ACNT 2331 - Chap 11

To determine that all sales have been recorded, the auditors would select a sample of transactions from the:

Shipping documents file.

1. If the misstatements identified by the confirmation process are in total immaterial, the auditors may still conclude that the account is materially overstated. 2. Only material accounts need be confirmed. 3. Confirmation requests should be mailed by the client under the careful supervision of the CPAs. 4. Confirmations address completeness more than they address existence. 5. Second requests are more frequently used for negative confirmation requests than for positive confirmation requests. 6. Depending upon the circumstances, auditors may confirm total balances due or individual portions of those balances.

1. Correct 2.Incorrect 3. Incorrect 4. Incorrect 5. Incorrect 6. Correct

1. Receivables written off are often turned over to a ___________. 2. A ___________ is a shipping document that is prepared for goods shipped by a common carrier. 3. The best evidence of collectibility of accounts receivable is examination of subsequent ___________ of the accounts. 4. A test of the completeness of recorded sales involves tracing a sample of ___________ to recorded sales. 5. An ___________ of customers' accounts receivable should be prepared at regular intervals for use by the credit department in carrying out its collection program.

1. collection agency 2. bill of lading 3. collections 4. shipping documents 5. aged trial balance

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

Accounts receivable subsidiary ledger.

The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low:

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

Check my work Check My Work button is now enabled Item 2 Item 2 10 points Which of the following would provide the most assurance concerning the valuation of accounts receivable?

Assess the allowance for uncollectible accounts for reasonableness.

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.

Which of the following would most likely be detected by an auditor's review of the client's sales cutoff?

Inflated sales for the year.

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.

This simulation presents the Memo re Sales Invoice Procedures/Results relating to the Keystone Computers & Networks, Inc. (Keystone), audit. Background financial and other information on Keystone is included in Appendix 6C of Chapter 6. Callouts 1-4 of this simulation relate most directly to Chapters 10 and 11; Callouts 5-7 require knowledge of sampling, as presented in Chapter 9. A staff member on your audit team has performed a portion of the audit plan for the audit of Keystone Computers & Networks Inc., a nonissuer. The procedures involved selecting a random sample of sales invoices from throughout the year and comparing them to the authorized customer list and to appropriate support related to the sale. Required: Your job as senior on the engagement is to review the various points made by the assistant, including consideration of the exhibits. For each of the sentences called out in the points on the document, determine if the current language is appropriate as is, should be removed altogether, or replaced with any of the provided alternatives. Links to each of the exhibits are provided in the document, but are available in the list below for convenience. Exhibit 1 - Sales Invoice Sample Exhibit 2 - Sample Inputs and Results Exhibit 3 - Conversation with Controller Memo Exhibit 4 - Conversation with Billing Clerk Memo Document (For each Document Callout, choose the correct Determination from the table below.) Memo re Keystone Sales Invoice Procedures/Results 1/22/year 6 A number of the credit sales in our sample were to customers not on the authorized customers list (Exhibit 1, fifth column). Selling to unauthorized customers may increase the risk that receivables will not be collectible. Accordingly, to address this issue, I suggest that we test for year-end receivables to unauthorized customers that remain uncollected as of the end of January. For those not collected, we should corroborate that the client has taken its normal 2 percent estimate for credit losses. (Callout #1) Keystone in some circumstances ships sales FOB destination and pays the freight (see Exhibit 3). Because title ordinarily passes on such goods when they are delivered, there is a possibility that some sales have been recorded prior to the passage of title. Accordingly, we should increase the scope of our audit plan by selecting a sample of sales shipped FOB Shipping Point shortly after year-end to determine that the sale is recorded in the period goods were received by the customer. (Callout #2) Our sample results (Exhibit 1) reveal two sales recorded in year 5 that should have been recorded in year 6. (Callout #3) A billing clerk (Exhibit 4) informed us that in several cases, sales were not recorded (completeness). Based on the discussion, an effective audit procedure to address this would be to select a sample of invoices sent to customers and agree their details to the underlying customer purchase order and shipping document. (Callout #4) As a part of the audit of sales to unauthorized customers (above, top paragraph), we selected a sample of 40 sales invoices and found that three in our sample were to unauthorized customers. As indicated above, Exhibit 1 details our sample; Exhibit 2 presents results relating to the sample. The most likely deviation rate in the population is 5 percent (Callout #5). The sample results in "rejection" because the achieved upper deviation rate exceeds the sample deviation rate (Callout #6). Because we do not intend to expand our sample, the most likely effect on our audit will be a decrease in the assessed level of control risk (Callout #7) for the related assertion(s).

For those not collected, we should corroborate that the client has taken its normal 2 percent estimate for credit losses." Replace with "We should age all uncollected accounts as of year-end, paying particular attention to those to unauthorized customers to estimate likely doubtful accounts."selected answer correct 2. "Shipping Point shortly after year-end to determine that the sale is recorded in the period goods were received by the customer." Replace with "Destination shortly prior to year-end to determine that sale is recorded in the period goods were received by the customer."selected answer correct 3. "two sales recorded in year 5 that should have been recorded in year 6." Replace with "no sales recorded in year 5 that should have been recorded in year 6."selected answer correct 4. "invoices sent to customers and agree their details to the underlying customer purchase order and shipping document." Replace with "shipping documents and determine that related sales have been recorded in the sales journal."selected answer correct 5. "5 percent" Replace with "7.5 percent"selected answer correct 6. "sample deviation rate." Replace with "tolerable deviation rate"selected answer correct 7. "assessed level of control risk" Replace with "planned level of detection risk"selected answer correct

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales?

Recording sales when the customer is likely to return the goods.

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:

Send positive confirmation requests.

Which of the following is an example of misappropriation of assets relating to sales?

Theft of cash register sales.

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:

Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.

An auditor may use confirmations of accounts receivable. Reply as to whether the following statements are correct or incorrect with respect to the confirmation process when applied to accounts receivable. a. 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). b. Confirmations address existence more than they address completeness. c. A combination of positive and negative request forms must be used if receivables are significant. d. Auditors may ignore individually immaterial accounts when confirming accounts receivable. e. The auditors ordinarily should confirm accounts receivable.

a. Incorrect b. Correct c. Incorrect d. Correct e. Correct

a. The bank reconciliation is prepared monthly by the outside accountant, who is independent of the revenue-generating and revenue-recording functions. b. Insurance coverage for patients is verified and communicated to the clerks by the office manager before medical services are rendered. c. The physician who renders the medical services documents the services on a prenumbered slip that is used for recording revenue and as a receipt for the patient. d. Southwest is involved only in medical services and has not diversified its operations. e. Cash collection is centralized in that clerk #2 receives the cash (checks) from patients and records the cash receipt. f. Southwest extends credit rather than requiring cash or insurance in all cases. g. Computer passwords are only known to the individual employees and the managing partner, who has no duties in the revenue-recording functions.

a. Strength b. Strength c. Strength d. Neither e. Deficiency f. Strength g. Strength

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices?

completeness