Chapter 7 Audit

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable?

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

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

A. Completeness.

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

A. Daily sales summaries are compared to daily postings to the accounts receivable ledger.

Confirmations of accounts receivable provide the most evidence for which of the following assertions?

A. Existence.

Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues?

A. Is customer credit approved before orders are shipped?

The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This procedure is related to which of the following assertions

A. Occurrence.

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following?

A. One of the cashiers has been covering a personal embezzlement by lapping

The negative request form of accounts receivable confirmation is useful particularly when the

A. Option A

The composition of Oak and Company's accounts receivable are as follows:

A. Positive confirmations on a sample of all 285 accounts.

Which of the following controls is designed to meet the completeness assertion?

A. Prenumbering invoices, shipping documents, and sales orders.

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

A. Understating the sales journal.

Which of the following statements is correct concerning the use of negative confirmation requests?

A. Unreturned negative confirmation requests rarely provide significant explicit evidence.

The SEC requires all of the following for revenue to be recognized except

A. cash is collected

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

A. no reply to a positive confirmation request is received.

The assertion that auditors will probably emphasize in the revenue and collection cycle is

A. occurrence

A customer reply on a positive confirmation says "We dispute the $250 charge. We believe it is excessive." This confirmation

A. provides evidence of existence.

The most effective audit procedure for determining the collectability of an account receivable is the

A. review of the subsequent cash collections

. "Bill and hold" refers to an arrangement where

A. sales are recorded but are not shipped.

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to

A. sales invoices with shipping documents.

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that

A. shipments to customers were invoiced.

To determine whether sales transactions have been recorded in the proper accounting period, the auditor performs cutoff tests. Which of the following best describes the overall approach used when performing cutoff tests?

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

Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004. This situation is an example of a violation of which of the following assertions?

B. Completeness.

In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This procedure is related to which of the following assertions?

B. Completeness.

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

B. Inflating sales for the year.

The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

B. Inherent risk was particularly high for accounts receivable

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

B. Unrecorded sales.

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the

B. accounts receivable listing

Accountants should be under orders to record sales and accounts receivable when

B. all supporting documentation of shipping is in order.

The primary consideration when planning whether to send confirmations of accounts receivable before the balance sheet date is the

B. client's internal control over transactions affecting receivables.

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of

B. completeness.

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except

B. do nothing for immaterial balances.

In the audit of accounts receivable, the most important emphasis should be on the

B. existence assertion.

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except

B. mailing the confirmation letters.

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 (these returns did not exist). The most effective control for preventing this activity is to

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

Tracing shipping documents to prenumbered sales invoices provides evidence that

B. shipments to customers were properly invoiced.

Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and tested Elm Tree's internal control procedures over the sales recording process and finds the controls to be effective. At a minimum, the auditor's year-end procedures for testing internal control procedures must include

B. test the client's internal control procedures from October 15 through the year end.

Revenues are normally considered to have been earned when

B. the company has substantially accomplished what it must to be entitled to the benefits.

Custody of inventory is transferred to the shipping area upon authorization of

B. the shipping order

When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the client's

B. treasurer.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of

B. valuation or allocation

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

C. "These goods were returned for credit on November 15th."

The control activity "credit sales approved by credit department" is directed toward which transaction assertion?

C. Accuracy

Which of the following is the best reason for prenumbering in sequence such documents as sales orders, shipping documents, and sales invoices?

C. Enables personnel to check the numerical sequence for missing documents and unrecorded transactions

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

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

Which of the following internal control activities most likely would deter lapping of collections from customers?

C. Separation of duties between receiving cash and posting the accounts receivable ledger.

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

C. The client requests alternative procedures be performed instead.

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

C. Trace a sample of shipping documents to sales invoices recorded in the sales journal.

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

C. Unrecorded sales at year-end.

If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable, the auditor's opinion should be unqualified and could be expected to

C. avoid mentioning the alternative procedures

A small business owner can best offset the lack of separation of duties by

C. being actively involved in the accounting process.

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations

C. client-prepared statements of account that show the details of the account balances.

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because

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

To be recognized, revenues must also be realized or realizable and

C. earned

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to

C. estimate credit losses.

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the

C. existence of the balances confirmed

The document that generates recording of a sale is the

C. invoice.

In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by

C. processing customer orders, granting credit, delivering goods, and billing customers.

Sales are normally recorded on the date of the

C. sales invoice.

When accounts receivable are confirmed at an interim date, auditors need not be concerned with

C. sending negative confirmations to all the customers as of the year-end date.

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

C. the auditor cannot infer that all nonrespondents have verified their account information.

Write-offs of doubtful accounts should be approved by

C. the treasurer.

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

D . A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

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

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

D. Invoice quantities are compared to shipment and customer order quantities.

Which of the following accounts is not normally part of the revenue and collection cycle?

D. Purchases Returns and Allowances

To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts?

D. Sales returns.

A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

D. Send out positive confirmations on a large sample of these customers.

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded

D. The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

D. Use more experienced audit team members to perform year-end testing.

Favorite Soda Company distributes beverages in the Portland, Oregon area. Which of the following would be the test to determine that shipments made were actual sales?

D. Vouch bills of lading to the customer order documents.

An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor interviewed the sales manager who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor best test the sales manager's representation?

D. Vouch vender invoices to payments made after year-end.

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that

D. entries in the accounts receivable subsidiary ledger were properly invoiced.

An auditor noted that client sales had increased 10 percent for the year. At the same time, cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. The auditor is most likely concerned about

D. fictitious sales.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose

D. individual invoices

. In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from

D. no reply to negative confirmations.

The file that contains sales transactions that were initiated in the system but are not yet completed is the

D. pending order master.

The sum of customers' unpaid balances that is compared to the general ledger balance comes from

D. the accounts receivable trial balance.

A computer generally cannot be used for scanning large files of accounts receivable for unusual credit balances.

False

Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures.

False

Credit checks should be performed by the sales department before credit is approved.

False

If control risk is assessed very low, the substantive audit procedures on account balances must be expanded.

False

When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and obligations assertions.

False

A comparison of checks listed on a sample of deposit slips to the detail of customer credits posted to customer accounts receivable can be an audit test for lapping.

True

A confirmation procedure scheduled on the year-end date with a large sample of customer account balances is necessary if tests of controls reveal control weaknesses.

True

A price list master file contains the product unit prices that are used for billing customers.

True

An objective for an audit is to obtain evidence related to management's financial statement assertions.

True

Confirmations yield evidence about existence and the gross valuation of a receivable balance.

True

Inquiries of management usually do not provide very convincing evidence about the existence and rights assertions.

True

The accountants who record cash receipts and credits to customer accounts should not handle the cash.

True

The aging information for accounts receivable is typically used in connection with assessing the allowance for doubtful accounts.

True

The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.

True