uncollected ratio measures a company’s ability to manage its debt.
A)
True
B)
False
29)
The days’ sales uncollected ratio measures the liquidity of accounts receivable.
A)
True
B)
False
30)
When evaluating the days’ sales uncollected ratio, generally the higher the receivables balance, the
better the ratio.
A)
True
B)
False
31)
Internal control of cash receipts aims to ensure that all cash received is properly recorded and
deposited.
A)
True
B)
False
32)
A voucher system is a set of procedures and approvals designed to control cash disbursements and
the acceptance of obligations.
A)
True
B)
False
33)
Most large thefts occur from payment of fictitious invoices, which makes control of cash
disbursements especially important for companies.
A)
True
B)
False
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.
A)
True
B)
False
35)
The clerk who has access to the cash in the cash register should also have access to the cash
register tape or file.
A)
True
B)
False
36)
A voucher system’s control over cash disbursements begins when a company incurs an obligation
that will result in eventual payment of cash.
A)
True
B)
False
37)
A voucher system establishes procedures for verifying, approving, and recording obligations for
eventual cash disbursement.
A)
True
B)
False
38)
Assigning purchasing, receiving, and paying for merchandise to one department or individual is a
way to streamline a voucher system.
A)
True
B)
False
39)
A voucher is an external document used to accumulate information to control cash disbursements
and to ensure that a transaction is properly recorded.
A)
True
B)
False
40)
Vouchers should be used for purchases of inventory and all other expenditures made within a
company.
A)
True
B)
False
41)
A debit balance in the Cash Over and Short account reflects an expense and is reported on the
income statement as part of selling, general and administrative expenses.
A)
True
B)
False
42)
The Petty Cash account is a separate bank account used for small amounts.
A)
True
B)
False
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.
A)
True
B)
False
44)
Petty cash reimbursement requires a journal entry that involves a debit to the appropriate expenses
and a credit to Cash.
A)
True
B)
False
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.
A)
True
B)
False
46)
The entry to increase the balance in petty cash from $50 to $75 would include a credit to Petty
Cash of $25.
A)
True
B)
False
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.
A)
True
B)
False
48)
Outstanding checks are checks the bank has paid and deducted from the customer’s account during
the month.
A)
True
B)
False
49)
Deposits in transit are deposits made and recorded by the depositor but not yet recorded on the
bank statement.
A)
True
B)
False
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.
A)
True
B)
False
51)
After preparing a bank reconciliation, adjustments must be made for items reconciling the book
balance.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
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 needed and requests that it be purchased.
A)
True
B)
False
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.
A)
True
B)
False
56)
Approved vouchers are recorded in a journal called the voucher register.
A)
True
B)
False
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.
A)
True
B)
False
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.
A)
True
B)
False
59)
In order to streamline the purchasing process, department managers should place orders directly
with suppliers.
A)
True
B)
False
60)
A purchase order is a document the purchasing department sends to the vendor to place an order.
A)
True
B)
False