Auditing Assurance Services 6th edition Louwers Testbank

Auditing Assurance Services  6th edition  Louwers  Testbank
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Chapter 07
Revenue and Collection Cycle

True / False Questions

1. A price list master file contains the product unit prices that are used for billing customers.

True False

2. The accountants who record cash receipts and credits to customer accounts should not handle the cash.

True False

3. Credit checks should be performed by the sales department before credit is approved.

True False

4. The aging information for accounts receivable is typically used in connection with assessing the allowance for doubtful accounts.

True False

5. A comparison of checks listed on a sample of deposit slips to the detail of customer credits posted to customer accounts receivable can be an audit test for lapping.

True False

6. If control risk is assessed very low, the substantive audit procedures on account balances must be expanded.

True False

7. A confirmation procedure scheduled on the year-end date with a large sample of customer account balances is necessary if tests of controls reveal control weaknesses.

True False

8. Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures.

True False

9. An objective for an audit is to obtain evidence related to managements financial statement assertions.

True False

10. When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and obligations assertions.

True False

11. Inquiries of management usually do not provide very convincing evidence about the existence and rights assertions.

True False

12. A computer generally cannot be used for scanning large files of accounts receivable for unusual credit balances.

True False

13. The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.

True False

14. Confirmations yield evidence about existence and the gross valuation of a receivable balance.

True False

Multiple Choice Questions

15. To be recognized, revenues must also be realized or realizable and

A. foreseeable.

B. collected.

C. earned.

D. shipped.

16. The SEC requires all of the following for revenue to be recognized except

A. cash is collected.

B. persuasive evidence of an arrangement exists.

C. delivery has occurred or services have been rendered.

D. the sellers price to the buyer is fixed or determinable.

17. Bill and hold refers to an arrangement where

A. sales are recorded but are not shipped.

B. sales are shipped but are not recorded.

C. sales are billed but not collected.

D. inventory is held but not billed.

18. Custody of inventory is transferred to the shipping area upon authorization of

A. the customer order.

B. the shipping order.

C. the invoice.

D. the purchase order.

19. The document that generates recording of a sale is the

A. customer order.

B. shipping order.

C. invoice.

D. purchase order.

20. The sum of customers unpaid balances that is compared to the general ledger balance comes from

A. a total of sales invoices.

B. a total of shipping orders.

C. the sales journal.

D. the accounts receivable trial balance.

21. The file that contains sales transactions that were initiated in the system but are not yet completed is the

A. credit check file.

B. sales detail.

C. inventory master.

D. pending order master.

22. The assertion that auditors will probably emphasize in the revenue and collection cycle is

A. occurrence.

B. completeness.

C. accuracy.

D. classification.

23. A small business owner can best offset the lack of separation of duties by

A. creating an internal audit department.

B. installing the latest computer equipment and software.

C. being actively involved in the accounting process.

D. relying on the external auditor to detect errors.

24. Accountants should be under orders to record sales and accounts receivable when

A. the customers order is received.

B. all supporting documentation of shipping is in order.

C. the item has been paid for.

D. the terms are agreed upon.

25. Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

A. Recorded sales in the sales journal are supported by invoices.

B. Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked.

C. Sales are recorded in the proper account.

D. Invoice quantities are compared to shipment and customer order quantities.

26. Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

A. Completeness.

B. Accuracy.

C. Occurrence.

D. Classification.

27. Vouching debits from a sample selection of customers accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of

A. occurrence.

B. completeness.

C. classification.

D. accuracy.

28. Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004. This situation is an example of a violation of which of the following assertions?

A. Existence or occurrence.

B. Completeness.

C. Classification.

D. Accuracy.

29. Confirmations of accounts receivable provide the most evidence for which of the following assertions?

A. Existence.

B. Valuation or allocation.

C. Rights and obligations.

D. Completeness.

30. The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except

A. preparing the confirmation letters.

B. mailing the confirmation letters.

C. receiving the confirmation letters.

D. None of the above.

31. If the auditor obtains sufficient competent evidence on the clients accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable, the auditors opinion should be unqualified and could be expected to

A. disclose the fact that alternative procedures were used due to client-imposed scope limitation.

B. disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.

C. avoid mentioning the alternative procedures.

D. include an explanatory paragraph that discloses the performance of alternative procedures.

32. Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

A. The balance is immaterial.

B. Confirmations would be ineffective.

C. The client requests alternative procedures be performed instead.

D. Other procedures provide sufficient competent evidence.

33. When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the clients

A. credit manager.

B. treasurer.

C. accountant.

D. internal auditor.

34. Which of the following audit procedures is the most effective in testing sales for understatement?

A. Analyze the aged trial balance of recorded accounts receivable.

B. Confirm recorded accounts receivable.

C. Trace a sample of shipping documents to sales invoices recorded in the sales journal.

D. Vouch a sample of recorded sales from the sales journal to shipping documents.

35. To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?

A. Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.

B. Analyze transactions occurring within a few days before and after year-end.

C. Confirm year-end transactions with regular customers.

D. Examine cash receipts in the subsequent period.

36. The most effective audit procedure for determining the collectability of an account receivable is the

A. review of the subsequent cash collections.

B. examination of the related sales invoice(s).

C. confirmation of the account.

D. review of authorization of credit sales to the customer and the previous history of collections.

37. In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from

A. an aging schedule of past due accounts that the auditor has tested.

B. correspondence with the clients collection agency.

C. financial statements of individual customers.

D. no reply to negative confirmations.

38. An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

A. One of the cashiers has been covering a personal embezzlement by lapping.

B. One of the sales clerks has not been preparing charge slips for credit sales to family and friends.

C. One of the IT control clerks has been removing all sales invoices applicable to his account from the data file.

D. The credit manager has misappropriated remittances from customers whose accounts have been written off.

39. An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when

A. no reply to a positive confirmation request is received.

B. no reply to a negative confirmation request is received.

C. collectability of the receivables is in doubt.

D. pledging of the receivables is probable.

40. A customer reply on a positive confirmation says We dispute the $250 charge. We believe it is excessive. This confirmation

A. provides evidence of existence.

B. does not provide evidence of existence because the customer may refuse to pay the $250 charge.

C. provides evidence that the account was understated.

D. provides evidence that the account should be written off.

41. The primary consideration when planning whether to send confirmations of accounts receivable before the balance sheet date is the

A. type of confirmation to be used.

B. clients internal control over transactions affecting receivables.

C. availability of staff auditors.

D. number of customer accounts.

42. In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions?

A. Existence.

B. Completeness.

C. Rights and obligations.

D. Valuation or allocation.

43. The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to which of the following assertions?

A. Occurrence.

B. Completeness.

C. Accuracy.

D. Cutoff.

44. In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

B. A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

C. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.

D. A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

45. Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

A. The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.

B. The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.

C. The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.

D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

46. Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

A. Daily sales summaries are compared to daily postings to the accounts receivable ledger.

B. Each sales invoice is supported by a prenumbered shipping document.

C. The accounts receivable ledger is reconciled daily to the control account in the general ledger.

D. Each shipment on credit is supported by a prenumbered sales invoice.

47. In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entitys aging of receivables to support managements financial statement assertion of

A. existence.

B. valuation or allocation.

C. completeness.

D. rights and obligations.

48. Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

A. Review the cash receipts journal for the month prior to the year-end.

B. Intensify the study of the internal control structure concerning the revenue cycle.

C. Increase the assessed level of detection risk for the existence assertion.

D. Inspect the shipping records documenting the merchandise sold to the debtors.

49. Which of the following most likely would be detected by an auditors review of a clients sales cutoff?

A. Shipments lacking sales invoices and shipping documents.

B. Excessive write-offs of accounts receivable.

C. Unrecorded sales at year-end.

D. Lapping of year-end accounts receivable.

50. Tracing shipping documents to prenumbered sales invoices provides evidence that

A. no duplicate shipments or billings occurred.

B. shipments to customers were properly invoiced.

C. all goods ordered by customers were accounted for.

D. all prenumbered sales invoices were accounted for.

51. Which of the following statements is correct concerning the use of negative confirmation requests?

A. Unreturned negative confirmation requests rarely provide significant explicit evidence.

B. Negative confirmation requests are effective when detection risk is low.

C. Unreturned negative confirmation requests indicate that alternative procedures are necessary.

D. Negative confirmation requests are effective when understatements of account balances are suspected.

52. The confirmation of customers accounts receivable rarely provides reliable evidence about the completeness assertion because

A. many customers merely sign and return the confirmation without verifying its details.

B. recipients usually respond only if they disagree with the information on the request.

C. customers may not be inclined to report understatement errors in their accounts.

D. auditors typically select many accounts with low recorded balances to be confirmed.

53. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

A. a majority of recipients usually lacks the willingness to respond objectively.

B. some recipients may report incorrect balances that require extensive follow up.

C. the auditor cannot infer that all nonrespondents have verified their account information.

D. negative confirmations do not produce evidential matter that is statistically quantifiable.

54. Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and tested Elm Trees internal control procedures over the sales recording process and finds the controls to be effective. At a minimum, the auditors year-end procedures for testing internal control procedures must include

A. confirmations of year-end accounts that were examined on October 15.

B. test the clients internal control procedures from October 15 through the year end.

C. tests of compliance with internal control for a random sample of transactions throughout the audit period.

D. a comparison of the responses to the auditors internal control questionnaire with a detailed flowchart of control procedures at year end.

55. Revenues are normally considered to have been earned when

A. all possibility of return has expired.

B. the company has substantially accomplished what it must to be entitled to the benefits.

C. the cash is collected.

D. goods have been shipped.

56. Sales are normally recorded on the date of the

A. customer purchase order.

B. bill of lading.

C. sales invoice.

D. payment check.

57. When auditing the revenue and collection cycle, auditors normally select balances to confirm from the

A. sales journal.

B. accounts receivable listing.

C. general ledger.

D. cash receipts listing.

58. Which of the following accounts is not normally part of the revenue and collection cycle?

A. Sales.

B. Accounts Receivable.

C. Cash.

D. Purchases Returns and Allowances.

59. The control activity credit sales approved by credit department is directed toward which transaction assertion?

A. Occurrence.

B. Completeness.

C. Accuracy.

D. Cutoff.

60. Which of the following would be the best protection for a company that wishes to prevent the lapping of trade accounts receivable?

A. Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.

B. Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.

C. Have customers send payments directly to the companys depository bank.

D. Request that customers payment checks be made payable to the company and addressed to the treasurer.

61. Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?

A. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.

B. Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off.

C. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.

D. Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.

62. Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

A. Unrecorded purchases.

B. Unrecorded sales.

C. Merchandise purchases being charged to selling and general expense.

D. Fictitious sales.

63. An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that

A. sales invoices represent bona fide sales.

B. all sales have been recorded.

C. all sales invoices have been properly posted to customer accounts.

D. entries in the accounts receivable subsidiary ledger were properly invoiced.

64. An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor is most likely concerned about

A. unrecorded costs.

B. improper credit approvals.

C. improper sales cut-off.

D. fictitious sales.

65. An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor interviewed the sales manager who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor best test the sales managers representation?

A. Perform additional inquiries with sales personnel.

B. Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.

C. Send confirmations asking customers about unit prices paid for product.

D. Vouch vender invoices to payments made after year-end.

66. To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts?

A. Miscellaneous income.

B. Petty cash.

C. Miscellaneous expense.

D. Sales returns.

67. Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

A. This amount was paid on December 30th.

B. We received this shipment on January 2nd.

C. These goods were returned for credit on November 15th.

D. The balance does not reflect our sales discount for paying by January 5th.

68. A client has a separate sales group for its largest preferred customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

A. Prepare a schedule of purchases and payments for these customers.

B. Send out negative confirmations on a large sample of these customers.

C. Inquire of the sales manager regarding the accounts receivable terms.

D. Send out positive confirmations on a large sample of these customers.

69. Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to

A. evaluate internal control over credit sales.

B. test the accuracy of recorded charge sales.

C. estimate credit losses.

D. verify the existence of the recorded receivables.

70. Which of the following might be detected by auditors cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

A. Lapping year-end accounts receivable.

B. Inflating sales for the year.

C. Kiting bank balances.

D. Misappropriating merchandise.

71. Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the

A. collectability of the balances confirmed.

B. ownership of the balances confirmed.

C. existence of the balances confirmed.

D. internal control over balances confirmed.

72. Which of the following is the best reason for prenumbering in sequence such documents as sales orders, shipping documents, and sales invoices?

A. Enables company personnel to determine the accuracy of each document.

B. Enables personnel to determine the proper period for recording of sales revenue and receivables.

C. Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.

D. Enables personnel to determine the validity of recorded transactions.

73. When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to

A. sales invoices with shipping documents.

B. records of accounts receivable write-offs.

C. cash remittance lists and bank deposit slips.

D. credit files and reports.

74. In the audit of accounts receivable, the most important emphasis should be on the

A. completeness assertion.

B. existence assertion.

C. rights and obligations assertion.

D. presentation and disclosure assertion.

75. When accounts receivable are confirmed at an interim date, auditors need not be concerned with

A. obtaining a summary of receivables transactions from the interim date to the year-end date.

B. obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and obtaining evidence and explanations for large variations.

C. sending negative confirmations to all the customers as of the year-end date.

D. considering the necessity for some additional confirmations as of the balance sheet date if balances have increased materially.

76. The negative request form of accounts receivable confirmation is useful particularly when the

A. Option A

B. Option B

C. Option C

D. Option D

77. When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that

A. shipments to customers were invoiced.

B. shipments to customers were recorded as sales.

C. recorded sales were shipped.

D. invoiced sales were shipped.

78. Write-offs of doubtful accounts should be approved by

A. the salesperson.

B. the credit manager.

C. the treasurer.

D. the cashier.

79. When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except

A. send a second request.

B. do nothing for immaterial balances.

C. examine shipping documents.

D. examine client correspondence files.

80. Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

A. Understating the sales journal.

B. Overstating the accounts receivable control account.

C. Overstating the accounts receivable subsidiary ledger.

D. Understating the cash receipts journal.

81. Which of the following internal control activities most likely would deter lapping of collections from customers?

A. Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.

B. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.

C. Separation of duties between receiving cash and posting the accounts receivable ledger.

D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.

82. The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

A. Control risk was particularly low for accounts receivable.

B. Inherent risk was particularly high for accounts receivable.

C. Mr. Denniss account was not yet due.

D. Mr. Denniss account was not with a related party.

83. In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by

A. delivering goods, billing customer, granting credit, and performing collection activities.

B. customer ordering, delivering goods, granting credit, and billing customers.

C. processing customer orders, granting credit, delivering goods, and billing customers.

D. granting credit, billing customers, delivering goods, and processing cash receipts.

84. Which of the following controls is designed to meet the completeness assertion?

A. Prenumbering invoices, shipping documents, and sales orders.

B. Sales orders are approved by the credit department prior to shipping goods.

C. The sale is to a customer on the approved customer list.

D. Sales are dated by the computer to ensure it is included in the proper period.

85. Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues?

A. Is customer credit approved before orders are shipped?

B. Are sales orders prenumbered?

C. Are shipping documents required before a customer invoice is sent?

D. Are payments received from the customer deposited in the bank in a timely manner?

86. The composition of Oak and Companys accounts receivable are as follows:

Over $250,000 5 accounts
Between $25,000 and $250,000 80 accounts
Less than $25,000 200 accounts

The best confirmation strategy for the auditor is:

A. Positive confirmations on a sample of all 285 accounts.

B. Positive confirmations on all a sample of all accounts over $25,000; negative confirmations on a sample of accounts less than $25,000.

C. Positive confirmations on all 5 accounts over $250,000; positive confirmations on a sample of the accounts between $25,000 and $25,000; negative confirmations on a sample of accounts less than $25,000.

D. Positive confirmations on all 5 accounts over $250,000; negative confirmations on a sample of the accounts less than $250,000.

87. Favorite Soda Company distributes beverages in the Portland, Oregon area. Which of the following would be the test to determine that shipments made were actual sales?

A. Trace bills of lading to the sales journal.

B. Vouch entries made in the sales journal to the bills of lading.

C. Trace entries in the sales journal to accounts receivable subsidiary ledger.

D. Vouch bills of lading to the customer order documents.

88. Smith Manufacturing Companys accounts receivable clerk has a friend who is also Smiths customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned (these returns did not exist). The most effective control for preventing this activity is to

A. prenumber and account for all credit memorandums.

B. require receiving reports to support all credit memorandums before they are approved.

C. have the sales department independent of the accounts-receivable department.

D. mail monthly statements to the customer.

89. While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

A. Move detailed analytical procedures from year end to interim.

B. Increase the dollar threshold of vouching customer invoices.

C. Send negative accounts receivable confirmations instead of positive accounts receivable confirmations.

D. Use more experienced audit team members to perform year-end testing.

90. In confirming a clients accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current years audit, the auditor most likely would choose

A. customers with credit balances.

B. small account balances.

C. individual overdue balances.

D. individual invoices.

91. When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations

A. copies of the clients shipping documents that support the account balances.

B. lists of the customers recent payments that the client has already recorded.

C. client-prepared statements of account that show the details of the account balances.

D. copies of the customers purchase orders that support the account balances.

Fill in the Blank Questions

92. _________________________________ of accounts receivable records implies the power to alter them directly or enter transactions to alter them.

________________________________________

93. The pending sales orders can be reviewed for evidence of the _________________________________ of recorded _________________________________ and ________________________________.

________________________________________

94. Internal control assessment is important because it governs the ________________________________, _________________________________ and _________________________________ of substantive procedures.

________________________________________

95. Information about the internal control system can be gathered by completing an __________________________________________.

________________________________________

96. Another way to obtain information about the internal control system is to take a single example of a transaction and __________________________ the process from its initiation to its recording in the accounting records.

________________________________________

97. The actions in tests of controls involve ________________________________, ________________________________, ________________________________, _________________________________ and ________________________________.

________________________________________

98. Dual direction testing involves samples of transactions selected to obtain evidence about control over _________________________________ in one direction and control over _________________________________ in the other direction.

________________________________________

99. A procedure to gather evidence on both account balances and controls is called a ______________________________________ procedure.

________________________________________

100. Assertions related to account balances are ________________________________, ________________________________, _________________________________ ________________________________, _________________________________ and ________________________________.

________________________________________

101. Confirmations provide evidence of _________________________________ and, to a limited extent, ________________________________ of accounts and notes receivable.

________________________________________

102. ___________________________ may be used to access computerized receivable files to select and print confirmations.

________________________________________

103. Two widely used confirmation forms to test accounts receivable are _________________________________ and _________________________________ confirmations.

________________________________________

104. The ____________________________ confirmation form is used when individual balances are ____________________________ or accounts are in ______________________________.

________________________________________

105. Auditing the details of customer payments listed in bank deposits in comparison to details of customer payment postings can detect _________________________________.

________________________________________

Short Answer Questions

106. For each of the tests of controls for sales and receivables, indicate the assertion that is supported by placing the correct letter in the blank.

Essay Questions

107. What is dual direction testing?

108. Is the confirmation of cash and accounts receivable required according to auditing standards? Explain.

109. In tests of controls auditing, auditors need to define deviations in advance. Give seven examples of control compliance deviations related to a clients processing of credit sales transactions and the related assertion that was violated.

110. You are the auditor for Wilson Wholesale Products Inc. As part of the audit of accounts receivable, Wilson has provided you an electronic file representing its accounts receivable as of its fiscal year-end. The file includes the customer name, customer address, customer number, sales invoice number, sales invoice date, and amount.

Required:

Describe three or more substantive audit procedures you might perform using computer-assisted audit tools and techniques (CAATs) with this computer file.

111. What procedures should an auditor perform for a positive confirmation that is not returned by the clients customer?

112. The following question appeared on an internal control questionnaire for sales. Next to each of the question indicate the related assertion.

Chapter 07 Revenue and Collection Cycle Answer Key

True / False Questions

1. A price list master file contains the product unit prices that are used for billing customers.

TRUE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Topic: Revenue and Collection Cycle: Typical Activities

2. The accountants who record cash receipts and credits to customer accounts should not handle the cash.

TRUE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Topic: Revenue and Collection Cycle: Typical Activities

3. Credit checks should be performed by the sales department before credit is approved.

FALSE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Topic: Revenue and Collection Cycle: Typical Activities

4. The aging information for accounts receivable is typically used in connection with assessing the allowance for doubtful accounts.

TRUE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Topic: Revenue and Collection Cycle: Typical Activities

5. A comparison of checks listed on a sample of deposit slips to the detail of customer credits posted to customer accounts receivable can be an audit test for lapping.

TRUE
Question also found in study guide

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Give examples of tests of controls over customer credit approval; delivery; and recording of accounts receivable.
Topic: Control Risk Assessment

6. If control risk is assessed very low, the substantive audit procedures on account balances must be expanded.

FALSE
Question also found in study guide

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Give examples of tests of controls over customer credit approval; delivery; and recording of accounts receivable.
Topic: Control Risk Assessment

7. A confirmation procedure scheduled on the year-end date with a large sample of customer account balances is necessary if tests of controls reveal control weaknesses.

TRUE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Topic: Substantive Procedures in the Revenue and Collection Cycle

8. Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures.

FALSE
Question also found in study guide

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-03 Give examples of tests of controls over customer credit approval; delivery; and recording of accounts receivable.
Topic: Control Risk Assessment

9. An objective for an audit is to obtain evidence related to managements financial statement assertions.

TRUE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Topic: Revenue and Collection Cycle: Typical Activities

10. When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and obligations assertions.

FALSE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Topic: Substantive Procedures in the Revenue and Collection Cycle

11. Inquiries of management usually do not provide very convincing evidence about the existence and rights assertions.

TRUE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Topic: Revenue and Collection Cycle: Typical Activities

12. A computer generally cannot be used for scanning large files of accounts receivable for unusual credit balances.

FALSE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Topic: Revenue and Collection Cycle: Typical Activities

13. The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.

TRUE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Topic: Substantive Procedures in the Revenue and Collection Cycle

14. Confirmations yield evidence about existence and the gross valuation of a receivable balance.

TRUE
Question also found in study guide

AACSB: Analytic
AICPA: BB Industry
AICPA: FN Decision Making
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Topic: Substantive Procedures in the Revenue and Collection Cycle

Multiple Choice Questions

15. To be recognized, revenues must also be realized or realizable and

A. foreseeable.

B. collected.

C. earned.

D. shipped.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-01 Discuss inherent risks related to the revenue and collection cycle with a focus on improper revenue recognition.
Source: Original
Topic: Inherent Risks in the Revenue and Collection Cycle

16. The SEC requires all of the following for revenue to be recognized except

A. cash is collected.

B. persuasive evidence of an arrangement exists.

C. delivery has occurred or services have been rendered.

D. the sellers price to the buyer is fixed or determinable.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 07-01 Discuss inherent risks related to the revenue and collection cycle with a focus on improper revenue recognition.
Source: Original
Topic: Inherent Risks in the Revenue and Collection Cycle

17. Bill and hold refers to an arrangement where

A. sales are recorded but are not shipped.

B. sales are shipped but are not recorded.

C. sales are billed but not collected.

D. inventory is held but not billed.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 3 Hard
Learning Objective: 07-05 Describe some common errors and frauds in the revenue and collection cycle and design some audit and investigation procedures for detecting them.
Source: Original
Topic: Audit Cases: Extended Audit Procedures

18. Custody of inventory is transferred to the shipping area upon authorization of

A. the customer order.

B. the shipping order.

C. the invoice.

D. the purchase order.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Source: Original
Topic: Revenue and Collection Cycle: Typical Activities

19. The document that generates recording of a sale is the

A. customer order.

B. shipping order.

C. invoice.

D. purchase order.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Source: Original
Topic: Revenue and Collection Cycle: Typical Activities

20. The sum of customers unpaid balances that is compared to the general ledger balance comes from

A. a total of sales invoices.

B. a total of shipping orders.

C. the sales journal.

D. the accounts receivable trial balance.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

21. The file that contains sales transactions that were initiated in the system but are not yet completed is the

A. credit check file.

B. sales detail.

C. inventory master.

D. pending order master.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Source: Original
Topic: Revenue and Collection Cycle: Typical Activities

22. The assertion that auditors will probably emphasize in the revenue and collection cycle is

A. occurrence.

B. completeness.

C. accuracy.

D. classification.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Understand
Difficulty: 2 Medium
Learning Objective: 07-01 Discuss inherent risks related to the revenue and collection cycle with a focus on improper revenue recognition.
Source: Original
Topic: Inherent Risks in the Revenue and Collection Cycle

23. A small business owner can best offset the lack of separation of duties by

A. creating an internal audit department.

B. installing the latest computer equipment and software.

C. being actively involved in the accounting process.

D. relying on the external auditor to detect errors.

AACSB: Reflective Thinking
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Evaluate
Difficulty: 2 Medium
Learning Objective: 07-03 Give examples of tests of controls over customer credit approval; delivery; and recording of accounts receivable.
Source: Original
Topic: Control Risk Assessment

24. Accountants should be under orders to record sales and accounts receivable when

A. the customers order is received.

B. all supporting documentation of shipping is in order.

C. the item has been paid for.

D. the terms are agreed upon.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 1 Easy
Learning Objective: 07-02 Describe the revenue and collection cycle; including typical source documents and control procedures.
Source: Original
Topic: Revenue and Collection Cycle: Typical Activities

25. Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

A. Recorded sales in the sales journal are supported by invoices.

B. Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked.

C. Sales are recorded in the proper account.

D. Invoice quantities are compared to shipment and customer order quantities.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-03 Give examples of tests of controls over customer credit approval; delivery; and recording of accounts receivable.
Source: Original
Topic: Control Risk Assessment

26. Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

A. Completeness.

B. Accuracy.

C. Occurrence.

D. Classification.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

27. Vouching debits from a sample selection of customers accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of

A. occurrence.

B. completeness.

C. classification.

D. accuracy.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

28. Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004. This situation is an example of a violation of which of the following assertions?

A. Existence or occurrence.

B. Completeness.

C. Classification.

D. Accuracy.

AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 1 Easy
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

29. Confirmations of accounts receivable provide the most evidence for which of the following assertions?

A. Existence.

B. Valuation or allocation.

C. Rights and obligations.

D. Completeness.

AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

30. The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except

A. preparing the confirmation letters.

B. mailing the confirmation letters.

C. receiving the confirmation letters.

D. None of the above.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

31. If the auditor obtains sufficient competent evidence on the clients accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable, the auditors opinion should be unqualified and could be expected to

A. disclose the fact that alternative procedures were used due to client-imposed scope limitation.

B. disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.

C. avoid mentioning the alternative procedures.

D. include an explanatory paragraph that discloses the performance of alternative procedures.

AACSB: Communication
AICPA: BB Legal
AICPA: FN Reporting
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

32. Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

A. The balance is immaterial.

B. Confirmations would be ineffective.

C. The client requests alternative procedures be performed instead.

D. Other procedures provide sufficient competent evidence.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

33. When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the clients

A. credit manager.

B. treasurer.

C. accountant.

D. internal auditor.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 07-03 Give examples of tests of controls over customer credit approval; delivery; and recording of accounts receivable.
Source: Original
Topic: Control Risk Assessment

34. Which of the following audit procedures is the most effective in testing sales for understatement?

A. Analyze the aged trial balance of recorded accounts receivable.

B. Confirm recorded accounts receivable.

C. Trace a sample of shipping documents to sales invoices recorded in the sales journal.

D. Vouch a sample of recorded sales from the sales journal to shipping documents.

AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

35. To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?

A. Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.

B. Analyze transactions occurring within a few days before and after year-end.

C. Confirm year-end transactions with regular customers.

D. Examine cash receipts in the subsequent period.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

36. The most effective audit procedure for determining the collectability of an account receivable is the

A. review of the subsequent cash collections.

B. examination of the related sales invoice(s).

C. confirmation of the account.

D. review of authorization of credit sales to the customer and the previous history of collections.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

37. In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from

A. an aging schedule of past due accounts that the auditor has tested.

B. correspondence with the clients collection agency.

C. financial statements of individual customers.

D. no reply to negative confirmations.

AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

38. An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

A. One of the cashiers has been covering a personal embezzlement by lapping.

B. One of the sales clerks has not been preparing charge slips for credit sales to family and friends.

C. One of the IT control clerks has been removing all sales invoices applicable to his account from the data file.

D. The credit manager has misappropriated remittances from customers whose accounts have been written off.

AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

39. An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when

A. no reply to a positive confirmation request is received.

B. no reply to a negative confirmation request is received.

C. collectability of the receivables is in doubt.

D. pledging of the receivables is probable.

AACSB: Analytic
AICPA: BB Legal
AICPA: FN Research
Accessibility: Keyboard Navigation
Blooms: Remember
Difficulty: 2 Medium
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Procedures in the Revenue and Collection Cycle

40. A customer reply on a positive confirmation says We dispute the $250 charge. We believe it is excessive. This confirmation

A. provides evidence of existence.

B. does not provide evidence of existence because the customer may refuse to pay the $250 charge.

C. provides evidence that the account was understated.

D. provides evidence that the account should be written off.

AACSB: Analytic
AICPA: BB Critical Thinking
AICPA: FN Risk Analysis
Accessibility: Keyboard Navigation
Blooms: Apply
Difficulty: 3 Hard
Learning Objective: 07-04 Give examples of substantive procedures in the revenue and collection cycle and relate them to assertions about account balances at the end of the period.
Source: Original
Topic: Substantive Pr

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