Chapter 3—Ethics, Fraud, and 8.

Business bankruptcy cases always involve

Internal Control fraudulent behavior. 19. A key modifying assumption in internal
control is that the internal control system is the
TRUE AND FALSE 9. Defalcation is another word for financial responsibility of management.
fraud.
1. The ethical principle of justice asserts that the 20. Database management fraud includes
benefits of the decision should be distributed 10. The trend toward distributed data processing altering, updating, and deleting an
fairly to those who share the risks. increases the exposure to fraud from remote organization‟s data.
locations.
2. The ethical principle of informed consent 21. While the Sarbanes-Oxley Act prohibits
suggests that the decision should be 11. The external auditor is responsible for auditors from providing non-accounting services
implemented so as to minimize all of the risks establishing and maintaining the internal control to their audit clients, they are not prohibited
and to avoid any unnecessary risks. system. from performing such services for non-audit
clients or privately held companies.
3. Employees should be made aware of the 12. Segregation of duties is an example of an
firm‟s internal control procedure. 22. The Sarbanes-Oxley Act requires the audit
commitment to ethics. committee to hire and oversee the external
13. Controls in a computer-based information auditors.
4. Business ethics is the analysis of the nature system are identical to controls in a manual
and social impact of computer technology, and system. 23. Section 404 requires that corporate
the corresponding formulation and justification management (including the CEO) certify their
of policies for the ethical use of such 14. Preventive controls are passive techniques organization‟s internal controls on a quarterly
technology. designed to reduce fraud. and annual basis.

5. Para computer ethics is the exposure to stories 15. Ethical issues and legal issues are essentially 24. Section 302 requires the management of
and reports found in the popular media the same. public companies to assess and formally report
regarding the good or bad ramifications of on the effectiveness of their organization‟s
computer technology. 16. Internal control systems are recommended internal controls.
but not required of firms subject to the Foreign
6. Source code is an example of intellectual Corrupt Practices Act. 25. The objective of SAS 99 is to seamlessly
property. blend the auditor‟s consideration of fraud into
17. Operations fraud is the misuse or theft of the all phases of the audit process.
7. Copyright laws and computer industry firm‟s computer resources.
standards have been developed jointly and rarely
conflict. 18. The Foreign Corrupt Practices Act requires
only that a firm keep good records.
MULTIPLE CHOICE c. automated monitoring to detect intruders d. creating a false transaction
d. ease of dissemination
1. Which ethical principle states that the benefit 9. Operations fraud includes
from 5. For an action to be called fraudulent, all of the a. altering program logic to cause the application
a decision must outweigh the risks, and that following conditions are required except to
there is no alternative decision that provides the a. poor judgment process data incorrectly
same or greater benefit with less risk? b. false representation b. misusing the firm‟s computer resources
a. minimize risk c. intent to deceive c. destroying or corrupting a program‟s logic
b. justice d. injury or loss using a
c. informed consent computer virus
d. proportionality 6. One characteristic of employee fraud is that d. creating illegal programs that can access data
the fraud files to
2. Individuals who acquire some level of skill a. is perpetrated at a level to which internal alter, delete, or insert values
and controls do not apply
knowledge in the field of computer ethics are b. involves misstating financial statements 10. Who is responsible for establishing and
involved in which level of computer ethics? c. involves the direct conversion of cash or other maintaining the internal control system?
a. para computer ethics assets to the employee‟s personal benefit a. the internal auditor
b. pop computer ethics d. involves misappropriating assets in a series of b. the accountant
c. theoretical computer ethics complex transactions involving third parties c. management
d. practical computer ethics d. the external auditor
7. Forces which may permit fraud to occur do
3. All of the following are issues of computer not 11. The concept of reasonable assurance
security except include suggests that
a. releasing incorrect data to authorized a. a gambling addiction a. the cost of an internal control should be less
individuals b. lack of segregation of duties than the benefit it provides
b. permitting computer operators unlimited c. centralized decision making environment b. a well-designed system of internal controls
access to the computer room d. questionable integrity of employees will detect all t fraudulent activity
c. permitting access to data by unauthorized c. the objectives achieved by an internal control
individuals 8. Which of the following best describes system vary depending on the data processing
d. providing correct data to unauthorized lapping? method
individuals a. applying cash receipts to a different d. the effectiveness of internal controls is a
customer‟s account in an attempt to conceal function of the industry environment
4. Which characteristic is not associated previous thefts of fund
with software as intellectual property? b. inflating bank balances by transferring money 12. Which of the following is not a limitation of
a. uniqueness of the product among different bank accounts the internal control system?
b. possibility of exact replication c. expensing an asset that has been stolen a. errors are made due to employee fatigue
b. fraud occurs because of collusion between 17. The bank reconciliation uncovered a 21. Which of the following indicates a strong
two employees transposition internal control environment?
c. the industry is inherently risky error in the books. This is an example of a a. the internal audit group reports to the audit
d. management instructs the bookkeeper to make a. preventive control committee of the board of directors
fraudulent journal entries b. detective control b. there is no segregation of duties between
c. corrective control organizational functions
13. The most cost-effective type of internal d. none of the above c. there are questions about the integrity of
control is management
a. preventive control 18. In balancing the risks and benefits that are d. adverse business conditions exist in the
b. accounting control part of every ethical decision, managers receive industry
c. detective control guidance from each of the following except
d. corrective control a. justice 22. According to SAS 78, an effective
b. self interest accounting
14. Which of the following is a preventive c. risk minimization system performs all of the following except
control? d. proportionality a. identifies and records all valid financial
a. credit check before approving a sale on transactions
account 19. Which of the following is not an element of b. records financial transactions in the
b. bank reconciliation the internal control environment? appropriate accounting period
c. physical inventory count a. management philosophy and operating style c. separates the duties of data entry and report
d. comparing the accounts receivable subsidiary b. organizational structure of the firm generation
ledger to the control account c. well-designed documents and records d. records all financial transactions promptly
d. the functioning of the board of directors and
15. A well-designed purchase order is an the audit committee 23. Which of the following is the best reason to
example of a separate duties in a manual system?
a. preventive control 20. Which of the following suggests a weakness a. to avoid collusion between the programmer
b. detective control in the and the computer operator
c. corrective control internal control environment? b. to ensure that supervision is not required
d. none of the above a. the firm has an up-to-date organizational chart c. to prevent the record keeper from authorizing
b. monthly reports comparing actual transactions
16. A physical inventory count is an example of performance to d. to enable the firm to function more efficiently
a budget are distributed to managers
a. preventive control c. performance evaluations are prepared every 24. Segregation of duties in the computer-based
b. detective control three years information system includes
c. corrective control d. the audit committee meets quarterly with the a. separating the programmer from the computer
d. feedforward control external auditors operator
b. preventing management override
c. separating the inventory process from the 29. Employee fraud involves three steps. Of the a. the accounting system
billing process following, which is not involved? b. the control environment
d. performing independent verifications by the a. concealing the crime to avoid detection c. control procedures
computer operator b. stealing something of value d. this is not a weakness
c. misstating financial statements
25. Which of the following is not an internal d. converting the asset to a usable form 33. Computer fraud can take on many forms,
control procedure? including each of the following except
a. authorization 30. Which of the following is not an example of a. theft or illegal use of computer-readable
b. management‟s operating style independent verification? information
c. independent verification a. comparing fixed assets on hand to the b. theft, misuse, or misappropriation of computer
d. accounting records accounting equipment
records c. theft, misuse, or misappropriation of assets by
26. The decision to extend credit beyond the b. performing a bank reconciliation altering computer-readable records and files
normal c. comparing the accounts payable subsidiary d. theft, misuse, or misappropriation of printer
credit limit is an example of ledger to supplies
a. independent verification the control account
b. authorization d. permitting authorized users only to access the 34. When certain customers made cash
c. segregation of functions accounting system payments to
d. supervision reduce their accounts receivable, the bookkeeper
31. The importance to the accounting profession embezzled
27. When duties cannot be segregated, the most of the the cash and wrote off the accounts as
important internal control procedure is Foreign Corrupt Practices Act of 1977 is that uncollectible. Which
a. supervision a. bribery will be eliminated control procedure would most likely prevent this
b. independent verification b. management will not override the company‟s irregularity?
c. access controls internal a. segregation of duties
d. accounting records controls b. accounting records
c. firms are required to have an effective internal c. accounting system
28. An accounting system that maintains an control d. access controls
adequate system
audit trail is implementing which internal d. firms will not be exposed to lawsuits 35. The office manager forgot to record in the
control procedure? accounting records the daily bank deposit.
a. access controls 32. The board of directors consists entirely Which control
b. segregation of functions of personal procedure would most likely prevent or detect
c. independent verification friends of the chief executive officer. This this error?
d. accounting records indicates a a. segregation of duties
weakness in b. independent verification
c. accounting records d. disaggregation, relevance, timeliness, b. The warehouse clerk, who has the custodial
d. supervision accuracy, and responsibility over inventory in the warehouse,
completeness selects the vendor and authorized purchases
36. Business ethics involves when inventories are low.
a. how managers decide on what is right in 40. Internal control system have limitations. c. The sales manager has the responsibility to
conducting business These approve credit and the authority to write off
b. how managers achieve what they decide is include accounts.
right for the business a. possibility of honest error d. The department time clerk is given the
c. both a and b b. circumvention undistributed payroll checks to mail to absent
d. none of the above c. management override employees.
d. stability of systems e. The accounting clerk who shares the record
37. All of the following are conditions for fraud keeping responsibility for the accounts
except 41. Management can expect various benefits to receivable subsidiary ledger performs the
a. false representation follow monthly reconciliation of the subsidiary ledger
b. injury or loss from implementing a system of strong internal and the control account.
c. intent control.
d. material reliance Which of the following benefits is least likely to 43. Which of the following is not an issue to be
occur? addressed in a business code of ethics required
38. The four principal types of fraud include all a. reduced cost of an external audit. by the SEC?
of the following except b. prevents employee collusion to commit fraud. a. Conflicts of interest
a. bribery c. availability of reliable data for b. Full and Fair Disclosures
b. gratuities decision-making c. Legal Compliance
c. conflict of interest purposes. d. Internal Reporting of Code Violations
d. economic extortion d. some assurance of compliance with the e. All of the above are issues to be addressed
Foreign Corrupt
39. The characteristics of useful information Practices Act of 1977.
include e. some assurance that important documents and
a. summarization, relevance, timeliness, records
accuracy, and are protected.
completeness
b. relevance, summarization, accuracy, 42. Which of the following situations is not a
timelessness, and segregation of duties violation?
completeness a. The treasurer has the authority to sign checks
c. timeliness, relevance, summarization, but gives the signature block to the assistant
accuracy, and treasurer to run the check-signing machine.
conciseness
ANSWER KEY 7. C 43. E
8. A
TRUE AND FALSE 9. B
1. T 10. C
2. F 11. A
3. T 12. C
4. F 13. A
5. F 14. A
6. T 15. A
7. F 16. B
8. F 17. B
9. T 18. B
10. T 19. C
11. F 20. C
12. T 21. A
13. F 22. C
14. T 23. C
15. F 24. A
16. F 25. B
17. T 26. B
18. F 27. A
19. T 28. D
20. F 29. C
21. T 30. D
22. T 31. C
23. F 32. B
24. F 33. D
25. T 34. A
35. B
MULTIPLE CHOICES 36. C
1. D 37. D
2. A 38. B
3. B 39. A
4. C 40. D
5. A 41. B
6. C 42. B
CHAPTER 4 REVENUE CYCLE 5. Copies of the sales order can be used for all d. informs the billing department of the
of the quantities shipped
MULTIPLE CHOICE following except
1. The revenue cycle consists of a. purchase order 10. The billing department is not responsible for
a. one subsystem–order entry b. credit authorization a. updating the inventory subsidiary records
b. two subsystems–sales order processing and c. shipping notice b. recording the sale in the sales journal
cash receipts d. packing slip c. notifying accounts receivable of the sale
c. two subsystems–order entry and inventory d. sending the invoice to the customer
control
d. three subsystems–sales order processing, 6. The purpose of the sales invoice is to 11. Customers should be billed for
credit a. record reduction of inventory backorders when
authorization, and cash receipts b. transfer goods from seller to shipper a. the customer purchase order is received
c. bill the customer b. the backordered goods are shipped
2. The reconciliation that occurs in the shipping d. select items from inventory for shipment c. the original goods are shipped
department is intended to ensure that d. customers are not billed for backorders
a. credit has been approved 7. The customer open order file is used to because a backorder is a lost sales
b. the customer is billed for the exact quantity a. respond to customer queries
shipped b. fill the customer order 12. Usually specific authorization is required for
c. the goods shipped match the goods ordered c. ship the customer order all of
d. inventory records are reduced for the goods d. authorize customer credit the following except
shipped a. sales on account which exceed the credit limit
8. The stock release copy of the sales order b. sales of goods at the list price
3. The adjustment to accounting records to is not used to c. a cash refund for goods returned without a
reflect the a. locate and pick the items from the receipt
decrease in inventory due to a sale occurs in the warehouse shelves d. write off of an uncollectible
a. warehouse b. record any out-of-stock items account receivable
b. shipping department c. authorize the warehouse clerk to
c. billing department release custody of the inventory to 13. Which of the following functions should be
d. inventory control department shipping segregated?
d. record the reduction of inventory a. opening the mail and making the journal entry
4. Which document triggers the revenue cycle? to
a. the sales order 9. The shipping notice record cash receipts
b. the customer purchase order a. is mailed to the customer b. authorizing credit and determining reorder
c. the sales invoice b. is a formal contract between the seller and quantities
d. the journal voucher the shipping company c. maintaining the subsidiary ledgers and
c. is always prepared by the shipping clerk handling used to customer queries
d. providing information on inventory levels and in the accounts receivable
reconciling the bank statement 17. Which department is least likely to be
involved in the revenue cycle?
14. Which situation indicates a weak internal a. credit
control structure? b. accounts payable
a. the mailroom clerk authorizes credit memos c. billing
b. the record keeping clerk maintains d. Shipping
both accounts
receivable and accounts payable 18. Which document is included with a shipment
subsidiary ledgers sent
c. the warehouse clerk obtains a signature to a customer?
before releasing goods for shipment a. sales invoice
d. the accounts receivable clerk b. stock release form
prepares customer statements every c. packing slip
month d. shipping notice

15. The most effective internal control 19. Good internal controls in the revenue cycle
procedure to prevent or detect the creation of should ensure all of the following except
fictitious credit memoranda for sales returns is a. all sales are profitable
to b. all sales are recorded
a. supervise the accounts receivable department c. credit is authorized
b. limit access to credit memoranda d. inventory to be shipped is not stolen
c. prenumber and sequence check all credit
memoranda 20. Which control does not help to ensure that
d. require management approval for all credit accurate records are kept of customer accounts
memoranda and inventory?
a. reconcile accounts receivable control to
16. The accounts receivable clerk destroys all accounts receivable subsidiary
invoices for sales made to members of her b. authorize credit
family and does not record the sale in the c. segregate custody of inventory from record
accounts receivable subsidiary ledger. Which keeping
procedure will not detect this fraud? d. segregate record keeping duties of general
a. prenumber and sequence check all invoices ledger from
b. reconcile the accounts receivable control accounts receivable
to the accounts receivable
c. prepare monthly customer statements
d. reconcile total sales on account to the debits
21. 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

22. 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

23. Which department prepares the bill

of lading?
a. sales
b. warehouse
c. shipping
d. credit

24. 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
 b. current inventory information is available d. general journal
25. A weekly reconciliation of cash receipts c. hard copy documents provide a permanent
would include comparing record of the transaction 34. Periodically, the general ledger
a. the cash prelist with bank deposit slips d. data entry errors are corrected at the end department receives all of the following
b. the cash prelist with remittance advices of each batch except
c. bank deposit slips with remittance advices a. total increases to accounts receivable
d. journal vouchers from accounts receivable 30. Commercial accounting systems have fully b. total of all sales backorders
and general integrated modules. The word “integrated” c. total of all sales
ledger means that d. total decreases in inventory
a. segregation of duties is not possible
26. At which point is supervision most critical b. transfer of information among modules 35. The credit department
in the cash receipts system? occurs automatically a. prepares credit memos when goods are
a. accounts receivable c. batch processing is not an option returned
b. general ledger d. separate entries are made in the general b. approves credits to accounts receivable when
c. mail room ledger accounts and the subsidiary ledgers payments are received
d. cash receipts c. authorizes the granting of credit to customers
31. The data processing method that can shorten d. none of the above
27. EDI trading partner agreements specify all the cash cycle is
of the except a. batch, sequential file processing 36. Adjustments to accounts receivable for
a. selling price b. batch, direct access file processing payments received from customers is based
b. quantities to be sold c. real-time file processing upon
c. payment terms d. none of the above a. the customer‟s check
d. person to authorize transactions b. the cash prelist
32. Which of the following is not a risk c. the remittance advice that accompanies
28. A cash prelist is exposure in a microcomputer accounting payment
a. a document that records sales returns system? d. a memo prepared in the mailroom
and allowances a. reliance on paper documentation is increased
b. a document returned by customers with b. functions that are segregated in a 37. The revenue cycle utilizes all of the
their payments manual environment may be com following files except
c. the source of information used to prepare c. backup procedures require human intervention a. credit memo file
monthly statements d. data are easily accessible b. sales history file
d. none of the above c. shipping report file
33. Which journal is not used in the revenue d. cost data reference file
29. An advantage of real-time processing of cycle?
sales is a. cash receipts journal 38. All of the following are advantages of
a. the cash cycle is lengthened b. sales journal real-time processing of sales except
c. purchases journal a. The cash cycle is shortened
b. Paper work is reduced inventory
c. Incorrect data entry is difficult to detect
d. Up-to-date information can provide a
competitive advantage in the
marketplace

TRUE OR FALSE
1. The packing slip is also known as the
shipping notice.

2. The bill of lading is a legal contract

between the buyer and the seller.

3. Another name for the stock release form is

the picking ticket.

4. Warehouse stock records are the

formal accounting records for inventory.

5. The purpose of the invoice is to bill

the customer.

6. In most large organizations, the journal

voucher file has replaced the formal
general journal.

7. The cash receipts journal is a special journal.

8. In the revenue cycle, the internal control

“limit access” applies to physical assets
only.

9. In real-time processing systems, routine credit

authorizations are automated.

10. In a computerized accounting system,

segregation of functions refers to
c and general ledger tasks.
o
n 11. A written customer purchase order is
t required to trigger the sales order
r system.
o
l 12. Inventory control has physical custody of
, inventory.

a 13. The principal source document in the sales

c order system is the sales order.
c
o 14. Sales orders should be prenumbered
u documents.
n
t 15. Integrated accounting systems automatically
s transfer data between modules.

r 16. If a customer submits a written purchase

e order, there is no need to prepare a sales
c order.
e
i 17. Sales return involves receiving, sales, credit,
v and billing departments, but not accounts
a receivable.
b
l 18. A remittance advice is a form of turn-around
e document.
,
19. A bill of lading is a request for payment for
b shipping charges.
i
l 20. In point of sale systems, authorization takes
l the form of validation of credit card charges.
i
n
g
,
ANSWERS: 12. B
13. A
TRUE OR FALSE 14. A
1. F 15. D
2. F 16. C
3. T 17. B
4. F 18. C
5. T 19. A
6. T 20. B
7. T 21. A
8. F 22. A
9. T 23. C
10. F 24. B
11. F 25. A
12. F 26. C
13. T 27. D
14. T 28. D
15. T 29. B
16. F 30. B
17. F 31. C
18. T 32. A
19. F 33. C
20. T 34. B
35. C
MULTIPLE CHOICE 36. C
1. B 37. D
2. C 38. C
3. D
4. B
5. A
6. C
7. A
8. D
9. D
10. A
11. B