Auditing & Assurance Services Chapter 7

One way to avoid misstatement of revenue is to ensure the client has proper ________.

cutoff policies

Audit risk is manifested when a material misstatement enters the financial reporting process, which is known as Blank______ risk.

inherent

The risk of material misstatement is a combination of ______ risk and ______ risk.

inherent; control

A description of the goods being shipped as well as the quantity shipped is found on the Blank______.

packing slip

Many instances of misstatement are based on the inappropriate recognition of ______.

revenue

When the auditor evaluates the reasonableness of the allowance for doubtful accounts, ______ is a high risk assertion.

valuation

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

"These goods were returned for credit on November 15."

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

identify the assertion about classes of transactions and events most benefited by the control for: Product line A sales recorded as Product line B?

Classification

________ needs to be assured in order to recognize revenue.

Collectibility

- Are sales invoice blanks prenumbered? - Are prenumbered bill of lading prepared in the shipping department?

Completeness

Not all accounts receivable have been recorded

Completeness

Does the accounting manual contain instructions to date sales invoices on the shipment date?

Cutoff

Vouch sales and cash receipt transactions occurring near period end

Cutoff of transactions

In the audit of accounts receivable, the most important emphasis should be on the___

Existence assertion.

Confirm a sample of receivables by direct communication with the debtors

Existence of assets

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide the strongest evidence concerning the___

Existence of the balances confirmed.

Management may fail to recognize the possibility of customer returns

Occurrence

To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts?

Sales returns.

Write-offs of doubtful accounts should be approved by____

The treasurer.

Receivables are not included in financial statements at the appropriate amount, and valuation adjustments are not recorded properly

Valuation

Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.

accomplished

When an auditor receives an oral response to a confirmation Blank______. Multiple select question. the definition of external confirmation has been met alternative audit procedures may be warranted a written response still needs to be requested

alternative audit procedures may be warranted a written response still needs to be requested

Substantive procedures are Blank______.

always performed in the revenue cycle

Confirmations do not necessarily mitigate the risk of _________.

bad debt

The auditor assess inherent risk to determine where a material misstatement could enter the process Blank______ the consideration of any internal controls.

before

A fraudulent financial reporting activity by which a company recognizes a sale even though it does not ship the merchandise to the customer but holds it in its own warehouse

bill and hold

The form the carrier signs to verify goods are shipped is a(n) Blank______.

bill of lading

Auditors review items in the pending order file for evidence of the Blank______ of recorded sales and accounts receivable.

completeness

Select a sample of sales invoices in the subsequent period, and examine the related shipping documents for date of shipment to ascertain whether some of those shipments at the end of the period were inadvertently not recorded

completeness

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of

completeness.

Prenumbered documents are important in testing the ______ assertion and the ______ assertion.

completeness; occurrence

Justifications for not using confirmations may include Blank______. Multiple select question. other procedures require less of the auditor's time confirmations would be ineffective receivables are not material other procedures provide sufficient, competent evidence

confirmations would be ineffective receivables are not material other procedures provide sufficient, competent evidence

Overstatement may occur when sales for the next period are recorded in the _______ period.

current

For current status, including up-to-date credit limit information, auditors may test a sample of the ______ ______ file.

customer master

A way to subject all items in a population of occurrences for a particular control activity in the revenue cycle is to use ______ testing.

exception

Accounts receivable are overstated and do not represent actual sales

existence

Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the ______ and rights and obligations of customers' balances directly from the customer.

existence

Regarding accounts receivable, the relevant assertion that must be emphasized is:

existence

A blank form confirmation: Multiple select question. may result in a lower response rate. may produce better evidence than a positive confirmation. is a variation of a negative confirmation. requires the customer to confirm a balance.

may result in a lower response rate. may produce better evidence than a positive confirmation.

Management overstates sales by adding fictitious transactions or inflating actual sales

occurrence

Systems may automatically produce customer invoices, but billings will be incorrect if the ______ ______ master file is incorrect.

price list

Access to accounts receivable records gives an individual Blank______, Multiple select question. custody of assets recording responsibility authorization

recording responsibility authorization

Sales must be realized or realizable and earned in order to be recorded under the accounting standards related to ______ ______

revenue recognition

Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the Blank______ of customers' balances directly from the customer. Multiple select question. rights & obligations existence collectability payment terms

rights & obligations existence

If controls are not in place or personnel are not performing control activities effectively, auditors need to design ______ procedures to try to detect whether control failures have produced material misstatements in the financial statements.

substantive

Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and tested Elm Tree's internal control procedures over the sales recording process and finds the controls to be effective. At a minimum, the auditor's year-end procedures for testing internal control procedures must include

tests of the client's internal control procedures from October 15 through the year end.

If a control is missing or ineffective, Blank______. Multiple select question. the risk of material misstatement increases there is most certainly an error or fraud in the financial statements auditors need to design substantive procedures related to control failure

the risk of material misstatement increases auditors need to design substantive procedures related to control failure

The negative request form of accounts receivable confirmation is useful particularly when the___

- Assessed Level of Risk of Material Misstatement Relating to Receivables is low - Number of Small Balances is many -Proper Consideration by the Recipient is likely

Which of the following accounts is normally part of the revenue and collection cycle?

- Cash - Sales - Accounts receivable

identify the assertion about classes of transactions and events most benefited by the control for: Goods shipped, sales not recorded?

Completeness

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___

Fictitious sales.

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?

Inflating sales for the year

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?

Inherent risk was particularly high for accounts receivable.

Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company?

Purchasing raw materials

Which of the following internal control activities most likely would deter lapping of collections from customers?

Separation of duties between receiving cash and posting the accounts receivable ledger.

True or false: Physical protection of accounts receivable files is an important facet of control.

T

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

Understating the sales journal.

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?

Unrecorded sales.

Compare the amount of credits given to customers in the subsequent period to the amount estimated by management

Valuation of assets

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?

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

The risk that an unqualified opinion will be issued on financial statements that contain a material misstatement is the definition of ______ risk

audit

Difficulties in estimating the allowance for doubtful accounts can be due to Blank______. Multiple select question. change in customer base revised credit policies a decrease in sales changing economic conditions

change in customer base revised credit policies changing economic conditions

To ensure sales are recorded in the proper period, auditors use sales ______ tests.

cutoff

Tracing shipping documents before and after year-end to the sales journal and vouching credit memos for returns after year end to receiving reports are done to test the ______ assertion.

cutoff

Verifying the dates on sales documents helps reduce the risk of misstatement related to the ______ assertion of revenue.

cutoff

Confirmations are more persuasive than subsequent cash receipts as they help mitigate the risk of _______.

lapping

If a customer confirms that an account exists, the auditor Blank______.

must still review the account for collectability

A blank form is a variation of the ______ confirmation.

positive

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following EXCEPT

Do nothing for immaterial balances.

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_____

Estimate credit losses.

identify the assertion about classes of transactions and events most benefited by the control for: Sales recorded, goods not shipped?

Occurrence

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following _____

- Examine shipping documents. - Send a second request. - Examine client correspondence files.

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?

Accept the confirmation but verify the source and content through a telephone call to the respondent.

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the_____

Accounts receivable listing.

identify the assertion about classes of transactions and events most benefited by the control for: Failure to post charges to customers for sales?

Completeness

Which of the following statements are correct? Multiple select question. Confirming a specific transaction is often more effective than confirming the account balance. Confirmation returned as "undeliverable" are always a red flag. Auditors may not receive an oral response to a confirmation. Confirmations of accounts, loans, and notes receivable produces sufficient evidence of the rights assertion.

Confirming a specific transaction is often more effective than confirming the account balance. Confirmation returned as "undeliverable" are always a red flag.

identify the assertion about classes of transactions and events most benefited by the control for: January sales recorded in December?

Cut-off

A letter sent to a customer by auditors requesting that the customer respond whether the balance show is correct or not

Positive confirmation

Which of the following accounts is not normally part of the revenue and collection cycle?

Purchases Returns and Allowances.

Sales are normally recorded on the date of the_____

Sales Invoice

A client has a separate sales group for its largest "preferred" customers, a select group of customers that 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?

Send out positive confirmations on a large sample of these customers.

True or false: Prenumbered documents are an example of an internal control.

T

When customers are not willing or able to return confirmations, examining subsequent cash receipts, sales orders, invoices, and shipping documents, and correspondence files for past-due accounts are alternative procedures that may be performed to ensure ______.

existence

Confirmations provide evidence of Blank______. Multiple select question. presentation and disclosure existence rights and obligations valuation

existence rights and obligations

The sales detail (journal) file can be checked for Blank______. Multiple select question. appropriate credit limits fictitious sales sales recorded before shipment

fictitious sales sales recorded before shipment

It is important to maintain an up-to-date customer master file to ensure Blank______. Multiple Selection all sales invoices are recorded files are accurate credit limits are appropriate

files are accurate credit limits are appropriate

Regarding the revenue process, management should Blank______. Multiple select question. evaluate the timeliness of accounts payable payments scrutinize total write-offs of accounts receivables continually review revenues and compare them to budgeted and forecasts review merchandise returns

scrutinize total write-offs of accounts receivables continually review revenues and compare them to budgeted and forecasts review merchandise returns

The most effective alternative procedure to confirmations to ensure existence is examining Blank______.

subsequent cash receipts

- Are all credit sales approved by the credit department prior to shipment? - Are invoice quantities compared to shipped quantities? - Are summary journal entries approved before posting? - Are sales prices and terms based on approved standards? - Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting?

Accuracy

The control procedure "credit sales approved by credit department" is directed toward which transaction assertion?

Accuracy

identify the assertion about classes of transactions and events most benefited by the control for: Goods shipped to a bad credit risk customer?

Accuracy

identify the assertion about classes of transactions and events most benefited by the control for: Sales billed at the wrong price or wrong quantity?

Accuracy

Which of the following is the best reason for pre-numbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices?

Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.

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______

Entries in the accounts receivable subsidiary ledger were properly invoiced.

Review confirmations of liabilities to determine if receivables have been sold

Rights to assets

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to _____

Sales invoices with shipping documents and customer sales invoices.

To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts?

Sales returns.

A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that 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?

Send out positive confirmations on a large sample of these customers.

When accounts receivable are confirmed at an interim date, auditors need not be concerned with____

Sending negative confirmations to all customers as of the year-end date.

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that____

Shipments to customers were invoiced.

True or false: There is no such thing as a typical revenue and collection cycle.

T

Revenues are normally considered to have been earned when___

The company has substantially accomplished what it must to be entitled to the benefits.

Which of the following statements regarding the revenue cycle are correct? Multiple select question. There is always a presumptive risk of fraud. Most auditing clients have inadequate controls. Tests of controls often support a reduction in control risk. It consists of routine transactions.

There is always a presumptive risk of fraud. Tests of controls often support a reduction in control risk. It consists of routine transactions.

A company should always compare daily credit sales totals in the sales journal to the Blank______.

total debits posted to accounts receivable

When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the client's

treasurer.

Provide a list of related parties to all members of the audit team to assist in identification of the transactions

Financial statement presentation and disclosure of assets

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

Have customers send payments directly to the company's depository bank.

An auditor is required to confirm accounts receivable if the accounts receivable balances are:

Material to the financial statements.

A form sent to a customer by auditors requesting that the customer respond whether the balance shown on it is incorrect or not

Negative confirmation

- Is access to sales invoice blanks restricted? - Are returned sales credits supported by documentation?

Occurrence

True or false: Auditing standards recommend but generally do not require the use of confirmations for accounts receivable.

F

True or false: When vouching invoices and sales journal entries to price lists, the auditor must be sure to have the most up-to-date price list available.

F

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?

Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.