Chapter 11 Exam 2

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:

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

The confirmation process may be performed using a(n): Paper Form Electronic Form

Yes Yes

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

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

False

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

False

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

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

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

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

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

True

Receivables judged to be uncollectible should be written off. 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

Which of the following would indicate the need to use positive accounts receivable confirmation requests?

A large number of accounts receivable is in dispute.

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?

Accounts receivable are overstated at December 31, 20X0.

To test the existence assertion for recorded receivables, an auditor would select a sample from the:

Accounts receivable subsidiary ledger.

To test the existence assertion for recorded receivables, the auditors would select a sample from the:

Accounts receivable subsidiary ledger.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?

Aging of accounts receivable.

After the CPAs have selected particular accounts receivable for confirmation:

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.

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?

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

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?

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

There is a presumption that auditors will confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low.

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

Which of the following would provide the most assurance concerning the valuation of accounts receivable?

Assess the allowance for uncollectible accounts for reasonableness.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?

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?

Client records include a large number of relatively small balances.

Which of the following manipulations would understate receivables on the financial statements?

Closing the sales journal prior to year-end.

Which of the following is not one of the criteria for revenue recognition?

Collectibility is certain.

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?

Collection of receipts on account and maintaining accounts receivable records.

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:

Collection of receivables.

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices?

Completeness.

Which of the following statements regarding the audit of negotiable notes receivable is correct?

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

Which of the following is not true about the confirmation of accounts receivable?

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?

Confirming accounts receivable.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?

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

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:

Estimate credit losses.

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized?

Delivery has occurred or is scheduled to occur in the near future.

The confirmation of accounts receivable is most closely associated with

Detection risk.

Which of the following is not a primary objective of the auditors in the examination of accounts receivable?

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

Which of the following revenue related transactions is not linked to the accounts indicated?

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

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

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:

Examining subsequent receipts of year-end accounts receivable.

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:

Expand tests of collectibility.

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

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?

Inclusion of the information in the engagement letter.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff?

Inflated sales for the year.

Which of the following is not true about the auditors' verification of notes receivable?

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:

Internal control over receivables is good.

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?

Inventory.

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:

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:

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

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:

No reply to a positive confirmation request is received.

Tracing recorded sales transactions to the bills of lading provides evidence about the:

Occurrence of sales transactions.

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable?

Oral responses obtained by the auditor through a telephone call.

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?

Over-recorded sales due to a lack of control over the sales entry function.

Which of the following is least likely to be typically considered an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Physically examine items sold.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?

Recording sales when the customer is likely to return the goods.

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?

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:

SAB 104.

For effective internal control, the billing function should not be performed by the:

Sales department.

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?

Sales.

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:

Send positive confirmation requests.

To determine that all sales have been recorded, the auditors would select a sample of transactions from the:

Shipping documents file.

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:

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?

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

Which of the following is consistent with effective internal control over sales transactions?

The billing department accounts for all shipping documents.

Which of the following is an effective control over accounts receivable?

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

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:

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

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?

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

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:

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

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

The inference drawn from receiving no reply may not be correct.

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?

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

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:

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

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

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

Which of the following is an example of misappropriation of assets relating to sales?

Theft of cash register sales.

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:

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

Which of the following audit procedures is most effective in testing credit sales for understatement?

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

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:

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

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

For effective internal control, the billing function should be performed by the:

accounting department.

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:

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

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:

procedure.

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:

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

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:

test of controls.

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when:.

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