Audit Chapter 10 MC

T/F: Revenue is realized when a product or service is exchanged for inflows or other enhancement of assets.

True

T/F: The revenue process affects numerous accounts in the financial statements.

True

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

True

T/F: Accounting standards require entities to follow a five-step approach for recognizing revenue.

True

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

True

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. A) cutoff B) authorization and accuracy C) occurrence D) completeness

B. authorization and accuracy

Tracing copies of sales invoices to shipping documents will provide evidence that all: A) shipments to customers were recorded as receivables. B) billed sales were shipped. C) accounts receivable ledger is complete. D) shipments to customers were billed.

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: A) customer order file. B) bills of lading file. C) open invoice file. D) sales invoice file.

B. bills of lading file.

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. A) cutoff B) authorization and accuracy C) completeness D) occurrence

D. occurrence

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

False

T/F: A remittance advice is used to track purchases.

False

T/F: The return of vendor purchases is a part of the revenue process.

False

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders? A) Billing. B) Shipping. C) Credit. D) Sales Order.

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. B) Apply gross profit rates to inventory disposed of during the period. C) Trace payments received subsequent to the balance sheet date. D) Send accounts receivable confirmation requests.

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. 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.

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. B) Each sales order should be approved by authorized personnel. C) Sales journal entries should be reconciled to daily sales summaries. D) Each sales invoice should be supported by a shipping document.

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. B) Review collections during the year being examined. C) Intensify the study of the entity's system of internal control with respect to receivables. D) Increase the balance in the allowance for uncollectible accounts.

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. B) Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables. C) Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped. D) Omission of shipping documents could go undetected, causing an understatement of inventory.

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 accuracy of the confirmation of accounts receivable? A) Including a monthly statement of the customer's account with the confirmation. B) Restricting the selection of accounts to be confirmed to those customers with relatively large balances. C) Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail. D) Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner.

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

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

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following? A) The credit manager's opinion. B) An aging schedule of past due accounts. C) Subsequent year collections of amounts in accounts receivable at the balance sheet date. D) Ratios calculated showing the past relationship of the valuation allowance to net credit sales.

A. The credit manager's opinion.

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's assertion about account balances of: A) accuracy, valuation and allocation. B) completeness. C) existence or occurrence. D) rights and obligations.

A. accuracy, valuation and allocation.

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) accuracy, valuation and allocation. B) completeness. C) existence. D) rights and obligations.

A. accuracy, valuation and allocation.

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. B) entities are more likely to understate than overstate revenues. C) it is difficult to determine when services have been performed. D) the allowance for doubtful accounts often is understated.

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. B) billing (sales) register to the meter department records. C) accounts receivable ledger to the billing (sales) register. D) billing (sales) register to the accounts receivable ledger.

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

Which is not a key segregation of duties for the revenue process? Different parties should: A) prepare shipping orders and prepare bills of lading. B) perform the credit and billing functions. C) perform the shipping and billing functions. D) receive cash and adjust accounts receivable.

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. B) credit memos should be approved by someone other than whoever initiated it. C) credit memos should be supported by a receiving document for returned goods. D) proper segregation of duties between access to customer records and authorizing credit memos.

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

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. B) send negative confirmation requests. C) examine evidence of subsequent cash receipts. D) inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

A. send positive confirmation requests.

To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivable, an auditor most likely would: A) validate the sender of electronic information. B) examine subsequent cash receipts for the accounts in question. C) consider the electronic responses to the confirmations to be exceptions. D) mail second requests to the electronic respondents.

A. validate the sender of electronic information.

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? A) The positive confirmation form must always be used to confirm all balances regardless of size. 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. C) A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables. D) The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory.

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? A) Scan the sales journal for sequential and unusual entries. B) Examine shipping documents for matching sales invoices. C) Compare the accounts receivable ledger to daily sales summaries. D) Inspect unused sales invoices for consecutive prenumbering.

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? A) Fictitious purchases. B) Fictitious sales. C) Selling and general expenses erroneously being recorded as merchandise purchases. D) Unrecorded sales.

B. Fictitious sales.

In general, revenue is recognized when: A) goods are shipped. B) an entity satisfies a performance obligation. C) it is recorded in the sales journal. D) it is received in cash.

B. an entity satisfies a performance obligation.

An auditor is reviewing sales cutoff as of March 31, 2019. All sales are shipped FOB destination and the company records sales three days after shipment. The auditor notes the following transactions: Shipped. Month Recorded Selling Price (000's) Cost (000's) March 28, March, $192, $200 March 29, March, 44, 40 March 30, April, 77, 81 April 2, March, 208, 220 April 5, April, 92, 84 If the entity records the required adjustments, the net effect on income (in thousands of dollars) for the period ended March 31, 2019 is A) an increase of 12. B) an increase of 8. C) a decrease of 12. D) a decrease of 8.

B. an increase of 8.

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: A) opening and closing inventory balances. B) cash receipts and accounts receivable. C) receiving activities. D) cutoffs of sales and purchases.

B. cash receipts and accounts receivable.

Confirmation is least likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables: A) valuation. B) classification. C) existence. D) completeness.

B. classification.

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: A) authorization and accuracy. B) completeness. C) cutoff. D) occurrence.

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: A) classification. B) cutoff. C) occurrence. D) authorization and accuracy.

B. cutoff.

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: A) understatement of revenues, receivables, and inventory. B) overstatement of revenues and receivables and an understatement of inventory. C) understatement of revenues and receivables and an overstatement of inventory. D) overstatement of revenues, receivables, and inventory.

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

Immediately upon receipt of cash, a responsible employee should: A) record the amount in the cash receipts journal. B) prepare a control listing. C) update the subsidiary accounts receivable records. D) prepare a deposit slip in triplicate.

B. prepare a control listing.

When reviewing bank confirmations for any liens on receivables, the auditor is testing the ________ assertion. A) valuation and allocation B) rights and obligations C) existence D) completeness

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: A) send positive confirmation requests. B) send negative confirmation requests. C) examine evidence of subsequent cash receipts instead of sending confirmation requests. D) use statistical sampling instead of sending confirmation requests.

B. send negative confirmation requests.

Tracing shipping documents to prenumbered sales invoices provides evidence that: A) no duplicate shipments or billings occurred. B) shipments to customers were properly billed. C) all goods ordered by customers were shipped. D) all prenumbered sales invoices were accounted for.

B. shipments to customers were properly billed.

In auditing accounts receivable, the negative form of confirmation request most likely would be used when: A) recipients are likely to return positive confirmation requests without verifying the accuracy of the information. B) the combined assessed level of inherent and control risk relative to accounts receivable is low. C) a small number of accounts receivable are involved but a relatively large number of errors are expected. D) the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

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

What is channel stuffing? A) A company records revenue before delivery terms can be arranged. B) A company records revenue on goods that will be shipped overseas. C) A company induces distributors to buy substantially more inventory than they can promptly resell. D) A company alters the terms and conditions of recorded sales to entice customers to accept delivery of goods.

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? A) An October invoice was improperly computed. B) An October check from a customer was posted in error to the account of another customer with a similar name. C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period. D) An account balance is past due and should be written off.

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

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

Which of the following misstatements is not related to the completeness assertion for revenue? A) Goods are shipped, but revenue is not recorded. B) This year's revenue is recorded next year. C) Next year's revenue is recorded this year. D) Revenue is not recognized for services that have been performed.

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? A) The cashier prepares the daily deposit. B) The cashier makes the daily deposit at a local bank. C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards. D) The cashier endorses the checks.

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? A) The owner reviews errors in billings to customers and postings to the subsidiary ledger. B) A controller receives the monthly bank statement directly and reconciles the checking accounts. C) The owner reviews credit memos before they are recorded. D) The controller reconciles the total of the detailed accounts receivable accounts to the amount shown in the ledger.

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

Which of the following is a test of controls for the transaction assertion of completeness for revenue? A) Test a sample of sales invoices for authorized customer orders. B) Review sales orders for proper credit approval. C) Trace shipping documents to sales invoices and the sales journal. D) Examine reconciliation of subsidiary ledger to general ledger control account.

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 control listing. A copy of the listing should be sent to the: A) internal auditor to investigate the listing for unusual transactions. B) treasurer to compare the listing with the monthly bank statement. C) accounts receivable bookkeeper to update the subsidiary accounts receivable records. D) entity's bank to compare the listing with the deposit slip.

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: 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.

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

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: A) understatement of revenues, receivables, and inventory. B) overstatement of revenues and receivables and an understatement of inventory. C) understatement of revenues and receivables and an overstatement of inventory. D) overstatement of revenues, receivables, and inventory.

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

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: A) evaluate internal control over credit sales. B) test the accuracy of recorded credit sales. C) evaluate the allowance for doubtful accounts. D) verify the existence of the recorded receivables.

C. valuate the allowance for doubtful accounts.

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? A) An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct. B) A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent. C) An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor. D) A client-prepared statement of account showing the details of the customer's account balance.

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? 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.

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? A) Tracing amounts in the subsidiary ledger to details on shipping documents. B) Comparing receivable turnover ratios to industry statistics for reasonableness. C) Inquiring about receivables pledged under loan agreements. D) Assessing the allowance for uncollectible accounts for reasonableness.

D. Assessing the allowance for uncollectible accounts for reasonableness.

According to FASB ASC 606, which of the following is not part of the five-step approach for revenue recognition? A) Identify the contract(s) with a customer. B) Determine the transaction price. C) Determine whether the buyer will take a discount. D) Identify the performance obligations in the contract.

D. Determine whether the buyer will take a discount.

Which of the following might be detected by an auditor's review of the entity's sales cutoff? A) Excessive goods returned for credit. B) Unrecorded sales discounts. C) Lapping of year-end accounts receivable. D) Overstated sales for the year.

D. Overstated sales for the year.

Which of the following is not an issue related to the valuation of accounts receivable? A) The credit granting function. B) A proper allowance for doubtful accounts. C) The net realizable value of accounts receivable. D) Proper cutoff.

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? A) Comparing control totals for shipping documents with corresponding totals for sales invoices. B) Using computer programmed controls on the pricing and mathematical accuracy of sales invoices. C) Matching shipping documents with approved sales orders before invoice preparation. D) Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

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? A) Tracing audited cash receipts to accounts receivable credits. B) Selecting accounts to be confirmed on a random basis. C) Examining sales invoices for completeness, consistency between different items, valid conditions, and reasonable amounts. D) Resolving differences reported by customers on confirmation requests.

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? A) Granting of credit. B) Shipment of goods. C) Determination of discounts. D) Selling of goods for cash.

D. Selling of goods for cash.

Which of the following is not an inherent risk factor for the revenue process? A) Complexity of revenue recognition issues. B) Difficulty of auditing transactions. C) Special industry practices. D) The entity does not follow its stated policies for sales order approvals.

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? A) The cost-per-response is excessively high. B) There is no way of knowing if the intended recipients received them. C) Recipients are likely to feel that, in reality, the confirmation is a subtle request for payment. D) The inference drawn from receiving no reply may not be correct.

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: A) cash receipts journal to the sales journal. B) sales journal to the cash receipts journal. C) shipping documents to the accounting records. D) accounting records to the shipping documents.

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. A) classification B) cutoff C) existence D) completeness

D. completeness

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: A) increase the balance in the allowance for bad debts account. B) review the going concern ramifications. C) require the entity to tighten its credit policy. D) expand tests regarding the collectability of receivables.

D. expand tests regarding the collectability of receivables.

In the confirmation of accounts receivable, the auditor would most likely: A) send negative confirmations when the assessed risk of material misstatement is high. B) seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables. C) require confirmation of all receivables from agencies of the federal government. D) require that confirmation requests be sent as soon as possible after fiscal year-end.

D. require that confirmation requests be sent as soon as possible after fiscal year-end.

T/F: Credit authorization is used to determine if a customer is able to pay for goods.

True

T/F: Order entry is the initial function in the revenue cycle.

True