Question 1

It is unlikely that a company would want to bond its employees who handle cash or inventory.

Accepted Answer

Bonding employees who handle cash or inventory is actually common practice in many companies, as it provides a form of insurance against employee theft or fraud. Bonding involves purchasing a type of insurance policy that compensates the employer if an employee engages in dishonest activities.

Question 2

Internal control is most effective when several people are responsible for a given task.

Accepted Answer

Internal control is most effective when there is clear separation of duties and responsibilities. Having several people responsible for a given task can lead to confusion and a lack of accountability. It is important to have a designated individual or team accountable for each aspect of a task or process to ensure a strong internal control system.

Question 3

A system of internal control cannot be considered good until the possibility of human error has been completely eliminated.

Accepted Answer

Unfortunately, it is impossible to completely eliminate the possibility of human error in any system of control. However, the goal is to minimize the risk of such errors occurring through the implementation of effective controls, employee training, and regular monitoring and evaluation of the system.

Question 4

An effective system of internal control centralizes functions in a single capable individual.

Accepted Answer

An effective system of internal control segregates functions among different individuals to ensure checks and balances and to reduce the risk of errors or fraud. Centralizing functions in a single individual can create opportunities for collusion, manipulation, or abuse of power.

Question 5

Segregation of duties among employees eliminates the possibility of collusion.

Accepted Answer

The answer of Segregation of duties among employees eliminates the...

Question 6

Bonding means insuring a company against theft by employees.

Accepted Answer

The answer of Bonding means insuring a company against theft...

Question 7

A good system of internal control will safeguard its assets and enhance the accuracy and reliability of its accounting records.

Accepted Answer

A system of internal control helps a company ensure that its assets are protected and that the financial information reported in its accounting records is accurate and reliable. These controls can include processes such as separation of duties, regular audits, and sound accounting practices. By implementing strong internal controls, a company is better able to prevent fraud, errors, and other financial problems that could negatively impact its operations and reputation.

Question 8

Only large companies need to be concerned with a system of internal control.

Accepted Answer

All organizations, regardless of their size, should have a system of internal control in place to ensure the reliability of financial reporting, compliance with laws and regulations, and the effectiveness and efficiency of operations. Small companies are at a higher risk of fraud and errors due to limited resources and personnel, making internal controls even more important.

Question 9

In order to prevent a transaction from being recorded more than once, a company should maintain only one book of original entry.

Accepted Answer

Maintaining only one book of original entry does not necessarily prevent a transaction from being recorded more than once. Effective internal controls, such as segregation of duties and regular reconciliations, are necessary to prevent duplicate entries.

Question 10

Requiring employees to take vacations is a weakness in the system of internal controls because it does not promote operational efficiency.

Accepted Answer

Requiring employees to take vacations is actually a strength in the system of internal controls. It helps prevent fraud and errors by ensuring that multiple employees are cross-trained and can cover for each other's responsibilities, as well as allowing for a fresh perspective and reduced risk of burnout.

Question 11

When one individual is responsible for all related activities, the potential for errors and irregularities is decreased.

Accepted Answer

This statement is false. When one individual is responsible for all related activities, the potential for errors and irregularities is actually increased. This is because there is no system of checks and balances in place, and the individual may become overwhelmed or make mistakes without anyone to catch them. It is generally recommended to have multiple people involved in important activities to improve accuracy and reduce the risk of errors.

Question 12

The separation of duties feature of internal control can be negated when several employees are involved in a scheme.

Accepted Answer

When multiple employees are involved in a scheme, they can collude to bypass the separation of duties controls in place. This is why it's important to not only have separation of duties, but also to have other internal controls in place to detect and prevent fraud.

Question 13

An effective system of internal control requires that at least two individuals be assigned to one cash drawer so that each can serve as check on the other.

Accepted Answer

An effective system of internal control often requires that only one individual be assigned to a cash drawer to ensure clear accountability and simplify the tracing of any discrepancies or errors.

Question 14

The most important element of the fraud triangle is rationalization.

Accepted Answer

The fraud triangle consists of three elements: pressure, opportunity, and rationalization, with no single element considered the most important as all are required for fraud to occur.

Question 15

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

Accepted Answer

This is a basic principle of internal control. Separating the record-keeping responsibilities from the physical custody of assets helps to prevent fraud, errors, and misuse of resources. It ensures that there is an independent verification and oversight of the transactions related to the asset.

Question 16

Employees sometimes commit fraud because of personal financial problems caused by too much debt.

Accepted Answer

Personal financial problems caused by too much debt can lead to desperation and can motivate employees to commit fraud.

Question 17

The safeguarding of assets is an objective of a company's system of internal control.

Accepted Answer

The safeguarding of assets, including physical, financial, and intellectual assets, is an important objective of a company's system of internal control. It aims to protect assets from theft, fraud, unauthorized use, and damage, which could impact the company's financial position and reputation. Therefore, internal controls are established to ensure that assets are secure, monitored, and appropriately used.

Question 18

The extent of internal control features adopted by a company must be evaluated in terms of cost-benefit.

Accepted Answer

Internal control features can be costly to implement and maintain, so it is important to consider whether the benefits of these controls outweigh the costs. An appropriate cost-benefit analysis will help to determine the optimal level of internal control for a particular company.

Question 19

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

Accepted Answer

This is a good practice to maintain checks and balances and reduce the risk of fraud or errors.

Question 20

Under an effective system of internal control, errors occur only as a result of fraud or dishonesty.

Accepted Answer

While an effective system of internal control can help minimize errors, it cannot completely prevent them as human error is always a possibility. However, a good internal control system can help detect and correct errors in a timely manner. Fraud or dishonesty may also bypass internal controls in some cases, emphasizing the need for internal control systems to be regularly reviewed and updated to address potential vulnerabilities.

Quiz 7: Fraud, Internal Control, and Cash