Accounting 201: Intermediate Financial Accounting I Ch 9. Systems & Controls in Accounting

Internal controls

procedures that are put in place within an organization to ensure business is carried out in an orderly, effective and accurate manner

intentional loss

results from intended from intended fraudulent activity

Financial Accounting Standards Boarding (FASB)

sets the guidelines that all accounting professionals must follow

Generally Accepted Accounting Principles (GAAP)

the guidelines that the FASB set

In her role as accounting manager for ABC Manufacturing Janis has uncovered a pattern of errors made by one clerk in the parts department. How should Janis handle this situation?

1. She should investigate and if the errors are intentional the clerk should be disciplined.

2. She should investigate and if the errors are intentional she does not need to be concerned.

3. Janis should investigate and if the errors are unintended the person responsible should be fired.

4. This is normal in all businesses and Janis does not need to do anything.

She should investigate and if the errors are intentional the clerk should be disciplined.

Procedures that are put in place within an organization to ensure business is carried out in an orderly, effective and accurate manner are called _____.

1. Internal Controls

2. Accounting Laws

3. Journal Entries

4. Financial Statements

Internal Controls

The Securities and Exchange Commission created a special group called the _____ to set the guidelines that all accounting professionals must follow.

1. FASB

2. FSAB

3. GACC

4. GAPP

FASB

Jan is the accounting manager for ABC Manufacturing. In her role she instructs newly hired accountants in the use of internal controls. Why would she stress the importance of accuracy when they are creating financial documents?

1. The financial documents must be created every week so the accounting manager can review and balance the company check book.

2. None of these choices are a primary reason

3. The financial documents will be used by the managers as well as investors and bankers to get a picture of how well the company is doing. If they are not accurate, incorrect decisions could be made.

4. Accuracy is not important, Jan is just trying to make the new accountants do all her work for her. Financial documents are not used by anyone except the accounting manager.

The financial documents will be used by the managers as well as investors and bankers to get a picture of how well the company is doing. If they are not accurate, incorrect decisions could be made.

A loss that occurs from honest mistakes being made by individuals is called a(n) _____ loss.

1. Intentional

2. Unintentional

3. Fraudulent

4. Accidental

Accidental

Financial Information

the information found on the financial statements of a company that tells how good or bad a company is performing

Financial Statements

provide all of a company’s financial information

Reporting Errors

errors that are a result of such things as miscalculations or transposing numbers

Disagreements in Judgement

what I believe and what you believe may not be the same

Fraudulent Financial Reporting

to deliberately omit or misstate financial information with the intent of deceiving investors and creditors

A company's financial statements include an income statement, a statement of retained earnings, a statement of cash flows and a _____.

1. stock summary

2. payroll receipt

3. ledger

4. balance sheet

balance sheet

To deliberately omit or misstate financial information with the intent of deceiving investors and creditors is _____.

1. fraudulent financial reporting

2. an error in judgment

3. a reporting error

4. a disagreement in judgment

fraudulent financial reporting

The information found on the financial statements of a company that tells how good or bad a company is performing is called _____.

1. financial Information

2. debits

3. financial statements

4. credits

financial Information

Two people have differing opinions on the reporting period for a company's income. What typical problem are they most likely experiencing with their financial information?

1. Reporting error

2. Disagreement in judgment

3. Error in judgment

4. Fraudulent financial reporting

Disagreement in judgment

Ben, a company accountant, accidentally reported $5300 of earnings as $3500 on a company financial statement. Ben's mistake is an example of _____.

1. a reporting error

2. disagreement in judgment

3. an error in judgment

4. fraudulent financial reporting

a reporting error

Safeguards

measures that are taken to prevent someone or something from an undesirable outcome

Internal Controls

rules and regulations that are put into place to guard assets owned by a person or a company

Five goals of safeguards

• provide reasonable assurance that banks operate efficiently and effectively

• ensure that each transaction that occurs in the bank is recorded correctly

• make sure that the information provided by banks is true and reliable information

• make sure that the risk management system in place in the bank is effective

• make sure that all banking laws and regulations are being complied to

Separation of Duties

to separate one big job into several small jobs, with a different individual performing each

How many goals are there for having effective safeguards in place in the banking industry?

1. 5

2. 3

3. 4

4. 2

5

Measures that are taken to prevent someone or something from an undesirable outcome are called _____.

1. safeguards

2. audits

3. compliance

4. internal controls

safeguards

Rachel works as a teller at the bank. Normally she reports all the transactions that have been made to the accountant at the end of the day. On this particular day, Rachel decided to just enter all the information herself rather than give them to the accountant to verify and enter, in order to save time so she could go home earlier. In doing this, has Rachel violated one of the five goals of safeguards?

1. Yes, Rachel was not ensuring integrity in the bank's practice by not passing along the transactions to the accountant.

2. Yes, it is imperative that they ensure each transaction is recorded correctly, and giving the paperwork to the accountant is a part of ensuring that.

3. No, Rachel is free to do that work herself, it is not important for the duties to be separated at the bank.

4. No, what she did may not be the best option long term, but there is nothing in the safeguards that deals explicitly with this.

Yes, it is imperative that they ensure each transaction is recorded correctly, and giving the paperwork to the accountant is a part of ensuring that.

_____ means to separate one big job into several small jobs, with a different individual performing each.

1. Separation of state

2. Division

3. Separation of duties

4. Job diversity

Separation of duties

What are rules and regulations that are put into place to guard assets owned by a person or a company?

1. Compliance

2. Internal Controls

3. Safeguards

4. Auditors

Internal Controls

Cash Control

a way to monitor credit, collection, cash allocation and disbursement policies, as well as invoicing functions

Cash

money or anything else, such as coins, money orders or bank notes, that a bank will accept as a deposit to a business’ account

Cash Equivalents

liquid assets that can be turned into cash within a short period of time and that are not affected by changing interest rates

Liquidity

how quickly something can be turned into cash

Internal Controls

guidelines for managing the cash account

How quickly something can be turned into cash refers to its _____.

1. trade In Value

2. worth

3. liquidity

4. value

liquidity

A company has the following information:

1.$10,000 in the bank

2.$25,000 in 90 day CDs

3. $15,000 in 1 year bonds

4.$5,000 in money orders

5.$30,000 in real estate

How much cash and cash equivalents does the company have on-hand?

1. $40,000

2. $10,000

3. $55,000

4. $85,000

$40,000

A way to monitor a company's credit, collections, cash allocation and disbursement policies as well as its invoicing function is called which of the following?

1. Balancing

2. Cash Journal

3. Management

4. Cash Control

Cash Control

Internal controls need to contain written protocols and _____.

1. time stamps

2. separation of duties

3. directions

4. job classifications

separation of duties

Which of the following is an example of a cash equivalent?

1. Coins

2. Short-term Certificates of Deposit

3. Long term Treasury Notes

4. Bank Notes

Short-term Certificates of Deposit

Internal Controls

rules and regulations that are put into place to guard assets owned by a person or a company

Cash Receipts

money received from consumers from the sale of goods or services

Separation of Duties

to separate one big job into several small jobs, with a different individual performing each

Cash Disbursements

monies paid out to the individuals for the purchase of items that are needed and used by a company

What is the business asset most vulnerable to fraudulent activity?

1. Property

2. Cash

3. Accounts Receivable

4. Equipment

Cash

_____ are rules and regulations that are put into place to guard the assets owned by a person or a company.

1. Demands

2. Payments

3. Internal Controls

4. External Controls

Internal Controls

Which of the following is the best example of separation of duties?

1. Rachel is an accountant for her company. She prints checks but cannot sign them, she cannot make cash withdrawals, nor can she make cash disbursements. Her boss Katie is responsible for those tasks.

2. Emily is the accountant for her company, she deals with bank deposits and check writing.

3. Bob is one of seven accountants for his company. Bob is responsible for recording cash withdrawals and deposits done by Alan, checks written by Steve, and receipts filed by Susie.

4. Sarah is an accountant for her company, she cannot sign checks, but she does handle all cash disbursements and deposits and receipts and accounting when it comes to cash.

Bob is one of seven accountants for his company. Bob is responsible for recording cash withdrawals and deposits done by Alan, checks written by Steve, and receipts filed by Susie.

What is the term for monies paid out to individuals for the purchase of items that are needed and used by a company?

1. Income

2. Cash Receipts

3. Cash Disbursements

4. Internal Control

Cash Disbursements

What is the term for money received from consumers from the sale of goods or services?

1. Cash disbursements

2. Cash receipts

3. Liabilities

4. Expenses

Cash receipts

Bank Reconciliation

the balancing of a company’s cash account balance to its bank account balance

Bank Statement

• the bank balance was at the beginning of the month, the deposits the bank has on record for the account, the withdrawals that have been made from the account, and the ending balance of the account on a specific date

• only lists deposits and withdrawals that have been processed through the bank

Check Register

• all the deposits and withdrawals that were made by the company during a given time period

• lists all the deposits and withdrawals a company had in a specific period

Cleared

the item has been recorded in both the company’s records and the bank’s records

Outstanding Debits

checks and other withdrawals that have been recorded in the company’s cash account but have not yet been recorded in the bank’s accounting records

Outstanding Credits

deposits that have been recorded in company’s records but do not yet appear on the bank’s records

Transposition

when the order of numbers are inadvertently switched during the recording process

What is the term for balancing a company's cash account to its bank account?

1. Bank reconciliation

2. Cleared balance

3. Account balancing

4. Adjustment

Bank reconciliation

Sarah's Salon has a book cash balance of $3,400. From her bank statement she found out that one of her customers wrote a $50 NSF check and that the bank paid her $40 interest on a CD, and charged her $75 in monthly service fees. What is her adjusted book balance?

1. $3,565

2. $3,235

3. $3,315

4. $3,400

$3,315

What are checks or withdrawals that are recorded in the cash account but have not yet been recorded in the bank account?

1. Credits

2. Debits

3. Outstanding debits

4. Outstanding credits

Outstanding debits

Marcy's bank statement shows a balance of $3,000. She wrote $1,000 in checks yesterday to pay bills, and made a deposit of $2,000 today. What is the adjusted bank balance?

1. $4,000

2. $6,000

3. $2,000

4. $0

$4,000

What is the difference between the bank statement and the check register?

1. There is no difference between the two.

2. The bank statement only shows transactions that have cleared the bank, while the check register records all transactions.

3. The bank statement accounts for all outstanding debits, while the check register takes into account all outstanding credits.

4. The check register only shows transactions that have cleared the bank, while the bank statement records all transactions.

The bank statement only shows transactions that have cleared the bank, while the check register records all transactions.

Technology

the equipment that is created by the use of scientific knowledge that aids in streamlining business operations

Internal Controls

procedures that are put in place within an organization to ensure business is carried out in an orderly, effective and accurate manner

Separation of Duties

to break down one big job into smaller parts, each performed by a different individual

The ability to process payroll in one hour instead of four hours is reflective of which of the following areas of internal control?

1. Reduced paperwork

2. Reduced processing time

3. Separation of duties

4. Reduced errors

Reduced processing time

How has technology increased efficiency by using separation of duties?

1. By breaking down the job into smaller parts, each performed by a different individual.

2. By the ability to scan, sort, compose, and save documents on a portable drive allowing for easier transfer.

3. By computer programs designed to catch entry errors.

4. By creating cash registers and computers.

By breaking down the job into smaller parts, each performed by a different individual.

How would a company implement internal controls focused on employee efficiency?

1. With detailed job descriptions

2. With financial statements

3. With payroll journals

4. With top-down communication

With detailed job descriptions

Which of the following internal controls creates a check and balance system?

1. Reduced processing time

2. Reduced errors

3. Separation of duties

4. Reduced paperwork

Separation of duties

Which of the following terms best describes the equipment that is created by the use of scientific knowledge that aids in streamlining business operations?

1. Regulations

2. Technology

3. Fabrication

4. Art

Technology

fraud

a purposeful act done to deliberately mislead someone

errors

mistakes someone unintentionally makes

How can you distinguish an error from fraud?

1. Fraud is impossible to detect.

2. Errors are easier to spot because they're not hidden.

3. Fraud is easy to spot because it's never hidden.

4. Errors are done on purpose.

Errors are easier to spot because they're not hidden.

What's the main difference between an error and fraud on a financial statement?

1. The impact it has

2. Who creates the entry

3. The intent it has

4. Where it's placed on the balance sheet

The intent it has

Which of the following is a good example of an error?

1. Adding inventory under the wrong section

2. Decreasing the cost of a liability

3. Inflating an asset's value

4. Omitting a liability in order to strengthen a company's balance sheet

Adding inventory under the wrong section

What's a good example of fraud?

1. Putting a current asset in the fixed asset category

2. Double counting an inventory item

3. Putting a short-term liability in the long-term liability category

4. Doubling the price of a real estate asset

Doubling the price of a real estate asset

Fraud could include all of the following except _____.

1. Misrepresenting material information

2. Accidentally miscounting inventory

3. Knowingly misleading investors

4. Omitting material information

Accidentally miscounting inventory

Sarbanes-Oxley Act aka SOX

a federal law that protect investors from fraudulent accounting practices

Audit Report

a report prepared by an auditor that validates the reliability of a company’s financial statements

Auditor

a professional whose job it is to examine the financial records of a company and prepare the audit report

Publicly Traded Companies

companies that offer shares of stock for sale to outside investors

Internal Controls

procedures that are put in place within an organization to ensure business is carried out in an orderly, effective and accurate manner

What is the law that protects investors from fraudulent accounting activity?

1. FASB

2. SACS

3. CPAS

4. SOX

SOX

What year was the Sarbanes-Oxley Act enacted?

1. 2007

2. 2002

3. 1997

4. 1992

2002

Why is an audit report valuable?

1. It validates a company's claim that it's profitable.

2. It validates the reliability of a company's financial statements.

3. It validates a company's claim that it's experiencing continuous growth.

4. It allows the IRS to conduct a thorough investigation of a company.

It validates the reliability of a company's financial statements.

Which of the following is NOT a purpose of the Sarbanes-Oxley Act?

1. To ensure that publicly traded companies have internal controls in place.

2. To require that publicly traded companies have a high ratio of income to debt.

3. To require that an audit report accompanies corporate financial statements.

4. To ensure corporate accountability for what is reported on financial statements.

To require that publicly traded companies have a high ratio of income to debt.

A scandal involving _____ is a prime example of why the Sarbanes-Oxley Act was needed.

1. BP

2. Shell

3. AT&T

4. Enron

Enron