ACCT 217 - Quiz 3

Chapter 7, 8, 9

What are the three objectives of an internal control system?

• Reliable financial reporting

• Effective and efficient operations

• Compliance with laws and regulations

A control that averts an unwanted action before it occurs

Preventive Control

A control that identifies that an unwanted action has occurred

Detective Control

What are the five primary components of a good internal control system?

• Control environment

• Risk assessment

• Control activities

• Information and communication

• Monitoring activities

What is the purpose of risk assessment in internal control?

To identify, analyze, and mitigate business risks

Policies and procedures that address specific risks

Control Activities

Why is information and communication important in internal control?

It ensures relevant information reaches appropriate users.

What is the purpose of monitoring activities?

To periodically evaluate whether internal controls remain adequate

Which control activity makes a specific employee accountable for completing a task?

Assignment of responsibility

Which control activity separates authorization, recording, and custody functions among different people?

Segregation of duties

What is the main purpose of segregation of duties?

To reduce the risk of errors and fraud

What type of control activity provides evidence that a transaction occurred?

Documentation

Why should documents be sequentially pre-numbered?

To reduce the risk of missing or duplicate transaction records

Why should original source documents be used for recording transactions?

To reduce the risk of duplicate entries and payments

What is the purpose of physical controls?

To safeguard assets and improve the reliability of records

Give an example of a physical control

A safe, security camera, building alarm, or password

The comparison of two or more documents to identify differences

Reconciliation

Employees who evaluate the effectiveness of internal controls

Internal Auditors

Independent auditors hired to report on whether financial statements are fairly presented

External Auditors

Why can internal controls provide only reasonable assurance?

Because they have limitations such as cost, human error, collusion, and management override

What internal control limitation occurs when two or more people work together to bypass controls?

Collusion

What internal control limitation occurs when managers bypass established controls?

Management Override

An intentional act to steal assets or misstate financial information

Fraud

What are the three elements of the fraud triangle?

Opportunity, pressure, and rationalization

According to the fraud triangle, what creates the possibility for fraud to occur?

Opportunity

According to the fraud triangle, what refers to motivation to commit fraud?

Pressure

According to the fraud triangle, what refers to justifying dishonest behavior?

Rationalization

Why do businesses use bank accounts as an internal control tool?

They provide an independent record of transactions

What are the two records compared during a bank reconciliation?

The company's records and the bank's records

A cheque written by the company that has not yet been paid by the bank

Outstanding Cheque

A deposit recorded by the company but not yet recorded by the bank

Deposit in Transit

What is the purpose of a bank reconciliation?

To reconcile (verify) the bank statement balance with the book cash balance

On the bank side of a bank reconciliation, are deposits in transit added or subtracted?

Added

On the bank side of a bank reconciliation, are outstanding cheques added or subtracted?

Subtracted

Which reconciling items on the book side usually increase cash?

EFT collections, interest earned, and other deposits

Which reconciling items on the book side usually decrease cash?

EFT payments, service charges, interest charges, and other payments

Which reconciling items from a bank reconciliation require journal entries?

Book-side reconciling items

Should bank-side reconciling items be journalized by the company?

No; Only reconciling items that affect your internal general ledger (the "book" balance) should be journalized.

A cheque returned by the bank because of insufficient funds

NSF Cheque

When a bank returns an NSF cheque, what happens to Accounts Receivable?

It increases because the customer's debt is reinstated

A short-term, highly liquid investment with insignificant risk of value changes

Cash Equivalent

Why are cash equivalents held?

To meet short-term cash needs rather than for investment purposes

Give one example of a cash equivalent.

Treasury bill, commercial paper, bankers' acceptance, money market fund, or short-term term deposit

Where is cash reported on the statement of financial position?

First in the current assets section

A pre-approved ability to withdraw more than the available cash balance

Bank Overdraft

How is bank indebtedness reported at year-end?

As a current liability

What is the first basic principle of cash management?

Increase the speed of receivables collection

Why should inventory levels be kept low from a cash management perspective?

Large inventories tie up cash

Why should a company take advantage of supplier credit periods?

To avoid paying bills too early

Why should idle cash be invested?

Cash on hand earns no return

What is the purpose of a cash budget?

To project future cash flows and identify financing or investment needs

Which internal control component involves identifying and analyzing business risks?

A) Monitoring activities
B) Risk assessment
C) Documentation
D) Control environment

B) Risk assessment

Which control activity is violated if one employee orders, receives, and pays for merchandise?

A) Documentation
B) Physical controls
C) Segregation of duties
D) Monitoring

Segregation of Duties

Which item is added to the bank balance during a bank reconciliation?

A) Service charges
B) Outstanding cheques
C) NSF cheques
D) Deposits in transit

D) Deposits in transit

Which item requires a journal entry after a bank reconciliation?

A) Deposit in transit
B) Outstanding cheque
C) EFT collection recorded by the bank only
D) Bank-side error

C) EFT collection recorded by the bank only

Which fraud triangle element refers to an employee justifying dishonest behavior?

A) Pressure
B) Opportunity
C) Rationalization
D) Monitoring

C) Rationalization

Which of the following is a cash equivalent?

A) Accounts receivable
B) Treasury bill
C) Inventory
D) Equipment

B) Treasury bill

Which internal control limitation occurs when employees make mistakes because of fatigue or carelessness?

A) Collusion
B) Human error
C) Management override
D) Cost-benefit constraint

B) Human error

Which control activity is best illustrated by a safe that stores excess cash?

A) Documentation
B) Assignment of responsibility
C) Physical controls
D) Monitoring

C) Physical controls

Which item would normally decrease the book balance during a bank reconciliation?

A) Interest earned
B) EFT collection
C) Deposit in transit
D) Service charges

D) Service charges

What is the main purpose of a cash budget?

A) Detect fraud
B) Reconcile bank accounts
C) Forecast future cash needs and surpluses
D) Value inventory

C) Forecast future cash needs and surpluses

An amount owed to a company that is expected to be collected in cash.

Receivable

An amount owed by a customer from the sale of goods or services on account.

Accounts Receivable

A written promise to repay a debt.

Notes receivable

Accounts receivable and notes receivable arising from sales transactions

Trade receivable

Receivables that do not arise from normal business operations.

Non-trade receivable

A method that estimates uncollectible accounts at the end of each accounting period.

Allowance Method

What type of account is Allowance for Doubtful Accounts?

A contra-asset account.

How is carrying amount of accounts receivable calculated?

Accounts Receivable - Allowance for Doubtful Accounts

What journal entry records estimated uncollectible accounts?

Debit Bad Debts Expense; Credit Allowance for Doubtful Accounts

What is the journal entry to write off an uncollectible account?

Debit Allowance for Doubtful Accounts; Credit Accounts Receivable.

A written promise to pay a specific amount on demand or at a future date.

Promissory note

The date on which a note must be paid in full.

Maturity date

What is the formula for interest on a note?

Principal × Annual Interest Rate × Time in Years.

What journal entry records accrued interest income?

Debit Interest Receivable; Credit Interest Income

What does it mean for a note to be honoured?

It is paid in full at maturity

What does it mean for a note to be dishonoured?

It is not paid at maturity

If a dishonoured note is expected to be collected, where is it transferred?

Accounts Receivable

Where are short-term receivables reported?

Current Assets

Where is bad debts expense reported?

As an operating expense on the income statement.

What does the receivables turnover ratio measure?

How many times receivables are collected during the year.

What is the formula for receivables turnover?

Credit Sales / Average Gross Accounts Receivable.

What is the formula for average collection period?

365 Days / Receivables Turnover.

A group of accounts that share a common characteristic.

Subsidiary Ledger

What is the accounts receivable control account?

The accounts receivable account in the general ledger.

Which account is credited when recording estimated uncollectible accounts?

A) Cash
B) Accounts Receivable
C) Allowance for Doubtful Accounts
D) Interest Receivable

C) Allowance for Doubtful Accounts

What is the carrying amount of receivables?
A) A/R + AFDA
B) A/R − AFDA
C) A/R + Cash
D) A/R − Revenue

B) A/R − AFDA

Which formula correctly calculates note interest?
A) Principal × Rate × Time
B) Principal ÷ Rate × Time
C) Rate × Time
D) Principal × Rate

A) Principal × Rate × Time

Which journal entry records a write-off?

A) Dr AFDA, Cr A/R
B) Dr Bad Debts Expense, Cr A/R
C) Dr Cash, Cr A/R
D) Dr A/R, Cr AFDA

A) Dr AFDA, Cr A/R

A higher receivables turnover ratio generally indicates:

A) Slower collections
B) More liquid receivables
C) Higher bad debts
D) Lower sales

B) More liquid receivables

Contra-asset account that reduces a company's total accounts receivable to reflect the amount of money it estimates it will not collect from customers.

Allowance for doubtful accounts (AFDA)