atg exam 3 - chapter 11

which confirmation is most reliable? why?

- blank confirmation - recipient is required to give a specific amount rather than auditor giving the amount

what are alternative procedures taken if there is no response from a confirmation

- look for subsequent payments - look for documentation to support sales (sales invoice)

what happens when an auditor does not receive a response from a confirmation?

- send a second request, maybe even a third - if still no response, perform alternative procedures

negative confirmation

a confirmation request to which the recipient responds only if the amount/information stated is incorrect

positive confirmation

a confirmation request to which the recipient responds whether or not he or she agrees with the amount of information stated

the auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?

a low exception rate is expected

which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

examine cash receipts received after year end

to prove COMPLETENESS for accounts receivable, where does an auditor choose a sample from

floor to sheet

which of the following would most likely be detected by an auditor's review of the client's sales cutoff?

inflated sales for the year

your client performed the physical count of inventory as on Nov 30, a moth prior to year end. subsequently, your client closed the sales journal on 12/29/XX, two days before year end, and are reported those two days' credit sales in Jan of the next year. assuming a perpetual inventory system is used, which of the following is most likely to be overstated relating to the year XX financial statements?

inventory

which confirmation is the least reliable?

negative confirmation

are accounts receivable prepared on a standard form like cash confirmations?

no, can be created in whatever format the client wishes

which of the following is LEAST likely to be considered an inherent risk relating to receivables and revenues?

over recorded sales due to a lack of control over the sales entry function

which of the following is LEAST likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

physically examine items sold

which of the following is most likely to be an example of fraudulent financial reporting relating to sales?

recording sales when the customer is likely to return the goods

blank confirmation

a confirmation in which he recipient is requested to fill in the balance

under SEC rules, which of the following is NOT among the criteria that ordinarily exist for revenue to be recognized?

delivery has occurred or is scheduled to occur in the near future

which risk do audit procedures address?

detection risk

the audit working papers often include a client prepared, aged trial balance of accounts receivable as of the balance sheet date. this aging is best used by the auditors to

estimate credit losses

what are the steps for confirmations?

1. Select the sample of customer confirmations to send from client A/R detail. 2. Ask the audit client to prepare the letters on their letterhead and sign them 3. Mail the confirmations - auditor controls the mailing process - and include a return envelope 4. Send a 2nd request to the customer. Possibly call the customer. 5. Summarize the confirmations received in a Spreadsheet 6. Perform additional substantive tests for those confirmations not received, such as review of subsequent receipts and/or review of sales invoices and shipping documents 7. Summarize additional work performed

when should an auditor use negative confirmations?

1. assessed level of RMM is low and sufficient evidence of effectiveness of strong controls 2. large number of small valued transactions 3. low exception rate is expected 4. auditors aren't aware of any reasons why recipients would disregard confirmation

to test the existence assertion for recorded receivables, an auditor would select a sample from the

accounts receivable subsidiary ledger

to test the existence assertion for recorded receivables, the auditors would select a sample FROM the:

accounts receivable subsidiary ledger

which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?

aging of accounts receivable

the auditors should confirm accounts receivable UNLESS the auditors' assessment of the risk of material misstatement is low:

and accounts receivable are immaterial, or the use of confirmations, would be ineffective

which of the following would provide the most assurance concerning the valuation of accounts receivable?

assess the allowance for uncollectible accounts for reasonableness

which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?

collection of receipts on account and maintaining accounts receivable records

which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoice?

completeness

if a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by

confirming accounts receivable

if a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by:

confirming accounts receivable

which procedure would be most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?

confirming accounts receivable

for effective internal control, the billing function should NOT be performed by

sales department

to prove EXISTENCE for accounts receivable, where does the auditor choose a sample from?

sheet to floor

to determine that all sales have been recorded, the auditors would select a sample of transactions FROM the:

shipping documents file

a CPA examines a sample of credit memoranda to ensure they were signed by an officer of the company. this is an example of a

test of control

which of the following would be LEAST likely to diminish the validity of evidence obtained through confirmation of accounts receivable?

the confirmation requests are sent on the client's letterhead

which of the following fraudulent activities most likely could be perpetrated because of ineffective internal controls in the revenue cycle?

the write off of receivables by personnel who receive cash permits the misappropriation of cash

which of the following is an example of misappropriation of assets relating to sales?

theft of cash register sales

identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write off of a trade account receivable

write offs must be approved by a responsible official after review of credit department recommendations and supporting evidence

can accounts receivable confirmations be emailed?

yes

do confirmations help an auditor detect when a client failed to properly record a customer return?

yes

do confirmations help an auditor discover when a sale has been recorded twice?

yes