Audit and Assurance Chapter 10
The accounting standard regarding revenue requires an entity to follow a five-step approach. The first step it to ______. Multiple choice question. a. identify contractual agreement(s) with a customer b. identity the performance obligations an entity will offer to customers in providing goods and services c. determine transaction prices for goods and services offered to customers
a
To test for proper authorization of early payment discounts, the auditor can ______. Multiple choice question. a. examine a sample of cash receipts transactions to determine if the entity's cash discount policies are being followed b. analyze typical cash receipts for dips in trends c. test reconciliations of the daily cash receipts with the postings to the accounts receivable subsidiary ledger
a
A credit approval form ______. Multiple select question. a. documents a customer's creditworthiness b. is an example of a source document c. establishes customer credit limits
a and b
Possible programmed controls to ensure accuracy of the revenue process include ______. Multiple select question. a. only authorized changes are made to the master file b. the authorized price list is updated promptly c. shipping documents are matched to sales invoices
a and b
Sending confirmation requests at the end of the accounting period ______. Multiple select question. a. reduces the chance of timing differences b. maximizes response rate c. is required for auditor reliance
a and b
The open-order report should be reviewed daily or weekly, and old orders should be investigated to determine ______. Multiple select question. a. if any goods have been shipped but not billed b. why orders have not been filled c. the value of items in inventory d. inventory turnover time
a and b
Which of the following statements are correct? Multiple select question. a. Many accounting systems integrate purchasing and human resources with revenue. b. The revenue process is similar for all types of organizations. c. In most systems the revenue process does not interact with the inventory management process.
a and b
Important controls regarding the processing of credit memoranda are ______. Multiple select question. a. a credit for returned goods should be supported by a receiving document indicating that the goods have been returned b. remittance advices should be reconciled to the cash receipts journal c. each credit memorandum should be approved by someone other than the individual who initiated it d. the entity should use a lockbox system to ensure that cash is deposited on a timely basis
a and c
The auditor must maintain control over the accounts receivable confirmations to minimize the possibility of ______. Multiple select question. a. alteration of the confirmation by the entity b. lack of customer response to the confirmation c. entity interception of the
a and c
The auditor must maintain control over the accounts receivable confirmations to minimize the possibility of ______. Multiple select question. a. entity interception of the confirmation b. lack of customer response to the confirmation c. alteration of the confirmation by the entity
a and c
Understanding the control environment ______. Multiple select question. a. is important because these factors have a pervasive effect on all business processes b. is generally completed by looking only at individual business processes c. includes consideration of integrity and ethical values
a and c
Which of the following statements are correct? Multiple select question. a. Sending confirmations at the end of the accounting period reduces the chance of timing differences. b. Accounts receivable should only be confirmed at year end except in rare circumstances. c. Confirmation requests should be made soon after the end of the accounting period to maximize the response rate.
a and c
A customer sales order typically contains ______. Multiple select question. a. quantity of items ordered b. credit approval c. availability of inventory d. type of products ordered
a and d
The major control for preventing cash from being recorded in the wrong account is ______. Multiple choice question. proper cutoff a chart of account proper authorizations segregation or duties
a chart of account
The major control for preventing cash from being recorded in the wrong account is ______. Multiple choice question. segregation or duties a chart of account proper authorizations proper cutoff
a chart of account
The choice of which type of test of controls is appropriate for a particular assertion will be a function of the ______. Multiple select question. a. volume of transactions or data b. nature of the available evidence, including audit evidence in electronic form c. nature and complexity of the systems by which the entity d. processes and controls information e. experience and training that the auditor has f. nature and timing of substantive audit procedures
a, b and c
When the auditor does not receive a response to the positive confirmations, possible procedures include ______. Multiple select question. a. examining specific subsequent cash receipts b. examining shipping documentation c. sending second and third requests d. verifying sales by examining the sales journal e. having the client contact the customer to ask for a response
a, b and c
For control of the confirmation process, the auditor should ______. Multiple select question. a. mail the confirmations outside the entity's facilities b. mail the confirmations in envelopes with the public accounting firm as the return address c. call the customer to be sure that they will respond to the confirmation d. send return envelope addressed to the public accounting firm e. ask the client to reach out to customers who have not responded to the confirmations
a, b and d
Industry related factors that affect the potential for misstatements in the revenue process include ______. Multiple select question. a. profitability and health of the industry b. industry's rate of technological change c. the number of firms in the industry d. level of competition e. the industry's history
a, b and d
Audit procedures used to test controls in the revenue process include ______. Multiple select question. a. inspection of documents and records b. walkthroughs c. comparison of ratios to prior years d. confirmation of receivables balances e. reperformance by the auditor of the control activities
a, b and e
The accounts commonly affected by sales returns and allowance transactions are ______. Multiple select question. a. Trade accounts receivable b. Sales allowances c. Allowance for uncollectible accounts d. Cash discounts e. Sales returns f. Sales
a, b and e
Customer sales order may be prepared and ______. Multiple select question. a. forwarded from a salesperson b. mailed c. faxed d. received by telephone e. received over the internet f. forwarded from the warehouse
a, b, c, d, and e
Inherent risk may increase due to issues regarding recognition of revenue on ______. Multiple select question. a. installment sales b. lease contracts c. sale of goods for cash d. long-term construction contracts e. sale of goods on credit f. long-term service contracts
a, b, d and f
Shipping documents ______. Multiple select question. a. are used to initiate the billing process b. are prepared when goods are received from vendors c. are sent to customers d. can serve as a bill of lading
a, c and d
Industry related factors that affect the potential for misstatements in the revenue process include ______. Multiple select question. a. industry's rate of technological change b. the number of firms in the industry c. profitability and health of the industry d. the industry's history e. level of competition
a, c and e
he choice of which type of test of controls is appropriate for a particular assertion will be a function of the ______. Multiple select question. a. nature and complexity of the systems by which the entity processes and controls information b. nature and timing of substantive audit procedures c. nature of the available evidence, including audit evidence in electronic form d. experience and training that the auditor has e. volume of transactions or data
a, c and e
The accounts commonly affected by sales transactions are ______. Multiple select question. a. Allowance for uncollectible accounts b. Sales returns and allowances c. Bad-debt expense d. Sales e. Trade accounts receivable
a, c, d and e
o test the auditor's concern with accounts receivables completeness, the aged trial balance should be reconciled to the ______. Multiple choice question. cash general ledger account accounts receivables general ledger account cash receipts journal accounts receivables
accounts receivables general ledger account
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. Multiple choice question. tolerable planned expected achieved
achieved
f an auditor does not receive responses to positive confirmations ______. Multiple choice question. additional requests can be sent the account(s) should be considered misstatement(s) the client should be asked to confirm the account(s)
additional requests can be sent
The auditor assesses the adequacy of the allowance account by first examining the ______ for amounts that have been outstanding for a long time. Multiple choice question. listing of sales invoices general ledger aged trial balance accounts receivable subsidiary ledger
aged trial balance
Much of the substantive audit work in accounts receivables is done using the ______. Multiple choice question. accounts receivable subsidiary ledger aged trial balance of accounts receivable remittance advice report open-order sales invoices report
aged trial balance of accounts receivable
To monitor the collection of receivables and ensure that the details of the accounts receivable subsidiary ledger agree with the general ledger control account, managers use the ______. Multiple choice question. remittance advice report open-order sales invoices report aged trial balance of accounts receivable cash receipts journal
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 and tolerable
There are two categories of substantive procedures: (1) substantive __________________ procedures and (2) tests of __________ of classes of transactions, account balances and disclosures.
analytical and details
To examine the fairness of revenue related accounts ____________________ procedures are useful audit tests because they provide sufficient evidence at low cost.
analytical procedures
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. Multiple choice question. substantive tests and possible misstatements assertions and the possible misstatements causes and consequences
assertions and the possible misstatements
It is the responsibility of ______ to ensure that all necessary financial statements disclosures are made. Multiple choice question. auditors management both the auditors and management
auditors
It is the responsibility of ______ to ensure that all necessary financial statements disclosures are made. Multiple choice question. management both the auditors and management auditors
auditors
Shipping goods to customers with bad credit and making sales at incorrect prices or terms are both possible misstatements due to improper ___________.
authorization
Substantive analytical procedures are ______. Multiple choice question. a. only necessary if internal controls are not functioning properly b. used to examine plausible relationships among related accounts c. concerned with the presentation and disclosure related to accounts receivable and related accounts
b
Auditing standards allow the auditor to omit confirming accounts receivable when ______. Multiple select question. a. the accounts receivable balance is at the same level as prior years b. assessed level of risk for the assertion is low, and the planned c. substantive procedures address that risk d. the accounts receivable balance is immaterial e. external confirmations would be ineffective
b , c, d and e
The auditor must maintain control over the accounts receivable confirmations to minimize the possibility of ______. Multiple select question. a. lack of customer response to the confirmation b. entity interception of the confirmation c. alteration of the confirmation by the entity
b and c
When payments are sent directly to an entity ______. Multiple select question. a. checks should be deposited no less than weekly b. all checks should be restrictively endorsed c. a control listing should be prepared
b and c
Which of the following statements are correct? Multiple select question. a. Accounts receivable should only be confirmed at year end except in rare circumstances. b. Confirmation requests should be made soon after the end of the accounting period to maximize the response rate. c. Sending confirmations at the end of the accounting period reduces the chance of timing differences.
b and c
Which of the following statements are correct? Multiple select question. a. Receivables with related-party transactions cannot be confirmed and must be treated as exceptions. b. The auditor's concern with satisfying other types of receivables is similar to that of trade accounts receivables. c. Typically other types of receivables are evaluated for collectibility. d. All notes receivables must be examined to determine if they were at arm's length.
b and c
According to FASB, in order to recognize revenue an entity must ______. Multiple select question. a. create a contract with a customer to provide a good or service b. satisfy a performance obligation c. receive payment for the transferred good or service d. transfer a good or service to a customer
b and d
Possible misstatements due to improper authorization of revenue transactions include ______. Multiple select question. a. shipping goods that are not billed b. making sales at unauthorized prices or terms c. billing for goods that are not shipped d. performing services for customers who are bad credit risks
b and d
The accounts commonly affected by cash receipts transactions are ______. Multiple select question. a. Sales returns & allowances b. Cash discounts c. Trade accounts receivable d. Bad debt expense e. Sales f. Cash
b, c and f
The accounts commonly affected by sales transactions are ______. Multiple select question. a. Sales returns and allowances b. Allowance for uncollectible accounts c. Trade accounts receivable d. Bad-debt expense e. Sales
b, c, d and e
The major issues related to the classification for accounts receivable are ______. Multiple select question. a. ensuring the correct value for the allowance for uncollectible accounts b. ensuring that different types of receivables are properly classified. c. ensuring that all cash receipts have been properly recorded in the accounts receivable subsidiary ledger d. identifying and reclassifying any material credits contained in accounts receivable e. segregating short-term and long-term receivables
b, d and e
Failure to perform the credit authorization function properly may result in ______. Multiple choice question. too few customers sales returns bad-debt losses increased sales
bad-debt losses
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
The accounting standard regarding revenue requires an entity to follow a five-step approach. The first step it to ______. Multiple choice question. a.identity the performance obligations an entity will offer to customers in providing goods and services b.determine transaction prices for goods and services offered to customers c.identify contractual agreement(s) with a customer
c
To provide evidence on the valuation of the allowance, the auditor looks at the aged trial balance for old items and ______. Multiple choice question. a. discusses collection policies with entities that factor accounts receivable b. examines payment patterns of customers by looking at cash receipts during the year c. considers historical collection to provide evidence of uncolletability for current items d. nothing else
c
A customer sales order typically contains ______. Multiple select question. a. credit approval b. availability of inventory c. type of products ordered d. quantity of items ordered
c and d
Credit memoranda that are used to process sales returns and allowance transactions ______. Multiple select question. a. should always be approved to the person who sold the goods b. may cause the general ledger sales account balance to be incorrect c. may conceal a misappropriation of cash d. can cover up unauthorized shipments of goods
c and d
Reconciling the daily remittance report to control listings of remittance advices provide reasonable assurance that ______. Multiple choice question. customers have paid for all outstanding purchases cash receipts were deposited on a timely basis all sales were made at the correct selling price cash receipts were recorded at the correct amounts
cash receipts were recorded at the correct amounts
One control activity that can provide assurance for the _______________ assertion that customer payments are recorded to the correct account is to reconcile the daily remittance report with postings to the cash receipts journal and accounts receivable subsidiary ledger.
classification
One of the major issues related to _____________ of accounts receivables is segregating short-term and long-term receivables.
classification
The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the ______ assertion. Multiple choice question. accuracy completeness cutoff classification
classification
The use of a chart of accounts and proper codes for recording revenue transactions should provide adequate assurance for the ________________ assertion.
classification
When it comes to cash receipt transactions, auditors seldom have major concerns about ______. Multiple choice question. completeness incorrect recording of receipts proper authorizations classification
classification
Having cash or checks stolen or lost before being recorded in the cash receipts records is a major misstatement related to the ___________________.
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
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
Control activities that ensure the ______ assertion include accounting for the numerical sequence of shipping documents and sales invoices and matching shipping documents with sales invoices. Multiple choice question. authorization occurrence accuracy completion
completion
Control activities that ensure the ______ assertion include accounting for the numerical sequence of shipping documents and sales invoices and matching shipping documents with sales invoices. Multiple choice question. completion occurrence authorization accuracy
completion
Control activities that ensure the ______ assertion include accounting for the numerical sequence of shipping documents and sales invoices and matching shipping documents with sales invoices. Multiple choice question. occurrence completion authorization accuracy
completion
If goods are shipped or services are performed and no revenue is recognized, the ______ assertion has not been met. Multiple choice question. accuracy authorization occurrence completion
completion
If goods are shipped or services are performed and no revenue is recognized, the ______ assertion has not been met. Multiple choice question. completion occurrence accuracy authorization
completion
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
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
Determining that the customer is able to pay for the goods or services is the role of the ______________.
credit approval
Determining that the customer is able to pay for the goods or services is the role of the __________________.
credit authorization
A key control in the billing function is that a(n) _______________ should not be issued unless the goods have been returned
credit memorandum
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 the __________ control
cutoff
If the entity does not have adequate controls to ensure that revenue transactions are recorded on a timely basis, sales may be recorded in the wrong accounting period. This relates to the ______ assertion. Multiple choice question. completeness cutoff occurrence accuracy
cutoff
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 and substantive
The auditor should document the achieved level of control risk for the revenue process using ______. Multiple choice question. qualitative terms only either quantitative amounts or qualitative terms both quantitative amounts or qualitative terms quantitative amounts only
either quantitative amounts or qualitative terms
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
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
The major audit procedures for testing the ___________ assertion for accounts receivables are confirmation of customers' accounts balances and examination of subsequent cash receipts.
existence
The major audit procedures for testing the _____________ assertion for accounts receivables are confirmation of customers' accounts balances and examination of subsequent cash receipts.
existence
True or false: Misstatements in previous audits are not good indicators that misstatements are likely to be present in the current audit.
false
A shipping document should be prepared anytime ______. Multiple choice question. a payment is made to the shipping company inventory is received goods are sent to a customer an order is packaged for ship
goods are sent to a customer
The billing function is responsible for handling ______. Multiple choice question. the general ledger the accounts receivable sub ledger goods returned for credit cash receipts process
goods returned for credit
When the results of testing controls do not support the planned level of control risk, detection risk will ______. Multiple choice question. not be affected have to be set higher have to be set lower
have to be set lower
f there is a dispute between the auditor and management over when revenue should be recognized, the auditor should assess the risk of material misstatement as ______. Multiple choice question. moderate low high
high
Many business risks are also ____________ risk.
inherent
The assessment of the potential effects of _____________ risk factors is one of the inputs for the assessment of the risk of material misstatement
inherent
The presence of misstatements in previous audits suggests that misstatements are ______ to be present during the current audit. Multiple choice question. likely unlikely
likely
Many companies use a(n) ______________ system in which customer payments are sent directly to the entity's bank.
lockbox
Auditors are concerned about the ___________ assertion for revenue transactions because clients are more likely to overstate sales than to understate them.
occurence
Auditors are concerned about the ______ assertion for revenue transactions because clients are more likely to overstate sales than to understate them. Multiple choice question. accuracy completeness occurrence authorization
occurrence
The possible misstatement that concerns the auditor when considering the ______ assertion is that cash receipts are recorded but not deposited in the entity's bank account. Multiple choice question. completeness accuracy authorization occurrence
occurrence
The possible misstatement that concerns the auditor when considering the ______ assertion is that cash receipts are recorded but not deposited in the entity's bank account. Multiple choice question. occurrence completeness authorization accuracy
occurrence
Because control environment factors have a pervasive effect on all business processes, understanding the control environment is generally completed ______. Multiple choice question. on a department by department basis by reviewing individual business processes by focusing on upper management on an overall entity basis
on an overall entity basis
For a negative confirmation, a response is required ______. Multiple choice question. only if the amount is correct whether the amount is correct or incorrect only if the amount is incorrect
only if the amount is incorrect
When items are out of stock or on backorder, the orders of the affected customers will appear on the ____________ report.
open order
f the results of tests of controls do not support the ______ level of control risk, additional substantive procedures must be conducted. Multiple choice question. achieved planned expected tolerable
planned
There are two types of confirmations: _______ and _________.
positive and negative
For entities that have specialized revenue or services that require separation, controls over the aggregation or disaggregation of transactions are paramount for proper ______. Multiple choice question. completeness presentation authorization accuracy
presentation
Many accounting systems integrate the revenue process with the human resources ____________ and __________ process.
purchasing and inventory
Information regarding which invoices are being paid by the customer are found on the ______. Multiple choice question. credit memorandum customer statement remittance advice cash receipts statement
remittance advice
This document is usually mailed with the customer's bill and returned with the customer's payment for goods or services. Multiple choice question. customer statement cash receipts statement credit memorandum remittance advice
remittance advice
The sale of goods and services to customers is the focus of the _____________ process.
revenue
Transactions recorded in the __________ and ______________ journals are posted to the accounts receivable subsidiary ledger.
sales and cash receipts
The document used to bill the customer is a ______. Multiple choice question. sales journal customer statement shipping document sales invoice
sales invoice
The source document that typically signals the recognition of revenue is the ___________.
sales invoice
Columns for debiting accounts receivable and crediting the various sales accounts are found in the ______. Multiple choice question. open-order report sales journal accounts receivable subsidiary ledger cash receipts journal
sales journal
The necessary information for each sales transaction is recorded in the ____________.
sales journal
One of the most important controls in any accounting system is proper ___________ of ___________.
segregation of duties
The key control activity to prevent misstatements with respect to the occurrence of cash receipts is ______. Multiple choice question. daily cash receipts reconciled with posting to accounts receivable sub ledger checks restrictively endorsed when received customer statements prepared on a regular basis segregation of duties
segregation of duties
Any entries into customers' accounts should be made from authorized ________________ such as sales invoices, remittance advices, and credit memoranda
source documents
Management's estimate for the allowance for uncollectible accounts and sales returns can be difficult to audit because of the ______ that may be involved in determining proper value. Multiple choice question. subjectivity complexity variance
subjectivity
An account and the details of transactions with each customer are found in the accounts receivable ______________.
subsidiary ledger
When using a reliance strategy, the auditor conducts ______ to ensure that the controls in the revenue process operate effectively. Multiple choice question. documentation analytical procedures tests of controls substantive testing
tests of controls
When using a reliance strategy, the auditor conducts ______ to ensure that the controls in the revenue process operate effectively. Multiple choice question. tests of controls analytical procedures substantive testing documentation
tests of controls
If there is not a proper cutoff of revenue transactions, both the revenue and accounts receivable accounts will be misstated for ______. Multiple choice question. the current and following years the current year only the following year only
the current and following years
True or false: Understanding management's attitudes towards risk relevant to the revenue process is an important component of assessing the control risk for the revenue process
true
Ensuring all billings, adjustments and cash collections are properly recorded in customers' accounts is the responsibility of the _____________________ function.
Accounts receivable
True or false: Substantive analytical procedures are inadequate audit tests for examining the fairness of revenue related accounts because such tests fail to provide sufficient evidence, even though they are low cost.
False
rue or false: Auditors normally test the cutoff assertion by conducting tests of controls only.
False
The potential for theft and fraud in the revenue process makes this particularly important. Multiple choice question. Segregation of duties Duties of managers Segregation of entries
Segregation of duties
True or false: An industry's rate of technological changes can affect the potential for misstatements in this revenue process.
True
True or false: Related-party transactions is a common disclosure for revenue-related accounts.
True
True or false: Related-party transactions is a common disclosure for revenue-related accounts. True false question.
True
True or false: Some accounts are difficult to audit because of the lack of reliable evidence.
True
Risk factors to an entity's internal controls over the revenue process include ______. Multiple select question. a. rapid growth b. competition c. new technology d. new HR management
a, b and c
The creditworthiness of a customer should be documented on a(n) _______________________ form.
credit approval
A common control to ensure proper presentation is the use of a(n) _____________ checklist .
disclosure
