1. Riverton Company rents a building that it uses in its operations. The accountant for Riverton Company mistakenly input a $1,000 rental payment on the building as just $100 in the accounting records. What is the impact of this recording error on the financial statements?
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0. Expenses are too high, so reported net income is too low. 0. Expenses are too low, so reported net income is too high. 0. Revenues are too low, so reported net income is too low. 0. Revenues are too high, so reported net income is too high. |
1. The accountant for Kearns Company mistakenly posted an expense amount as an asset in the general ledger. What is the financial statement impact of this error?
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1. Assets are too low, and retained earnings are too high. 1. Assets are too high, and retained earnings are too high. 1. Assets are too high, and retained earnings are too low. 1. Assets are too low, and retained earnings are too low. |
1. Why is the separation-of-duties control so important with cash?
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2. Without separation of duties, the general ledger is maintained by the same person who posts the adjusting entries. 2. Without separation of duties, the adjusting entry process and the closing entry process are done by the same person. 2. Without separation of duties, an employee who takes cash can cover up the shortage by adjusting the accounting records. 2. Without separation of duties, the general ledger is maintained by the same person who posts the closing entries. |
1. Roger Lemmon is the chief financial officer (CFO) for a large aviation parts supply company. In recent months, Roger has been alarmed at the increase in inventory losses. He is not sure whether parts orders are not being properly recorded or whether employees or outside individuals are stealing parts. Roger realizes that he needs to improve the control activities related to inventory. He wants to start with the detective controls. What are the two detective controls?
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3. Proper authorizations and physical control 3. Adequate documents and independent checks 3. Segregation of duties and physical control 3. Independent checks and segregation of duties |
1. Maya Company has seen slow but steady growth over the past 10 years. Maya Company started small, and all of the employees were family members. However, the business is now big enough that it is important to start setting up a more sophisticated internal control structure, including segregation of duties. What are the three specific functions that must be kept separate?
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4. Physical possession, adjusting, posting 4. Recording, physical possession, posting 4. Approving, evaluating, ordering 4. Approving, recording, physical possession |
1. In preparing a bank reconciliation, what is the proper treatment of a deposit in transit ?
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5. Subtract from the reported cash balance in the bank statement 5. Subtract from the reported cash balance in the company’s books 5. Add to the reported cash balance in the bank statement 5. Add to the reported cash balance in the company’s books |
1. In preparing a bank reconciliation, what is the proper treatment of an outstanding check ?
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6. Add to the reported cash balance in the bank statement 6. Add to the reported cash balance in the company’s books 6. Subtract from the reported cash balance in the bank statement 6. Subtract from the reported cash balance in the company’s books |
1. In preparing a bank reconciliation, what is the proper treatment of a bank service charge ?
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7. Add to the reported cash balance in the company’s books 7. Add to the reported cash balance in the bank statement 7. Subtract from the reported cash balance in the company’s books 7. Subtract from the reported cash balance in the bank statement |
1. In preparing a bank reconciliation, what is the proper treatment of interest earned on the bank account ?
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8. Subtract from the reported cash balance in the company’s books 8. Add to the reported cash balance in the company’s books 8. Subtract from the reported cash balance in the bank statement 8. Add to the reported cash balance in the bank statement |
1. In preparing a bank reconciliation, what is the proper treatment of an NSF check ?
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9. Subtract from the reported cash balance in the company’s books 9. Add to the reported cash balance in the company’s books 9. Add to the reported cash balance in the bank statement 9. Subtract from the reported cash balance in the bank statement |
1. Which of the following is typically NOT a reason for managing reported earnings?
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10. Meet internal earnings targets 10. Accelerate collection of cash from suppliers 10. Income smoothing 10. Meet external expectations |
1. As Lorien is preparing the end of year financial statements, she realizes that the earnings are not quite high enough to justify the large loan application that is being currently processed. She decides to stretch the assumptions just enough to be able to meet the requirements for the loan application. This is an example of:
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11. Window dressing 11. Meeting internal targets 11. Meeting external expectations 11. Income smoothing |
1. With respect to the earnings management continuum, what is the FIRST item in the continuum and what is the LAST item in the continuum?
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12. FIRST, change in methods or estimates with full disclosure; LAST, strategic matching 12. FIRST: strategic matching; LAST, non-GAAP accounting 12. FIRST, non-GAAP accounting; LAST, change in methods or estimates with full disclosure 12. FIRST: strategic matching; LAST, fictitious transactions |
1. The shareholders of Escalante Company are suing the external auditors of the company. The shareholders are upset because the management of Escalante Company produced overly positive financial statements and used these financial statements to lure new investors. Escalante Company is now bankrupt, the managers are facing prison time, and the external auditors are in monetary damages settlement talks with the shareholders of Escalante Company.
What role could the Public Company Accounting Oversight Board (PCAOB) have played in avoiding this catastrophe?
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13. Provide ethics training for the top managers of the company 13. Review the tax returns of the company 13. Enforce compliance with the Foreign Corrupt Practices Act 13. Conduct an inspection of the external audit firm |
1. Which ONE of the following audit processes attempts to identify areas that may deserve attention by using techniques such as comparative ratio analysis?
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14. Observations 14. Sampling 14. Confirmation 14. Analytical procedures |
