Audit SB 11

The auditor's assessment of the risks of material misstatement include assessments of ____ risk and _____ risk, which are used to design further audit procedures.

Blank 1: control Blank 2: inherent

Management should make appropriate background checks of prospective employees and obtain _____ bonds on employees in positions of trust.

Blank 1: fidelity

Auditors use the understanding of the client and its environment to consider ____ risks, including fraud risks, related to receivables and revenue.

Blank 1: inherent

Written promises to pay certain amounts at future dates are _____ ____.

Blank 1: notes Blank 2: receivables or payables

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

Related party transactions often include loans to officers and directors. Auditors are most concerned with ______ related to these transactions.

presentation and disclosure

Sales that are invoiced but not shipped are called ______ and _____ transactions

Blank 1: bill Blank 2: hold

Match the fraud example with misstatement description. Instructions a.Intentional overshipment of goods b.Holding the sales journal open to record next year's sales as having occurred in the current year c.Recording sales when the customer is likely to return the goods

a.Recording unearned revenues b. Cutoff problems c. Recording revenue when significant uncertainties exist

Notes receivable are typically used for transactions of substantial amounts with customers and typically represent the single most important asset for ______.

banks

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 only use electronic confirmation requests request confirmation responses be delivered to the client directly

mail confirmation requests in envelopes bearing the CPA firm's return address determine confirmation requests are directed toward an appropriate confirming party

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 person with custody of the note should also have access to cash or accounting records write-off of defaulted notes should be approved by responsible officials amounts due at the end of the period should be validated by monthly confirmations

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

For any significant risk, the auditors ______. should evaluate the design of the related controls may not rely on prior period evidence regarding the operating effectiveness of controls may rely solely on appropriate, documented procedures to address the risk should determine if the related controls are implemented

should evaluate the design of the related controls may not rely on prior period evidence regarding the operating effectiveness of controls should determine if the related controls are implemented

External factors that can influence the revenue cycle include ______.

customer demand competition

For auditors, the audit of revenue and receivables represents an area of ______ risk.

significant

A listing of individual customers' accounts classified by the number of days each account has been outstanding is a(n) _____ _____ _____ of trade accounts receivables

Blank 1: aged Blank 2: trial Blank 3: balance

True or false: The choice between positive and negative forms of confirmation requests generally has no effect on the size of the sample.

False

Confirming accounts receivable is generally required by ______. international auditing standards only both international and US auditing standards US auditing standards only

US auditing standards only

When positive confirmations are used and there are non-respondents, the auditors should ______.

follow up with a second request for information

Management monitoring activities over the revenue cycle include all of the following except ______. Multiple choice question. taking over the mailing of monthly statements to customers soliciting feedback from customers about billing accuracy reviewing sales performance reports reviewing the aging of accounts receivable report

taking over the mailing of monthly statements to customers

Which of the following questions may be included on an internal control questionnaire for revenue and receivables? Are estimates of revenue calculated by internal auditors? x Are orders from customers initiated and reviewed by the sales department? Are all sales approved by the billing department before shipment? x Are sales invoices prenumbered and all numbers accounted for?

Are orders from customers initiated and reviewed by the sales department? Are sales invoices prenumbered and all numbers accounted for?

Select all that apply Auditors design substantive procedures to primarily address which assertions for receivables and revenue? Valuation Cutoff Existence Control effectiveness

Valuation Cutoff Existence

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

Match the substantive procedure with the primary audit objective. Instructions a.Obtain aged listing of receivables and reconcile to ledgers b.Confirm receivables with debtors c.Investigate receivables from related parties

a.Valuation and accuracy b. Existence, occurrence, and rights c.Presentation and disclosure

Trade and accounts receivable should appear as separate items in the current asset section at their ______.

net realizable value

True or false: When the auditors' assessments of control risk assume that controls are operating effectively, no additional tests of controls are ever required.

False

Inherent risks related to receivables and revenue include all of the following except ______.

an increase in sales due to economic conditions

Accounts receivable consists of ______.

claims against customers from the sale of goods loans to officers or employees

The audit procedures for the verifications of sales transactions selected for immediate testing may begin with a comparison of the ______. Multiple select question. duplicate copies of sales invoices product catalogs customer's purchase orders customer's contracts authorized price lists client's sales orders

duplicate copies of sales invoices customer's purchase orders client's sales orders

For any significant risk, the auditors ______. should evaluate the design of the related controls should determine if the related controls are implemented may not rely on prior period evidence regarding the operating effectiveness of controls may rely solely on appropriate, documented procedures to address the risk

may not rely on prior period evidence regarding the operating effectiveness of controls should evaluate the design of the related controls should determine if the related controls are implemented

The confirming party is asked to respond directly to the auditor providing the requested information or indicating agreement or disagreement with the information in the request _____ confirmations are used

positive

The best alternative auditing procedure when confirmation replies are not received is an examination of ______.

subsequent cash receipts in payment of the receivable

In obtaining assurance that all shipments have been billed, auditors should ______.

account for all documents by serial number

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

When control activities over sales on account are inadequate ______.

sales may be made to unapproved customers shipments may occur without notice to billing sales invoices may contain errors

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

The most common technique used by management to engage in fraudulent financial reporting is ______.

improper revenue recognition

External confirmation can be in various forms except ______.

oral

For a reasonableness test, the accounts receivable turnover ratio for the current year should be compared to ______. Multiple select question. average ratios for all publicly traded companies average ratios for the industry the ratio from last year budgeted ratios

average ratios for the industry the ratio from last year budgeted ratios

For effective control, the custodian of notes receivable should not have access to_______.

both cash and general accounting records

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

The aged trial balance is prepared by the client and is used in the audit to ______. Multiple select question. compute the receivable turnover ratio provide confirmation control information provide information on notes receivable display the aging of customers' accounts estimate probable credit losses

provide confirmation control information display the aging of customers' accounts estimate probable credit losses

As the auditors confirm their understanding of the revenue cycle, they are likely to ______. review revenue budgets and variance ensure that all incoming payments are received and processed by the billing department x perform a walk-through of the cycle x inquire as to who performed various functions

review revenue budgets and variance perform a walk-through of the cycle inquire as to who performed various functions

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

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

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

Under US auditing standards auditors ______.

confirmations are not required if they would be ineffective

Audit documentation (working papers) for receivables and revenues include ______. analysis of trade accounts payable x documentation of internal controls x analysis of other accounts receivable x analysis of notes receivable and related interest

documentation of internal controls analysis of other accounts receivable analysis of notes receivable and related interest

By receiving an external confirmation of the debt by the debtor, auditors obtain audit evidence to help ______. establish completeness of the asset provide conclusive evidence about the completeness assertion regarding receivables provide some assurance no lapping of receivables is occurring establish the gross valuation of the asset

provide some assurance no lapping of receivables is occurring establish the gross valuation of the asset

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. Presentation and disclosure Existence Completeness Understanding

Existence Completeness

Notes receivable on hand should be inspected at the same time as the count of ______ to prevent the concealment of shortages.

cash and securities

Internal factors that can influence the revenue cycle include ______. Multiple select question. new type of sales transactions regulations that affect the risk of achieving company sale's objectives customer demand and competition new products and services

new type of sales transactions new products and services

True or false: When performing any tests of sales transactions, auditors do not need to be concerned with consigned items. True false question.TrueFalse

False

To test notes and accounts written-off during the year auditors use an analysis of ______.

the allowance for doubtful accounts and notes

To strengthen controls over credit sales and reduce the opportunity for fraud, companies should ______ for all revenue cycle activities.

divide duties between different departments

Audit documentation (working papers) for receivables and revenues include ______. aged trial balance of notes receivable comparative analyses of revenue analysis of allowance for collectible accounts and notes analysis of other accounts receivable

comparative analyses of revenue analysis of other accounts receivable

Installment notes are typically used in all of the following except ______. Multiple choice question. issuance of capital stock sale of goods or services to customers sale of divisions of a company sale of automobiles

sale of goods or services to customers

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

Match the error example with the internal control weakness or factor that increases the risk of misstatement. a. Inaccurate billing and recording of sales b. Recording sales in the wrong period based on incorrect shipping information c.Recording sales when the customer's payment is contingent upon the customer receiving financing or selling the goods to another party

a. Ineffective controls for testing invoices, or ineffective input validation checks and computer reconciliations to ensure the accuracy of databases b. Ineffective cutoff procedures in the shipping department c. Aggressive attitude of management toward financial reporting; incompetent chief accounting officer

The date of each invoice in a sample of sales transactions be compared against the date ______. the invoice is paid on each related shipping document of entry in accounts receivable that the vendor accounted for the sale

on each related shipping document of entry in accounts receivable

Select all that apply The audit of receivables and revenue represents a significant audit risk because ______. understatement of receivables and revenue is a popular fraud technique routine sales transactions with customers are well-documented significant accounting estimates are used to value receivables and revenue complex accounting rules exist for revenue recognition

significant accounting estimates are used to value receivables and revenue complex accounting rules exist for revenue recognition

Substantial sales returns following the balance sheet date may be indicative of boosting sales by inducing customers to buy in excess, which is known as ______.

channel stuffing

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 ______. review management's procedure for sending notes to others confirm the note with the holder confirm the note with the maker

confirm the note with the holder

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

Auditors should obtain an aged trial balance from the client and verify the listing by performing all of the following steps except ______. testing agings of accounts comparing the totals from the client listing to the related controlling accounts comparing customer terms to written agreements testing footings and cross-footings

comparing customer terms to written agreements

Risks identified by auditors that require special audit consideration are referred to as _____ risks.

Blank 1: significant