Ch.10 SB

True or false: Accounts receivable should only be confirmed at year-end except in rare circumstances.

False

True or false: All notes receivables must be examined to determine if they were at arm's length.

False

True or false: Auditors normally test the cutoff assertion by conducting tests of controls only.

False

True or false: In most systems, the revenue process does not interact with the inventory management process.

False

True or false: Misstatements in previous audits are not good indicators that misstatements are likely to be present in the current audit.

False

True or false: Receivables with related-party transactions cannot be confirmed and must be treated as exceptions.

False

True or false: Revenue recognition has little impact on the cutoff assertion.

False

There are two types of confirmations: _____ and _____.

Positive & Negative

True or false: Confirmation requests should be made soon after the end of the accounting period to maximize the response rate.

True

True or false: Many accounting systems integrate purchasing and human resources with revenue.

True

True or false: Many accounting systems integrate the revenue process with the human resources, purchasing and inventory processes.

True

The sale of goods and services to customers is the focus of the:

revenue process

Controls for the completeness assertion include all of the following except: · use of a lockbox system · procedures specifying policies for cash discounts · restrictive endorsements · segregation of duties

· procedures specifying policies for cash discounts

According to FASB, in order to recognize revenue an entity must: (Select all that apply) · satisfy a performance obligation · transfer a good or service to a customer · create a contract with a customer to provide a good or service · receive payment for the transferred good or service

· satisfy a performance obligation · transfer a good or service to a customer

For a positive confirmation, a response is required ______. · only if the amount is correct · whether the amount is correct or incorrect · only if the amount is incorrect

· whether the amount is correct or incorrect

What are the two major business processes that affect financial statements?

1. Revenue process 2. Purchasing process

What form documents the creditworthiness of a customer?

Credit approval form

True or false: Even though they are low cost, substantive analytical procedures are inadequate audit tests for examining the fairness of revenue-related accounts because they fail to provide sufficient evidence.

False

True or false: Related-party transactions is a common disclosure for revenue-related accounts.

True

True or false: Sending confirmations at the end of the accounting period reduces the chance of timing differences.

True

True or false: The auditor's concern with satisfying other types of receivables is similar to that of trade accounts receivables.

True

True or false: The revenue process is similar for all types of organizations.

True

True or false: Typically other types of receivables are evaluated for collectability.

True

True or false: Understanding management's attitudes toward risk relevant to the revenue process is an important component of assessing the control risk for the revenue process.

True

The accounts commonly affected by sales transactions are all of the following except: · allowance for uncollectible accounts · sales · bad-debt expense · trade accounts receivable · sales returns and allowances

· sales returns and allowances

The potential for theft and fraud in the revenue process makes this particularly important. · segregation of duties · segregation of entries · duties of managers

· segregation of duties

Possible programmed controls to ensure accuracy of the revenue process include all of the following except: · only authorized changes are made to the master file · shipping documents are matched to sales invoices · the authorized price list is updated promptly

· shipping documents are matched to sales invoices

Management's estimate for the allowance for uncollectible accounts and sales returns can be difficult to audit because of the _____ that may be involved in determining proper value. · complexity · variance · subjectivity

· subjectivity

When the results of testing controls do not support the planned level of control risk, detection risk will · not be affected · have to be set lower · have to be set higher

· have to be set lower

If there is a dispute between the auditor and management over when revenue should be recognized, the auditor should assess the risk of material misstatement as: · high · moderate · low

· high

The presence of misstatements in previous audits suggests that misstatements are ______ to be present during the current audit. · likely · unlikely

· likely

When using a reliance strategy, the auditor conducts______ to ensure that the controls in the revenue process operate effectively. · tests of controls · documentation · analytical procedures · substantive testing

· tests of controls

True or false: An industry's rate of technological changes can affect the potential for misstatements in this revenue process.

True

Determining that the customer is able to pay for the goods or services is the role of the:

credit approval function

To test the auditor's concern with accounts receivables completeness, the aged trial balance should be reconciled to the ______. · cash general ledger account · cash receipts journal · accounts receivables subsidiary ledger · accounts receivables general ledger account

· accounts receivables general ledger account

An authorized price list and proper verification of the information contained on the sales invoice are control activities that ensure the ______ assertion. · cutoff · authorization · occurrence · accuracy

· accuracy

Once the tests of controls in the revenue process have been completed, the auditor documents the ______ level of control risk. · tolerable · planned · expected · achieved

· achieved

If an auditor does not receive responses to positive confirmations · the account(s) should be considered misstatement(s) · additional requests can be sent · the client should be asked to confirm the account(s)

· additional requests can be sent

The auditor assesses the adequacy of the allowance account by first examining the ______ for amounts that have been outstanding for a long time. · aged trial balance · general ledger · accounts receivable subsidiary ledger · listing of sales invoices

· aged trial balance

The auditor's decision process for planning and performing tests of controls involves considering the ______ that can occur if internal control does not operate effectively. · assertions and possible misstatements · substantive tests and possible misstatements · causes and consequences

· assertions and possible misstatements

It is the responsibility of ______ to ensure that all necessary financial statement disclosures are made. · both the auditors and management · auditors · management

· auditors

Failure to perform the credit authorization function properly may result in: · increased sales · too few customers · sales returns · bad-debt losses

· bad-debt losses

Credit memoranda that are used to process sales returns and allowance transactions: (Select all that apply) · can cover up unauthorized shipments of goods · may conceal a misappropriation of cash · should always be approved to the person who sold the goods · may cause the general ledger sales account balance to be incorrect

· can cover up unauthorized shipments of goods · may conceal a misappropriation of cash

Segregating short-term and long-term receivables is one of the major issues related to ______ of accounts receivables. · rights and obligations · presentation · valuation · classification

· classification

The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the ______ assertion. · classification · completeness · accuracy · cutoff

· classification

That cash or checks are stolen or lost before being recorded in the cash receipts records is a major misstatement related to the ______ assertion. · completeness · occurrence · cutoff · accuracy

· completeness

Accounting for the numerical sequence of shipping documents and sales invoices and matching shipping documents with sales invoices are control activities that ensure that the ______ assertion is being met. · occurrence · accuracy · completion · authorization

· completion

If goods are shipped or services are performed and no revenue is recognized, the ______ assertion has not been met. · occurrence · accuracy · completion · authorization

· completion

If the results of the tests of controls support the planned level of control risk, the auditor: · does not perform substantive procedures · reduces the level of substantive procedures · conducts substantive procedures at the planned level

· conducts substantive procedures at the planned level

Accounts receivables from related parties are: · confirmed and evaluated for collectability · examined for repayment terms and whether interest income has been properly recorded · assumed not to be "arm's length" transactions

· confirmed and evaluated for collectability

If the entity does not have adequate controls to ensure that revenue transactions are recorded on a timely basis, sales may be recorded in the wrong accounting period. This relates to the ______ assertion. · completeness · occurrence · accuracy · cutoff

· cutoff

Important controls regarding the processing of credit memoranda are: (Select all that apply) · the entity should use a lockbox system to ensure that cash is deposited on a timely basis · remittance advices should be reconciled to the cash receipts journal · each credit memorandum should be approved by someone other than the individual who initiated it · a credit for returned goods should be supported by a receiving document indicating that the goods have been returned

· each credit memorandum should be approved by someone other than the individual who initiated it · a credit for returned goods should be supported by a receiving document indicating that the goods have been returned

The auditor should document the achieved level of control risk for the revenue process using ______. · quantitative amounts only · either quantitative amounts or qualitative terms · qualitative terms only · both quantitative amounts or qualitative terms

· either quantitative amounts or qualitative terms

The major issues related to the classification for accounts receivable are: (Select all that apply) · ensuring that different types of receivables are properly classified · identifying and reclassifying any material credits contained in accounts receivable · ensuring the correct value for the allowance for uncollectible accounts · ensuring that all cash receipts have been properly recorded in the accounts receivable subsidiary ledger · segregating short-term and long-term receivables

· ensuring that different types of receivables are properly classified · identifying and reclassifying any material credits contained in accounts receivable · segregating short-term and long-term receivables

The credit approval form includes all of the following except: · documents a customer's creditworthiness · is an example of a source document · establishes customer credit limits

· establishes customer credit limits

When the auditor does not receive a response to positive confirmations, possible procedures include: (Select all that apply) · verifying sales by examining the sales journal · examining specific subsequent cash receipts · examining shipping documentation · sending second and third requests · having the client contact the customers to ask for a response

· examining specific subsequent cash receipts · examining shipping documentation · sending second and third requests

The accounting standard regarding revenue requires an entity to follow a five-step approach. The first step is to: · identify contractual agreement(s) with a customer · identity the performance obligations an entity will offer to customers in providing goods and services · determine transaction prices for goods and services offered to customers

· identify contractual agreement(s) with a customer

Sending confirmation requests at the end of the accounting period applies to all of the following except: · maximizes response rate · reduces the chance of timing differences · is required for auditor reliance

· is required for auditor reliance

The auditor must maintain control over the accounts receivable confirmations to minimize the possibility of all of the following except: · alteration of the confirmation by the entity · entity interception of the confirmation · lack of customer response to the confirmation

· lack of customer response to the confirmation

Inherent risk may increase due to issues regarding recognition of revenue on: (Select all that apply) · lease contracts · long-term construction contracts · installment sales · long-term service contracts · sale of goods for cash · sale of goods on credit

· lease contracts · long-term construction contracts · installment sales · long-term service contracts

If the aggregate misstatement is ______ the tolerable misstatement, the auditor may accept the account as fairly presented. · greater than · less than · greater than or equal to · equal to

· less than

For control of the confirmation process, the auditor should: (Select all that apply) · mail the confirmations in envelopes with the public accounting firm as the return address · send return envelope addressed to the public accounting firm · ask the client to reach out to customers who have not responded to the confirmations · mail the confirmations outside the entity's facilities · call the customers to be sure that they will respond to the confirmation

· mail the confirmations in envelopes with the public accounting firm as the return address · send return envelope addressed to the public accounting firm · mail the confirmations outside the entity's facilities

If a performance obligation does not have an observable market value,: · a stand-alone selling price cannot be estimated · management must estimate the stand-alone selling price · the external auditor must estimate the stand-alone selling price

· management must estimate the stand-alone selling price

The choice of which type of test of controls is appropriate for a particular assertion will be a function of the: (Select all that apply) · nature of the available evidence, including audit evidence in electronic form · volume of transactions or data · nature and timing of substantive audit procedures · nature and complexity of the systems by which the entity processes and controls information · experience and training of the auditor

· nature of the available evidence, including audit evidence in electronic form · volume of transactions or data · nature and complexity of the systems by which the entity processes and controls information

Risk factors to an entity's internal controls over the revenue process include all of the following except: · competition · new HR management · new technology · rapid growth

· new HR management

Because clients are more likely to overstate sales than to understate them, auditors are concerned about the ______ assertion for revenue transactions. · completeness · authorization · occurrence · accuracy

· occurrence

Possible misstatements due to improper authorization of revenue transactions include: (Select all that apply) · billing for goods that are not shipped · shipping goods that are not billed · performing services for customers who are bad credit risks · making sales at unauthorized prices or terms

· performing services for customers who are bad credit risks · making sales at unauthorized prices or terms

If the results of tests of controls do not support the ______ level of control risk, additional substantive procedures must be conducted. · tolerable · achieved · planned · expected

· planned

For entities that have specialized revenue or services that require separation, controls over the aggregation or disaggregation of transactions are paramount for proper: · completeness · presentation · authorization · accuracy

· presentation

For the revenue process, the auditor is concerned about material misstatements related to: (Select all that apply) · cash receipts not being properly authorized · recording of revenue when goods have not been shipped · sales to fictitious customers · recording of revenue when services have not been performed · a customer's inability to pay the amount they have been invoiced

· recording of revenue when goods have not been shipped · sales to fictitious customers · recording of revenue when services have not been performed

Auditing standards allow the auditor to omit confirming accounts receivable when all of the following except: · external confirmations would be ineffective · assessed level of risk for the assertion is low, and the planned substantive procedures address that risk · the accounts receivable balance is immaterial · the accounts receivable balance is at the same level as prior years

· the accounts receivable balance is at the same level as prior years

Inherent risk factors that affect the revenue process include all of the following except: · misstatements detected in prior audits · the complexity and contentiousness of revenue recognition issues · the difficulty of auditing transactions and account balances · the control environment and controls over cash · industry-related factors

· the control environment and controls over cash

If there is not a proper cutoff of revenue transactions, both the revenue and accounts receivable accounts will be misstated for: · the following year only · the current year only · the current and following years

· the current and following years

Industry-related factors that affect the potential for misstatements in the revenue process include all of the following except: · the industry's history · the rate of technological change · government regulation · profitability and health of the industry · level of competition

· the industry's history

Which account is affected by sales, cash receipts, and sales return and allowance transactions? · sales · allowance for uncollectible accounts · cash · trade accounts receivable

· trade accounts receivable

Substantive analytical procedures are: · only necessary if internal controls are not functioning properly · used to examine plausible relationships among related accounts · concerned with the presentation and disclosure related to accounts receivable and related accounts

· used to examine plausible relationships among related accounts

Audit procedures used to test controls in the revenue process include: (Select all that apply) · walkthroughs · confirmation of receivables balances · reperformance by the auditor of the control activities · comparison of ratios to prior years · inspection of documents and records

· walkthroughs · reperformance by the auditor of the control activities · inspection of documents and records