Chapter 5—Internal Controls: Ensuring the Integrity of Financial
Information Key
1. Which of the following is NOT a reason for problems occurring in the financial statements?
2. Which of the following statements is true about errors in the financial statements of a company?
3. Recording $130 of insurance expense as advertising expense will result in
4. If rent for 2012 is paid in advance during 2011 but is mistakenly debited to Rent Expense in 2011,
5. Recording the payment of an account payable twice will result in the
6. Failure to record the expired amount of prepaid rent expense
7. Recording the collection of accounts receivable by debiting Cash and crediting Revenue
8. Recording Rent Expense as Wage Expense
9. Failure to record the used portion of supplies on hand during the month has the following effect on the
financial statements prepared at the end of the month
10. Which one of the following errors causes net income to be overstated?
11. Which one of the following errors causes net income to be understated?
12. A company purchased a two-year insurance policy on September 1, debiting Prepaid Insurance for the full
amount. If no adjusting entry is made at the end of the year, how does this affect the year-end financial
statements?
13. If a company does NOT record accrued wages expense at the end of the year, how does this affect the year-
end financial statements?
14. If the total amount for Rent Expense is inadvertently posted to Prepaid Rent at the end of the year, what will
be the effect on the year-end financial statements?
15. If the total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year,
what will be the effect on the year-end financial statements?
16. If the total amount for Rent Expense is inadvertently posted to Prepaid Rent at the end of the year, what will
be the effect on the year-end financial statements?
17. If the total amount for Insurance Expense is inadvertently posted to Prepaid Insurance at the end of the year,
what will be the effect on the year-end financial statements?
18. A collection of an account receivable was erroneously recorded and posted as a debit to Cash and a credit to
Consulting Fees Revenue. The journal entry to correct this error would be
19. Blake Co. provided $5,000 of consulting services to Simmons Co. for which they have not yet received
payment. When Blake billed Simmons for the consulting services, Blake mistakenly journalized and posted the
transaction as a $5,000 debit to Accounts Receivable and a $5,000 credit to Unearned Consulting Fees. The
entry Blake needs to make to correct this error is
20. A purchase of $1,600 of supplies for cash was incorrectly journalized and posted as a $1,600 debit to
Supplies Expense and a $1,600 credit to cash. The entry to correct this error is
21. Which of the following statements is true about disagreements in the financial statements of a company?
22. Estimates are used in many instances when recording a company’s results of operations. Which of the
following would NOT require an estimate to be made?
23. If two different accountants were to estimate the percentage of customers who will NOT pay their accounts
(bad debts), they could arrive at different estimates. These differing estimates would affect the financial
statements. Such differences in assessing estimates are due to
24. Which of the following is true about fraudulent accounting?
25. All of the following are likely to be methods that could be used to conduct fraud EXCEPT
26. If an employee steals cash from a company and successfully covers up his/her actions by recording a
fictitious debit to Prepaid Advertising and a credit to Cash, then
27. If an employee steals cash from a company and tries to cover up his/her actions by recording a fictitious
debit to Prepaid Insurance and a credit to Cash, then
28. If an employee steals cash from a company and tries to cover up his/her actions by recording a fictitious
debit to Insurance Expense and a credit to Cash, then
29. If an employee steals cash from a company and successfully covers up his/her actions by recording a
fictitious debit to Accounts Payable and a credit to Cash, then
30. Which of the following requires that every company’s annual report contain an internal control report?
31. Which of the following is NOT one of the major safeguards in the financial reporting process?
32. Which of the following is NOT one of the major concerns most companies have when they are designing
internal controls?
33. Which of the following is NOT one of the five basic categories of internal control?
34. The Sarbanes-Oxley Act requires that an internal control report be included in every company’s annual
report. Which one of the following is NOT one of the requirements of the internal control report?
35. Internal controls are designed to help and protect all of the following groups of people, EXCEPT
36. The internal control structure of a company is a system of policies and procedures established to
37. Which of the following is NOT usually considered a component of a company’s control environment?
38. Which of the following requires that audit committee members be financially literate?
39. Which of the following are usually members of a company’s audit committee?
40. The purpose of the audit committee within an organization is to
41. If an external auditor suspects wrongdoing in financial statements, the concerns should be addressed to
42. The control environment can be defined as
43. Control activities can be defined as
44. Which of the following categories of control activities is NOT considered a preventative control?
45. Which of the following groups of control activities are considered preventative controls?
46. Which of the following groups of control activities are considered detective controls?
47. Which of the following are valid control procedures?
48. Which of the following are the three functions that should be performed by separate departments or
individuals?
49. Which of the following is generally NOT performed by an accounting clerk?
50. Which of the following is desirable in a good system of internal accounting control?
51. Which of the following is a poor internal accounting control feature?
52. Keeping marketable securities and cash in a fireproof vault is an example of which type of accounting
procedure?
53. Using independent reviewers, such as auditors, is an example of which type of accounting procedure?
54. Which of the following is NOT an objective of the accounting system?
55. Which of the following is a characteristic of a well-designed document?
56. Which of the following is an example of an adequate segregation of duties?
57. Which of the following is an example of a proper procedure of authorization?
58. Which of the following is an example of a physical control over assets and records?
59. Which of the following is an example of an independent check on performance?
60. Which of the following is typically NOT a reason for managing reported earnings?
61. As William is preparing the end of year financial statements, he has been asked to reconsider the timing of
revenues and expenses in order to report less volatile earnings. This is an example of
62. As William is preparing the end of year financial statements, he has been asked to review the accrual
judgments and estimates to see if the originally calculated net loss can be changed to a net profit. This is an
63. As William is preparing the end of year financial statements, he notices that the numbers required for his
personal bonus have not been met. He begins to review the estimates that he has made in order to possibly
adjust some numbers to meet the requirements for his bonus. This is an example of
64. As William is preparing the end of year financial statements, he realizes that the earnings are not quite up to
par for the large loan application that is being currently processed. He decides to stretch the assumptions just
enough to be able to meet the requirements for the loan application. This is an example of
65. Which of the following items of the earnings management continuum is in the correct order?
66. Most companies that engage in earnings management typically do NOT go beyond which of the following
activities on the earnings management continuum?
67. Earnings management through strategic matching is best exemplified by
68. Earnings management through aggressive accounting is best exemplified by
69. Earnings management through deceptive accounting is best exemplified by
70. Recording as an asset expenditures that have no future economic benefit is an example of
71. Which of the following typically involves the use of non-GAAP accounting?
72. Fraud is