Chapter 10

Management's emphasis on meeting projected profit goals most likely would significantly influence an entity's control environment when - Internal auditors have direct access to the entity's board of directors - A significant portion of management compensation is represented by stock options - External policies established by parties outside the entity affect accounting policies - The audit committee is active in overseeing the entity's financial reporting policies

A significant portion of management compensation is represented by stock options

An auditor suspects that a client's cashier, who also posts sales and collections to customer accounts in the subsidiary ledger, is lapping cash receipts. Of the following, what is the best procedure to detect this fraud? - Compare dates checks are deposited per bank statement with dates remittance credits are posted - Compare daily cash summaries with sums of cash receipts journal entries - Compare individual bank deposits with details of monthly bank statements. - Compare dates uncollectible accounts are authorized to be written off with dates write-off entries are made.

Compare dates checks are deposited per bank statement with dates remittance credits are posted

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of - Occurrence - Completeness - Valuation - Rights/obligations

Completeness

Confirmation of customer accounts receivable rarely provides reliable evidence about which assertion? - Existence/occurrence - Valuation - Presentation/disclosure - Completeness

Completeness

Which of the following controls most likely would reduce the risk of diversion of customer receipts by employees? - A bank lockbox system - Prenumbered remittance advices - Monthly bank reconciliations - Daily deposit of all cash and checks received

A bank lockbox system

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting - Opening and closing inventory balances - Cash receipts and accounts receivable - Shipping and receiving activities - Cutoffs of sales and purchases

Cash receipts and accounts receivable

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the - Collection of receivables - Purchase of inventory - Payment of accounts payable - Payment of employees

Collection of receivables

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-off? - Employees responsible for authorizing sales and bad debt write-offs are denied access to cash - Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts. - Employees involved in the credit-granting function are separated from the sales function. - Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

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

An auditor observed that a client mails monthly statements to customers. Subsequently, the auditor reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertion(s) of - Classification - Existence/occurrence - Presentation/disclosure - Understandability

Existence/occurrence

Tracing shipping documents to prenumbered sales invoices provides evidence that - No duplicate shipments or billings occurred - Shipments to customers were properly invoiced - All goods ordered by customers were shipped - All prenumbered sales invoices were accounted for

No duplicate shipments or billings occurred

Which of the following procedures would an auditor most likely perform to test controls relating to management's assertion about the completeness of cash receipts for cash sales at a retail outlet? - Observe the consistency of employees use of over the counter sales computer devices with internal records of such sales - Inquire about employees access to recorded but undeposited cash - Trace deposits in the cash receipts journal to the cash balance in the general ledger. - Compare the cash balance in the general ledger with the bank confirmation.

Observe the consistency of employees use of over the counter sales computer devices with internal records of such sales

Sound internal control procedures dictate that immediately upon receiving checks from customers by mail, a responsible employee should - Add the checks to the daily cash summary - Verify that each check is supported by a prenumbered sales invoice - Prepare a duplicate listing of checks received - Record the checks in the cash receipts journal

Prepare a duplicate listing of checks received

Which of the following procedures would most likely not be an internal control procedure designed to reduce the risk of errors in the billing process? - Comparing control totals for shipping documents with corresponding totals for sales invoices - Using computer programmed controls to check pricing and mathematical accuracy of sales invoices - Matching shipping documents with approved sales orders before invoice preparation - Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

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

To reduce the risks associated with accepting e-mail responses to request for confirmations of accounts receivable, an auditor most likely would - Request senders to mail the original forms directly to the auditor - Examine subsequent cash receipts for the accounts in question - Consider the e-mail responses to confirmations to be exceptions - Mail second requests to the e-mail respondents.

Request senders to mail the original forms directly to the auditor

Which of the following controls is most likely to help ensure that all credit revenue transactions of an entity are recorded? - The billing department supervisor matches prenumbered shipping documents with entries in the sales journal. - The billing department supervisor sends a copy of each approved sales order to the credit department for comparison to the customer's authorized credit limit and current account balance. - The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers. - The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account each month.

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

Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations? - The recipients are likely to sign the confirmations without devoting proper attention to them. - Subsequent cash receipts are unusually difficult to verify. - Analytical procedures indicate that few exceptions are expected. - The risk of material misstatement (IR x CR) is low.

The recipients are likely to sign the confirmations without devoting proper attention to them.

For the control activities to be effective, employees maintaining the accounts receivable subsidiary ledger should not also approve: - write-offs of customer accounts. - cash disbursements. - employee overtime wages. - credit granted to customers.

write-offs of customer accounts.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? - Merchandise receivedis not promptly reconciled to the outstanding purchase order file. - Obsolete items included in inventory balances are rarely reduced to lower-of-cost-or market - The write-off of receivables by personnel who receive cash permits misappropriation of cash receipts - Fictitious transactions are recorded that cause understatement of revenue and overstatement of receivables.

The write-off of receivables by personnel who receive cash permits misappropriation of cash receipts

Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments? - Accounts receivable - Credit - Accounts payable - Treasurer

Treasurer

Which of the following most likely would be detected by an auditor's review of a client's sales cutoff? - Shipments lacking sales invoices and shipping documents - Excessive write-offs of accounts receivable - Unrecorded sales at year-end - Lapping of year-end accounts receivable

Unrecorded sales at year-end

An auditor recomputes and evaluates the adequacy of a client's allowance for doubtful accounts. This procedure supports management's assertion of - Completeness - Existence/occurrence - Valuation/allocation - Rights/obligations

Valuation/allocation

When an auditor fails to receive replies to positive confirmation requests for year-end accounts receivable confirmations, the auditor most likely would - Inspect the allowance for doubtful accounts to verify whether the accounts in question were written off - Increase the assessed level of detection risk for valuation and completeness assertions - Vouch subsequent collections of the accounts in question to cash receipts records after year-end - Report the error to the client as a material misstatement

Vouch subsequent collections of the accounts in question to cash receipts records after year-end

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of: - valuation and allocation. - rights and obligations. - completeness. - existence.

valuation and allocation.

If the number of days' sales in accounts receivable (365 days/receivables turnover) decreases significantly, which of the following assertions for accounts receivable most likely is violated? - existence or occurrence - rights and obligations - classification - completeness

completeness

Smith Corporation has numerous customers. A customer file is maintained and includes a customer record with a name, an address, a credit limit, and an account balance. The auditor wishes to test this file to determine whether credit limits are being exceeded. The best procedure for the auditor to follow would be to: - request a printout of all account balances so that they can be manually checked against the credit limits. - develop a routine in IDEA or an audit data analytic to compare credit limits with account balances and identify any account with a balance exceeding its credit limit. - develop test data that would cause some account balances to exceed the credit limit and determine if the system properly detects such situations. - request a printout of a sample of account balances so that they can be individually checked against the respective credit limits.

develop a routine in IDEA or an audit data analytic to compare credit limits with account balances and identify any account with a balance exceeding its credit limit.

An auditor discovers that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that - fictitious credit sales have been recorded during the year. - Employees have stolen inventory just before year end. - The client recently tightened its credit-granting policies - An employee has been lapping receivables in both years.

fictitious credit sales have been recorded during the year.

If accounts receivable turnover (credit sales/receivables) was 7.1 times last year compared to only 5.6 times in the current year, it is possible that there were: - unrecorded cash receipts last year. - fictitious sales in the current year. - unrecorded credit sales in the current year. - more thorough credit investigations made by the company late last year.

fictitious sales in the current year.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: - no reply to a negative confirmation request is received. - the collectibility of the receivables is in doubt. - pledging of the receivables is probable. - no reply to a positive confirmation request is received.

no reply to a positive confirmation request is received.

Which of the following internal controls would be most likely to deter the lapping of collections from customers? - supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries - authorization of write-offs of uncollectible accounts by a supervisor independent of the credit approval function - independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries - segregation of duties between receiving cash and posting the accounts receivable ledger

segregation of duties between receiving cash and posting the accounts receivable ledger

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because: - the auditor cannot infer that all nonrespondents have verified their account information. - a majority of recipients usually lack the willingness to respond objectively. - some recipients may report incorrect balances that require extensive follow-up. - negative confirmations do not produce evidence that is statistically quantifiable.

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

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this theft and be least likely to be detected by an auditor? - overstating the accounts receivable subsidiary ledger - understating the cash disbursements journal - understating the sales journal - overstating the accounts receivable control account

understating the sales journal

Which of the following is most likely to be detected by an auditor's review of an entity's sales cutoff? - lapping of year-end accounts receivable - unauthorized goods returned for credit - unrecorded sales for the year - excessive sales discounts

unrecorded sales for the year