Audit Chapter 11

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? Multiple Choice Accounts receivable divided by Cost of goods sold. Aging of accounts receivable. Cash Sales divided by Accounts receivable. Year 2 accounts receivable compared to year one accounts receivable.

Aging of accounts receivable.

Cutoff tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion of Multiple Choice Presentation. Completeness. Rights. Existence.

Completeness.

Which of the following procedures would probably be most effective in identifying duplicate billing of customers during the year? Analytical procedures. Confirmation of accounts at year end. Data analytics applied to sales transactions. Review of contracts.

Confirmation of accounts at year end.

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? Multiple Choice Examine sales invoices. Trace the balances from accounts receivable ledger to the billing statements. Examine correspondence. Examine any subsequent cash receipts.

Trace the balances from accounts receivable ledger to the billing statements.

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by: Multiple Choice Tracing sales invoices to shipping documents to tests the completeness of reported sales. Tracing shipping documents to sales invoices to test the occurrence of reported sales. Tracing sales invoices to shipping documents to test the occurrence of reported sales. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

Tracing sales invoices to shipping documents to test the occurrence of reported sales.

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end? Multiple Choice Cash receipts. Payroll. Purchases. Sales.

sales

Which of the following would indicate the need to use positive accounts receivable confirmation requests? Multiple Choice A large population consisting of small balances. Good internal control over accounts receivable. Most accounts are with large reputable companies. A large number of accounts receivable are in dispute.

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 Cash receipts journal to the sales journal. Sales journal to the cash receipts journal. Source documents to the accounting records. Accounting records to the source documents.

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? Multiple Choice Accounts receivable are understated at December 31, 20X0. Accounts receivable are overstated at December 31, 20X0. Operating expenses are overstated for the 12 months ended December 31, 20X0. Sales returns and allowance are overstated at December 31, 20X0.

Accounts receivable are overstated at December 31, 20X0.

To test the existence assertion for recorded receivables, an auditor would select a sample from the: Multiple Choice Sales orders file. Customer purchase orders. Accounts receivable subsidiary ledger. Shipping documents (bills of lading) file.

Accounts receivable subsidiary ledger

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle? Fictitious transactions may be recorded that cause an understatement of revenues and an overstatement of receivables. Claims received from customers for goods returned (and unpaid for) may be intentionally recorded in other customers' accounts permitting a misappropriation of cash. Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash. The failure to prepare shipping documents may lead to an understatement of inventory balances.

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control? Multiple Choice Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger. Posting to the general ledger and approval of additions and terminations relating to the payroll. Custody of unmailed signed checks and maintenance of expense subsidiary ledger. Collection of receipts on account and maintaining accounts receivable records.

Collection of receipts on account and maintaining accounts receivable records.

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice? Multiple Choice Footing the sales journal. Confirming accounts receivable. Tracing the total sales in the sales journal to the general ledger. Observation of the physical inventory count at year-end.

Confirming accounts receivable.

The confirmation of accounts receivable is most closely associated with: Multiple Choice Business risk. Detection risk. Inherent risk. Relative risk.

Detection risk.

Which of the following is not a primary objective of the auditors in the examination of accounts receivable? Multiple Choice Determine the approximate realizable value. Consider the adequacy of internal control. Establish the existence of receivables. Determine the expected day of collection of each of the receivables.

Determine the expected day of collection of each of the receivables.

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to: Multiple Choice Consider internal control over credit sales. Test the accuracy of recorded charge sales. Estimate credit losses. Verify the validity of the recorded receivables.

Estimate credit losses.

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts? Multiple Choice Examine cash receipts received after year-end. Confirm receivables. Examine dates of purchase orders. Foot the receivables lead schedule.

Examine cash receipts received after year-end.

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? Multiple Choice Fictitious revenues. Timing differences. Improper asset valuations. Improper disclosures.

Fictitious revenues.

Complex sales contracts are most likely to result in higher risks regarding all of the following except: Identifying the contracting parties. Determining performance obligations. Determining when performance obligations are met. Allocating the transaction price to performance obligations.

Identifying the contracting parties.

A computer software firm allows its sales team to make material modifications to standard software contracts. What should be the auditors' primary concern in this situation? Increased risk of misstatement of commissions expense. Increased risk of misstatement of revenue. Increased risk of uncollectible accounts. Increased risk of loss of software copyright.

Increased risk of misstatement of revenue.

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if: Multiple Choice Subsequent collections are to be reviewed. Internal control over receivables is good. Negative confirmation requests are to be used. There is a simultaneous examination of cash and accounts receivable.

Internal control over receivables is good.

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? Multiple Choice Sales. Cash. Inventory. Accounts receivable.

Inventory

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: Multiple Choice No reply to a positive confirmation request is received. No reply to a negative confirmation request is received. Collectibility of the receivables is in doubt. Pledging of the receivables is probable.

No reply to a positive confirmation request is received.

Tracing recorded sales transactions to the bills of lading provides evidence about the: Completeness of sales transactions. Collectibility of sales transactions. Occurrence of sales transactions. Billing of all sales transactions.

Occurrence of sales transactions.

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests? Multiple Choice Examine bills of lading. Physically examine items sold. Examine correspondence. Examine subsequent cash receipts.

Physically examine items sold.

Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts? Investigate confirmation exceptions for indication of amounts in dispute. Review accounts which have been written off as uncollectible prior to year-end. Investigate credit ratings for large accounts receivable. Discuss with the credit manager the current status of doubtful accounts.

Review accounts which have been written off as uncollectible prior to year-end.

For effective internal control, the billing function should not be performed by the: Multiple Choice Sales department. Accounting department. Finance department. Information Processing department.

Sales department

A CPA examines a sample of credit memoranda to ensure they were signed by an officer of the company. This is an example of a: Multiple Choice Test of a control. Substantive test. Cutoff test. Statistical test.

Test of a control.

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables? Multiple Choice The account balances as of year-end will generally be confirmed. The auditors will in general use blank rather than positive confirmation requests. The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year-end. Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

The account balances as of year-end will generally be confirmed.

Which of the following is consistent with effective internal control over sales transactions? Multiple Choice The accounting department prepares a shipping report authorizing the shipment of goods. The accounting department accounts for all receiving reports. The billing department accounts for all shipping documents. The accounts payable department annually approves the extension of credit to customers.

The billing department accounts for all shipping documents.

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor? Multiple Choice A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. Internal control activities over the recording of cash receipts have been improved since the end of the prior year. The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.

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: Multiple Choice The sales journal. The billing clerk's file of sales orders. Duplicate copies of sales invoices. The shipping clerk's file of duplicate copies of bills of lading.

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

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors: Multiple Choice Trace a sample of the bills of lading to sales invoices. Confirm a sample of accounts payable. Review the aging of accounts receivable. Trace a sample of recorded sales to shipping documents.

Trace a sample of the bills of lading to sales invoices.

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful? Multiple Choice A substantial number of accounts are in disputes. The combination of inherent risk and control risk is high. A low exception rate is expected. The auditors believe that recipients of the requests are unlikely to give them consideration.

A low exception rate is expected.

After the CPAs have selected particular accounts receivable for confirmation: Multiple Choice As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail. It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures. All requests for confirmation should be mailed personally by the auditors at a post office. All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

All requests for confirmation should be mailed personally by the auditors at a post office.

Tracing copies of sales invoices to shipping documents will provide evidence that all: Multiple Choice Shipments to customers were recorded as receivables. Billed sales were shipped. Debits to the subsidiary accounts receivable ledger are for sales shipped. Shipments to customers were billed.

Billed sales were shipped.

Which of the following manipulations would understate receivables on the financial statements? Multiple Choice Understatement of cash sales. Closing the sales journal prior to year-end. Closing the cash receipts journal prior to year-end. Underestimating the allowance for doubtful accounts.

Closing the sales journal prior to year-end.

Which of the following is not one of the criteria for revenue recognition? Collectibility is certain. Delivery has occurred or services have been rendered. Evidence of an arrangement exists and is persuasive. A fixed or determinable price to buyer exists.

Collectibility is certain.

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: Multiple Choice Collection of receivables. Purchase of merchandise inventory. Payment of accounts payable. Sale of long-term debt.

Collection of receivables.

Which of the following is not true about the confirmation of accounts receivable? Multiple Choice Confirmation requests should bear the auditors' return address. Confirmation requests should be signed by the auditors. Confirmation requests should be mailed directly by the auditors. Confirmation requests should include a return envelope addressed to the office of the auditors.

Confirmation requests should be signed by the auditors.

If a company failed to record goods returned by customers near year end, the auditors would most likely discover this issue by: Multiple Choice Reviewing records of sales returns. Confirming accounts receivable. Examining sales orders. Reviewing the accounts receivable subsidiary ledger.

Confirming accounts receivable.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? Multiple Choice Reviewing an aging of accounts receivable. Examination of cash receipts subsequent to the balance sheet date. Confirming current (0-30 day) year-end accounts receivable. Reviewing credit files for selected account.

Confirming current (0-30 day) year-end accounts receivable.

Which of the following revenue related transactions is not linked to the accounts indicated? Recognize revenues too early-accounts receivable and revenue. Understate allowance for doubtful accounts-bad debt expense, allowance for doubtful accounts. Don't write off uncollectible receivables-sales returns, sales discounts. Don't record discounts given to customers-cash, sales discounts, accounts receivable.

Don't write off uncollectible receivables-sales returns, sales discounts.

it is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be: Examining subsequent receipts of year-end accounts receivable. Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date. Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed. Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

Examining subsequent receipts of year-end accounts receivable.

Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the Multiple Choice Collectability of the balances confirmed. Ownership of the balances confirmed. Existence of the balances confirmed. Internal control over balances confirmed.

Existence of the balances confirmed.

Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to: Multiple Choice Increase the balance in the allowance for bad debts accounts. Review the going concern ramifications. Review the credit and collection policy. Expand tests of collectibility.

Expand tests of collectibility.

The individual looking for guidance on revenue recognition is most likely to appropriately review: Multiple Choice APB 99. FASB ASC 606. ASR 44. B1 Document.

FASB ASC 606.

Which of the following is not true about the auditors' verification of notes receivable? Multiple Choice The interest revenue on notes receivable is usually audited by independent computation. Inspecting the notes is sufficient evidence of existence of the notes. The auditors may evaluate the collectibility of notes by inspecting credit files. Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.

Inspecting the notes is sufficient evidence of existence of the notes.

Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except: Multiple Choice It understates liabilities. It overstates revenues. It overstates net income. It understates expenses.

It understates expenses.

When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is: Multiple Choice Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. High, and the individuals receiving the confirmation requests are likely to give them adequate consideration. High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration. Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

The confirmation process may be performed using a(n): Paper form Electronic form A. Yes Yes B. Yes No C. No Yes D. No No

Option A

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable? Fax responses. Oral responses obtained by the auditor through a telephone call. Written responses to negative confirmation requests. Written response to confirmations sent out without balances due.

Oral responses obtained by the auditor through a telephone call.

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that: Multiple Choice The cash receipts journal was closed before year-end. The cash receipts journal was held open after year-end. There are many unrecorded liabilities. The sales journal was held open after year-end.

The cash receipts journal was held open after year-end.

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable? Multiple Choice The confirmation requests are sent on the client's letterhead. The confirmation requests are mailed to customers by the internal auditors. The client's mailroom personnel closely monitor and inspect confirmation requests during mailing. The return address on the envelope used to send the confirmation request is that of the client.

The confirmation requests are sent on the client's letterhead.

Which of the following is the best argument against the use of negative accounts receivable confirmation requests? Multiple Choice The cost-per-response is excessively high. There is no way of knowing if the intended recipients received them. Recipients are likely to feel that in reality the confirmation is a subtle request for payment. The inference drawn from receiving no reply may not be correct.

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

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? The positive form for small balances, and the negative form for large balances. The positive form used for large balances and the negative form for the small balances. The positive form used for trade receivables and the negative form for other receivables. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

The positive form used for large balances and the negative form for the small balances.

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle? Multiple Choice Merchandise received is not promptly reconciled to the outstanding purchase order file. Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value. The write-off of receivables by personnel who receive cash permits the misappropriation of cash. Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

The write-off of receivables by personnel who receive cash permits the misappropriation of cash.

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that: Obsolete inventory has not yet been reduced to fair market value. There was an improper cutoff of sales at the end of the year. An unusually large receivable was written off near the end of the year. The aging of accounts receivable was improperly performed in both years.

There was an improper cutoff of sales at the end of the year.