ACCY131-Chpt 11
Auditors perform a test of control by observing and making inquiries about the segregation of duties over sales and collection of receivables that affects the auditors' assessment of risk for these assertions.
Completeness Existence
Recording fictitious accounts receivable
Confirming a sample of accounts receivable.
"We returned those goods on Dec. 2." You have been able to determine that the goods were received by the client on Dec. 29, but not recorded until Jan. 2.
Exception; propose an adjustment
The best way to evaluate the results of the confirmation process is to compare the total misstatements identified to the account's.
Incorrect/false
This department contributes to the monitoring of internal control over the revenue cycle by periodically taking over the monthly statement process, sending confirmations to customers, and reviewing revenue cycle documentation.
Internal audit
Recorded receivables are at appropriate net realizable values.
Review the aged trial balance for significant past due accounts.
Failing to inform the auditors of pledged accounts receivable.
Reviewing standard confirmations from financial insitutions
Confirmation of accounts receivable is generally required in all audits. Which of the following is not a legitimate reason to not perform the procedure?
The company has a relatively small number of customers with large balances.
Auditors should always confirm the total balances of accounts rather than individual portions (e.g.; if the balance is made up of three sales, all three should be confirmed).
incorrect
Confirmation of a/r is generally accepted auditing standard
incorrect
Differences reported by customers in confirmation replies typically arise because of ______.
timing lags in recording sales transactions timing lags in recording cash receipts
Accounts receivable consists of ______.
- loans to officers or employees - claims against customers from the sale of goods
A combination of positive and negative requests may be used.
Correct
Auditors may ignore individually immaterial accounts when confirming a/r.
Correct
The confirmation requests should be mailed to respondents by the CPA's.
Correct
Confirming accounts receivable is generally required by ______.
US auditing standards only
For a reasonableness test, the accounts receivable turnover ratio for the current year should be compared to ______.
average ratios for the industry budgeted ratios the ratio from last year
The employee responsible for controlling and depositing checks should be the ______.
cashier
To strengthen controls over credit sales and reduce the opportunity for fraud, companies should ______ for all revenue cycle activities.
divide duties between different departments
Relying upon the confirmation process to form an opinion about the fairness of accounts receivable as a whole ______.
provides valuable evidence is an important part of the auditor's work
For auditors, the audit of revenue and receivables represents an area of ______ risk.
significant
Which of the following questions may be included on an internal control questionnaire for revenue and receivables?
Are orders from customers initiated and reviewed by the sales department? Are sales invoices prenumbered and all numbers accounted for?
Which of the following would provide the most assurance concerning valuation of a/r?
Assess the allowance for uncollectible accounts for reasonableness.
Watched the accounting clerk record the daily deposit of cash receipts.
Audit procuder: Observation Classification of audit procedure: Test of control
Which department is responsible for determining whether goods may be shipped to the customer on an open account?
Credit
The audit of revenue recognition generally involves significant audit risk for all of the following reasons, except:
Cut-off of sales transactions are difficult to audit.
Under SEC rules, which of the following is NOT among the criteria that ordinarily exist for revenue to be recognized?
Delivery has occurred or is scheduled to occur in the near future.
"We mailed the check for this on December 31"
Examine shipping documents and/or subsequent cash receipts.
"While that's what we owe, we didn't owe it on Dec. 31 because we didn't receive the goods until Jan. 2 of year 2."
Examine shipping documents and/or subsequent cash receipts.
Request asking for a reply only if the balance shown is incorrect
Negative
Which of the following procedures is not generally used to audit the allowance for uncollectibe accounts?
Review collection of certain accounts receivable during the year. (unsure?)
Which department is responsible for sending goods to the customer by arranging space in motor freight carriers and creating shipping documents?
Shipping
Which department should be responsible for the issuance of a sales order?
The sales department
Which of the following is an example of misappropriation of assets relating to sales?
Theft of cash register sales.
Auditors need to obtain an aged listing of receivables to reconcile to the ledgers and address which audit objective?
Valuation and accuracy
Selecting a sample of sales invoices and examining them for evidence of a second-person review addresses which assertion?
Valuation and accuracy
"We also owe for two more invoices for purchases we made around year-end. I'm not sure of the exact date.
Verify whether additional invoices noted on confirmation reply pertain to the year under audit or subsequent year.
Recorded receivables exist
Vouch year-end a/r balances to supporting documents. Existence, rights.
The client has rights to recorded year-end receivables.
Vouch year-end a/r balances to supporting documents. Existence, rights.
For effective control regarding notes receivable, the ______.
acceptance and renewal of notes should be authorized in writing by a responsible official who does not have custody of the notes write-off of defaulted notes should be approved by responsible officials
In obtaining assurance that all shipments have been billed, auditors should ______.
account for all documents by serial number
To identify related party transactions, auditors should review all of the following except ______.
accounting records for transactions with usual customers
A listing of individual customers' accounts classified by the number of days each account has been outstanding is a(n) _________________ of trade accounts receivables.
aged trial balance
An ___________ of customers' accounts receivable should be prepared at regular intervals for use by the credit department in carrying out its collection program.
aged trial balance
Auditors should be most concerned with investigating charge-offs of a note or account receivable from ______.
an officer, stockholder, or director
Calculating the gross profit rate by store and comparing the ratio of sales in the last month to total sales for the year are examples of ______.
analytical procedures
Sales that are invoiced but not shipped are called _______________ and ____________________ transactions.
bill and hold transactions
A ______________ is a shipping document that is prepared for goods shipped by a common carrier.
bill of lading
The shipping document created at the time of loading the goods into cars or trucks is called a(n) _____________________ of ____________________.
bill of lading
For effective control, the custodian of notes receivable should not have access to_______.
both cash and general accounting records
To address the threat of fictitious sales at year-end, auditors should be aware of and investigate all of the following except ______.
changes in accounting principles that lead to decreases in recorded revenue
Receivables written off are often turned over to a ___________.
collection agency
The control environment component that helps management to address complex accounting principles, estimates, and computations that increase the risk of errors in revenue recognition is a ______.
commitment to competence
Audit documentation (working papers) for receivables and revenues include ______.
comparative analyses of revenue analysis of other accounts receivable
Auditors should obtain an aged trial balance from the client and verify the listing by performing all of the following steps except ______.
comparing customer terms to written agreements
Audit evidence obtained as a direct written response to the auditors from a third party in paper form or by electronic or other medium is an external _________________.
confirmation
Under US auditing standards auditors ______.
confirmations are not required if they would be ineffective
Depending upon the circumstances, auditors may confirm total balances due or individual portions of those balances.
correct
External factors that can influence the revenue cycle include ______.
customer demand competition
Initial steps in controlling a customer's order (before preparation of a sales order) include ______.
determining if the order can be filled within a reasonable time registering the customer's purchase order
The audit procedures for the verifications of sales transactions selected for immediate testing may begin with a comparison of the ______.
duplicate copies of sales invoices customer's purchase orders client's sales orders
Because of threat of misstatements due to inaccurate cutoff of sales records, auditors should compare the sales recorded for several days before and after the balance sheet date with ______.
duplicate sales invoices and shipping documents
By receiving an external confirmation of the debt by the debtor, auditors obtain audit evidence to help ______.
establish the gross valuation of the asset provide some assurance no lapping of receivables is occurring
When positive confirmations are used and there are non-respondents, the auditors should ______.
follow up with a second request for information
Accounting estimate(s) related to receivables and revenue include all of the following except ______.
gross profit percentage
The most common technique used by management to engage in fraudulent financial reporting is ______.
improper revenue recognition
When selecting a sample for accounts receivable selection is customary to ______.
include all customers with balances over a certain size and select a sample of the remaining accounts
Risks in the confirmation of accounts receivable process ______.
include omitting accounts with erroneous balances include inappropriate intervention by client personnel may be due to customers failing to compare the balance with their records
As the auditors confirm their understanding of the revenue cycle, they are likely to ______.
inquire as to who performed various functions review revenue budgets and variance perform a walk-through of the cycle
To control risks in the confirmation process, auditors should ______.
mail confirmation requests in envelopes bearing the CPA firm's return address determine confirmation requests are directed toward an appropriate confirming party
For any significant risk, the auditors ______.
may not rely on prior period evidence regarding the operating effectiveness of controls should determine if the related controls are implemented should evaluate the design of the related controls
A customer's response to a receivable confirmation contains restrictive language concerning its use, the restriction ______ the reliability of the response as audit evidence.
may or may not invalidate
When the risk of material misstatement is low and a large number of small homogeneous balances are involved, a(n) ______ confirmation request is appropriate.
negative
Internal factors that can influence the revenue cycle include ______.
new products and services new type of sales transactions
A department ______ by sales executives should perform billing.
not controlled
Any adjustments to sales for allowances and returns must be supported by serially numbered credit memoranda that is signed by an employee ______.
not responsible for cash handling or ledger maintenance
Problems auditors may encounter in auditing revenue recognition include ______.
notes receivables may need to be discounted to present value cash receipts from franchise fees may be inappropriately recognized before services are rendered
A ___________ confirmation request asks the debtor to respond in all cases.
positive
Loans by a company to its officers, directors, major stockholders, or affiliates require particular attention because these ___________ are not the results of arm's length bargaining by independent parties.
related party receivables (transactions)
To develop their own estimate of the allowance for uncollectible accounts auditors may ______.
review collectibility status of significant delinquent accounts with credit manager review confirmation exceptions for indications of amounts in dispute investigate the credit ratings for delinquent and unusually large accounts
Auditors test management's estimate for the allowance for uncollectible accounts by ______.
reviewing and testing management's method of developing the estimate developing their own estimate and comparing it to management's
Under the new FASB revenue recognition standard, revenue is recognized when performance obligations are ______.
satisfied
When control activities over sales on account are inadequate ______.
shipments may occur without notice to billing sales invoices may contain errors sales may be made to unapproved customers
Differences reported by customers in confirmation replies ______.
should always be resolved
One problem that auditors may encounter while testing methods for receivables and revenue is that management or employees may have established certain ___________________ agreements that could affect the final terms of sale.
side
Risks identified by auditors that require special audit consideration are referred to as ______________.
significant risks
The best alternative auditing procedure when confirmation replies are not received is an examination of ______.
subsequent cash receipts in payment of the receivable
Auditors obtain a sample of shipping documents issued during the year and compare these to sales invoices to obtain assurance that all orders ______.
that have been shipped have also been billed
To test notes and accounts written-off during the year auditors use an analysis of ______.
the allowance for doubtful accounts and notes
Proper internal controls over credits for merchandise that has been returned typically will include a stipulation that ______ before credit can be given.
the goods be received and fully examined
True or false: The choice between positive and negative forms of confirmation requests generally has no effect on the size of the sample.
true
Request addressed to the debtor asking for a reply
Positive
When a customer's credit is not approved, the customer should be notified and ______.
an effort to negotiate other terms should be made
Compare total bad debts this year with the totals for the previous two years.
Audit procuder: Analytical procedure Classification of audit procedure: substantive procedure
"We are very satisfied with Jelco and plan to purchase from them in the future"
Not an exception; no further audit work necessary.
Which of the following documents sets forthe all of teh terms of a sales transaction?
Sales order
Examined invoice to obtain evidence in support of the ending recorded balance of a customer.
Audit procuder: Inspection of records or documents Classification of audit procedure: Analytical procedures
Examined a sample of sales invoices to see if they were initialized by the credit manager indicating credit approval.
Audit procuder: Inspection of records or documents Classification of audit procedure: Test of control
Which department is typically responsible for taking and controlling customers' orders?
Sales
Questioned management about likely total uncollectible accounts.
Audit procuder: Inquiry Classification of audit procedure: substantive procedure
All receivables that should be recorded are recorded as of year-end.
Trace a sample of sales invoices from late in Dec. to the sales journal and to postings in a/r and sales accounts.
The shipping department forwards shipping documents to the ______ department after the items have been shipped to the customer.
billing
You received no reply to a positive confirmation request to Blake Co. Subsequently you recalled Blake Co. has a policy of not responding to confirmation -- in writing or orally
Exception; propose an adjustment
The presentation and disclosure of receivables are adequate.
Review drafts of financial statements. Disclosure.
If an auditor is unable to inspect a note because it is being held by others at the time of examination, an acceptable alternative is to ______.
confirm the note with the holder
The auditor's assessment of the risks of material misstatement include assessments of __________________ risk and ____________________ risk, which are used to design further audit procedures.
control inherent
When testing a sample of sales transactions for controls, auditors compare descriptions and quantities of items from shipping documents to all of these documents except ______.
copy of the cash receipt
Requested responses directly from customers as to amounts due
Audit procuder: Confirmation Classification of audit procedure: substantive procedure
In a manual accounting system, controls to ensure the accuracy of the invoices before they are mailed to customers should include ______.
a second-person review of prices, credit terms, extensions, and footings
Economic conditions have changed resulting in the possibility that the allowance for uncollectible accounts may need to be increased. Which of the following control components is likely to identify this issue?
Monitoring
Overall, positive confirmatinon requests are ordinarily considered to result in more reliable evidence than negative requests.
correct
Test of control results may result in the need to confirm fewer accounts.
correct
The process of writing-off uncollectible receivables should be initiated by the ______.
credit manager
Confirmations address completeness more than they address existence
Incorrect
Management monitoring activities over the revenue cycle include all of the following except ______.
taking over the mailing of monthly statements to customers
Which of the following is least likely to be considered an inherent risk relating to receivables and revenues?
Over-recorded sales due to a lack of control over the sales entry function.
Auditors use the understanding of the client and its environment to consider _____________________ risks, including fraud risks, related to receivables and revenue.
inherent
You received no reply to a negative confirmation request to Adams Company
Not an exception; no further audit work necessary.
Failing to record all sales transactions
Tracing a sample of shipping documents to recorded sales transactions.
When a customer's response to a receivable confirmation contains restrictive language concerning its use ______.
further evidence to determine the accuracy of the account may or may not be required
Compared a sample of sales invoices to credit files to determine whether the customers were on the approved customer list.
Audit procuder: Reperformance Classification of audit procedure: Test of control
Recording of sales made in the subsequent period.
Comparing recorded sales several days before and after the balance sheet date with shipping documents.
Notes receivable on hand should be inspected at the same time as the count of ______ to prevent the concealment of shortages.
cash and securities
Auditors may choose to evaluate management's process of developing the allowance for uncollectible accounts balance by considering the reasonableness of the process and the ______.
competence of the personnel involved
The audit of receivables and revenue represents significant audit risk because ______.
complex accounting rules exist for revenue recognition significant accounting estimates are used to value receivables and revenue
Only material accounts need be confirmed
incorrect
Related party transactions often include loans to officers and directors. Auditors are most concerned with ______ related to these transactions.
presentation and disclosure