Chapter 3—Ethics, Fraud, and Internal Control

TRUE/FALSE

1. The ethical principle of justice asserts that the benefits of the decision should be distributed fairly to
those who share the risks.

ANS: T

2. The ethical principle of informed consent suggests that the decision should be implemented so as to
minimize all of the risks and to avoid any unnecessary risks.

ANS: F

3. Employees should be made aware of the firm’s commitment to ethics.

ANS: T

4. Business ethics is the analysis of the nature and social impact of computer technology, and the
corresponding formulation and justification of policies for the ethical use of such technology.

ANS: F

5. Para computer ethics is the exposure to stories and reports found in the popular media regarding the
good or bad ramifications of computer technology.

ANS: F

6. Source code is an example of intellectual property.

ANS: T

7. Copyright laws and computer industry standards have been developed jointly and rarely conflict.

ANS: F

8. Business bankruptcy cases always involve fraudulent behavior.

ANS: F

9. Defalcation is another word for financial fraud.

ANS: T

10. The trend toward distributed data processing increases the exposure to fraud from remote locations.

ANS: T

11. The external auditor is responsible for establishing and maintaining the internal control system.

ANS: F
12. Segregation of duties is an example of an internal control procedure.

ANS: T

13. Controls in a computer-based information system are identical to controls in a manual system.

ANS: F

14. Preventive controls are passive techniques designed to reduce fraud.

ANS: T

15. Ethical issues and legal issues are essentially the same.

ANS: F

16. Internal control systems are recommended but not required of firms subject to the Foreign Corrupt
Practices Act.

ANS: F

17. Operations fraud is the misuse or theft of the firm’s computer resources.

ANS: T

18. The Foreign Corrupt Practices Act requires only that a firm keep good records.

ANS: F

19. A key modifying assumption in internal control is that the internal control system is the responsibility
of management.

ANS: T

20. Database management fraud includes altering, updating, and deleting an organization’s data.

ANS: F

21. While the Sarbanes-Oxley Act prohibits auditors from providing non-accounting services to their audit
clients, they are not prohibited from performing such services for non-audit clients or privately held
companies.

ANS: T

22. The Sarbanes-Oxley Act requires the audit committee to hire and oversee the external auditors.

ANS: T

23. Section 404 requires that corporate management (including the CEO) certify their organization’s
internal controls on a quarterly and annual basis.

ANS: F
 24. Section 302 requires the management of public companies to assess and formally report on the
effectiveness of their organization’s internal controls.

ANS: F

25. The objective of SAS 99 is to seamlessly blend the auditor’s consideration of fraud into all phases of
the audit process.

ANS: T

MULTIPLE CHOICE

1. Which ethical principle states that the benefit from a decision must outweigh the risks, and that there is
no alternative decision that provides the same or greater benefit with less risk?
a. minimize risk
b. justice
c. informed consent
d. proportionality
ANS: D

2. Individuals who acquire some level of skill and knowledge in the field of computer ethics are involved
in which level of computer ethics?
a. para computer ethics
b. pop computer ethics
c. theoretical computer ethics
d. practical computer ethics
ANS: A

3. All of the following are issues of computer security except

a. releasing incorrect data to authorized individuals
b. permitting computer operators unlimited access to the computer room
c. permitting access to data by unauthorized individuals
d. providing correct data to unauthorized individuals
ANS: B

4. Which characteristic is not associated with software as intellectual property?

a. uniqueness of the product
b. possibility of exact replication
c. automated monitoring to detect intruders
d. ease of dissemination
ANS: C

5. For an action to be called fraudulent, all of the following conditions are required except
a. poor judgment
b. false representation
c. intent to deceive
d. injury or loss
ANS: A

6. One characteristic of employee fraud is that the fraud

 a. is perpetrated at a level to which internal controls do not apply
b. involves misstating financial statements
c. involves the direct conversion of cash or other assets to the employee’s personal benefit
d. involves misappropriating assets in a series of complex transactions involving third parties
ANS: C

7. Forces which may permit fraud to occur do not include

a. a gambling addiction
b. lack of segregation of duties
c. centralized decision making environment
d. questionable integrity of employees
ANS: C

8. Which of the following best describes lapping?

a. applying cash receipts to a different customer’s account in an attempt to conceal previous
thefts of funds
b. inflating bank balances by transferring money among different bank accounts
c. expensing an asset that has been stolen
d. creating a false transaction
ANS: A

9. Operations fraud includes

a. altering program logic to cause the application to process data incorrectly
b. misusing the firm’s computer resources
c. destroying or corrupting a program’s logic using a computer virus
d. creating illegal programs that can access data files to alter, delete, or insert values
ANS: B

10. Who is responsible for establishing and maintaining the internal control system?
a. the internal auditor
b. the accountant
c. management
d. the external auditor
ANS: C

11. The concept of reasonable assurance suggests that

a. the cost of an internal control should be less than the benefit it provides
b. a well-designed system of internal controls will detect all fraudulent activity
c. the objectives achieved by an internal control system vary depending on the data
processing method
d. the effectiveness of internal controls is a function of the industry environment
ANS: A

12. Which of the following is not a limitation of the internal control system?
a. errors are made due to employee fatigue
b. fraud occurs because of collusion between two employees
c. the industry is inherently risky
d. management instructs the bookkeeper to make fraudulent journal entries
ANS: C
13. The most cost-effective type of internal control is
a. preventive control
b. accounting control
c. detective control
d. corrective control
ANS: A

14. Which of the following is a preventive control?

a. credit check before approving a sale on account
b. bank reconciliation
c. physical inventory count
d. comparing the accounts receivable subsidiary ledger to the control account
ANS: A

15. A well-designed purchase order is an example of a

a. preventive control
b. detective control
c. corrective control
d. none of the above
ANS: A

16. A physical inventory count is an example of a

a. preventive control
b. detective control
c. corrective control
d. feedforward control
ANS: B

17. The bank reconciliation uncovered a transposition error in the books. This is an example of a
a. preventive control
b. detective control
c. corrective control
d. none of the above
ANS: B

18. In balancing the risks and benefits that are part of every ethical decision, managers receive guidance
from each of the following except
a. justice
b. self interest
c. risk minimization
d. proportionality
ANS: B

19. Which of the following is not an element of the internal control environment?
a. management philosophy and operating style
b. organizational structure of the firm
c. well-designed documents and records
d. the functioning of the board of directors and the audit committee
 ANS: C

20. Which of the following suggests a weakness in the internal control environment?
a. the firm has an up-to-date organizational chart
b. monthly reports comparing actual performance to budget are distributed to managers
c. performance evaluations are prepared every three years
d. the audit committee meets quarterly with the external auditors
ANS: C

21. Which of the following indicates a strong internal control environment?

a. the internal audit group reports to the audit committee of the board of directors
b. there is no segregation of duties between organization functions
c. there are questions about the integrity of management
d. adverse business conditions exist in the industry
ANS: A

22. According to SAS 78, an effective accounting system performs all of the following except
a. identifies and records all valid financial transactions
b. records financial transactions in the appropriate accounting period
c. separates the duties of data entry and report generation
d. records all financial transactions promptly
ANS: C

23. Which of the following is the best reason to separate duties in a manual system?
a. to avoid collusion between the programmer and the computer operator
b. to ensure that supervision is not required
c. to prevent the record keeper from authorizing transactions
d. to enable the firm to function more efficiently
ANS: C

24. Segregation of duties in the computer-based information system includes

a. separating the programmer from the computer operator
b. preventing management override
c. separating the inventory process from the billing process
d. performing independent verifications by the computer operator
ANS: A

25. Which of the following is not an internal control procedure?

a. authorization
b. management’s operating style
c. independent verification
d. accounting records
ANS: B

26. The decision to extend credit beyond the normal credit limit is an example of
a. independent verification
b. authorization
c. segregation of functions
d. supervision
 ANS: B

27. When duties cannot be segregated, the most important internal control procedure is
a. supervision
b. independent verification
c. access controls
d. accounting records
ANS: A

28. An accounting system that maintains an adequate audit trail is implementing which internal control
procedure?
a. access controls
b. segregation of functions
c. independent verification
d. accounting records
ANS: D

29. Employee fraud involves three steps. Of the following, which is not involved?
a. concealing the crime to avoid detection
b. stealing something of value
c. misstating financial statements
d. converting the asset to a usable form
ANS: C

30. Which of the following is not an example of independent verification?

a. comparing fixed assets on hand to the accounting records
b. performing a bank reconciliation
c. comparing the accounts payable subsidiary ledger to the control account
d. permitting authorized users only to access the accounting system
ANS: D

31. The importance to the accounting profession of the Foreign Corrupt Practices Act of 1977 is that
a. bribery will be eliminated
b. management will not override the company’s internal controls
c. firms are required to have an effective internal control system
d. firms will not be exposed to lawsuits
ANS: C

32. The board of directors consists entirely of personal friends of the chief executive officer. This indicates
a weakness in
a. the accounting system
b. the control environment
c. control procedures
d. this is not a weakness
ANS: B

33. Computer fraud can take on many forms, including each of the following except
a. theft or illegal use of computer-readable information
b. theft, misuse, or misappropriation of computer equipment
c. theft, misuse, or misappropriation of assets by altering computer-readable records and files
 d. theft, misuse, or misappropriation of printer supplies
ANS: D

34. When certain customers made cash payments to reduce their accounts receivable, the bookkeeper
embezzled the cash and wrote off the accounts as uncollectible. Which control procedure would most
likely prevent this irregularity?
a. segregation of duties
b. accounting records
c. accounting system
d. access controls
ANS: A

35. The office manager forgot to record in the accounting records the daily bank deposit. Which control
procedure would most likely prevent or detect this error?
a. segregation of duties
b. independent verification
c. accounting records
d. supervision
ANS: B

36. Business ethics involves

a. how managers decide on what is right in conducting business
b. how managers achieve what they decide is right for the business
c. both a and b
d. none of the above
ANS: C

37. All of the following are conditions for fraud except

a. false representation
b. injury or loss
c. intent
d. material reliance
ANS: D

38. The four principal types of fraud include all of the following except
a. bribery
b. gratuities
c. conflict of interest
d. economic extortion
ANS: B

39. The characteristics of useful information include

a. summarization, relevance, timeliness, accuracy, and completeness
b. relevance, summarization, accuracy, timelessness, and completeness
c. timeliness, relevance, summarization, accuracy, and conciseness
d. disaggregation, relevance, timeliness, accuracy, and completeness
ANS: A

40. Internal control system have limitations. These include

 a. possibility of honest error
b. circumvention
c. management override
d. stability of systems
ANS: D

41. Management can expect various benefits to follow from implementing a system of strong internal
control. Which of the following benefits is least likely to occur?
a. reduced cost of an external audit.
b. prevents employee collusion to commit fraud.
c. availability of reliable data for decision-making purposes.
d. some assurance of compliance with the Foreign Corrupt Practices Act of 1977.
e. some assurance that important documents and records are protected.
ANS: B

42. Which of the following situations is not a segregation of duties violation?

a. The treasurer has the authority to sign checks but gives the signature block to the assistant
treasurer to run the check-signing machine.
b. The warehouse clerk, who has the custodial responsibility over inventory in the warehouse,
selects the vendor and authorizes purchases when inventories are low.
c. The sales manager has the responsibility to approve credit and the authority to write off
accounts.
d. The department time clerk is given the undistributed payroll checks to mail to absent
employees.
e. The accounting clerk who shares the record keeping responsibility for the accounts
receivable subsidiary ledger performs the monthly reconciliation of the subsidiary ledger
and the control account.
ANS: B

43. Which of the following is not an issue to be addressed in a business code of ethics required by the
SEC?
a. Conflicts of interest
b. Full and Fair Disclosures
c. Legal Compliance
d. Internal Reporting of Code Violations
e. All of the above are issues to be addressed
ANS: E

SHORT ANSWER

1. What are the main issues to be addressed in a business code of ethics required by the SEC?

ANS:
Conflicts of interest, Full and Fair Disclosures, Legal Compliance, Internal Reporting of Code
Violations, Accountability

2. List the four broad objectives of the internal control system.

ANS:
safeguard assets,
Chapter 4—The Revenue Cycle

TRUE/FALSE

1. The packing slip is also known as the shipping notice.

ANS: F

2. The bill of lading is a legal contract between the buyer and the seller.

ANS: F

3. Another name for the stock release form is the picking ticket.

ANS: T

4. Warehouse stock records are the formal accounting records for inventory.

ANS: F

5. The purpose of the invoice is to bill the customer.

ANS: T

6. In most large organizations, the journal voucher file has replaced the formal general journal.

ANS: T

7. The cash receipts journal is a special journal.

ANS: T

8. In the revenue cycle, the internal control “limit access” applies to physical assets only.

ANS: F

9. In real-time processing systems, routine credit authorizations are automated.

ANS: T

10. In a computerized accounting system, segregation of functions refers to inventory control, accounts
receivable, billing, and general ledger tasks.

ANS: F

11. A written customer purchase order is required to trigger the sales order system.

ANS: F

12. Inventory control has physical custody of inventory.

ANS: F
 13. The principal source document in the sales order system is the sales order.

ANS: T

14. Sales orders should be prenumbered documents.

ANS: T

15. Integrated accounting systems automatically transfer data between modules.

ANS: T

16. If a customer submits a written purchase order, there is no need to prepare a sales order.

ANS: F

17. Sales return involves receiving, sales, credit, and billing departments, but not accounts receivable.

ANS: F

18. A remittance advice is a form of turn-around document.

ANS: T

19. A bill of lading is a request for payment for shipping charges.

ANS: F

20. In point of sale systems, authorization takes the form of validation of credit card charges.

ANS: T

MULTIPLE CHOICE

1. The revenue cycle consists of

a. one subsystem–order entry
b. two subsystems–sales order processing and cash receipts
c. two subsystems–order entry and inventory control
d. three subsystems–sales order processing, credit authorization, and cash receipts
ANS: B

2. The reconciliation that occurs in the shipping department is intended to ensure that
a. credit has been approved
b. the customer is billed for the exact quantity shipped
c. the goods shipped match the goods ordered
d. inventory records are reduced for the goods shipped
ANS: C

3. The adjustment to accounting records to reflect the decrease in inventory due to a sale occurs in the
a. warehouse
b. shipping department
 c. billing department
d. inventory control department
ANS: D

4. Which document triggers the revenue cycle?

a. the sales order
b. the customer purchase order
c. the sales invoice
d. the journal voucher
ANS: B

5. Copies of the sales order can be used for all of the following except
a. purchase order
b. credit authorization
c. shipping notice
d. packing slip
ANS: A

6. The purpose of the sales invoice is to

a. record reduction of inventory
b. transfer goods from seller to shipper
c. bill the customer
d. select items from inventory for shipment
ANS: C

7. The customer open order file is used to

a. respond to customer queries
b. fill the customer order
c. ship the customer order
d. authorize customer credit
ANS: A

8. The stock release copy of the sales order is not used to

a. locate and pick the items from the warehouse shelves
b. record any out-of-stock items
c. authorize the warehouse clerk to release custody of the inventory to shipping
d. record the reduction of inventory
ANS: D

9. The shipping notice

a. is mailed to the customer
b. is a formal contract between the seller and the shipping company
c. is always prepared by the shipping clerk
d. informs the billing department of the quantities shipped
ANS: D

10. The billing department is not responsible for

a. updating the inventory subsidiary records
b. recording the sale in the sales journal
 c. notifying accounts receivable of the sale
d. sending the invoice to the customer
ANS: A

11. Customers should be billed for backorders when

a. the customer purchase order is received
b. the backordered goods are shipped
c. the original goods are shipped
d. customers are not billed for backorders because a backorder is a lost sale
ANS: B

12. Usually specific authorization is required for all of the following except
a. sales on account which exceed the credit limit
b. sales of goods at the list price
c. a cash refund for goods returned without a receipt
d. write off of an uncollectible account receivable
ANS: B

13. Which of following functions should be segregated?

a. opening the mail and making the journal entry to record cash receipts
b. authorizing credit and determining reorder quantities
c. maintaining the subsidiary ledgers and handling customer queries
d. providing information on inventory levels and reconciling the bank statement
ANS: A

14. Which situation indicates a weak internal control structure?

a. the mailroom clerk authorizes credit memos
b. the record keeping clerk maintains both accounts receivable and accounts payable
subsidiary ledgers
c. the warehouse clerk obtains a signature before releasing goods for shipment
d. the accounts receivable clerk prepares customer statements every month
ANS: A

15. The most effective internal control procedure to prevent or detect the creation of fictitious credit
memoranda for sales returns is to
a. supervise the accounts receivable department
b. limit access to credit memoranda
c. prenumber and sequence check all credit memoranda
d. require management approval for all credit memoranda
ANS: D

16. The accounts receivable clerk destroys all invoices for sales made to members of her family and does
not record the sale in the accounts receivable subsidiary ledger. Which procedure will not detect this
fraud?
a. prenumber and sequence check all invoices
b. reconcile the accounts receivable control to the accounts receivable subsidiary ledger
c. prepare monthly customer statements
d. reconcile total sales on account to the debits in the accounts receivable subsidiary ledger
ANS: C
17. Which department is least likely to be involved in the revenue cycle?
a. credit
b. accounts payable
c. billing
d. shipping
ANS: B

18. Which document is included with a shipment sent to a customer?

a. sales invoice
b. stock release form
c. packing slip
d. shipping notice
ANS: C

19. Good internal controls in the revenue cycle should ensure all of the following except
a. all sales are profitable
b. all sales are recorded
c. credit is authorized
d. inventory to be shipped is not stolen
ANS: A

20. Which control does not help to ensure that accurate records are kept of customer accounts and
inventory?
a. reconcile accounts receivable control to accounts receivable subsidiary
b. authorize credit
c. segregate custody of inventory from record keeping
d. segregate record keeping duties of general ledger from accounts receivable
ANS: B

21. Internal controls for handling sales returns and allowances do not include
a. computing bad debt expense using the percentage of credit sales
b. verifying that the goods have been returned
c. authorizing the credit memo by management
d. using the original sales invoice to prepare the sales returns slip
ANS: A

22. The printer ran out of preprinted sales invoice forms and several sales invoices were not printed. The
best internal control to detect this error is
a. a batch total of sales invoices to be prepared compared to the actual number of sales
invoices prepared
b. sequentially numbered sales invoices
c. visual verification that all sales invoices were prepared
d. none of the above will detect this error
ANS: A

23. Which department prepares the bill of lading?

a. sales
b. warehouse
c. shipping
 d. credit
ANS: C

24. A remittance advice is

a. used to increase (debit) an account receivable by the cash received
b. is a turn-around document
c. is retained by the customer to show proof of payment
d. none of the above
ANS: B

25. A weekly reconciliation of cash receipts would include comparing

a. the cash prelist with bank deposit slips
b. the cash prelist with remittance advices
c. bank deposit slips with remittance advices
d. journal vouchers from accounts receivable and general ledger
ANS: A

26. At which point is supervision most critical in the cash receipts system?
a. accounts receivable
b. general ledger
c. mail room
d. cash receipts
ANS: C

27. EDI trading partner agreements specify all of the following except
a. selling price
b. quantities to be sold
c. payment terms
d. person to authorize transactions
ANS: D

28. A cash prelist is

a. a document that records sales returns and allowances
b. a document returned by customers with their payments
c. the source of information used to prepare monthly statements
d. none of the above
ANS: D

29. An advantage of real-time processing of sales is

a. the cash cycle is lengthened
b. current inventory information is available
c. hard copy documents provide a permanent record of the transaction
d. data entry errors are corrected at the end of each batch
ANS: B

30. Commercial accounting systems have fully integrated modules. The word “integrated” means that
a. segregation of duties is not possible
b. transfer of information among modules occurs automatically
c. batch processing is not an option
 d. separate entries are made in the general ledger accounts and the subsidiary ledgers
ANS: B

31. The data processing method that can shorten the cash cycle is
a. batch, sequential file processing
b. batch, direct access file processing
c. real-time file processing
d. none of the above
ANS: C

32. Which of the following is not a risk exposure in a microcomputer accounting system?
a. reliance on paper documentation is increased
b. functions that are segregated in a manual environment may be combined in a
microcomputer accounting system
c. backup procedures require human intervention
d. data are easily accessible
ANS: A

33. Which journal is not used in the revenue cycle?

a. cash receipts journal
b. sales journal
c. purchases journal
d. general journal
ANS: C

34. Periodically, the general ledger department receives all of the following except
a. total increases to accounts receivable
b. total of all sales backorders
c. total of all sales
d. total decreases in inventory
ANS: B

35. The credit department

a. prepares credit memos when goods are returned
b. approves credits to accounts receivable when payments are received
c. authorizes the granting of credit to customers
d. none of the above
ANS: C

36. Adjustments to accounts receivable for payments received from customers is based upon
a. the customer’s check
b. the cash prelist
c. the remittance advice that accompanies payment
d. a memo prepared in the mailroom
ANS: C

37. The revenue cycle utilizes all of the following files except
a. credit memo file
b. sales history file
 c. shipping report file
d. cost data reference file
ANS: D

38. All of the following are advantages of real-time processing of sales except
a. The cash cycle is shortened
b. Paper work is reduced
c. Incorrect data entry is difficult to detect
d. Up-to-date information can provide a competitive advantage in the marketplace
ANS: C

SHORT ANSWER

1. Distinguish between a packing slip, shipping notice, and a bill of lading.

ANS:
The packing slip travels with the goods to the customer, and it describes the contents on the order.
Upon filling the order, the shipping department sends the shipping notice to the billing department to
notify them that the order has been filled and shipped. The shipping notice contains additional
information that the packing slip may not contain, such as shipment date, carrier and freight charges.
The bill of lading is a formal contract between the seller and the transportation carrier; it shows legal
ownership and responsibility for assets in transit.

2. State two specific functions or jobs that should be segregated in the sales processing system.

ANS:
sales order processing and credit approval; inventory control (record keeping) from warehouse
(custody); and general ledger from accounts receivable subsidiary ledger

3. State two specific functions or jobs that should be segregated in the cash receipts system.

ANS:
cash receipts (custody) from accounts receivable (record keeping); and general ledger from accounts
receivable subsidiary ledger
mail room (receiving cash) and accounts receivable subsidiary ledger

4. List two points in the sales processing system when authorization is required.

ANS:
credit check, sales returns policy, preparation of cash prelist

5. For the revenue cycle, state two specific independent verifications that should be performed.

ANS:
shipping verifies that the goods sent from the warehouse are correct in type and quantity;
billing reconciles the shipping notice with the sales order to ensure that customers are billed only for
the quantities shipped;
general ledger reconciles journal vouchers submitted by the billing department (sales journal),
inventory control (inventory subsidiary ledger), and cash receipts (cash receipts journal)
treasurer determines that all cash received got to the bank

6. What task can the accounts receivable department engage in to verify that all checks sent by
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Hall 5e TB Ch05

Accounting Information System (University of the East (Philippines))

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Chapter 5—The Expenditure Cycle Part I: Purchases and Cash Disbursements

Procedures

TRUE/FALSE

1. Purchasing decisions are authorized by inventory control.

ANS: T

2. The blind copy of the purchase order that goes to the receiving department contains no item
descriptions.

ANS: F

3. Firms that wish to improve control over cash disbursements use a voucher system.

ANS: T

4. In a voucher system, the sum of all unpaid vouchers in the voucher register equals the firm’s total
voucher payable balance.

ANS: T

5. The accounts payable department reconciles the accounts payable subsidiary ledger to the control
account.

ANS: F

6. The use of inventory reorder points suggests the need to obtain specific authorization.

ANS: F

7. Proper segregation of duties requires that the responsibility approving a payment be separated from
posting to the cash disbursements journal.

ANS: T

8. A major risk exposure in the expenditure cycle is that accounts payable may be overstated at the end of
the accounting year.

ANS: F

9. When a trading partner agreement is in place, the traditional three way match may be eliminated.

ANS: T

10. Authorization of purchases in a merchandising firm occurs in the inventory control department.

ANS: T

11. A three way match involves a purchase order, a purchase requisition, and an invoice.

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ANS: F

12. Authorization for a cash disbursement occurs in the cash disbursement department upon receipt of the
supplier’s invoice.

ANS: F

13. An automated cash disbursements system can yield better cash management since payments are made
on time.

ANS: T

14. Permitting warehouse staff to maintain the only inventory records violates separation of duties.

ANS: T

15. A purchasing system that employs electronic data interchange does not use a purchase order.

ANS: F

16. Inventory control should be located in the warehouse.

ANS: F

17. Inspection of shipments in the receiving department would be improved if the documentation showed
the value of the inventory.

ANS: F

18. One reason for authorizing purchases is to enable efficient inventory management.

ANS: T

19. If accounts payable receives an invoice directly from the supplier it needs to be reconciled with the
purchase order and receiving report.

ANS: T

20. Supervision in receiving is intended to reduce the theft of assets.

ANS: T

MULTIPLE CHOICE

1. The purpose of the purchase requisition is to

a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. bill for goods delivered
ANS: C

2. The purpose of the receiving report is to

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a. order goods from vendors

b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. bill for goods delivered
ANS: B

3. All of the following departments have a copy of the purchase order except
a. the purchasing department
b. the receiving department
c. accounts payable
d. general ledger
ANS: D

4. The purpose of the purchase order is to

a. order goods from vendors
b. record receipt of goods from vendors
c. authorize the purchasing department to order goods
d. approve payment for goods received
ANS: A

5. The open purchase order file in the purchasing department is used to determine
a. the quality of items a vendor ships
b. the best vendor for a specific item
c. the orders that have not been received
d. the quantity of items received
ANS: C

6. The purchase order

a. is the source document to make an entry into the accounting records
b. indicates item description, quantity, and price
c. is prepared by the inventory control department
d. is approved by the end-user department
ANS: B

7. The reason that a blind copy of the purchase order is sent to receiving is to
a. inform receiving when a shipment is due
b. force a count of the items delivered
c. inform receiving of the type, quantity, and price of items to be delivered
d. require that the goods delivered are inspected
ANS: B

8. The receiving report is used to

a. accompany physical inventories to the storeroom or warehouse
b. advise the purchasing department of the dollar value of the goods delivered
c. advise general ledger of the accounting entry to be made
d. advise the vendor that the goods arrived safely
ANS: A

9. When a copy of the receiving report arrives in the purchasing department, it is used to

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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
ANS: D

10. The financial value of a purchase is determined by reviewing the

a. packing slip
b. purchase requisition
c. receiving report
d. supplier’s invoice
ANS: D

11. Which document is least important in determining the financial value of a purchase?
a. purchase requisition
b. purchase order
c. receiving report
d. supplier’s invoice
ANS: A

12. In a merchandising firm, authorization for the payment of inventory is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements
ANS: C

13. In a merchandising firm, authorization for the purchase of inventory is the responsibility of
a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements
ANS: A

14. When purchasing inventory, which document usually triggers the recording of a liability?
a. purchase requisition
b. purchase order
c. receiving report
d. supplier’s invoice
ANS: D

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
ANS: A

16. Usually the open voucher payable file is organized by

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a. vendor
b. payment due date
c. purchase order number
d. transaction date
ANS: B

17. Which of the following statements is not correct?

a. the voucher system is used to improve control over cash disbursements
b. the sum of the paid vouchers represents the voucher payable liability of the firm
c. the voucher system permits the firm to consolidate payments of several invoices on one
voucher
d. many firms replace accounts payable with a voucher payable system
ANS: B

18. In the expenditure cycle, general ledger does not

a. post the journal voucher from the accounts payable department
b. post the account summary from inventory control
c. post the journal voucher from the purchasing department
d. reconcile the inventory control account with the inventory subsidiary summary
ANS: C

19. The documents in a voucher packet include all of the following except
a. a check
b. a purchase order
c. a receiving report
d. a supplier’s invoice
ANS: A

20. To maintain a good credit rating and to optimize cash management, cash disbursements should arrive
at the vendor’s place of business
a. as soon as possible
b. on the due date
c. on the discount date
d. by the end of the month
ANS: C

21. The cash disbursement clerk performs all of the following tasks except
a. reviews the supporting documents for completeness and accuracy
b. prepares checks
c. signs checks
d. marks the supporting documents paid
ANS: C

22. When a cash disbursement in payment of an accounts payable is recorded

a. the liability account is increased
b. the income statement is changed
c. the cash account is unchanged
d. the liability account is decreased
ANS: D

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23. Authorization for payment of an accounts payable liability is the responsibility of

a. inventory control
b. purchasing
c. accounts payable
d. cash disbursements
ANS: C

24. Of the following duties, it is most important to separate

a. warehouse from stores
b. warehouse from inventory control
c. accounts payable and accounts receivable
d. purchasing and accounts receivable
ANS: B

25. In a firm with proper segregation of duties, adequate supervision is most critical in
a. purchasing
b. receiving
c. accounts payable
d. general ledger
ANS: B

26. The receiving department is not responsible to

a. inspect shipments received
b. count items received from vendors
c. order goods from vendors
d. safeguard goods until they are transferred to the warehouse
ANS: C

27. The major risk exposures associated with the receiving department include all of the following except
a. goods are accepted without a physical count
b. there is no inspection for goods damaged in shipment
c. inventories are not secured on the receiving dock
d. the audit trail is destroyed
ANS: D

28. When searching for unrecorded liabilities at the end of an accounting period, the accountant would
search all of the files except
a. the purchase requisition file
b. the cash receipts file
c. the purchase order file
d. the receiving report file
ANS: B

29. In regards to the accounts payable department, which statement is not true?
a. the purchase requisition shows that the transaction was authorized
b. the purchase order proves that the purchase was required
c. the receiving report provides evidence of the physical receipt of the goods
d. the supplier’s invoice indicates the financial value of the transaction

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ANS: B

30. In a computerized system that uses an economic order quantity (EOQ) model and the perpetual
inventory method, who determines when to reorder inventory?
a. the inventory control clerk
b. the purchasing department
c. the vendor
d. the computer system
ANS: D

31. Firms can expect that proper use of a valid vendor file will result in all of the following benefits except
a. purchasing agents will be discouraged from improperly ordering inventory from related
parties
b. purchases from fictitious vendors will be detected
c. the most competitive price will be obtained
d. the risk of purchasing agents receiving kickbacks and bribes will be reduced
ANS: C

32. In a real-time processing system with a high number of transactions, the best and most practical
control over cash disbursements is to have
a. all checks manually signed by the treasurer
b. all checks signed by check-signing equipment
c. checks over a certain dollar amount manually signed by the treasurer
d. checks over a certain dollar amount manually signed by the cash disbursements clerk
ANS: C

33. The document which will close the open purchase requisition file is the
a. purchase order
b. vendor invoice
c. receiving report
d. none of the above
ANS: C

34. Goods received are inspected and counted to

a. determine that the goods are in good condition
b. determine the quantity of goods received
c. preclude payment for goods not received or received in poor condition
d. all of the above
ANS: D

35. If a company uses a standard cost system, inventory records can be updated from the
a. vendor invoice
b. purchase order
c. receiving report
d. purchase requisition
ANS: C

36. If a company uses an actual cost system, inventory records can first be updated from the
a. vendor invoice
b. purchase order

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c. receiving report
d. purchase requisition
ANS: A

37. Copies of a purchase order are sent to all of the following except
a. inventory control
b. receiving
c. general ledger
d. accounts payable
ANS: C

38. The receiving report

a. is used to update the actual cost inventory ledger
b. accompanies the goods to the storeroom
c. is sent to general ledger
d. is returned to the vendor to acknowledge receipt of the goods
ANS: B

39. A supplier invoice

a. is included with the goods
b. shows what was ordered even if all was not shipped
c. is sent by vendor to accounts payable
d. none of the above
ANS: C

40. The cash disbursement function is

a. part of accounts payable
b. an independent accounting function
c. a treasury function
d. part of the general ledger department
ANS: C

SHORT ANSWER

1. Which internally generated document should be compared to the supplier’s invoice to verify the price
of an item?

ANS:
purchase order

2. Which internally generated document should be compared to the supplier’s invoice to verify the
quantity being billed for?

ANS:
receiving report

3. List specific jobs that should be segregated in the purchases processing system.

ANS:
inventory control from warehouse, general ledger from accounts payable subsidiary ledger

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Chapter 6—The Expenditure Cycle Part II: Payroll Processing and Fixed Asset
Procedures

TRUE/FALSE

1. Time cards are used by cost accounting to allocate direct labor charges to work in process.

ANS: F

2. The personnel department authorizes changes in employee pay rates.

ANS: T

3. Most payroll systems for mid-size firms use real-time data processing.

ANS: F

4. To improve internal control, paychecks should be distributed by the employee's supervisor.

ANS: F

5. Employee paychecks should be drawn against a special checking account.

ANS: T

6. Because a time clock is used, no supervision is required when employees enter and leave the work
place.

ANS: F

7. Inventory control performs the formal record keeping function for fixed assets.

ANS: F

8. The depreciation schedule shows when assets are fully depreciated.

ANS: T

9. Authorization to dispose of fixed assets should be issued by the user of the asset.

ANS: F

10. Work-in-process records are updated by payroll personnel.

ANS: F

11. Ideally, payroll checks are written on a special bank account used only for payroll.

ANS: T

12. The supervisor is the best person to determine the existence of a “phantom employee” and should
distribute paychecks.
 ANS: F

13. Payroll processing can be automated easily because accounting for payroll is very simple.

ANS: F

14. Timekeeping is part of the personnel function.

ANS: F

15. Fixed asset accounting systems include cost allocation and matching procedures that are not part of
routine expenditure systems.

ANS: T

16. Asset maintenance involves only the recording of depreciation charges. Physical improvements are
always expensed.

ANS: F

17. Fixed Asset Systems must keep track of the physical location of each asset to promote accountability.

ANS: T

18. Time cards capture the total time an individual worker spends on each production job.

ANS: F

19. Accounting conventions and IRS rules sometime specify the depreciation parameters to be used.

ANS: T

20. The fixed asset disposal report authorizes the user department to dispose of a fixed asset.

ANS: F

MULTIPLE CHOICE

1. The document that captures the total amount of time that individual workers spend on each production
job is called a
a. time card
b. job ticket
c. personnel action form
d. labor distribution form
ANS: B

2. An important reconciliation in the payroll system is

a. general ledger compares the labor distribution summary from cost accounting to the
disbursement voucher from accounts payable
b. personnel compares the number of employees authorized to receive a paycheck to the
number of paychecks prepared
 c. production compares the number of hours reported on job tickets to the number of hours
reported on time cards
d. payroll compares the labor distribution summary to the hours reported on time cards
ANS: A

3. Which internal control is not an important part of the payroll system?

a. Supervisors verify the accuracy of employee time cards.
b. Paychecks are distributed by an independent paymaster.
c. Accounts payable verifies the accuracy of the payroll register before transferring payroll
funds to the general checking accounting.
d. General ledger reconciles the labor distribution summary and the payroll disbursement
voucher.
ANS: C

4. Which transaction is not processed in the Fixed Asset System?

a. purchase of building
b. improvement of equipment
c. purchase of raw materials
d. sale of company van
ANS: C

5. Depreciation
a. is calculated by the department that uses the fixed asset
b. allocates the cost of the asset over its useful life
c. is recorded weekly
d. results in book value approximating fair market value
ANS: B

6. Depreciation records include all of the following information about fixed assets except
a. the economic benefit of purchasing the asset
b. the cost of the asset
c. the depreciation method being used
d. the location of the asset
ANS: A

7. Which control is not a part of the Fixed Asset System?

a. formal analysis of the purchase request
b. review of the assumptions used in the capital budgeting model
c. development of an economic order quantity model
d. estimates of anticipated cost savings
ANS: C

8. Objectives of the Fixed Asset System do not include

a. authorizing the acquisition of fixed assets
b. recording depreciation expense
c. computing gain and/or loss on disposal of fixed assets
d. maintaining a record of the fair market value of all fixed assets
ANS: D
 9. Which of the following is not a characteristic of the Fixed Asset System?
a. Acquisitions are routine transactions requiring general authorization.
b. Retirements are reported on an authorized disposal report form.
c. Acquisition cost is allocated over the expected life of the asset.
d. Transfer of fixed assets among departments is recorded in the fixed asset subsidiary ledger.
ANS: A

10. In the payroll subsystem, which function should distribute paychecks?

a. personnel
b. timekeeping
c. paymaster
d. payroll
ANS: C

11. Where does the responsibility lie for reconciling the labor distribution summary and the payroll
disbursement voucher?
a. cash disbursements
b. cost accounting
c. personnel
d. general ledger
ANS: D

12. Which of the following statements is not true?

a. Routine payroll processing begins with the submission of time cards.
b. Payroll clerks must verify the hours reported on the time cards.
c. Payroll reconciles personnel action forms with time cards and prepares paychecks.
d. Cash disbursements signs paychecks and forwards them to the paymaster for distribution.
ANS: B

13. In a manufacturing firm, employees use time cards and job tickets. Which of the following statements
is not correct?
a. Job tickets are prepared by employees for each job worked on, so an employee may have
more that one job ticket on a given day.
b. An individual employee will have only one time card.
c. The time reported on job tickets should reconcile with the time reported on time cards.
d. Paychecks should be prepared from the job tickets.
ANS: D

14. Which department is responsible for approving changes in pay rates for employees?
a. payroll
b. treasurer
c. personnel
d. cash disbursements
ANS: C

15. Which of the following situations represents a serious control weakness?

a. Timekeeping is independent of the payroll department.
b. Paychecks are distributed by the employees immediate supervisor.
c. Time cards are reconciled with job tickets.
d. Personnel is responsible for updating employee records, including creation of records for
 new hires.
ANS: B

16. Why would an organization require the paymaster to deliver all unclaimed paychecks to the internal
audit department?
a. to detect a “phantom employee” for whom a check was produced
b. to prevent an absent employee’s check from being lost
c. to avoid paying absent employees for payday
d. to prevent the paymaster from cashing unclaimed checks
ANS: A

17. Which of the following is not a reasonable control for fixed assets?
a. Proper authorization is required for acquisition and disposal of fixed assets.
b. Fixed asset records show the location of each asset.
c. Fully depreciated assets are immediately disposed of.
d. Depreciation policies are in writing.
ANS: C

18. Cost accounting updates work-in-process accounts from

a. time cards
b. the labor distribution summary
c. job tickets
d. personnel action forms
ANS: C

19. Payroll uses time card data to do all of the following except
a. prepare the payroll register
b. update employee payroll records
c. prepare the labor distribution summary
d. prepare paychecks
ANS: C

20. Payroll checks are typically drawn on

a. the regular checking account
b. a payroll imprest account
c. a wages payable account
d. petty cash
ANS: B

21. The personnel action form provides authorization control by

a. preventing paychecks for terminated employees
b. verifying pay rates for employees
c. informing payroll of new hires
d. all of the above
ANS: D

22. Accounting records that provide the audit trail for payroll include all of the following except
a. time cards
b. job tickets
 c. payroll register
d. accounts payable register
ANS: D

23. Personnel actions forms are used to do all of the following except
a. activate new employees
b. terminate employees
c. record hours worked
d. change pay rates
ANS: C

24. The payroll department performs all of the following except

a. prepares the payroll register
b. distributes paychecks
c. updates employee payroll records
d. prepares paychecks
ANS: B

25. The document that records the total amount of time spent on a production job is the
a. time card
b. job ticket
c. labor distribution summary
d. personnel action form
ANS: C

26. A control technique that can reduce the risk of a terminated employee being paid is
a. a security camera viewing the time clock
b. the supervisor taking role during the shift
c. paychecks being distributed by an independent paymaster
d. reconciliation of time cards and job tickets
ANS: C

27. Accounts payable

a. signs paychecks
b. prepares the payroll voucher
c. reconciles time cards and employee records
d. distributes paychecks to employees
ANS: B

28. All of the following are processed by the Fixed Asset System except
a. sale of unneeded equipment
b. purchase of raw materials
c. repair of production equipment
d. purchase of a new plant
ANS: B

29. The Fixed Asset System performs all of the following except
a. determines the need for new assets
b. maintains depreciation records
 c. records retirement and disposal of assets
d. tracks the physical location of fixed assets
ANS: A

30. The payroll department performs all of the following except

a. prepares paychecks
b. transfers adequate funds to the payroll imprest account
c. updates employee payroll records
d. prepares the payroll register
ANS: B

31. Depreciation
a. assures that assets are reported at fair market value
b. is discretionary for many firms
c. allocates the cost of an asset over its useful life
d. is the responsibility of the department using the asset
ANS: C

32. The Fixed Asset System is similar to the expenditure cycle except
a. fixed asset transactions are non-routine and require special authorization and controls
b. fixed assets are capitalized, not expensed
c. both a and b
d. none of the above
ANS: C

33. Asset maintenance involves

a. the recording of periodic depreciation
b. adjusting the asset records to reflect the cost of physical improvements
c. keeping track of the physical location of the assets
d. all of the above
ANS: D

34. The Fixed Asset Systems does all of the following except
a. records acquisition of assets
b. records improvements to assets
c. estimates the fair market value of assets in service
d. records the disposal of assets
ANS: C

35. Asset disposal

a. occurs as soon as an asset is fully depreciated
b. requires no special authorization
c. automatically initiates the purchase of a replacement asset
d. must follow formal authorization procedures
ANS: D

SHORT ANSWER