Chapter 16 MAL

List five analytical procedures for the sales and collection cycle.

1. bad debts as a percentage of gross sales 2. days sales in receivables outstanding 3. gross margin by product line 4. sales, returns, and allowances as a percentage of gross sales by product line or segment 5. trade discounts taken as a percentage of net sales

The negative form of accounts receivable confirmation request is useful except when 1. internal control surrounding accounts receivable is considered to be effective. 2. a large number of small balances are involved. 3. the auditor has reason to believe the persons receiving the requests are likely to give them consideration. 4. individual account balances are relatively large.

4. individual account balances are relatively large.

When is it appropriate to use negative confirmation requests to reduce audit risk to an acceptable​ level? A. The auditor expects a low exception rate and the auditor reasonably believes that recipients of negative confirmation requests will give the requests adequate consideration. B. The population of items subject to negative confirmation procedures is made up of a large number of​ small, homogenous account​ balances, transactions, or other items. C. When the auditor has assessed the risk of material misstatement as low and has obtained sufficient appropriate evidence regarding the design and operating effectiveness of controls relevant to the assertion being tested by the confirmation procedure. D. All of the above.

D. All of the above.

balance-related audit objective for each: completeness

Existing accounts receivable are included in the aged trial balance.

balance-related audit objective for each: existence

The accounts receivable in the aged trial balance exist.

confirmations are typically more effective in uncovering _____ of accounts receivable than ____, whereas tests of controls and substantive tests of transactions are effective for discovering _____.

overstatements understatements both types

____ for the sales and collection cycle are intended to test the substance of the transactions that are produced by this cycle. Such tests include ____.

substantive tests of transactions examining sales invoices in support of entries, reconciling cash receipts, or reviewing the approval of credit

State the most important factors affecting the sample size in confirmation of accounts receivable

- achieved detection risk from other substantive tests - type of confirmation - performance materiality - control risk - inherent risk

For each audit​ procedure, identify the​ balance-related audit objective or objectives it partially or fully satisfies. compute accounts receivable turnover for the current year and compare to the prior year

- existence - realizable value

For each audit​ procedure, identify the​ balance-related audit objective or objectives it partially or fully satisfies. request 30 positive and 50 negative confirmations of accounts receivable

- existence - accuracy

Which of the following will most likely provide the most assurance concerning the accuracy​ balance-related objective for accounts​ receivable? 1. Vouch amounts in the subsidiary ledger to details on shipping documents. 2. Compare receivable turnover ratios with industry statistics for reasonableness. 3. Inquire about receivables pledged under loan agreements. 4. Assess the allowance for uncollectible accounts for reasonableness.

1. Vouch amounts in the subsidiary ledger to details on shipping documents.

The confirmation of​ customers' accounts receivable rarely provides reliable evidence about the completeness assertion because 1. customers may not be inclined to report understatement errors in their accounts. 2. recipients usually respond only if they disagree with the information on the request. 3. many customers merely sign and return the confirmation without verifying details. 4. there is likely to be reliable third party evidence available.

1. customers may not be inclined to report understatement errors in their accounts.

An​ auditor's preliminary analysis of accounts receivable turnover revealed the following rates over these account​ periods: 2016 - 4.3 2015 - 6.2 2014 - 7.3 Which of the following is the most likely cause of the decrease in accounts receivable​ turnover? 1. Increase in the cash discount offered 2. Liberalization of credit policy 3. Shortening of due date terms 4. Increased cash sales

2. Liberalization of credit policy

Which of the following procedures will an auditor most likely perform for​ year-end accounts receivable confirmations when the auditor did not receive replies to second​ requests? 1. Review the cash receipts journal for the month prior to year end. 2. Intensify the study of internal control concerning the revenue cycle. 3. Inspect the shipping records documenting the merchandise sold to the debtors. 4. Increase the assessed level of detection risk for the existence assertion.

3. Inspect the shipping records documenting the merchandise sold to the debtors.

Which of the following is least likely to be a reasonable explanation for an increase in accounts receivable​ turnover? 1. Early payment incentives for customers 2. Tightening of credit policy 3. Implementation of more aggressive collection policies 4. Allowance of a new grace period for customer payments

4. Allowance of a new grace period for customer payments

As a result of analytical​ procedures, the auditor determines that the gross profit percentage has declined from​ 30% in the preceding year to​ 20% in the current year. The auditor should 1. express a qualified opinion due to inability of the client company to continue as a going concern. 2. evaluate​ management's performance in causing this decline. 3. require footnote disclosure. 4. consider the possibility of a misstatement in the financial statements.

4. consider the possibility of a misstatement in the financial statements.

After a CPA has determined that accounts receivable have increased as a result of slow collections in a​ "tight money"​ environment, the CPA will be likely to 1. increase the balance in the allowance for bad debt account. 2. review the going concern ramifications. 3. review the credit and collection policy. 4. expand tests of collectibility.

4. expand tests of collectibility.

For each​ test, describe a misstatement that could be identified. 2.

A problem with​ collections, potentially causing an understatement of bad debts and allowance for uncollectible accounts.

Is it necessary to trace each amount to the master​ file? Why? A. No, unless a significant number of misstatements is noted and it is determined that reliance cannot be placed upon the trial balance with less than​ 100% testing. B. No, because there is a level of materiality for misstatements that are allowed. Providing the auditor reviews the largest dollar​ amounts, the other amounts do not need to be traced. C. Yes, because in order to accurately perform the audit​ procedure, the auditor is required to trace each amount from the​ client's accounts receivable trial balance by tracing individual customer names and amounts to the accounts receivable master​ file, and tracing the total to the general ledger. D. Yes, unless the auditor cannot because the​ client's accounts are not computerized in such a way to easily trace the amounts.

A. No, unless a significant number of misstatements is noted and it is determined that reliance cannot be placed upon the trial balance with less than​ 100% testing.

balance-related audit objective for each: detail tie-in

Accounts receivable in the aged trial balance agree with related master file​ amounts; the total is correctly added and agrees with the general ledger.

balance-related audit objective for each: classification

Accounts receivable in the aged trial balance are properly classified.

balance-related audit objective for each: accuracy

Accounts receivable in the trial balance are accurately recorded.

balance-related audit objective for each: rights

Accounts receivable in the trial balance are owned.

balance-related audit objective for each: realizable value

Accounts receivable in the trial balance are stated at realizable value.

audit procedure for each objective accuracy Accounts receivable in the trial balance are accurately recorded.

Confirm accounts receivable using positive confirmations. Confirm all amounts over ​$15,000 and a statistical sample of the remainder.

audit procedure for each objective existence The accounts receivable in the aged trial balance exist.

Confirm accounts receivable using positive confirmations. Confirm all amounts over ​$15,000 and a statistical sample of the remainder.

For each​ test, describe a misstatement that could be identified. 5.

Discounts that were taken by customers and allowed by the company were not recorded.

audit procedure for each objective realizable value Accounts receivable in the trial balance are stated at realizable value.

Discuss with the credit manager the likelihood of collecting older accounts. Examine subsequent cash receipts and the credit file on older accounts to evaluate whether receivables are collectible.

For each​ test, describe a misstatement that could be identified. 1.

Misstatement in determining the allowance for uncollectible accounts.

audit procedure for each objective rights Accounts receivable in the trial balance are owned.

Review the minutes of the board of directors for any indication of pledged or factored accounts receivable.

audit procedure for each objective classification Accounts receivable in the aged trial balance are properly classified.

Review the receivables listed on the aged trial balance for notes and related party receivables.

For each​ test, describe a misstatement that could be identified. 3.

Sales cutoff errors or other misstatements involving​ sales; purchase cutoff errors or other misstatements involving inventory or purchases.

audit procedure for each objective completeness Existing accounts receivable are included in the aged trial balance.

Trace ten accounts from the accounts receivable master file to the aged trial balance.

balance-related audit objective for each: cutoff

Transactions in the sales and collection cycle are recorded in the proper period.

The results of the tests of controls and substantive tests of transactions ____ the tests of details of balances.

affect the procedures, sample size, timing, and items selected for

to perform the cutoff test for sales, the auditor should obtain the number of the last shipping document issued before year-end and examine shipping documents representing shipments _____ and the related _____ to determine that the shipments were recorded as sales in the appropriate period.

before and after year-end

____ cutoff misstatements generally lead to a misclassification of ____ and, therefore, ____ income.

cash receipt accounts receivable and cash do not affect

Any delays in crediting deposits by the bank should be investigated to determine whether the ________

cash receipts books were held open

For each audit​ procedure, identify the​ balance-related audit objective or objectives it partially or fully satisfies. Select 10 customer accounts from the accounts receivable master file and trace to the aged accounts receivable to verify name and amounts

completeness

____ at year-end should be traced to the subsequent ____.

deposits in transit bank statement

For each audit​ procedure, identify the​ balance-related audit objective or objectives it partially or fully satisfies. obtain a list of aged accounts receivable, foot and cross-foot the list, and trace the total to the general ledger

detail tie-in

The use of tests of controls and substantive tests of transactions combined with the strengths of confirmation result in ____ combination

highly useful

If the auditor has carefully evaluated ____ , tested internal controls for _____, and concluded that the internal controls are likely to provide correct results, it is ____ to reduce the confirmation of the accounts receivable. On the other hand, it would be ____ to bypass confirmation altogether

internal control effectiveness appropriate inappropriate

the determination of test of details procedures _____ affected by results from tests of controls and substantive test of transactions. When results of tests of controls and substantive tests of transactions _____ the auditor's initial assessment of control risk, the auditor will ____ control risk, which then _____ the need to perform additional substantive tests, particularly tests of details.

is directly do not support increases increases

Confirmations are typically ____ effective than tests of controls and substantive tests of transactions for discovering certain types of misstatements, such as invalid accounts and disputed amounts. Confirmations _____ guarantee the discovery of any of these types of misstatements, but they are ___ reliable than tests of controls and substantive tests of transactions. Tests of controls and substantive tests of transactions rely upon ______, whereas confirmations ______.

more cannot more internally created documents are obtained from independent sources

Cynthia's approach is _____ from the standpoint that _______, but her confirmation at an interim date requires her to assume an assessed control risk ______, but she has not tested the related internal controls to justify this assumption.

questionable nonresponses have not necessarily proved the existence of the receivable less than maximum

Explain why you agree or disagree with the following​ statement: ​ "In most​ audits, it is more important to test carefully the cutoff for sales than for cash​ receipts." Describe how you perform each type of​ test, assuming documents are prenumbered. In most audits it is more important to carefully test the cutoff for ____ because _____ cutoff misstatements are more likely to affect ______.

sales sales net earnings

_____ for the sales and collection cycle are intended to determine the effectiveness of internal controls.

test of controls

audit procedure for each objective detail tie-in Accounts receivable in the aged trial balance agree with related master file​ amounts; the total is correctly added and agrees with the general ledger.

Trace twenty accounts from the trial balance to the related accounts in the master file. Use audit software to foot the aged trial​ balance, and trace the total to the general ledger.

In the situation being addressed in this problem, the auditor will want to put ____ emphasis on tests of controls and substantive tests of transactions than confirmations because of the ______

more nature of the customers and the effectiveness of internal control

For each audit​ procedure, identify the​ balance-related audit objective or objectives it partially or fully satisfies. Select 10 customer accounts from the aged accounts receivable listing and trace to the accounts receivable master file for name, amount, and aging categories

- detail tie-in - realizable value

For each audit​ procedure, identify the​ balance-related audit objective or objectives it partially or fully satisfies. perform alternative procedures on accounts not responding to second requests by examining subsequent cash receipts documentation and shipping reports or sales invoices

- existence - accuracy - realizable value

audit procedure for each objective cutoff Transactions in the sales and collection cycle are recorded in the proper period.

Select the last 10 sales transactions from the current​ year's sales journal and the first 10 from the subsequent​ year's and trace each one to the related shipping​ documents, checking for the date of actual shipment and the correct recording.

State three types of differences that might be observed in the confirmation of accounts receivable that do not constitute misstatements. For​ each, state an audit procedure that will verify the difference.

- merchandise shipped by the client has not been received by the customer at the confirmation date; the shipping documents should be examined to verify that the goods were shipped prior to confirmation date - payment has been made by the customer, but not received by the client at the confirmation date; the subsequent payment should be examined as to the date deposited - merchandise has been returned, but has not been received by the client at the confirmation date; receiving documents and the credit memo should be examined

An auditor who is auditing accounts receivable would least likely perform which of the following​ tests? 1. Select cash disbursements made shortly after​ year-end and examine the supporting documentation such as receiving reports and vendor invoices. 2. Confirm a sample of accounts receivables with the customers that owe the balances. 3. Vouch cash receipts to the accounts receivables transactions. 4. Obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account.

1. Select cash disbursements made shortly after​ year-end and examine the supporting documentation such as receiving reports and vendor invoices.

Which of the following audit procedures will best uncover an understatement of sales and accounts​ receivable? 1. Test a sample of sales​ transactions, selecting the sample from prenumbered shipping documents. 2. Test a sample of sales​ transactions, selecting the sample from sales invoices recorded in the sales journal. 3. Confirm accounts receivable. 4. Review the aged accounts receivable trial balance.

1. Test a sample of sales​ transactions, selecting the sample from prenumbered shipping documents.

The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to​ respond, the auditor​ should: 1. Consider the nonresponse as a minor audit finding and use responding confirmations as a basis for test results. 2. Issue a qualified opinion due to the lack of sufficient audit evidence. 3. Send out a third confirmation request and if no​ response, perform alternative procedures. 4. Provide the client a copy of the accounts receivable confirmation and request that they obtain the information from the customer.

3. Send out a third confirmation request and if no​ response, perform alternative procedures.

The return of a positive confirmation of accounts receivable without an exception attests to the 1. collectibility of the receivable balance. 2. accuracy of the allowance for uncollectible accounts. 3. accuracy of the aging of accounts receivable. 4. accuracy of the receivable balance.

4. accuracy of the receivable balance.

State the purpose of footing the total column in the​ client's accounts receivable trial​ balance, tracing individual customer names and amounts to the accounts receivable master​ file, and tracing the total to the general ledger. A. A necessary audit procedure is to test the information on the​ client's trial balance for detail​ tie-in, which includes the purpose of footing the total column. B. A necessary audit procedure is to confirm through inquiry of management that the accounts receivables on the trial balance is​ accurate, which includes the purpose of footing the total column. C. A necessary audit procedure is to perform cutoff tests on the accounts receivable trial balance for proper accounting​ guidelines, which includes the purpose of footing the total column. D. A necessary audit procedure is to review the aged trial balance of the accounts receivable accounts for classification​ purposes, which includes the purpose of footing the total column.

A. A necessary audit procedure is to test the information on the​ client's trial balance for detail​ tie-in, which includes the purpose of footing the total column.

For each​ test, describe a misstatement that could be identified. 4.

All returns were not​ recorded, or shipments to customers were not in accordance with specifications and were returned​ (this could result in significant operating​ problems).

Explain why the analysis of differences is important in the confirmation of accounts​ receivable, even if the misstatements in the sample are not material. A. The auditor is required to prepare an analysis of differences for each confirmation of accounts receivable as part of the audit procedures. The​ report, which is filed with the​ financials, must include sample​ size, percentage of confirmations with​ differences, and​ management's reasons for these differences. B. Differences must be analyzed individually and in total to determine their effect on the total accounts receivable balance. Even if individual differences are not​ material, they may indicate a material problem when extended to the entire population. C. The analysis of differences is important in the confirmation of accounts receivable because it could mean that the bookkeeper might be committing fraud by creating fake sales to increase revenue for the company. D. Each difference is important for the auditor to track down and​ analyze, because any error could mean the accounts receivable employee is unintentionally booking entries to the wrong customer accounts and a manager needs to oversee the process.

B. Differences must be analyzed individually and in total to determine their effect on the total accounts receivable balance. Even if individual differences are not​ material, they may indicate a material problem when extended to the entire population.

Why do CPA firms sometimes use a combination of positive and negative confirmations on the same​ audit? A. Positive and negative confirmations are commonly used by auditors when they are looking for more reliable evidence from the debtor. The auditor is requiring the debtor to respond. B. It is common to use a combination of negative and positive confirmations so the auditor can focus the confirmation testing on large account​ balances, while still allowing for a representative sample from the rest of the population. C. Auditors prefer to use positive and negative confirmations when they have assessed the risk of material misstatement as high and the auditor expects a low exception rate. D. Auditors will use a combination of negative and positive confirmations when in the previous​ year, the auditor did not receive a high rate of return on positive confirmations.

B. It is common to use a combination of negative and positive confirmations so the auditor can focus the confirmation testing on large account​ balances, while still allowing for a representative sample from the rest of the population.

Distinguish between accuracy tests of gross accounts receivable and tests of the realizable value of receivables. A. The purpose of the accuracy tests of gross accounts receivable is to keep track of sales by​ customers, regardless of​ how, or if they pay. The purpose of the tests of the realizable value of receivables is to accurately maintain the value of the account given the inflation rate fluctuation over time. B. The purpose of the accuracy tests of gross accounts receivable is to determine the correctness of the total amounts receivable from customers. The purpose of the tests of the realizable value of receivables is to estimate the amount of the accounts receivable balance that will not be collected. C. The purpose of the accuracy tests of gross accounts receivable is to estimate the amount of the accounts receivable balance that will not be collected. The purpose of the tests of the realizable value of receivables is to determine the overstatement of the sales account in relation to the account receivable accounts. D. None of the above.

B. The purpose of the accuracy tests of gross accounts receivable is to determine the correctness of the total amounts receivable from customers. The purpose of the tests of the realizable value of receivables is to estimate the amount of the accounts receivable balance that will not be collected.

_____ are designed to determine the reasonableness of the balances in sales, accounts receivable, and other account balances that are affected by the sales and collection cycle. Such tests include ______.

tests of details of balances confirmation of accounts receivable and examining documents supporting the balance in these accounts

the propriety of the cash receipts cutoff is determined through _____.

tests of the year end bank reconciliation