Chapter 8: Fraud, Internal Control, and Cash

Question 1

Which of the following is NOT an element of the fraud triangle?

(a) Rationalization.
(b) Financial pressure.
(c) Segregation of duties.
d) Opportunity.

Answer 1

(c) Segregation of duties is not an element of the fraud triangle.

Question 2

An organization uses internal control to enhance the accuracy and reliability of accounting records and to:

(a) safeguard assets.
(b) prevent fraud.
(c) produce correct financial statements.
(d) deter employee dishonesty.

Answer 2

(a) Safeguarding assets is one of the purposes of using internal control.

Question 3

Which of the following was NOT a result of the Sarbanes-Oxley Act?
(a) Companies must file financial statements with the
Internal Revenue Service.
(b) All publicly traded companies must maintain ade-
quate internal controls.
(c) The Public Company Accounting Oversight Board
was created to establish auditing standards and
regulate auditor activity.
(d) Corporate executives and board of directors must
ensure that controls are reliable and effective, and they can be fined or imprisoned for failure to do so.

Answer 3

(a) Filing financial statements with the IRS is not a result of the Sarbanes-Oxley Act (SOX); SOX focuses on the prevention or detection of fraud.

Question 4

The principles of internal control do NOT include:

(a) establishment of responsibility.
(b) documentation procedures.
(c) management responsibility.
(d) independent internal verification.

Answer 4

(c) Management responsibility is not one of the principles of internal control

Question 5

Physical controls do NOT include:

(a) safes and vaults to store cash.
(b) independent bank reconciliations.
(c) locked warehouses for inventories.
(d) bank safety deposit boxes for important papers.

Answer 5

(b) Independent bank reconciliations are not a physical control.

Question 6

Which of the following control activities is NOT relevant when a company uses a computerized (rather than manual) accounting system?
(a) Establishment of responsibility.
(b) Segregation of duties.
(c) Independent internal verification.
(d) All of these control activities are relevant to a
computerized system.

Answer 6

(d) Establishment of responsibility, segregation of duties and independent internal verification are all relevant to a computerized system.

Question 7

Permitting only designated personnel to handle cash
receipts is an application of the principle of:
(a) segregation of duties.
(b) establishment of responsibility.
(c) independent internal verification.
(d) human resource controls.

Answer 7

(b) Permitting only designated personnel to handle cash receipts is an application of the principle of establishment of responsibility,

Question 8

The use of prenumbered checks in disbursing cash is
an application of the principle of: 
(a) establishment of responsibility. (
b) segregation of duties.
(c) physical controls.
(d) documentation procedures.

Answer 8

(d) The use of prenumbered checks in disbursing cash is an application of the principle of documentation procedures

Question 9

A company writes a check to replenish a $100 petty
cash fund when the fund contains receipts of $94 and $4 in cash. In recording the check, the company should:
(a) debit Cash Over and Short for $2.
(b) debit Petty Cash for $94. (c) credit Cash for $94.
(d) credit Petty Cash for $2.

Answer 9

(a) When this check is recorded, the company should debit Cash Over and Short for the shortage of $2 (total of the receipts plus cash in the drawer ($98) versus $100)

Question 10

The control features of a bank account do not include: (a) having bank auditors verify the correctness of the
bank balance per books.
(b) minimizing the amount of cash that must be kept
on hand.
(c) providing a double record of all bank transac-
tions.
(d) safeguarding cash by using a bank as a deposi-
tory.

Answer 10

(a) Having bank auditors verify the correctness of the bank balance per books is not one of the control features of a bank account.

Question 11

In a bank reconciliation, deposits in transit are:

(a) deducted from the book balance.
(b) added to the book balance.
(c) added to the bank balance.
(d) deducted from the bank balance.

Answer 11

(c) Deposits in transit are added to the bank balance on a bank reconciliation

Question 12

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

(a) outstanding checks.
(b) deposit in transit.
(c) a bank error.
(d) bank service charges.

Answer 12

(d) Because the depositor does not know the amount of the bank service charges until the bank statements is received, an adjusting entry must be made when the statement is received.

Question 13

Which of the following items in a cash drawer at November 30 is NOT cash?

(a) Money orders.
(b) Coins and currency.
(c) An NSF check.
(d) A customer check dated November 28.

Answer 13

(c) An NSF check should not be considered cash

Question 14

Which of the following statements correctly describes
the reporting of cash?
(a) Cash cannot be combined with cash equivalents.
(b) Restricted cash funds may be combined with
cash.
(c) Cash is listed first in the current assets section.
(d) Restricted cash funds cannot be reported as a cur-
rent asset.

Answer 14

(c) Cash is listed first in the current assets section.