Question 1

The use of a bank account makes internal control over cash more difficult.

Accepted Answer

Using a bank account actually enhances internal control over cash by providing an independent record of transactions, facilitating reconciliations, and reducing the risks of theft and mismanagement.

Question 2

The responsibility for keeping the records for an asset should be separate from the physical custody of that asset.

Accepted Answer

Separating the responsibility for record-keeping and physical custody helps reduce the risk of fraud, errors, and mismanagement. It ensures that there is a system of checks and balances in place, and provides greater accountability and transparency.

Question 3

External auditors report on whether or not the company's financial statements fairly present its financial position and results of operations.

Accepted Answer

External auditors examine a company's financial statements and provide an opinion on whether these statements are free from material misstatement and fairly present the company's financial position and results of operations in accordance with applicable financial reporting standards.

Question 4

Control over cash disbursements is improved if all expenditures are paid by cheque or through use of electronic funds transfers.

Accepted Answer

Using cheques or electronic funds transfers (EFTs) for all expenditures improves control over cash disbursements by creating a verifiable audit trail, enhancing security, and reducing the risk of theft or misappropriation of funds.

Question 5

Errors give rise to unintentional misstatements in the financial statements.

Accepted Answer

Errors in accounting, such as mistakes in gathering, processing, or interpreting financial information, can lead to unintentional misstatements in the financial statements.

Question 6

The person responsible for making credit sales should be the vice-president of finance.

Accepted Answer

The person responsible for making credit sales is typically not the vice-president of finance, but rather individuals in roles directly related to sales or credit management, as these positions are more closely involved with the day-to-day decisions and assessments of creditworthiness of customers. The vice-president of finance may oversee the overall financial health of the company and set policies, but does not usually handle specific credit sales decisions.

Question 7

An example of segregation of duties is having a cheque signer record cash disbursements.

Accepted Answer

Segregation of duties means dividing tasks and responsibilities among different people to reduce the risk of error or fraud. Having the same person sign cheques and record cash disbursements would concentrate rather than segregate duties, which goes against the principle of segregation of duties.

Question 8

Fraud is an unintentional act to misappropriate (steal) assets or misstate financial statements.

Accepted Answer

Fraud involves intentional acts by individuals to misappropriate assets or misstate financial statements for personal gain or to present a company in a more favorable or less unfavorable light.

Question 9

Electronic funds transfers never have to be recorded.

Accepted Answer

Electronic funds transfers, like any financial transaction, must be recorded for accounting purposes, to ensure accuracy in financial statements and compliance with regulatory requirements.

Question 10

The use of electronic funds transfers normally results in better control over cash.

Accepted Answer

Electronic funds transfers (EFT) allow for immediate and direct transfer of funds between accounts, reducing the handling of physical cash and thus minimizing the risk of theft or loss, leading to better control over cash resources.

Question 11

To obtain maximum benefit from a bank reconciliation, the reconciliation should be prepared by the person authorized to sign cheques.

Accepted Answer

The bank reconciliation should ideally be prepared by someone who is not authorized to sign checks to ensure segregation of duties and reduce the risk of fraud or errors.

Question 12

All reconciling items in determining the reconciled cash balance per books require the depositor to make adjusting journal entries to the Cash account.

Accepted Answer

Reconciling items are transactions that have occurred but have not yet been recorded in the bank statement or the company's books. To reconcile the cash balance, the depositor must make adjusting journal entries to the Cash account to reflect these transactions.

Question 13

A bank reconciliation is generally prepared by the bank and sent to the depositor along with cancelled cheques.

Accepted Answer

A bank reconciliation is typically prepared by the depositor (the company or individual holding the bank account) to compare their records with the bank's records and identify any discrepancies.

Question 14

Segregation of duties among employees eliminates the possibility of collusion.

Accepted Answer

Segregation of duties reduces the risk of fraud and errors, but it does not eliminate the possibility of collusion among employees who might work together to circumvent controls.

Question 15

NSF cheques received from customers are debited by the bank to the depositor's account.

Accepted Answer

When a cheque is returned due to insufficient funds (NSF), the bank debits the depositor's account for the amount of the cheque, reversing any credit that was initially given.

Question 16

All documents should be prenumbered.

Accepted Answer

Prenumbering documents helps in tracking, preventing fraud, and ensuring that all documents are accounted for, which is a key control in both accounting and document management systems.

Question 17

External auditors are usually employees of the company.

Accepted Answer

External auditors are independent of the company they audit and are typically employed by an external auditing firm, not the company itself. Their independence is crucial for providing an unbiased opinion on the company's financial statements.

Question 18

The responsibility for ordering, receiving, and paying for merchandise should be assigned to different individuals.

Accepted Answer

Separation of duties is important in preventing fraud and errors. Assigning different individuals to order, receive, and pay for merchandise creates a system of checks and balances and ensures accountability.

Question 19

An effective control activity results when at least two individuals are assigned to one cash drawer so that each can serve as check on the other.

Accepted Answer

Effective control activity typically involves assigning a single individual to a cash drawer to ensure clear accountability and simplify the tracking of discrepancies.

Question 20

An authorized signing officer should sign a cheque only after reviewing the appropriate supporting documentation.

Accepted Answer

An authorized signing officer should review the appropriate supporting documentation before signing a cheque to ensure the payment is valid and authorized, preventing fraud and financial errors.

Quiz 7: Internal Control and Cash