Ch. 11: Auditing the Revenue Process

Which of the following involves direct written communication between the client's customers and the auditor? a) Trace revenue transactions b) Confirmation of accounts receivable c) Bank confirmations d) Performing cutoff tests for sales and sales returns

b) Confirmation of accounts receivable

Good internal controls over the write-off of uncollectible accounts ______ a) are important to prevent write-offs from being used to conceal fraud in processing cash receipts b) are typically expensive and cumbersome to implement c) are less important if accounts receivable are outsourced d) are option if the company is smaller in size

a) are important to prevent write-offs from being used to conceal fraud in processing cash receipts

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average net receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000 respectively. If the accounts receivable turnover in days is calculated, which of the following best represents the conclusions drawn? a) Accounts receivable turnovers in days are 36.5 and 54.8 respectively. Examine allowance for possible understatement of the allowance. b) Accounts receivable turnovers in days are 14.3 and 8.0 respectively. Examine allowance for possible understatement of the allowance. c) Accounts receivable turnovers in days are 10.0 and 6.6 respectively. Examine allowance for possible overstatement of the allowance. d) Accounts receivable turnovers in days are 14.3 and 8.0 respectively. Examine allowance for possible overstatement of the allowance.

a) Accounts receivable turnovers in days are 36.5 and 54.8 respectively. Examine allowance for possible understatement of the allowance.

As a control for the assertion of cutoff of cash receipts, a daily exception report is generated for which of the following? a) Any cash receipts recorded in the incorrect time period b) Any recorded values of cash received but not supported by an underlying remittance report c) Any cash receipts posted to the incorrect customer d) Any recorded cash receipts not supported by the bank remittance report

a) Any cash receipts recorded in the incorrect time period

Which of the following circumstances would most likely cause an auditor to suspect that material misstatements exist in a client's financial statements? a) Differences between reconciliations of control accounts and subsidiary records are not investigated b) Negative confirmation requests yield fewer responses than in the prior year's audit c) The assumptions used in developing the prior year's accounting estimates have changed d) Management consults with another CPA firm about complex accounting matters

a) Differences between reconciliations of control accounts and subsidiary records are NOT investiaged

An example of a factor that provides the incentive for management to misstate revenue cycle assertions would be _____ a) pressures to overstate revenues to achieve revenue or profitability targets that were not achieved b) realistic sales targets within the firm c) strong support from top management of an ethical culture d) pressures to accurately report revenues to achieve revenue or profitability targets that were achieved

a) Pressures to overstate revenues to achieve revenue or profitability targets that were not achieved

Assume that an auditor is auditing a public company client that manufactures computer hardware and markets significant maintenance and consulting services. The auditor should be concerned about which of the following? a) Significant revenue issues associated with bundling products and services b) More than the usual concern about collection risk c) Significant concerns about the completeness of revenues d) Appropriate accounting for commissions sales

a) Significant revenue issues associated with bundling products and services

An example of a sales-related factor that would increase inherent risk would be _______ a) significant legal compliance issues when making sales b) strong oversight of management by the board of directors c) revenue recognition is relatively straightforward, with no significant accounting issue d) a history of complying with all laws and regulations

a) significant legal compliance issues when making sales

While examining internal control weaknesses, the auditor may need to change the timing of planned substantive tests related to an assertion from interim testing to testing _______ balances a) year-end b) end-of-quarter c) month-end d) none of these answer choices are correct

a) year-end

Understanding how the entity earns and recognizes revenue assists the auditor in ________ a) determining control risk related to accounts payable b) developing an expectation of total revenues by understanding the client's capacity, market place, and customers c) discussing the audit with the predecessor auditor d) developing an expectation of total revenues by understanding the capacities of the client's key competitors

b) Developing an expectation of total revenues by understanding the client's capacity, market place, and customers

Which of the following risks is addressed by preparing periodic independent bank reconciliations? a) Receipts being posted to the wrong customer account b) Errors being made in journalizing cash receipts c) Cash not being deposited intact daily d) Cash sales may not be recorded

b) Errors being made in journalizing cash receipts

Walk-throughs provide evidence that helps auditors to: a) Confirm whether controls operate with absolute completeness b) Evaluate design effectiveness of controls c) Document systems flows throughout compliance testing of operational aspects of transactions d) Substantive account balances

b) Evaluate design effectiveness of controls

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? a) Increase the assessed level of detection risk for the existence assertion b) Inspect the shipping records documenting the merchandise sold to the debtors c) Review the cash receipts journal for the month prior to year-end d) Intensify the study of internal control concerning the revenue cycle

b) Inspect the shipping records documenting the merchandise sold to the debtors

Which of the following is a form showing the description, quantity, and other data pertaining to goods the customer is authorized to return? a) Authorization for accounts receivable write-off b) Sales return authorization c) Journal entry d) Cash receipts journal

b) Sales return authorization

Which of the following situations increases the risk of fraud due to "lapping?" a) The sales manager can approve credit limits for customers b) The accounts receivable clerk also has responsibilities for receiving cash c) The accounts receivable clerk also has responsibilities for writing a sales invoice d) The shipping clerk in the warehouse has read-only access to sales orders

b) The accounts receivable clerk also has responsibilities for receiving cash

The process used for developing an audit strategy for various assertions begins with ______ a) Assessing whether controls exist to mitigate what can go wrong b) understanding the flow of transactions in a given transaction cycle c) identifying what can go wrong from initiating the transaction to the recording in the general ledger d) Identifying relevant controls, performing tests of controls, and evaluating results

b) Understanding the flow of transactions in a given transaction cycle

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would: a) Examine the shipping documents that provide evidence for the existence assertion b) Verify the sources and contents of the faxes in telephone calls to the senders c) Consider the faxes to be nonresponses and evaluate them as unadjusted differences 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

There is significant interaction between cash receipt transactions and accounts receivable because _______. a) the creation of an account receivable indicates receipt of cash b) a misstatement of cash receipts will result in a misstatement of accounts receivable c) the settlement of an account receivable will result in a decrease to the cash account d) a misstatement of cash receipts will result in a misstatement of interest payments

b) a misstatement of cash receipts will result in a misstatement of accounts receivable

Under an FOB shipping point arrangement, title passes from seller to buyer when goods ______ a) arrive at the seller's warehouse b) are shipped c) are invoiced d) arrive at the customer's warehouse

b) are shipped

It is particularly important in growth companies for auditors to monitor the entity's collection period because any growth in sales is usually accompanied by _____ a) decrease in the client's collection period b) growth in accounts receivables that consume operating cash c) increase in premium gross margins d) increase in the market share for the client's product

b) growth in accounts receivables that consume operating cash

The first step in planning the use of audit data analytics ______ a) is collection of data b) is determining the overall purpose of the test c) is collection of evidence d) is to poll management to determine which data they would like included

b) is determining the overall purpose of the test

After evaluating inherent risk and control risk, the auditor _______ a) can conclude the audit and issue an audit opinion b) is in a position to evaluate fraud risk c) is in a position to begin the audit work d) should confirm with management to ensure the auditors findings are agreed with

b) is in a position to evaluate fraud risk

Good internal controls over the write-off of uncollectible accounts include appropriate review of ______ by management to ensure the appropriateness of the transaction a) receiving reports b) journal entries c) debit memos d) cash receipts journal

b) journal entries

A primary account balance in the revenue cycle is _____ a) cost of good sold b) gross profit c) accounts receivable d) accounts payable

c) Accounts receivable

Many clients build in redundant controls such that if one control does not detect a misstatement, ______ a) the control should immediately be eliminated b) no other control will find the same misstatement c) another control will detect the problem d) an exception report is generated

c) Another control will detect the problem

Which of the following fraudulent activities could most likely be perpetuated due to the lack of effective internal controls in the revenue cycle? a) Claims received from customers for goods returned may be intentionally recorded in other customers' accounts b) Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables c) Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash d) The failure to prepare shipping documents may cause an overstatement of inventory balances

c) Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash - Failure to separate authorization of credit memos from cash handling is a segregation of duties failure in the revenue cycle, which falls under internal controls

As an important control for the occurrence assertion related to sales, the computer starts with the population of daily sales invoices and develops a one for one match with underlying shipping documents to ensure that each sales invoice is supported by a ________. a) Packing slip b) Sales order c) Bill of lading d) Sales invoice

c) Bill of lading

For companies that sell goods or services on account, if revenue is recognized prematurely, what would be overstated: sales or accounts receivable? a) Neither sales nor accounts receivable b) Accounts receivable, not sales c) Both accounts receivable and sales d) Sales, but not accounts receivable

c) Both sales and accounts receivable

Which of the following internal control procedures would most likely assure that all billed sales are correctly posted to the accounts receivable ledger? a) The accounts receivable ledger is reconciled daily to the control account in the general ledger b) Each shipment on credit is supported by a pre-numbered sales invoice c) Daily sales summaries are compared by daily postings to the accounts receivable ledger d) Each sales invoice is supported by a pre-numbered shipping document

c) Daily sales summaries are compared to daily postings to the accounts receivable ledger

Confirmation of accounts receivable involves ______ a) confirming accounts receivable with the bank b) confirming accounts receivable with the client c) direct written communication between the client's customers and the auditor d) direct written communication between the client's customers and the client

c) Direct written communication between the client's customers and the auditor

An example of a sales-related factor that would decrease inherent risk would be ______ a) lax oversight of management by the board of directors b) existence of excessive sales goals/targets c) nominal legal compliance issues when making and collecting sales d) complicated revenue recognition policies

c) Nominal legal compliance issues when making and collecting sales

As a control for cash receipts, which assertion is addressed when the computer starts with the population of daily cash receipts recorded in the daily remittance report (or cash receipts journal) and develops a one for one match with the underlying bank remittance report? a) Classification b) Accuracy c) Occurrence d) Completeness

c) Occurrence

During which of the following functions is the auditor primarily concerned that sales invoices are recorded accurately and in the proper period? a) Shipping sales orders b) Accepting customer orders c) Recording sales d) Filling sales orders

c) Recording sales

When performing an audit, a CPA notes that bad-debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls? a) Reconcile account receivable in the general ledger with the subsidiary ledger b) Use approved price lists for customer billing c) Require credit checks on all new customers d) Send monthly statements of accounts to customers with outstanding balances

c) Require credit checks for all new customers

An auditor is studying a ration of accounts receivable growth rate to sales growth rate. Which of the following indicates a potential risk of collection problem in accounts receivable? a) Sales declined by 2% and receivables declined by 7% from year one to year two. b) Sales grew by 10% and receivables grew by 11% from year one to year two. c) Sales grew by 5% and receivables grew by 17% from year one to year two d) Sales grew by 10% and receivables declined by 2% from year one to year two.

c) Sales grew by 5% and receivables grew by 17% from year one to year two

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 in the conduct of an audit? a) Shipment of goods b) Granting of credit c) Selling of goods for cash d) Determination of discounts

c) Selling of goods for cash

Which of the following is a control for the completeness (of cash receipts assertion)? a) The computer starts with the population of daily cash receipts recorded in the daily remittance report and develops a one for one match with the underlying bank remittance report b) The computer starts with the population of daily cash receipts recorded in the daily remittance report and compares the date recorded in the daily remittance report with the date received and deposited by the bank c) The computer compares each item on the underlying information in the bank remittance report to develop a one for one match with recorded cash receipts in the daily remittance report d) The computer starts with the population of daily cash receipts recorded in the daily remittance report and it compares the dollar amount of each recorded cash receipt with the underlying bank remittance report

c) The computer compares each item on the underlying information in the bank remittance report to develop a one for one match with recorded cash receipts in the daily remittance report

What is the nature of a sale under refund rights? a) The sale is made with the right to return the goods for a full refund, if the goods are defective b) The sale is made with no right to return the goods for a refund, even if the goods are not defective c) The sales is made with the right to return the goods for a full refund, even if the goods are not defective d) The sale is made with no right to return the goods for a refund, even if the goods are defective

c) The sale is made with the right to return the goods for a full refund, even if the goods are not defective

If receivables are growing faster than sales, it may be an indication that the company is ______ a) slowing down sales growth by taking on increased credit risk b) slowing down sales growth by taking steps to reduce credit risk c) accomplishing sales growth by taking on increased credit risk d) accomplishing sales growth by taking steps to reduce credit risk

c) accomplishing sales growth by taking on increased credit risk

A lockbox system ______ a) increases a company's inherent risk, as the firm is now more susceptible to fraud and error b) is only used by large companies that can afford to pay for this service c) deals with cash being received at a post office box that is controlled by the company's bank d) enables a firm to completely eliminate/outsource its accounts receivable function

c) deals with cash being received at a post office box that is controlled by the company's bank

A walkthrough is important as _______ a) the volume of routine transactions in the revenue cycle is very high b) Companies with dominant market shares often obtain premium gross margins c) Any growth in sales is usually accompanied by receivable growth that consumes operating cash d) Different companies often have different documents and transaction flows

d) Different companies often have different documents and transaction flows

Which of the following is an act of fraud? a) Disclosure b) Lockbox c) Walkthrough d) Lapping

d) Lapping

At the warehouse, when goods are pulled from inventory, which of the following is normally produced to detail the items that will be shipped to the customer and the quantity of each item shipped? a) Sales invoice b) Bill of lading c) Sales order d) Packing slip

d) Packing slip

If discounts are given for early payment, ______ a) the customer's account payable balance should be decreased accordingly b) an increase in equity will result from a customer taking the discount c) the company should credit the sales discount account d) sales discounts are recorded when recording the cash receipt and reducing a customer's receivable

d) Sales discounts are recorded when recording the cash receipt and reducing a customer's receivable

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the a) Sales order file b) Customer order fole c) Sales invoice file d) Shipping document file

d) Shipping document file

Which of the following computer actions is a control for the classification assertion of the sales and receivables? a) Starts with the population of daily sales invoices and compares the date on the sales invoice with the date on the underlying bill of lading. b) Starts with the population of daily sales invoices and compares quantities with the underlying packing slips, compares prices to the underlying sales order, and checks the mathematical accuracy of the sales invoice. c) Starts with the population of daily sales invoices and develops a one for one match with underlying shipping documents to ensure that each sales invoice is supported by a bill of lading. d) Starts with the population of daily sales invoices and compares customer numbers with the sales order, specifically addressing customer coding errors

d) Starts with the population of daily sales invoices and compares customer numbers with sales order, specifically addressing customer coding errors

Which of the following could indicate source document fraud? a) The same customer purchase order number appears on different customer invoices b) The same item code appears on different invoices c) The same invoice date appears on different invoices d) The same invoice number appears on different invoices

d) The same invoice number appears on different invoices

Which of the following control activities would most likely assure that no fictitious billings have been posted to the sales journal? a) The software application compares prices on the sales invoices with prices on the master list and notes any discrepancies b) The accounts receivable master file is compared with the general ledger control account c) Each shipment on credit is supported by a pre-numbered sales order d) The software application compares each sales invoice with the supporting shipping documents and notes any discrepancies

d) The software application compares each sales invoice with the supporting shipping documents and notes any discrepancies

For effective internal control, the billing function should be performed by the: a) shipping department b) credit and collections department c) sales department d) accounting department

d) accounting department - The accounting department serves a recording function and billing is an example of a recording function

The classification of the transaction as a sale or a borrowing may be incorrect when ______ a) debating over the timing and amount of revenue to be recognized b) estimating the likelihood of collecting within the next year c) writing off customers' balances as uncollectible d) factoring receivables with recourse

d) factoring receivables with recourse

Recognizing revenues without shipping would lead to ________ gross margins and _______ accounts receivable turnover in days. a) increased; high b) decreased; high c) decreased; low d) increased; low

d) increased; low

Public company auditors test controls in order to _____ a) decide if responsibility for internal control should be reassigned from management to the internal auditors b) determine if they should be eliminated c) determine their audit opinion without regard to substantive testing d) support an opinion on internal controls

d) support an opinion on internal controls

If the auditor's expectations regarding effective controls are not confirmed, ________ a) the auditor will beed to evaluate the significance of the weaknesses noted and simply document this b) the auditor should withdraw from the engagement c) the auditor should proceed with testing of controls d) the auditors will need to evaluate the significance of the weaknesses noted and determine if the client has a compensating control in place that the auditor might rely on

d) the auditor will need to evaluate the significance of the weaknesses noted and determine if the client has a compensating control in place that the auditor might rely on

What is a remittance advice? a) A document received from the customer showing the details of payments made by the customer b) A receipt from the bank showing the total amount deposited to the client's account at the bank c) A daily report showing cash recorded in the cash receipts journal identifying customers making payments on account and the amounts received d) A document prepared by the bank showing the details of electronic funds transfers received by the bank from customers

a) A document received from the customer showing the details of payments made by the customer

To which part of the revenue cycle does the assertion of valuation at historical cost and at net realizable value pertain? a) Account balances b) Transaction classes c) Disclosures d) All of the above

a) Account balances

When no response has been received after the second or third positive confirmation request to a customer, ________ a) alternative procedures should ordinarily be performed b) the auditor should assume that no news is good news c) the auditor should simply confirm with the client instead d) the auditor should make inquiries of the client's legal counsel

a) Alternative procedures should ordinarily be performed

If a customer pays its receivable in full but a client fails to record cash received from the customer, which of the following account balance assertions related to accounts receivable is misstated? a) Existence b) Completeness c) Valuation at net realizable value d) Rights and obligations

a) Existence

Which of the following internal control procedures would most likely deter lapping of collections from customers? a) Segregation of duties between receiving cash and posting the accounts receivable ledger b) Independent internal verification of entry in the cash receipts journal with date of daily cash summaries c) Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval d) Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries

a) Segregation of duties between receiving cash and posting the accounts receivable ledger

Sound control activities dictate that defective merchandise returned by customers should be presented initially to: a) the receiving department b) the credit manager c) the accounts receivable manager d) the sales manager

a) the receiving department

A credit sale should always include debits to accounts receivable and cost of goods sold, and credits to ________. a) Sales and sales discounts b) Sales and inventory c) Sales discounts and allowances d) Sales discounts and inventory

b) Sales and inventory

A cutoff test designed to detect credit sales made before the end of the fiscal year that have been recorded in the subsequent year provides assurance about which of the following management assertions? a) Classification b) Occurrence c) Completeness d) Accuracy

c) Completeness

Immediately upon receipt of cash, a responsible employee should a) Prepare a deposit slip in triplicate b) Record the amount in the cash receipts journal c) Prepare a remittance listing d) Update the subsidiary accounts receivable records

c) Prepare a remittance listing

If a reasonable estimate of potential refunds cannot be made, ______ a) the firm should simply disregard any expense and handle on a case-by-case basis b) no revenue recognition should occur during the life of the refund obligation c) revenue should not be recognized until the material uncertainty is resolved d) a portion of the revenue should be recognized immediately upon sale

c) Revenue should not be recognized until the material uncertainty is resolved

Which of the following provides the basis for recording a sale in the sales journal? a) Bill of lading b) Packing slip c) Sales invoice d) Master price file

c) Sales invoice

An auditor would be most likely to limit substantive audit tests of sales transactions when control risk is assessed as low for the existence or occurrence of assertion 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

Which of the following represents the start of the transaction trail of documentary evidence? a) Bill of lading b) Sales order c) Credit approval d) Sales journal

b) Sales order

Which of the following is a receipt from the bank showing the total amount deposited to the client's account at the bank? a) Monthly statements of receivable balances b) Remittance report from the bank c) Bank deposit slip d) Remittance advice

c) Bank deposit slip

An auditor wants to determine that all sales adjustments are recorded. This relates to which of the following transaction-class assertions? a) Occurrence b) Classification c) Completeness d) Accuracy

c) Completeness

With respect to understanding the client's revenue process, it is particularly important that the auditor _________ a) uses accounting standards as an option guide to determining what the client should be recording b) makes some preliminary inquiries with the client's attorney c) be knowledgeable about the entity, how the entity earns revenues, and particular revenue recognition issues that may be relevant to the entity d) examines other firms within the client's industry to determine acceptable practices

c) be knowledgeable about the entity, how the entity earns revenues, and particular revenue recognition issues that may be relevant to the entity

A small manufacturing company makes only credit sales. If cash receipts from sales are misappropriated, which of the following acts would most likely conceal this fraud? a) Understating the accounts receivable control account b) Understating the accounts receivable subsidiary ledger c) Overstating the sales journal d) Understating the cash receipts journal

d) Understating the cash receipts journal