Chapter 7 – Internal Control and Cash
1. The Sarbanes-Oxley Act applies only to companies whose stock is traded on public exchanges.
a.
True
b.
False
2. Sarbanes-Oxley’s purpose is to maintain public confidence and trust in the financial reporting of companies.
a.
True
b.
False
3. There are three internal control objectives and they are to safeguard the company’s reputation, ensure accurate financial
reports, and ensure compliance with applicable laws.
a.
True
b.
False
4. The Sarbanes-Oxley Act requires that financial statements of all public companies report on management’s conclusions
about the effectiveness of the company’s internal control procedures.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
5. Sarbanes-Oxley requires companies to maintain strong and effective internal controls and thus deter fraud and prevent
misleading financial statements.
a.
True
b.
False
6. The control environment in an internal control structure is the overall attitude of management and employees about the
importance of internal control.
a.
True
b.
False
7. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the control
procedure: separating operations, custody of assets, and accounting.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
8. Internal control is enhanced by separating the control of a transaction from the record-keeping function.
a.
True
b.
False
9. A backlog in recording transactions is an example of a warning sign from the accounting system.
a.
True
b.
False
10. Money orders are considered cash.
a.
True
b.
False
11. A customer’s check received in settlement of an account receivable is considered cash.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
12. Businesses who have several bank accounts, petty cash, and cash on hand, would maintain a separate ledger account
for each type of cash.
a.
True
b.
False
13. For a strong internal control system over cash, it is important to have the duties related to cash receipts and cash
payments divided among different employees.
a.
True
b.
False
14. If the balance in Cash Short and Over at the end of a period is a credit, it indicates that cash shortages have exceeded
cash overages for the period.
a.
True
b.
False
15. If the balance in Cash Short and Over at the end of a period is a credit, it should be reported as an “other income” item
on the income statement.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
16. An example of good internal controls over cash payments is the taking of all cash discounts offered.
a.
True
b.
False
17. A voucher is a form on which is recorded pertinent data about a liability and the particulars of its payment.
a.
True
b.
False
18. When the voucher system is used, the amount due on each voucher represents the credit balance of an account payable
if the voucher is in full payment to a creditor.
a.
True
b.
False
19. A voucher system is an example of an internal control procedure over cash payments.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
20. A voucher is a written authorization to make a cash payment.
a.
True
b.
False
21. The bank often informs the company of bank service charges by including a credit memo with the monthly bank
statement.
a.
True
b.
False
22. Bank customers are considered creditors of the bank so the bank shows their accounts with credit balances on the
bank’s records.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
23. Depositing all cash, checks, etc. in a bank and paying with checks is an internal control procedure over cash.
a.
True
b.
False
24. For efficiency of operations and better control over cash, a company should maintain only one bank account.
a.
True
b.
False
25. In preparing a bank reconciliation, the amount of deposits in transit is deducted from the balance per bank statement.
a.
True
b.
False
26. In preparing a bank reconciliation, the amount of outstanding checks is added to the balance per bank statement.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
27. In preparing a bank reconciliation, the amount indicated by a debit memo for bank service charges is added to the
balance per company’s records.
a.
True
b.
False
28. In preparing a bank reconciliation, the amount of a canceled check omitted from the journal is added to the balance per
company’s records.
a.
True
b.
False
29. A check for $342 was erroneously charged by the bank as $432. In order for the bank reconciliation to balance, you
must add $90 to the bank statement balance.
a.
True
b.
False
30. If an adjustment for an NSF check is made in a company’s bank reconciliation, then the company must have written a
bad check during the month.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
31. The amount of the “adjusted balance” appearing on the bank reconciliation as of a given date is the amount that is
shown on the balance sheet for that date.
a.
True
b.
False
32. All bank memos reported on the bank reconciliation require entries in the company’s accounts.
a.
True
b.
False
33. The bank reconciliation is an important part of the system of internal controls.
a.
True
b.
False
34. The main reason that the bank statement cash balance and the company’s cash balance do not initially balance is due
to timing differences.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
35. The bank reconciles its statement to the company’s records.
a.
True
b.
False
36. In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by the bank
is added to the balance per company’s records.
a.
True
b.
False
37. In preparing a bank reconciliation, the amount of an error indicating the recording of a check in the journal for an
amount larger than the amount of the check is added to the balance per company’s records.
a.
True
b.
False
38. A check outstanding for two consecutive months will appear only on the first month’s bank reconciliation.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
39. After a bank reconciliation is completed, journal entries are prepared for items in the balance per company’s records as
well as items in the balance per bank statement.
a.
True
b.
False
40. A business that requires all cash payments be made by check can not use a petty cash system.
a.
True
b.
False
41. In establishing a petty cash fund, a check is written for the amount of the fund and is recorded as a debit to Accounts
Payable and a credit to Petty Cash.
a.
True
b.
False
42. Expenditures from a petty cash fund are documented by a petty cash receipt.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
43. The sum of the money on hand and petty cash receipts in a petty cash fund will always be equal to the balance in the
petty cash account.
a.
True
b.
False
44. When the petty cash fund is replenished, the petty cash account is credited for the total of all expenditures made since
the fund was last replenished.
a.
True
b.
False
45. Most companies who have several bank accounts, petty cash, and cash on hand, would list each separately on the
balance sheet.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
46. A petty cash fund is used to pay relatively large amounts.
a.
True
b.
False
47. The petty cash fund eliminates the need for a bank checking account.
a.
True
b.
False
48. A compensating balance occurs when a bank may require a company to maintain a maximum cash balance.
a.
True
b.
False
49. Cash equivalents include short-term investments that will be converted to cash within 120 days.
a.
True
b.
False
Chapter 7 – Internal Control and Cash
50. Money market accounts, commercial paper, and U. S. Treasury bills are examples of cash equivalents.
a.
True
b.
False
51. Sarbanes-Oxley applies to
a.
publicly held companies
b.
not-for-profit organizations
c.
privately held businesses
d.
all of these
52. “To maintain public confidence and trust in the financial reporting of companies” is the purpose of
a.
the FASB
b.
the IRS
c.
Sarbanes-Oxley
d.
GAAP
53. Which one of the following below is not an element of internal control?
a.
risk assessment
b.
monitoring
c.
information and communication
d.
cost-benefit considerations
Chapter 7 – Internal Control and Cash
54. Which one of the following is not a factor that influences a business’s control environment?
a.
management’s philosophy and operating style
b.
organizational structure
c.
proofs and security measures
d.
personnel policies
55. When a firm uses internal auditors, it is adhering to which of the following internal control elements?
a.
risk assessment
b.
monitoring
c.
proofs and security measures
d.
information and communication
56. The objectives of internal control are to
a.
control the internal organization of the accounting department personnel and equipment
b.
provide reasonable assurance that assets are safeguarded and used for business purposes, business information
is accurate, and laws and regulations are complied with
c.
prevent fraud, and promote the social interest of the company
d.
provide control over “internal-use only” reports and employee internal conduct
Chapter 7 – Internal Control and Cash
57. Which one of the following reflects a weak internal control system?
a.
all employees are well supervised
b.
a single employee is responsible for comparing a receiving report to an invoice
c.
all employees must take their vacations
d.
a single employee is responsible for collecting and recording of cash
58. Internal control does not consist of policies and procedures that
a.
protect assets from misuse
b.
ensure employees and managers comply with laws and regulations
c.
guarantee the company will earn a profit
d.
ensure that business information is accurate
59. A firm’s internal control environment is not influenced by
a.
management’s operating style
b.
organizational structure
c.
personnel policies
d.
monitoring policies
Chapter 7 – Internal Control and Cash
60. An element of internal control is
a.
risk assessment
b.
journals
c.
subsidiary ledgers
d.
controlling accounts
61. A necessary element of internal control is
a.
database
b.
systems design
c.
systems analysis
d.
information and communication
62. Which of the following should not be considered cash by an accountant?
a.
money orders
b.
bank checking accounts
c.
postage stamps
d.
travelers’ checks
Chapter 7 – Internal Control and Cash
63. The cash account in the company’s ledger is a(n)
a.
asset with a normal debit balance
b.
asset with a normal credit balance
c.
liability with a normal debit balance
d.
liability with a normal credit balance
64. The portion of an invoice that is returned with payment is a
a.
remittance advice
b.
voucher
c.
debit memo
d.
credit memo
65. The debit balance in Cash Short and Over at the end of an accounting period is reported as
a.
an expense on the income statement
b.
income on the income statement
c.
an asset on the balance sheet
d.
a liability on the balance sheet
Chapter 7 – Internal Control and Cash
66. Procedures designed to protect cash from theft and misuse from the time it is received until it can be deposited in a
bank are called
a.
accounting controls
b.
cash controls
c.
FASB controls
d.
GAAP controls
67. A special form on which is recorded pertinent data about a liability and the particulars of its payment is called a(n)
a.
invoice
b.
voucher
c.
debit memo
d.
remittance advice
68. EFT
a.
means Efficient Funds Transfer
b.
can process certain cash transactions at less cost than by using the mail
c.
makes it easier to document purchase and sale transactions
d.
means Effective Funds Transfer
Chapter 7 – Internal Control and Cash
69. A voucher is usually supported by
a.
a supplier’s invoice
b.
a purchase order
c.
a receiving report
d.
all of these
70. Credit memos from the bank
a.
decrease a bank customer’s account
b.
are used to show a bank service charge
c.
show that a company has deposited a customer’s NSF check
d.
show the bank has collected a note receivable for the customer
71. Consider the following information taken from the cash account. Assume cash payments were 80% of collections.
Cash
??
Beginning balance
$115,375
Collections
??
Disbursements
$80,275
Ending balance
How much was the beginning balance of the cash account?
a.
$57,200
b.
$92,300
c.
$103,350
d.
$35,100