CH 11 (Connect)

A note receivable from an officer is considered a related party receivable. True False

True

Accounts receivable should be valued at their net realizable value. True False

True

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. True False

True

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts. True False

True

Material accounts receivable from related parties should be stated separately from other receivables. True False

True

The auditors should mail confirmation requests, and the enclosed envelope for the customer's reply should be addressed to the auditors' office. True False

True

The auditors will generally confirm a proportionately larger sample of accounts with large balances than accounts with small balances. True False

True

The use of serial numbers on shipping documents and sales invoices provides assurance that all goods shipped are billed to customers and recorded as sales. True False

True

Sales can be recorded in the sales journal directly from serially numbered purchase orders, thus eliminating the need for sales invoices to be serially numbered. True False

False

Since customers that cannot pay are ordinarily asked not to reply, mailing of confirmations is a test of collectibility of accounts receivable. True False

False

The accounts receivable section of the accounting department should open incoming mail and post collections to the customer's accounts. True False

False

The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned. True False

False

The department approving a sales transaction should be the shipping department. True False

False

The person maintaining the accounts receivable subsidiary ledger should reconcile the subsidiary ledger to the accounts receivable controlling account at least once a month. True False

False

Tracing a sample of shipping documents to recorded sales is designed to test the existence of recorded sales. True False

False

When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements. True False

False

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable. True False

True

Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on. True False

True

Receivables judged to be uncollectible should be written off. True False

True

The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include: A) neither a comment on the use of alternative auditing procedures nor an opinion qualification. B) both a scope qualification and an opinion qualification. C) an opinion qualification, but reference to the use of alternative auditing procedures is not required. D) a description of the limitation on the scope of their audit and the alternative auditing procedures used, but an opinion qualification is not required.

A) neither a comment on the use of alternative auditing procedures nor an opinion qualification.

Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to: A) require receiving reports to support all credit memorandums before they are approved. B) have the sales department independent of the accounts-receivable department. C) mail monthly statements. D) prenumber and account for all credit memorandums.

A) require receiving reports to support all credit memorandums before they are approved.

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when: A) there is reason to believe that a substantial number of accounts may be in dispute. B) a large number of small balances are involved. C) there is reason to believe a significant portion of the requests will be answered. D) control risk for accounts receivable is assessed as low.

A) there is reason to believe that a substantial number of accounts may be in dispute.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A) Accounts receivable divided by cost of goods sold. B) Aging of accounts receivable. C) Cash sales divided by accounts receivable. D) Year 2 accounts receivable compared to year 1 accounts receivable.

B) Aging of accounts receivable.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that: A) Obsolete inventory has not yet been reduced to fair market value. B) There was an improper cutoff of sales at the end of the year. C) An unusually large receivable was written off near the end of the year. D) The aging of accounts receivable was improperly performed in both years.

B) There was an improper cutoff of sales at the end of the year.

For effective internal control, the billing function should be performed by the: A) shipping department. B) accounting department. C) sales department. D) credit and collection department.

B) accounting department.

The best evidence of interest revenue on notes receivable is confirmation with the maker of the note. True False

False

To test the existence assertion for recorded receivables, an auditor would select a sample from the: A) Sales orders file. B) Customer purchase orders. C) Accounts receivable subsidiary ledger. D) Shipping documents (bills of lading) file.

C) Accounts receivable subsidiary ledger.

To test the existence assertion for recorded receivables, the auditors would select a sample from the: A) Sales orders file. B) Customer purchase orders. C) Accounts receivable subsidiary ledger. D) Shipping documents (bills of lading) file.

C) Accounts receivable subsidiary ledger. The objective is to determine the population the auditors would sample from to test the existence assertion for recorded receivables. The direction of testing should be from the accounts receivable subsidiary ledger to the available support, such as sales invoices, bills of lading, sales orders, and customers' orders.

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn of which of the following? A) An October invoice was improperly computed. B) 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. D) 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.

Which of the following statements regarding the audit of negotiable notes receivable is correct? A) Notes receivable discounted without recourse are confirmed via the standard form for confirmation of deposits and loans at financial institutions used in the audit of cash. B) Physical inspection of a note by the auditors provides conclusive evidence. C) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection. D) Notes receivable discounted with recourse need not be confirmed.

C) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? A) Reviewing an aging of accounts receivable. B) Examination of cash receipts subsequent to the balance sheet date. C) Confirming current (0-30 day) year-end accounts receivable. D) Reviewing credit files for selected accounts.

C) Confirming current (0-30 day) year-end accounts receivable.

The primary control that prevents the shipping department from making unauthorized shipments of merchandise is the use of serially numbered shipping documents. True False

False

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A) The sales journal. B) The billing clerk's file of sales orders. C) Duplicate copies of sales invoices. D) The shipping clerk's file of duplicate copies of bills of lading.

D) The shipping clerk's file of duplicate copies of bills of lading.

Which of the following is an example of misappropriation of assets relating to sales? A) Accidentally recording cash that represents a liability as revenue. B) Holding the sales journal open to record next year's sales as having occurred in the current year. C) Intentionally recording cash received from a new debt agreement as revenue. D) Theft of cash register sales.

D) Theft of cash register sales. Theft of cash register sales is an example of misappropriation of assets. Answer (1) is an example of an error while answers (2) and (3) are examples of fraudulent financial reporting.

Which of the following audit procedures is most effective in testing credit sales for understatement? A) Trace sample of recorded sales from ledger to initial sales slip. B) Confirm accounts receivable. C) Age accounts receivable. D) Trace sample of initial sales slips through summaries to recorded general ledger sales.

D) Trace sample of initial sales slips through summaries to recorded general ledger sales.

The confirmation of the client's trade accounts receivable is a means of obtaining evidential matter and is specifically considered to be a generally accepted auditing: A) standard. B) principle. C) practice. D) procedure.

D) procedure.

The auditor examines copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a: A) substantive procedure. B) dual purpose test. C) test of balances. D) test of controls.

D) test of controls.

When merchandise is shipped, the shipping department completes a document known as a sales order. True False

False

Accounts receivable that are pledged as collateral for loans should be reclassified as noncurrent assets. True False

False

Accounts receivable that are written-off should not be turned over to a collection agency. True False

False

Accounts with zero balances and accounts that have been written off as uncollectible are not confirmed by the auditors. True False

False

CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests. True False

False

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address. True False

False

For effective internal control, the billing function should not be performed by the: A) Sales department. B) Accounting department. C) Finance department. D) Information Processing department.

A) Sales department.

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales? A) Accounts receivable are overstated at December 31, 20X0. B) Accounts receivable are understated at December 31, 20X0. C) Operating expenses are overstated for the 12 months ended December 31, 20X0. D) Sales returns and allowance are overstated at December 31, 20X0.

A) Accounts receivable are overstated at December 31, 20X0.

There is a presumption that auditors will confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. A) And accounts receivable are immaterial, or the use of confirmations would be ineffective. B) And accounts receivable are composed of large accounts. C) And the effectiveness of confirmations is absolutely determined. D) Or accounts receivable are from extremely reputable customers.

A) And accounts receivable are immaterial, or the use of confirmations would be ineffective. A presumption that receivables will be confirmed requires a combined assessment of inherent risk and controls risk at the low level, immaterial receivables, or circumstances in which the use of confirmations would be ineffective.

Which of the following is not one of the criteria for revenue recognition? A) Collectibility is certain. B) Delivery has occurred or services have been rendered. C) Evidence of an arrangement exists and is persuasive. D) A fixed or determinable price to buyer exists.

A) Collectibility is certain.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the: A) Collection of receivables. B) Purchase of merchandise inventory. C) Payment of accounts payable. D) Sale of long-term debt.

A) Collection of receivables.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A) Examine cash receipts received after year-end. B) Confirm receivables. C) Examine dates of purchase orders. D) Foot the receivables lead schedule.

A) Examine cash receipts received after year-end.

It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be: A) Examining subsequent receipts of year-end accounts receivable. B) Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. C) Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. D) Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

A) Examining subsequent receipts of year-end accounts receivable.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: A) No reply to a positive confirmation request is received. B) No reply to a negative confirmation request is received. C) Collectibility of the receivables is in doubt. D) Pledging of the receivables is probable.

A) No reply to a positive confirmation request is received.

The confirmation process may be performed using a(n): Paper Form Electronic Form A) Yes Yes B) Yes No C) No Yes D) No No A) Option A B) Option B C) Option C D) Option D

A) Option A

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. The auditor would send positive confirmations rather than negative confirmations because the fact that the balances are delinquent may indicate that amounts are in dispute. Examining subsequent cash receipts, answer (3), is unlikely to be effective since many of the accounts will not have been collected. Inspection of internal records, answer (4), is likely to result in less credibility evidential matter than confirming the accounts.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: A) Shipping documents file. B) Sales journal. C) Accounts receivable subsidiary ledger. D) Remittance advices.

A) Shipping documents file. The goal is to determine the population to be sampled from to determine that all sales have been recorded; therefore, the sample should be taken from a population of source documents, here the shipping documents file. None of the other three answers represent source documents that may be sampled from to determine that all sales have been recorded.

A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a: A) Test of a control. B) Substantive test. C) Cutoff test. D) Statistical test.

A) Test of a control.

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? A) The account balances as of year end will generally be confirmed. B) The auditors will in general use blank rather than positive confirmation requests. C) The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end. D) Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

A) The account balances as of year end will generally be confirmed.

Which of the following is an effective control over accounts receivable? A) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records. B) Only persons who handle cash receipts should be responsible for the preparation of documents that reduce accounts receivable balances. C) Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier. D) Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account once a year, preferably at year end.

A) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records.

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A) Trace a sample of the bills of lading to sales invoices. B) Confirm a sample of accounts payable. C) Review the aging of accounts receivable. D) Trace a sample of recorded sales to shipping documents.

A) Trace a sample of the bills of lading to sales invoices.

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: A) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. B) Write-offs must be approved by the accounts receivable department. C) Write-offs must be authorized by the shipping department. D) Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

A) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. Write-offs of receivables should be approved by a responsible officer after a review of the account by the credit department. Answer (2) is incorrect because accounts receivable, a recordkeeping function, should not authorize such entries. Answer (3) is incorrect because other procedures (e.g., a review of shipping documents) may be used to determine that the goods were received and because the shipping department would have no other information on whether the receivable is likely to be collectible. Answer (4) is incorrect because the account need not be overdue by several months as a "current" receivable may become worthless due to, for example, a bankruptcy.

Which of the following manipulations would understate receivables on the financial statements? A) Understatement of cash sales. B) Closing the sales journal prior to year-end. C) Closing the cash receipts journal prior to year-end. D) Underestimating the allowance for doubtful accounts.

B) Closing the sales journal prior to year-end.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? A) Existence or occurrence. B) Completeness. C) Rights and obligations. D) Presentation and disclosure.

B) Completeness. Comparing shipping documents to related sales invoices addresses the completeness assertion relating to sales. More specifically, it addresses whether all items that have been shipped have been recorded as sales.

Which of the following is not true about the confirmation of accounts receivable? A) Confirmation requests should bear the auditors' return address. B) Confirmation requests should be signed by the auditors. C) Confirmation requests should be mailed directly by the auditors. D) Confirmation requests should include a return envelope addressed to the office of the auditors.

B) Confirmation requests should be signed by the auditors.

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A) Footing the sales journal. B) Confirming accounts receivable. C) Tracing the total sales in the sales journal to the general ledger. D) Observation of the physical inventory count at year-end.

B) Confirming accounts receivable.

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? A) Collectibility is reasonably assured. B) Delivery has occurred or is scheduled to occur in the near future. C) Persuasive evidence of an arrangement exists. D) The seller's price to the buyer is fixed or determinable.

B) Delivery has occurred or is scheduled to occur in the near future. Answer (2) is not among the criteria because of the portion of the answer that states "scheduled to occur in the near future." Ordinarily delivery must have occurred. Answers (2), (3) and (4) all describe circumstances required to recognize revenue.

The confirmation of accounts receivable is most closely associated with A) Business risk. B) Detection risk. C) Inherent risk. D) Relative risk.

B) Detection risk.

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? A) Request that customers' payment checks be made payable to the company and addressed to the treasurer. B) Have customers send payments directly to the company's depository bank. C) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. D) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.

B) Have customers send payments directly to the company's depository bank.

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A) Examine sales invoices. B) Inclusion of the information in the engagement letter. C) Examine correspondence. D) Examine any subsequent cash receipts.

B) Inclusion of the information in the engagement letter.

Which of the following is not true about the auditors' verification of notes receivable? A) The interest revenue on notes receivable is usually audited by independent computation. B) Inspecting the notes is sufficient evidence of existence of the notes. C) The auditors may evaluate the collectibility of notes by inspecting credit files. D) Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.

B) Inspecting the notes is sufficient evidence of existence of the notes.

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A) Subsequent collections are to be reviewed. B) Internal control over receivables is good. C) Negative confirmation requests are to be used. D) There is a simultaneous examination of cash and accounts receivable.

B) Internal control over receivables is good.

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable? A) Fax responses. B) Oral responses obtained by the auditor through a telephone call. C) Written responses to negative confirmation requests. D) Written response to confirmations sent out without balances due.

B) Oral responses obtained by the auditor through a telephone call.

Which of the following is least likely to be typically considered an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A) Examine bills of lading. B) Physically examine items sold. C) Examine correspondence. D) Examine subsequent cash receipts.

B) Physically examine items sold.

Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A) Investigate confirmation exceptions for indication of amounts in dispute. B) Review accounts which have been written off as uncollectible prior to year-end. C) Investigate credit ratings for large accounts receivable. D) Discuss with the credit manager the current status of doubtful accounts.

B) Review accounts which have been written off as uncollectible prior to year-end.

The individual looking for guidance on revenue recognition is most likely to appropriately review: A) APB 99. B) SAB 104. C) ASR 44. D) B1 Document.

B) SAB 104.

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: A) The cash receipts journal was closed before year-end. B) The cash receipts journal was held open after year-end. C) There are many unrecorded liabilities. D) The sales journal was held open after year-end.

B) The cash receipts journal was held open after year-end.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? A) The positive form for small balances, and the negative form for large balances. B) The positive form used for large balances and the negative form for the small balances. C) The positive form used for trade receivables and the negative form for other receivables. D) The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

B) The positive form used for large balances and the negative form for the small balances.

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: A) Consider internal control over credit sales. B) Test the accuracy of recorded charge sales. C) Estimate credit losses. D) Verify the validity of the recorded receivables.

C) Estimate credit losses.

Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared. True False

False

After the CPAs have selected particular accounts receivable for confirmation: A) As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B) It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. C) All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. D) All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

C) All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review? A) Examine cash receipts in the subsequent period. B) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. C) Analyze transactions occurring within a few days before and after year end. D) Confirm year-end transactions with regular customers.

C) Analyze transactions occurring within a few days before and after year end

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? A) Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B) Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. C) Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D) The failure to prepare shipping documents may lead to an understatement of inventory balances.

C) Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? A) A substantial number of accounts are in disputes. B) The combination of inherent risk and control risk is high. C) Client records include a large number of relatively small balances. D) The auditors believe that recipients of the requests are unlikely to give them consideration.

C) Client records include a large number of relatively small balances.

Which of the following revenue related transactions is not linked to the accounts indicated? A) Recognize revenues too early--accounts receivable and revenue. B) Understate allowance for doubtful accounts--bad debt expense, allowance for doubtful accounts. C) Don't write off uncollectible receivables--sales returns, sales discounts. D) Don't record discounts given to customers--cash, sales discounts, accounts receivable.

C) Don't write off uncollectible receivables--sales returns, sales discounts.

Inspection of notes receivable is adequate evidence of the existence of the notes. True False

False

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements? A) Sales. B) Cash. C) Inventory. D) Accounts receivable.

C) Inventory.

Tracing recorded sales transactions to the bills of lading provides evidence about the: A) Completeness of sales transactions. B) Collectibility of sales transactions. C) Occurrence of sales transactions. D) Billing of all sales transactions.

C) Occurrence of sales transactions.

Which of the following is consistent with effective internal control over sales transactions? A) The accounting department prepares a shipping report authorizing the shipment of goods. B) The accounting department accounts for all receiving reports. C) The billing department accounts for all shipping documents. D) The accounts payable department annually approves the extension of credit to customers.

C) The billing department accounts for all shipping documents.

Analytical procedures performed during an audit indicate that accounts receivable 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 would satisfy the auditor? A) A greater percentage of accounts receivable is listed in the "more than 120 days overdue" category than in the prior year. B) Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D) The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

C) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

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

C) The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by: A) Tracing sales invoices to shipping documents to test the completeness of reported sales. B) Tracing shipping documents to sales invoices to test the occurrence of reported sales. C) Tracing sales invoices to shipping documents to test the occurrence of reported sales. D) Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

C) Tracing sales invoices to shipping documents to test the occurrence of reported sales.

Which of the following would indicate the need to use positive accounts receivable confirmation requests? A) A large population consisting of small balances. B) Good internal control over accounts receivable. C) Most accounts are with large reputable companies. D) A large number of accounts receivable is in dispute.

D) A large number of accounts receivable is in dispute.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? A) Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. B) Compare receivable turnover ratios to industry statistics for reasonableness. C) Inquire about receivables pledged under loan agreements. D) Assess the allowance for uncollectible accounts for reasonableness.

D) Assess the allowance for uncollectible accounts for reasonableness. Answer (4) is correct because receivables are valued at net realizable value, and assessing the allowance for uncollectible accounts for reasonableness will help the auditor determine the proper amount. Answer (1) is incorrect because the limited information in the accounts receivable ledger will not make possible tracing details to the shipping documents—also, the shipping documents may not even capture the total sales price that is included in the accounts receivable ledger. Answer (2) is incorrect because while comparing turnover ratios may provide some information on the collectibility of receivables, it is very imprecise. Answer (3) is incorrect because it relates to presentation and disclosure more directly than valuation.

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? A) Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger. B) Posting to the general ledger and approval of additions and terminations relating to the payroll. C) Custody of unmailed signed checks and maintenance of expense subsidiary ledger. D) Collection of receipts on account and maintaining accounts receivable records.

D) Collection of receipts on account and maintaining accounts receivable records.

Which of the following is not a primary objective of the auditors in the examination of accounts receivable? A) Determine the approximate realizable value. B) Consider the adequacy of internal control. C) Establish the existence of receivables. D) Determine the expected day of collection of each of the receivables.

D) Determine the expected day of collection of each of the receivables.

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

D) Expand tests of collectibility.

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

D) Inflated sales for the year. Detecting overstated sales is a primary reason for the auditors' review of a client's sales cutoff. For example, shipments made in the first part of January may be improperly included in the December sales total.

Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except: A) It understates liabilities. B) It overstates revenues. C) It overstates net income. D) It overstates assets.

D) It overstates assets.

When there are a large number of relatively small accounts receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is: A) Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. B) High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. C) High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. D) Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

D) Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? A) Restrictions placed on sales by laws and regulations. B) Decline in sales due to economic declines. C) Decline in sales due to product obsolescence. D) Over-recorded sales due to a lack of control over the sales entry function.

D) Over-recorded sales due to a lack of control over the sales entry function. Over-recorded sales due to a lack of control over the sales entry function relates to control risk not inherent risk. The other three replies all relate to inherent risk.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? A) Inaccurate billing due to a lack of controls. B) Lapping of accounts receivable. C) Misbilling a client due to a data input error. D) Recording sales when the customer is likely to return the goods.

D) Recording sales when the customer is likely to return the goods. A sale either shouldn't be recorded, or a proper allowance for returns should be established when a customer is likely to return the goods. Thus, simply recording the sale is an example of fraudulent financial reporting when the customer is likely to record the goods. Answers (1) and (3) are examples of errors, while answer (2) is an example of misappropriation of assets.

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? A) Cash receipts. B) Payroll. C) Purchases. D) Sales.

D) Sales.

Which of the following is the best argument against the use of negative accounts receivable confirmation requests? 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.