chapter 7

Question 1

what are internal controls?

Answer 1

systems adopted within a company to help it achieve reliable financial reporting, effective and efficient operations and compliance with relevant laws and regulations

Question 2

can internal controls help prevent and detect errors?

Answer 2

yes, they help prevent unintentional misstatements

Question 3

can internal controls help prevent and detect fraud?

Answer 3

yes

Question 4

what is an example of physical internal controls?

Answer 4

locking inventories

Question 5

can internal controls be bypassed?

Answer 5

yes people can violate the controls to get what they want

Question 6

what are the 5 primary components of internal controls?

Answer 6

control environment
risk assessment for the organizations
control activities, limit exposure to risk
information and communication
monitoring activities

Question 7

what are 5 kinds of control activities?

Answer 7

assignment of responsibility
segregation of duties
documentation
physical controls
review and reconciliation

Question 8

what determines what control activities a company will use?

Answer 8

the risks they are facing, management assessment and the size and nature of the company

Question 9

what is assignment of responsibility?

Answer 9

responsibility should be assigned to be specific employees, making them accountable for carrying out a task appropriately

Question 10

what is an example of assignment of responsibility?

Answer 10

each cashier has a responsibility for their own cash drawer

Question 11

what is segregation of duties?

Answer 11

responsibility for authorization and recording of transactions and custody of assets should be assigned to different individuals

Question 12

what is an example of segregation of duties?

Answer 12

all purchasing activities (ordering, approving, receiving and authorizing payment) should not be carried out by the same employee

Question 13

what is documentation?

Answer 13

evidence that transactions and events have occurred at specific times and specified amounts

Question 14

what is an example of documentation?

Answer 14

shipping documents indicating goods have been shipped

Question 15

what is an important part of documentation?

Answer 15

never do anything without proper documentation

Question 16

what are physical controls?

Answer 16

safeguarding of assets and enhancing the accuracy and reliability of accounting records

Question 17

what is an example of physical controls?

Answer 17

computer passwords, building alarms, security cameras, safes, vaults

Question 18

what is review and reconciliation?

Answer 18

data prepared by employees should be subject to independent review, both internal and external

Question 19

what is an example of review and reconciliation?

Answer 19

reconciliation involves the comparison between two or more documents

Question 20

do internal controls have limitations?

Answer 20

yes, they can only provide reasonable assurance that assets are safeguarded and records are reliable

Question 21

what are the 4 limitations to internal controls?

Answer 21

cost/ benefit considerations

human error

collusion (2 people working together to do something bad)

management override

Question 22

what is fraud?

Answer 22

an intentional act to misappropriate (steal) assets or to misstate financial information

Question 23

what are 3 examples of misstatements?

Answer 23

recording expenses as assets
overstating useful lives of assets
recording revenues that do not exist

Question 24

when is fraud most likely to occur?

Answer 24

when the 3 factors in the fraud triangle is present

Question 25

what are the 3 factors of the fraud triangle?

Answer 25

opportunity financial pressure rationalization

Question 26

what is the factor "opportunity" in the fraud triangle?

Answer 26

opportunity is the opportunity to commit fraud

Question 27

what is an example of "opportunity"?

Answer 27

seeing a stack of blank signed paycheques to be filled out and cashed in yourself

Question 28

what is the factor "financial pressure" in the fraud triangle?

Answer 28

people might need money so they steal because they need the money for somthing

Question 29

what is an example of 'financial pressure"?

Answer 29

someone stealing because they can't feed their children

Question 30

what is the factor "rationalization" in the fraud triangle?

Answer 30

making reasons why it is okay to commit fraud

Question 31

what is an example of "rationalization"?

Answer 31

someone stealing money and telling themself they are going to pay it back

Question 32

is cash highly susceptible to theft?

Answer 32

yes

Question 33

what is cash?

Answer 33

coins, currency, cheques, money order, money on hand or in bank

Question 34

what is the general rule for determining what is cash?

Answer 34

if bank will accept it for deposit, it is considered cash

Question 35

when are control activities over cash receipts most effective?

Answer 35

when cash receipts are deposited into the bank account daily or are made by electronic funds transfer

Question 36

when are control activities over cash payments more effective?

Answer 36

when payments are made by cheque or by electronic funds transfer, rather than cash

Question 37

how does a company safeguard cash?

Answer 37

by depositing a it in a bank rather than keeping cash on hand

Question 38

what is the benefit of depositing cash in the bank?

Answer 38

it provides a second record of transactions one by the bank and one by the company , than these 2 accounts can be reconciled

Question 39

what are the 5 things online banking allows companies to do?

Answer 39

transfer funds between accounts make online payments for invoice, payroll or taxes deposit cheques online view account transactions and balance details at any time download transactions directly, facilitating bank reconciliations

Question 40

what can cause some differences between company records and bank statements?

Answer 40

timing differences that result in one of the parties recording the transaction before the other is aware of it

Question 41

what are the 6 principles of cash management?

Answer 41

increase the speed of receivables collection keep inventory low take advantage of credit periods plan timing of major expenditures invest idle cash prepare a cash budget

Question 42

do you journalize any entries on the bank side when doing bank reconciliation journal entries?

Answer 42

no

Question 43

where do you report cash on statements?

Answer 43

on the statement of cash flows and statement of financial position

Question 44

what is cash combined with when being reported on financial statements?

Answer 44

cash equivalents

Question 45

what are cash equivalents?

Answer 45

short-term highly liquid held-for-trading investments that are subject to insignificant risk of changes in value ( anything maturing is 90 days or less)

Question 46

if cash is in a deficit or overdraft at year end, how is it reported?

Answer 46

it is reported as a current liability called bank indebtedness

Question 47

what are the journal entries to report a negative cash balance or bank indebtedness?

Answer 47

dn cash cr bank indebtedness