Ch. 10 LS

Wotf statements are correct?

Confirmations can address more than one assertion; customer account confirmation provides evidence of accounts receivable validity; goods should not be shipped without proper authorization; the shipping function is responsible for ensuring orders are filled correctly; the auditor's concern with satisfying other types of receivables is similar to that of trade accounts receivables; typically other types of receivables are evaluated for collectibility

Important controls regarding the processing of credit memoranda are:

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

For each major class of transactions in the revenue process related to sales and cash receipts the auditor needs to determine the:

accounts involved in processing; supporting documents involved; initiation process for transactions

Ensuring all billings, adjustments and cash collections are properly recorded in customers' accounts is the responsibility of the ________ ___________ function.

accounts receivables

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

Once the tests of controls in the revenue process have been completed, the auditor sets the ____________ level of control risk

achieved

The auditor uses this report for conducting much of the substantive audit work in accounts receivables.

aged trial balance of accounts receivable

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

aggregate; tolerable

When payments are sent directly to an entity:

all checks should be restrictively endorsed; a control listing should be prepared

The accounts commonly affected by sales transactions are:

allowance for uncollectible accounts; bad-debt expense; trade accounts receivable; sales

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.

assertions and the possible misstatements

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

authorization

The main responsibility of the ________ function is to ensure that all goods shipped and all services provided are charged to customers at authorized prices and terms.

billing

Shipping documents

can serve as a bill of lading; are sent to customers; are used to initiate the billing process

The accounts commonly affected by cash receipts transactions are:

cash; cash discounts; trade accounts receivable

Trade loading or _________ _________ is a marketing practice that suppliers use to induce distributors to buy more inventory than they can promptly resell.

channel stuffing

To examine tests of controls related to the accuracy assertion, the auditor should:

check the reconciliations between the accounts receivable subsidiary ledger and the general ledger control account; review reconciliations of daily sales journal recordings with the posting to the accounts receivable subsidiary ledger; examine and test the application controls

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

classification

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

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

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

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

credit approval

A key control in the billing function is that a(n) ________ __________ should not be issued unless the goods have been returned.

credit memorandum

The form of a(n) _______ _____________ is generally similar to that of a sales invoice and it may be processed through the system in the same way.

credit memorandum

The details of all sales, cash receipts, and credit memorandum transactions processed through the customer's account for the period are found in the:

customer statement

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 for the ________ control.

cutoff

The _______ assertion attempts to determine whether all revenue transactions and related accounts receivable are recorded in the proper period.

cutoff

Accounts receivable confirmations provide evidence on several assertions including:

cutoff; completeness; valuation; existence

When is comes to cash receipt transactions, auditors seldom have major concern about:

cutoff; financial statement classification

The cash receipts journal contains columns for:

debiting cash; crediting other accounts such as scrap sales or internet income; crediting accounts receivable

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

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

Auditing standards allow the auditor to omit confirming accounts receivable when:

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

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

false

Comparison of gross profit percentage to previous years' or industry data may provide valuable evidence on:

fictitious revenue; changes in pricing policies; unrecorded revenue

To test the aged trial balance the auditor may add each column and the column totals to ensure they agree with the total balance for the account. This technique is called ___________ and _____________.

footing; crossfooting

Customer sales order may be prepared and:

forwarded from a salesperson; received over the internet; faxed; received by telephone; mailed

Ensuring all revenues, collections and receivables are properly accumulated, classified, and summarized in the accounts is the objective of the ________ ________ function.

general ledger

The major issues related to the presentation and disclosure assertion about classification for accounts receivables are:

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

Industry related factors that affect the potential for misstatements in the revenue process include:

industry's rate of technological change; profitability and health of the industry; level of competition

Transactions that may occur as part of the revenue process of an entity include:

intercompany sales; related-party sales; scrap sales

A credit approval form:

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

According to FASB, in order to record revenue:

it must be realized or realizable; it must be earned

When an employee steals cash and covers the shortage by applying cash from one customer's account against another customer's account, this is referred to as

lapping

Inherent risk may increase due to issues regarding recognition of revenue on:

lease contracts; long-term construction contracts; installment sales; long-term service contracts

Many companies use a(n) ______ system in which customer payments are sent directly to the entity's bank.

lockbox

Inherent risk factors that may affect the revenue process are:

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

The credit function has responsibility for:

monitoring customer payments; requesting payment from customers who are delinquent; reviewing and preparing aged accounts receivable trial balance; preparing report of customer accounts that may require write-off

The use of _______________ also reduces the risk of revenue being recorded before goods are shipped or services are performed because customers are unlikely to recognize an obligation to pay in such a circumstance.

monthly customer statements

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

occurrence

Because control environment factors have a pervasive effect on all business processes, understanding the control environment is generally completed:

on an overall entity basis

If the auditor concludes that audit risk is unacceptably high, options include:

performing additional audit procedures; issuing a qualified report; client adjustment of financial statement accounts

Possible misstatements due to improper authorization of revenue transactions include:

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

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

planned

There are two types of confirmations: __________ and _______.

positive; negative

One of the major issues related to the ___________ and ___________ assertion about classification of accounts receivables is segregating short-term and long-term receivables.

presentation; disclosure

Types of transactions typically processed through the revenue process are the:

receipt of cash from the customer in payment for the goods or services; sale of goods or rendering of a service for cash or credit; return of goods by the customer for credit or cash

For the revenue process, the auditor is concerned about material misstatements related to:

recording of revenue when goods have not been shipped; recording of revenue when services have not been performed; sales to fictitious customers

Significant "substance over form" revenue recognition issues can arise from _______ ________ transactions.

related party

The auditor needs to understand the controls that exist to ensure management's objectives are being met when a(n) _________ strategy is adopted for the revenue process.

reliance

The sale of goods and services to customers is the focus of the _________ process.

revenue

For virtually all entities, the ________ and _________ processes represent the two major business processes than affect the financial statements.

revenue; purchasing

Typically the source document that signals the recognition of revenue is the ______ _______.

sales invoice

The necessary information for each sales transaction is recorded using the ________ _________.

sales journal

The accounts commonly affected by sales returns and allowance transactions are:

sales returns; trade accounts receivable; sales allowances

Transactions recorded in the _______ and _____ ________ journals are posted to the accounts receivable subsidiary ledger.

sales; cash receipts

Strong controls for the completeness assertion include:

segregation of duties; restrictive endorsements; use of a lockbox system

Fraud risks related to revenue recognition include:

side agreements; related party transactions; channel stuffing

Any entries into customers' accounts should be made from authorized ___________ __________ such as sales invoices, remittance advices, and credit memoranda.

source documents

To test the accuracy assertion, the accounts receivable _________ ledger should be periodically reconciled to the general ledger _______ account.

subsidiary; control

Possible programmed controls to ensure accuracy of the revenue process include:

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

Factors affecting the reliability of accounts receivable confirmation include:

the type of confirmation request; the intended respondent; prior experience with the client

In many cases confirmation exceptions result from what are referred to as ________ ____________.

timing differences

Analyzing misstatements may lead the auditor to conclude that the original assessment of the control risk was:

too low

Many entities use __________ documents, where a portion of the sales invoice serves as a remittance advice that is returned with the customer's payment.

turnaround

A customer sales order typically contains:

type of products ordered; quantity of items ordered

To understand the entity's monitoring of controls in the revenue process, the auditor needs to:

understand how supervisory personnel review the personnel who perform the controls; understand how management assesses the design and operation of controls; evaluate the performance of the entity's IT function; evaluate the effectiveness of controls

In order for an auditor to issue a(n) __________ _________, revenue must be recognized in conformity with GAAP.

unqualified opinion

Substantive analytical procedures are:

used to examine plausible relationships among related accounts

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

valuation

The choice of which type of test of controls is appropriate for a particular assertion will be a function of the:

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

The auditor can develop an understanding of the revenue process by conducting a(n):

walkthrough

Audit procedures used to test controls in the revenue process include:

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