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Accounting and Internal Controls Multiple Choice Problem Set

Internal Control CheckPoint

SE1: Ann Mogen owns a gourmet coffee shop. Identify four ways in which good internal controls can help her operate her business.

SE2: Schell Company is a men's clothing store. Indicate whether each of the following components of internal control is part of the:

a. control environment
b. risk assessment
c. information and communication
d. control activities
e. monitoring

1. An organization plan calls for separation of duties in the handling of cash sales.
2. Charles Schell emphasizes to employees the importance of following specific procedures in the handling of cash.
3. All cash transactions are recorded automatically in the company's computer when the sales are rung up on the cash register.
4. Management identifies the ways clothes could be stolen.
5. Management observes that employees are flowing proper procedures.

SE3: Internal control is subject to several inherent limitations. Indicate whether each of the following situations is an example of:

a. human error
b. collusion
c. changed conditions
d. dost-benefit considerations

1. Effective separation of duties in a restaurant is impractical because the business is too small.
2. The cashier and the manager of a retail shoe store work together to circumvent the internal controls for the purpose of embezzling funds.
3. The cashier in a pizza shop does not understand the procedures for operation the cash register and thus fails to ring up all sales and to count the cash at the end of the day.
4. At a law firm, computer supplies were mistakenly delivered to the reception area instead of the receiving area because the supplier began using a different means of shipment. As a result, the receipt of supplies was not recorded.

SE4: Match the check-writing policy for a small business described below to these control activities:

a. Authorization
b. Recording transactions
c. Documents and records
d. Physical controls
e. Periodic independent verification
f. Separation of duties
g. Sound personnel policies

1. The person who writes the checks to pay bills is different from the persons who authorize the payments and who keeps the records of the payments.
2. The checks are kept in a locked drawer. The only person who has the key is the person who writes the checks.
3. The person who writes the checks is bonded.
4. Once the each month the owner compares and reconciles the amount of money shown in the accounting records with the amount in the bank account.
5. Each check is approved by the owner of the business before it is mailed.
6. A check stub recording pertinent information is completed for each check.
7. Every day, all checks are recorded in the recorded in the accounting records, using the information on the check stubs.

SE5: Indicate the letter of where each of the following documents would be prepared and the letter of where each document would be sent:

1. Purchase requisition
2. Receiving report
3. Invoice
4. Check authorization
5. Check

a. Requesting department
b. Purchasing department
c. Receiving department
d. Accounting department
e. Treasurer
f. Supplier

SE6: When a bank reconciliation is performed, is each of the following items:

a. an addition to the balance per bank
b. a deduction from the balance per bank
c. an addition to the balance per books
d. a deduction from the balance per books

1. Service charges (by the bank)
2. Deposits in transit
3. Interest income (shown on bank statement)
4. Outstanding checks

SE7: Prepare a bank reconciliation from the following information:

a. Balance per bank statement as of June 30, $2,586.58
b. Balance per books as of June 30, $1,308.87
c. Deposits in transit, $348.00
d. Outstanding checks, $1,611.11
e. Interest on average balance, $14.60

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Internal Control CheckPoint

SE1: Ann Mogen owns a gourmet coffee shop. Identify four ways in which good internal controls can help her operate her business.

1. Delegation of authority and separation of duties : There must be separation of different duties in the company to avoid temptation and misuse of assets. The responsibilities for handling cash receipts, making cash payments, and recording cash transactions should be clearly defined.
2. Reconciliation : To reconcile is to check written record if they are in tune with reality. This will help Ann to know the actual movement of her cash balance.
3. Cash control : Need good control procedures concerning cash. For example, employees who handle cash transactions should not maintain the accounting records for cash.
4. Physical control : Need to safeguard against the risk of loss or damage of assets.

SE2: Schell Company is a men's clothing store. Indicate whether each of the following components of internal control is part of the:

a. control environment
b. risk assessment
c. information and communication
d. control activities
e. monitoring

1. An organization plan calls for separation of duties in the handling of cash sales. (a)
The control environment includes administrator's attitudes that are then reflected in the employees' attitudes. An administrator's attitudes should support ethical values and good business practices.

2. Charles Schell emphasizes to employees the importance of following specific procedures in the handling of cash. (c)
The purpose of the information and communication system is to help ensure that employees are aware of the company's goals and objectives, how they are to be accomplished, and who is responsible for the specific tasks to accomplish them.

3. All cash transactions are recorded automatically in the company's computer when the sales are rung up on the cash register. (d)
Control activities are those activities that provide a "reasonable" level of assurance that the company's goals and objectives will be accomplished.

4. Management identifies the ways clothes could be stolen. ...

Solution Summary

This solution explains the correct answers for the accounting questions listed.

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