Audit I Chapters 6, 7, 10, 11
Which of the following is not one of the criteria for revenue recognition? A) Collectibility is certain. B) Delivery has occurred or services have been rendered. C) Evidence of an arrangement exists and is persuasive. D) A fixed or determinable price to buyer exists.
A) Collectibility is certain.
Which of the following is a proper alternative audit procedure for nonresponses to positive accounts receivable confirmation requests? A) Examination of subsequent cash receipts in payment of the receivable. B) Mailing negative confirmation requests to nonrespondents. C) Expansion of the sample by the number of nonrespondents. D) Reduction of accounts receivable by the amount of the nonresponses.
A) Examination of subsequent cash receipts in payment of the receivable.
Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? A) Examine cash receipts received after year-end. B) Confirm receivables. C) Examine dates of purchase orders. D) Foot the receivables lead schedule.
A) Examine cash receipts received after year-end.
The best control to prevent lapping is: A) Separation of recordkeeping for receivables from custody of cash. B) Separation of authorization of sales transactions from recordkeeping for accounts receivable. C) Timely reconciliation of the bank account by an individual not involved in recordkeeping for receivables. D) Comparison of the total per the daily bank deposit ticket with the total recorded in the cash receipts journal by an individual otherwise independent of the cash receipts function.
A) Separation of recordkeeping for receivables from custody of cash.
When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? A) The account balances as of year-end will generally be confirmed. B) The auditors will in general use blank rather than positive confirmation requests. C) The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end. D) Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.
A) The account balances as of year-end will generally be confirmed.
Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? A) The confirmation requests are sent on the client's letterhead. B) The confirmation requests are mailed to customers by the internal auditors. C) The client's mailroom personnel closely monitor and inspect confirmation requests during mailing. D) The return address on the envelope used to send the confirmation request is that of the client.
A) The confirmation requests are sent on the client's letterhead.
Which of the following would be least likely todiminish the validity of evidence obtained from confirmation of accounts receivable? A) The confirmation requests are sent on the client's letterhead. B) The confirmation requests are mailed to clients by the internal auditors. C) The mailing addresses on the confirmation requests are verified by the client's mailroom personnel. D) The return address on the envelopes used to send the confirmation requests is the exact office address that the CPAs work in at the client's premises.
A) The confirmation requests are sent on the client's letterhead.
The confirmation process may be performed using a(n): paper form electronic form A)Yes Yes B)Yes No C)No Yes D)No No
A)Yes Yes
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the: A. Collection of receivables. B. Purchase of merchandise inventory. C. Payment of accounts payable. D. Sale of long-term debt.
A. Collection of receivables
Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A) Accounts receivable divided by Cost of goods sold. B) Aging of accounts receivable. C) Cash Sales divided by Accounts receivable D) Year 2 accounts receivable compared to year one accounts receivable.
B) Aging of accounts receivable.
Which of the following manipulations would understate receivables on the financial statements? A) Understatement of cash sales. B) Closing the sales journal prior to year-end. C) Closing the cash receipts journal prior to year-end. D) Underestimating the allowance for doubtful accounts.
B) Closing the sales journal prior to year-end.
The most practical and effective audit procedure for detecting lapping is: A) Preparing an interbank transfer schedule. B) Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank. C) Tracing recorded cash receipts to postings in customers' ledger cards. D) Preparing a proof of cash.
B) Comparing recorded cash receipts in detail against items making up the bank deposit as shown on duplicate deposit slips validated by the bank.
Which of the following is not true about the confirmation of accounts receivable? A) Confirmation requests should bear the auditors' return address. B) Confirmation requests should be signed by the auditors. C) Confirmation requests should be mailed directly by the auditors. D) Confirmation requests should include a return envelope addressed to the office of the auditors.
B) Confirmation requests should be signed by the auditors.
Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A) Examine sales invoices. B) Inclusion of the information in the engagement letter. C) Examine correspondence. D) Examine any subsequent cash receipts.
B) Inclusion of the information in the engagement letter.
Which of the following is not true about the auditors' verification of notes receivable? A) The interest revenue on notes receivable is usually audited by independent computation. B) Inspecting the notes is sufficient evidence of existence of the notes. C) The auditors may evaluate the collectibility of notes by inspecting credit files. D) Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.
B) Inspecting the notes is sufficient evidence of existence of the notes.
Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the: A) Completeness of recording of sales transactions. B) Occurrence of sales transactions. C) Billing of all sales transactions. D) Presentation of payables.
B) Occurrence of sales transactions.
Which of the following does not meet the definition of an external confirmation in the context of accounts receivable? A) Fax responses. B) Oral responses obtained by the auditor through a telephone call. C) Written responses to negative confirmation requests. D) Written response to confirmations sent out without balances due.
B) Oral responses obtained by the auditor through a telephone call.
Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A) Examine bills of lading. B) Physically examine items sold. C) Examine correspondence. D) Examine subsequent cash receipts.
B) Physically examine items sold.
Tracing copies of shipping documents to sales invoices will provide evidence that all A) Billed sales were shipped. B) Debits to the subsidiary accounts receivable ledger are for sales shipped. C) Shipments to customers were billed. D) Accounts receivable are recorded.
C) Shipments to customers were billed.
Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except: A) It understates liabilities. B) It overstates revenues C) It overstates net income. D) It overstates assets.
D) It overstates assets.
Which of the following is the best argument against the use of negative accounts receivable confirmation requests? A) The cost-per-response is excessively high. B) There is no way of knowing if the intended recipients received them. C) Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D) The inference drawn from receiving no reply may not be correct.
D) The inference drawn from receiving no reply may not be correct.
Which of the following is the best argument against the use of negative accounts receivable confirmations? A) The cost-per-response is excessively high. B) There is no way of knowing if the intended recipients received them. C) Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D) The inference drawn from receiving no reply may not be correct.
D) The inference drawn from receiving no reply may not be correct.
An analysis of the aged accounts receivables is most directly related to which substantive test objective? A) Existence and occurrence. B) Presentation and disclosure. C) Rights and obligations. D) Valuation.
D) Valuation.
Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to: A. Increase the balance in the allowance for bad debts accounts. B. Review the going concern ramifications. C. Review the credit and collection policy. D. Expand tests of collectibility.
D. Expand tests of collectibility.
Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.
False
The department approving a sales transaction should be the shipping department.
False
When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.
True
Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? a) Excessive goods returned for credit. b) Unrecorded sales discounts. c) Lapping of year-end accounts receivable. d) Inflated sales for the year.
d) Inflated sales for the year.
Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? a) Restrictions placed on sales by laws and regulations. b) Decline in sales due to economic declines. c) Decline in sales due to product obsolescence. d) Over-recorded sales due to a lack of control over the sales entry function.
d) Over-recorded sales due to a lack of control over the sales entry function.
Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? a) Inaccurate billing due to a lack of controls. b) Lapping of accounts receivable. c) Misbilling a client due to a data input error. d) Recording sales when the customer is likely to return the goods.
d) Recording sales when the customer is likely to return the goods.
Which of the following is an example of misappropriation of assets relating to sales? a) Accidentally recording cash that represents a liability as revenue. b) Holding the sales journal open to record next year's sales as having occurred in the current year. c) Intentionally recording cash received from a new debt agreement as revenue. d) Theft of cash register sales.
d) Theft of cash register sales.
For effective internal control, the billing function should be performed by the: a) shipping department. b) sales department. c) credit and collection department. d) accounting department
d) accounting department
The confirmation of the client's trade accounts receivable as a means of obtaining audit evidence is ordinarily considered to be a: a) required observation technique. b) test of a control. c) basic principle of attestation. d) substantive procedure.
d) substantive procedure.
Material accounts receivable from related parties should be stated separately from other receivables.
True
It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be: A. Examining subsequent receipts of year-end accounts receivable. B. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. C. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. D. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.
A. Examining subsequent receipts of year-end accounts receivable.
In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely? A. Fictitious revenues. B. Timing differences. C. Improper asset valuations. D. Improper disclosures.
A. Fictitious revenues
An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: A. No reply to a positive confirmation request is received. B. No reply to a negative confirmation request is received. C. Collectibility of the receivables is in doubt. D. Pledging of the receivables is probable.
A. No reply to a positive confirmation request is received.
For effective internal control, the billing function should not be performed by the: A. Sales department. B. Accounting department. C. Finance department. D. Information Processing department.
A. Sales department.
A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a: A. Test of a control. B. Substantive test. C. Cutoff test. D. Statistical test.
A. Test of a control.
To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: A. Trace a sample of the bills of lading to sales invoices. B. Confirm a sample of accounts payable. C. Review the aging of accounts receivable. D. Trace a sample of recorded sales to shipping documents.
A. Trace a sample of the bills of lading to sales invoices.
To test the existence assertion for recorded receivables, an auditor would select a sample from the.
Accounts receivable subsidiary ledger.
Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A) Investigate confirmation exceptions for indication of amounts in dispute. B) Review accounts which have been written off as uncollectible prior to year-end. C) Investigate credit ratings for large accounts receivable. D) Discuss with the credit manager the current status of doubtful accounts.
B) Review accounts which have been written off as uncollectible prior to year-end.
Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? A) Investigate confirmation exceptions for indication of amounts in dispute. B) Review amounts of accounts which have been written off as uncollectible prior to year-end. C) Investigate credit ratings for large accounts receivable. D) Discuss with the credit manager the current status of doubtful accounts.
B) Review amounts of accounts which have been written off as uncollectible prior to year-end.
receivable. Of the following, which combination is it most likely that the auditors will use? A) The positive form for small balances, and the negative form for large balances. B) The positive form used for large balances and the negative form for the small balances. C) The positive form used for trade receivables and the negative form for other receivables. D) The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.
B) The positive form used for large balances and the negative form for the small balances.
Tracing copies of sales invoices to shipping documents will provide evidence that all: A. Shipments to customers were recorded as receivables. B. Billed sales were shipped. C. Debits to the subsidiary accounts receivable ledger are for sales shipped. D. Shipments to customers were billed.
B. Billed sales were shipped.
Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? A. Footing the sales journal. B. Confirming accounts receivable. C. Tracing the total sales in the sales journal to the general ledger. D. Observation of the physical inventory count at year-end.
B. Confirming accounts receivable.
The confirmation of accounts receivable is most closely associated with: A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.
B. Detection risk.
Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed? A. Scan the sales journal for sequential and unusual entries. B. Examine shipping documents for matching sales invoices. C. Compare the accounts receivable ledger to daily sales summaries. D. Inspect unused sales invoices for consecutive pre-numbering.
B. Examine shipping documents for matching sales invoices.
When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: A. Subsequent collections are to be reviewed. B. Internal control over receivables is good. C. Negative confirmation requests are to be used. D. There is a simultaneous examination of cash and accounts receivable.
B. Internal control over receivables is good.
The individual looking for guidance on revenue recognition is most likely to appropriately review: A. APB 99. B. SAB 104. C. ASR 44. D. B1 Document.
B. SAB 104.
You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: A. The cash receipts journal was closed before year-end. B. The cash receipts journal was held open after year-end. C. There are many unrecorded liabilities. D. The sales journal was held open after year-end.
B. The cash receipts journal was held open after year-end.
An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that: A. Obsolete inventory has not yet been reduced to fair market value. B. There was an improper cutoff of sales at the end of the year. C. An unusually large receivable was written off near the end of the year. D. The aging of accounts receivable was improperly performed in both years.
B. There was an improper cutoff of sales at the end of the year.
An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by: A. Tracing sales invoices to shipping documents to tests the completeness of reported sales. B. Tracing shipping documents to sales invoices to test the occurrence of reported sales. C. Tracing sales invoices to shipping documents to test the occurrence of reported sales. D. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.
B. Tracing sales invoices to shipping documents to test the occurrence of reported sales.
Which of the following is statements is correct about "window dressing?" A) Window dressing involves intentional overstatements of receivables and sales through decreases in the percentage complete of long-term construction projects. B) An audit is not developed to provide assurance of detecting any forms of window dressing. C) A number of window dressing practices represent proper and appropriate business practices. D) Window dressing ordinarily involves the intentional overstatement of liability and equity accounts.
C) A number of window dressing practices represent proper and appropriate business practices.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? A) Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. B) Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. C) Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. D) The failure to prepare shipping documents may lead to an understatement of inventory balances.
C) Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.
Which statement is correct concerning the audit of notes receivable? A) An aged schedule of notes receivable is ordinarily used to estimate an allowance for uncollectible notes. B) Because note forms are tightly controlled by banks, physical inspection is ordinarily a particularly effective audit technique. C) Confirmation in writing from the holder of the note is ordinarily considered as an acceptable alternative to inspection of the note. D) The inspection of notes receivable on hand is ordinarily performed concurrently with the inspection of notes payable.
C) Confirmation in writing from the holder of the note is ordinarily considered as an acceptable alternative to inspection of the note.
Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? A) Reviewing an aging of accounts receivable. B) Examination of cash receipts subsequent to the balance sheet date. C) Confirming current (0-30 day) year-end accounts receivable. D) Reviewing credit files for selected account.
C) Confirming current (0-30 day) year-end accounts receivable.
Which of the following revenue related transactions is not linked to the accounts indicated? A) Recognize revenues too early--accounts receivable and revenue. B) Understate allowance for doubtful accounts--Bad debt expense, allowance for doubtful accounts. C) Don't write off uncollectible receivables--sales returns, sales discounts. D) Don't record discounts given to customers--Cash, sales discounts, accounts receivable.
C) Don't write off uncollectible receivables--sales returns, sales discounts.
When scheduling audit work, the auditors are most likely to confirm accounts receivable balances at an interim date if: A) Negative confirmations are being used. B) Internal control is weak. C) Internal control is strong. D) There is a simultaneous examination of cash and accounts payable.
C) Internal control is strong.
Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements? A) Sales. B) Cash. C) Inventory. D) Accounts receivable.
C) Inventory.
Tracing copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents provides evidence that: A) Shipments to customers were properly billed. B) Entries in the accounts receivable subsidiary ledger were for sales actually shipped. C) Sales billed to customers were actually shipped. D) No duplicate shipments to customers were made.
C) Sales billed to customers were actually shipped.
Which of the following is consistent with effective internal control over sales transactions? A) The accounting department prepares a shipping report authorizing the shipment of goods. B) The accounting department accounts for all receiving reports. C) The billing department accounts for all shipping documents. D) The accounts payable department annually approves the extension of credit to customers.
C) The billing department accounts for all shipping documents.
Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? A) A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B) Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D) The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.
C) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.
Which of the following is one of the most conclusive forms of evidence in establishing the existence of accounts receivable? A) Close inspection of notes on hand and verification with company personnel. B) Comparisons of last year's receivables with current year amounts to test for reasonableness. C) The confirmation of accounts. D) Contacting a credit reporting agency to determine the credit worthiness of customers.
C) The confirmation of accounts.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? A) Merchandise received is not promptly reconciled to the outstanding purchase order file. B) Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. C) The write-off of receivables by personnel who receive cash permits the misappropriation of cash. D) Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.
C) The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
After the CPAs have selected particular accounts receivable for confirmation: A. As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. B. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm. D. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.
C. All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.
The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? A) A substantial number of accounts are in disputes. B) The combination of inherent risk and control risk is high. C) Client records include a large number of relatively small balances. D) The auditors believe that recipients of the requests are unlikely to give them consideration.
C. Client records include a large number of relatively small balances.
The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: A. Consider internal control over credit sales. B. Test the accuracy of recorded charge sales. C. Estimate credit losses. D. Verify the validity of the recorded receivables.
C. Estimate credit losses.
Tracing recorded sales transactions to the bills of lading provides evidence about the: A. Completeness of sales transactions. B. Collectibility of sales transactions. C. Occurrence of sales transactions. D. Billing of all sales transactions.
C. Occurrence of sales transactions.
Which of the following is not a primary objective of the auditors in the examination of accounts receivable? A) Determine the approximate realizable value. B) Consider the adequacy of internal control. C) Establish the existence of receivables. D) Determine the expected day of collection of each of the receivables.
D) Determine the expected day of collection of each of the receivables.
Which of the following would indicate the need to use positive accounts receivable confirmation requests? A) A large population consisting of small balances. B) Good internal control over accounts receivable. C) Most accounts are with large reputable companies. D) A large number of accounts receivable are in dispute.
D) A large number of accounts receivable are in dispute.
Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? A) Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger. B) Posting to the general ledger and approval of additions and terminations relating to the payroll. C) Custody of unmailed signed checks and maintenance of expense subsidiary ledger. D) Collection of receipts on account and maintaining accounts receivable records.
D) Collection of receipts on account and maintaining accounts receivable records.
CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.
False
When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is: A. Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. B. High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. C. High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
D. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from: A. The sales journal. B. The billing clerk's file of sales orders. C. Duplicate copies of sales invoices. D. The shipping clerk's file of duplicate copies of bills of lading.
D. The shipping clerk's file of duplicate copies of bills of lading.
Accounts receivable that are written-off should not be turned over to a collection agency.
False
Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.
True
An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.
True
Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.
True
Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.
True
The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. a) And accounts receivable are immaterial, or the use of confirmations would be ineffective. b) And accounts receivable are composed of large accounts. c) And the effectiveness of confirmations is absolutely determined. d) Or accounts receivable are from extremely reputable customers.
a) And accounts receivable are immaterial, or the use of confirmations would be ineffective.
Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? a) Have customers send payments directly to the company's depository bank. b) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. c) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. d) Request that customers' payment checks be made payable to the company and addressed to the treasurer.
a) Have customers send payments directly to the company's depository bank.
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: a) Send positive confirmation requests. b) Send negative confirmation requests. c)Examine evidence of subsequent cash receipts. d) Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.
a) Send positive confirmation requests.
To determine that all sales have been recorded, the auditors would select a sample of transactions from the: a) Shipping documents file. b) Sales journal. c) Accounts receivable subsidiary ledger. d) Remittance advices.
a) Shipping documents file.
Which of the following is an effective control over accounts receivable? a) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records. b) Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account once a year, preferably at year end. c) Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier. d) Only persons who handle cash receipts should be responsible for the preparation of documents that reduce accounts receivable balances.
a) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records.
Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: a) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. b) Write-offs must be approved by the accounts receivable department. c) Write-offs must be authorized by the shipping department. d) Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.
a) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.
Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? a) Existence or occurrence. b) Completeness. c) Rights and obligations. d) Presentation and disclosure.
b) Completeness.
Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? a) Collectibility is reasonably assured. b) Delivery has occurred or is scheduled to occur in the near future. c) Persuasive evidence of an arrangement exists. d) The seller's price to the buyer is fixed or determinable.
b) Delivery has occurred or is scheduled to occur in the near future.
Which of the following audit procedures is most effective in testing credit sales for understatement? a) Trace sample of recorded sales from ledger to initial sales slip. b) Trace sample of initial sales slips through summaries to recorded general ledger sales. c) Confirm accounts receivable. d) Age accounts receivable.
b) Trace sample of initial sales slips through summaries to recorded general ledger sales.
The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include: a) an opinion qualification, but reference to the use of alternative auditing procedures is not required. b) neither a comment on the use of alternative auditing procedures nor an opinion qualification. c) both a scope qualification and an opinion qualification. d) a description of the limitation on the scope of their audit and the alternative auditing procedures used, but an opinion qualification is not required.
b) neither a comment on the use of alternative auditing procedures nor an opinion qualification
The auditor is examining copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a: a) dual purpose test. b) test of controls. c) substantive procedure. d) test of balances.
b) test of controls.
The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when: a) control risk for accounts receivable is assessed as low. b) there is reason to believe that a substantial number of accounts may be in dispute. c) a large number of small balances are involved. d) there is reason to believe a significant portion of the requests will be answered.
b) there is reason to believe that a substantial number of accounts may be in dispute.
An auditor's tests of controls for completeness for the revenue cycle usually include determining whether: a. Each receivable is collected subsequent to the year end. b. An invoice is prepared for each shipping document. c. Each invoice is supported by a customer purchase order. d. Each credit memo is properly approved.
b. An invoice is prepared for each shipping document.
To test the existence assertion for recorded receivables, the auditors would select a sample from the: a) Sales orders file. b) Customer purchase orders. c) Accounts receivable subsidiary ledger. d) Shipping documents (bills of lading) file.
c) Accounts receivable subsidiary ledger.
Which of the following statements regarding the audit of negotiable notes receivable is correct? a) Physical inspection of a note by the auditors provides conclusive evidence. b) Notes receivable discounted without recourse are confirmed via the standard form for confirmation of deposits and loans at financial institutions used in the audit of cash. c) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection. d) Notes receivable discounted with recourse need not be confirmed.
c) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.
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. The most effective procedure for preventing this activity is to: a) prenumber and account for all credit memorandums. b) have the sales department independent of the accounts receivable department. c) require receiving reports to support all credit memorandums before they are approved. d) mail monthly statements.
c) require receiving reports to support all credit memorandums before they are approved.
An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn which of the following? a) An October check from a customer was posted in error to the account of another customer with a similar name. b) An October invoice was improperly computed. c) An account balance is past due and should be written off. d) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
d) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review? a) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. b) Confirm year-end transactions with regular customers. c) Examine cash receipts in the subsequent period. d) Analyze transactions occurring within a few days before and after year end.
d) Analyze transactions occurring within a few days before and after year end.
Which of the following would provide the most assurance concerning the valuation of accounts receivable? a) Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. b) Compare receivable turnover ratios to industry statistics for reasonableness. c) Inquire about receivables pledged under loan agreements. d) Assess the allowance for uncollectible accounts for reasonableness.
d) Assess the allowance for uncollectible accounts for reasonableness.
Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process? a. Matching shipping documents with approved sales orders before invoice preparation. b. Using computer programmed controls on the pricing and mathematical accuracy of sales invoices. c. Comparing control totals for shipping documents with corresponding totals for sales invoices. d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
d. Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
