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328 Chapter 7 Fraud, Internal Control, and Cash

Fraud A dishonest act by an employee that results in personal

Outstanding checks Checks issued and recorded by a company

but not yet paid by the bank. (p. 321).

benefit to the employee at a cost to the employer. (p.298).

Fraud triangle The three factors that contribute to fraudulent Petty cash fund A cash fund used to pay relatively small

amounts. (p. 314).

activity by employees: opportunity, financial pressure, and
rationalization. (p. 298).
Restricted cash Cash that must be used for a special purpose. (p.
Internal auditors Company employees who continuously
evaluate the effectiveness of the company's internal control Voucher An authorization form prepared for each payment in a
system. (p. 306).
voucher system. (p. 312).

Internal control All of the related methods and activities adopted Voucher system A network of approvals by authorized in-

within an organization to safeguard its assets and enhance the

accuracy and reliability of its accounting records. (p. 300).

dividuals acting independently to ensure that all disbursements

by check are proper. (p. 312).

NSF check A check that is not paid by a bank because of in-

sufficient funds in a customer's bank account. (p. 319).


Answers are at the end a/the chapter.


Which of the following is not an element of the fraud



The use of prenumbered checks in disbursing cash is an (SO 4

application of the principle of:
a. establishment of responsibility.
b. segregation of duties.
c. physical controls.
d. documentation procedures.

Financial pressure.
Segregation of duties.
8. A company writes a check to replenish a $100 petty cash (SO 5 fund
when the fund contains receipts of $94 and $3 in
2. An organization uses internal control to enhance the accuracy
cash. In recording the check, the company should:
and reliability of its accounting records and to:
a. debit Cash Over and Short for $3.
a. safeguard its assets.
b. debit Petty Cash for $94.
b. prevent fraud.
c. credit Cash for $94.
c. produce correct financial statements.
d. credit Petty Cash for $3.
d. deter employee dishonesty.
9.The control features of a bank account do not include:
(SO 6
(SO 2) 3. The principles of internal control do not include:
a. establishment of responsibility.
balance per books.
b. documentation procedures.
b. minimizing the amount of cash that must be kept on hand.
c. management responsibility.
c. providing a double record of all bank transactions.
d. independent internal verification.
d. safeguarding cash by using a bank as a depository.
(SO 2) 4. Physical controls do not include:
In a bank reconciliation, deposits in transit are:
a. safes and vaults to store cash.
deducted from the book balance.
b. independent bank reconciliations.
b. added to the book balance.
c. locked warehouses for inventories.
c. added to the bank balance.
d. bank safety deposit boxes for important papers.
(SO 3) 5. Permitting only designated personnel to handle cash receipts deducted from the bank balance.
application of the principle of:
a. segregation of duties.
11. The reconciling item in a bank reconciliation that will (SO 7 result in
b. establishment of responsibility.
an adjusting entry by the depositor is:
c. independent check.
a. outstanding checks.
d. human resource controls.
b. deposit in transit.
(SO 3) 6. Which of the following control activities is not relevant when
c. a a bank error.
company uses a computerized (rather than manual)
d. bank service charges.
accounting system?
12. Which of the following items in a cash drawer at (SO 8) November 30
a. Establishment of responsibility.
is not cash?
b. Segregation of duties.
a. Money orders.
c. Independent internal verification.
b. Coins and currency.
d. All of these control activities are relevant to a comput
erized system.
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