Auditing Chapter 7

Tracing shipping documents before and after year-ed to the sales journal and couching credit memos for returns after year end to receiving reports are done to test the _____________ assertion.

Cutoff

When using confirmations, auditors should: a. consider features of the reply b. follow-up on electronic and telephone responses c. have them returned to the client's accounts payable department d. control the mailing

a, b, and d. a. consider features of the reply b. follow-up on electronic and telephone responses d. control the mailing

The accounting standards of __________ __________ states that sales must be realized or realizable and earned in order to be recorded.

Revenue Recognition

Which of the following documents should be matched before recording revenue? a. evidence of shipment b. customer sales order c. customer credit authorization d. customer invoice

a, b, and d. a. evidence of shipment b. customer sales order d. customer invoice

Which of the following statements regarding confirmations are correct? a. Nonresponding customers should be audited by alternative procedures. b. The lack of response to a negative confirmation is not a guarantee it was read or received. c. Second and third requests should be sent for all confirmations. d. When exceptions cannot be resolved auditors should consider if fraud has occurred.

a, b, and d. a. Nonresponding customers should be audited by alternative procedures. b. The lack of response to a negative confirmation is not a guarantee it was read or received d. When exceptions cannot be resolved auditors should consider if fraud has occurred.

A fraud technique whereby someone steals a cash receipt and uses a later cash receipt from another customer to cover the theft of the first receipt is called a. kiting b. lapping c. bill and hold d. none of the above

b

A form signed by the carrier to verify goods are shipped is called the a. shipping order b. receiving report c. carrier form d. bill of lading

d

A customer is asked to respond whether the balance is correct or incorrect on a(n) ____________ confirmation.

positive

An automated procedure designed to test all items in a population in order to identify violations of a particular control activity is called _____________ testing.

Exception

The auditor typically obtains evidence to satisfy the _____________ assertion for accounts receivable through a combination of analytical procedures and confirmations.

Existence

A blank form is a variation of the ___________ confirmation.

Positive

Match the following with the most appropriate type of confirmation, positive or negative. a. a large number of small balances exist b. risk of material misstatement is low c. customers are expected to consider the confirmations properly d. accounts are in dispute e. individual balances are relatively large

Positive Confirmation d. accounts are in dispute e. individual balances are relatively large Negative Confirmation a. a large number of small balances exist b. risk of material misstatement is low c. customers are expected to consider the confirmations properly

Audit processes to gather evidence on the assertions in account balances are called _____________ ____________.

Substantive Procedures

True or false: Accounts receivable records should be considered assets.

True

True or false: Prenumbered documents are an example of an internal control.

True

Reviewing accounts for collectability and determining the adequacy of the allowance for doubtful accounts is done in support of the ____________ assertion.

Valuation

When the auditor evaluates the reasonableness of the allowance for doubtful accounts, __________ is a high risk assertion.

Valuation

Confirming accounts receivable primarily supports the assertion of a. existence b. completeness c. valuation or allocation d. rights and obligations

a

Custody is transferred from the warehouse to the shipping department upon authorization of the a. Shipping order. b. Customer order. c. Purchase order. d. Invoice.

a

Substantive procedures a. differ from tests of controls in their basic purpose b. are designed to obtain direct evidence about account balances c. are also called dual-purpose procedures d. are designed to obtain evidence about the company's performance of its control activities

a and b a. differ from tests of controls in their basic purpose b. are designed to obtain direct evidence about account balances

It is important to maintain an up-to-date customer master file to ensure a. credit limits are appropriate b. files are accurate c. all sales invoices are recorded

a and b. a. credit limits are appropriate b. files are accurate

Customer statements a. detail what has been billed and paid b. help with control over cash receipts c. should not be sent if the ending balance is zero

a and b. a. detail what has been billed and paid b. help with control over cash receipts

When a retailer accepts third-party credit cards: a. data security is a significant issue b. the risk of nonpayment must be considered c. the authorization function is performed electronically d. transactions are considered credit sales

a and c. a. data security is a significant issue c. the authorization function is performed electronically

Auditing standards recommend but generally do not require the use of confirmations for accounts receivable. a. False b. True

a. False Confirmation is considered a required auditing procedure.

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable? a. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. b. Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off. c. Write-offs must be approved by the cashier who is in a position to know whether the receivables have, in fact, been collected. d. Write-offs must be authorized by company field sales employees who are in a position to determine customers' financial standing.

a. Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.

Which of the following SEC criteria for revenue recognition is incorrect? a. a delivery or service has been promised b. the price is fixed or determinable c. persuasive evidence of an arrangement exists d. collectability is reasonably ensured

a. a delivery or service has been promised (It must have already occurred)

When an auditor receives an oral response to a confirmation: a. alternative audit procedures may be warranted b. a written response still needs to be requested c. the definition of external confirmation has been met

a. alternative audit procedures may be warranted b. a written response still needs to be requested

To determine that customers were sent the goods ordered at the correct price and quantity, customer invoices should be compared to: a. bills of landing b. customer orders c. packing slips d. customer credit authorizations

a. bills of landing b. customer orders

Including a sample of zero-balance accounts in the confirmation process test for: a. completeness of revenue and accounts receivable b. rights and obligations of accounts receivable c. classification of accounts receivable

a. completeness of revenue and accounts receivable

A blank form confirmation: a. may result in a lower response rate b. requires the customer to confirm a balance c. is a variation of a negative response d. may produced better evidence than a positive confirmation

a. may result in a lower response rate d. may produce better evidence than a positive confirmation

When auditors are satisfied that controls have been examined and transactions and balances have been appropriately tested, they must still consider: a. presentation and disclosure b. rights and obligations c. classification and understandability d. accuracy and valuation

a. presentation and disclosure

The most effective alternative procedure to confirmations to ensure existence is examining: a. subsequent cash receipts b. correspondence files for past-due accounts c. sales order, invoices, and shipping documents

a. subsequent cash receipts

Recording a sale while keeping the goods in your own warehouse is called a. invoice and keep b. bill and hold c. recognition d. none of the above

b

Separation of duties in the revenue cycle should include different people and departments performing: a. payments for inventory and other cash disbursements b. recording keeping for sales, receivables, inventory and cash receipts c. custody of good and cash d. sales and credit authorization

b, c, and d. b. recording keeping for sales, receivables, inventory and cash receipts c. custody of good and cash d. sales and credit authorization

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the a. sales journal b. accounts receivable listing c. general ledge d. cash receipts listing

b. accounts receivable listing

To help assess the allowance for doubtful accounts, auditors use the: a. sales detail file b. aged trial balance c. customer master file d. cash receipts listing

b. aged trial balance

The auditor assesses inherent risk to determine where a material misstatement could enter the process _________ the consideration of internal controls. a. after b. before

b. before

Examining evidence of client review and follow up of sales data related to specific classes of products or locations is a test of control for: a. cutoff of revenue b. completeness of revenue and accounts receivable c. classification of accounts receivable d. accuracy of revenue and accounts receivable

b. completeness of revenue and accounts receivable

The sales detail files can be checked for: a. appropriate credit limits b. fictitious sales c. sales recorded before shipment

b. fictitious sales c. sales recorded before shipment

The person who has the ability to change invoices should not: a. be responsible for mailing invoices b. have recording responsibilities c. have custody of assets

b. have recording responsibilities c. have custody of assets

A strong entity-level control in the revenue process is: a. interim auditing procedures by the external auditors b. overall performance review by management c. involvement of the internal audit department in the revenue process

b. overall performance review by management

A description of the goods being shipped as well as the quantity shipped is found on the: a. shipment record b. packing slip c. shipping order

b. packing slip

Revenues are normally considered to have been earned when a. all possibility of return has expired b. the company has substantially accomplished what it must to be entitled to the benefits c. the cash is collected d. goods have been shipped

b. the company has substantially accomplished what it must to be entitled to the benefits

If a control is missing or ineffective: a. there is most likely an error or fraud in the financial statements b. the risk of material misstatement increases c. auditors need to design substantive procedures related to control failure

b. the risk of material misstatement increases c. auditors need to design substantive procedures related to control failure

Which of the accounts would NOT be included in the Revenue and Collection cycle? a. cash in bank b. accounts receivable c. raw materials d. bad debt expense

c

Approval of credit sales by the credit department supports the assertion of a. existence or occurrence b. completeness c. valuation or allocation d. rights and obligations

c

The most reliable evidence comes from a. a positive confirmation b. a negative confirmation c. a blank confirmation d. examining a sales invoice

c

Which of the following responses to a confirmation request at December 31 is most likely to indicate a misstatement? a. This amount was paid on December 30 b. We are unable to confirm this account c. We returned these items in November d. We received these goods on January 4

c

The control procedure "credit sales approved by credit department" is direct toward which assertion?

c. Valuation/Accuracy

Substantive procedures are: a. never performed in the revenue cycle b. only performed if inherent risk is assessed as high c. always performed in the revenue cycle d. only performed in the revenue cycle if control risk is high

c. always performed in the revenue cycle

Confirmations provide evidence of: a. valuation b. presentation and disclosure c. existence d. rights and obligations

c. existence d. rights and obligations

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? a. separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. b. separate duties so that no employee has access to both checks from customers and currency from daily cash receipts. c. have customers send payments directly to the company's depository bank d. request that customer's payment check be made payable to the company and addressed to the treasurer.

c. have customers send payments directly to the company's depository bank

Sales are normally recorded on the date of the a. customer purchase order b. bill of landing c. sales invoice d. payment check

c. sales invoice

If a confirmation cannot be resolved, the auditor: a. should select another account to be confirmed b. may ignore it if the account balance is immaterial c. should determine the cause

c. should determine the cause

Sending confirmations to customers to substantiate the existence and rights and obligation assertions of accounts receivable is an example of a: a. dual-purpose procedure b. test of controls c. substantive test of details d. substantive analytical procedure

c. substantive test of details

Auditors review items in the pending order file for evidence of the ___________ of recorded sales and accounts receivable.

completeness

To be recognized, revenue must be a. realized b. realizable c. earned d. all of the above

d

Which of the following accounts is not normally part of the revenue and collection cycle? a. sales b. accounts receivable c. cash d. purchases and returns and allowances

d. Purchases returns and allowances

Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company? a. receiving and processing customer orders b. billing customers c. collecting and depositing cash d. purchasing raw materials e. delivering goods and services

d. purchasing raw materials

An audit test that provides evidence on both controls and relevant assertions is called a(n) ______________ _____________ procedure.

dual purpose

To be effective, auditor tests of control in the revenue cycle must be performed using ______________ _______________ test of controls.

dual-direction

Because fictitious sales may be used to overstate assets, the ___________ assertion is important in the audit of accounts receivables and the ___________ assertion is important for sales.

existence, occurrence

In order to obtain cash immediately, companies may sell or ____________ their accounts receivable.

factor

With a(n) ___________ confirmation, a customer is asked to respond only if something is wrong with the account balance.

negative

Auditors typically achieve an understanding of controls by completing a(n) ____________ of the processes in the revenue and collection cycle.

walkthrough