Chapter 7 LearnSmart

Access to accounts receivable records gives an individual ______,

- authorization - recording responsibility

When a retailer accepts third-party credit cards, ______.

- authorization controls are minimized - they can become liable for customer losses for failing to adequately protect information

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

- completeness - occurrence

Regarding the revenue process, management should ______.

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

It is important to maintain an up-to-date customer master file to ensure ______.

- credit limits are appropriate - files are accurate

Separation of duties in the revenue cycle should include different people and departments performing ______.

- custody of goods and cash - sales and credit authorization - record keeping for sales, receivables, inventory and cash receipts

Because fictitious sales may be used to overstate assets, the ______ assertion is important in the audit of accounts receivables and the ______ assertion is important for sales.

- existence - occurrence

The sales detail (journal) file can be checked for ______.

- fictitious sales - sales recorded before shipment

The person who has the ability to change invoices should not ______.

- have custody of assets - have recording responsibilities

Customer statements ______.

- help with control over cash receipts - detail what has been billed and paid

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

- inherent - control

According to accounting standards, to be recognized, revenue must be ______ or ______ and earned.

- realized - realizable

Difficulties in estimating the allowance for doubtful accounts can be due to ______.

- revised credit policies - change in customer base - changing economic conditions

To look for unusually high or low sales volume, the auditor may look to a sales analysis reported classified by ______.

- sales employee - region

When a retailer accepts third-party credit cards, ______.

- the authorization function is performed electronically - data security is a significant issue

Which of the following SEC criteria for revenue recognition is incorrect?

A delivery or service has been promised.

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.

False

"Frequent deficiencies related to the design and performance of audit procedures that address the assessed risk of material misstatement, particularly when auditing revenue" was observed in a 2018 inspection conducted by the ______.

PCAOB

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

Purchasing raw materials

Revenue generally is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably ensured according to ______ standards.

SEC

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

True

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

True

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

True

To help assess the allowance for doubtful accounts, auditors use the ______.

aged trial balance

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

audit

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

before

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

bill of lading

Adjusting and correcting entries that can result from the bank account reconciliation are found in the ______ ______ journal.

cash receipts

The population of entries that should be reflected in the credits to accounts receivable for customer payments are found in the ______ ______ journal.

cash receipts

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

completeness

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

customer master

In the basic three-step approach for using the audit risk model to plan an engagement, ______ risk is set at the significant account and assertion level based on the level of audit risk and the risk of material misstatement.

detection

Since auditors generally presume management has an incentive to overstate revenues, all other things being equal, auditors may assess inherent risk for ______.

existence to be higher than for completeness

When planning an engagement, AS 2110 indicates that the auditor should presume that there is a(n) ______ risk involving improper revenue recognition.

fraud

Customers statements should be sent ______.

if there is any account activity

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

inherent

The issuance of FASB ASC 606 has likely made difficulties with auditing revenues ______ challenging.

more

A strong entity-level control in the revenue process is ______.

overall performance review by management

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

packing slip

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

price list

Information required for business segment disclosures is provided by sales classified by ______.

product line

According to AS 2201.A9, a financial statement assertion is ______ if it has a "reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated."

relevant

Once all significant accounts and disclosures have been identified, the auditor needs to identify the ______ assertions.

relevant

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

revenue recognition

The bill sent to a customer indicating the amount due and payment terms is called a ______.

sales invoice

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

total debits posted to accounts receivable

The starting point for selecting accounts for confirmation is the accounts receivable ______.

trial balance

True or false: Auditors typically achieve an understanding of controls by completing a walkthrough of the processes in the revenue and collection cycle.

true

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

valuation

Auditors typically achieve an understanding of controls by completing a(n) ______ of the processes in the revenue and collection cycle.

walkthrough