Audit CH.10

The creditworthiness of a customer should be documented on a(n) _______ form.

Credit Approval

Substantive analytical procedures are ______.

used to examine plausible relationships among related accounts

Inherent risk may increase due to issues regarding recognition of revenue on ______.

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

The accounts commonly affected by sales transactions are ______.

Trade accounts receivable sales allowance for uncollectible accounts bad debt

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

True

Revenues are deemed to be earned when the company has __________ what it must do to fulfill its obligation.

accomplished

When it comes to cash receipt transactions, auditors seldom have major concerns about ______.

classification

Risk factors to an entity's internal controls over the revenue process include ______.

competition rapid growth new tech

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

completion

One way to avoid misstatement of revenue is to ensure the client has proper __________.

cutoff policies

The major audit procedures for testing the _______ assertion for accounts receivables are confirmation of customers' accounts balances and examination of subsequent cash receipts.

existance

The major control for preventing fictitious sales is ______.

proper segregation of duties

Controls for the completeness assertion include ______.

segregation of duties restrictive endorsements use of a lockbox system

Inherent risk factors that may affect the revenue process are ______.

- Industrial-related factors - complexity and contentiousness of revenue recognition issues - difficulty of auditing transactions and account balances - misstatements detected in prior audits

__________ needs to be assured in order to recognize revenue.

collectibility

The major control for preventing cash from being recorded in the wrong account is ______.

chart of account

Receivables from related parties are ______.

confirmed and evaluated for collectibility

To provide evidence on the valuation of the allowance, the auditor looks at the aged trial balance for old items and ______.

considers historical collection to provide evidence of uncolletability for current items

Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed __________.

correctly

According to FASB, in order to recognize revenue an entity must ______. - satisfy a performance obligation - create a contract with a customer to provide a good or service - transfer a good or service to a customer - receive payment for the transferred good or service

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

The choice of which type of test of controls is appropriate for a particular assertion will be a function of the ______.

- volume of transactions or data - nature and complexity of the systems by which the entity processes and controls information - nature of the available evidence

The accounts commonly affected by cash receipts transactions are ______.

Cash Trade Accounts Receivable Cash Discounts

Which of the following statements are correct? - Confirmation requests should be made soon after the end of the accounting period to maximize the response rate. - Accounts receivable should only be confirmed at year end except in rare circumstances. - Sending confirmations at the end of the accounting period reduces the chance of timing differences.

Confirmation requests should be made soon after the end of the accounting period to maximize the response rate. Sending confirmations at the end of the accounting period reduces the chance of timing differences.

When the auditor does not receive a response to the positive confirmations, possible procedures include ______.

Examination of: - specific subsequent cash receipts - shipping docs - other client docs sending second and third requests

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: Substantive analytical procedures are inadequate audit tests for examining the fairness of revenue related accounts because such tests fail to provide sufficient evidence, even though they are low cost.

False

The use of ______ also reduces the risk of revenue being recorded before goods are shipped or services are performed because customers are unlikely to recognize an obligation to pay in such a circumstance.

Monthly customer statements

The sale of goods and services to customers is the focus of the _____ process.

Revenue

The potential for theft and fraud in the revenue process makes this particularly important.

Segregation of Duties

True or false: Some accounts are difficult to audit because of the lack of reliable evidence.

True

To test the auditor's concern with accounts receivables completeness, the aged trial balance should be reconciled to the ______.

accounts receivables general ledger account

Because revenue transactions that are processed incorrectly result in misstatements that directly affect the amounts reported in the financial statements, _________ is an important assertion.

accuracy

Once the tests of controls in the revenue process have been completed, the auditor sets the ______ level of control risk.

achieved

Side __________ can substantially alter the terms of a sale.

agreements

There are two categories of substantive procedures: (1) substantive _______ procedures and (2) tests of ____ of classes of transactions, account balances and disclosures.

analytical;details

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 the possible misstatements

Receivables that have been sold should not remain as a(n) __________ on the company's books.

asset

It is the responsibility of ______ to ensure that all necessary financial statements disclosures are made.

auditors

Shipping goods to customers with bad credit and making sales at incorrect prices or terms are both possible misstatements due to improper ______.

authorization

Confirmations do not necessarily mitigate the risk of __________.

bad debt

Failure to perform the credit authorization function properly may result in ______.

bad debt losses

Reconciling the daily remittance report to control listings of remittance advices provide reasonable assurance that ______.

cash receipts were recorded at the correct amounts

One control activity that can provide assurance for _______ the assertion that customer payments are recorded to the correct account is to reconcile the daily remittance report with postings to the cash receipts journal and accounts receivable subsidiary ledger.

classification

One control activity that can provide assurance for the _______ assertion that customer payments are recorded to the correct account is to reconcile the daily remittance report with postings to the cash receipts journal and accounts receivable subsidiary ledger.

classification

One of the major issues related to ________ of accounts receivables is segregating short-term and long-term receivables.

classification

The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the ________ assertion.

classification

A major misstatement related to the ______ assertion is that cash or checks are stolen or lost before being recorded in the cash receipts records.

completeness

When it comes to cash receipt transactions, auditors seldom have major concerns about ______.

cutoff

Important controls regarding the processing of credit memoranda are ______.

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 must maintain control over the accounts receivable confirmations to minimize the possibility of ______.

entity interception of the confirmation alteration of the confirmation by the entity

To test for proper authorization of early payment discounts, the auditor can ______.

examine a sample of cash receipts transactions to determine if the entity's cash discount policies are being followed

One of the more important assertions regarding accounts receivables is ________ because the auditor wants assurance that this account balance is not overstated through the inclusion of fictitious customer accounts or amounts.

existance

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

false

When the results of testing controls do not support the planned level of control risk, detection risk will ______.

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

The accounting standard regarding revenue requires an entity to follow a five-step approach. The first step it to ______.

identify contractual agreement(s) with a customer

Management may have fraudulently overstated revenue by making __________ journal entries.

inappropriate

The assessment of the potential effects of _______ risk factors is one of the inputs for the assessment of the risk of material misstatement.

inherent

Audit procedures used to test controls in the revenue process include ______.

inquiry of personnel inspection of documents and records observation of the operation of the control walkthroughs reperformance of the control activities

For virtually all entities, the _______ and ________ processes represent the two major business processes than affect the financial statements.

inventory and purchasing

Confirmations are more persuasive than subsequent cash receipts as they help mitigate the risk of __________.

lapping

To test collectibility of receivables, auditors may consider credit ratings for debtors of __________ receivables.

large

There is only a small possibility of cash being recorded in the wrong period if the entity uses a(n) ______ system.

lockbox

For control of the confirmation process, the auditor should ______.

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

The possible misstatement that concerns the auditor when considering the ______ assertion is that cash receipts are recorded but not deposited in the entity's bank account.

occurrence

There are two types of confirmations:

positive and negative

For entities that have specialized revenue or services that require separation, controls over the aggregation or disaggregation of transactions are paramount for proper ______.

presentation

Industry related factors that affect the potential for misstatements in the revenue process include ______.

profitability and health of industry level of competition rate of technological change

Sending confirmation requests at the end of the accounting period ______.

reduces the chance of timing differences maximizes response rate

Many instances of misstatement are based on the inappropriate recognition of __________.

revenue

One of the most important controls in any accounting system is proper _____ of _______ .

segregation of duties

Possible misstatements due to improper authorization of revenue transactions include ______.

shipping goods to or performing services for customers who are bad credit risks and making sales at unauthorized prices or terms

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.

subjectivity

To examine the fairness of revenue related accounts, ________ procedures are useful audit tests because they provide sufficient evidence at low cost.

substantive analytical

When using a reliance strategy, the auditor conducts ______ to ensure that the controls in the revenue process operate effectively.

tests of controls

Possible programmed controls to ensure accuracy of the revenue process include ______.

the authorized price list is updated promptly only authorized changes are made to the master file

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

true

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

true

The major _______ issue related to accounts receivable is concerned with the net realizable value of accounts receivable.

valuation

For a positive confirmation, a response is required ______.

whether the amount is correct or incorrect

The major issues related to the classification for accounts receivable are ______.

- IDing and reclassifying any material credits contained in AR. - Segregating short-term and long-term receivables - ensuring that different types of receivables are properly classified

Auditing standards allow the auditor to omit confirming accounts receivable when ______.

- The balance is immaterial - External confirmations would be ineffective - Assessed level of risk of material misstatement at the relevant assertion level is low, and other planned substantive procedures address the assessed risk

Which of the following statements are correct? - Many accounting systems integrate purchasing and human resources with revenue. - The revenue process is similar for all types of organizations. - In most systems the revenue process does not interact with the inventory management process.

- The revenue process is similar for all types of organizations. - Many accounting systems integrate purchasing and human resources with revenue

A credit approval form ______.

- documents a customer's creditworthiness - is an example of a source doc

If an auditor does not receive responses to positive confirmations ______.

additional requests can be sent

Credit memoranda that are used to process sales returns and allowance transactions ______.

also used to cover an unauthorized shipment of goods or conceal a misappropriation of cash

Having cash or checks stolen or lost before being recorded in the cash receipts records is a major misstatement related to the ________ assertion.

completeness

The auditor's concern with the _______ assertion over accounts receivable is whether all accounts receivable have been included in the subsidiary ledger and the general ledger account.

completeness

Control activities that ensure the ______ assertion include accounting for the numerical sequence of shipping documents and sales invoices and matching shipping documents with sales invoices.

completion

Audit evidence that is a direct written response from a third party to the auditor, in paper form or by electronic or other medium is called _______.

confirmation

Determining that the customer is able to pay for the goods or services is the role of the _____ ______ function.

credit approval

Overstatement may occur when sales for the next period are recorded in the __________ period.

current

Comparing the date of a bill of lading with the date on the respective sales invoice and the date the sales invoice was recorded in the sales journal allows the auditor to test the _____ control.

cutoff

Comparing the date of a bill of lading with the date on the respective sales invoice and the date the sales invoice was recorded in the sales journal allows the auditor to test the ______ control.

cutoff

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.

cutoff

The attempt of the _______ assertion is to determine whether all revenue transactions and related accounts receivable are recorded in the proper period.

cutoff

The results of the auditor's testing of internal control for the revenue process directly impact ______ risk and therefore the level of ______ procedures that will be required for the accounts affected by this process.

detection; substantive

__________ communication with debtors is the most conclusive step in verifying accounts receivable.

direct

A common control to ensure proper presentation is the use of a(n) ______ checklist.

disclosure

Many accounting systems integrate the revenue process with the human resources, _______ and ______ processes.

inventory, purchasing

If the aggregate misstatement is ______ the tolerable misstatement, the auditor may accept the account as fairly presented.

less than

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

likely

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

classification

The auditor should document the achieved level of control risk for the revenue process using ______.

either quantitative amounts or qualitative terms

A strong control that prevents misstatement of cash receipts is the use of a(n) _____ system where customers mail payments directly to the entity's bank account.

lockbox

AR confirmations can be sent electronically or via __________.

paper form