Chapter 7

Question 1

fraud

Answer 1

a dishonest act by an employee that results in personal benefit to the employee at a cost to the employer

Question 2

the fraud triangle

Answer 2

opportunity, financial pressure, and rationalization

Question 3

sarbanes-oxley act

Answer 3

maintain adequate system of internal control
corporate execs and outside auditors must attest to the adequacy of the controls
also created PCAOB

Question 4

internal control

Answer 4

a process designed to provide reasonable assurance regarding the achievement of company objectives related to operations reporting and compliance

Question 5

purpose of internal controls

Answer 5

safeguard assets, enhance the reliability of accounting records, increase efficiency of operations, and ensure compliance with laws and regulations

Question 6

primary components of internal control

Answer 6

control environment, risk assessment, control activities, info and communication, and monitoring

Question 7

control environment

Answer 7

management should make it clear that integrity is valued and that unethical activity will not be tolerated

Question 8

risk assessment

Answer 8

identify and analyze dif factors that create risk and determine how to manage these risks

Question 9

control activities

Answer 9

to reduce the possibilities of fraud, management must design policies and procedures to address the specific risks

Question 10

info and communication

Answer 10

the system must capture/communicate all pertinent info both down and up the org, and communicate info to appropriate external parties

Question 11

monitoring

Answer 11

systems must be monitored for their adequacy-significant deficiencies need to be reported to top management

Question 12

6 principles of control activities

Answer 12

establishment of responsibility
segregation of duties
documentation procedures
physical controls
independent internal verification
human resource controls

Question 13

establishment of responsibility

Answer 13

most effective when only one person is responsible for a given task (passcodes)

Question 14

segregation of duties

Answer 14

dif individuals should be responsible for related activities
responsibility for record keeping for an asset should be separate from the physical custody of the asset

Question 15

segregation of related activities

Answer 15

purchasing activities separate from sale activities
accountant shouldn’t touch the asset
asset custodian shouldn’t touch the accountant records

Question 16

documentation procedures

Answer 16

provide evidence of transactions/events have occured-use pre-numbered documents

Question 17

independent internal verification

Answer 17

review of data prepared by employees (companies should verify records periodically or on a surprise basis) an employee who is independent of the personnel responsible for the info should make the verification

Question 18

internal auditors

Answer 18

company employees who continuously evaluate the effectiveness of the company’s internal control systems

Question 19

human resource controls

Answer 19

bond employees who handle cash (bonding-obtaining insurance protection against theft by employees) rotate employees duties and require employees to take vacations-conduct thorough background checks

Question 20

limitations of internal control

Answer 20

reasonable assurance
human element
collusion
size of the company

Question 21

cash over and short account

Answer 21

used for the amount of money over and short deposited-account record (based on tape) is dif than deposited amount) -often occurs from cashier handing back wrong amount of change

Question 22

cash disbursement controls

Answer 22

internal controls are more effective when companies pay by check or EFT rather than cash

Question 23

use of a bank

Answer 23

safe place to deposit money and minimize the amount of money on hand
keeps records of balances/transactions

Question 24

bank statements:

Answer 24

1. checks paid and other debits that reduce the balance (debit card transactions and EFTs for bill paymnts)
2. deposits and other credits that increase the balance (direct deposit, automated teller machine, EFT)
3. debit memorandum (bank service charge, NSF check)
4. credit memorandum (collection of notes receivable, interest earned)
5. the account balance after each days transactions

Question 25

bank rec order

Answer 25

per bank statement: + deposits in transit - outstanding checks +/- bank errors
per books: + notes collected by bank -NSF checks - service charges +/- bank errors

Question 26

each reconciling entry from the bank rec will always involve ______ as either a debit or a credit

Answer 26

CASH

Question 27

cash equivalents

Answer 27

treasury bills, commercial paper, and market funds

Question 28

restricted cash

Answer 28

not available for general use
set aside for special purpose
reported separately on balance sheet

Question 29

capital investment

Answer 29

money can be used to make purchases of PP&E to sustain long-term production

Question 30

objective of managing cash

Answer 30

ensure the company has sufficient cash to meet payments

minimize the amount of idle cash on hand