CH 7 Smartbook

Prenumbered documents are important in testing the _____ assertion and the ______ assertion

Completeness, occurrence

Confirmations provide evidence of ______. -presentation and disclosure -rights and obligations -valuation -existence

2,4

True or false: There is no such thing as a typical revenue and collection cycle.

True

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

audit

A strong entity-level control in the revenue process is ______. a. interim auditing procedures by the external auditors b. overall performance review by management c. involvement of the internal audit department in the revenue process

b

Customers statements should be sent ______. a. only if there is a balance at the end of the month b. if there is any account activity c. only to customers who request them d. only at year end

b

Including a sample of zero-balance accounts in the confirmation process tests for ______. a. rights and obligations of accounts receivable b. completeness of revenue and accounts receivable c. classification of accounts receivable

b

Inspecting bank confirmations, loan agreements and board of director minutes provides evidence regarding ______. a. classification of accounts receivable b. rights and obligations of accounts receivable c. completeness of revenue and accounts receivable

b

Examining evidence of client review and follow up of sales data related to specific classes of products or locations is a test of control for ______. a. classification of accounts receivable b. completeness of revenue and accounts receivable c. accuracy of revenue and accounts receivable d. cutoff of revenue

b.

A company should always compare daily credit sales totals in the sales journal to the ______. a. sales analysis report b. price list master file c. total debits posted to accounts receivable d. total daily invoices issued to customers

c

A description of the goods being shipped as well as the quantity shipped is found on the ______. a. shipment record b. shipping order c. packing slip

c

Audit risk is manifested when a material misstatement enters the financial reporting process, which is known as ______ risk. a. detection b. control c. inherent d. misstatement

c

Auditors review items in the pending order file for evidence of the ______ of recorded sales and accounts receivable. a. rights and obligations b. presentation and disclosure c. completeness d. occurrence

c

Confirmation should be returned ______, a. to the client's internal audit department b. to the client's audit committee c. directly to the auditor

c

If a confirmation exception cannot be resolved, the auditor ______. a. may ignore it if the account balance is immaterial b. should select another account to be confirmed c. should determine the cause

c

Pending order files should be reviewed frequently to ______. a. help validate the allowance for doubtful accounts b. ensure than fictitious sales are not recorded c. avoid failure to bill and record shipment d. validate that customers received goods at the proper quantity and price

c

Sending confirmations to customers to substantiate the existence and rights and obligations assertions of accounts receivable is an example of a ______. a. dual-purpose procedure b. substantive analytical procedure c. substantive test of details d. test of controls

c

The starting point for selecting accounts for confirmation is the accounts receivable ______. a. control account b. aging schedule c. trial balance

c

Sending confirmations to customers to substantiate the existence and rights and obligations assertions of accounts receivable is an example of a ______. a. test of controls b. substantive analytical procedure c. dual-purpose procedure d. substantive test of details

d

In the basic three-step approach for using the audit risk model to plan an engagement, _____ risk is set at the significant account and assertion level based on the level of audit risk and the risk of material misstatement.

detection

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

Because fictitious sales may be used to overstate assets, the _____ assertion is important in the audit of accounts receivables and the _______assertion is important for sales.

existence, occurrence

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

Audit processes to gather evidence on the assertions in account balances are called

substantive procedures

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

valuation

Auditors typically achieve an understanding of controls by completing a(n) ____of the processes in the revenue and collection cycle

walkthrough

An audit test that provides evidence on both controls and relevant assertions is called a(n) ___ ____ procedure.

dual purpose

The sales detail (journal) file can be checked for ______. -fictitious sales -sales recorded before shipment -appropriate credit limits

1,2

Which of the following SEC criteria for revenue recognition is incorrect? a. The price is fixed or determinable. b. Persuasive evidence of an arrangement exists. c. A delivery or service has been promised. d. Collectability is reasonably ensured.

c reason: it must have already occurred

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

When an auditor receives an oral response to a confirmation ______. . -a written response still needs to be requested -the definition of external confirmation has been met -alternative audit procedures may be warranted

1,3

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

The auditor typically obtains evidence to satisfy the _____ assertion for accounts receivable through a combination of analytical procedures and confirmations.

existence

In order to obtain cash immediately, companies may sell or ____ their accounts receivable

factor

When planning an engagement, AS 2110 indicates that the auditor should presume that there is a(n) ____ risk involving improper revenue recognition

Fraud

A customer is asked to respond only if something is wrong with the account balance when a(n) ____ confirmation is used.

negative

A customer is asked to respond whether the balance is correct or incorrect on a(n) _____ confirmation.

Positive

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

Valuation

Confirmations do not provide strong evidence of ______. a. valuation b. rights and obligations c. existence

a

Examining evidence of client review and follow up of sales data related to specific classes of products or locations is a test of control for ______. a. completeness of revenue and accounts receivable b. accuracy of revenue and accounts receivable c. classification of accounts receivable d. cutoff of revenue

a

Information required for business segment disclosures is provided by sales classified by ______. a. region b. product line c. sales employee

b

Once all significant accounts and disclosures have been identified, the auditor needs to identify the ______ assertions. a. control b. relevant c. inherent d. significant

b

Substantive procedures are ______. ` a. only performed if inherent risk is assessed as high b. always performed in the revenue cycle c. never performed in the revenue cycle d. only performed in the revenue cycle if control risk is high

b

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

b

The issuance of FASB ASC 606 has likely made difficulties with auditing revenues ______ challenging. Multiple choice question. a. less b. more

b

To help assess the allowance for doubtful accounts, auditors use the ______. a, sales detail file b. cash receipts listing c. customer master file d. aged trial balance

d

When auditors are satisfied that controls have been examined and transactions and balances have been appropriately tested, they must still consider ______. . a. accuracy and valuation b. rights and obligations c. classification and understandability d. presentation and disclosure

d

A blank form is a variation of the ____ confirmation.

positive

Customer statements ______. -detail what has been billed and paid -help with control over cash receipts -should not be sent if the ending balance is zero

1,2

To look for unusually high or low sales volume, the auditor may look to a sales analysis reported classified by ______. -region -sales employee -product line

1,2

Which of the following documents should be matched before recording revenue? -customer sales order -customer invoice -evidence of shipment -customer credit authorization

1,2,3

Justifications for not using confirmations may include ______. -other procedures provide sufficient, competent evidence -receivables are not material -other procedures require less of the auditor's time -confirmations would be ineffective

1,2,4

Regarding the revenue process, management should ______. -scrutinize total write-offs of accounts receivables -continually review revenues and compare them to budgeted and forecasts -evaluate the timeliness of accounts payable payments -review merchandise returns

1,2,4 3 reason: collections not payments

Separation of duties in the revenue cycle should include different people and departments performing ______. -custody of goods and cash -record keeping for sales, receivables, inventory and cash receipts -sales and credit authorization -payments for inventory and other cash disbursements

1,2.3

Access to accounts receivable records gives an individual ______, -recording responsibility -custody of assets -authorization

1,3

Difficulties in estimating the allowance for doubtful accounts can be due to ______. -revised credit policies -a decrease in sales -changing economic conditions -change in customer base

1,3,4

Which of the following statements regarding the revenue cycle are correct? -There is always a presumptive risk of fraud. -Most auditing clients have inadequate controls. -It consists of routine transactions. -Tests of controls often support a reduction in control risk.

1,3,4 2 reason: most auditing client have strong controls

Which of the following statements regarding confirmations are correct? -The positive form is the more common one used. -A negative form is acceptable when the client's customers are expected to consider the confirmations properly. -Auditors may choose to ask about entire account balances or specific invoices only. -On a single audit, auditors must choose to use either positive or negative confirmations, not both.

1.2.3

It is important to maintain an up-to-date customer master file to ensure ______. -all sales invoices are recorded -files are accurate -credit limits are appropriate

2,3

The person who has the ability to change invoices should not ______. -be responsible for mailing invoices -have custody of assets -have recording responsibilities

2,3

if a control is missing or ineffective, ______. -there is most certainly an error or fraud in the financial statements -auditors need to design substantive procedures related to control failure -the risk of material misstatement increases

2,3

Ways to determine if a company has factored accounts receivable include ______. -sending confirmations to customers -examining support for large cash receipts -inquiring of management

2,3 1 reason Customers generally don't know if someone else owns the account

Which of the following statements regarding confirmations are correct? -Second and third requests should be sent for all confirmations. -When exceptions cannot be resolved auditors should consider if fraud has occurred. -Nonresponding positive confirmation customers should be audited by alternative procedures. -The lack of response to a negative confirmation is not a guarantee it was read or received.

2,3,4 1 reason only for positive confirmations

Which of the following statements are correct? -Confirmations of accounts, loans, and notes receivable produces sufficient evidence of the rights assertion. -Auditors may not receive an oral response to a confirmation. -Confirming a specific transaction may be more effective than confirming the account balance. -Confirmation returned as "undeliverable" are always a red flag.

3,4

When a retailer accepts third-party credit cards, ______. -the risk of nonpayment must be considered -transactions are considered credit sales -the authorization function is performed electronically -data security is a significant issue -they can become liable for customer losses for failing to adequately protect information -authorization controls are minimized -transactions are considered receivables until payment is received -the credit card company pays the retailer a processing fee

3,4 5,6 1 reason: the risk of nonpayment shifts to the credit card company in exchange for a fee 2 reason: These are considered cash sales 7 reason: these are considered cash sales 8 reason: the opposite is true

To determine that customers were sent the goods ordered at the correct price and quantity, customer invoices should be compared to ______. -packing slips -customer credit authorizations -bills of lading -customer orders

3.4

The population of entries that should be reflected in the credits to accounts receivable for customer payments are found in the ___ ____ journal

Cash receipts

For current status, including up-to-date credit limit information, auditors may test a sample of the ____ _____ file.

Customer Master

When considering relevant assertions and obtaining evidence about accounts receivable and other assets, auditors must emphasize the ______ assertion

Existence

True or false: When vouching invoices and sales journal entries to price lists, the auditor must be sure to have the most up-to-date price list available

False - the auditor must be sure to have the price list that was in effect as the time of the customer's order

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

Revenue Recognition

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

True: If they are lost or destroyed, it is unlikely the accounts will be collected

A review of the adequacy of the provision for bad debt expense is an example of a ______. a. substantive analytical procedure b. dual-purpose procedure c. substantive test of details d. test of controls

a

A review of the adequacy of the provision for bad debt expense is an example of a ______. a. substantive analytical procedure b. substantive test of details c. test of controls d. dual-purpose procedure

a

Revenue generally is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably ensured according to ______ standards. a. SEC b. FASB c. GAAP d. PCAOB

a

Since auditors generally presume management has an incentive to overstate revenues, all other things being equal, auditors may assess inherent risk for ______. a. existence to be higher than for completeness b. completeness to be higher than for existence c. existence to be equal to completeness

a

The bill sent to a customer indicating the amount due and payment terms is called a ______. a. sales invoice b. bill of lading c. packing slip d. shipping order

a

The most effective alternative procedure to confirmations to ensure existence is examining ______. a. subsequent cash receipts b. sales order, invoices and shipping documents c. correspondence files for past-due accounts

a

Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company? a. Purchasing raw materials b. Billing customers c. Collecting and depositing cash d. Receiving and processing customer orders e. Delivering goods and services

a

For current status, including up-to-date credit limit information, auditors may test a sample of the ____ _____file.

cash receipts

The risk of material misstatement is a combination of ___ risk and __ risk

control, inherent

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

cutoff

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

cutoff

"Frequent deficiencies related to the design and performance of audit procedures that address the assessed risk of material misstatement, particularly when auditing revenue" was observed in a 2018 inspection conducted by the ______. a. FASB b. AICPA c. SEC d. PCAOB

d

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

false: confirmations is considered a required auditing procedure

A lack of response to a(n) ____ confirmation is considered evidence that the account is fairly stated.

negative

One of the reasons that auditors complete a checklist at the end of the audit of the revenue cycle is because revenue recognition policies and the amount of the allowance for doubtful accounts are examples of items that require specific ____ and ___

presentation and disclosure

Systems may automatically produce customer invoices, but billings will be incorrect if the ____ _____master file is incorrect

price list

According to accounting standards, to be recognized, revenue must be ____or ____ and earned.

realized, realizable

When complete separation of duties in a small business is not possible, the owner must have active involvement in the accounting process in order for the auditors to obtain ___ ____that financial controls are intact

reasonable asserance