Audit Chapter 7

Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company?

Purchasing raw materials

Which of the following statements regarding the revenue cycle are correct?

Tests of controls often support a reduction in control risk. It consists of routine transactions. There is always a presumptive risk of fraud.

Which of the following statements regarding the revenue cycle are correct?

There is always a presumptive risk of fraud. It consists of routine transactions. Tests of controls often support a reduction in control risk.

True or false: Physical protection of accounts receivable files is an important facet of control.

True

When an auditor receives an oral response to a confirmation ______.

a written response still needs to be requested alternative audit procedures may be warranted

When an auditor receives an oral response to a confirmation ______.

alternative audit procedures may be warranted a written response still needs to be requested

Substantive procedures are ______.

always performed in the revenue cycle

The risk that an unqualified opinion will be issued on financial statements that contain a material misstatement is the definition of ______ risk.

audit

The risk that an unqualified opinion will be issued on financial statements that contain a material misstatement is the definition of

audit risk

If a control is missing or ineffective, ______.

auditors need to design substantive procedures related to control failure the risk of material misstatement increases

The auditor assess inherent risk to determine where a material misstatement could enter the process ______ the consideration of any internal controls.

before

The form the carrier signs to verify goods are shipped is a(n) ______.

bill of lading

Difficulties in estimating the allowance for doubtful accounts can be due to ______.

changing economic conditions revised credit policies change in customer base

Auditors review items in the pending order file for evidence of the ____ of recorded sales and accounts receivable.

completeness

Auditors review items in the pending order file for evidence of the ______ of recorded sales and accounts receivable.

completeness

Prenumbered documents are important in testing the ____ assertion and the ____

completeness occurence

Regarding the revenue process, management should ______.

continually review revenues and compare them to budgeted and forecasts review merchandise returns scrutinize total write-offs of accounts receivables

Which of the following documents should be matched before recording revenue?

customer invoice customer sales order evidence of shipment

To ensure sales are recorded in the proper period, auditors use sales ____ tests.

cutoff

Tracing shipping documents before and after year-end to the sales journal and vouching credit memos for returns after year end to receiving reports are done to test the ____ assertion.

cutoff

Verifying the dates on sales documents helps reduce the risk of misstatement related to the ____ assertion of revenue.

cutoff

A way to subject all items in a population of occurrences for a particular control activity in the revenue cycle is to use

exception

A way to subject all items in a population of occurrences for a particular control activity in the revenue cycle is to use ____ testing.

exception

An automated procedure designed to test all items in a population in order to identify violations of a particular control activity is called

exception

Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the ____ and rights and obligations of customers' balances directly from the customer.

existence

When customers are not willing or able to return confirmations, examining subsequent cash receipts, sales orders, invoices, and shipping documents, and correspondence files for past-due accounts are alternative procedures that may be performed to ensure

existence

Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the ______ of customers' balances directly from the customer.

existence rights & obligations

If a customer confirms that an account exists, the auditor ______.

must still review the account for collectability

Justifications for not using confirmations may include ______.

other procedures provide sufficient, competent evidence confirmations would be ineffective receivables are not material

A strong entity-level control in the revenue process is ______.

overall performance review by management

A description of the goods being shipped as well as the quantity shipped is found on the ______.

packing slip

The most effective alternative procedure to confirmations to ensure existence is examining ______.

subsequent cash receipts

If controls are not in place or personnel are not performing control activities effectively, auditors need to design ____ procedures to try to detect whether control failures have produced material misstatements in the financial statements.

substantive

If a control is missing or ineffective, ______.

the risk of material misstatement increases auditors need to design substantive procedures related to control failure

True or false: Prenumbered documents are an example of an internal control.

true

Reviewing accounts for collectability and determining the adequacy of the allowance for doubtful accounts is done in support of the ____ assertion.

valuation

When the auditor evaluates the reasonableness of the allowance for doubtful accounts, ___ is a high risk assertion

valuation

When the auditor evaluates the reasonableness of the allowance for doubtful accounts, ____ is a high risk assertion.

valuation

typical manufacturing company-The basic activities in the revenue and collection cycle for a company like this are

(1) receiving and processing customer orders, including credit approval; (2) delivering goods and services to customers; (3) billing customers and accounting for accounts receivable; and (4) collecting and depositing cash received from customers

Prenumbered documents are important in testing the ___ assertion and the ___ assertion

1. completeness 2. occurrence

The risk of material misstatement is a combination of ____ risk and ____ risk.

1.inherent 2.control

Which of the following statements are correct?

Confirmation returned as "undeliverable" are always a red flag. Confirming a specific transaction is often more effective than confirming the account balance.

Which of the following statements are correct?

Confirming a specific transaction is often more effective than confirming the account balance. Confirmation returned as "undeliverable" are always a red flag.

True or false: Auditing standards recommend but generally do not require the use of confirmations for accounts receivable.

False

Which of the following statements regarding the revenue cycle are correct?

It consists of routine transactions. There is always a presumptive risk of fraud. Tests of controls often support a reduction in control risk.

According to accounting standards, to be recognized, revenue must be

realized or realizable and earned.

Access to accounts receivable records gives an individual ______,

recording responsibility authorization

There is no such thing as a typical

revenue and collection cycle.

Sales must be realized or realizable and earned in order to be recorded under the accounting standards related to

revenue recognition

Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the ______ of customers' balances directly from the customer.

rights & obligations existence