Chapter 11

3. Determine that proper receivable disclosures are presented

Read the financial statements (including notes) for completeness

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.

1-3. The auditor determines that both of the following objectives will be part of the audit of Anthony Company. For each of the following audit objectives, select the substantive test that would most likely provide support for the objective. A substantive test may be used once, more than once, or not at all. 1. Verify existence of accounts receivable.

Perform tests of subsequent cash receipts after the balance sheet date.

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

Theft of cash register sales.

The ___________ should account for the serially numbered shipping documents to ensure that an invoice is prepared for all shipments.

Billing Department

Which of the following is most likely to increase days' sales in accounts receivable at the end of the year for Anthony Company?

A larger percentage of sales occurred during the last month of the year, as compared to the prior year.

4. The existence of which of the following is most likely to increase audit risk in an audit client?

A new CFO is redesigning Anthony's accounting policies and procedures.

Which of the following is the best argument against the use of negative accounts receivable confirmation requests?

The inference drawn from receiving no reply may not be correct.

Computer passwords are only known to the individual employees and the managing partner, who has no duties in the revenue-recording functions.

strength

Prenumbered service slips are accounted for on a monthly basis by the outside accountant, who is independent of the revenue-generating and revenue-recording functions.

strength

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

Completeness.

6. "sample deviation rate."

Replace with "tolerable deviation rate"

2. Determine that accounts receivable are valued at their net realizable value.

Review and assess an aging schedule of accounts receivable

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."

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:

The shipping clerk's file of duplicate copies of bills of lading.

CPAs use positive accounts receivable confirmation requests more frequently than negative accounts receivable confirmation requests.

true

Material accounts receivable from related parties should be stated separately from other receivables.

true

Receivables written off are often turned over to a ___________.

Collection Agency

A combination of positive and negative requests may be used.

Correct

5. "5 percent"

Replace with "7.5 percent"

Computer software cannot be modified by Southwest's employees.

strength

Which of the following would indicate the need to use positive accounts receivable confirmation requests?

A large number of accounts receivable are in dispute.

If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the

Accounting records to the source documents.

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?

Accounts receivable are overstated at December 31, 20X0.

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

Accounts receivable subsidiary ledger.

The best evidence of collectibility of accounts receivable is examination of subsequent ___________ of the accounts.

Collections

Which of the following manipulations would understate receivables on the financial statements?

Closing the sales journal prior to year-end.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Collection of receivables.

Auditors may ignore individually immaterial accounts when confirming accounts receivable.

Correct

Confirmation of accounts receivables may be omitted in certain circumstances.

Correct

Depending upon the circumstances, auditors may confirm total balances due or individual portions of those balances.

Correct

Second requests are ordinarily sent for positive form confirmation requests when the first request is not returned.

Correct

The auditors ordinarily should confirm accounts receivable.

Correct

The confirmation requests should be mailed to respondents by the CPAs.

Correct

Cash collection is centralized in that clerk #2 receives the cash (checks) from patients and records the cash receipt.

Deficiency

Clerk #2 receives cash and checks and prepares the daily bank deposit.

Deficiency

The office manager extends credit on a case-by-case basis rather than using a formal credit search and established credit limits.

Deficiency

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.

In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely?

Fictitious revenues.

Confirmation replies should be addressed directly to the CPAs at the client's address.

Incorrect

Confirmations address completeness more than they address existence.

Incorrect

Only material accounts need be confirmed.

Incorrect

The best way to evaluate the results of the confirmation process is to compare the total misstatements identified to the account's tolerable misstatements amounts.

Incorrect

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.

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?

Inventory.

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Physically examine items sold.

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.

Loans by a company to its officers, directors, major stockholders, or affiliates require particular attention because these ___________ are not the results of arm's length bargaining by independent parties.

Related party receivables

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."

1. "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."

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."

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.

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

Shipping documents file.

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.

A ___________ is a shipping document that is prepared for goods shipped by a common carrier.

bill of lading

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.

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.

false

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.

true

7. "assessed level of control risk

Replace with "planned level of detection risk"

Which of the following would provide the most assurance concerning the valuation of accounts receivable?

Assess the allowance for uncollectible accounts for reasonableness.

The bank reconciliation is prepared monthly by the outside accountant, who is independent of the revenue-generating and revenue-recording functions.

strength