Chapter 3—Ethics, Fraud, and Internal Control

TRUE/FALSE

1. The ethical principle ofjustice 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 te 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?

11. 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. e rm as an up-to - ate organizat nal c art
b. o hly eports comp ring actual p form nce 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 certa n cust o me rsm a de cash paymentsto r ce their accounts rece vable the ookkeep er
embezzle d h e c a sha nd wrote off the accou nts as ollectible Which con rol proced r e 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,
ensure the accuracy and reliability of accounting records,
promote organizational efficiency,
comply with management’s policies and procedures

3. Explain the purpose of the PCAOB

ANS:
The PCAOB is empowered to set auditing, quality control, and ethics standards; to inspect registered accounting
firms; to conduct investigations; and to take disciplinary actions.

4. What are the five internal control components described in the SAS 78 / COSO framework

ANS:
the control environment, risk assessment, information and communication, monitoring, and control activities

5. What are management responsibilities under section 302 and 404?

ANS:
Section 302 requires that corporate management (including the CEO) certify their organization’s
internal controls on a quarterly and annual basis. Section 404 requires the management of public
companies to assess and formally report on the effectiveness of their organization’s internal controls.

6. Identify to indicate whether each procedure is a preventive or detective control.

a. authorizing a credit sale Preventive Detective

b. preparing a bank reconciliation Preventive Detective
c. locking the warehouse Preventive Detective
d. preparing a trial balance Preventive Detective
e. counting inventory Preventive Detective

ANS:
A. preventive; B. detective; C. preventive; D. detective; E. detective

Use the internal control procedures listed below to complete the statements.

segregation of duties specific authorization

general authorization accounting records
access controls independent verification
supervision

7. A clerk reorders 250 items when the inventory falls below 25 items. This is an example of
.

ANS:
general authorization

8. The internal audit department recalculates payroll for several employees each pay period. This is an example of
 ANS:
independent verification

9. Locking petty cash in a safe is an example of .

ANS:
access controls

10. Approving a price reduction because goods are damaged is an example of

.

ANS:
specific authorization

11. Using cameras to monitor the activities of cashiers is an example of .

ANS:
supervision

12. Not permitting the computer programmer to enter the computer room is an example of
.

ANS:
segregation of duties

13. Sequentially numbering all sales invoices is an example of .

ANS:
accounting records

14. What are the five conditions necessary for an act to be considered fraudulent?

ANS:
false representation, material fact, intent, justifiable reliance, and injury or loss

15. What is the objective of SAS 99?

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

16. Distinguish between exposure and risk.

ANS:
Exposure is the absence or weakness of a control which increases the firm’s risk of financial loss or injury. Risk
is the probability of incurring such a loss or injury.

17. Explain the characteristics of management fraud.

ANS:
Management fraud typically occurs at levels above where the internal control system is effective.
Financial statements are frequently modified to make the firm appear more healthy than it actually is. If any
misappropriation of assets occurs, it is usually well hidden.
18. The text discusses many questions about personal traits of employees which might help uncover fraudulent
activity. What are three?

ANS:
executives: with high personal debt, living beyond their means, engaged in habitual gambling, appear to abuse
alcohol or drugs, appear to lack personal codes of ethics, appear to be unstable

19. Give two examples of employee fraud and explain how the theft might occur.

ANS:
Charges to expense accounts: Cash could be stolen and charged to a miscellaneous expense account. Once
the account is closed, detection would be more difficult.

Lapping: This involves converting cash receipts to personal use. If a customer’s check is taken, his/her balance
will not reflect a payment and will be detected when a statement is sent. In order to conceal
this fraud, a later payment is used to cover the stolen check. This is in effect a small scale Ponzi scheme.

20. What are the six broad classes of physical control activities defined by SAS 78?

ANS:
Transaction authorization, segregation of duties, supervision, access controls, accounting records,
independent verification

ESSAY

1. The text describes six internal control activities. List four of them and provide a specific example of each one.

ANS:
Control Activity Example
Authorization general (purchase of inventory when level drops) or specific
(credit approval beyond normal limit)
Segregation of functions separate authorization from processing separate custody of
assets from record keeping
Supervision required when separation of duties is not possible, such as
opening the mail (cash receipts)
Accounting records maintain an adequate audit trail
Access controls maintain physical security
Independent verification bank reconciliation, physical inventory count
AIS CHAPTER 4
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

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

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

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

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

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

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

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

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

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

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

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

Which department is least likely to be involved in the revenue cycle?

a. credit
b. accounts payable
c. billing
d. shipping

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

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

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

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

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

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
Which department prepares the bill of lading?
a. sales
b. warehouse
c. shipping
d. credit

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

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

At which point is supervision most critical in the cash receipts system?

a. accounts receivable
b. general ledger
c. mail room
d. cash receipts

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

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

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

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

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

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

Which journal is not used in the revenue cycle?

a. cash receipts journal
b. sales journal
c. purchases journal
d. general journal

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

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

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

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

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

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

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

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

Which document triggers the revenue cycle?

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

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

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

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

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

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

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

Customers should be billed for backorders when

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

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

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

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

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

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

Which department is least likely to be involved in the revenue cycle?

a. credit
b. accounts payable
c. billing
d. shipping

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

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

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

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

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

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

Which department prepares the bill of lading?

a. sales
b. warehouse
c. shipping
d. credit
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

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

At which point is supervision most critical in the cash receipts system?

a. accounts receivable
b. general ledger
c. mail room
d. cash receipts

EDI trading partner agreements specify all of the following except

a. selling price
b. quantities to be sold
c. c. payment terms
d. person to authorize transactions

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

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

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

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

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

Which journal is not used in the revenue cycle?

a. cash receipts journal
b. sales journal
c. purchases journal
d. general journal
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

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

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

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

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

AIS CHAPTER 5
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

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

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

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

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

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

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

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
b. purchase requisition
c. receiving report
d. supplier's invoice

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

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

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

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

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
b. payment due date
c. purchase order number
d. transaction date

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

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

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

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

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

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

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

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

4. 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

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

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
c. order goods from vendors
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

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

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

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

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

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

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

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

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

6. If a company uses an actual cost system, inventory records can first be updated from the
a. vendor invoice
b. purchase order
c. receiving report
d. purchase requisition
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

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

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

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

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

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

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

Which document triggers the revenue cycle?

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