ACCT 4310: Chapter 7 (Revenue and Collection Cycle)

Dual-Direction tests of controls

demonstrates how an auditor performs tests of control to assess control risk for both the occurrence assertion (vouch) and the completeness assertion (trace)

Obtaining substantive evidence supporting the existence of accounts receivable is required in audits where receivables are _________.

material

When a delivery or shipment is complete, the transaction is completed by filing a _________________ and preparing a _______________ for the customer.

shipment record & sales invoice

Which of the following is not a relevant assertion for Accounts Receivable? a.) Existence b.) Occurrence c.) Completeness d.) Valuation

B

A variation of a positive confirmation that does not contain the balance, customers are asked to fill it in themselves.

Blank Form

Procedures include tracing shipping documents before and after year-end to the sales journal to ensure the sale was recorded in the proper period. a.) Occurrence test b.) Dual-Purpose test c.) Sales Cutoff Test

C

Auditors will often perform ___________ testing on credit checks.

Exception

Revenue Recognition

To be recognized, revenues must be 1.) realized or realizable and 2.) earned

SEC criteria for revenue recogntion

- Persuasive evidence of an arrangement exists - delivery has occurred or services have been rendered - Seller's price to the buyer is fixed or determinable - Collectability is reasonably ensured

The basic activities in the revenue and collection cycle for a typical manufacturing company include:

1. receiving and processing customer orders 2. delivering goods and services to customers 3. billing customers and accounting for accounts receivable 4.collecting and depositing cash received from customers.

All other things being equal, regarding revenues, auditors normally assess inherent risk for the existence assertion to be higher than for the completeness assertion. True or False. a.) True b.) False

A

Asks the customer to respond whether the balance is correct or incorrect. a.) positive confirmation b.) negative confirmation

A

Contains orders for products that are out of stock currently. a.) Back Order Master File b.) Price List Master File c.) Customer Master File d.) Pending Order Master File

A

In terms of the dual-direction tests of control: Looking at did all recorded sales actually occur? Vouch sample of invoices to shipping documents a.) Occurrence b.) Completeness

A

Often included with the shipment, describes the goods being shipped, and the quantity of goods shipped. a.) packing slip b.) sales invoice c.) bill of lading d.) three-way match

A

The __________ assertion is extremely important in the audit of sales. a.) Occurrence b.) existence c.) completeness d.) accuracy

A

The following statement relates to which relevant assertion for Accounts Receivable Accounts receivable are overstated and do not represent amounts owed from actual sales. a.) Existence b.) Completeness c.) Cutoff d.) Valuation

A

The following statement relates to which relevant assertion for Revenue: Management may overstate sales by adding fictitious transactions or by inflating actual sales. Management may also fail to recognize the possibility of customer returns. a.) Occurrence b.) Completeness c.) Cutoff d.) Existence

A

This auditor's Test of Internal Control for Accounts Receivable relates to which assertion. When payments are received, vouch checks listed on sample deposit slips to the customer credits listed on the day's posting to customer accounts receivable. a.) Existence b.) Completeness c.) Valuation d.) Occurrence

A

This auditor's Test of Internal Control for revenue relates to which assertion. Vouch sales in the Sales Detail Master File to invoices, supporting shipping docs, and customer purchase orders for customer name, product description, terms, dates, and quantities. a.) Occurrence b.) Completeness c.) Existence d.) Cutoff

A

This internal control activity for Accounts Receivable relates to which assertion. Check the sales order and shipping document to make sure sales were earned and a customer owes a balance. a.) Existence b.) Completeness c.) Valuation d.) Occurrence

A

This internal control activity for revenue relates to which assertion. Invoices are supported by purchase orders, bill of lading and other shipping docs. exist for all invoices, and recorded sales in the Sales Revenue account are supported by invoices. a.) Occurrence b.) Completeness c.) Existence d.) Cutoff

A

This internal control activity for revenue relates to which assertion. Management analyzes sales returns regularly and estimates an allowance for returns. a.) Occurrence b.) Completeness c.) Existence d.) Cutoff

A

True or False: The auditor always performs substantive procedures in the revenue cycle (analytical procedures and tests of details). a.) True b.) False

A

Used in connection with assessing the allowance for doubtful accounts. a.) AR aging b.) AR listing c.) Customer listing d.) Customer statemetns

A

When vouching invoices and sales journal entries to price lists, the auditor should use the price list that: a.) was in effect at the time of the customer's order b.) is currently in use c.) that was most frequently marked as official d.) that is to be used in the next set of billings

A

Three-Way Match

A primary control in the revenue cycle, that ensures revenue is only recorded when a complete set of matched sales documents is present. Provides assurance related to the existence of A/R and occurrence of revenue, as well as completeness and cutoff (revenue).

Dual-purpose procedure

An audit procedure that serves as a test of controls and a substantive test of the details of the transactions that occurred during the year.

Asks for a response only if something is wrong with the balance. a.) positive confirmation b.) negative confirmation

B

Auditors will review items in the pending orders file for evidence of the _____________ of recorded sales and accounts receivable. a.) occurrence b.) completeness c.) existence d.) authorization

B

Contains the actual amounts specifically identified with individual customers. a.) Aged Trial Balance b.) Accounts Receivable Listing c.) Customer Master File d.) Customer Statements

B

In terms of the dual-direction tests of control: Were all shipments invoiced? Trace sample of shipping documents to invoices a.) Occurrence b.) Completeness

B

The __________ assertion is extremely important in the audit of accounts receivable. a.) Occurrence b.) existence c.) completeness d.) accuracy

B

The bill sent to the customer that indicates the amount due and the payment terms. a.) packing slip b.) sales invoice c.) bill of lading d.) three-way match

B

The following statement relates to which relevant assertion for Accounts Receivable Not all accounts receivable have been recorded. a.) Existence b.) Completeness c.) Cutoff d.) Valuation

B

The following statement relates to which relevant assertion for Revenue: Not all sales are recorded a.) Occurrence b.) Completeness c.) Cutoff d.) Existence

B

The system may produce customer invoices automatically, but if the ___________________ is incorrect, the billing will be incorrect. a.) Back Order Master File b.) Price List Master File c.) Customer Master File d.) Pending Order Master File

B

This auditor's Test of Internal Control for Accounts Receivable relates to which assertion. Inspect documents for evidence that the Billing Dept. supervisor matches pre-numbered shipping documents with entries in the sales journal. a.) Existence b.) Completeness c.) Valuation d.) Occurrence

B

This auditor's Test of Internal Control for revenue relates to which assertion. Scan documents for numerical sequence, observe client-checking sequence, and trace shipping documents to recording in the Sales Detail master file. a.) Occurrence b.) Completeness c.) Existence d.) Cutoff

B

This internal control activity for Accounts Receivable relates to which assertion. Check invoices with the shipping document to the A/R ledger. a.) Existence b.) Completeness c.) Valuation d.) Occurrence

B

This internal control activity for revenue relates to which assertion. Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked. a.) Occurrence b.) Completeness c.) Existence d.) Cutoff

B

True or False: Customer statements should be sent if there is any activity in the account, except when the ending balance is zero. a.) True b.) False

B

True or False: Improper revenue recognition is lower in high-growth companies that analysts often value at a multiple of total revenues. a.) True b.) False

B

Form that the carrier signs to verify the goods are shipped. a.) packing slip b.) sales invoice c.) bill of lading d.) three-way match

C

The detailed sales entries which should correspond with the issuance of invoices to customers and should include the shipping references and dates, should be in the: a.) Price list master file b.) sales analysis report c.) Sales Detail (Journal) file d.) Sales Journal file

C

The following statement relates to which relevant assertion for Revenue: Sales have been recorded in incorrect periods. a.) Occurrence b.) Completeness c.) Cutoff d.) Existence

C

This auditor's Test of Internal Control for Accounts Receivable relates to which assertion. Inspect documentation for evidence that subsequent cash receipts from the customer are reviewed. Inquire of the credit manager procedures regarding unpaid accounts. Inspect credit files for most recent review of customer creditworthiness. a.) Existence b.) Completeness c.) Valuation d.) Occurrence

C

This internal control activity for Accounts Receivable relates to which assertion. Authorize and record discounts when customers take them. Management evaluates the collect-ability of delinquent receivables on a timely basis. a.) Existence b.) Completeness c.) Valuation d.) Occurrence

C

This master file is often updated frequently to maintain up-to-date customer information so that credit checks are based on complete and up to date information. a.) Back Order Master File b.) Price List Master File c.) Customer Master File d.) Pending Order Master File

C

Contains all the detailed entries for cash deposits and credits to various accounts. a.) Accounts Receivable Listing b.) Customer Statements c.) Back Order master file d.) Cash Receipts listing

D

Lack of response to a negative confirmation is considered evidence that the account is: a.) improperly valued b.) overstated c.) timely d.) fairly stated

D

Sales transactions that were initiated but are not yet completed, and thus not yet recorded as sales, are kept in the ________. a.) Back Order Master File b.) Price List Master File c.) Customer Master File d.) Pending Order Master File

D

The following statement relates to which relevant assertion for Accounts Receivable Receivables are not included in financial statements at the appropriate amount. a.) Existence b.) Completeness c.) Cutoff d.) Valuation

D

This auditor's Test of Internal Control for revenue relates to which assertion. Trace shipping data on shipping documents with sales invoice date, and check FOB terms. a.) Occurrence b.) Completeness c.) Existence d.) Cutoff

D

This internal control activity for revenue relates to which assertion. The date of shipping document is compared to the invoice date. a.) Occurrence b.) Completeness c.) Existence d.) Cutoff

D

Which is not a relevant assertion for Revenue? a.) Occurrence b.) Completeness c.) Cutoff d.) Existence

D

What are the two primary methods of confirming accounts receivable?

Positive Confirmation and Negative Confirmation

How do substantive procedures differ from tests of control?

Substantive procedures are designed to obtain direct evidence about the dollar amounts in account balances, while tests of control are designed to obtain evidence about the company's performance of its own control activities.

Substantive Analytical Procedures

an analytical procedure in which the auditor develops an expectation of recorded amounts and compares with the actual balance.

Sending ___________ __________ of what has been billed, what has been paid, and ending balances on a monthly basis enables customers to spot discrepancies and notify the company.

customer statements

Substantive Test of Detail

substantive procedure where the auditor directly tests the transactions that make up the account balance of the account.