Financial Accounting, 3e (Kemp/Waybright)
Chapter 6 The Challenges of Accounting: Standards, Internal Control, Audits, Fraud,
and Ethics
6.1 Questions
1) For inventory costing purposes, GAAP and IFRS differ in that GAAP allows the use of FIFO,
whereas IFRS prohibits the use of FIFO.
2) The process CPAs use to confirm that financial reports conform to GAAP is called a review.
3) U.S. GAAP has been organized into what is called the Accounting Standards Codification.
4) Currently, most European countries are using International Financial Reporting Standards.
5) The U.S. is now using International Financial Reporting Standards instead of the old GAAP
system.
6) IFRS is considered a principles-based system, while U.S. GAAP is considered a rules-based
system.
7) For accounting information to be useful it must be all of the following EXCEPT:
A) reliable.
B) understandable.
C) economical.
D) relevant.
8) Which of the following help ensure the usefulness of accounting information?
A) Reliability
B) Understandability
C) Relevance
D) All of the above
9) The government agency that approves U.S. GAAP is the:
A) Senate.
B) Department of Commerce.
C) Department of the Treasury.
D) Securities and Exchange Commission.
10) U.S. GAAP’s overriding principles of accounting are written by the:
A) FASB.
B) SEC.
C) IRS.
D) IASB.
11) IFRS are developed by the:
A) European Union.
B) Financial Accounting Standards Board.
C) International Accounting Standards Board.
D) International Monetary Fund.
12) The International Accounting Standards Board was formed in:
A) 2001.
B) 1991.
C) 1981.
D) 1971.
13) In terms of valuation, U.S. GAAP generally uses ________, while IFRS generally uses
________.
A) market values, historical values
B) historical values, historical values
C) historical values, market values
D) market values, market values
14) The process CPAs use to confirm that financial reports conform to GAAP is known as a(n):
A) examination.
B) audit.
C) review.
D) confirmation.
15) Contingent liabilities are ________ under GAAP, and ________ under IFRS
I. Recorded if probable
II. Recorded if possible
III. Recorded if reasonably estimated
IV. All of the above
A) GAAP I and II; IFRS I and II
B) GAAP I and III; IFRS I and III
C) GAAP IV; IFRS I and III
D) GAAP I and III; IFRS IV
6.2 Questions
1) An organization’s employees are responsible for the design and implementation of the internal
control system.
2) One objective of an internal control system is to safeguard the assets of a company.
3) Ensuring compliance with laws and regulations is an example of what following GAAP can
do for a company.
4) Safeguarding assets and ensuring proper reporting of financial information are two of the
objectives of having an internal control system.
5) According to the text, there are three elements that affect an organization’s internal control
system.
6) Management and staff attitudes toward internal control are an important part of control
activities.
7) The ongoing process that identifies and analyzes potential problems in an organization and
takes steps to reduce those problems is risk assessment.
8) Separation of duties is part of the control environment of an internal control system.
9) The delegation of authority and responsibility is part of the control environment of an internal
control system.
10) Two or more people must work together to commit fraud.
11) A properly designed internal control system can guarantee that fraud will not occur.
12) Internal control is a comprehensive system that helps an organization do all of the following
EXCEPT:
A) safeguard assets.
B) safeguard liabilities.
C) operate efficiently and effectively.
D) ensure compliance with applicable laws and regulations.
13) Internal control systems:
A) are the same from company to company.
B) are regulated by the Securities and Exchange Commission.
C) vary from company to company.
D) guarantee the safeguard of assets.
14) Which element of internal control deals with establishing procedures for things such as
handling of incoming checks?
A) Monitoring
B) Control environment
C) Control activities
D) Risk assessment
15) Which element of internal control deals with the oversight of the internal control system?
A) Monitoring
B) Control environment
C) Information and communication
D) Risk assessment
16) Which element of internal control deals with the establishment of a company’s policies?
A) Control environment
B) Control activities
C) Information and communication
D) Risk assessment
17) Which element of internal control deals with a company having large amounts of cash on
hand?
A) Control environment
B) Control activities
C) Information and communication
D) Risk assessment
18) Properly supervising employees would be an example of what element of internal control?
A) Control environment
B) Control activities
C) Information and communication
D) Risk assessment
19) Establishing a hierarchy to let all management and employees know what is going on in a
company would be an example of what element of internal control?
A) Risk assessment
B) Monitoring
C) Information and communication
D) Control environment
20) Details that support business transactions make up what is called:
A) internal control.
B) monitoring.
C) risk assessment.
D) an audit trail.
21) Which of the following would NOT be considered a control activity?
A) Keeping accounting records
B) Having written job descriptions
C) Not having employees take vacations
D) Changing passwords regularly
22) Which of the following would NOT be considered part of the control environment?
A) Having integrity and ethical values
B) Assessing chances of fraud
C) Having competent workers
D) Having a leadership philosophy
23) Which of the following would NOT be considered part of monitoring in an internal control
system?
A) Having an audit trail
B) Assessing performance of the system
C) Locating weakness of the system
D) Management involvement
24) Which of the following would be considered a part of control activities in an internal control
system?
A) Having large quantities of cash on hand
B) Separation of duties
C) Having a leadership philosophy
D) Locating weaknesses in an internal control system
25) Having security measures, proper authorization channels, and restricted access to assets is an
example of what element of internal control?
A) Control environment
B) Control activities
C) Information and communication
D) Risk assessment
26) Which of the following items is NOT a limit to the effectiveness of internal control systems
in an organization?
A) Properly designed controls
B) Collusion
C) Costs not worth benefits
D) Overriding controls
27) Which of the following items is NOT a limit to the effectiveness of internal control systems
in an organization?
A) Duties not segregated
B) Understanding of policies and procedures
C) Poorly designed controls
D) Costs not worth benefits
28) A disgruntled employee who convinces another to steal from the company is an example of:
A) collusion.
B) monitoring.
C) the control environment.
D) control activities.
29) Which of the following items is NOT a limit to the effectiveness of internal control systems
in an organization?
A) Careless employees
B) Benefits of system exceed the cost of the system.
C) Staff size limitations
D) Collusion
30) A good internal control system does which of the following?
A) Guarantees the efficiency and effectiveness of operations
B) Reduces the risk of undetected errors
C) Provides absolute assurance that no errors will occur
D) Guarantees that fraud will be prevented
31) Which of the following items is NOT a limit to the effectiveness of internal controls?
A) Poorly defined controls
B) Managers overriding controls
C) Not separating duties in departments
D) Making sure employees are less distracted on the job
32) A company may be limited in their internal control procedures because the cost of hiring
enough people to implement the procedures:
A) outweighs the benefits of the system.
B) has nothing to do with the effectiveness of the internal control system.
C) can prevent collusion.
D) can limit employee distractions.
33) A requirement that customers receive a receipt is an example of:
A) monitoring.
B) information and communication.
C) control activities.
D) risk assessment.
34) A requirement that employees go on vacation is an example of:
A) monitoring.
B) information and communication.
C) control activities.
D) A and C are both correct.
35) An audit trail:
A) requires employees to take an annual vacation.
B) limits the number of employees who have access to company assets.
C) consists of business documents and records that provide evidence of transactions.
D) requires the use of security cameras and alarm systems.
36) Risk assessment:
A) is an ongoing process.
B) identifies and analyzes risk.
C) varies from company to company.
D) includes all of the above.
6.3 Questions
1) In a broad sense, fraud is the use of deception or trickery for personal gain.
2) Fraud is always committed against an organization.
3) Fraud is one of the less perpetrated business crimes today.
4) An organization’s employees are usually responsible for fraud that is committed by a business
organization.
5) For fraud to occur, three things must exist.
6) A business has great control over perceived pressure felt by an employee.
7) The Fraud Triangle is used to show the connection of the factors necessary to commit fraud by
or against an organization.
8) The goal of overstating earnings by using fraud is to:
A) deflate the amount of taxes the corporation pays.
B) overstate the cost of goods sold.
C) help increase the stock price of the company.
D) overstate receivables.
9) Fraudulent financial reporting typically involves:
A) management.
B) employees.
C) the board of directors.
D) the stockholders.
10) In order to overstate earnings, a company can:
A) overstate expenses and overstate revenue.
B) overstate receivables and understate payables.
C) understate unearned revenue and understate property, plant and equipment.
D) understate expenses and understate revenue.
11) An overstatement of earnings can inflate a company’s stock price and may also be used to:
A) deflate the amount of taxes the corporation pays.
B) avoid paying raises to employees.
C) ensure larger bonuses to upper management at year-end.
D) avoid paying dividends to stockholders.
12) The primary form of fraud committed against an organization is usually done by:
A) management.
B) employees.
C) stockholders.
D) boards of directors.
13) ________ embezzlement is a form of fraud committed against an organization.
A) Management
B) Employee
C) Stockholder
D) Board of directors
14) Embezzlement usually involves the misappropriation of business:
A) equity by an employee.
B) liabilities by an employee.
C) assets by an employee.
D) information by an employee.
15) If an employee overbills a company for travel, this would be considered a(n):
A) disbursement scheme.
B) expense scheme.
C) cash register scheme.
D) check tampering scheme.
16) If an employee gives a false refund and pockets the cash, this would be considered a(n):
A) disbursement scheme.
B) expense scheme.
C) cash register scheme.
D) check tampering scheme.
17) By definition, an employee who tricks a company into giving up cash for an invalid reason
has engaged in a(n):
A) disbursement scheme.
B) expense scheme.
C) cash register scheme.
D) check tampering scheme.