ACCT 3122- Internal Controls

Question 1

accounting information systems provides information about….

Answer 1

assets, liabilities, equity and income statement accounta

Question 2

control are:

Answer 2

policies and procedures a company uses to ensure that the quality of its AIS’s inputs, outputs and processes are not compromised

Question 3

internal controls are the methods a business uses to

Answer 3

safeguard assets, provide accurate and reliable information, promote and improve operational efficiency

Question 4

internal control limitations

Answer 4

1) possibility of error
2) circumvention
3) management override
4) changing conditions

Question 5

possibility of error

Answer 5

no system is perfect; someone may forget to perform the internal control

Question 6

circumvention

Answer 6

personnel may circumvent the system through collusion or other means

Question 7

management override

Answer 7

management can override control procedures or by directing a subordinate to do so

Question 8

changing conditions

Answer 8

conditions may change over time (ex: growing from one location to two locations) so that existing controls become ineffectual

Question 9

internal controls are designed to reduce the likelihood of:

Answer 9

errors or fraud in an information system

Question 10

companies have multiple controls to prevent the theft of cash (2 kinds)

Answer 10

1) only certain individuals are allowed to sign checks
2) at end of the month, an independent person performs a bank reconciliation

Question 11

section 404 of the Sarbanes Oxley Act requires management to

Answer 11

1) Accept responsibility for the effectiveness of the company’s internal control over financial reporting.
2) Evaluate the effectiveness of the company’s internal control over financial reporting using suitable control criteria.
3) Supporting its evaluation with sufficient evidence, including documentation
4) Presenting a written assessment about the effectiveness of the company’s internal control over financial reporting as of the end of the company’s most recent fiscal year.

Question 12

categories of internal controls:

Answer 12

1) authorization of transactions
2) segregation of duties
3) access controls
4) human resource controls
5) adequate documents
6) independent checks of performance

Question 13

authorization:

Answer 13

process of reviewing and approving transactions or operations

Question 14

general authorization:

Answer 14

management authorizes employees to perform certain activities and to execute certain transactions within limits set by a policy

Question 15

what internal control is this an example of? Sales personnel have the authority to make sales to customers that are within the customer’s credit limit. Someone in the shipping department or purchasing department does not have authorization to make a sale.

Answer 15

general authorization

Question 16

specific authorization

Answer 16

case-by-case decisions associated with nonroutine transactions. A manager must authorize any particular deviation from the limits set by general authorization

Question 17

what is this an example of?
A salesperson cannot complete a sale that would exceed the customer’s credit limit. A sale exceeding the customer’s credit limit would require management approval.

Answer 17

specific authorization

Question 18

what are these examples of? credit limits for customers; maximum spending limits for employees; purchasing limits for employees

Answer 18

general authorization of transactions

Question 19

specific authorization of transactions involves what

Answer 19

reviewing supporting documentation, question unusual items and make sure that necessary information is present to justify the transaction before they approve it

Question 20

proper procedures for authorization

Answer 20

1) approval should be linked to specific dollar levels
2)signing blank forms should never be allowed
3) under NO circumstances should someone be allowed to approve transactions on someone elses behalf
4) the person initating a transaction should not be the person who approves the transaction
5) company’s approval policies should be specified in a procedures manual

Question 21

segregation of duties serves 2 key purposes

Answer 21

1) it ensures that there is oversight and review to catch errors
2) reduces fraud or theft because it requires 2 people to collude to hide a transaction

Question 22

effective segregation of duties achieved when following are seperated

Answer 22

1) authorization
2) record keeping
3) custody

Question 23

authorization-

Answer 23

approving transactions and decisions

Question 24

record keeping-

Answer 24

preparing source documents; maintaining journals, ledgers or other files; preparing reconciliations; and preparing performance reports

Question 25

custody-

Answer 25

handling cash, maintaining an inventory storeroom, or receiving incoming customer checks

Question 26

collusion-

Answer 26

risk that two or more employees could act together to undermine the functioning of internal controls

Question 27

access controls ensure that only authorized personnel have access to the company’s assets to protect against:

Answer 27

misappropriation, damage or theft

Question 28

access to assets can be _______ or ________

Answer 28

direct; indirect

Question 29

direct access controls:

Answer 29

controls that safeguard cash, inventory, fixed assets (ex: safes, alarms)

Question 30

indirect access controls:

Answer 30

protect the records and documents that control the use, ownership, and disposition of assets (ex: computer passwords, computer backup systems, etc)

Question 31

human resource controls:

Answer 31

controls to assure that employees conform to regulations and standards of the company

Question 32

bonding in regards to HR controls:

Answer 32

obtaining insurance protection against theft by employees; typically used when the employees have access to money or valuables

Question 33

conducting background checks is a form of what internal control?

Answer 33

human resource controls

Question 34

adequate documents and records provide evidence that

Answer 34

management’s policies and procedures, including internal control procedures, are being carried out by employees

Question 35

audit trail in regards to adequate documents and records

Answer 35

presents verifiable information about the accuracy of accounting records

Question 36

the bill of lading document indicates that

Answer 36

goods have shipped

Question 37

the sales invoice indicates that

Answer 37

company has billed the customer

Question 38

this is an example of what? Ray Kramer’s signature on the customer purchase order – Signifies that the customer’s credit has been approved

Answer 38

adequate documents and records

Question 39

this is an example of what? Jim Adam’s initials on the sales invoice – Signifies that he has reviewed the invoice for accuracy.

Answer 39

adequate documents and records

Question 40

prenumbered documents help to:

Answer 40

1) prevents transactions from being recorded more than once
2) prevent transactions from not being recorded at all
3) locate documents when they need to be retrieved later

Question 41

chart of account is an example of what internal control?

Answer 41

adequate documents and records (its basically a filing sys for your transactions to ensure they are organized properly and can be found later

Question 42

Independent checks on performance:

Answer 42

reviews carried out by employees who did not do the work to ensure the reliability of accounting information and the efficiency of operations

Question 43

this is an example of which internal control? Bank reconciliations to verify that the bank balance reconciles with the book balance.

Answer 43

independent checks of performance

Question 44

this is an example of which internal control? crossfooting a journal

Answer 44

independent checks of performance

Question 45

this is an example of which internal control? Counts of inventory by an independent team during the periodic inventory count.

Answer 45

independent checks of performance

Question 46

purpose of independent checks is to ensure:

Answer 46

record keeping is done accurately, completely and honestly

Question 47

this is an example of what?
When the government started requiring banks to report interest income to the IRS, interest income reported on individual tax returns increased by $8 billion.

Answer 47

independent checks of performance