audit ch 10

Which is not a key segregation of duties for the revenue process? Different parties should

prepare shipping orders and prepare bills of lading

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also

preparg=es the daily deposit slip

All of the following are important controls over credit memos except:

proper segregation of duties to ensure that sales discounts were taken were earned

Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process?

Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme.

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?

Including a monthly statement of the customer's account with the confirmation

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest that goods have been shipped on consignment?

Large debits to accounts receivable followed by small periodic credits.

Which of the following misstatements is not related to the completeness assertion for revenue?

Next year's revenue is recorded this year.

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?

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

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

Overstated sales for the year.

Which of the following is not an issue related to the valuation of accounts receivable?

Proper cut-off.

In the confirmation of accounts receivable, the auditor would most likely

Randomly select a representative sample of accounts for confirmation

Mill Company uses a batch processing method to process its sales transactions. Data on Mill's sales transaction tapes are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer account balances. One of the direct outputs of the creation of these tapes most likely would be a

Report showing exceptions and control totals

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would

Request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response.

Data Corporation has just computerized its billing and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of Data Corporation. Which of the following audit techniques could not be performed through a computer program?

Resolving differences reported by customers on confirmation requests

When reviewing bank confirmations for any liens on receivables, the auditor is testing the ______________ assertion

Rights and obligations

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.

Which of the following is a test of controls for the transaction assertion of completeness for revenue?

Trace shipping documents to sales invoices and the sales journal.

a negative confirmation requests that customers respond whether they agree or not with the amount due to the client stated in the confirmation

false

a remittance advice is used to track purchases

false

the return of vendor purchases is a part of the revenue process

false

Which of the following procedures most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?

reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger

at which point in an ordinary sales transaction of a wholesale business would a lack of specific authorization be of least concern to the auditor?

selling of goods for cash

Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely

send negative confirmation requests

a positive confirmation requests that customers respond whether they agree or not with the amount due to the client stated in the confirmation

true

channel surfing is an improper practice used to boost sales by inducing distributors to buy more inventory than they can promptly resell

true

credit authorization is used to determine if a customer is able to pay for goods

true

order entry is the initial function in the revenue cycle

true

revenue is realized when a product or service is exchanged for cash or a promise to pay cash or other assets that can be converted into cash

true

revenue must be realized (or realizable) and earned to be recognized

true

the revenue process affects numerous accounts in the financial statements

true

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an

understatement of revenues and receivables and an overstatement of inventory

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about

valuation and allocation

an auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of

value or allocation

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?

Fictitious sales.

Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipient?

"If you do not report any differences within 15 days, it will be assumed that this statement is correct."

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the client's confirmation letter?

A client-prepared statement of account showing the details of the customer's account balance

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

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

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the

Accounting records to the shipping documents.

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a listing of remittances that is forwarded to the cashier. A copy of the listing should be sent to the

Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

An auditor is reviewing sales cutoff as of March 31, 2010. All sales are shipped FOB destination and the company records sales three days after shipment. The auditor notes the following transactions: If the client records the required adjustments, the net effect on income in thousands of dollars for the period ended March 31, 2011 is

An increase of 8.

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. 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.

Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?

Assessing the allowance for uncollectible accounts for reasonableness.

An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting

Cash receipts and accounts receivable.

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

Collection of receipts on account and maintaining accounts receivable records.

Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?

Compare shipping documents with sales records.

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

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

Which of the following control activities may prevent the failure to bill customers for some shipments?

Each shipment should be supported by a prenumbered sales invoice that is accounted for.

Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?

Examine shipping documents

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to

Expand tests regarding the collectability of receivables.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?

a combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances

what is channel surfing

a company induces distributors to buy substantially more inventory than they can promptly resell

When comparing prices and terms on a sample of sales invoices with the authorized price list and terms of trade, the auditor is testing the ____________ assertion

authorization

tracing copies of sales invoices to shipping documents will provide evidence that all

billed sales were shipped

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries?

billing

to determine whether the system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the

bills of lading file

auditors or more concerned with the occurrence assertion for revenues than the completeness assertion because

clients are more likely to overstate than understate revenues

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of

completeness

When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the _____________ assertion

completeness

tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertions of

cutoff

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

daily sales summaries are compared to daily postings to the accounts receivable ledger

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

employees involved in the credit-granting function are separated from the sales function

audit documents often include a client-prepared aged trial balance of accounts receivable as of the balance sheet date. this aging is used by the auditor to

evaluate the allowance for doubtful accounts

an aged trial balance of accounts receivable is normally used by the auditor to

evaluate the provisions for bad debt

which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

examine shipping documents for matching sales invoices

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables'

existence

for the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the

internal auditor

in general, revenue is recognized when

it is earned and realized

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the

metered department records to the billing (sales) register

When a sample of sales transactions recorded in the sales journal is traced back to the customer orders and shipping documents, the auditor is testing the ____________ assertion

occurrence

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an

overstatement of revenues and receivables and an understatement of inventory

when evaluating internal control of an entity that processes revenue transactions on the Internal, an auditor would be most concerned about the

potential for computer disruptions in recording sales

in connection with the examination of financial statements by an independent auditor, the client suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff?

preparation of schedules for negative accounts receivable responses

immediately upon receipt of cash, a responsible employee should

prepare a listing of remittances

tracing bills of lading to sales invoices provides evidence that

shipments to customers were billed

tracing shipping documents to prenumbered sales invoices provides evidence that

shipments to customers were properly billed

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

the cashier posts the receipts to the accounts receivable subsidiary ledger cards

which of the following is not an inherent risk factor for the revenue process?

the client does not follow its stated policies for sales order approvals

In auditing accounts receivable, the negative form of confirmation request most likely would be used when

the combined assessed level of inherent risk relative to accounts receivables is low

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?

the credit manager's opinion

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

the inference drawn from receiving no reply may not be correct

During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?

the owner reviews credit memos before they are recorded.

according to the SEC's SAB No. 101, which of the following is not necessary for revenue recognition?

the seller has determined that the buyer will take the discount