Chapter 5

Chapter 5—Accounting Systems and Internal Controls
TRUE/FALSE
1. The methods or procedures used to record and report financial data is called the accounting
system.
ANS: T DIF: 1 OBJ: 01
2. Internal controls are the policies and procedures adopted by management to achieve the
business's goals, ensure accurate financial reports, and ensure compliance with applicable laws.
3. System analysis is the final phase in the creation or revision of an accounting system.
ANS: F DIF: 1 OBJ: 01
4. Processing methods are the means by which the system collects, summarizes, and reports
accounting information.
5. The control environment is affected by what is actually practiced rather than by the written
procedure.
6. Policies and procedures that are primarily concerned with aiding management in achieving a
business's goals are termed EFT.
7. The assessment of risks is necessary so that the objectives of internal control can be achieved.
8. The control environment in an internal control structure is the attitude and awareness of internal
control by all employees.
9. Adherence to good internal controls requires the hiring of competent employees and then rotating
them from job to job.
10. Monitoring the internal control system helps locate deficiencies and improve control
effectiveness.

11. Good internal control requires that one employee handle the tasks of ordering supplies, receiving
the supplies, and paying the supplier.
12. Adding a review of operations by an internal audit staff strengthens internal control.
13. Information and communication are essential elements of an organization's internal control.
14. Adjusting entries are recorded in a special journal.
15. Closing entries are recorded in a special journal.
16. Adjusting and closing entries are recorded in the general journal.
17. The total of the amount column in the revenue journal is posted as a debit to Accounts Receivable
and a credit to Fees Earned.
18. The principal ledger that contains all the balance sheet and income statement accounts is the
general ledger.
19. The single summarizing account for a subsidiary ledger is referred to as a controlling account.
20. The creditors ledger is controlled by the general ledger account entitled Accounts Receivable.
21. The customers ledger is controlled by the general ledger account entitled Accounts Payable.
22. Closing entries are recorded in the general journal.
23. The purchase of supplies for cash would be recorded in the purchases journal.
24. A purchase of office equipment on account is recorded in the purchases journal.
25. The accounts entitled Accounts Receivable and Accounts Payable are both controlling accounts.
26. The customers ledger and the creditors ledger refer to subsidiary ledgers.
27. A controlling account is used to record the details of the individual accounts.
28. A cash refund paid to a customer who overpaid an account receivable is recorded in the cash
payments journal.
29. Purchases of supplies for cash are recorded in the cash payments journal.
30. Purchases of store equipment on account are recorded in the general journal.
31. The total on the "schedule of accounts payable" at January 31, the end of the first month of
operations, agrees with the total of the Accounts Payable debit column in the cash payments
journal for the same period.
32. The offering of services for cash is recorded in the revenue journal.
33. The offering of services on account is recorded in the revenue journal.
34. Sales of office supplies for cash, at cost, to a neighboring business as an accommodation, are
recorded in the revenue journal.
35. Revenue journals will have an Other Accounts Dr. column.

36. Cash receipts journals will have an Other Accounts Cr. column.
37. For some companies it is advisable to have subsidiary ledgers for equipment.
38. When a special journal is used, the amount columns should not be totaled before posting to the
ledger at the end of the accounting period.
39. The use of subsidiary ledgers is limited to Accounts Payable and Accounts Receivable.
40. Computerized accounting typically uses specialized journals.
41. Since the concepts, methods, and procedures of a manual accounting system do not apply to a
computerized system, there is no need to learn the manual system if one plans to work only for
firms that use computerized accounting systems.
MULTIPLE CHOICE
1. The system through which management is given financial information for use in conducting the
affairs of the business and in reporting to owners and other interested parties is called the:
a. accounting system
b. fiduciary system
c. operations system
d. auditing system
ANS: A DIF: 1 OBJ: 01
2. To determine information needs and how the system should provide it is the goal of:
a. systems design
b. accounting systems
c. systems analysis
d. internal auditing
ANS: C DIF: 1 OBJ: 01
3. The job of changing an accounting system, either in its entirety or in part, is made up of three
phases. Which of the following is not one of the phases?
a. analysis
b. design
c. review
d. implementation
4. The three phases of setting up an accounting system are, in order:

a. design, implementation, analysis
b. analysis, design, implementation
c. design, analysis, implementation
d. implementation, design, analysis
ANS: B DIF: 1 OBJ: 01
5. The goal of systems analysis is to determine:

a. when to implement a system
b. information needs
c. the size of the competitor's system
d. changes to the present system
6. When a firm uses internal auditors, it is adhering to which one of the following internal control
elements?
a. risk assessment
b. monitoring
c. proofs and security measures
d. separating responsibilities for related operations
7. The objectives of internal control are to:

a. control the internal organization of the accounting department personnel and equipment
b. provide reasonable assurance that operations are managed to achieve goals, financial
reports are accurate, and laws and regulations are complied with
c. prevent fraud, and promote the social interest of the company
d. provide control over "internal-use only" reports and employee internal conduct
8. Internal controls include detailed policies and procedures that are used to:
a. aid management in directing operations
b. apply for secret patents
c. control who is allowed in a retail area of a store
d. aid systems implementation
9. Internal control does not consist of policies and procedures that:

a. protect assets from misuse
b. aid management in directing operations toward achieving business goals
c. guarantee the company will not go bankrupt
d. ensure that business information is accurate
10. A firm's internal control environment is influenced by:

a. management's operating style
b. organizational structure
c. personnel policies
d. all of the above
ANS: D DIF: 1 OBJ: 02
11. An element of internal control is:

a. risk assessment
b. journals
c. subsidiary ledgers
d. controlling accounts
12. A necessary element of internal control is:

a. generally accepted accounting principles
b. concepts
c. control procedures
d. principles

a. fidelity insurance
b. prepaid insurance
c. monitoring
d. insurance expense

a. database
b. systems design
c. systems analysis
d. information and communication
15. Which of the following is recorded in the general journal?

a. cash purchase of fixed assets
b. cash receipts from services rendered
c. adjusting entries
d. purchase of merchandise on account
16. The primary ledger containing all the balance sheet and income statement accounts is the:
a. general ledger
b. creditors ledger
c. customers ledger
d. subsidiary ledger
17. The individual accounts with customers are included in a subsidiary ledger called the:
a. asset ledger
b. accounts payable ledger
c. expense ledger
d. accounts receivable ledger
18. The controlling account that summarizes the debits and the credits to the individual accounts in
the creditors ledger is entitled:
a. Accounts Receivable
b. Wages Payable
c. Accounts Payable
d. Fees Earned
19. The total on the "schedule of accounts payable" at January 31 should equal:
a. the sum of the accounts payable and notes payable controlling accounts totals at January
31
b. the total of the purchases journal on January 31
c. the amount reported in the post-closing trial balance at January 31 for Accounts Payable
d. the balance in Accounts Receivable at January 31
20. Every controlling account must have its own:

a. revenue ledger
b. general ledger
c. subsidiary ledger
d. journal
21. At the end of each month, the total of the amount column of the revenue journal is posted as a:
a. debit to Accounts Receivable and a credit to Cash
b. debit to Accounts Receivable and a credit to Fees Earned
c. debit to Cash and a credit to Fees Earned
d. debit to Cash and a credit to Accounts Payable
22. The controlling account in the general ledger that summarizes the debits and credits to the
individual customers accounts in the subsidiary ledger is entitled:
a. Purchases
b. Accounts Payable
c. Fees Earned
d. Accounts Receivable
23. When there are a large number of individual accounts with a common characteristic, it is
common to place them in a separate ledger called a(n):
a. accounts receivable ledger
b. accounts payable ledger
c. creditors ledger
d. subsidiary ledger
24. A purchase of supplies for cash is recorded in the:
a. revenue journal
b. purchases journal
c. cash receipts journal
d. cash payments journal
25. A purchase of supplies on account is recorded in the:

a. revenue journal
b. general journal
c. purchases journal
d. cash payments journal
26. Which of the following transactions is recorded in the purchases journal?

a. purchase of store supplies on account
b. return of damaged office equipment
c. purchase of store supplies for cash
d. purchase of office equipment for cash
27. In which journal would an adjustment for an overcharge by a creditor be recorded?

a. general journal
c. cash payments journal
d. cash receipts journal
28. Which of the following transactions is recorded in the revenue journal?

a. sale of excess office equipment for cash
b. rendering services for cash
c. rendering services on account
d. sale of excess office equipment on account
29. In which journal are adjusting entries recorded?

a. cash receipts journal
d. general journal

a. services rendered for cash
b. correction of error in billing client
c. purchases of equipment on account
d. purchases of equipment for cash
a. rendering services for cash
b. purchases of supplies on account
c. rendering services on account
d. closing entries
32. Which of the following is recorded in the revenue journal?

a. purchase of supplies for cash
b. fees earned on account
c. purchase of supplies on account
d. cash purchase of equipment
33. Which of the following is recorded in the cash receipts journal?

a. cash withdrawn by the owner
b. cash purchase of equipment
c. cash received on customer's account
d. adjusting entry for depreciation
34. Which of the following is recorded in the cash payments journal?

a. adjusting entry for accrued salaries
b. receipt of cash on supplies returned
c. receipt of cash from services rendered
d. payment of employees' salaries
35. In which journal is the return of supplies purchased on account recorded?

a. general journal
b. cash receipts journal
d. purchases journal
36. In which journal is the receipt of a promissory note from a customer on account recorded?
a. revenue journal
b. cash receipts journal
c. general journal
d. purchases journal
37. Entries in a special journal for revenues are posted in the:

a. accounts receivable subsidiary ledger
b. accounts payable subsidiary ledger
c. fixed asset subsidiary ledger
d. cash subsidiary ledger
38. Subsidiary ledgers:
a. are used only for Accounts Payable and Accounts Receivable
b. may be used for various ledger accounts
c. may be used for only those accounts specified by the FASB
d. are never used for more than four accounts
39. Special journal entries are:

a. all posted at the end of the accounting period
b. posted either daily or monthly depending on the accounts used
c. all posted daily
d. recorded in addition to the same information being recorded in a general journal
40. If a company uses special journals:

a. it must have one for cash, receivables, and payables
b. it may have no more than four
c. the quantity and design depend on the needs of the company
d. no matter the quantity, the design must comply with the FASB requirements
41. Which account would probably never need a subsidiary ledger?

a. Cash
b. Office equipment
c. Vehicles
d. Notes receivable
42. Which of the following is not an advantage of a computerized system over a manual system?
a. transactions are recorded and posted at the same time
b. accuracy is usually better with a computerized system
c. current balances are always available
d. internal controls are optional to the computerized system
43. Which of the following explains why there is no month-end posting to controlling accounts in a
computerized accounting system?
a. controlling accounts are the sum of the balances in the subsidiary
b. when transactions are entered, they are posted immediately to all affected accounts
c. the computer does not make posting and mathematical errors
d. computerized accounting keeps a "running balance" on all accounts; therefore, posting is
not necessary.
PROBLEM
1. Briefly describe the three-step process of an accounting system evolution.
ANS:
(1) Analysis. Identify the needs of those who use the business's financial information
and determine how the system should provide this information.
(2) Design. The system is designed so that it will meet the users' needs.
(3) Implementation. The chosen system is put in place.
DIF: 1 OBJ: 01
2. List the objectives of internal control and give an example of how each is implemented.
ANS:
Internal control provides reasonable assurance that:
(1) assets are safeguarded and used for business purposes
(2) business information is accurate
(3) employees comply with laws and regulations
Examples are:
(1) duties are separated
(2) duties are rotated
(3) reports are submitted to management
There are many other examples that would be correct.
DIF: 2 OBJ: 02
3. List and define each of the five elements of internal control.
ANS:
(1) Control Environment. The control environment is the overall attitude of

management and employees about the importance of internal controls.
(2) Risk assessment. Risk assessment is the identification of risks faced by an
organization so that management can take necessary actions to control them.
(3) Control Procedures. The control procedures are the policies and procedures
designed to provide reasonable assurance that the business goals are met and fraud
is prevented.
(4) Monitoring. Monitoring is the location of deficiencies in the internal control
system and improving them.
(5) Information and Communication. Information and communication to management
about the control environment, risk assessment, control procedures, and monitoring
elements of internal control are needed by management to guide operations and
ensure compliance with reporting, legal, and regulatory requirements.
DIF: 1 OBJ: 02
4. Two features of internal control are presented in the following sections. Each is followed by a list
of four irregularities that occurred in processing data. Identify the one irregularity from each list
that would be discovered or prevented by the feature of internal control described.
(a) The sum of the balances of the accounts in the customers ledger is compared at the
end of each month with the balance of the accounts receivable account in the
general ledger by a person who has no responsibility for maintaining either the
general ledger or the customers ledger.
(1) Five hours of services were rendered but the customer was only billed for
four hours.
(2) A cash receipt of $750 was recorded correctly in the accounts receivable
controlling account but was posted to the customers ledger as $75.
(3) A bill for services rendered to Cole Co. was erroneously posted to the
account of Coleman Co. in the customers ledger.
(4) No entry was made in the accounting records for services rendered to a
customer.
(b) Both cash and credit charges for services rendered are recorded on prenumbered
invoices. At the end of the day, all invoices are accounted for before the duplicate
copies of the invoices are routed to the accounting department for entry into the
accounts and the cash is sent to the cashier's department for deposit.
(1) Some charge customers complained that the monthly statements of account
did not add all amounts correctly.
(2) Some clerks used incorrect hourly rates in preparing invoices.
(3) Some clerks destroyed duplicate copies of cash invoices and
misappropriated the cash.
(4) Some charge customers complained that the monthly statement of account
did not indicate credits for payments made.
ANS:
(a) (2)
(b) (3)
DIF: Moderate OBJ: 02
5. If a two-column (all-purpose) general journal, a revenue journal, and a cash receipts journal are
used, indicate the journal in which each of the following transactions should be recorded:
(a) Investment of additional cash in the business by the owner.

(b) Rendering of services for cash.
(c) Rendering of services on account.
(d) Receipt of cash on account from a customer.
(e) Sale of office supplies for cash, at cost, to a neighboring business.
(f) Adjustment to record supplies used at the end of the year.
(g) Closing of drawing account at the end of the year.
ANS:
(a) cash receipts journal

(b) cash receipts journal
(c) revenue journal
(d) cash receipts journal
(e) cash receipts journal
(f) general journal
(g) general journal
DIF: 1 OBJ: 03
6. If a two-column (all-purpose) general journal, a purchases journal, and a cash payments journal
are used, indicate the journal in which each of the following transactions should be recorded:
(a) Payment of rent.

(b) Purchase of supplies on account.
(c) Purchase of computer on account.
(d) Purchase of supplies for cash.
(e) Advance payment of a one-year fire insurance policy on the office.
(f) Adjustment to record accrued salaries at the end of the period.
(g) Adjustment to record depreciation at the end of the month.
(h) Payment of an account payable.
ANS:
(a) cash payments journal

(b) purchases journal
(c) purchases journal
(d) cash payments journal
(e) cash payments journal
(f) general journal
(g) general journal
(h) cash payments journal
DIF: 1 OBJ: 03
7. Present general journal entries to record the following transactions:
May 30 Corrected amount of services rendered on account to Palmer

Company on April 10. The services for $600 had been recorded
incorrectly as $650.
31 Recorded depreciation on equipment for May, $2,000.
ANS:
May 30 Services Revenue 50

Accounts Receivable 50
31 Depreciation Expense-Equipment 2,000

Accumulated Depreciation-Equipment 2,000
DIF: 1 OBJ: 03
8. The posting references in the following purchases journal are indicated by letters. Identify each
posting reference [(a) through (i)] as representing (1) a posting to a general ledger account, (2) a
posting to a subsidiary ledger account, or (3) that no posting is required.
PURCHASES JOURNAL )
)
)
Accounts Office Store )
Account Post. Payable Supplies Supplies )
Date Credited Ref. Cr. Dr. Dr. )
19-- )
May )
3 Lee Company (a) 1,350 ..... 1,350 )
7 Atlas Co. (b) 6,100 6,100 ..... )
14 Bradley Inc. (c) 8,000 8,000 ..... )
26 Sims Bros. (d) 1,950 ..... ..... )
31 17,400 14,100 1,350 )
====== ====== ===== )
(e) (f) (g) )
(
(
( Other Accounts Dr.
( Post.
( Account Ref. Amoun
t
(
( ...... ... .....
.
( ...... ... .....
.
( ...... ... .....
.
( ...... ... .....
.
( Equipment (h) 1,950
( 1,950
(===============================
( (i)
ANS:
(1) General ledger account: (e), (f), (g), (h)

(2) Subsidiary ledger account: (a), (b), (c), (d)
(3) No posting required: (i)
DIF: 1 OBJ: 03
9. The posting references in the following revenue journal are indicated by letters. Identify each
posting reference [(a) through (h)] as representing (1) a posting to a general ledger account, (2) a
posting to a subsidiary ledger account, or (3) that no posting is required.
REVENUE JOURNAL
Post Acct. Rec. Dr.
Date Invoice Account Debited Ref. Fees Earned Cr.
No.
June 3 190 Chase Company (a) 3,750
8 191 Keck Supply (b) 3,025
13 192 Howe Inc. (c) 3,100
17 193 Young Products (d) 7,000
25 194 Barr Supply (e) 1,500
30 195 Jenkins and Kane (f) 5,750
30 24,125
======
(g)(h)
ANS:
(1) General ledger account: (g), (h)

(2) Subsidiary ledger account: (a), (b), (c), (d), (e), (f)
(3) No posting required: --
DIF: 1 OBJ: 03
10. The following are selected transactions related to purchases and cash payments completed during
June of the current year.
June 1 Issued Check No. 50 in payment of rent for month,

$2,000.
5 Purchased office supplies from Carson Co., $750.
9 Issued Check No. 51 to Davis Co. for $9,750 for cash
purchase of equipment.
10 Purchased store supplies from Evans Co., $425.
15 Issued Check No. 52 to Carson Co. in payment of June 5
invoice.
17 Purchased store supplies from Parker Co., $7,500.
20 Issued Check No. 53 to Evans Co. in payment of June 10
invoice of $425.
25 Purchased equipment from Stone Co., $7,750.
27 Issued Check No. 54 to D. Bowen for invoice of May 17,
$4,000.
30 Purchased office supplies from Porter Co., $400.
(a) Record the transactions, using the accompanying journals.

(b) Total and rule the purchases and cash payments journals as of June 30.
(c) Indicate the method of posting the individual items and the totals of the purchases and
cash payments journals in the following manner:
(1) For individual items and totals to be posted to the subsidiary ledger or not to be
posted, insert a check mark in the Posting Reference column or below the totals.
(2) For individual items and totals to be posted to the general ledger, insert the letter
"G" (as a substitute for specific account numbers) in the Posting Reference column
or below the totals.
ANS:
(Note: It is assumed that the instructor will supply journal forms. The debit and credit
designations in the headings may be omitted. If the students are required to construct their own
forms, the instructions should be modified accordingly.)
CASH PAYMENTS JOURNAL

Other Accounts
Check Account Post. Accounts Payable Cash
Date No. Debited Ref. Dr. Dr. Cr.
June 1 50 Rent Expense G 2,000 ..... 2,000
9 51 Equipment G 9,750 ..... 9,750
15 52 Carson Co.  ..... 750 750
20 53 Evans Co.  ..... 425 425
27 54 D. Bowen  ..... 4,000 4,000
30 11,750 5,175 16,925
====== ===== ======
() (G) (G)
PURCHASES JOURNAL )
Accounts Store )
Account Post. Payable Supplies )
Date Credited Ref. Cr. Dr. )
June 5 Carson Co.  750 ..... )
10 Evans Co.  425 425 )
17 Parker Co.  7,500 7,500 )
25 Stone Co.  7,750 ..... )
30 Porter Co.  400 ..... )
30 16,825 7,925 )
====== ===== )
(G) (G) )
(
( Other Accounts Dr.
( Office
( Supplies Post.
( Dr. Account Ref. Amount
( 750 ...... ... .....
( ..... ...... ... ......
( ..... Equipment G 7,750
( 400 ...... ... .....
( 1,150 7,750
( ====== =====
( (G) ()
DIF: 5 OBJ: 03
11. Listed below are selected transactions completed by Garner Company during May of the current
year.
May 5 Rendered services on account to Pile Co., Invoice No.

92, $4,100.
10 Rendered services on account to Morris Inc., Invoice
No. 93, $8,500.
13 Received $5,150 in payment of monthly rent, which was
due on May 1.
15 Received payment from Pile Co. for invoice of May 5.
19 Received payment from Morris Inc. for balance due on
invoice of May 10.
20 Received amount due from Zion Co. on sale made in
April, $2,500.
31 Recorded cash from services rendered for cash during
the month, $16,100.
(a) Record the transactions, using the accompanying revenue journal and cash receipts
journal.
(b) Total and rule the revenue and cash receipts journals.
(c) Indicate the method of posting the individual items and the columnar totals of the
revenue and cash receipts journals in the following manner:
(1) For individual items and totals to be posted to the subsidiary ledger or not to be
posted, insert a check mark in the Posting Reference column or below the totals.
(2) For individual items and totals to be posted to the general ledger, insert the letter
"G" (as a substitute for specific account numbers) in the Posting Reference column
or below the totals.
ANS:
(Note: It is assumed that the instructor will supply journal forms. The debit and credit
designations in the headings may be omitted. If the students are required to construct their own
forms, the instructions should be modified accordingly.)
REVENUE JOURNAL
Post. Accts. Rec. Dr.
Date Invoice No. Account Debited Ref. Services Revenue Cr.
May 5 92 Pile Co.  4,100
10 93 Morris Inc.  8,500
31 12,600
======
(G)(G)
CASH RECEIPTS JOURNAL

Other Accts.
Account Post. Accounts Rec. Cash
Date Credited Ref. Cr. Cr. Dr.
May
13 Rent Revenue G 5,150 ..... 5,150
15 Pile Co.  ..... 4,100 4,100
19 Morris Inc.  ..... 8,500 8,500
20 Zion Co.  ..... 2,500 2,500
31 Services Revenue G 16,100 ..... 16,100
31 21,250 15,100 36,350
====== ====== ======
() (G) (G)
DIF: 3 OBJ: 03
12. The transactions completed by Brown Company during January, its first month of operations, are
listed below. Assume that Brown Company uses the following journals: Cash Receipts (CR),
Cash Payments (CP), Revenue (R), Purchases (P), and General (G). Assume that it uses
Accounts Receivable and Accounts Payable Subsidiary Ledgers as well as a General Ledger.
Indicate by letters which journal would be used for each transaction. Also indicate if the entry
requires a posting to a subsidiary ledger.
___ (1) Issued check for rent.

___ (2) Purchased equipment on account.
___ (3) Issued an invoice to a customer.
___ (4) Received a check from a customer for payment on account.
___ (5) Issued check for advertising expense.
___ (6) Issued check for a payment on account.
___ (7) Issued check for cash purchase of supplies.
___ (8) Issued check for salary.
___ (9) Received cash for a sale.
___ (10) Purchased supplies on account.
ANS:
(1) CP
(2) P, subsidiary posting
(3) R, subsidiary posting
(4) CR, subsidiary posting
(5) CP
(6) CP, subsidiary posting
(7) CP
(8) CP
(9) CR
(10) P, subsidiary posting
DIF: 1 OBJ: 03

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Chapter 5—Accounting Systems and Internal Controls

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14. Adjusting entries are recorded in a special journal.

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15. Closing entries are recorded in a special journal.

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22. Closing entries are recorded in the general journal.

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24. A purchase of office equipment on account is recorded in the purchases journal.

ANS: T DIF: 5 OBJ: 03

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33. The offering of services on account is recorded in the revenue journal.

ANS: T DIF: 1 OBJ: 03

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35. Revenue journals will have an Other Accounts Dr. column.

ANS: F DIF: 1 OBJ: 03

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40. Computerized accounting typically uses specialized journals.

ANS: F DIF: 1 OBJ: 05

ANS: F DIF: 5 OBJ: 05

4. The three phases of setting up an accounting system are, in order:

5. The goal of systems analysis is to determine:

7. The objectives of internal control are to:

9. Internal control does not consist of policies and procedures that:

10. A firm's internal control environment is influenced by:

11. An element of internal control is:

12. A necessary element of internal control is:

13. A necessary element of internal control is:

14. A necessary element of internal control is:

15. Which of the following is recorded in the general journal?

20. Every controlling account must have its own: