Auditing Ch 11

If a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by:

Confirming accounts receivable.

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?

Confirming accounts receivable.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

Examine cash receipts received after year-end.

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

Existence of the balances confirmed.

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 low exception rate is expected.

The existence of which of the following is most likely to increase audit risk in an audit client?

A new chief financial officer (CFO) is redesigning Anthony's accounting policies and procedures.

When using a transaction cycle approach to assessing control risk, the auditor most likely would test control activities related to customer sales transactions with the:

Collection of receivables.

Which of the following is not one of the criteria for revenue recognition?

Collection of the contract amount must be probable.

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of:

Completeness.

Which of the following procedures would probably be most effective in identifying duplicate billing of customers during the year?

Confirmation of accounts at year end.

The individual looking for guidance on revenue recognition is most likely to appropriately review:

FASB ASC 606.

An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because:

Few responses may occur because more effort is required of recipients.

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if:

Internal control over receivables is good.

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?

Inventory.

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:

It understates expenses.

A certified public accountant (CPA) examines a sample of credit memoranda to ensure they were signed by an officer of the company. This is an example of a:

Test of a control.

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?

The account balances as of year-end will generally be confirmed.

For effective internal control, the billing function should not be performed by the:

Sales department.

Which of the following would indicate the need to use positive accounts receivable confirmation requests?

A large number of accounts receivable are in dispute.

Which of the following is most likely to increase days' sales in accounts receivable at the end of the year for Anthony Company?

A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

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

Accounting records to the source documents.

What type of error is the certified public accountant (CPA) most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped free on board (FOB) shipping point, which were recorded in December of 20X0 as credit sales?

Accounts receivable are overstated at December 31, 20X0.

To test the existence assertion for recorded receivables, an auditor would select a sample from the:

Accounts receivable subsidiary ledger.

Confirmation of accounts receivable that have been categorized initially by an auditor as "exceptions" most likely could be due to:

Accounts receivable that have been classified as uncollectible.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?

Aging of accounts receivable.

After the certified public accountants (CPAs) have selected particular accounts receivable for confirmation:

All requests for confirmation should be mailed personally by the auditors at a post office.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

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

Billed sales were shipped.

Which of the following manipulations would understate receivables on the financial statements?

Closing the sales journal prior to year-end.

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

Collection of receipts on account and maintaining accounts receivable records.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?

Confirming current (0-30 day) year-end accounts receivable.

Which of the following controls are most relevant the client's application of accounting standards to revenue recognition for complex sales agreements?

Control environment and management review controls.

The confirmation of accounts receivable is most closely associated with:

Detection risk.

Which of the following revenue related transactions is not linked to the accounts indicated?

Don't write off uncollectible receivables-sales returns, sales discounts.

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:

Estimate credit losses.

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:

Examining subsequent receipts of year-end accounts receivable.

Once a certified public accountant (CPA) has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the certified public accountant (CPA) would be likely to:

Expand tests of collectibility.

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?

Fictitious revenues.

Complex sales contracts are most likely to result in higher risks regarding all of the following except:

Identifying the contracting parties.

A computer software firm allows its sales team to make material modifications to standard software contracts. What should be the auditors' primary concern in this situation?

Increased risk of misstatement of revenue.

Which of the following is not true about the auditors' verification of notes receivable?

Inspecting the notes is sufficient evidence of existence of the notes.

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:

Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

Why do estimates of recognized revenue generally present high risk for the auditors?

Management often has an incentive to misstate revenue.

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

No reply to a positive confirmation request is received.

Tracing recorded sales transactions to the bills of lading provides evidence about the:

Occurrence of sales transactions.

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable?

Oral responses obtained by the auditor through a telephone call.

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Physically examine items sold.

Salem Corporation engages in complex sales contracts. As the auditor you are trying to determine if revenue should be recognized on a group of contracts. Which of the true with respect to the recognition of revenue:

Revenue should be recognized only if it is at least probable that the contract amounts will be collected.

Which of the following procedures is least likely to help auditors assess the adequacy of the allowance for doubtful accounts?

Review accounts which have been written off as uncollectible prior to year-end.

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the:

Sales journal to the shipping documents.

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?

Sales.

Which of the following is consistent with effective internal control over sales transactions?

The billing department accounts for all shipping documents.

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:

The cash receipts journal was held open after year-end.

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?

The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?

The confirmation requests are sent on the client's letterhead.

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

The inference drawn from receiving no reply may not be correct.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?

The positive form used for large balances and the negative form for the small balances.

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:

The shipping clerk's file of duplicate copies of bills of lading.

Which of the following fraudulent activities most likely could be perpetrated because of ineffective internal controls in the revenue cycle?

The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

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:

There was an improper cutoff of sales at the end of the year.

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Trace the balances from accounts receivable ledger to the billing statements.

Which of the following statements represents the correct audit procedure and related assertion?

Tracing sales invoices to shipping documents to test the occurrence of reported sales.

An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should:

Verify the account balance by inspecting the client's shipping documents and cash receipt records.