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Chapter 8: Fraud, Internal Controls, and Cash

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Chapter 8: Fraud, Internal Controls, and Cash

17 problems · 0 figures

Multiple Choice 8.1 §8.1 source ↗

Which of the following would a fraudster perceive as a pressure?
  1. a.
    lack of management oversight
  2. b.
    everyone does it
  3. c.
    living beyond one’s means
  4. d.
    lack of an internal audit function

Answer

C. living beyond one’s means

Multiple Choice 8.3 §8.4 source ↗

What is the best way for owners of small businesses to maintain proper internal controls?
  1. a.
    The owner must have enough knowledge of all aspects of the company and have controls in place to track all assets.
  2. b.
    Small businesses do not need to worry about internal controls.
  3. c.
    Small businesses should make one of their employees in charge of all aspects of the company, giving the owner the ability to run the company and generate sales.
  4. d.
    Only managers need to be concerned about internal controls.

Answer

A. The owner must have enough knowledge of all aspects of the company and have controls in place to track all assets.

Multiple Choice 8.5 §8.4 source ↗

There are several elements to internal controls. Which of the following would not address the issue of having cash transactions reported in the accounting records?
  1. a.
    One employee would have access to the cash register.
  2. b.
    The cash drawer should be closed out, and cash and the sales register should be reconciled on a prenumbered form.
  3. c.
    Ask customers to report to a manager if they do not receive a sales receipt or invoice.
  4. d.
    The person behind the cash register should also be responsible for making price adjustments.

Answer

D. The person behind the cash register should also be responsible for making price adjustments.

Multiple Choice 8.7 §8.4 source ↗

There are three employees in the accounting department: payroll clerk, accounts payable clerk, and accounts receivable clerk. Which one of these employees should not make the daily deposit?
  1. a.
    payroll clerk
  2. b.
    account payable clerk
  3. c.
    accounts receivable clerk
  4. d.
    none of them

Answer

C. accounts receivable clerk

Multiple Choice 8.9 §8.4 source ↗

What is the advantage of using technology in the internal control system?
  1. a.
    Passwords can be used to allow access by employees.
  2. b.
    Any cash received does not need to be reconciled because the computer tracks all transactions.
  3. c.
    Transactions are easily changed.
  4. d.
    Employees cannot steal because all cash transactions are recorded by the computer/cash register.

Answer

A. Passwords can be used to allow access by employees.

Multiple Choice 8.11 §8.5 source ↗

Which of the following is true about the Sarbanes-Oxley Act?
  1. a.
    It was passed to ensure that internal controls are properly documented and tested by public companies.
  2. b.
    It applies to both public and smaller companies.
  3. c.
    It requires all companies to report their internal control policies to the US Securities and Exchange Commission.
  4. d.
    It does not require additional costs or resources to have adequate controls.

Answer

A. It was passed to ensure that internal controls are properly documented and tested by public companies.

Multiple Choice 8.13 §8.5 source ↗

Petty cash is used to ________.
  1. a.
    write checks for frequent purchases
  2. b.
    make small payments in cash
  3. c.
    avoid having to retain receipts because the amounts are very small
  4. d.
    pay for recurring purchases such as postage or office supplies

Answer

B. make small payments in cash

Multiple Choice 8.15 §8.6 source ↗

Which of the following items are found on a book side of the bank reconciliation?
  1. a.
    beginning bank balance
  2. b.
    outstanding checks
  3. c.
    interest income
  4. d.
    error made by bank

Answer

C. interest income

Multiple Choice 8.17 §8.7 source ↗

What would be a reason a company would want to understate income?
  1. a.
    to help nudge its stock price higher
  2. b.
    to lower its tax bill
  3. c.
    to show an increase in overall profits
  4. d.
    to increase investor confidence

Answer

B. to lower its tax bill

Multiple Choice 8.19 §8.7 source ↗

At what point does revenue recognition occur?
  1. a.
    When the purchase order is received
  2. b.
    When the seller receives the money for the job
  3. c.
    When the seller has met “performance”
  4. d.
    When the purchaser makes payment

Answer

C. When the seller has met “performance”

Question 8.1 §8.1 source ↗

What is an example of perceived opportunity as one of the three elements causing a person to commit fraud?

Answer

Examples include weak internal controls, improper or nonexistent management oversight, and lack of an internal audit function or other opportunities that create the perception that the fraudster will be successful in committing a fraudulent act.

Question 8.3 §8.1 source ↗

What is an example of incentive as one of the three elements causing a person to commit fraud?

Answer

Examples include vices such as gambling, living beyond one’s means, high debts, employer pressures to report fictitious accounting results, or alcohol/drug use.

Question 8.5 §8.2 source ↗

The information technology departments of all companies have significant and important roles in the internal control systems. Discuss them and their importance.

Answer

Protect data from corruption or damage. Have their servers mirrored at various locations around the world. Ensure that no unauthorized parties have access to the data. Ensure that all transactions are entered into the accounting system properly and accurately. If fraud or illegal access to data occurs, a good internal control will help identify the responsible party or parties.

Question 8.8 §8.5 source ↗

What is the role of the Sarbanes-Oxley Act and the Public Company Accounting Oversight Board?

Answer

To ensure that large companies are consistent with internal controls, properly documented, and tested.

Question 8.10 §8.4 source ↗

Is it required to have only one petty cashier or should the company appoint more than one person to administer the fund? Why?

Answer

One person should be responsible for the fund. If one person is in charge and the fund is short, then the petty cashier is the only one responsible for the shortage.

Question 8.11 §8.3 source ↗

Technology can be used to support a strong internal control system. Discuss how technology has improved the point-of-sale transactions.

Answer

Records all sales and inventory reduction and ensures that correct prices are charged.

Question 8.13 §8.6 source ↗

What should be done if differences are found between the bank statement and the book account?

Answer

All differences must be researched, explained, and corrected. Differences pertaining to the bank must be reported. If fraud is suspected, a complete investigation must be performed.

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Problems and answers are adapted from Principles of Accounting, Volume 1: Financial Accounting by Mitchell Franklin, Patty Graybeal and Dixon Cooper, OpenStax, and are used under the CC BY-NC-SA 4.0 licence. Access for free at https://openstax.org/books/principles-financial-accounting/pages/1-why-it-matters. Illustrations: Copyright Rice University, OpenStax, under CC BY-NC-SA 4.0 license. This adaptation is released under the same licence, is non-commercial, and is neither affiliated with nor endorsed by OpenStax or Rice University.