ACIS MIDTERM REVIEWER 8.

The most common method for detecting occupational fraud is a tip – from
CHAPTER 3 an employee, a customer, vendor, or anonymous source.
TRUE OR FALSE 9. Defalcation and internal theft are names that refer to the misstatement of
financial records.
1. The ethical principle of justice asserts that the benefits of the decision 10. The three conditions that make up the fraud triangle are theft,
should be distributed fairly to those who share the risks. concealment, and conversion.
2. The ethical principle of informed consent suggests that the decision should 11. A good set of internal controls may not be as effective in reducing the
be implemented so as to minimize all of the risks and to avoid any chance of management fraud as it would be in reducing the change of fraud
unnecessary risks. committed by an employee.
3. Employees should be made aware of the firm’s commitment to ethics. 12. The most effective measure to prevent management fraud is to establish a
4. Business ethics is the analysis of the nature and social impact of computer professional internal audit staff that periodically checks up on management
technology, and the corresponding formulation and justification of policies and reports directly to the audit committee of the board of directors.
for the ethical use of such technology. 13. Collusion between employees is one of the easiest frauds to detect and
5. Para computer ethics is the exposure to stories and reports found in the prevent.
popular media regarding the good or bad ramifications of computer 14. Collusion can make it much easier to commit and conceal a fraud or
technology. theft, even when proper internal controls are in place.
6. Source code is an example of intellectual property. 15. Customer fraud is a common problem for companies that sell
7. Copyright laws and computer industry standards have been developed merchandise online
jointly and rarely conflict.
16. Collusion can occur only when two employees who work for the same
8. Business bankruptcy cases always involve fraudulent behavior.
firm conspire to circumvent the internal controls to commit fraud or theft.
9. Defalcation is another word for financial fraud.
17. A vendor audit occurs when a vendor examines the books and records of
10. The trend toward distributed data processing increases the exposure to
a customer.
fraud from remote locations.
18. Industrial espionage can occur with or without the use of a computer.
11. The external auditor is responsible for establishing and maintaining the
19. It is necessary to use a computer to accomplish software piracy.
internal control system.
20. A hacker is someone who has gained unauthorized access to the
12. Segregation of duties is an example of an internal control procedure.
computer and must be someone outside the organization.
13. Controls in a computer-based information system are identical to
21. If an organization has the policy of allowing employees to work from
controls in a manual system.
home via telecommunications, they could be opening themselves up to
14. Preventive controls are passive techniques designed to reduce fraud.
an opportunity for a hacker to break-in to their network.
15. Ethical issues and legal issues are essentially the same.
22. E-mail spoofing is more of an irritation to an organization that a fraud
16. Internal control systems are recommended but not required of firms
threat.
subject to the Foreign Corrupt Practices Act.
23. In order for a code of ethics to reduce opportunities for managers and
17. Operations fraud is the misuse or theft of the firm’s computer resources.
employees to commit fraud, it is necessary that management emphasizes this
18. The Foreign Corrupt Practices Act requires only that a firm keep good
code. Punishment related to violations of the code is not necessary.
records.
24. It is not always possible to avoid all mistakes and frauds because there
19. A key modifying assumption in internal control is that the internal control
will always be human error, human nature, and it is not always cost-effective
system is the responsibility of management.
to close all the holes.
20. Database management fraud includes altering, updating, and deleting an
25. The risk assessment is the foundation for all other components of internal
organization’s data.
control and provides the discipline and structure of all other components.
21. While the Sarbanes-Oxley Act prohibits auditors from providing non-
26. Companies that reward management with incentives to achieve a growth
accounting services to their audit clients, they are not prohibited from
in earnings is running the risk that management will also have more
performing such services for non-audit clients or privately held companies.
motivation and pressure to falsify the financial statements to show the higher
22. The Sarbanes-Oxley Act requires the audit committee to hire and oversee
amounts.
the external auditors.
27. The tone at the top of the organization tends to flow through the entire
23. Section 404 requires that corporate management (including the CEO)
organization and affects behavior at all levels.
certify their organization’s internal controls on a quarterly and annual basis.
28. A poor control environment can be overcome if the remaining
24. Section 302 requires the management of public companies to assess and
components of internal control are strong.
formally report on the effectiveness of their organization’s internal controls.
29. The difference between a general authorization and a specific
25. The objective of SAS 99 is to seamlessly blend the auditor’s
authorization is that with a general authorization, a transaction is allowed if it
consideration of fraud into all phases of the audit process.
falls within specified parameters, whereas with a specific authorization,
1. When management does not act ethically, fraud is more likely to occur.
explicit authorization is needed for that singe transaction to becompleted.
2. In the Phar-Mor fraud case, management did not write or adopt a code of
30. When safeguarding assets, there is no trade-off between access and
ethics.
efficiency.
3. Maintaining high ethics can help prevent fraud but will not help to
31. Independent checks can serve as a preventive control in that they uncover
detect fraud.
problems in the data or the processing.
4. Due to management’s responsibility to monitor operations by
examining reports that summarize the results of operations, it is necessary 32. Feedback needed by management to assess, manage, and control the
that the system provide timely and accurate information. efficiency and effectiveness of the operations of an organization relates to
5. In order to fulfill the obligations of stewardship and reporting, both financial and operational information.
management has to create a code of ethics. 33. A sophisticated accounting system will provide the necessary accurate
6. In most cases, a fraud will include altering accounting records to conceal and effective feedback needed by management to assess, manage and control
the fact that a theft has occurred. the operations of an organization.
7. According to the 2004 Report to the Nation by the Association of Certified 34. Auditing, a monitoring activity, takes place only on a periodic basis.
Fraud Examiners, the estimate of losses due to fraud would 35. It is not possible to have an internal control system that will provide
total approximately $2,800 per employee. absolute assurance.
36. Computer systems increase the efficiency and effectiveness of an a. the internal auditor c. management
organization but also increases their vulnerability. b. the accountant d. the external auditor
37. The risks related to computerized systems are adequately covered by the 11. The concept of reasonable assurance suggests that
COSO internal control report. a. the cost of an internal control should be less than the benefit it
38. The acronym COBIT stands for Control Objectives for Information provides
Technology, an extensive framework of information technology controls b. a well-designed system of internal controls will detect all fraudulent
developed by Information Systems Audit and Control Association. activity
39. The AICPA and the Canadian Institute of Chartered Accountants worked c. the objectives achieved by an internal control system vary depending on
together to develop IT guidelines, commonly referred to as COBIT. the data processing method
40. The risk related to confidentiality category of Trust Principles is that d. the effectiveness of internal controls is a function of the industry
confidential information about the company or its business partners may be environment
subject to unauthorized access during its transmission or storage in the 12. Which of the following is not a limitation of the internal control system?
IT system. a. errors are made due to employee fatigue
b. fraud occurs because of collusion between two employees
MULTIPLE CHOICE c. the industry is inherently risky
1. Which ethical principle states that the benefit from a decision must d. management instructs the bookkeeper to make fraudulent journal entries
outweigh the risks, and that there is no alternative decision that provides the 13. The most cost-effective type of internal control is
same or greater benefit with less risk? a. preventive control c. detective control
a. minimize risk c. informed consent b. accounting control d. corrective control
b. justice d. proportionality 14. Which of the following is a preventive control?
2. Individuals who acquire some level of skill and knowledge in the field of a. credit check before approving a sale on account
computer ethics are involved in which level of computer ethics? b. bank reconciliation
a. para computer ethics c. theoretical computer ethics c. physical inventory count
b. pop computer ethics d. practical computer ethics d. comparing the accounts receivable subsidiary ledger to the control account
3. All of the following are issues of computer security except 15. A well-designed purchase order is an example of a
a. releasing incorrect data to authorized individuals a. preventive control c. corrective control
b. permitting computer operators unlimited access to the computer b. detective control d. none of the above
room 16. A physical inventory count is an example of a
c. permitting access to data by unauthorized individuals a. preventive control c. corrective control
d. providing correct data to unauthorized individuals b. detective control d. feed forward control
4. Which characteristic is not associated with software as intellectual 17. The bank reconciliation uncovered a transposition error in the books.
property? This is an example of a
a. uniqueness of the product a. preventive control c. corrective control
b. possibility of exact replication b. detective control d. none of the above
c. automated monitoring to detect intruders 18. In balancing the risks and benefits that are part of every ethical decision,
d. ease of dissemination managers receive guidance from each of the following except
5. For an action to be called fraudulent, all of the following conditions are a. justice c. risk minimization
required except b. self interest d. proportionality
a. poor judgment c. intent to deceive 19. Which of the following is not an element of the internal control
b. false representation d. injury or loss environment?
6. One characteristic of employee fraud is that the fraud a. management philosophy and operating style
a. is perpetrated at a level to which internal controls do not apply b. organizational structure of the firm
b. involves misstating financial statements c. well-designed documents and records
c. involves the direct conversion of cash or other assets to the employee’s d. the functioning of the board of directors and the audit committee
personal benefit 20. Which of the following suggests a weakness in the internal control
d. involves misappropriating assets in a series of complex transactions environment?
involving third parties a. the firm has an up-to-date organizational chart
7. Forces which may permit fraud to occur do not include b. monthly reports comparing actual performance to budget are distributed
a. a gambling addiction c. centralized decision making environment to managers
b. lack of segregation of duties d. questionable integrity of employees c. performance evaluations are prepared every three years
8. Which of the following best describes lapping? d. the audit committee meets quarterly with the external auditors
a. applying cash receipts to a different customer’s account in an attempt 21. Which of the following indicates a strong internal control environment?
to conceal previous thefts of funds a. the internal audit group reports to the audit committee of the board of
b. inflating bank balances by transferring money among different bank directors
accounts b. there is no segregation of duties between organization functions
c. expensing an asset that has been stolen c. there are questions about the integrity of management
d. creating a false transaction d. adverse business conditions exist in the industry
9. Operations fraud includes 22. According to SAS 78, an effective accounting system performs all of the
a. altering program logic to cause the application to process data incorrectly following except
b. misusing the firm’s computer resources a. identifies and records all valid financial transactions
c. destroying or corrupting a program’s logic using a computer virus b. records financial transactions in the appropriate accounting period
d. creating illegal programs that can access data files to alter, delete, or insert c. separates the duties of data entry and report generation
values d. records all financial transactions promptly
10. Who is responsible for establishing and maintaining the internal control 23. Which of the following is the best reason to separate duties in a manual
system? system?
a. to avoid collusion between the programmer and the computer operator b. how managers achieve what they decide is right for the business
b. to ensure that supervision is not required c. both a and b
c. to prevent the record keeper from authorizing transactions d. none of the above
d. to enable the firm to function more efficiently 37. All of the following are conditions for fraud except
24. Segregation of duties in the computer-based information system includes a. false representation c. intent
a. separating the programmer from the computer operator b. injury or loss d. material reliance
b. preventing management override 38. The four principal types of fraud include all of the following except
c. separating the inventory process from the billing process a. bribery c. conflict of interest
d. performing independent verifications by the computer operator b. gratuities d. economic extortion
25. Which of the following is not an internal control procedure? 39. The characteristics of useful information include
a. authorization c. independent verification a. summarization, relevance, timeliness, accuracy, and completeness
b. management’s operating style d. accounting records b. relevance, summarization, accuracy, timelessness, and completeness
26. The decision to extend credit beyond the normal credit limit is an c. timeliness, relevance, summarization, accuracy, and conciseness
example of d. disaggregation, relevance, timeliness, accuracy, and completeness
a. independent verification c. segregation of functions 40. Internal control system have limitations. These include
b. authorization d. supervision a. possibility of honest error c. management override
27. When duties cannot be segregated, the most important internal control b. circumvention d. stability of systems
procedure is 41. Management can expect various benefits to follow from implementing a
a. supervision c. access controls system of strong internal control. Which of the following benefits is least
b. independent verification d. accounting records likely to occur?
28. An accounting system that maintains an adequate audit trail is a. reduced cost of an external audit.
implementing which internal control procedure? b. prevents employee collusion to commit fraud.
a. access controls c. independent verification c. availability of reliable data for decision-making purposes.
b. segregation of functions d. accounting records d. some assurance of compliance with the Foreign Corrupt Practices Act of
29. Employee fraud involves three steps. Of the following, which is not 1977.
involved? e. some assurance that important documents and records are protected.
a. concealing the crime to avoid detection 42. Which of the following situations is not a segregation of duties violation?
b. stealing something of value a. The treasurer has the authority to sign checks but gives the signature block
c. misstating financial statements to the assistant treasurer to run the check-signing machine.
d. converting the asset to a usable form b. The warehouse clerk, who has the custodial responsibility over
30. Which of the following is not an example of independent verification? inventory in the warehouse, selects the vendor and authorizes purchases
a. comparing fixed assets on hand to the accounting records when inventories are low.
b. performing a bank reconciliation c. The sales manager has the responsibility to approve credit and the
c. comparing the accounts payable subsidiary ledger to the control account authority to write off accounts.
d. permitting authorized users only to access the accounting system d. The department time clerk is given the undistributed payroll checks to mail
31. The importance to the accounting profession of the Foreign Corrupt to absent employees.
Practices Act of 1977 is that e. The accounting clerk who shares the record keeping responsibility for the
a. bribery will be eliminated accounts receivable subsidiary ledger performs the monthly reconciliation of
b. management will not override the company’s internal controls the subsidiary ledger and the control account.
c. firms are required to have an effective internal control system 43. Which of the following is not an issue to be addressed in a business code
d. firms will not be exposed to lawsuits of ethics required by the SEC?
32. The board of directors consists entirely of personal friends of the chief a. Conflicts of interest c. Legal Compliance
executive officer. This indicates a weakness in b. Full and Fair Disclosures d. Internal Reporting of Code Violation
a. the accounting system c. control procedures e. All of the above are issues to be addressed
b. the control environment d. this is not a weakness
33. Computer fraud can take on many forms, including each of the following SHORT ANSWER
except 1. What are the main issues to be addressed in a business code of ethics
a. theft or illegal use of computer-readable information required by the SEC?
b. theft, misuse, or misappropriation of computer equipment ANS: Conflicts of interest, Full and Fair Disclosures, Legal Compliance,
c. theft, misuse, or misappropriation of assets by altering computer-readable Internal Reporting of Code Violations, Accountability
records and files 2. List the four broad objectives of the internal control system.
d. theft, misuse, or misappropriation of printer supplies ANS: safeguard assets, ensure the accuracy and reliability of accounting
34. When certain customers made cash payments to reduce their accounts records, promote organizational efficiency, comply with management’s
receivable, the bookkeeper embezzled the cash and wrote off the accounts as policies and procedures
uncollectible. Which control procedure would most likely prevent this 3. Explain the purpose of the PCAOB
irregularity? ANS: The PCAOB is empowered to set auditing, quality control, and ethics
a. segregation of duties c. accounting system standards; to inspect registered accounting firms; to conduct investigations;
b. accounting records d. access controls and to take disciplinary actions.
35. The office manager forgot to record in the accounting records the daily 4. What are the five internal control components described in the SAS 78 /
bank deposit. Which control procedure would most likely prevent or detect COSO framework
this error? ANS: the control environment, risk assessment, information and
a. segregation of duties c. accounting records communication, monitoring, and control activities
b. independent verification d. supervision 5. What are management responsibilities under section 302 and 404?
36. Business ethics involves ANS: Section 302 requires that corporate management (including the CEO)
a. how managers decide on what is right in conducting business certify their organization’s internal controls on a quarterly and annual basis.
Section 404 requires the management of public companies to assess and provide a specific example of each one.
formally report on the effectiveness of their organization’s internal controls. ANS: Control Activity Example
6. Identify to indicate whether each procedure is a preventive or detective Authorization general (purchase of inventory when level drops) or specific
control. (credit approval beyond normal limit)
a. authorizing a credit sale Preventive Detective Segregation of functions separate authorization from processing separate
b. preparing a bank reconciliation Preventive Detective custody of assets from record keeping
c. locking the warehouse Preventive Detective Supervision required when separation of duties is not possible, such as
d. preparing a trial balance Preventive Detective opening the mail (cash receipts)
e. counting inventory Preventive Detective Accounting records maintain an adequate audit trail
ANS: A. preventive; B. detective; C. preventive; D. detective; E. detective Access controls maintain physical security Independent verification bank
reconciliation, physical inventory count
Use the internal control procedures listed below to complete the statements. 2. Contrast management fraud with employee fraud.
segregation of duties specific authorization general authorization accounting ANS: Employee fraud is usually designed to directly convert cash or other
records access controls independent verification supervision assets to the employee’s personal benefit.
7. A clerk reorders 250 items when the inventory falls below 25 items. This Management fraud involves less of a direct benefit to the perpetrator.
is an example of general authorization. Management fraud may involve an attempt to misstate financial performance
8. The internal audit department recalculates payroll for several employees in order to gain additional compensation or to earn a promotion.
each pay period. This is an example of independent verification Management fraud may also involve an attempt to misstate financial
9. Locking petty cash in a safe is an example of access controls performance in order to increase the price of the company’s stock or to
10. Approving a price reduction because goods are damaged is an example of reduce the cost of debt.
specific authorization 3. Discuss the importance of the Foreign Corrupt Practices Act of 1977 to the
11. Using cameras to monitor the activities of cashiers is an example of accounting profession.
supervision ANS: The Foreign Corrupt Practices Act of 1977 (FCPA) is a law that
12. Not permitting the computer programmer to enter the computer room is requires all companies registered with the Securities and Exchange
an example of segregation of duties Commission to: keep records that fairly and reasonably reflect the
13. Sequentially numbering all sales invoices is an example of accounting transactions of the firm and its financial position maintain a system of
records internal control that provides reasonable assurance that the organization’s
14. What are the five conditions necessary for an act to be considered objectives are met As a result of the Foreign Corrupt Practices Act of 1977,
fraudulent? management devotes substantial time to developing and maintaining the
ANS: false representation, material fact, intent, justifiable reliance, and internal control structure because failure to do so violates the FCPA and
injury or loss could lead to heavy fines and imprisonment. Accountants are key participants
15. What is the objective of SAS 99? in establishing and maintaining the internal control structure. Therefore, it is
ANS: The objective of SAS 99 is to seamlessly blend the auditor’s accountants who are instrumental in ensuring that the firm is in compliance
consideration of fraud into all phases of the audit process. with the Foreign Corrupt Practices Act of 1977.
16. Distinguish between exposure and risk. 4. Why are the computer ethics issues of privacy, security, and property
ANS: Exposure is the absence or weakness of a control which increases the ownership of interest to accountants?
firm’s risk of financial loss or injury. Risk is the probability of incurring such ANS: Privacy is a concern because the nature of computer data files makes it
a loss or injury. possible for unauthorized individuals to obtain information without it being
17. Explain the characteristics of management fraud. recognized as “missing” from its original location. Security is a concern
ANS: Management fraud typically occurs at levels above where the internal because its absence makes control from a privacy viewpoint questionable. In
control system is effective. Financial statements are frequently modified to addition lack of security may permit unauthorized changes to data, therefore
make the firm appear more healthy than it actually is. If any misappropriation distorting information that is reported. Property ownership raises issues of
of assets occurs, it is usually well hidden. legitimacy of organizational software, valuation of assets, and questions of
18. The text discusses many questions about personal traits of employees lost revenues.
which might help uncover fraudulent activity. What are three? 5. According to common law, there are five conditions that must be present
ANS: executives: with high personal debt, living beyond their means, for an act to be deemed fraudulent. Name and explain each.
engaged in habitual gambling, appear to abuse alcohol or drugs, appear to ANS: In order for an act to be deemed fraudulent under common law, it must
lack personal codes of ethics, appear to be unstable possess the following characteristics: false representation, meaning some
19. Give two examples of employee fraud and explain how the theft might misrepresentation or omission must have occurred, material facts, meaning
occur. that the facts must influence someone’s actions, intent, meaning there must
ANS: Charges to expense accounts: Cash could be stolen and charged to a have been the intention to deceive others, justifiable reliance, meaning it did
miscellaneous expense account. Once the account is closed, detection would affect someone’s decision, and injury or loss must have occurred.
be more difficult. 6. Management fraud is regarded as more serious than employee fraud. Three
Lapping: This involves converting cash receipts to personal use. If a special characteristics have been discussed for management fraud. What are
customer’s check is taken, his/her balance will not reflect a payment and will they? Explain.
be detected when a statement is sent. In order to conceal this fraud, a later ANS: It usually occurs at levels above the normal internal control system.
payment is used to cover the stolen check. This is in effect a small scale There is typically an intent to present a better picture of the business than is
Ponzi scheme. valid, often to deceive creditors and/or shareholders. If assets are
20. What are the six broad classes of physical control activities defined by misappropriated, the route is quite devious involving a maze of business
SAS 78? transactions.
ANS: Transaction authorization, segregation of duties, supervision, access 7. Four principal types of corruption are discussed. Name all four and explain
controls, accounting records, independent verification at least two.
ANS: Corruption involves an executive, manager, or employee of a business
ESSAY working in collusion with an outsider. The four principal types of corruption
1. The text describes six internal control activities. List four of them and are: bribery, illegal gratuities, conflicts of interest, and economic extortion.
Bribery involves giving, offering, soliciting, or receiving things of value to company; have a financial relationship as primary stockholders or have
influence an official in the performance of his or her lawful duties. An illegal received personal loans from the company; have an operational relationship
gratuity involves giving. receiving, offering, or soliciting something of value as employees of the company.
because of an official act that has been taken. A conflict of interest occurs 14. Explain the problems associated with Questionable Executive
when an employee acts on behalf of a third party during the discharge of his Compensation Schemes
or her duties or has self-interest in the activity being performed. Economic ANS: A survey by Thompson Financial revealed the strong belief that
extortion is the use (or threat) of force (including economic sanctions) by an executives have abused stock-based compensation. The consensus is that
individual or organization to obtain something of value. fewer stock options should be offered than currently is the practice.
8. Misappropriation of assets can involve various schemes: charges to Excessive use of short-term stock options to compensate directors and
expense accounts, lapping, and transaction fraud. Explain each and give an executives may result in short term thinking and strategies aimed at driving
example. up stock prices at the expense of the firm’s longterm health. In extreme
ANS: Charges to expense accounts involve fictitious charges to such cases, financial statement misrepresentation has been the vehicle to achieve
accounts as miscellaneous expense to offset theft of an asset. Because the the stock price needed to exercise the option.
expense account is closed to revenue at the end of the period, the period in 15. Explain the problems associated with inappropriate accounting practices.
which it could be detected is short. Lapping is a technique whereby an early ANS: The use of inappropriate accounting techniques is a characteristic
theft is covered up by a later one, i.e., with the moves “lapping” over each common to many financial statement fraud schemes. Enron made elaborate
other. The simplest example involves taking a customer’s payment. A later use of Special Purpose Entities (SPE) to hide liabilities through off balance
payment is then credited to the first customer’s account, not the second. And sheet accounting. WorldCom management transferred transmission line costs
on it goes. This requires some control over billing to avoid tipping off the from current expense accounts to capital accounts. This allowed them to
last customer. Transaction fraud involves deleting, altering, or adding false defer some operating expenses and report higher earnings. Also, they
transactions to divert assets to the perpetrator. For example, if an employee reduced the book value of hard assets of MCI by $3.4 billion and increased
leaves the business and the supervisor fails to notify payroll and continues to goodwill by the same amount. Had the assets been left at book value, they
clock the employee in and out, a fraudulent paycheck would be produced. If, would have been charged against earnings over four years. Goodwill, on the
in addition, the supervisor distributes the paycheck, it can be kept, and other hand, was amortized over much longer period.
cashed. 16. Explain the purpose of the PCAOB.
9. Computer fraud is easiest at the data collection stage. Why? ANS: The Sarbanes-Oxley Act creates a Public Company Accounting
ANS: Computer fraud is easiest at the data collection stage because much of Oversight Board (PCAOB). The PCAOB is empowered to set auditing,
what occurs after the data collection or input stage is not visible to human quality control, and ethics standards, to inspect registered accounting firms,
eyes. Once entered, the system will presume that the input is legitimate and to conduct investigations, and to take disciplinary actions.
will process it as all others. 17. Why is an Independent Audit Committee important to a company?
10. Explain why collusion between employees and management in the ANS: The Sarbanes-Oxley Act requires all audit committee members to be
commission of a fraud is difficult to both prevent and detect. independent and requires the audit committee to hire and oversee the external
ANS: Collusion among employees in the commission of a fraud is difficult auditors. This provision is consistent with many investors who consider the
to both prevent and detect. This is particularly true when the collusion is board composition to be a critical investment factor. For example, Thompson
between managers and their subordinate employees. Management plays a Financial survey revealed that most institutional investors want corporate
key role in the internal control structure of an organization. They are relied boards to be comprised of at least 75% of independent directors
upon to prevent and detect fraud among their subordinates. When they 18. What are the key points of the “Issuer and Management Disclosure” of
participate in fraud with the employees over whom they are supposed to the Sarbanes-Oxley Act?
provide oversight, the organization’s control structure is weakened, or ANS: 1. Public companies must report all off balance-sheet transactions.
completely circumvented, and the company becomes more vulnerable to 2. Annual reports filed with the SEC must include a statement by
losses. management asserting that it is responsible for creating and maintaining
11. Since all fraud involves some form of financial misstatement, how is adequate internal controls and asserting to the effectiveness of those controls.
Fraudulent Statement fraud different? 3. Officers must certify that the company’s accounts ‘fairly present’ the firms
ANS: Fraudulent statements are associated with management fraud. While financial condition and results of operations. Knowingly filing a false
all fraud involves some form of financial misstatement, to meet the definition certification is a criminal offence.
under this class of fraud scheme, the statement itself must bring direct or 19. In this age of high technology and computer based information systems,
indirect financial benefit to the perpetrator. In other words, the statement is why are accountants concerned about physical (human) controls?
not simply a vehicle for obscuring or covering a fraudulent act. For example, ANS: This class of controls relates primarily to the human activities
misstating the cash account balance to cover the theft of cash does not fall employed in accounting systems. These activities may be purely manual,
under this class of fraud scheme. On the other hand, understating liabilities to such as the physical custody of assets, or they may involve the use of
present a more favorable financial picture of the organization to drive up computers to record transactions or update accounts. Physical controls do not
stock prices does qualify. relate to the computer logic that actually performs these accounting tasks.
12. Explain the problems associated with lack of auditor independence. This is the subject matter of chapter 16. Rather, they relate to the human
ANS: Auditing firms who are also engaged by their clients to perform non- activities that initiate such computer logic. In other words, physical controls
accounting activities such as actuarial services, internal audit outsourcing do not suggest an environment in which clerks update paper accounts with
services, and consulting lack independence. They are essentially auditing pen and ink. Virtually all systems, regardless of their sophistication, employ
their own work. This risk is that as auditors they will not bring to human activities that need to be controlled.
management’s attention detected problems that may adversely affect their 20. How has the Sarbanes-Oxley Act had a significant impact on corporate
consulting fees. For example, Enron’s auditors – Arthur Andersen – were governance?
also their internal auditor’s and their management consultants. ANS: The Sarbanes-Oxley Act requires all audit committee members to be
13. Explain the problems associated with lack of director independence independent and requires the audit committee to hire and oversee the external
ANS: Many boards of directors are comprised of individuals who are not auditors. This provision is consistent with many investors who consider the
independent. Examples of lack of independence are directors who: have a board composition to be a critical investment factor. For example, a
personal relationship by serving on the boards of other directors companies; Thomson Financial survey revealed that most institutional investors want
have a business trading relationship as key customers or suppliers of the corporate boards to be comprised of at least 75 percent independent directors.
21. Discuss the non accounting services that external auditors are no longer 18. Illegal Gratuity - Involves giving or receiving something of value
permitted to render to audit clients under SOX legislation. because of an official act that has been taken
ANS: The Act addresses auditor independence by creating more separation 19. Conflict of Interest - Occurs when an employee acts on behalf of a third
party during the discharge of their duties or has self interest in the activity
between a firm’s attestation and non-auditing activities. This is intended to
20. Economic Extortion - Is the use of force by an individual or organization
specify categories of services that a public accounting firm cannot perform to obtain something of value
for its client. These include the following nine functions: 21. Skimming - Involves stealing cash from an organization before it is
Bookkeeping or other services related to the accounting records or financial recorded on the organization's books and records
statements; 22. Cash Larceny - Involves schemes in which cash receipts are stolen from
Financial information systems design and implementation; an organization after they have been recorded in the organization's books and
Appraisal or valuation services, fairness opinions, or contribution-in-kind records
23. Lapping - In which the cash receipts clerk first steals and cashes a check
reports;
from customer A and makes up the difference from customer B
Actuarial services; 24. Vendor Fraud - Are perpetrated by employees who cause their employer
Internal audit outsourcing services; to issue a payment to a false supplier by submitting invoices for goods and
Management functions or human resources; services
Broker or dealer, investment adviser, or investment banking services; 25. Shell Company - First requires that the perpetrator establish a false
Legal services and expert services unrelated to the audit; and supplier in the books of the victim company. Them by issuing false invoices
Any other service that the PCAOB determines is impermissible. creates payments to this false supplier
26. Pass Through Fraud - Is similar to a shell company fraud with the
While the Sarbanes-Oxley Act prohibits auditors from providing the above
exception that a transaction has taken place. Inventory is purchased from a
services to their audit clients, they are not prohibited from performing such legitimate supplier then the place is inflated by a fake supplier before being
services for non-audit clients or privately held companies. sold to the victim company
22. What are the key points of the “Issuer and Management Disclosure” of 27. Pay and Return - Involves a clerk with check writing authority who
the Sarbanes-Oxley Act? intentionally pays a vendor twice for the same invoice. The supplier
ANS: The Sarbanes-Oxley Act imposes new corporate disclosure reimburses one of the checks and the employee takes the cash
requirements including: Public companies must report all off-balance-sheet
transactions. Annual reports filed with the SEC must include a statement by CHAPTER 4
management asserting that it is responsible for creating and maintaining TRUE OR FALSE
adequate internal controls and asserting to the effectiveness of those controls. 1. The packing slip is also known as the shipping notice.
Officers must certify that the company’s accounts “fairly present” the firm’s 2. The bill of lading is a legal contract between the buyer and the seller.
financial condition and results of operations. Knowingly filing a false 3. Another name for the stock release form is the picking ticket.
certification is a criminal offence. 4. Warehouse stock records are the formal accounting records for inventory.
5. The purpose of the invoice is to bill the customer.
DEFINITIONS 6. In most large organizations, the journal voucher file has replaced the
1. Ethics - Pertains to the principles of conduct that individuals use in making formal general journal.
choices and guiding their behavior in situations that involve the concept of 7. The cash receipts journal is a special journal
right and wrong 8. In the revenue cycle, the internal control “limit access” applies to physical
2. Business Ethics - Involves finding the answers to 2 questions. How do
managers decide what is right in conducting business? And how do they assets only.
achieve what is right? 9. In real-time processing systems, routine credit authorizations are
3. Computer Ethics - Is the analysis of the nature and social impact of automated.
computer technology and the corresponding formulation and justification of 10. In a computerized accounting system, segregation of functions refers to
policies for the ethical use of such technology inventory control, accounts receivable, billing, and general ledger tasks.
4. Privacy - People desire to be in full control of what and how much 11. A written customer purchase order is required to trigger the sales order
information about themselves is available to others
system.
5. Security - Is an attempt to avoid such undesirable events as a loss of
confidentiality or data integrity 12. Inventory control has physical custody of inventory.
6. Fraud - Denotes a false representation of a material fact made by one 13. The principal source document in the sales order system is the sales
party to another party with the intent to deceive the other party to justifiably order.
rely on the fact 14. Sales orders should be pre-numbered documents
7. False Representation - There must be a false statement or a non disclosure 15. Integrated accounting systems automatically transfer data between
8. Material Fact - A fact must be a substantial factor in inducing someone to modules.
act
16. If a customer submits a written purchase order, there is no need to
9. Intent- There must be the intent to deceive or the knowledge that one's
statement is false prepare a sales order.
10. Injury or Loss - The deception must have caused injury or loss to the 17. Sales return involves receiving, sales, credit, and billing departments, but
victim of the fraud not accounts receivable.
11. Justifiable Reliance - The misrepresentation must have been a substantial 18. A remittance advice is a form of turn-around document.
fact on which the injured party relied 19. A bill of lading is a request for payment for shipping charges.
12. Employee Fraud - Is generally designed to directly convert cash or other 20. In point of sale systems, authorization takes the form of validation of
assets to the employee's personal benefit
13. Management Fraud - Usually does not involve the direct theft of assets. Is credit card charges.
usually done by top management where internal controls can't detect
14. Fraud Triangle - Consists of situational pressure, opportunity, and ethics MULTIPLE CHOICE
15. Fraudulent Statements - Are associated with management fraud. The 1. The revenue cycle consists of
financial statement misrepresentation must bring direct or indirect financial a. one subsystem–order entry
benefit to the perpetrator b. two subsystems–sales order processing and cash receipts
16. Corruption - Involves an executive, manager or employee of the c. two subsystems–order entry and inventory control
organization in collusion with an outsider. 10% of occupational fraud cases
d. three subsystems–sales order processing, credit authorization, and cash
17. Bribery - Involves giving, offering, or soliciting things of value to
influence an official in the performance of their lawful duties receipts
2. The reconciliation that occurs in the shipping department is intended to
ensure that b. limit access to credit memoranda
a. credit has been approved c. pre-number and sequence check all credit memoranda
b. the customer is billed for the exact quantity shipped d. require management approval for all credit memoranda
c. the goods shipped match the goods ordered 16. The accounts receivable clerk destroys all invoices for sales made to
d. inventory records are reduced for the goods shipped members of her family and does not record the sale in the accounts
3. The adjustment to accounting records to reflect the decrease in inventory receivable subsidiary ledger. Which procedure will not detect this fraud?
due to a sale occurs in the a. prenumber and sequence check all invoices
a. warehouse c. billing department b. reconcile the accounts receivable control to the accounts receivable
b. shipping department d. inventory control department subsidiary ledger
4. Which document triggers the revenue cycle? c. prepare monthly customer statements
a. the sales order c. the sales invoice d. reconcile total sales on account to the debits in the accounts receivable
b. the customer purchase order d. the journal voucher subsidiary ledger
5. Copies of the sales order can be used for all of the following except 17. Which department is least likely to be involved in the revenue cycle?
a. purchase order c. shipping notice a. credit c. billing
. credit authorization d. packing slip b. accounts payable d. shipping
6. The purpose of the sales invoice is to 18. Which document is included with a shipment sent to a customer?
a. record reduction of inventory a. sales invoice c. packing slip
b. transfer goods from seller to shipper b. stock release form d. shipping notice
c. bill the customer 19. Good internal controls in the revenue cycle should ensure all of the
d. select items from inventory for shipment following except
7. The customer open order file is used to a. all sales are profitable c. credit is authorized
a. respond to customer queries c. ship the customer order b. all sales are recorded d. inventory to be shipped is not stolen
b. fill the customer order d. authorize customer credit 20. Which control does not help to ensure that accurate records are kept of
8. The stock release copy of the sales order is not used to customer accounts and inventory?
a. locate and pick the items from the warehouse shelves a. reconcile accounts receivable control to accounts receivable subsidiary
b. record any out-of-stock items b. authorize credit
c. authorize the warehouse clerk to release custody of the inventory to c. segregate custody of inventory from record keeping
shipping d. segregate record keeping duties of general ledger from accounts receivable
d. record the reduction of inventory 21. Internal controls for handling sales returns and allowances do not include
9. The shipping notice a. computing bad debt expense using the percentage of credit sales
a. is mailed to the customer b. verifying that the goods have been returned
b. is a formal contract between the seller and the shipping company c. authorizing the credit memo by management
c. is always prepared by the shipping clerk d. using the original sales invoice to prepare the sales returns slip
d. informs the billing department of the quantities shipped 22. The printer ran out of preprinted sales invoice forms and several sales
10. The billing department is not responsible for invoices were not printed. The best internal control to detect this error is
a. updating the inventory subsidiary records a. a batch total of sales invoices to be prepared compared to the actual
b. recording the sale in the sales journal number of sales invoices prepared
c. notifying accounts receivable of the sale b. sequentially numbered sales invoices
d. sending the invoice to the customer c. visual verification that all sales invoices were prepared
11. Customers should be billed for backorders when d. none of the above will detect this error
a. the customer purchase order is received 23. Which department prepares the bill of lading?
b. the backordered goods are shipped a. sales c. shipping
c. the original goods are shipped b. warehouse d. credit
d. customers are not billed for backorders because a backorder is a lost sale 24. A remittance advice is
12. Usually specific authorization is required for all of the following except a. used to increase (debit) an account receivable by the cash received
a. sales on account which exceed the credit limit b. is a turn-around document
b. sales of goods at the list price c. is retained by the customer to show proof of payment
c. a cash refund for goods returned without a receipt d. none of the above
d. write off of an uncollectible account receivable 25. A weekly reconciliation of cash receipts would include comparing
13. Which of following functions should be segregated? a. the cash prelist with bank deposit slips
a. opening the mail and making the journal entry to record cash receipts b. the cash prelist with remittance advices
b. authorizing credit and determining reorder quantities c. bank deposit slips with remittance advices
c. maintaining the subsidiary ledgers and handling customer queries d. journal vouchers from accounts receivable and general ledger
d. providing information on inventory levels and reconciling the bank 26. At which point is supervision most critical in the cash receipts system?
statement a. accounts receivable c. mail room
14. Which situation indicates a weak internal control structure? b. general ledger d. cash receipts
a. the mailroom clerk authorizes credit memos 27. EDI trading partner agreements specify all of the following except
b. the record keeping clerk maintains both accounts receivable and accounts a. selling price c. payment terms
payable subsidiary ledgers b. quantities to be sold d. person to authorize transactions
c. the warehouse clerk obtains a signature before releasing goods for 28. A cash prelist is
shipment a. a document that records sales returns and allowances
d. the accounts receivable clerk prepares customer statements every month b. a document returned by customers with their payments
15. The most effective internal control procedure to prevent or detect the c. the source of information used to prepare monthly statements
creation of fictitious credit memoranda for sales returns is to d. none of the above
a. supervise the accounts receivable department 29. An advantage of real-time processing of sales is
a. the cash cycle is lengthened ownership and responsibility for assets in transit.
b. current inventory information is available 2. State two specific functions or jobs that should be segregated in the sales
c. hard copy documents provide a permanent record of the transaction processing system.
d. data entry errors are corrected at the end of each batch ANS: sales order processing and credit approval; inventory control (record
30. Commercial accounting systems have fully integrated modules. The word keeping) from warehouse (custody); and general ledger from accounts
“integrated” means that receivable subsidiary ledger
a. segregation of duties is not possible 3. State two specific functions or jobs that should be segregated in the cash
b. transfer of information among modules occurs automatically receipts system.
c. batch processing is not an option ANS: cash receipts (custody) from accounts receivable (record keeping); and
d. separate entries are made in the general ledger accounts and the subsidiary general ledger from accounts receivable subsidiary ledger mail room
ledgers (receiving cash) and accounts receivable subsidiary ledger
31. The data processing method that can shorten the cash cycle is 4. List two points in the sales processing system when authorization is
a. batch, sequential file processing required.
b. batch, direct access file processing ANS: credit check, sales returns policy, preparation of cash prelist
c. real-time file processing 5. For the revenue cycle, state two specific independent verifications that
d. none of the above should be performed.
32. Which of the following is not a risk exposure in a microcomputer ANS: shipping verifies that the goods sent from the warehouse are correct in
accounting system? type and quantity; billing reconciles the shipping notice with the sales order
a. reliance on paper documentation is increased to ensure that customers are billed only for the quantities shipped; general
b. functions that are segregated in a manual environment may be combined in ledger reconciles journal vouchers submitted by the billing department (sales
a microcomputer accounting system journal), inventory control (inventory subsidiary ledger), and cash receipts
c. backup procedures require human intervention (cash receipts journal) treasurer determines that all cash received got to the
d. data are easily accessible bank
33. Which journal is not used in the revenue cycle? 6. What task can the accounts receivable department engage in to verify that
a. cash receipts journal all checks sent by the customers have been appropriately deposited and
b. sales journal recorded?
c. purchases journal ANS: The company should periodically, perhaps monthly, send an account
d. general journal summary to each customer listing invoices and amounts paid by check
34. Periodically, the general ledger department receives all of the following number and date. This form allows the customer to verify the accuracy of the
except records. If any payments are not recorded, they will notify the company of
a. total increases to accounts receivable the discrepancy. These reports should not be handled by the accounts
b. total of all sales backorders receivable clerk or the cashier.
c. total of all sales 7. What specific internal control procedure would prevent the sale of goods
d. total decreases in inventory on account to a fictitious customer?
35. The credit department ANS: credit check
a. prepares credit memos when goods are returned 8. The clerk who opens the mail routinely steals remittances. Describe a
b. approves credits to accounts receivable when payments are received specific internal control procedure that would prevent or detect this fraud.
c. authorizes the granting of credit to customers ANS: supervision (two people) when opening the mail; customer complaints
d. none of the above when monthly statements mailed
36. Adjustments to accounts receivable for payments received from 9. A customer payment of $247 was correctly posted in the general ledger
customers is based upon but was recorded as $274 in the customer’s account receivable. Describe a
a. the customer’s check specific internal control procedure that would detect this error.
b. the cash prelist ANS: reconcile the accounts receivable control account to the accounts
c. the remittance advice that accompanies payment receivable subsidiary ledger; compare control totals of cash received with
d. a memo prepared in the mailroom total credits to A/R subsidiary ledger
37. The revenue cycle utilizes all of the following files except 10. Goods are shipped to a customer, but the shipping department does not
a. credit memo file c. shipping report file notify billing and the customer never receives an invoice. Describe a specific
b. sales history file d. cost data reference file internal control procedure that would detect this error.
38. All of the following are advantages of real-time processing of sales ANS: Billing department matches the stock release copy of the sales order
except (from shipping) to the invoice, ledger, and file copies of the sales order (sent
a. The cash cycle is shortened directly to billing), and then mails the invoice to the customer. After a certain
b. Paper work is reduced amount of time has passed, the billing department should investigate any
c. Incorrect data entry is difficult to detect unmatched invoice, ledger, and file copies of the sales order.
d. Up-to-date information can provide a competitive advantage in the 11. A clerk embezzles customer payments on account and covers up the theft
marketplace by making an adjustment to the accounts receivable ledger. Describe a
specific internal control procedure that would prevent this fraud.
SHORT ANSWER ANS: segregation of duties; do not let one person have custody of payments
1. Distinguish between a packing slip, shipping notice, and a bill of lading. and the ability to make adjustments to the records; all adjustments to
ANS: The packing slip travels with the goods to the customer, and it accounts receivable records must be authorized
describes the contents on the order. Upon filling the order, the shipping 12. A credit sale is made to a customer, even though the customer’s account
department sends the shipping notice to the billing department to notify them is four months overdue. Describe a specific internal control procedure that
that the order has been filled and shipped. The shipping notice contains would prevent this from happening.
additional information that the packing slip may not contain, such as ANS: perform a credit check and require management approval for all sales
shipment date, carrier and freight charges. The bill of lading is a formal to accounts that are overdue
contract between the seller and the transportation carrier; it shows legal 13. What specific internal control procedure would prevent a customer from
being billed for all 50 items ordered although only 40 items were shipped? customer.
ANS: billing should reconcile the shipping report with the sales order 25. Give three examples of Access Control in a Point-of-Sale (POS) system.
14. What specific internal control procedure would prevent the shipping clerk ANS: Lock on the cash drawer
from taking goods from the storeroom and sending them to someone who  Internal cash register tape that can be accessed only by the manager
had not placed an order?  Physical security over the inventory. The following are examples: Steel
ANS: shipping clerk should not have access to the storeroom cables to secure expensive
15. What specific internal control procedure would prevent an accounts  leather coats to the clothing rack. Locked showcases to display jewelry and
receivable clerk from issuing a fictitious credit memo to a customer (who is costly electronic equipment.
also a relative) for goods that were “supposedly” returned from previous Magnetic tags attached to merchandise, which will sound an alarm when
sales? removed from the store. Note to Instructor: Some physical security devices
ANS: credit memo should be authorized after verifying the return of goods could also be classified as supervision
based on evidence from the person who received the goods
16. What specific internal control procedure would prevent an increase in ESSAY
sales returns since salesmen were placed on commission? 1. When Clipper Mail Order Co. receives telephone and fax orders, the
ANS: customer credit should be verified by the credit department reduce billing department prepares an invoice. The invoice is mailed immediately. A
commissions for sales returns copy of the invoice serves as a shipping notice. The shipping department
17. What specific internal control procedure would detect the misplacement removes inventory from the warehouse and prepares the shipment. When the
of a sales invoice after preparation and not mailed to the customer? The order is complete, the goods are shipped. The clerk checks the customer’s
invoice was never found. credit before recording the sale in the general journal and the account
ANS: all documents should be prenumbered receivable subsidiary ledger. The receptionist opens the mail and lists all
18. What function does the receiving department serve in the revenue cycle? payments. The receptionist also handles all customer complaints and
ANS: The receiving department counts and inspects items which are returned prepares sales return forms for defective merchandise. The cashier records all
by customers. The receiving department prepares a return slip of which a cash receipts in the general journal and makes the appropriate entry in the
copy goes to the warehouse for restocking, and a copy goes to the sales order accounts receivable subsidiary ledger. The cashier prepares the daily bank
department so that a credit memo can be issued to the customer. deposit. Describe at least four internal control weaknesses at Clipper Mail
19. What are the three rules that ensure that no single employee or Order Co.
department processes a transaction in its entirety. ANS: no sales order is prepared; credit should be checked before shipping
ANS: The three rules that ensure segregation of functions are: the items; invoices are mailed before the goods are shipped; shipping has
1. Transaction authorization should be separate from transaction processing access to the warehouse; record keeping duties are not segregated (general
2. Asset custody should be separate from asset record keeping. ledger from subsidiary ledger); only one person opens the mail; sales return
3. The organization structure should be such that the perpetration of a fraud forms are not authorized by management; custody and record keeping duties
requires collusion between 2 or more individuals. are not separated; the cashier has custody of cash, makes journal entries, and
20. What is automation and why is it used? maintains A/R ledger; Cashier has custody of cash and handles customer
ANS: Automation involves using technology to improve the efficiency and complaints (e.g., about unrecorded payments).
effectiveness of a task. Automation of the revenue cycle is typically used to 2. How may an employee embezzle funds by issuing an unauthorized sales
reduce overhead costs, make better credit granting decisions, and better credit memo if the appropriate segregation of functions and authorization
collect outstanding accounts receivable. controls were not in place?
21. What is the objective of re-engineering? ANS: An employee who has access to incoming payments, either cash or
ANS: The objective of re-engineering is to greatly reduce costs by check, as well as the authorization to issue credit memos may pocket the cash
identifying and eliminating non valueadded tasks and also by streamlining or check of a payment for goods received. This employee could then issue a
necessary existing processes. credit memo to this person’s account so that the customer does not show a
22. What are the key segregation of duties related to computer programs that balance due.
process accounting transactions. 3. For each of the following documents, describe its purpose, the functional
ANS: Response: The tasks of design, maintenance, and operation of area preparing it, and the key data included: sales order, bill of lading, credit
computer programs need to be segregated. The programmers who write the memo.
original computer programs should not also be responsible for making ANS: A sales order is used to collect information needed to initiate the sales
program changes. Both of these functions must also be separate from the process. It can be a copy of the customer’s purchase order prepared by the
daily task of operating the system. customer or a document prepared by a member of the sales staff in response
23. How is EDI more than technology? What unique control problems may it to mail, phone or personal contact with the customer. It contains information
pose? about the customer, the type and quantity of merchandise being requested,
ANS: EDI represents a unique business arrangement between the buyer and price information, shipping information, etc. The bill of lading is prepared by
seller in which they agree, in advance, to the terms of their relationship on the shipping clerk. It is a formal contract between the seller and the carrier
such items as selling price, quantities, delivery times, payment terms and who will transport the goods to the customer. It contains information about
methods of handling disputes. The terms of agreement are binding. One the carrier, the customer, descriptions of the package(s) being shipped,
problem is ensuring that only valid transactions are processed. Another risk declared value of the goods, and information on freight charges, including
is that a non-trading partner will masquerade as a trading partner and access how much and who will pay. A credit memo is a document authorizing
the firm's processing systems. issuance of credit to a customer for returned goods. It is prepared in the sales
24. What makes point-of-sales systems different from revenue cycles of department after receipt of a return slip from receiving. It shows the
manufacturing firms? customer’s name, reason for the return, a list of items and prices, and the
ANS: In point-of-sale systems, the customer literally has possession of the total amount of credit. Many credit memos require additional authorization.
items purchased, thus the inventory is in hand. Typically, for manufacturing 4. What features of a reengineered cash receipts system contribute to
firms, the order is placed and the good is shipped to the customer at some improved control and reduced costs? What complicates the process?
later time period. Thus, updating inventory at the time of sale is necessary in ANS: A reengineered cash receipts system can include automated mail
point-of-sale systems since the inventory is changing hands, while it is not processing that opens envelopes and separates checks and remittance advices
necessary in manufacturing firms until the goods are actually shipped to the in a manner that limits access of the mail room clerk to the checks. Software
can be used to read the amount of payment and compare to the amount due, 10. How is independent verification carried out in a manual revenue system?
verify that the check has been signed, etc. “Good” transactions continue ANS: Independent verification occurs in several departments as part of the
through processing, exceptions are handled separately. Checks are sent to the sales order processing system. The shipping department verifies that the
cash receipts department for deposit, listings of transactions are sent to goods released by the warehouse for shipment, as shown on the stock release
accounts receivable, cash receipts, and general ledger departments. This document, match the packing slip. Billing compares the shipping notice with
process is complicated when the organization receives many partial the invoice to be sure customers are billed only for goods shipped. And
payments, single payments covering multiple invoices, or encounters many general ledger reconciles the journal vouchers prepared by billing, inventory
clerical errors on the part of customers. control, cash receipts, and accounts receivable. This reconciliation focuses on
5. What role does each of the following departments play in the sales order a match between what was ordered, what was removed from the stockroom,
processing subsystem: sales, credit, and shipping? Be complete. what was shipped, what was billed, cash received, and credit to the customer
ANS: The sales department receives the order information from the account.
customer, either by mail, phone, or in person. Information is captured on a
sales order form which includes customer name, account number, name, CHAPTER 5
number and description of items ordered, quantities and unit prices plus True or False
taxes, shipping info, discounts, freight terms. This form is usually prepared
in multiple copies that are used for credit approval, packing, stock release, 1. Purchasing decisions are authorized by inventory control.
shipping, and billing. The credit department provides transaction 2. The blind copy of the purchase order that goes to the receiving department
authorization by approving the customer for a credit sale and returns and contains no item descriptions.
allowances. The shipping department receives information from the sales 3. Firms that wish to improve control over cash disbursements use a voucher
department in the form of packing slip and shipping notice. When the goods system.
arrive from the warehouse, the documents are reconciled with the stock 4. In a voucher system, the sum of all unpaid vouchers in the voucher register
release papers. The goods are packed and labeled. The packing slip is equals the firm’s total voucher payable balance.
included. The shipping notice is sent to billing. A bill of lading is prepared to 5. The accounts payable department reconciles the accounts payable
accompany the shipment. subsidiary ledger to the control account.
6. With regard to segregation of duties, rule one is that transaction 6. The use of inventory reorder points suggests the need to obtain specific
authorization and transaction processing should be separated. What does this authorization.
require in the revenue cycle? 7. Proper segregation of duties requires that the responsibility approving a
ANS: Within the revenue cycle, the credit department is separate from the payment be separated from posting to the cash disbursements journal.
rest of the process. Hence, the authorization of the transaction (granting of 8. A major risk exposure in the expenditure cycle is that accounts payable
credit) is independent. If other people, e.g., sales staff, were able to authorize may be overstated at the end of the accounting year.
credit sales, there would be the temptation to approve sales to any customer, 9. When a trading partner agreement is in place, the traditional three way
even those known to not be credit worthy. match may be eliminated.
7. With regard to segregation of duties, rule two is that asset custody and 10. Authorization of purchases in a merchandising firm occurs in the
record keeping should be separated. What does this require in the revenue inventory control department.
cycle? 11. A three way match involves a purchase order, a purchase requisition, and
ANS: In the revenue cycle, the warehouse has custody of physical assets an invoice.
while accounting (especially general ledger and inventory control) maintains 12. Authorization for a cash disbursement occurs in the cash disbursement
the records. Also, in the cash receipts subsystem, cash receipts has custody of department upon receipt of the supplier’s invoice.
the asset (cash) while general ledger and accounts receivable keep the 13. An automated cash disbursements system can yield better cash
records. management since payments are made on time.
8. What role does each of the following departments play in the cash receipts 14. Permitting warehouse staff to maintain the only inventory records
subsystem: mail room, cash receipts, accounts receivable, and general violates separation of duties.
ledger? Be complete. 15. A purchasing system that employs electronic data interchange does not
ANS: The mail room receives the customer’s payment–usually a check use a purchase order.
accompanied by a document called a remittance advice (which may be a 16. Inventory control should be located in the warehouse.
copy of the invoice sent to the customer). Mail clerks separate the two, 17. Inspection of shipments in the receiving department would be improved
prepare a cash prelist or remittance list which lists all the payments received if the documentation showed the value of the inventory.
and sends the checks to the cashier and remittance advices to accounts 18. One reason for authorizing purchases is to enable efficient inventory
receivable. In cash receipts someone (e.g., cashier) restrictively endorses the management.
checks and records the payments in the cash receipts journal. A deposit slip 19. If accounts payable receives an invoice directly from the supplier it needs
is prepared which accompanies the checks to the bank. The accounts to be reconciled with the purchase order and receiving report.
receivable department posts from the remittance advices to the customer 20. Supervision in receiving is intended to reduce the theft of assets.
accounts in the AR subsidiary ledger. The general ledger department records
MULTIPLE CHOICE
cash receipts to the cash and AR control accounts based on the list from the
1. The purpose of the purchase requisition is to
mailroom and the summary report of posting from A/R.
a. order goods from vendors
9. For each of the following documents, describe its purpose, the functional
b. record receipt of goods from vendors
area preparing it, and the key data included: remittance advice, remittance
c. authorize the purchasing department to order goods
list, deposit slip.
d. bill for goods delivered
ANS: A remittance advice is sent by the customer to accompany payment.
2. The purpose of the receiving report is to d. bill for goods delivered
However, it is often part of or a copy of the invoice sent by the billing
a. order goods from vendors
department after the goods were shipped. A remittance list is often called a
b. record receipt of goods from vendors
cash prelist and is prepared by the mail room clerk to record all cash
c. authorize the purchasing department to order goods
received. It accompanies the checks to the cashier. A deposit slip is prepared
d. bill for goods delivered
by the cashier to accompany the checks to the bank. This is usually a
3. All of the following departments have a copy of the purchase order except
preprinted bank form.
a. the purchasing department c. accounts payable b. the sum of the paid vouchers represents the voucher payable liability
b. the receiving department d. general ledger of the firm
4. The purpose of the purchase order is to c. the voucher system permits the firm to consolidate payments of several
a. order goods from vendors invoices on one voucher
b. record receipt of goods from vendors d. many firms replace accounts payable with a voucher payable system
c. authorize the purchasing department to order goods 18. In the expenditure cycle, general ledger does not
d. approve payment for goods received a. post the journal voucher from the accounts payable department
5. The open purchase order file in the purchasing department is used to b. post the account summary from inventory control
determine c. post the journal voucher from the purchasing department
a. the quality of items a vendor ships d. reconcile the inventory control account with the inventory subsidiary
b. the best vendor for a specific item summary
c. the orders that have not been received 19. The documents in a voucher packet include all of the following except
d. the quantity of items received a. a check c. a receiving report
6. The purchase order b. a purchase order d. a supplier’s invoice
a. is the source document to make an entry into the accounting records 20. To maintain a good credit rating and to optimize cash management, cash
b. indicates item description, quantity, and price disbursements should arrive at the vendor’s place of business
c. is prepared by the inventory control department a. as soon as possible c. on the discount date
d. is approved by the end-user department b. on the due date d. by the end of the month
7. The reason that a blind copy of the purchase order is sent to receiving is to 21. The cash disbursement clerk performs all of the following tasks except
a. inform receiving when a shipment is due a. reviews the supporting documents for completeness and accuracy
b. force a count of the items delivered b. prepares checks
c. inform receiving of the type, quantity, and price of items to be delivered c. signs checks
d. require that the goods delivered are inspected d. marks the supporting documents paid
8. The receiving report is used to 22. When a cash disbursement in payment of an accounts payable is recorded
a. accompany physical inventories to the storeroom or warehouse a. the liability account is increased c. the cash account is unchanged
b. advise the purchasing department of the dollar value of the goods b. the income statement is changed d. the liability account is decreased
delivered
c. advise general ledger of the accounting entry to be made
d. advise the vendor that the goods arrived safely
9. When a copy of the receiving report arrives in the purchasing department,
it is used to
a. adjust perpetual inventory records
b. record the physical transfer of inventory from receiving to the warehouse
c. analyze the receiving department's process
d. recognize the purchase order as closed
10. The financial value of a purchase is determined by reviewing the
a. packing slip c. receiving report
b. purchase requisition d. supplier’s invoice
11. Which document is least important in determining the financial value of a
purchase?
a. purchase requisition c. receiving report
b. purchase order d. supplier’s invoice
12. In a merchandising firm, authorization for the payment of inventory is the
responsibility of
a. inventory control c. accounts payable
b. purchasing d. cash disbursements
13. In a merchandising firm, authorization for the purchase of inventory is
the responsibility of
a. inventory control c. accounts payable
b. purchasing d. cash disbursements
14. When purchasing inventory, which document usually triggers the
recording of a liability?
a. purchase requisition c. receiving report
b. purchase order d. supplier’s invoice
15. Because of time delays between receiving inventory and making the
journal entry
a. liabilities are usually understated
b. liabilities are usually overstated
c. liabilities are usually correctly stated
d. none of the above
16. Usually the open voucher payable file is organized by
a. vendor c. purchase order number
b. payment due date d. transaction date
17. Which of the following statements is not correct?
a. the voucher system is used to improve control over cash disbursements