Chapter 5

Question 1

An attempt to deceive others for personal gain.

Answer 1

Fraud

Question 2

Types of Fraud:

Answer 2

(1) Corruption
(2) Asset Misappropriation
(3) Financial Statement Fraud

Question 3

Misusing one’s position for inappropriate personal gain.

Answer 3

Corruption

Question 4

Theft where cash is usually the target, but other assets can be misappropriated.

Answer 4

Asset Misappropriation

Question 5

Involves misreporting amounts in the financial statements, usually to portray more favorable financial results than what actually exist.

Answer 5

Financial Statement Fraud

Question 6

Consists of the actions taken by people at every level of an organization to achieve its objectives.

Answer 6

Internal Control

Question 7

Types of Internal Control Objectives:

Answer 7

(1) Operations
(2) Reporting
(3) Compliance

Question 8

Focus on completing work efficiently and effectively and protecting assets by reducing the risk of fraud.

Answer 8

Operations Objectives

Question 9

Includes producing reliable and timely accounting information for use by people internal and external to the organization.

Answer 9

Reporting Objectives

Question 10

Focus on adhering to laws and regulations.

Answer 10

Compliance Objectives

Question 11

Principle of Control Activities:

Answer 11

(1) Establish responsibility
(2) Segregate duties
(3) Restrict access
(4) Document Procedures
(5) Independently verify

Question 12

Whenever possible, assign each task to only one employee. Doing so will allow you to determine who caused any errors or thefts that occur.

Answer 12

Establish Responsibility

Question 13

Involves assigning responsibilities so that one employee can’t make a mistake or commit a dishonest act without someone else discovering it. One employee should not initiate, approve, record, and have access to the items involved in the same transaction.

Answer 13

Segregation of Duties

Question 14

Some controls involve rather obvious steps such as physically locking up valuable assets and electronically securing access to other assets and information. Companies restrict access to check-signing equipment, require a passcode to open cash registers, and protect computer systems with firewalls. If employees do not need assets or information to fulfill their assigned responsibilities, they are denied access.

Answer 14

Restrict Access

Question 15

Digital and paper documents are such common features of business that you may not realize they represent an internal control. By documenting each business activity, a company creates a record of whether goods were shipped, customers were billed, cash was received, and so on. To enhance this control, most companies assign sequential numbers to their documents and check that they are used in numerical sequence. This check occurs frequently, sometimes daily, to ensure that every transaction is recorded and that each document number corresponds to one and only one accounting entry.

Answer 15

Document Procedures

Question 16

Hire someone (an auditor) to check that the work done by others within the company is appropriate and supported by documentation

Answer 16

Independently Verify

Question 17

Internal controls can never completely prevent and detect errors and fraud for two reasons:

Answer 17

(1) Benefits must exceed the costs

(2) Human error or fraud

Question 18

Internal controls for cash are important because:

Answer 18

The volume of cash transactions is enormous and because cash is valuable and portable and therefore poses a high risk of theft.

Question 19

Businesses can receive cash in two different ways:

Answer 19

(1) Receive cash in person at time of sale

(2) Receive cash remotely

Question 20

Primary Internal Control Goal for Cash Receipt:

Answer 20

Ensure that the business receives the appropriate amount of cash and safely deposits it in the bank.

Question 21

Shortage of Cash Journal Entry:

Answer 21

Cash (Debit)
Cash Shortage (Debit)
      Sales Revenue (Credit)

Question 22

Principle of Control Activity: Scans items sold

Answer 22

Document procedures

Question 23

Principle of Control Activity: Collects customer payment

Answer 23

Restricts access

Question 24

Principle of Control Activity: Prepares cash count sheet

Answer 24

Documents procedures

Question 25

Principle of Control Activity: Compares cash in register with cash count sheet

Answer 25

Independently verifies

Question 26

Principle of Control Activity: Stores cash in vault box

Answer 26

Restricts access

Question 27

Principle of Control Activity: Completes bank deposit

Answer 27

Documents procedure

Question 28

Principle of Control Activity: Compares cash register records with cash count sheet and bank deposit slip

Answer 28

Independently verifies

Question 29

Principle of Control Activity: Prepare journal entry

Answer 29

Documents procedure

Question 30

A company pays for purchases with dollar bills and coins

Answer 30

Petty Cash System

Question 31

True or False: Most companies pay cash to their employees through EFTs, which are known as direct deposits to employees. To reduce the risk of the bank accidentally overpaying or underpaying an employee, many companies use an imprest system.

Answer 31

True

Question 32

Used to reimburse employees for small expenditures they have made on behalf of the organization. Kept on hand to pay for minor expense, such as office supplies or reimbursements.

Answer 32

Petty Cash System

Question 33

Order for Petty Cash System

Answer 33

(1) Put money into the fund
(2) Pay money out of the fund
(3) Replenish the fund

Question 34

Journal entry for establishing a petty cash system:

Answer 34

Petty Cash (Debit)
     Cash (Credit)

Question 35

Journal entry for paying money out of the fund:

Answer 35

No entry required

Question 36

Journal Entry for Replenishing fund:

Answer 36

Supplies (Debit)
Expenses (Debit)
Cash (Credit)

Question 37

An internal report prepared to verify the accuracy of both the bank statement and the cash accounts of a business or individual.

Answer 37

Bank Reconiciliation

Question 38

For each account a business opens, the bank generates a statement that it makes available online. Checks are listed on the bank statement in the order in which they clear the bank. Deposits are listed on the bank statement in the order in which the bank processes them. The balance in a bank account can change for a variety of reasons other than checks and deposits. For example, the account balance increases when the account earns interest and when funds are transferred into the account electronically. The account balance decreases when the bank charges a service fee or transfers funds out of the account electronically.

Answer 38

Bank Statement

Question 39

Bank Reconciliation Goals

Answer 39

(1) Identify the deposits in transit
(2) Identify the outstanding checks
(3) Record other transactions on the bank statement and correct your errors.

Question 40

Reasons a Company’s records can differ from the banks:

Answer 40

(1) The company has recorded some items that the bank doesn’t know about at the time it prepares the statement of account
(2) The bank has recorded some items that the company doesn’t know about until the bank statement is examined.

Question 41

Steps in Performing Bank Reconciliation:

Answer 41

The first step in a reconciliation is to identify those items that are included on both the bank statement and the g/l and they are equal – mark those out. Second step, identify anything that is included on either the bank statement or the g/l that is not on the other document or if the amounts are different– these are your reconciling items. Common reconciling items are: From the company’s perspective there are items that they know about that the bank does not yet have. Checks recorded in the g/l that have not cleared the bank yet – referred to as outstanding checks. Deposits recorded in the g/l that have not yet been recorded by the bank – referred to as deposit in transit.

From the bank’s perspective there are items that the company does not yet know about and finds out through the review of the bank statement. For example, one of the company’s customers check bounces because they don’t have enough funds in their account, this check is returned the company and recorded on the bank statement as a Not Sufficient Funds (NSF). The bank may pay interest on the account and this will be reflected on the statement. Company’s may estimate the amount of interest they have earned but will need to use the bank statement to determine exactly how much was paid and make adjustments to any estimate.

Once you’ve identified your reconciling items, you are ready to start your bank reconciliation. Let’s use a new example to see how to deal with the reconciling items.

Question 42

True or False: For a bank reconciliation, only amounts shown on the book portion of the reconciliation require an adjusting entry.

Answer 42

True

Question 43

Bank Reconciliation - What the bank doesn’t know:

Answer 43

(1) Outstanding checks
(2) Deposits in transit
(3) Mistakes in bank records

Question 44

Bank Reconciliation - What we don’t know:

Answer 44

(1) Bank charges and collections
(2) NSF checks
(3) Mistakes in company records

Question 45

Includes money or any instrument that banks will accept for deposit and immediate credit to a company’s account, such as a check, money order, or bank draft.

Answer 45

Cash

Question 46

Short-term, highly liquid investments purchased within 3 months of maturity.

Answer 46

Cash Equivalents