SOP Financial SOP 4 — Questions and Answers
Question 1: Under a financial SOP, what is the primary purpose of a budget variance report?
- To document employee performance reviews
- To compare actual financial results against the approved budget and explain differences (Correct answer)
- To request new budget allocations for the following year
- To calculate depreciation schedules
Correct answer: To compare actual financial results against the approved budget and explain differences
Budget variance reports help management identify where spending or revenue deviated from plan, enabling corrective action and better forecasting.
Question 2: A financial SOP for fixed asset management requires periodic physical inventories. Why?
- To calculate employee bonuses
- To verify that recorded assets actually exist and are in the expected condition (Correct answer)
- To determine vendor payment terms
- To prepare the annual marketing plan
Correct answer: To verify that recorded assets actually exist and are in the expected condition
Physical inventories of fixed assets confirm the existence, location, and condition of assets recorded on the balance sheet, preventing ghost assets from inflating financials.
Question 3: Which of the following best describes 'accrual accounting' as required by many financial SOPs?
- Recording revenue and expenses only when cash is received or paid
- Recording revenue when earned and expenses when incurred, regardless of cash flow (Correct answer)
- Deferring all revenue recognition until year-end
- Recording only cash transactions above $10,000
Correct answer: Recording revenue when earned and expenses when incurred, regardless of cash flow
Accrual accounting matches revenues and expenses to the period they relate to, providing a more accurate picture of financial performance than cash-basis accounting.
Question 4: A financial SOP requires a 'journal entry approval' process. What is the key reason?
- Journal entries are automatically posted by accounting software without review
- To prevent unauthorized or erroneous changes to the general ledger (Correct answer)
- To ensure journal entries are printed on letterhead
- Journal entry approval speeds up the month-end close
Correct answer: To prevent unauthorized or erroneous changes to the general ledger
Requiring a second reviewer to approve journal entries before posting prevents both intentional manipulation and accidental errors in the financial records.
Question 5: What is the purpose of a financial SOP's vendor master file maintenance procedures?
- To track employee time off requests
- To ensure vendor information is accurate, complete, and authorized to prevent fraudulent payments (Correct answer)
- To negotiate lower prices with suppliers
- To generate marketing contact lists
Correct answer: To ensure vendor information is accurate, complete, and authorized to prevent fraudulent payments
Controlled vendor master file procedures prevent unauthorized vendors from being added, which could be used to redirect payments to fraudulent accounts.
Question 6: Under a financial SOP, when should an employee disclose a conflict of interest in a purchasing decision?
- Only if the purchase exceeds $100,000
- Immediately upon discovering a personal or financial relationship with a vendor being considered (Correct answer)
- At the end of the fiscal year during performance reviews
- Only if asked by an auditor
Correct answer: Immediately upon discovering a personal or financial relationship with a vendor being considered
Prompt disclosure of conflicts of interest allows the organization to reassign the decision-maker and maintain the integrity of the procurement process.
Question 7: A financial SOP requires that bank reconciliations be completed by someone who does NOT handle cash. Why?
- To give accounting staff varied tasks for career development
- To ensure that a single employee cannot both misappropriate funds and conceal it in the reconciliation (Correct answer)
- Bank reconciliations are too complex for cash handlers
- To comply with IRS reporting requirements
Correct answer: To ensure that a single employee cannot both misappropriate funds and conceal it in the reconciliation
Separating cash-handling from reconciliation is a key internal control that prevents employees from stealing cash and covering the shortage in the bank reconciliation.
SOP Financial SOP 4
Under a financial SOP, what is the primary purpose of a budget variance report?