OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
Multiple Choice
1. LO 8.1 Which of the following would a fraudster perceive as a pressure?
A. lack of management oversight
B. everyone does it
C. living beyond one’s means
D. lack of an internal audit function
Solution
C
2. LO 8.2 Internal control is said to be the backbone of all businesses. Which of the following is
the best description of internal controls?
A. Internal controls ensure that the financial statements published are correct.
B. The only role of internal controls is to protect customer data.
C. Internal controls and company policies are important to protect and safeguard assets and
to protect all company data and are designed to protect the company from fraud.
D. Internal controls are designed to keep employees from committing fraud against the
company.
Solution
C
3. LO 8.4 What is the best way for owners of small businesses to maintain proper internal
controls?
A. The owner must have enough knowledge of all aspects of the company and have controls
in place to track all assets.
B. Small businesses do not need to worry about internal controls.
C. Small businesses should make one of their employees in charge of all aspects of the
company, giving the owner the ability to run the company and generate sales.
D. Only managers need to be concerned about internal controls.
Solution
A
4. LO 8.4 Which of the following is not considered to be part of the internal control structure of
a company?
A. Ensure that assets are kept secure.
B. Monitor operations of the organization to ensure maximum efficiency.
C. Publish accurate financial statements on a regular basis.
D. Ensure assets are properly used.
Solution
C
5. LO 8.4 There are several elements to internal controls. Which of the following would not
address the issue of having cash transactions reported in the accounting records?
A. One employee would have access to the cash register.
B. The cash drawer should be closed out, and cash and the sales register should be
reconciled on a prenumbered form.
C. Ask customers to report to a manager if they do not receive a sales receipt or invoice.
Page 1 of 33
,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
D. The person behind the cash register should also be responsible for making price
adjustments.
Solution
D
6. LO 8.4 A company is trying to set up proper internal controls for their accounts
payable/inventory purchasing system. Currently the purchase order is generated by the same
person who receives the inventory. Together the purchase order and the receiving ticket are sent
to accounts payable for payment. What changes would you make to improve the internal control
structure?
A. No changes would be made since the person paying the bills is different from the person
ordering the inventory.
B. The person in accounts payable should generate the purchase order.
C. The person in accounts payable should generate the receiving ticket once the invoice
from the supplier is received.
D. The responsibilities of generating the purchase order and receiving the inventory should
be separated among two different people.
Solution
D
7. LO 8.4 There are three employees in the accounting department: payroll clerk, accounts
payable clerk, and accounts receivable clerk. Which one of these employees should not make the
daily deposit?
A. payroll clerk
B. account payable clerk
C. accounts receivable clerk
D. none of them
Solution
C
8. LO 8.4 Which one of the following documents is not needed to process a payment to a
vendor?
A. vendor invoice
B. packing slip
C. check request
D. purchase order
Solution
C
9. LO 8.4 What is the advantage of using technology in the internal control system?
A. Passwords can be used to allow access by employees.
B. Any cash received does not need to be reconciled because the computer tracks all
transactions.
C. Transactions are easily changed.
D. Employees cannot steal because all cash transactions are recorded by the computer/cash
register.
Solution
A
10. LO 8.4 Which of the following assets require the strongest of internal controls?
A. inventory
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,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
B. credit cards
C. computer equipment
D. cash
Solution
D
11. LO 8.5 Which of the following is true about the Sarbanes-Oxley Act?
A. It was passed to ensure that internal controls are properly documented and tested by
public companies.
B. It applies to both public and smaller companies.
C. It requires all companies to report their internal control policies to the US Securities and
Exchange Commission.
D. It does not require additional costs or resources to have adequate controls.
Solution
A
12. LO 8.5 The external auditor of a company has certain requirements due to Sarbanes-Oxley.
Which of the following best describes these requirements?
A. The auditor is required to only report weaknesses in the internal control design of the
company he or she is auditing.
B. The auditor must issue an internal control report on the evaluation of internal controls
overseen by the Public Company Accounting Oversight Board
C. The auditor in charge can serve for a period of only two years.
D. The Public Company Accounting Oversight Board reviews reports submitted by the
auditors when no evaluations have been performed.
Solution
B
13. LO 8.5 Petty cash is used to ________.
A. write checks for frequent purchases
B. make small payments in cash
C. avoid having to retain receipts because the amounts are very small
D. pay for recurring purchases such as postage or office supplies
Solution
B
14. LO 8.5 A company has decided to start a petty cash fund for $150. Which of the following is
the correct journal entry?
A.
B.
C. No entry is required.
D.
Solution
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, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
A
15. LO 8.6 Which of the following items are found on a book side of the bank reconciliation?
A. beginning bank balance
B. outstanding checks
C. interest income
D. error made by bank
Solution
C
16. LO 8.6 Which of the following are found on the bank side of the bank reconciliation?
A. NSF check
B. interest income
C. wire transfer into client’s account
D. deposit in transit
Solution
D
17. LO 8.7 What would be a reason a company would want to understate income?
A. to help nudge its stock price higher
B. to lower its tax bill
C. to show an increase in overall profits
D. to increase investor confidence
Solution
B
18. LO 8.7 What would be a reason a company would want to overstate income?
A. to help nudge its stock price higher
B. to lower its tax bill
C. to show a decrease in overall profits
D. none of the above
Solution
A
19. LO 8.7 At what point does revenue recognition occur?
A. When the purchase order is received
B. When the seller receives the money for the job
C. When the seller has met “performance”
D. When the purchaser makes payment
Solution
C
Questions
1. LO 8.1 What is an example of perceived opportunity as one of the three elements causing a
person to commit fraud?
Solution
Examples include weak internal controls, improper or nonexistent management oversight, and
lack of an internal audit function or other opportunities that create the perception that the
fraudster will be successful in committing a fraudulent act.
Page 4 of 33
Chapter 8: Fraud, Internal Controls, and Cash
Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
Multiple Choice
1. LO 8.1 Which of the following would a fraudster perceive as a pressure?
A. lack of management oversight
B. everyone does it
C. living beyond one’s means
D. lack of an internal audit function
Solution
C
2. LO 8.2 Internal control is said to be the backbone of all businesses. Which of the following is
the best description of internal controls?
A. Internal controls ensure that the financial statements published are correct.
B. The only role of internal controls is to protect customer data.
C. Internal controls and company policies are important to protect and safeguard assets and
to protect all company data and are designed to protect the company from fraud.
D. Internal controls are designed to keep employees from committing fraud against the
company.
Solution
C
3. LO 8.4 What is the best way for owners of small businesses to maintain proper internal
controls?
A. The owner must have enough knowledge of all aspects of the company and have controls
in place to track all assets.
B. Small businesses do not need to worry about internal controls.
C. Small businesses should make one of their employees in charge of all aspects of the
company, giving the owner the ability to run the company and generate sales.
D. Only managers need to be concerned about internal controls.
Solution
A
4. LO 8.4 Which of the following is not considered to be part of the internal control structure of
a company?
A. Ensure that assets are kept secure.
B. Monitor operations of the organization to ensure maximum efficiency.
C. Publish accurate financial statements on a regular basis.
D. Ensure assets are properly used.
Solution
C
5. LO 8.4 There are several elements to internal controls. Which of the following would not
address the issue of having cash transactions reported in the accounting records?
A. One employee would have access to the cash register.
B. The cash drawer should be closed out, and cash and the sales register should be
reconciled on a prenumbered form.
C. Ask customers to report to a manager if they do not receive a sales receipt or invoice.
Page 1 of 33
,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
D. The person behind the cash register should also be responsible for making price
adjustments.
Solution
D
6. LO 8.4 A company is trying to set up proper internal controls for their accounts
payable/inventory purchasing system. Currently the purchase order is generated by the same
person who receives the inventory. Together the purchase order and the receiving ticket are sent
to accounts payable for payment. What changes would you make to improve the internal control
structure?
A. No changes would be made since the person paying the bills is different from the person
ordering the inventory.
B. The person in accounts payable should generate the purchase order.
C. The person in accounts payable should generate the receiving ticket once the invoice
from the supplier is received.
D. The responsibilities of generating the purchase order and receiving the inventory should
be separated among two different people.
Solution
D
7. LO 8.4 There are three employees in the accounting department: payroll clerk, accounts
payable clerk, and accounts receivable clerk. Which one of these employees should not make the
daily deposit?
A. payroll clerk
B. account payable clerk
C. accounts receivable clerk
D. none of them
Solution
C
8. LO 8.4 Which one of the following documents is not needed to process a payment to a
vendor?
A. vendor invoice
B. packing slip
C. check request
D. purchase order
Solution
C
9. LO 8.4 What is the advantage of using technology in the internal control system?
A. Passwords can be used to allow access by employees.
B. Any cash received does not need to be reconciled because the computer tracks all
transactions.
C. Transactions are easily changed.
D. Employees cannot steal because all cash transactions are recorded by the computer/cash
register.
Solution
A
10. LO 8.4 Which of the following assets require the strongest of internal controls?
A. inventory
Page 2 of 33
,OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
B. credit cards
C. computer equipment
D. cash
Solution
D
11. LO 8.5 Which of the following is true about the Sarbanes-Oxley Act?
A. It was passed to ensure that internal controls are properly documented and tested by
public companies.
B. It applies to both public and smaller companies.
C. It requires all companies to report their internal control policies to the US Securities and
Exchange Commission.
D. It does not require additional costs or resources to have adequate controls.
Solution
A
12. LO 8.5 The external auditor of a company has certain requirements due to Sarbanes-Oxley.
Which of the following best describes these requirements?
A. The auditor is required to only report weaknesses in the internal control design of the
company he or she is auditing.
B. The auditor must issue an internal control report on the evaluation of internal controls
overseen by the Public Company Accounting Oversight Board
C. The auditor in charge can serve for a period of only two years.
D. The Public Company Accounting Oversight Board reviews reports submitted by the
auditors when no evaluations have been performed.
Solution
B
13. LO 8.5 Petty cash is used to ________.
A. write checks for frequent purchases
B. make small payments in cash
C. avoid having to retain receipts because the amounts are very small
D. pay for recurring purchases such as postage or office supplies
Solution
B
14. LO 8.5 A company has decided to start a petty cash fund for $150. Which of the following is
the correct journal entry?
A.
B.
C. No entry is required.
D.
Solution
Page 3 of 33
, OpenStax Principles of Accounting, Volume 1: Financial Accounting
Chapter 8: Fraud, Internal Controls, and Cash
A
15. LO 8.6 Which of the following items are found on a book side of the bank reconciliation?
A. beginning bank balance
B. outstanding checks
C. interest income
D. error made by bank
Solution
C
16. LO 8.6 Which of the following are found on the bank side of the bank reconciliation?
A. NSF check
B. interest income
C. wire transfer into client’s account
D. deposit in transit
Solution
D
17. LO 8.7 What would be a reason a company would want to understate income?
A. to help nudge its stock price higher
B. to lower its tax bill
C. to show an increase in overall profits
D. to increase investor confidence
Solution
B
18. LO 8.7 What would be a reason a company would want to overstate income?
A. to help nudge its stock price higher
B. to lower its tax bill
C. to show a decrease in overall profits
D. none of the above
Solution
A
19. LO 8.7 At what point does revenue recognition occur?
A. When the purchase order is received
B. When the seller receives the money for the job
C. When the seller has met “performance”
D. When the purchaser makes payment
Solution
C
Questions
1. LO 8.1 What is an example of perceived opportunity as one of the three elements causing a
person to commit fraud?
Solution
Examples include weak internal controls, improper or nonexistent management oversight, and
lack of an internal audit function or other opportunities that create the perception that the
fraudster will be successful in committing a fraudulent act.
Page 4 of 33
