Question 1

Which of the following is NOT one of the five components of internal control as defined by COSO?

Accepted Answer

Financial leverage

Question 2

A company receives a check by mail from a customer. According to best internal control practices, which department should record the journal entry for the cash receipt?

Accepted Answer

Accounting department

Question 3

Which of the following is a key reason for separating the custody of assets from accounting in internal control procedures?

Accepted Answer

To limit fraud and promote accuracy of accounting records

Question 4

A business has a petty cash fund of $$200. At the end of the month, there is 118 in $$cash and $80 in petty cash tickets. What journal entry is required to replenish the fund?

Accepted Answer

Debit Office Supplies $$60, Debit Delivery Expense 20$$, Debit Cash Short & Over $$2; Credit Cash 82$$

Question 5

Which of the following is a limitation of internal control systems?

Accepted Answer

Collusion can allow employees to circumvent controls

Question 6

A company sells merchandise for $3,000 and the customer pays with a credit card. The processor charges a 4% fee and deposits the net amount. What is the correct journal entry using the net method?

Accepted Answer

Debit Cash $$2,880, Debit Credit Card Expense 120$$; Credit Sales Revenue $3,000

Question 7

Which of the following is NOT a control procedure for cash payments by check?

Accepted Answer

Checks are signed by any employee available

Question 8

What is the purpose of a bank reconciliation?

Accepted Answer

To compare the company’s cash account with the bank statement and explain differences

Question 9

Which of the following items would be added to the book balance during a bank reconciliation?

Accepted Answer

EFT receipt from a customer

Question 10

A company’s cash ratio is calculated as follows: $$	ext{Cash Ratio} = \frac{	ext{Cash} + 	ext{Cash Equivalents}}{	ext{Total Current Liabilities}}. If a $$company has $$50,000 in cash, 20$$,000 in cash equivalents, and $100,000 in current liabilities, what is its cash ratio?

Accepted Answer

$$0.7$$

Question 11

Which of the following is an example of a control procedure related to e-commerce?

Accepted Answer

Encrypting data and using firewalls

Question 12

Which of the following is a correct statement about the Sarbanes-Oxley Act (SOX)?

Accepted Answer

SOX requires public companies to issue an internal control report

Question 13

A company’s bank statement shows a service charge of $20 not yet recorded in the company’s books. What is the correct journal entry?

Accepted Answer

Debit Bank Expense $$20; Credit Cash 20$$

Question 14

Which of the following is a feature of the lock-box system for cash receipts?

Accepted Answer

A bank employee collects and deposits checks sent to a post office box

Question 15

If a company’s petty cash fund is over at the end of the month, which account is credited when replenishing the fund?

Accepted Answer

Cash Short & Over

Question 16

Which of the following is a control procedure for debit and credit card sales?

Accepted Answer

Processing refunds by someone other than the person reconciling transactions

Question 17

Which of the following is a correct journal entry for an NSF (nonsufficient funds) check returned by the bank?

Accepted Answer

Debit Accounts Receivable; Credit Cash

Question 18

Which of the following is a reason why companies use electronic funds transfer (EFT) for payments?

Accepted Answer

EFT is less expensive and more efficient than mailing a check

Question 19

A company’s bank reconciliation shows a deposit in transit of $$9,000 and an outstanding check of 2$$,000. If the bank statement balance is $12,720, what is the adjusted bank balance?

Accepted Answer

$$19,720$$

Question 20

Which of the following best describes the purpose of the Cash Short & Over account?

Accepted Answer

To record discrepancies between actual cash and recorded cash in petty cash transactions

Chapter 7: Internal Control and Cash – Study Notes

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