Chapter 3: Ethics, Fraud and Internal Control

1. Management can expect various benefits to follow from d. Request that customers make checks payable to the
implementing a system of strong internal control. Which of company.
the following benefits is least likely to occur? 6. Providing timely information about transactions in sufficient
a. reduction of cost of an external audit detail to permit proper classification and financial reporting is
b. prevention of employee collusion to commit fraud an example of
c. availability of reliable data for decision-making purposes a. the control environment.
d. some assurance of compliance with the Foreign Corrupt b. risk assessment.
Practices Act of 1977 c. information and communication.
e. some assurance that important documents and records d. monitoring.
are protected
7. Ensuring that all material transactions processed by the
2. Which of the following situations is NOT a segregation of information system are valid and in accordance with
duties violation? management’s objectives is an example of
a. The treasurer has the authority to sign checks but gives a. transaction authorization.
the signature block to the assistant treasurer to run the b. supervision.
check-signing machine. c. accounting records.
b. The warehouse clerk, who has custodial responsibility d. independent verification.
over inventory in the warehouse, selects the vendor and
authorizes purchases when inventories are low. 8. Which of the following is often called a compensating control?
c. The sales manager has the responsibility to approve a. transaction authorization
credit and the authority to write off accounts. b. supervision
d. The department time clerk is given the undistributed c. accounting records
payroll checks to mail to absent employees. d. independent verification
e. The accounting clerk who shares the recordkeeping
responsibility for the accounts receivable subsidiary 9. Which of the following is NOT a necessary condition under
ledger performs the monthly reconciliation of the common law to constitute a fraudulent act?
subsidiary ledger and the control account. a. injury or loss
b. material fact
3. The underlying assumption of reasonable assurance regarding
c. written documentation
implementation of internal control means that
d. justifiable reliance
a. by the control that fraud has not occurred in the period.
b. auditors are reasonably assured that employee
10. The fraud scheme that is similar to the “borrowing from
carelessness can weaken an internal control structure.
Peter to pay Paul” scheme is
c. implementation of the control procedure should not
a. expense account fraud.
have a significant adverse effect on efficiency or
b. bribery.
profitability.
c. lapping.
d. management assertions about control effectiveness
d. transaction fraud.
should provide auditors with reasonable assurance.
e. a control applies reasonably well to all forms of
computer technology.

4. To conceal the theft of cash receipts from customers in

payment of their accounts, which of the following journal
entries should the bookkeeper make?
Debit Credit
a. Miscellaneous Expense Cash
b. Petty Cash Cash
c. Cash Accounts Receivable
d. Sales Returns Accounts Receivable
e. None of the above

5. Which of the following controls would best prevent the

lapping of accounts receivable?
a. Segregate duties so that the clerk responsible for
recording in the accounts receivable subsidiary ledger
has no access to the general ledger.
b. Request that customers review their monthly
statements and report any unrecorded cash payments.
c. Require customers to send payments directly to the
company’s bank.