Chapter 7

Question 1

What consists of Fraud and Internal Control?

Answer 1

1) Fraud
2) Sarbanes-Oxley
3) Internal control
4) Limitations

Question 2

What consists of cash controls?

Answer 2

1) Cash receipts controls

2) Cash disbursements controls

Question 3

What consists of Use of a Bank?

Answer 3

1) Bank statements

2) Reconciling the bank account

Question 4

What consists of Reporting Cash?

Answer 4

1) Cash equivalents

2) Reconciling the bank account

Question 5

What are the 3 factors of fraud?

Answer 5

Opportunity, Financial Pressure, Rationalization

Question 6

What methods and measures were adopted for Internal Control?

Answer 6

1) Safeguard assets
2) Enhance accuracy of records
3) Increase efficiency of operations
4) Ensure compliance with laws

Question 7

What are the five components of internal control?

Answer 7

1) Control environment
2) Control activities
3) Risk assessment
4) Information and communication
5) Monitoring

Question 8

What is establishment of responsibility?

Answer 8

Control is most effective when only one person is responsible for a given task

Question 9

What is segregation of duties?

Answer 9

Related duties should be assigned to different individuals

Question 10

What are documentation procedures?

Answer 10

Companies should use pre-numbered documents which should all be accounted for

Question 11

What are the two principles of independent internal verification?

Answer 11

1) Records periodically verified by an employee who is independent
2) Discrepancies reported to management

Question 12

What are human resource controls?

Answer 12

1) Bond employees
2) Rotate employees’ duties and require vacations
3) Conduct background checks

Question 13

What are the limitations of internal control?

Answer 13

1) Costs should not exceed benefit
2) Human element
3) Size of the business

Question 14

What are cash receipt controls?

Answer 14

Segregation of record-keeping from physical custody

Question 15

Permitting only designated personnel to handle cash receipts is an application of the principle of?

Answer 15

Establishment of responsibility

Question 16

What is establishment of responsibility?

Answer 16

Only designated personnel are authorized to sign checks and approve venders

Question 17

What is segregation of duties?

Answer 17

Different individuals approve and make payments; check signers do not record disbursements

Question 18

What are documentation procedures?

Answer 18

• Use prenumbered checks and account for them in sequence
• Each check must have an approved invoice
• Require employees to use corporate credit cards for expenses

Question 19

What are independent internal verification?

Answer 19

• Compare checks to invoice

- Reconcile bank statement monthly

Question 20

What are physical controls?

Answer 20

Store blank checks in safes with limited access

Question 21

The use of prenumbered checks in disbursing cash is an application of the principle of?

Answer 21

Documentation procedures

Question 22

What are the control features for the Use of a Bank?

Answer 22

1) Minimize the amount of currency on hand
2) Creates a double record of bank transactions
3) Bank reconciliation

Question 23

When do you debit memorandum?

Answer 23

1) Bank service charge

2) NSF (not sufficient funds)

Question 24

When do you credit memorandum?

Answer 24

1) Collect notes receivable

2) Interest earned

Question 25

The reconciling item in a bank reconciliation that will result in an adjusting entry by the depositor is?

Answer 25

Bank service charges

Question 26

What is involved in the Petty Cash Fund?

Answer 26

1) Establishing the fund
2) Making payments from the fund
3) Replenishing the fund