ACC 5100 - Ch 7

An auditor is required to confirm accounts receivable if the accounts receivable balances are a.Subject to valuation estimates. b.Material to the financial statements. c.Smaller than expected. d.Older than the prior year.

b

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation? a.Obtain copies of all price lists in use during the year and vouch the prices to sales invoices. b.Perform additional inquiries with sales personnel. c.Vouch vender invoices to payments made after year-end. d.Send confirmations asking customers about unit prices paid for product.

a

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to: a.Estimate credit losses. b.Evaluate internal control over credit sales. c.Test the accuracy of recorded charge sales. d.Verify the existence of the recorded receivables.

a

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities? a.Unrecorded sales. b. Merchandise purchases being charged to selling and general expense. c.Fictitious sales. d.Unrecorded purchases.

a

Revenues are normally considered to have been earned when: a.The company has substantially accomplished what it must to be entitled to the benefits. b.The cash is collected. c.Goods have been shipped. d.All possibility of return has expired.

a

Sales are normally recorded on the date of the: a.Sales invoice. b.Bill of lading. c.Payment check. d.Customer purchase order.

a

To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts? a.Sales returns. b.Miscellaneous expense. c.Miscellaneous income. d.Petty cash.

a

When accounts receivable are confirmed at an interim date, auditors need not be concerned with: a.Sending negative confirmations to all customers as of the year-end date. b.Obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and obtaining evidence and explanations for large variations. c.Considering the necessity for some additional confirmations as of the balance sheet date if balances have increased materially. d.Obtaining a summary of receivables transactions from the interim date to the year-end date.

a

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except: a.Do nothing for immaterial balances. b.Send a second request. c.Examine client correspondence files. d.Examine shipping documents.

a

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern? a."These goods were returned for credit on November 15." b."The balance does not reflect our sales discount for paying by January 5." c."We received this shipment on January 2." d."This amount was paid on December 30."

a

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.Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail. c.Request that customer's payment checks be made payable to the company and addressed to the treasurer. d.Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.

a

Write-offs of doubtful accounts should be approved by: a.The treasurer. b.The salesperson. c.cashier d.The credit manager.

a

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that: a.Sales invoices represent bona fide sales. b.Entries in the accounts receivable subsidiary ledger were properly invoiced. c.All sales have been recorded. d.All sales invoices have been properly posted to customer accounts.

b

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should the auditor take? a.Not accept the confirmation and treat it as an exception. b.Accept the confirmation but verify the source and content through a telephone call to the respondent. c.Not accept the confirmation and select another customer's balance to confirm. d.Accept the confirmation and file it in the working papers.

b

The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here? a.Dennis's account was not yet due. b.Inherent risk was particularly high for accounts receivable. c.Dennis's account was not with a related party. d.Control risk was particularly low for accounts receivable.

b

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off a trade account receivable? a.Write-offs must be authorized by company field sales employees who are in a position to determine customers' financial standing. b.Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence. c.Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off. d.Write-offs must be approved by the cashier who is in a position to know whether the receivables have, in fact, been collected.

b

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date? a.Misappropriating merchandise. b.Inflating sales for the year. c.Lapping year-end accounts receivable. d.Kiting bank balances.

b

A client has a separate sales group for its largest "preferred" customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform? a.Prepare a schedule of purchases and payments for these customers. b.Inquire of the sales manager regarding the accounts receivable terms. c.Send out positive confirmations on a large sample of these customers. d.Send out negative confirmations on a large sample of these customers.

c

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue? a.The auditor should perform tests of controls at an interim date to obtain audit evidence about the operational effectiveness of internal controls over sales. b.The auditor should review period-end compensation to determine whether bonuses were paid to meet earnings goals. c.The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period. d.The auditor should perform analytical procedures at an interim date and discuss any changes in the level of sales with senior management.

c

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the: a.Collectability of the balances confirmed. b.Ownership of the balances confirmed. c.Existence of the balances confirmed. d.Internal control over balances confirmed.

c

In the audit of accounts receivable, the most important emphasis should be on the: a.Completeness assertion. b.Presentation and disclosure assertion. c.Existence assertion. d.Rights and obligations assertion.

c

The control procedure "credit sales approved by credit department" is directed toward which assertion? a.Existence/Occurrence. b.Completeness c.Valuation/Accuracy. d.Cutoff

c

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to: a.Records of accounts receivable write-offs. b.Credit files and reports. c.Sales invoices with shipping documents and customer sales invoices. d.Cash remittance lists and bank deposit slips.

c

Which of the following accounts is not normally part of the revenue and collection cycle? a.Cash. b. Accounts Receivable. c.Purchases Returns and Allowances. d.Sales.

c

Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices? a.Enables company personnel to determine the accuracy of each document. b.Enables personnel to determine the proper period recording of sales revenue and receivables. c.Enables personnel to check the numerical sequence for missing documents and unrecorded transactions. d.Enables personnel to determine the validity of recorded transactions.

c

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor is most likely concerned about: a.Improper credit approvals. b.Unrecorded costs. c.Improper sales cutoff. d.Fictitious sales.

d

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the: a.Cash receipts listing. b.General ledger. c.Sales journal. d.Accounts receivable listing.

d