Audit- Chapter 11

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: 1. No reply to a positive confirmation request is received. 2. No reply to a negative confirmation request is received. 3. Collectibility of the receivables is in doubt. 4. Pledging of the receivables is probable.

1. No reply to a positive confirmation request is received.

Material accounts receivable from related parties should be stated separately from other receivables. True or False

True

When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures. True or False

True

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the: A. Sales journal to the shipping documents. B. Shipping documents to the cash receipts journal. C. Cash receipts journal to the customer's purchase orders. D. Customer's purchase orders to the sales journal.

A. Sales journal to the shipping documents.

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A. Trace a sample of the bills of lading to sales invoices. B. Confirm a sample of accounts payable. C. Review the aging of accounts receivable. D. Trace a sample of recorded sales to shipping documents.

A. Trace a sample of the bills of lading to sales invoices.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A. Accounts receivable divided by Cost of goods sold. B. Aging of accounts receivable. C. Cash Sales divided by Accounts receivable. D. Year 2 accounts receivable compared to year one accounts receivable.

B. Aging of accounts receivable.

Which of the following manipulations would understate receivables on the financial statements? A. Understatement of cash sales. B. Closing the sales journal prior to year-end. C. Closing the cash receipts journal prior to year-end. D. Underestimating the allowance for doubtful accounts.

B. Closing the sales journal prior to year-end.

Which of the following is not true about the confirmation of accounts receivable? A. Confirmation requests should bear the auditors' return address. B. Confirmation requests should be signed by the auditors. C. Confirmation requests should be mailed directly by the auditors. D. Confirmation requests should include a return envelope addressed to the office of the auditors.

B. Confirmation requests should be signed by the auditors.

The confirmation of accounts receivable is most closely associated with: A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.

B. Detection risk.

The individual looking for guidance on revenue recognition is most likely to appropriately review: A. APB 99. B. FASB ASC 606. C. CorrectASR 44. D. B1 Document.

B. FASB ASC 606.

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable? A. Fax responses. B. Oral responses obtained by the auditor through a telephone call. C. Written responses to negative confirmation requests. D. Written response to confirmations sent out without balances due.

B. Oral responses obtained by the auditor through a telephone call.

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A. Examine bills of lading. B. Physically examine items sold. C. Examine correspondence. D.Examine subsequent cash receipts.

B. Physically examine items sold.

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: A. The cash receipts journal was closed before year-end. B. The cash receipts journal was held open after year-end. C. There are many unrecorded liabilities. D. The sales journal was held open after year-end.

B. The cash receipts journal was held open after year-end.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that: A. Obsolete inventory has not yet been reduced to fair market value. B. There was an improper cutoff of sales at the end of the year. C. An unusually large receivable was written off near the end of the year. D. The aging of accounts receivable was improperly performed in both years.

B. There was an improper cutoff of sales at the end of the year.

he 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: A. Consider internal control over credit sales. B. Test the accuracy of recorded charge sales. C. Estimate credit losses. D. Verify the validity of the recorded receivables.

C. Estimate credit losses.

Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to: A. Customers who have credit or zero balances with the client. B. Responses that were mailed rather than faxed to the auditor. C. Accounts receivable that have been classified as uncollectible. D. Payments mailed to the client that have not been recorded.

C. Accounts receivable that have been classified as uncollectible.

After the certified public accountants (CPAs) have selected particular accounts receivable for confirmation: A. As a control measure, the certified public accountants (CPAs) should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. C. All requests for confirmation should be mailed personally by the auditors at a post office. D. All differences between confirmation replies and book values should be reconciled by the certified public accountants (CPAs), rather than the client.

C. All requests for confirmation should be mailed personally by the auditors at a post office.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? A. Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D. The failure to prepare shipping documents may lead to an understatement of inventory balances.

C. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

Why do estimates of recognized revenue generally present high risk for the auditors? A. Employee fraud often involves overstatement of revenue. B. Revenue is eventually converted to cash. C. Management often has an incentive to misstate revenue. D. Revenue generally affects the amount of inventories.

C. Management often has an incentive to misstate revenue.

Which of the following is consistent with effective internal control over sales transactions? A. The accounting department prepares a shipping report authorizing the shipment of goods. B. The accounting department accounts for all receiving reports. C. The billing department accounts for all shipping documents. D. The accounts payable department annually approves the extension of credit to customers.

C. The billing department accounts for all shipping documents.

Which of the following is most likely to increase days' sales in accounts receivable at the end of the year for Anthony Company? A. Operating expenses increased at a higher rate than sales revenue. B. Sales revenue increased at a higher rate than operating expenses. C. A smaller percentage of sales occurred during the last month of the year, as compared to the prior year. D. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

D. A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the A. Cash receipts journal to the sales journal. B. Sales journal to the cash receipts journal. C. Source documents to the accounting records. D. Accounting records to the source documents.

D. Accounting records to the source documents.

Which of the following sets of duties would ordinarily be considered incompatible in terms of good internal control? A. Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger. B. Posting to the general ledger and approval of additions and terminations relating to the payroll. C. Custody of unmailed signed checks and maintenance of expense subsidiary ledger. D. Collection of receipts on account and maintaining accounts receivable records.

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

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. True or False

True

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts. True or False

True