AUDIT HW 7

For the fiscal year ending December 31 of the previous year and for the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and an allowance for uncollectible accounts receivable of $30,000 and $50,000, respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions to be drawn? A)Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance. B)Accounts receivable turnovers are 14.3 and 8.0, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance. C)Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance. D)Accounts receivable turnovers are 10.0 and 6.6, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible overstatement of the allowance.

A)Accounts receivable turnovers are 10.0 and 6.7, and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.17, respectively. Examine allowance for possible understatement of the allowance.

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

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

The usefulness of the standard bank confirmation request may be limited because the bank employee who completes the form may A)Be unaware of all the financial relationships that the bank has with the client. B)Not have access to the client's cutoff bank statement. C)Not believe that the bank is obligated to verify confidential information to a third party. D)Sign and return the form without inspecting the accuracy of the client's bank reconciliation.

A)Be unaware of all the financial relationships that the bank has with the client.

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

A)Inflated sales for the year.

Which of the following audit procedures would an auditor most likely perform to test controls relating to management's assertion concerning the completeness of sales transactions? A)Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal. B)Inquire about the entity's credit granting policies and the consistent application of credit checks. C)Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed. D)Compare the invoiced prices on prenumbered sales invoices to the entity's authorized price list.

A)Inspect the entity's reports of prenumbered shipping documents that have not been recorded in the sales journal.

The standard AICPA form to financial institutions requesting information on direct liabilities on loans asks for the following information 1)the principal amount paid 2)description of collateral 2)date through which interest is paid A)NO YES YES B)YES YES YES C)YES NO NO D)NO NO YES

A)NO YES YES

The most effective audit procedure for determining the collectibility of an account receivable is the A)Review of the subsequent cash collections. B)Examination of the related sales invoice(s). C)Review of authorization of credit sales to the customer and the previous history of collections. D)Confirmation of the account.

A)Review of the subsequent cash collections.

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 ineffective. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely A)Send positive confirmation requests. B)Examine evidence of subsequent cash receipts. C)Send negative confirmation requests. D)Inspect the internal records such as copies of the tax invoices that were mailed to the residents.

A)Send positive confirmation requests.

Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption is that an auditor will request confirmation of accounts receivable. Confirmation is necessary when A)The combined assessed level of inherent and control risk is high. B)The accounts receivable are immaterial. C)Based on prior years' audit experience, response rates will be inadequate. D)Based on experience with similar engagements, responses are expected to be unreliable.

A)The combined assessed level of inherent and control risk is high.

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that A)The company is more aggressively collecting customer accounts. B)The company has eliminated its discount policy. C)Customer sales have substantially decreased. D)The accounts receivable aging has deteriorated.

A)The company is more aggressively collecting customer accounts.

The standard AICPA form directed to financial institutions requests all of the following except A)The principal amount paid on a direct liability. B)The interest rate of a direct liability. C)Description of collateral for a direct liability. D)Due date of a direct liability.

A)The principal amount paid on a direct liability.

A CPA is engaged in the annual audit of a calendar year client. The client took a complete physical inventory under the CPA's observation on December 15 and adjusted its inventory account and detailed perpetual inventory records to agree with the physical inventory. The client considers a sale to be made in the period that goods are shipped. Listed below are four items taken from the CPA's sales cutoff test worksheet. Which item does not require an adjusting entry on the client's books? 1) shipped 2)recorded as sale 3)credited to inventory A)12/31, 1/2, 12/31 B)12/10, 12/19, 12/12 C)12/14, 12/16, 12/16 D)1/2, 12/31, 12/31

B)12/10, 12/19, 12/12

An auditor most likely would limit substantive audit tests of sales transactions when the risks of material misstatement are assessed as low for the existence and 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)Cutoffs of sales and purchases. D)Shipping and receiving activities.

B)Cash receipts and accounts receivable.

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to A)Detect kiting activities that may otherwise not be discovered. B)Corroborate information regarding deposit and loan balances. C)Request information about contingent liabilities and secured transactions. D)Provide the data necessary to prepare a proof of cash.

B)Corroborate information regarding deposit and loan balances.

An auditor suspects that a client's cashier is misappropriating cash receipts for personal use by lapping customer checks received in the mail. In attempting to uncover this embezzlement scheme, the auditor most likely would compare the A)Individual bank deposit slips with the details of the monthly bank statements. B)Dates checks are deposited per bank statements with the dates remittance credits are recorded. C)Dates uncollectible accounts are authorized to be written off with the dates the write-offs are actually recorded. D)Daily cash summaries with the sums of the cash receipts journal entries.

B)Dates checks are deposited per bank statements with the dates remittance credits are recorded.

Once a CPA has determined that accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to A)Increase the balance in the allowance for bad debts account. B)Expand tests of collectibility. C)Review the credit and collection policy. D)Review the going concern ramifications.

B)Expand tests of collectibility.

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that A)Entries in the accounts receivable subsidiary ledger were for sales actually shipped. B)Sales billed to customers were actually shipped. C)No duplicate shipments to customers were made. D)Shipments to customers were properly billed.

B)Sales billed to customers were actually shipped.

In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate? A)Bank charges. B)Sales. C)Equipment. D)Bonds payable.

B)Sales.

To establish illegal "slush funds," corporations may divert cash received in normal business operations. An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from A)Purchase returns. B)Scrap sales. C)C.O.D. sales. D)Dividends.

B)Scrap sales.

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

B)Shipments to customers were properly invoiced.

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the A)Cash receipts journal to the sales journal. B)Shipping documents to the sales invoices. C)Sales invoices to the shipping documents. D)Sales journal to the cash receipts journal.

B)Shipping documents to the sales invoices.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past 5 years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? A)The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales. B)The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. C)The auditor should review period-end compensation to determine if bonuses were paid to meet earnings goals. D)The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management.

B)The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

An auditor's analytical procedures performed during the overall review stage indicated that the client's accounts receivable had doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations most likely would satisfy the auditor? A)The client liberalized its credit standards in the current year and sold much more merchandise to customers with poor credit ratings. B)The client opened a second retail outlet in the current year, and its credit sales approximately equaled those of the older, established outlet. C)Twice as many accounts receivable were written off in the prior year as in the current year. D)A greater percentage of accounts receivable were currently listed in the "more than 90 days overdue" category than in the prior year.

B)The client opened a second retail outlet in the current year, and its credit sales approximately equaled those of the older, established outlet.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would A)Consider the faxes to be nonresponses and evaluate them as unadjusted differences. B)Verify the sources and contents of the faxes in telephone calls to the senders. C)Examine the shipping documents that provide evidence for the existence assertion. D)Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.

B)Verify the sources and contents of the faxes in telephone calls to the senders.

A cutoff test of sales complements the verification of A)Sales returns. B)Sales allowances. C)Accounts receivable. D)Cash.

C)Accounts receivable.

The best evidence regarding year-end bank balances is documented in the A)Interbank transfer schedule. B)Bank deposit lead schedule. C)Bank reconciliations. D)Cutoff bank statement.

C)Bank reconciliations.

An auditor should test bank transfers for the last part of the audit period and first part of the subsequent period to detect whether A)Any unusual payments to or receipts from related parties occurred. B)The last checks recorded before year end were actually mailed by year end. C)Cash balances were overstated because of kiting. D)The cash receipts journal was held open for a few days after year end.

C)Cash balances were overstated because of kiting

Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate alternative audit procedure? A)Review collections during the year being audited. B)Intensify tests of the client's controls with respect to receivables. C)Examine shipping documents. D)Increase the balance in the accounts receivable allowance (contra) account.

C)Examine shipping documents.

The negative request form of accounts receivable confirmation may be used when the 1) risk of material mistatment is 2)number of small balances is 3)consideration by the recipient is A)HIGH FEW LIKELY B)HIGH MANY LIKELY C)LOW MANY LIKELY D)LOW FEW UNLIKELY

C)LOW MANY LIKELY

Which of the following would be a consideration in planning a sample for a test of subsequent cash receipts? A)The size of the intercompany receivable balance. B)The amount of bad debt write-offs in the prior year. C)Preliminary judgments about materiality levels. D)The auditor's allowable risk of assessing control risk is too low.

C)Preliminary judgments about materiality levels.

In the confirmation of accounts receivable, the auditor would most likely A)Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables. B)Require that confirmation requests be sent within 1 month of the fiscal year end. C)Request confirmation of a sample of the inactive accounts. D)Require confirmation of all receivables from agencies of the federal government.

C)Request confirmation of a sample of the inactive accounts.

An entity's financial statements were misstated over a period of years because large amounts of revenue were recorded in journal entries that involved debits and credits to an illogical combination of accounts. The auditor could most likely have been alerted to this fraud by A)Tracing a sample of journal entries to the general ledger. B)Performing a revenue cutoff test at year end. C)Scanning the general journal for unusual entries. D)Examining documentary evidence of sales returns and allowances recorded after year end.

C)Scanning the general journal for unusual entries.

Assuming a low assessed risk of material misstatement, which of the following audit procedures would be least likely to be performed? A)Obtaining a client representation letter. B)Confirmation of accounts receivable. C)Search for unrecorded cash receipts. D)Physical inspection of a sample of inventory.

C)Search for unrecorded cash receipts.

Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable? A)Trace a sample of invoices to recording in the general ledger. B)Trace transactions from the subsidiary ledger to the general ledger. C)Send confirmations to customers. D)Determine that all shipments before year end are recorded as sales.

C)Send confirmations to customers.

Tracing bills of lading to sales invoices provides evidence that A)Shipments to customers were recorded as sales. B)Invoiced sales were shipped. C)Shipments to customers were invoiced. D)Recorded sales were shipped.

C)Shipments to customers were invoiced.

An auditor is determining whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of transactions from the population represented by the A)Sales invoice file. B)Cash receipts file. C)Shipping document file. D)Customer order file.

C)Shipping document file.

When counting cash on hand, the auditor must exercise control over all cash and other negotiable assets to prevent A)Theft. B)Deposits in transit. C)Substitution. D)Irregular endorsement.

C)Substitution.

When scheduling the audit work to be performed on an engagement, the auditor should consider confirming accounts receivable balances at an interim date if A)Subsequent collections are to be reviewed. B)Negative confirmations are to be used. C)The risk of material misstatement relative to financial statement assertions about receivables is acceptably low. D)There is a simultaneous audit of cash and accounts receivable.

C)The risk of material misstatement relative to financial statement assertions about receivables is acceptably low.

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 A)Completeness. B)Existence. C)Valuation and allocation. D)Rights and obligations.

C)Valuation and allocation.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts? A)Noncontrolling interest of a subsidiary purchased during the year. B)Common stock. C)Purchase returns and allowances. D)Allowance for doubtful accounts.

D)Allowance for doubtful accounts.

A large university has relatively ineffective internal control. The university's auditor seeks assurance that all tuition revenue has been recorded. The auditor could best obtain the desired assurance by A)Preparing a year-end bank reconciliation. B)Confirming a sample of tuition payments with the students. C)Observing tuition payment procedures on a surprise basis. D)Comparing business office revenue records with registrar's office records of students enrolled.

D)Comparing business office revenue records with registrar's office records of students enrolled.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose A)Small account balances. B)Customers with credit balances. C)Individual overdue balances. D)Individual invoices.

D)Individual invoices.

Which of the following procedures would an auditor most likely perform in auditing the statement of cash flows? A)Vouch a sample of cash receipts and disbursements for the last few days of the current year. B)Reconcile the cutoff bank statement to the proof of cash to verify the accuracy of the year-end cash balance. C)Confirm the amounts included in the statement of cash flows with the entity's financial institution. D)Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

D)Reconcile the amounts included in the statement of cash flows to the other financial statements' amounts.

The auditing standards define external confirmation as "a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium." The assertions for which confirmation of accounts receivable balances provides primary evidence are A)Valuation and rights and obligations. B)Existence and completeness. C)Completeness and valuation. D)Rights and obligations and existence.

D)Rights and obligations and existence.

On the last day of the fiscal year, the cash disbursements clerk drew a company check on bank A and deposited the check in the company account bank B to cover a previous theft of cash. The disbursement has not been recorded. The auditor will best detect this form of kiting by a)Comparing the detail of cash receipts as shown by the cash receipts records with the detail on the confirmed duplicate deposit tickets for three days prior to and subsequent to year end. b)Examining paid checks returned with the bank statement of the next accounting period after year end. c)Preparing from the cash disbursements book a summary of bank transfers for one week prior to and subsequent to year end. d)Examining the composition of deposits in both bank A and B subsequent to year end.

b)Examining paid checks returned with the bank statement of the next accounting period after year end.