Audit Chapter 10

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries?

A. Billing.

Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?

A. Compare shipping documents with sales records.

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.

Which of the following control activities may prevent the failure to bill customers for some shipments?

A. Each shipment should be supported by a prenumbered sales invoice that is accounted for.

Customers having substantial year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?

A. Examine shipping documents.

Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process?

A. Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme.

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?

A. Including a monthly statement of the customer's account with the confirmation.

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 about which of the following?

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

Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because

A. entities are more likely to overstate than understate revenues.

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the

A. meter department records to the billing (sales) register.

When evaluating internal control of an entity that processes revenue transactions on the Internet, an auditor would be most concerned about the

A. potential for computer disruptions in recording sales.

Which is nota key segregation of duties for the revenue process? Different parties should

A. prepare shipping orders and prepare bills of lading.

All of the following are important controls over credit memos except:

A. proper segregation of duties to ensure that sales discounts taken were earned.

In the confirmation of accounts receivable, the auditor would most likely

A. randomly select a representative sample of accounts for confirmation.

Mill Company uses a batch processing method to process its sales transactions. Data on Mill's sales transaction tapes are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer account balances. One of the direct outputs of the creation of these tapes most likely would be a

A. report showing exceptions and control totals.

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would

A. request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response.

Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely

A. send positive confirmation requests.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about

A. valuation and allocation.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of

A. valuation or allocation.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?

B. A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

B. Examine shipping documents for matching sales invoices.

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?

B. Fictitious sales.

In connection with the examination of financial statements by an independent auditor, management suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff?

B. Preparation of schedules for negative accounts receivable responses.

An auditor is reviewing sales cutoff as of March 31, 2013. All sales are shipped FOB destination and the company records sales three days after shipment. The auditor notes the following transactions:

B. an increase of 8.

When comparing prices and terms on a sample of sales invoices with the authorized price list and terms of trade, the auditor is testing the ____________ assertion.

B. authorization

Tracing copies of sales invoices to shipping documents will provide evidence that all

B. billed sales were shipped.

To determine whether the system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the

B. bills of lading file.

An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting

B. cash receipts and accounts receivable.

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of

B. completeness.

Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of

B. cutoff.

In general, revenue is recognized when

B. it is earned and realized.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an

B. overstatement of revenues and receivables and an understatement of inventory.

Immediately upon receipt of cash, a responsible employee should

B. prepare a listing of remittances.

When reviewing bank confirmations for any liens on receivables, the auditor is testing the ______________ assertion.

B. rights and obligations

Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely

B. send negative confirmation requests.

Tracing shipping documents to prenumbered sales invoices provides evidence that

B. shipments to customers were properly billed.

In auditing accounts receivable, the negative form of confirmation request most likely would be used when

B. the combined assessed level of inherent and control risk relative to accounts receivable is low.

Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipient?

C. "If you do not report any differences within 15 days, it will be assumed that this statement is correct."

What is channel stuffing?

C. A company induces distributors to buy substantially more inventory than they can promptly resell.

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following?

C. An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

C. Employees involved in the credit-granting function are separated from the sales function.

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest that goods have been shipped on consignment?

C. Large debits to accounts receivable followed by small periodic credits.

Which of the following misstatements is notrelated to the completeness assertion for revenue?

C. Next year's revenue is recorded this year.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

C. The cashier posts the receipts to the accounts receivable subsidiary ledger cards.

During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?

C. The owner reviews credit memos before they are recorded.

According to the SEC's SAB No. 101, which of the following is not necessary for revenue recognition?

C. The seller has determined that the buyer will take the discount.

Which of the following is a test of controls for the transaction assertion of completeness for revenue?

C. Trace shipping documents to sales invoices and the sales journal.

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a listing of remittances that is forwarded to the cashier. A copy of the listing should be sent to the

C. accounts receivable bookkeeper to update the subsidiary accounts receivable records.

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

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

Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to

C. evaluate the allowance for doubtful accounts.

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables'

C. existence.

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also

C. prepares the daily deposit slip.

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an

C. understatement of revenues and receivables and an overstatement of inventory.

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the entity's confirmation letter?

D. A client-prepared statement of account showing the details of the customer's account balance.

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

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

Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?

D. Assessing the allowance for uncollectible accounts for reasonableness.

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

D. Collection of receipts on account and maintaining accounts receivable records.

Which of the following might be detected by an auditor's review of the entity's sales cutoff?

D. Overstated sales for the year.

Which of the following is not an issue related to the valuation of accounts receivable?

D. Proper cutoff.

Which of the following procedures most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?

D. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Data Corporation has just computerized its billing and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of Data Corporation. Which of the following audit techniques could not be performed through a computer program?

D. Resolving differences reported by customers on confirmation requests.

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor?

D. Selling of goods for cash.

Which of the following is not an inherent risk factor for the revenue process?

D. The entity does not follow its stated policies for sales order approvals.

Which of the following is the best argument against the use of negative accounts receivable confirmations?

D. The inference drawn from receiving no reply may not be correct.

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the

D. accounting records to the shipping documents.

When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the _____________ assertion.

D. completeness

An aged trial balance of accounts receivable is normally used by the auditor to

D. evaluate the provision for bad debts.

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to

D. expand tests regarding the collectability of receivables.

For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the`

D. internal auditor.

When a sample of sales transactions recorded in the sales journal is traced back to the customer orders and shipping documents, the auditor is testing the ____________ assertion.

D. occurrence

Tracing bills of lading to sales invoices provides evidence that

D. shipments to customers were billed.

A negative confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.

False

A remittance advice is used to track purchases

False

The return of vendor purchases is a part of the revenue process.

False

A positive confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.

True

Channel stuffing is an improper practice used to boost sales by inducing distributors to buy more inventory than they can promptly resell.

True

Credit authorization is used to determine if a customer is able to pay for goods.

True

Order entry is the initial function in the revenue cycle.

True

Revenue is realized when a product or service is exchanged for cash or a promise to pay cash or other assets that can be converted into cash.

True

Revenue must be realized (or realizable) and earned to be recognized.

True

The revenue process affects numerous accounts in the financial statements.

True

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?

c The credit manager's opinion.