343
Chapter 7—Sarbanes–Oxley, Internal Control, and Cash
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
Multiple
Choice
Learning
Goal(s)
Level of
Difficulty
AICPA
Tag
1
1
Easy
Reflective
Reporting
37
3
Moderate
Reporting
2
1
Easy
Reflective
Reporting
38
3
Moderate
Reporting
3
1
Easy
Reflective
Reporting
39
3
Easy
Reporting
4
1
Easy
Reflective
Reporting
40
4
Easy
Reporting
5
1
Easy
Reflective
Reporting
41
4
Moderate
Reporting
6
2
Easy
Reflective
Reporting
42
4
Difficult
Reporting
7
2
Easy
Reflective
Reporting
43
4
Difficult
Reporting
8
2
Easy
Reflective
Reporting
44
4
Difficult
Reporting
9
2
Easy
Reflective
Reporting
45
5
Difficult
Reporting
10
2
Easy
Reflective
Reporting
46
5
Difficult
Reporting
11
2
Easy
Reflective
Reporting
47
5
Moderate
Reporting
12
2
Moderate
Reflective
Reporting
48
5
Difficult
Reporting
13
2
Easy
Reflective
Reporting
49
5
Moderate
Reporting
14
2
Easy
Reflective
Reporting
50
5
Difficult
Reporting
15
2
Moderate
Reflective
Reporting
51
5
Difficult
Measure
16
2
Easy
Reflective
Reporting
52
5
Difficult
Measure
17
2
Easy
Reflective
Reporting
53
5
Difficult
Measure
18
2
Easy
Reflective
Reporting
54
5
Difficult
Reporting
19
2
Easy
Reflective
Reporting
55
5
Difficult
Reporting
20
2
Easy
Reflective
Reporting
56
5
Moderate
Measure
21
2
Moderate
Reflective
Reporting
57
5
Moderate
Reporting
22
2
Easy
Reflective
Reporting
58
5
Moderate
Reporting
23
2
Easy
Reflective
Reporting
59
5
Difficult
Reporting
24
2
Easy
Reflective
Reporting
60
5
Difficult
Reporting
25
2
Easy
Reflective
Reporting
61
5
Moderate
Reporting
26
2
Moderate
Reflective
Reporting
62
5
Difficult
Reporting
27
2
Moderate
Reflective
Reporting
63
5
Difficult
Reporting
28
3
Easy
Reflective
Measure
64
5
Moderate
Reporting
29
3
Easy
Reflective
Measure
65
5
Moderate
Reporting
30
3
Moderate
Reflective
Measure
66
5
Moderate
Analytic
Reporting
31
3
Difficult
Analytic
Reporting
67
6
Moderate
Reflective
Reporting
32
3
Difficult
Reflective
Reporting
68
6
Moderate
Analytic
Reporting
33
3
Easy
Reflective
Reporting
69
8
Moderate
Analytic
Measure
34
3
Moderate
Analytic
Reporting
70
8
Moderate
Analytic
Measure
35
3
Moderate
Reflective
Reporting
71
8
Moderate
Analytic
Measure
36
3
Moderate
Reflective
Reporting
72
8
Moderate
Analytic
Reporting
344 ♦ Chapter 7
True/
False
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Moderate
Reflective
Reporting
2
1
Moderate
Reflective
Reporting
3
1
Moderate
Reflective
Reporting
4
2
Moderate
Reflective
Reporting
5
2
Moderate
Reflective
Reporting
6
2
Moderate
Reflective
Reporting
7
2
Moderate
Reflective
Reporting
8
2
Moderate
Reflective
Reporting
9
2
Moderate
Reflective
Reporting
10
2
Moderate
Reflective
Reporting
11
2
Moderate
Reflective
Reporting
12
2
Moderate
Reflective
Reporting
13
2
Moderate
Reflective
Reporting
14
3
Moderate
Reflective
Reporting
15
3
Moderate
Reflective
Reporting
16
3
Moderate
Analytic
Reporting
17
3
Moderate
Analytic
Reporting
18
3
Moderate
Analytic
Reporting
19
3
Moderate
Analytic
Reporting
20
3
Moderate
Reflective
Reporting
21
3
Moderate
Analytic
Reporting
22
4
Moderate
Analytic
Reporting
23
4
Moderate
Analytic
Reporting
24
4
Moderate
Analytic
Reporting
25
4
Moderate
Analytic
Reporting
26
4
Moderate
Analytic
Reporting
27
4
Moderate
Analytic
Reporting
28
5
Moderate
Analytic
Reporting
29
5
Moderate
Reflective
Reporting
30
5
Moderate
Analytic
Reporting
31
5
Moderate
Reflective
Reporting
32
5
Moderate
Analytic
Reporting
33
5
Moderate
Analytic
Reporting
34
5
Moderate
Analytic
Reporting
35
5
Difficult
Analytic
Reporting
36
6
Difficult
Analytic
Reporting
37
6
Difficult
Analytic
Reporting
38
7
Moderate
Reflective
Reporting
39
8
Moderate
Reflective
Reporting
40
8
Moderate
Analytic
Reporting
41
9
Moderate
Reflective
Measure
42
9
Moderate
Analytic
Measure
43
9
Moderate
Analytic
Measure
Case
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
2
Difficult
Analytic
Reporting
2
3
Difficult
Analytic
Reporting
3
8
Difficult
Analytic
Measure
4
8
Difficult
Analytic
Measure
5
5
Moderate
Analytic
Reporting
Essay
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
1
Moderate
Reflective
Reporting
2
2
Moderate
Reflective
Reporting
3
2
Moderate
Reflective
Reporting
4
2
Moderate
Reflective
Reporting
5
2
Moderate
Reflective
Reporting
6
2
Moderate
Reflective
Reporting
7
2
Moderate
Reflective
Reporting
8
2
Moderate
Reflective
Reporting
9
3
Moderate
Reflective
Reporting
10
3
Moderate
Reflective
Reporting
11
4
Moderate
Reflective
Reporting
12
5
Difficult
Analytic
Reporting
13
6
Moderate
Reflective
Reporting
14
6
Moderate
Reflective
Reporting
15
6
Moderate
Reflective
Reporting
16
7
Moderate
Reflective
Reporting
17
7
Moderate
Reflective
Reporting
18
8
Moderate
Reflective
Measure
Problem(s)
Learning
Goal(s)
Level of
Difficulty
AACSB
Tag
AICPA
Tag
1
2
Difficult
Reflective
Reporting
2
2
Difficult
Reflective
Reporting
3
2
Difficult
Reflective
Reporting
4
2
Difficult
Reflective
Reporting
5
2
Difficult
Reflective
Reporting
6
3
Difficult
Analytic
Reporting
7
3
Moderate
Analytic
Reporting
8
5
Difficult
Analytic
Measure
9
5
Difficult
Analytic
Measure
10
5
Difficult
Analytic
Reporting
11
5
Difficult
Analytic
Reporting
12
5
Difficult
Analytic
Reporting
13
5
Difficult
Analytic
Reporting
14
5
Moderate
Analytic
Reporting
15
8
Difficult
Analytic
Measure
Difficulty Ratings
Guide:
Easy
Taken nearly verbatim
from the text
Moderate
Using different expression
or application of concept
Difficult
Several reasoning steps
Sarbanes-Oxley, Internal Control, and Cash ♦ 345
MULTIPLE CHOICE
1. The purpose of the Sarbanes-Oxley Act of 2002 is to
a.
restore public confidence and trust in the financial statements of publicly held companies
b.
require all companies to prepare financial statements
c.
protect companies from demands of investors, stockholders and creditors
d.
all of these are correct
2. Internal control is broadly defined as
a.
the laws and regulations affecting company reporting activities
b.
the internal code of conduct developed by a company
c.
the procedures and processes used by companies to safeguard assets, process information
accurately, and ensure compliance with laws and regulations
d.
both a and b
3. Internal controls are important because they
a.
prevent fraud and misleading financial statements.
b.
deter fraud and prevent theft and other abuses.
c.
eliminate fraud.
d.
ensures accurate financial statements.
4. The Sarbanes-Oxley Act of 2002 requires companies and their independent accountants to
a.
report on the financial activities of the company.
b.
report on any fraud and theft detected in the company.
c.
report on the state of the economy and liklihood of fraud.
d.
report on the effectiveness of the companies internal controls.
5. The framework that has become widely accepted as the standard by which companies design,
analyze, and evaluate internal controls is the
a.
Internal Control Integrated Framework by the Committee of Sponsoring Organizations.
b.
Internal Control Integrated Framework by the Congress of Special Offerings.
c.
Internal Control Localized Structure by the Committee of Sponsoring Organizations.
d.
Internal Control Localized Structure by the Congress of Special Offerings.
346 ♦ Chapter 7
6. Which of the following are objectives of internal control?
a.
Provide reasonable assurance that business information is accurate
b.
Provide reasonable assurance that employees comply with laws and regulations
c.
Provide assurance that assets are safeguarded
d.
all of these are correct are objectives
7. Employee fraud is __________.
a.
One of the most serious breaches of internal control
b.
The intentional act of deceiving an employer for personal gain
c.
Leaving work early on Fridays
d.
Both a and b
8. Which of the following is NOT one of the five elements of internal control?
a.
Monitoring
b.
Safeguarding assets
c.
Risk assessment
d.
The control environment
9. Which of the following is NOT one of the five elements of internal control?
a.
The control environment
b.
Control procedures
c.
Authorization and approval
d.
Information and communication
10. Management’s philosophy and operating style would affect which of the following elements of
internal control?
a.
Risk assessment
b.
Monitoring
c.
The control environment
d.
Information and communication
11. The business’s organizational structure influences which of the following elements of internal
control?
a.
The control environment
b.
Risk assessment
c.
Control procedures
d.
Information and communication
Sarbanes-Oxley, Internal Control, and Cash ♦ 347
12. Which of the following does NOT affect the control environment?
a.
Organizational structure
b.
Risk assessment
c.
Management’s philosophy
d.
Personnel policies
13. The organizational structure influences which element of internal control?
a.
Control procedures
b.
Monitoring
c.
Information and communication
d.
The control environment
14. Personnel policies involve all of the following except __________.
a.
Hiring employees
b.
Compensation
c.
Promotion
d.
Employee benefits
15. Which element of internal control focuses upon the overall attitude of management and employees
about the importance of internal controls?
a.
Information and communication
b.
The control environment
c.
Risk assessment
d.
Monitoring
16. Which of the following would not be considered an example of risk?
a.
changes in customer requirements
b.
changes in economic factors such as interest rates
c.
employee violations of company policies and procedures
d.
no change in regulatory activity
17. Risks can be analyzed to
a.
assess their likelihood of occurring
b.
assess their overall significance
c.
determine actions that will minimize them
d.
all of these are correct
348 ♦ Chapter 7
18. Rotating employees is part of which element of internal control?
a.
Control procedures
b.
Monitoring
c.
Risk assessment
d.
The control environment
19. Requiring employees to take annual vacations is part of which element of internal control?
a.
The control environment
b.
Risk assessment
c.
Control procedures
d.
Monitoring
20. Separating the custody of assets from accounting for assets is a part of which element of internal
control?
a.
Information and communication
b.
Monitoring
c.
Control procedures
d.
The control environment
21. Which of the following is NOT an example of an internal control procedure?
a.
Rotating duties
b.
Mandatory vacations
c.
Risk assessment
d.
Competent personnel
22. Which of the following elements of internal control focuses upon locating weaknesses and
improving control effectiveness?
a.
The control environment
b.
Risk assessment
c.
Control procedures
d.
Monitoring
23. Employing internal auditors is part of which element of internal control?
a.
Monitoring
b.
Control procedures
c.
Risk assessment
d.
The control environment
Sarbanes-Oxley, Internal Control, and Cash ♦ 349
24. The use of bank accounts and other measures to ensure safety of cash and valuable documents is
an example of what kind of control procedure?
a.
proofs and security measures
b.
competent personnel, rotating duties, and mandatory vacations
c.
separating responsibilities and related operations
d.
separating operations, custody of assets, and accounting
25. In large organizations, internal auditors independent of operations are responsible for monitoring
the internal control system. Internal auditors report issues and concerns to
a.
the public
b.
the SEC
c.
an audit committee of the board of directors
d.
the company president of the company
26. Which of the following is NOT an indicator of internal control problems with regard to people?
a.
abrupt lifestyle changes
b.
close social relationship with suppliers
c.
taking long vacations
d.
excessive use of alcohol and drugs
27. Which of the following is NOT an indicator of internal control problems with regard to the
accounting system?
a.
complete transactions
b.
unusual increase in customer refunds
c.
differences between daily cash receipts and bank deposits
d.
backlog in recording transactions
28. Which of the following would NOT be included in cash?
a.
Money orders
b.
Customer checks
c.
Certificates of deposit
d.
Money on deposit that is available for unrestricted withdrawal
29. In practice, a business will maintain
a.
only one bank account
b.
several bank accounts with only one ledger account
c.
several bank accounts with separate ledger accounts
d.
several bank accounts with no ledger accounts
350 ♦ Chapter 7
30. Which asset is most susceptible to theft?
a.
inventory
b.
cash
c.
micro-computers
d.
equipment
31. A debit balance in the cash short and over account would appear on the __________.
a.
Balance sheet as a current asset
b.
Balance sheet as a long-term asset
c.
Income statement as a miscellaneous expense
d.
Income statement as other income
32. A credit balance in the cash short and over account would appear on the __________.
a.
Balance sheet as a current asset
b.
Balance sheet as a long-term asset
c.
Income statement as an operating expense
d.
Income statement as in the other income section
33. An invoice designed so that a customer returns a portion of the invoice with payment is called a
a.
journal entry
b.
remittance advice
c.
ledger
d.
credit memorandum
34. All of the choices are internal controls over cash received except __________.
a.
An accounting clerk records the cash received and posts to the customers accounts
b.
All cash received in the mail is sent to the cashier’s department
c.
An employee prepares a bank deposit ticket and sends it to the accounting department
d.
An employee opening the mail stamps customers checks and money orders “for deposit
only”
35. The employee responsible for opening incoming mail should compare the amount of cash received
with the __________.
a.
Accounting records
b.
Voucher
c.
Canceled check
d.
Remittance advice
Sarbanes-Oxley, Internal Control, and Cash ♦ 351
36. When a cash payment is received in the mail, the cash
a.
is taken to the bank and the remittance advice is sent to the Accounting Department.
b.
is taken to the Cashier’s Department and the remittance advice is sent to the Accounting
Department.
c.
is taken to the Accounting Department along with the remittance advice.
d.
is taken to the bank and the remittance advice is filed by the Cashier’s Department.
37. All of the answers are a correct reason for companies to encourage automatic electronic transfers
EXCEPT
a.
electronic transfers eliminate late payments
b.
electronic transfers are less costly to process
c.
electronic transfers eliminate handling of cash by employees
d.
electronic transfers enhance internal controls over cash
38. A voucher system is a set of procedures for authorizing and recording __________.
a.
Cash receipts and payments
b.
Liabilities and cash payments
c.
Assets and cash payments
d.
Asset acquisitions
39. A voucher is any document that serves as proof of authority to
a.
deposit cash
b.
purchase goods
c.
ship goods
d.
pay cash or issue an electronic funds transfer
40. A bank statement is a record detailing all checking account transactions from the __________.
a.
Depositor’s viewpoint
b.
Bank’s viewpoint
c.
Bank’s and depositor’s viewpoints
d.
None of the above
41. The depositor’s checking account balance in the bank’s records is a __________.
a.
Liability
b.
Asset
c.
Revenue
d.
Expense
352 ♦ Chapter 7
42. A debit memorandum entry on the bank statement indicates a(n)
a.
decrease in the depositor’s account
b.
increase in the liability of the bank’s account
c.
increase in the depositors account
d.
credit in the depositor’s account
43. A bank makes credit entries for
a.
payments by electronic funds transfer
b.
service charges
c.
returned checks for non sufficient funds
d.
collection of a note receivable for the depositor
44. A bank makes debit entries for
a.
deposits made by electronic funds transfer
b.
service charges
c.
interest earned on the depositor’s account
d.
proceeds of a loan to the depositor
45. An item recorded by the depositor but NOT the bank would include __________.
a.
Outstanding checks
b.
NSF checks
c.
Service charges
d.
Debit memorandums
46. An item recorded by the bank but NOT the depositor would include __________.
a.
Service charges
b.
Debit memorandums
c.
NSF checks
d.
all of these are correct
47. In preparing a bank reconciliation, a deposit in transit would be __________.
a.
Added to the cash balance according to the bank statement
b.
Deducted from the cash balance according to the bank statement
c.
Added to the cash balance according to the depositor’s records
d.
Deducted from the cash balance according to the depositor’s records
Sarbanes-Oxley, Internal Control, and Cash ♦ 353
48. In preparing a bank reconciliation, interest revenue would be __________.
a.
Added to the cash balance according to the bank statement
b.
Deducted from the cash balance according to the bank statement
c.
Added to the cash balance according to the depositor’s records
d.
Deducted from the cash balance according to the depositor’s records
49. In preparing a bank reconciliation, a customer’s NSF check would be __________.
a.
Added to the cash balance according to the bank statement
b.
Deducted from the cash balance according to the bank statement
c.
Added to the cash balance according to the depositor’s records
d.
Deducted from the cash balance according to the depositor’s records
50. In preparing a bank reconciliation, a bank collection on behalf of the company would be
__________.
a.
Added to the cash balance according to the bank statement
b.
Deducted from the cash balance according to the bank statement
c.
Added to the cash balance according to the depositor’s records
d.
Deducted from the cash balance according to the depositor’s records
51. If the company accountant records a $1,200 deposit at $2,100, the error would be shown on the
bank reconciliation as __________.
a.
An addition to the cash balance according to the bank statement
b.
A deduction from the cash balance according to the bank statement
c.
An addition to the cash balance according to the depositor’s records
d.
A deduction from the cash balance according to the depositor’s records
52. If the bank records a $2,300 deposit at $3,200, the error would be shown on the bank
reconciliation as __________.
a.
An addition to the cash balance according to the bank statement
b.
A deduction from the cash balance according to the bank statement
c.
An addition to the cash balance according to the depositor’s records
d.
A deduction from the cash balance according to the depositor’s records
354 ♦ Chapter 7
53. If the bank records a $400 check written by the depositor at $4,000, the error would be shown on
the bank reconciliation as __________.
a.
An addition to the cash balance according to the bank statement
b.
A deduction from the cash balance according to the bank statement
c.
An addition to the cash balance according to the depositor’s records
d.
A deduction from the cash balance according to the depositor’s records
54. The bank statement reports an ending balance of $5,650 after deducting $120 in service charges
and an addition of $2,400 for a note collected by the bank on the company’s behalf. The depositor
reports an ending balance of $720 and determines that deposits in transit equal $2,100 and
outstanding checks equal $4,750. What is the adjusted balance for the bank?
a.
$900
b.
$3,000
c.
$8,300
d.
None of the above
55. If the company accountant records a $200 disbursement at $2,000, the error would be shown on
the bank reconciliation as __________.
a.
An addition to the cash balance according to the bank statement
b.
A deduction from the cash balance according to the bank statement
c.
An addition to the cash balance according to the depositor’s records
d.
A deduction from the cash balance according to the depositor’s records
56. The bank statement reports an ending balance of $12,620 after deducting $220 in service charges
and an addition of $4,500 for a note collected by the bank on the company’s behalf. The depositor
reports an ending balance of $7,690 and determines that deposits in transit equal $5,600 and
outstanding checks equal $6,250. What is the adjusted balance for the depositor?
a.
$11,320
b.
$5,600
c.
$11,970
d.
None of the above
57. The journal entry required by the depositor to record collection of a note with interest by the bank
would include a __________.
a.
Credit to cash
b.
Debit to note receivable
c.
Debit to interest expense
d.
Credit to note receivable
Sarbanes-Oxley, Internal Control, and Cash ♦ 355
58. The journal entry required by the depositor to record a deposit in transit on the bank reconciliation
would include a __________.
a.
Debit to cash
b.
Credit to cash
c.
Credit to sales
d.
No entry is required
59. The journal entry required by the depositor to record a customer’s NSF check on the bank
reconciliation would include a __________.
a.
Debit to accounts receivable
b.
Debit to an expense account
c.
Debit to cash
d.
No entry is required
60. The journal entry required by the depositor to record bank service charges on the bank
reconciliation would include a __________.
a.
Credit to miscellaneous expense
b.
Credit to cash
c.
Credit to accounts payable
d.
No entry is required
61. The journal entry required by the depositor to record outstanding checks on the bank reconciliation
would include a __________.
a.
Credit to cash
b.
Debit to accounts payable
c.
Debit to cash
d.
No entry is required
62. The journal entry required to correct an overstatement of disbursements by the depositor would
include a __________.
a.
Debit to cash
b.
Credit to cash
c.
Credit sales
d.
No entry is required
356 ♦ Chapter 7
63. The journal entry required to correct an overstatement of a bank deposit by the depositor would
include a __________.
a.
Debit to accounts payable
b.
Debit to cash
c.
Credit to accounts payable
d.
Credit to cash
64. In preparing a bank reconciliation, outstanding checks would be __________.
a.
Added to the cash balance according to the bank statement
b.
Deducted from the cash balance according to the bank statement
c.
Added to the cash balance according to the depositor’s records
d.
Deducted from the cash balance according to the depositor’s records
65. Which of the following insures that the bank’s and depositor’s records of cash are correct?
a.
Bank statement
b.
Voucher system
c.
Bank reconciliation
d.
Remittance advice
66. In preparing a bank reconciliation, a service charge would be __________.
a.
Added to the cash balance according to the bank statement
b.
Deducted from the cash balance according to the bank statement
c.
Added to the cash balance according to the depositor’s records
d.
Deducted from the cash balance according to the depositor’s records
67. Which of the following is a special cash fund maintained for small payments such as postage?
a.
Change fund
b.
Petty cash fund
c.
Travel fund
d.
Payroll fund
68. The entry to replenish the petty cash fund will include a debit to __________.
a.
Expense accounts
b.
Petty cash
c.
Assets accounts
d.
Accounts payable
Sarbanes-Oxley, Internal Control, and Cash ♦ 357
69. Calculate the cash flow ratio given the following information: (round to one decimal place)
Net cash flows from operations
$ 985,000
Net sales
$2,860,000
Income from operations
820,000
Net income
$ 690,000
a.
.3
b.
2.9
c.
1.2
d.
1.4
70. Calculate the cash flow ratio given the following information: (round to one decimal place)
Net cash flows from operations
$3,450,000
Net sales
$9,400,000
Income from operations
$2,200,000
Net income
$1,850,000
a.
1.9
b.
1.6
c.
2.7
d.
None of the above
71. Calculate the ratio of cash to monthly cash expenses given the following information: (round
answer to one decimal place)
Monthly revenues
$846,000
Net loss
($132,000)
Net cash flows from operating activities for the month
($165,000)
Cash balance at the end of the month
$547,000
a.
.6
b.
4.1
c.
3.3
d.
None of the above
358 ♦ Chapter 7
72. What does a ratio of cash to monthly cash expenses of 5.4 indicate?
a.
The company’s cash flows exceeded monthly expenses for five months
b.
The company will run out of cash in five months unless it is able to raise additional
financing
c.
The company’s cash flows from operations will not be sufficient to cover expenses in five
months.
d.
Cash flows from operations will turn negative after five months
TRUE/FALSE
1. The Sarbanes-Oxley Act of 2002 applies to all publicly held companies and privately held
companies.
2. The Sarbanes-Oxley Act of 2002 requires companies to maintain strong and effective internal
controls over recording transactions and preparing financial statements.
3. The Sarbanes-Oxley Act of 2002 provides a means of assessing and evaluating internal controls
by issuing the Internal Controls- Integrated Framework.
4. An objective of internal control is to provide reasonable assurance that business information is
accurate.
5. Insuring that employees comply with laws and regulations is an element of internal control.
6. The safeguarding of assets and accurate information are necessary for businesses to operate
successfully and reduce the opportunities for employee fraud.
7. The internal control environment is enhanced by the hiring and retention of competent, honest
employees.
Sarbanes-Oxley, Internal Control, and Cash ♦ 359
8. Risk assessment deals with separating responsibilities for related operations.
9. The individual who orders supplies should NOT be permitted to verify the receipt of supplies.
10. An employee who records the cash receipts should NOT be permitted to handle cash receipts.
11. Internal auditors cannot be responsible for monitoring the internal control system since this is the
responsibility of the external auditors.
12. A warning signal of internal control problems with regard to people working in a company would
include frequent borrowing from other employees.
13. A warning signal of internal control problems with regard to the accounting system would be
completeness of document and transaction records.
14. Even though cash is relatively small in value compared to other assets, many internal controls are
focused on cash since it is most susceptible to diversion and improper use by employees.
15. Customer checks made payable to a company cannot be considered cash until it clears the banking
system.
16. If the cash short and over account has a debit balance, this implies that customers were short
changed and the company would record this as an asset.
360 ♦ Chapter 7
17. After a cash register clerk’s cash has been counted and recorded on a memorandum form, the cash
is placed in a safe in the Cashier’s Department until it is deposited in the bank.
18. All cash received in the mail is sent directly to the Accounting Department where it records the
transactions and posts them to customer accounts.
19. A voucher for the purchase of goods is normally prepared after all supporting documents have
been received i.e. supplier’s invoice, purchase order, and a receiving report.
20. A voucher system is a set of procedures for recording receivables and cash receipts.
21. Upon payment, a voucher for the purchase of goods is recorded in accounts receivable. and filed.
22. The major reason business use bank accounts is for control purposes.
23. If the bank statement reflects a credit balance this implies that the company has cash in its
checking account.
24. A credit memorandum on the bank statement indicates a decrease in the depositor’s account.
25. The correction of bank errors always involves a credit entry.
26. Businesses use checks or bank account transfers to make all cash payments, except for very small
amounts.
Sarbanes-Oxley, Internal Control, and Cash ♦ 361
27. The cash balance shown by the bank statement is usually different from the cash balance in the
accounting records due to the time lag between when checks are written and when checks are
presented for payment.
28. A bank reconciliation is an analysis of the items and amounts that cause the accounts payable
balance to be different form the bank statement.
29. The cash balance shown by a bank statement is usually different from the cash balance shown in
the accounting records.
30. Checks written by the depositor show up as credits on the bank statement.
31. NSF customer checks returned by the bank are deducted from the depositor’s cash balance in a
bank reconciliation.
32. A deposit in transit would be added to the depositor’s cash balance in a bank reconciliation.
33. Debit memorandums for service charges and check printing charges are deducted by the bank on
the bank statement.
34. In a bank reconciliation, no entries are necessary on the company’s records as a result of
information included in the bank section of the reconciliation.
35. A journal entry to record interest income would increase net income but have no effect on cash
flow.
362 ♦ Chapter 7
36. When the petty cash fund is created, assets will increase.
37. When the petty cash fund is replenished, assets, net income and cash flows will decrease..
38. Companies that have invested excess cash in highly liquid investments usually report them as
long-term investments after cash on the balance sheet.
39. Net cash flows is rarely the same as net income.
40. The ratio of net cash flows to net income indicates whether the amount of accruals and deferrals is
large or small.
41. The ratio of cash flow to net income indicates how long a company can continue to operate
without additional financing or without generating positive cash flows from operations.
42. The ratio of cash flow to net income is useful for assessing how long a company can continue to
operate without additional financing or without generating positive cash flows from operations.
43. In preparing the statement of cash flows , generally accepted accounting principles require a
company to reconcile revenues with cash flows from operating activities.