ACCT 4123 Chapter 7

Assertion: Accounts receivable represent all amounts owed to the client company at the balance sheet date.

Audit Procedure: Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for inventories and COGS are recorded in the same and proper period.

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.

Management may have fraudulently overstated revenue by making _____ journal entries.

inappropriate

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

individual invoices.

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

inherent

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

packing slip

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

realized; realizable

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

revenue

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

revenue recognition

The most effective audit procedure for determining the collectability of an account receivable is the:

review of the subsequent cash collections.

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

total debits posted to accounts receivable

Access to accounts receivable records gives an individual ______,

- authorization - recording responsibility

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

Use more experienced audit team members to perform year-end testing.

Side _____ can substantially alter the terms of a sale.

agreements

Substantive procedures are ______.

always performed in the revenue cycle

Receivables that have been sold should not remain as a(n) _____ on the company's books.

asset

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:

occurrence.

If a control is missing or ineffective, ______.

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

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.

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

Accuracy.

Assertion: The client company has a legal right to all accounts receivable at the balance sheet date.

Audit Procedure: Review loan agreements for indications of whether accounts receivable have been factored or pledged.

Assertion: Accounts receivable are properly described and presented in the financial statements.

Audit Procedure: Review the accounts receivable trial balance for amounts due from officers and employees.

_____ needs to be assured in order to recognize revenue.

Collectibility

Existence of assets

Confirm a sample of receivables by direct communication with the debtors

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

False [Reason: Confirmations is considered a required auditing procedure.]

Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues?

Is customer credit approved before orders are shipped?

Rights to assets

Review confirmations of liabilities to determine if receivables have been sold

Cutoff of transactions

Vouch sales and cash receipt transactions occurring near period end

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

accomplished

If the auditor obtains sufficient appropriate evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable, the auditor's opinion should be unqualified and could be expected to:

avoid mentioning the alternative procedures.

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

completeness

To be recognized, revenues must also be realized or realizable and:

earned

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.

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

inherent; control

To test collectibility of receivables, auditors may consider credit ratings for debtors of _____ receivables.

large

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

must still review the account for collectability

A customer is asked to respond only if something is wrong with the account balance when a(n) _____ confirmation is used.

negative

A blank form is a variation of the _____ confirmation.

positive

A customer is asked to respond whether the balance is correct or incorrect on a(n) _____ confirmation.

positive

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

price list

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

sales invoices with shipping documents.

Error

- Recording sales in the wrong period based on incorrect shipping information. - Revenue earned from franchise is incorrectly calculated.

When an auditor receives an oral response to a confirmation ______.

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

Confirmations provide evidence of _____.

- rights and obligations - existence

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

C. Confirmation returned as "undeliverable" are always a red flag. D. Confirming a specific transaction may be more effective than confirming the account balance.

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

audit

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

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

- fictitious sales - sales recorded before shipment

A blank form confirmation ______.

- may result in a lower response rate - may produce better evidence than a positive confirmation - requires the customer to provide the balance - is a variation of a positive confirmation

Justifications for not using confirmations may include ______.

- receivables are not material - confirmations would be ineffective, based on prior-years' experience of knowledge that responses could be unreliable - analytical procedures and other substantive procedures provide sufficient, competent evidence

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

- rights & obligations - existence

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

completeness; occurrence

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations? A. The client requests alternative procedures be performed instead. B. The balance is immaterial. C. Other procedures provide sufficient competent evidence. D. Confirmations would be ineffective.

A. The client requests alternative procedures be performed instead.

Assertion: Accounts receivable are stated at net realizable value.

Audit Procedure: Review the aged trial balance for significant past due accounts.

Which of the following accounts is not normally part of the revenue and collection cycle? A. Cash. B. Sales. C. Purchases Returns and Allowances. D. Accounts Receivable.

C. Purchases Returns and Allowances. [Reason: Even though this involves shipments, it is considered part of the expenditure and disbursement cycle.]

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

True [Reason: If they are lost or destroyed, it is unlikely the accounts will be collected.]

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

True [Reason: They allow the system to check for unrecorded or duplicated transactions.]

The auditor assesses 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

The document that generates recording of a sale is the:

invoice.

A lack of response to a(n) _____ confirmation is considered evidence that the account is fairly stated.

negative

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

subsequent cash receipts

Confirmations do not provide strong evidence of ______.

valuation

Fraud

- Recording a fictitious sale without receiving a customer order for the goods. - Holding sales journal open to record next year's sales in the current year. - Recording a sale for goods that the customer is anticipated to return. - Intentional overshipment of goods.

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

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

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

- credit limits are appropriate - files are accurate

Regarding the revenue process, management should ______.

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

Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company? A. Purchasing raw materials B. Receiving and processing customer orders C. Collecting and depositing cash D. Billing customers E. Delivering goods and services

A. Purchasing raw materials

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

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

Which of the following documents should be matched before recording revenue? A. customer invoice B. customer credit authorization C. evidence of shipment D. customer sales order

A. customer invoice C. evidence of shipment D. customer sales order

Valuation of assets

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

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 [Reason: The auditor must be sure to have the price list that was in effect at the time of the customer's order.]

Financial statement presentation and disclosure

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

Completeness of assets

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

Which of the following audit procedures is the most effective in testing sales for understatement?

Trace a sample of shipping documents to sales invoices recorded in the sales journal.

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

True [Reason: Companies come in many different sizes and there are also differences between industries.]

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.

Which of the following statements is correct concerning the use of negative confirmation requests?

Unreturned negative confirmation requests rarely provide significant explicit evidence.

An auditor noted that client sales had 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. 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 best test the sales manager's representation?

Vouch vender invoices to payments made after year-end.

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

completeness

Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed _____.

correctly

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

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

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

cutoff policies

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

existence

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

existence assertion.

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

overall performance review by management

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

Custody of inventory is transferred to the shipping area upon authorization of:

the shipping order.

Reviewing accounts for collectability and determining the adequacy of the allowance for doubtful accounts is done in support of the _____ assertion.

valuation

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

valuation