Chapter 6: Cash and Internal Control
81. Having only one person authorized to both prepare and sign checks is a violation of what internal control procedure?
a. Segregation of duties
b. Independent review and appraisal
c. Independent verifications
d. Proper authorizations
82. Which one of the following statements regarding internal control is true?
a. Companies can design a system of internal control that is foolproof.
b. A well-designed internal control system is a luxury that few companies can afford.
c. It is easier to implement an effective internal control system in a small company because of the limited number of
employees.
d. Large companies are able to devote a substantial amount of resources to internal control systems because these
companies have the assets to justify the cost.
83. Administrative controls
a. Are concerned with efficient operations and adherence to managerial policies
b. Are concerned with the reliability of the financial statements
c. Are the responsibility of the company‘s auditors
d. Are concerned primarily with safeguarding assets
84. Segregation and rotation of duties is most effective in
a. Increasing cost of goods sold
b. Assisting management in overriding controls
c. Preventing collusion
d. Misappropriating company assets
85. Which internal control procedure is violated when the cashier at the checkout stand also records the daily receipts
in the journal?
a. Segregation of duties
b. Independent review and appraisal
c. Independent verifications
d. Proper authorizations
Chapter 6: Cash and Internal Control
86. Which one of the following documents is used in the control of cash receipts?
a. Purchase requisitions
b. Receiving reports
c. Canceled checks from customers
d. Bank deposit slips
87. Each of the following documents is used in the control of cash receipts except:
a. Cash register tapes
b. Check lists or prelists
c. Canceled checks from customers
d. Bank deposit slips
88. Each of the following documents is used in the control of cash disbursements except:
a. Purchase requisitions
b. Purchase orders
c. Receiving reports
d. Cash register tapes
89. Which one of the following documents is used in the control of cash disbursements?
a. Income Statement
b. Bank deposit slips
c. Receiving reports
d. Cash register tapes
90. The following set of items describes activities completed by a company in purchasing and paying for merchandise.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
Although the department supervisor can indicate a preferred supplier or vendor on purchase requisitions, the
purchasing department has the responsibility for making the final decision on a vendor.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
Chapter 6: Cash and Internal Control
91. The following set of items describes activities completed by a company in purchasing and paying for merchandise.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
The receiving department compares the quantity received with the quantity printed on the receiving report when the
purchase order was prepared.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
92. The following set of items describes activities completed by a company in purchasing and paying for merchandise.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
Extensions and footings on purchase invoices are verified before the invoices are approved for payment
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
93. The following set of items describes activities completed by a company in purchasing and paying for merchandise.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
All documents attached to an invoice approval form are canceled before a check is signed.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
94. The following set of items describes activities completed by a company in purchasing and paying for merchandise.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
The clerk in the accounting department records both purchases and payments of invoices.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
Chapter 6: Cash and Internal Control
95. The following set of items describes activities completed by a company in purchasing and paying for merchandise.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
Checks are signed by designated officers in the finance department.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
96. The following set of items describes activities completed by a company in collecting cash for merchandise sales.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
A single employee in the mailroom opens the mail, counts the money received, and prepares a control list of the
amount received.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
97. The following set of items describes activities completed by a company in collecting cash for merchandise sales.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
An employee in the accounting department records cash receipts from customers and prepares a bank deposit slip.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
98. The following set of items describes activities completed by a company in collecting cash for merchandise sales.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
Cash register tapes are picked up daily by an employee from the accounting department.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
Chapter 6: Cash and Internal Control
99. The following set of items describes activities completed by a company in collecting cash for merchandise sales.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
An employee from the accounting department compares the control list and the cash register tapes with the bank
deposit slip.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
100. The following set of items describes activities completed by a company in collecting cash for merchandise sales.
For each activity, identify whether or not the activity adheres to or violates sound internal control procedures.
Monthly statements, indicating the current balance due, are mailed to customers.
a. Adheres to sound internal control procedures
b. Violates sound internal control procedures
c. Neither strengthens nor violates internal control
101. Which one of the following is not a procedure in the approval of a specific invoice for payment?
a. The purchase requisition, purchase order, receiving report, and invoice are compared.
b. The extensions and footings on the invoice are verified.
c. An employee verifies that all of the approval activities have been completed before a check is prepared.
d. The purchasing department prepares a voucher to request payment.
102. What is the form sent by the seller to the buyer as evidence of a sale?
a. An invoice approval form
b. A purchase order
c. A receiving report
d. An invoice
103. The department in an organization that is responsible for preparing the invoice approval form to document all of the
information about a particular purchase is:
a. the human resources department.
b. the purchasing department.
c. the receiving department.
d. the accounting department.
Chapter 6: Cash and Internal Control
104. Which of the following is another term for the invoice approval form?
a. A receiving report
b. An invoice
c. A voucher
d. A remittance advice
105. A voucher is usually supported by
a. a supplier’s invoice
b. a purchase order
c. a receiving report
d. all of the above
106. The notification accompanying a check that indicates the specific invoice being paid is called a
a. remittance advice
b. voucher
c. debit memo
d. credit memo
107. A six–month certificate of deposit would be considered to be a cash equivalent.
a. True
b. False
108. Petty cash typically is composed of coins and currency kept on hand in a business to make minor disbursements.
a. True
b. False
109. The key to the classification of an amount as cash is that it be available to pay debts within a three-month period of
time.
a. True
b. False
Chapter 6: Cash and Internal Control
110. Some cash equivalents appear in the long term investment section of a balance sheet.
a. True
b. False
111. If collection of accounts receivable is assured, then accounts receivable are considered to be cash equivalents.
a. True
b. False
112. Treasury notes with a maturity of three months or less that are issued by the Federal Government are cash
equivalents.
a. True
b. False
113. A check written by a company but not yet presented to the bank for payment is called a check in transit.
a. True
b. False
114. When reconciling a bank account, the company does not have to prepare an adjusting entry for outstanding
checks.
a. True
b. False
115. When reconciling a bank account, the company must prepare an adjusting entry for deposits in transit.
a. True
b. False
116. In a sound internal control system, all cash receipts should be deposited daily intact.
a. True
b. False
Chapter 6: Cash and Internal Control
117. Checks received from customers are considered to be cash in the company’s books.
a. True
b. False
118. The bank informs a customer that a service charge has been assessed on their account by including a credit
memorandum in the monthly bank statement
a. True
b. False
119. On bank reconciliation, outstanding checks are added to the cash balance per the bank statement.
a. True
b. False
120. When a bank pays interest or collects an amount owed to a company by one of the bank‘s customers, the bank
issues a debit memorandum.
a. True
b. False
121. When a bank pays interest or collects an amount owed to a company by one of the bank‘s customers, the bank
issues a credit memorandum.
a. True
b. False
122. On a bank reconciliation, bank charges for the month are added to the cash balance per the books.
a. True
b. False
123. On a bank reconciliation, interest earned for the month is added to the cash balance per the books.
a. True
b. False
Chapter 6: Cash and Internal Control
124. A company prepares adjusting entries for debit memorandums but not for credit memorandums
a. True
b. False
125. The establishment of a petty cash fund has no effect on the company’s total cash balance.
a. True
b. False
126. No special internal control procedures are necessary with a petty cash account because the amount is usually so
small.
a. True
b. False
127. An advantage of a strong system of internal control is that less testing of the accounting system is done by the
outside auditors.
a. True
b. False
128. A good system of internal control is important to make a company‘s accounting records completely foolproof.
a. True
b. False
129. An accounting system must be computerized in order to ensure the company has proper internal control.
a. True
b. False
130. Audit committees are required to consist of only directors who are key officers of the company.
a. True
b. False
Chapter 6: Cash and Internal Control
131. According to the Sarbanes-Oxley Act of 2002, only external auditors can provide bookkeeping services for the
clients they audit.
a. True
b. False
132. One concern of the internal auditor is the efficiency with which the organization is run.
a. True
b. False
133. If a company has internal auditors, it does not need to have external auditors.
a. True
b. False
134. Accounting controls primarily concern safeguarding of assets and ensuring the reliability of the financial
statements.
a. True
b. False
135. A company’s internal control system is designed by its external auditors.
a. True
b. False
136. The only reason a company needs to create an internal control system is to deter intentional fraudulent acts.
a. True
b. False
137. A good system of internal controls requires that the physical custody of assets be separated from the accounting
for those assets. This concept is known as safeguarding assets and records.
a. True
b. False
Chapter 6: Cash and Internal Control
138. If a company hires honest employees, no internal control procedures are necessary.
a. True
b. False
139. As part of good internal control, disbursements can be made either by check or cash.
a. True
b. False
140. Most merchandisers receive checks and currency from customers in two ways: (1) cash received over the counter
from cash sales and (2) cash received in the mail from credit sales.
a. True
b. False
141. Only one copy of the prelist should be prepared when an employee opens mail with customer payments to avoid
complexity in the accounting system and maintain control.
a. True
b. False
142. The use of customer statements as a control device will be effective only if the employees responsible for the
custody of cash received through the mail, for record keeping, and for authorization of adjustments to customers’
accounts are not allowed to prepare and mail statements to customers.
a. True
b. False
143. A purchase order is not the basis for recording a purchase and a liability.
a. True
b. False
144. Typically the classification known as readily available refers to investments that are converted into cash in
_______________ months or less.
Chapter 6: Cash and Internal Control
145. The IFRS definition of cash equivalents is very similar to that used by .
146. are those investments that are readily convertible into known amounts of cash and that
have an original maturity to the investor of three months or less.
147. describes a form used by the accountant to reconcile the balance shown on the
bank statement for a particular account with the balance shown in the accounting records.
148. A check written by a company but not yet presented to the bank for payment is called a(n)
_________________________.
149. Items that are included on a bank statement and increase the bank account balance are called
_________________________.
150. A check that is returned or “bounces” because of insufficient funds is called a(n) .
151. An amount recorded as an increase in the company’s cash account at month-end, but which has not yet been
reflected on the bank statement is called a(n) .
152. Items that are included on a bank statement and decrease the firm‘s bank account balance are called
_________________________.
153. If a company records a $310 receipt as $130, this type of error is called a(n) .
154. The audit committee of the board of directors provides direct contact between the
______________________________ and the ________________________________________.
Chapter 6: Cash and Internal Control
155. is the body created by the Sarbanes-Oxley Act that was given the authority to set auditing
standards in the United States.
156. The is a subset of the board of directors that acts as a direct contact between the
stockholders and the independent accounting firm.
157. is a report required by section 404 of the Sarbanes-Oxley Act.
158. controls within a company are more concerned with efficient operations and the
adherence to management policies than with the accurate reporting of financial information.
159. controls primarily concern safeguarding of assets and ensuring the reliability of the
financial statements.
160. are the crucial link between economic transactions entered into by an
entity and the accounting for these events.
161. A(n) is a form that a department uses to initiate a request to order merchandise.
162. A(n) is a form sent by the purchasing department to the supplier.
163. A(n) is a form sent by the seller to the buyer as evidence of a sale.
164. A(n) is a form used by the receiving department to account for the quantity and
condition of merchandise received from a supplier.
Chapter 6: Cash and Internal Control
165. A(n) is a form the accounting department uses before making payment to document the
accuracy of all information about a purchase.
166. Select the action that matches the category of internal control procedures. (Select all that apply.)
Independent review and appraisal
a. One department should check on another
b. Internal audit staff ensure all is working as intended
c. Accounting and cash collection is properly separated
d. Blank checks are locked at all times when not in use
e. Origination of initial entry into accounting system
f. Specific authority is given by management for the performance of activities
167. French Corp. began the year with $18,000 in cash and another $6,500 in cash equivalents.
During the year, operations generated $132,000 in cash. Net cash used in investing activities during the year was
$213,000, and the company raised a net amount of $168,000 from financing activities.
REQUIRED:
Determine the year-end balance in cash and cash equivalents.
Chapter 6: Cash and Internal Control
168. Lower Enterprises invested its excess cash in the following instruments during December 2014:
Certificate of deposit, due January 31, 2017
$85,000
Certificate of deposit, due March 30, 2015
120,000
Commercial paper, original maturity date February 28, 2015
105,000
Deposit into a money market fund
45,000
Investment in stock
55,000
90–day Treasury bills
110,000
Treasury note, due December 1, 2042 REQUIRED:
400,000
Determine the amount of cash equivalents that should be combined with cash on the company’s balance sheet at
December 31, 2014, and for purposes of preparing a statement of cash flows for the year ended December 31,
2014.
Chapter 6: Cash and Internal Control
169. The following accounts are listed in a company’s general ledger:
December 31, 2015
December 31, 2014
$12,300
$10,000
12,000
15,000
4,500
4,000
800
1,000
23,200
28,700
6,200
5,400
REQUIRED:
1. Which items are cash equivalents?
2. Explain where items that are not cash equivalents should be classified on the balance sheet.
3. What are the amount and the direction of change in cash and cash equivalents for 2015? Is the company as liquid
at the end of 2015 as it was at the end of 2014? Explain your answer.
Certificates of Deposit
Petty Cash Fund
Money Market Fund
Cash in Checking Account
Chapter 6: Cash and Internal Control
170. Houston Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for July
2014 indicated the following:
Balance, July 31, 2014
$63,400
Service charge for July
160
Interest earned during July
100
NSF check from Black Corp. (deposited by Houston)
1,150
Note ($3,000) and interest ($80) collected for Houston from a
customer of Houston’s
3,080
An analysis of canceled checks and deposits and the records of Houston revealed the following items:
Checking account balance per Houston’s books
$58,770
Outstanding checks as of July 31
4,630
Deposit in transit at July 31
1,780
Error in recording check #205 issued by Houston
90
The correct amount of check #205 is $540, but it was recorded as a cash disbursement of $450. The check was
issued to pay for merchandise purchases. The check appeared on the bank statement correctly.
A) Prepare a bank reconciliation schedule at July 31, 2014, in proper form.
B) What amount would Houston report on its balance sheet at July 31, 2014, for cash?
Chapter 6: Cash and Internal Control
171. Winslet Corp. prepares monthly bank reconciliations of its checking account balance. The bank statement for May,
2014, indicated the following:
Checking account balance per Winslet’s books
$26,040
Outstanding checks as of May 31
2,950
Deposit in transit at May 31
3,110
Error in recording check # 4456 issued by Winslet
90
An analysis of canceled checks and deposits and the records of Winslet Corp. revealed the following items:
Checking account balance per Winslet’s books $26,040
Outstanding checks as of May 31 2,950
Deposit in transit at May 31 3,110
Error in recording check # 4456 issued by Winslet 90
The correct amount of check #4456 is $760. It was recorded as a cash disbursement of $670 by mistake. The check
was issued to pay for merchandise purchases. The check appeared on the bank statement correctly.
A) Prepare a bank reconciliation schedule at May 31, 2014 in proper form.
B) Explain how checking accounts, bank statements, and bank reconciliations are used by Winslet to control its cash.
Balance per bank statement
Add: deposit in transit
Less: outstanding checks
Total
Balance per books
Add: interest earned
Add: note ($4,000) and interest ($100) collected by the bank
Less: NSF check
Less: service charges
Correction of error-check for $760 recorded as $670