Chapter 5

Question 1

The purpose of the Sarbanes-Oxley Act of 2002 is to:

a. require all companies to prepare financial statements.

b. protect companies from demands of investors, stockholders, and creditors.	
c. do all of these choices are correct.	
d. restore public confidence and trust in the financial statements of publicly held companies.

Answer 1

d. restore public confidence and trust in the financial statements of publicly held companies.

Question 2

The Sarbanes-Oxley Act of 2002 requires companies and their independent accountants to:

a. report on the state of the economy and likelihood of fraud.

b. report on the effectiveness of the company's internal controls.	
c. report on any fraud and theft detected in the company.	
d. report on the financial activities of the company.

Answer 2

b. report on the effectiveness of the company’s internal controls

Question 3

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 Congress of Special Offerings.

b. Internal Control Localized Structure by the Congress of Special Offerings.	
c. Internal Control - Integrated Framework by the Committee of Sponsoring Organizations.	
d. Internal Control Localized Structure by the Committee of Sponsoring Organizations.

Answer 3

c. Internal Control - Integrated Framework by the Committee of Sponsoring Organizations.

Question 4

Internal controls are important because they:
a. ensure that the company maintains a compensating balance.
b. deter fraud and prevent misleading financial statements.
c. eliminate fraud.
d. guarantee accurate financial statements.
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Answer 4

b. deter fraud and prevent misleading financial statement

Question 5

Which of the following reflects a weak internal control system?

a. All employees are well supervised.

b. A single employee is responsible for the collecting and recording of cash.	
c. All employees must take their vacations.	
d. A single employee is responsible for comparing a receiving report to an invoice

Answer 5

b. A single employee is responsible for the collecting and recording of cash.

Question 6

An element of internal control is:

a. risk assessment.

b. subsidiary ledgers.	
c. journals.	
d. controlling accounts.

Answer 6

a. risk assessment.

Question 7

An element of internal control is:

a. monitoring.

b. management.	
c. personnel policies.	
d. business.

Answer 7

a. monitoring.

Question 8

Which of the following elements of internal control focuses on locating weaknesses and improving control effectiveness?

a. Control environment

b. Control procedures	
c. Risk assessment	
d. Monitoring

Answer 8

d. Monitoring

Question 9

Which of the following of internal control deals with hiring, training, evaluation, compensation, and promotion of employees?

a. Monitoring

b. Risk assessment	
c. Control environment	
d. Control procedures

Answer 9

c. Control environment

Question 10

Which of the following is considered as cash?

a. Bonds

b. Checks	
c. Commercial papers	
d. Equities

Answer 10

b. Checks

Question 11

Which of the following is true of EFT?

a. It means Effective Funds Transfer.

b. It can process certain cash transactions at less cost than by using the mail.	
c. It is easy to document purchase and sale transactions.	
d. It cost more than receiving cash payments through the mail.

Answer 11

b. It can process certain cash transactions at less cost than by using the mail.

Question 12

A voucher:

a. system is used to control cash receipts.

b. is normally prepared in the Accounting Department.	
c. is received from customers to explain the purpose of a payment.	
d. system is an internal control procedure to verify that the assets in the records are the ones the company owns.

Answer 12

b. is normally prepared in the Accounting Department

Question 13

On the bank’s accounting records, customers’ accounts are normally shown as a(n):

a. asset.

b. revenue.	
c. expenses.	
d. liability.

Answer 13

d. liability.

Question 14

A credit memorandum from the bank:

a. shows that a company has deposited a customer

’

s NSF check.

b. shows the bank has collected a note receivable for the customer.	
c. is used to show a bank service charge.	
d. decreases a bank customer's account.

Answer 14

b. shows the bank has collected a note receivable for the customer.

Question 15

A check drawn by a depositor for $295 in payment of a liability was recorded in the depositor’s book as $925. The $630 difference would be included on the bank reconciliation as a(n):

a. addition to the cash balance per books.

b. deduction from the cash balance per bank.	
c. deduction from the cash balance per books.	
d. addition to the cash balance per bank.

Answer 15

a. addition to the cash balance per books

Question 16

A bank reconciliation should be prepared periodically because:

a. any differences between the depositor

’

s records and the bank

’

s records should be determined, and any errors made by either party should be discovered and corrected.

b. the bank has not recorded all of its transactions.	
c. the bank must make sure that its records are correct.	
d. the depositor's records and the bank's records are in agreement.

Answer 16

a. any differences between the depositor’s records and the bank’s records should be determined, and any errors made by either party should be and corrected.

Question 17

Identify each of the following as related to (a) the control environment, (b) risk assessment, or (c) control procedures.

1. Mandatory vacations
2. Personnel policies
3. Report of outside consultants on future market changes

Answer 17

1. Mandatory vacations =control procedures
2. Personnel policies = control environment
3. Report of outside consultants on future market changes = risk assessment

Question 18

Santos Company gathered the following reconciling information in preparing its August bank reconciliation:
Cash balance per books, 8/31	$3,902
Deposits in transit	$259
Notes receivable and interest collected by bank	$834
Bank charge for check printing	$26
Outstanding checks	$1,485
NSF check	$157
Find the adjusted cash balance per books on August 31.
Select the correct answer.
 	$4,553	
	$2,676	
	$3,353	
	$1,093

Answer 18

$4,553
Cash balance per books, 8/31	$3,902
\+Notes receivable and interest collected by bank	$834
-Bank charge for check printing	$26
-NSF check	$157
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