Chapter 8--Sarbanes-Oxley, Internal Control, and Cash
Student: ___________________________________________________________________________
1. The Sarbanes-Oxley Act of 2002 was passed by Congress due to the public outcry after the financial scandals
of the early 2000s.
True False

2. Sarbanes-Oxley’s purpose is to improve financial reporting.
True False

3. There are two internal control objectives and they are to ensure accurate financial reports, and ensure
compliance with applicable laws.
True False

4. Sarbanes-Oxley requires companies to maintain strong and effective internal controls and thus prevent fraud
and misleading financial statements.
True False

5. The Sarbanes-Oxley Act requires that financial statements of all public companies report on management's
conclusions about the effectiveness of the company's internal control procedures.
True False

6. The control environment in an internal control structure is the attitude and awareness of internal control by all
employees.
True False

7. Separating the responsibilities for purchasing, receiving, and paying for equipment is an example of the
control procedure: separating operations, custody of assets, and accounting.
True False


8. Internal control is enhanced by separating the control of a transaction from the record-keeping function.



17. An example of good internal controls over cash payments is the taking of all cash discounts offered.
True False

18. A voucher is a form on which is recorded pertinent data about a liability and the particulars of its payment.
True False

19. When the voucher system is used, the amount due on each voucher represents the credit balance of an
account payable if the voucher is in full payment to a creditor.
True False

20. A voucher system is an example of an internal control procedure over cash payments.
True False

21. A voucher is a written authorization to make a cash payment.
True False

22. A payment system that uses computerized electronic impulses to effect a cash transaction is called
electronic funds transfer (EFT).
True False

23. A remittance advice is the notification accompanying the check issued to a creditor that states the specific
invoice being paid.
True False

24. The bank often informs the company of bank service charges by including a credit memo with the monthly
bank statement.
True False


balance, you must add $90 to the bank statement balance.
True False

33. If an adjustment for an NSF check is made in a company’s bank reconciliation, then the company must have
written a bad check during the month.
True False


34. The amount of the "adjusted balance" appearing on the bank reconciliation as of a given date is the amount
that is shown on the balance sheet for that date.
True False

35. All bank memos reported on the bank reconciliation require entries in the company's accounts.
True False

36. The bank reconciliation is an important part of the system of internal controls.
True False

37. The main reason that the bank statement cash balance and the company's cash balance do not initially
balance is due to timing differences.
True False

38. The bank reconciles its statement to the company's records.
True False

39. In preparing a bank reconciliation, the amount indicated by a credit memo for a note receivable collected by
the bank is added to the balance per company's records.
True False

40. In preparing a bank reconciliation, the amount of an error indicating the recording of a check in the journal

on the balance sheet.
True False

49. A petty cash fund is used to pay relatively large amounts.
True False

50. The petty cash fund eliminates the need for a bank checking account.
True False

51. A compensating balance occurs when a bank may require a company to maintain a maximum cash balance.
True False


52. Cash equivalents are short -term investments that will be converted to cash within 120 days.
True False

53. Money market accounts, commercial paper, and United States Treasury Notes are examples of cash
equivalents.
True False

54. The doomsday ratio includes both cash and cash equivalents in the numerator.
True False

55. Which one of the following below is not an element of internal control?
A. risk assessment
B. monitoring
C. information and communication
D. cost-benefit considerations

56. Which one of the following below is not a factor that influences a business's control environment?


61. A firm's internal control environment is not influenced by
A. management's operating style
B. organizational structure
C. personnel policies
D. monitoring policies

62. An element of internal control is
A. risk assessment
B. journals
C. subsidiary ledgers
D. controlling accounts

63. A necessary element of internal control is
A. database
B. systems design
C. systems analysis
D. information and communication

64. In management's internal control report that is now required of all public companies, which of the following
does not have a direct effect on a company's internal control system?
A. internal auditors
B. independent accountants
C. Board of Director's audit committee
D. Board of Trustees


65. Which of the following should not be considered cash by an accountant?
A. money orders
B. bank checking accounts

B. cash controls
C. preventive controls
D. detective controls


71. A special form on which is recorded pertinent data about a liability and the particulars of its payment is
called a(n)
A. invoice
B. voucher
C. debit memo
D. remittance advice

72. EFT
A. means Efficient Funds Transfer
B. can process certain cash transactions at less cost than by using the mail
C. makes it easier to document purchase and sale transactions
D. means Effective Funds Transfer

73. A voucher
A. is received from customers to explain the purpose of a payment
B. is normally prepared in the Accounting Department
C. system is used to control cash receipts
D. system is an internal control procedure to verify that the assets in the ledger are the ones the company owns

74. A voucher is usually supported by
A. a supplier's invoice
B. a purchase order
C. a receiving report
D. all of the above



80. A bank statement
A. is a credit reference letter written by the company's bank.
B. lets a company know the financial position of the bank as of a certain date.
C. is a bill from the bank for services rendered.
D. shows the activity that increased or decreased the company's account balance.

81. Which one of the following would not cause a bank to debit a company's account?
A. Bank service charge
B. Collection of a note receivable
C. Checks marked NSF
D. Wiring of funds to other locations

82. There are three parties to a check. The drawer is
A. a written document signed by the company
B. is the one who signs the check ordering payment by the bank
C. the bank on which the check is drawn
D. the party to whom payment is to be made


83. A debit or credit memo describing entries in the company's bank account may be enclosed with the bank
statement. An example of a credit memo is
A. deposited checks returned for insufficient funds
B. a promissory note left for collection
C. a service charge
D. notification that a customer's check for $375 was recorded by the company as $735 on the deposit ticket

84. Following the completion of the bank reconciliation, an adjusting entry was made that debited cash and
credited Interest Revenue. Therefore the bank reconciliation must have included an item that was
A. deducted from the balance per company's records

made by either party should be discovered and corrected
D. the bank must make sure that its records are correct

89. The bank reconciliation
A. should be prepared by an employee who records cash transactions
B. is part of the internal control system
C. is for information purposes only
D. is sent to the bank for verification

90. Journal entries based on the bank reconciliation are required in the company's accounts for
A. outstanding checks
B. deposits in transit
C. bank errors
D. book errors

91. Accompanying the bank statement was a debit memo for bank service charges. On the bank reconciliation,
the item is
A. a deduction from the balance per company's records
B. an addition to the balance per bank statement
C. a deduction from the balance per bank statement
D. an addition to the balance per company's records

92. Accompanying the bank statement was a debit memo for bank service charges. What entry is required in
the company's accounts?
A. debit Miscellaneous Administrative Expense; credit Cash
B. debit Cash; credit Other Income
C. debit Cash; credit Accounts Payable
D. debit Accounts Payable; credit Cash

93. A check drawn by a company in payment of a voucher for $965 was recorded in the journal as $695. This

A. deduction from the balance per company's records
B. addition to the balance per bank statement
C. deduction from the balance per bank statement
D. addition to the balance per company's records

98. Accompanying the bank statement was a credit memo for a short-term note collected by the bank for the
customer. What entry is required in the company's accounts?
A. debit Notes Receivable; credit Cash
B. debit Cash; credit Miscellaneous Income
C. debit Cash; credit Notes Receivable
D. debit Accounts Receivable; credit Cash


99. The amount of deposits in transit is included on the bank reconciliation as a(n)
A. deduction from the balance per the company's books
B. deduction from the balance per bank statement
C. addition to the balance per bank statement
D. addition to the balance per company books

100. The amount of the outstanding checks is included on the bank reconciliation as a(n)
A. deduction from the balance per company's records
B. addition to the balance per bank statement
C. deduction from the balance per bank statement
D. addition to the balance per company's records

101. Which of the following items that appeared on the bank reconciliation did not require an adjusting entry?
A. bank service charges
B. deposits in transit
C. NSF checks
D. A check for $630, recorded in the check register for $360.

B. Outstanding checks
C. Deposits in transit
D. Notes collected by the bank

107. Which of the following would be subtracted from the balance per books on a bank reconciliation?
A. Outstanding checks
B. Deposits in transit
C. Notes collected by the bank
D. Service charges

108. Which of the following would be subtracted from the balance per bank on a bank reconciliation?
A. Outstanding checks
B. Deposits in transit
C. Notes collected by the bank
D. Service charges

109. A bank reconciliation should be prepared
A. whenever the bank refuses to lend the company money.
B. to explain any difference between the company's balance per books with the balance per bank.
C. by the company's bank.
D. by the person who is authorized to sign checks.

110. Harris Company had checks outstanding totaling $15,400 on its May bank reconciliation. In June, Harris
Company issued checks totaling $64,900. The June bank statement shows that $47,600 in checks cleared the
bank in June. A check from one of Harris Company's customers in the amount of $300 was also returned
marked "NSF." The amount of outstanding checks on Harris Company's June bank reconciliation should be
A. $49,500
B. $63,000
C. $47,600
D. $32,700

31 is

A. $4,970
B. $5,120
C. $8,105
D. $3,295
112. Derek Company gathered the following reconciling information in preparing its September bank
reconciliation:

Cash balance per books, 9/30
Deposits in transit
Notes receivable and interest collected by bank
Bank charge for check printing
Outstanding checks
NSF check
T
he
adjus
ted
cash
balan
ce
per
book
s on
Septe
mber
30 is

A. $5,150.


A. $8,065
B. $10,565
C. $15,065
D. $6,435
114. Thompson Company developed the following reconciling information in preparing its October bank
reconciliation:

Cash balance per bank, 10/31
Note receivable collected by bank
Outstanding checks
Deposits-in-transit
Bank service charge
NSF check

$17,000
4,800
6,500
3,000
50
2,300

Using the above information, determine the cash balance per books (before adjustments) for the Thompson Company.

A. $11,050
B. $19,450
C. $15,950
D. $11,150
115. During a bank reconciliation process,
A. Outstanding checks and deposits in transit are added to the bank statement balance.

B. recording shortages in the fund.
C. replenishing the petty cash fund.
D. establishing the fund.

120. The type of account and normal balance of Petty Cash is a(n)
A. revenue, credit
B. asset, debit
C. liability, credit
D. expense, debit


121. The debit recorded in the journal to reimburse the petty cash fund is to
A. Petty Cash
B. Accounts Receivable
C. Cash
D. various accounts for which the petty cash was disbursed

122. A $100 petty cash fund contains $91 in petty cash receipts, and $4.75 in currency and coins. The journal
entry to record the replenishment of the fund would include a
A. credit to Petty Cash for $95.75.
B. credit to Cash for $90.
C. debit to Cash Short and Over for $4.25.
D. credit to Cash Short and Over for $4.25.

123. A $140 petty cash fund has cash of $20 and receipts of $117. The journal entry to replenish the account
would include a credit to
A. Cash for $20.
B. Cash Over and Short for $3.
C. Petty Cash for $120.
D. Cash for $120.

C. 87.5
D. 11.5

129. The following data were gathered to use in reconciling the bank account of Savannah Company:

Balance per bank
Balance per company records
Bank service charges
Deposit in transit
NSF check
Outstanding checks

$16,750
16,125
80
2,195
950
3,850

What is the adjusted balance on the bank reconcilition?

A. $14,470
B. $10,705
C. $15,095
D. $15,720
130. Consider the cash account below.
Additional Information: cash disbursements were 80% of collections.

Cash
??


134. List the objectives of internal control and give an example of how each is implemented.


135. You began your new job as the accountant at Bolivar Industries during the month of December. During
your first month, you found several interesting issues.
1) While looking through the invoices, you found Invoices 213-242, 245-271, and 275-290. It appears that
invoices 243, 244, 272, 273, and 274 are missing.
2) During the month, Clerk # 3 issued $250 in refunds as compared to Clerks #1, #2, and #4 who issued less
than $50 each.
3) The daily cash receipts and bank deposits reconcile, except on Tuesdays during the month.
4) Business is generally brisk during the holiday season, but two weeks before Christmas there was a sudden
increase in slow payments.
REQUIRED:
Part A: What kind of warning signs could be associated with these issues?
Part B: What control could you put in place regarding cash refunds mentioned in Part A (2)?

136. The following procedures were recently implemented at the Health Station, Inc. For each procedure,
indicate whether the internal control over cash represents (1) a strength or (2) a weakness. If it is a weakness,
please explain why.
(a) All mail is opened by the mail clerk, who forwards all cash remittances to the cashier. The cashier prepares a
listing of the cash receipts and forwards a copy of the list to the accounts receivable clerk for recording in the
accounts.
(b) The accounts payable clerk prepares a voucher for each disbursement. The voucher along with the
supporting documentation is forwarded to the treasurer’s office for approval.
(c) At the end of each day, all cash receipts are placed in the bank’s night depository.
(d) The bank reconciliation is prepared by the cashier, who works under the supervision of the treasurer.


137. The following procedures were recently implemented at the Pampered Pets, Inc. For each procedure,


Debit

Credit

140. The actual cash received during the week ended October 31 for cash sales was $23,447.00 and the amount
indicated by the cash register total was $23,457.00. Journalize the entry to record the cash receipts and cash
sales.
Journal
Date

Description

Post Ref.

Debit

141. Consider the cash account below.
Additional Information: cash disbursements were 80% of collections.

Cash
??
115,375
??
80,275

Beg. Balance
Collections
Disbursements
End Balance