Audit Chapter 10

The term 2/10, net 30 means customers paying within ______ percent discount. 2 days are entitled to a 10 30 days are entitled to a 2 30 days are entitled to a 10 10 days are entitled to a 2

10 days are entitled to a 2

Because revenue transactions that are processed incorrectly result in misstatements that directly affect the amounts reported in the financial statements, ______ is an important assertion.

ACCURACY

When the auditor has completed the planned substantive procedures, the ________ misstatement for accounts receivable is determined and compared to the ________ misstatement.

Aggregate tolerable

There are two categories of substantive procedures: (1) substantive _________ procedures and (2) tests of ____________ of classes of transactions, account balances and disclosures.

Analytical/detail

The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the _______ assertion.

CLASSIFICATION

Many business risks are also _________ risks.

Inherent

Auditors are concerned about the _________ assertion for revenue transactions because clients are more likely to overstate sales than to understate them.

OCCURRENCE

There are two types of confirmations:_________ and __________.

Positive/ negative

One of the most important controls in any accounting system is proper _______ of _______.

SEGREGATION/DUTIES

To examine the fairness of revenue related accounts, ______ __________ procedures are useful audit tests because they provide sufficient evidence at low cost.

Substantive / analytical

The major control for preventing cash from being recorded in the wrong account is ______. proper authorizations proper cutoff segregation or duties a chart of account

a chart of account

To test the auditor's concern with accounts receivables completeness, the aged trial balance should be reconciled to the ______. cash general ledger account accounts receivables subsidiary ledger cash receipts journal accounts receivables general ledger account

accounts receivables general ledger account

Control activities that ensure the ______ assertion include an authorized price list and proper verification of the information contained on the sales invoice. authorization cutoff occurrence accuracy

accuracy

If an auditor does not receive responses to positive confirmations ______. Multiple choice question. the client should be asked to confirm the account(s) the account(s) should be considered misstatement(s) additional requests can be sent

additional requests can be sent

The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the ______ assertion.

classification

Risk factors to an entity's internal controls over the revenue process include ______. Multiple select question. competition new HR management rapid growth new technology

competition rapid growth new technology

If goods are shipped or services are performed and no revenue is recognized, the ______ assertion has not been met. occurrence completion accuracy authorization

completion

A credit approval form ______. Multiple select question. documents a customer's creditworthiness establishes customer credit limits is an example of a source document

documents a customer's creditworthiness is an example of a source document

True or false: Auditors normally test the cutoff assertion by conducting tests of controls only.

false

If the aggregate misstatement is ______ the tolerable misstatement, the auditor may accept the account as fairly presented. Multiple choice question. less than equal to greater than

less than

There is only a small possibility of cash being recorded in the wrong period if the entity uses a(n) __________ system.

lockbox

Credit memoranda that are used to process sales returns and allowance transactions ______. Multiple select question. may conceal a misappropriation of cash can cover up unauthorized shipments of goods may cause the general ledger sales account balance to be incorrect should always be approved to the person who sold the goods

may conceal a misappropriation of cash can cover up unauthorized shipments of goods

Risk factors to an entity's internal controls over the revenue process include ______. new HR management new technology rapid growth competition

new technology rapid growth competition

Possible programmed controls to ensure accuracy of the revenue process include ______. Multiple select question. only authorized changes are made to the master file shipping documents are matched to sales invoices the authorized price list is updated promptly

only authorized changes are made to the master file the authorized price list is updated promptly

For a negative confirmation, a response is required ______. only if the amount is correct only if the amount is incorrect whether the amount is correct or incorrect

only if the amount is incorrect

The key control activity to prevent misstatements with respect to the occurrence of cash receipts is ______. Multiple choice question. segregation of duties daily cash receipts reconciled with posting to accounts receivable sub ledger checks restrictively endorsed when received customer statements prepared on a regular basis

segregation of duties

Management's estimate for the allowance for uncollectible accounts and sales returns can be difficult to audit because of the ______ that may be involved in determining proper value. complexity subjectivity variance

subjectivity

When using a reliance strategy, the auditor conducts ______ to ensure that the controls in the revenue process operate effectively. Multiple choice question. documentation analytical procedures tests of controls substantive testing

tests of controls

*Substantive analytical procedures are ______.

used to examine plausible relationships among related accounts

The creditworthiness of a customer should be documented on a(n) ______ _______form.

CREDIT/APPROVAL

Inherent risk may increase due to issues regarding recognition of revenue on ______. Multiple select question. a. lease contracts b. long-term service contracts c. long-term construction contracts d. sale of goods for cash e. sale of goods on credit f. installment sales

La. lease contracts b. long-term service contracts c. long-term construction contracts f. installment sales

The potential for theft and fraud in the revenue process makes this particularly important. Multiple choice question. Duties of managers Segregation of duties Segregation of entries

Segregation of duties

When the auditor does not receive a response to the positive confirmations, possible procedures include ______. Multiple select question. a. examining specific subsequent cash receipts b. verifying sales by examining the sales journal c. sending second and third requests d. examining shipping documentation e. having the client contact the customer to ask for a response

a. examining specific subsequent cash receipts c. sending second and third requests d. examining shipping documentation

For the revenue process, the auditor is concerned about material misstatements related to ______. Multiple select question. a. sales to fictitious customers b. recording of revenue when goods have not been shipped c. recording of revenue when services have not been performed d. cash receipts not being properly authorized e. a customer's inability to pay the amount they have been invoiced

a. sales to fictitious customers b. recording of revenue when goods have not been shipped c. recording of revenue when services have not been performed

Once the tests of controls in the revenue process have been completed, the auditor sets the ______ level of control risk. achieved expected tolerable planned

achieved

Having cash or checks stolen or lost before being recorded in the cash receipts records is a major misstatement related to the _______ assertion.

completeness

Audit procedures used to test controls in the revenue process include ______. Multiple select question. inspection of documents and records comparison of ratios to prior years reperformance by the auditor of the control activities walkthroughs confirmation of receivables balances

inspection of documents and records reperformance by the auditor of the control activities walkthroughs

A strong control that prevents misstatement of cash receipts is the use of a(n) ______ system where customers mail payments directly to the entity's bank account.

lockbox

*Inherent risk factors that may affect the revenue process are ______. misstatements detected in prior audits industry-related factors the complexity and contentiousness of revenue recognition issues the difficulty of auditing transactions and account balances

misstatements detected in prior audits industry-related factors the complexity and contentiousness of revenue recognition issues the difficulty of auditing transactions and account balances

Sending confirmation requests at the end of the accounting period ______. Multiple select question. reduces the chance of timing differences maximizes response rate is required for auditor reliance

reduces the chance of timing differences maximizes response rate

The major _______ issue related to accounts receivable is concerned with the net realizable value of accounts receivable

valuation

To test for proper authorization of early payment discounts, the auditor can ______. a. examine a sample of cash receipts transactions to determine if the entity's cash discount policies are being followed b. analyze typical cash receipts for dips in trends c. test reconciliations of the daily cash receipts with the postings to the accounts receivable subsidiary ledger

a. examine a sample of cash receipts transactions to determine if the entity's cash discount policies are being followed

For control of the confirmation process, the auditor should ______. Multiple select question. a. mail the confirmations in envelopes with the public accounting firm as the return address b. ask the client to reach out to customers who have not responded to the confirmations c. call the customer to be sure that they will respond to the confirmation d. mail the confirmations outside the entity's facilities e. send return envelope addressed to the public accounting firm

a. mail the confirmations in envelopes with the public accounting firm as the return address d. mail the confirmations outside the entity's facilities e. send return envelope addressed to the public accounting firm

Controls for the completeness assertion include ______. Multiple select question. a. restrictive endorsements b. segregation of duties c. use of a lockbox system d. procedures specifying policies for cash discounts

a. restrictive endorsements b. segregation of duties c. use of a lockbox system

Which of the following statements are correct? Multiple select question. a. Accounts receivable should only be confirmed at year end except in rare circumstances. b. Sending confirmations at the end of the accounting period reduces the chance of timing differences. c. Confirmation requests should be made soon after the end of the accounting period to maximize the response rate

b. Sending confirmations at the end of the accounting period reduces the chance of timing differences. c. Confirmation requests should be made soon after the end of the accounting period to maximize the response rate

Important controls regarding the processing of credit memoranda are ______. a. the entity should use a lockbox system to ensure that cash is deposited on a timely basis b. each credit memorandum should be approved by someone other than the individual who initiated it c. remittance advices should be reconciled to the cash receipts journal d. a credit for returned goods should be supported by a receiving document indicating that the goods have been returned

b. each credit memorandum should be approved by someone other than the individual who initiated it d. a credit for returned goods should be supported by a receiving document indicating that the goods have been returned

Possible misstatements due to improper authorization of revenue transactions include ______. Multiple select question. a. shipping goods that are not billed b. making sales at unauthorized prices or terms c. billing for goods that are not shipped d. performing services for customers who are bad credit risks

b. making sales at unauthorized prices or terms d. performing services for customers who are bad credit risks

The choice of which type of test of controls is appropriate for a particular assertion will be a function of the ______. Multiple select question. a. nature and timing of substantive audit procedures b. nature of the available evidence, including audit evidence in electronic form c. experience and training that the auditor has d. nature and complexity of the systems by which the entity processes and controls information e. volume of transactions or data

b. nature of the available evidence, including audit evidence in electronic form d. nature and complexity of the systems by which the entity processes and controls information e. volume of transactions or data

To provide evidence on the valuation of the allowance, the auditor looks at the aged trial balance for old items and ______. a. examines payment patterns of customers by looking at cash receipts during the year b. nothing else c. considers historical collection to provide evidence of uncolletability for current items d. discusses collection policies with entities that factor accounts receivable

c. considers historical collection to provide evidence of uncolletability for current items

The major issues related to the classification for accounts receivable are ______. Multiple select question. a. ensuring the correct value for the allowance for uncollectible accounts b. ensuring that all cash receipts have been properly recorded in the accounts receivable subsidiary ledger c. identifying and reclassifying any material credits contained in accounts receivable d. segregating short-term and long-term receivables e. ensuring that different types of receivables are properly classified.

c. identifying and reclassifying any material credits contained in accounts receivable d. segregating short-term and long-term receivables e. ensuring that different types of receivables are properly classified.

Reconciling the daily remittance report to control listings of remittance advices provide reasonable assurance that ______. Multiple choice question. customers have paid for all outstanding purchases cash receipts were deposited on a timely basis cash receipts were recorded at the correct amounts all sales were made at the correct selling price

cash receipts were recorded at the correct amounts

One control activity that can provide assurance for the ______ assertion that customer payments are recorded to the correct account is to reconcile the daily remittance report with postings to the cash receipts journal and accounts receivable subsidiary ledger.

classification

One of the major issues related to ________ of accounts receivables is segregating short-term and long-term receivables.

classification

The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the ______ assertion. accuracy completeness cutoff classification

classification

When it comes to cash receipt transactions, auditors seldom have major concerns about ______. Multiple choice question. completeness classification proper authorizations incorrect recording of receipts

classification

A major misstatement related to the ______ assertion is that cash or checks are stolen or lost before being recorded in the cash receipts records.

completeness

The auditor's concern with the ________ assertion over accounts receivable is whether all accounts receivable have been included in the subsidiary ledger and the general ledger account.

completeness

Control activities that ensure the ______ assertion include accounting for the numerical sequence of shipping documents and sales invoices and matching shipping documents with sales invoice

completion

Control activities that ensure the ______ assertion include accounting for the numerical sequence of shipping documents and sales invoices and matching shipping documents with sales invoices. Multiple choice question. completion authorization occurrence accuracy

completion

Audit evidence that is a direct written response from a third party to the auditor, in paper form or by electronic or other medium is called ____________.

confirmation

When it comes to cash receipt transactions, auditors seldom have major concerns about ______. incorrect recording of receipts cutoff proper authorizations completeness

cutoff

The results of the auditor's testing of internal control for the revenue process directly impact ________ risk and therefore the level of _______ procedures that will be required for the accounts affected by this process.

detection/substantive

*The auditor should document the achieved level of control risk for the revenue process using ______.

either quantitative amounts or qualitative terms

The auditor must maintain control over the accounts receivable confirmations to minimize the possibility of ______. Multiple select question. entity interception of the confirmation alteration of the confirmation by the entity lack of customer response to the confirmation

entity interception of the confirmation alteration of the confirmation by the entity

One of the more important assertions regarding accounts receivables is _______ because the auditor wants assurance that this account balance is not overstated through the inclusion of fictitious customer accounts or amounts.

existence

The major audit procedures for testing the ______ assertion for accounts receivables are confirmation of customers' accounts balances and examination of subsequent cash receipts.

existence

True or false: Misstatements in previous audits are not good indicators that misstatements are likely to be present in the current audit.

false

True or false: Substantive analytical procedures are inadequate audit tests for examining the fairness of revenue related accounts because such tests fail to provide sufficient evidence, even though they are low cost.

false

When the results of testing controls do not support the planned level of control risk, detection risk will ______. not be affected have to be set lower have to be set higher

have to be set lower

The presence of misstatements in previous audits suggests that misstatements are ______ to be present during the current audit. Multiple choice question. unlikely likely

likely

The possible misstatement that concerns the auditor when considering the ______ assertion is that cash receipts are recorded but not deposited in the entity's bank account. accuracy occurrence completeness authorization

occurrence

If the results of tests of controls do not support the ______ level of control risk, additional substantive procedures must be conducted.

planned

*Auditing standards allow the auditor to omit confirming accounts receivable when ______. the accounts receivable balance is immaterial external confirmations would be ineffective assessed level of risk for the assertion is low, and the planned substantive procedures address that risk

the accounts receivable balance is immaterial external confirmations would be ineffective assessed level of risk for the assertion is low, and the planned substantive procedures address that risk

If there is not a proper cutoff of revenue transactions, both the revenue and accounts receivable accounts will be misstated for ______. Multiple choice question. the current year only the following year only the current and following years

the current and following years

True or false: Understanding management's attitudes towards risk relevant to the revenue process is an important component of assessing the control risk for the revenue process.

true

Shipping goods to customers with bad credit and making sales at incorrect prices or terms are both possible misstatements due to improper _________________.

AUTHORIZATION

Comparing the date of a bill of lading with the date on the respective sales invoice and the date the sales invoice was recorded in the sales journal allows the auditor to test the ______ control.

CUTOFF

If there is a dispute between the auditor and management over when revenue should be recognized, the auditor should assess the risk of material misstatement as ______.

High

The assessment of the potential effects of _______ risk factors is one of the inputs for the assessment of the risk of material misstatement.

INHERENT

True or false: An industry's rate of technological changes can affect the potential for misstatements in this revenue process.

True

True or false: Some accounts are difficult to audit because of the lack of reliable evidence.

True

The auditor's decision process for planning and performing tests of controls involves considering the ______ that can occur if internal control does not operate effectively. a. assertions and the possible misstatements b. causes and consequences c. substantive tests and possible misstatements

a. assertions and the possible misstatements

Industry related factors that affect the potential for misstatements in the revenue process include ______. Multiple select question. a. the number of firms in the industry b. the industry's history c. industry's rate of technological change d. level of competition e. profitability and health of the industry

c. industry's rate of technological change d. level of competition e. profitability and health of the industry

If the entity does not have adequate controls to ensure that revenue transactions are recorded on a timely basis, sales may be recorded in the wrong accounting period. This relates to the ______ assertion. accuracy cutoff completeness occurrence

cutoff

If the entity does not have adequate controls to ensure that revenue transactions are recorded on a timely basis, sales may be recorded in the wrong accounting period. This relates to the ______ assertion. Multiple choice question. accuracy completeness occurrence cutoff

cutoff

*For a positive confirmation, a response is required ______.

whether the amount is correct or incorrect