Audit LO J-5

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the a. Accounts receivable listing. b. Sales journal. c. General ledger. d. Cash receipts listing.

a. Accounts receivable listing.

An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because: a. Few responses may occur because more effort is required of recipients. b. Accounts actually confirmed may not be representative of the population. c. Accounts unconfirmed may have already been written off as uncollectible. d. All accounts do not have an equal opportunity to be selected for confirmation.

a. Few responses may occur because more effort is required of recipients.

An auditor is required to confirm accounts receivable if the accounts receivable balances are a. Material to the financial statements. b. Smaller than expected. c. Older than the prior year. d. Subject to valuation estimates.

a. Material to the financial statements.

An auditor decides to use the blank form of accounts receivable confirmation rather than the positive form. The auditor should be aware that the blank form may be less efficient because: a. More nonresponses are likely to occur. b. Statistical sampling may not be used. c. Subsequent cash receipts need to be verified. d. A higher assessed level of detection risk is required.

a. More nonresponses are likely to occur.

The blank form of accounts receivable confirmations may be less efficient than the positive form because: a. More nonresponses to the requests are likely to occur. b. Recipients may sign the forms without proper investigation. c. Subsequent cash receipts need to be verified. d. Shipping documents need to be inspected.

a. More nonresponses to the requests are likely to occur.

After receiving responses to accounts receivable confirmations, the auditor determined that the evidence was not sufficient to form a conclusion regarding the accounts receivable balance. Which of the following actions should the auditor take next concerning the accounts receivable balance? a. Request additional confirmations and perform alternative procedures. b. Issue a qualified audit opinion on the client's financial statements. c. Ask the internal auditor to evaluate the valuation of accounts receivable. d. Withdraw from the engagement and issue a disclaimer of opinion.

a. Request additional confirmations and perform alternative procedures.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end? a. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end. b. Review cash collections subsequent to the interim date and the year-end. c. Resend confirmations for any significant customer balances remaining at year-end. d. Send confirmations for all new customer balances incurred from the interim date to year-end.

a. Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

Two assertions for which confirmation of accounts receivable balances provides primary evidence are: a. Rights and obligations and existence. b. Completeness and valuation. c. Existence and completeness. d. Valuation and rights and obligations.

a. Rights and obligations and existence.

Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable? a. Send confirmations to customers. b. Determine that all shipments before year-end are recorded as sales. c. Trace a sample of invoices to recording in the general ledger. d. Trace transactions from the subsidiary ledger to the general ledger.

a. Send confirmations to customers.

In order to obtain sufficient appropriate evidence after an auditor has tested controls and performed substantive tests of transactions what is the most important substantive test of details of balances procedure an auditor will perform with regard to the revenue and collection cycle? a. Substantive Tests of Transactions Testing for Occurrence b. Accounts Receivable Confirmations c. Cutoff Testing for Sales Transactions to ensure Sales are not Overstated d. Aging of Accounts Receivable Balances Testing for Valuation

b. Accounts Receivable Confirmations

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 a. Test the accuracy of recorded charge sales. b. Estimate credit losses. c. Evaluate internal control over credit sales. d. Verify the existence of the recorded receivables.

b. Estimate credit losses.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor would least likely: a. Examine shipping documents and sales invoices. b. Increase the assessed level of detection risk for the valuation assertion. c. Search for subsequent cash receipts. d. Send a second positive confirmation request.

b. Increase the assessed level of detection risk for the valuation assertion.

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: a. Individual overdue balances. b. Individual invoices. c. Customers with credit balances. d. Small account balances.

b. Individual invoices.

Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations? a. Prior years' audits indicate a pattern of overstatement of account balances. b. Recipients are likely to sign other types of positive confirmations without careful investigation. c. Accounts receivable are immaterial to the entity's financial statements. d. The auditor's combined assessed level of control risk and inherent risk is low.

b. Recipients are likely to sign other types of positive confirmations without careful investigation.

Generally accepted auditing procedures have not been followed in which of the following situations? a. The auditor receives very few responses to negative confirmations sent. The auditor does not perform any additional procedures related to the non-responses. b. The auditor receives several faxed and emailed confirmation responses indicating that the amount stated is correct. The auditor does not perform any additional procedures related to these electronic responses. c. The accounts receivable balance is immaterial, so the auditor decides not to send any receivables confirmations. d. An unusually large number of receivables confirmations are not returned, and the auditor decides to verify the related cash receipts rather than sending second requests.

b. The auditor receives several faxed and emailed confirmation responses indicating that the amount stated is correct. The auditor does not perform any additional procedures related to these electronic responses.

In auditing accounts receivable the negative form of confirmation request most likely would be used when: a. The auditor performs a dual purpose test that assesses control risk and obtains substantive evidence. b. The combined assessed level of inherent and control risk relative to accounts receivable is low. c. A small number of accounts receivable are involved but a relatively large number of errors are expected. d. Recipients are likely to return positive confirmation requests without verifying the accuracy of the information.

b. The combined assessed level of inherent and control risk relative to accounts receivable is low.

An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should: a. Select at random a different account for confirmation that is approximately the same size. b. Verify the account balance by inspecting the client's bank statements and cash receipt records. c. Explain to the client that the request will most likely cause the auditor to disclaim an opinion. d. Request the client's management to document the matter in the management representation letter.

b. Verify the account balance by inspecting the client's bank statements and cash receipt records.

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements? a. The chief financial officer does not sign the management representation letter until the date of the auditor's report. b. Audit trails of computer-generated transactions exist only for a short time. c. Accounts receivable confirmation requests yield significantly fewer responses than expected. d. Management consults with other accountants about significant accounting matters.

c. Accounts receivable confirmation requests yield significantly fewer responses than expected.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would: a. Increase the assessed level of detection risk for the valuation and completeness assertions. b. Inspect the allowance account to verify whether the accounts were subsequently written off. c. Ask the client to contact the customers to request that the confirmations be returned. d. Increase the assessed level of inherent risk for the revenue cycle.

c. Ask the client to contact the customers to request that the confirmations be returned.

The negative request form of accounts receivable confirmation is useful particularly when the a. Assessed Level of Risk of Material Misstatement Relating to Receivables is: High Number of Small Balances is: Few Proper Consideration by the Recipient is: Likely b. Assessed Level of Risk of Material Misstatement Relating to Receivables is: High Number of Small Balances is: Many Proper Consideration by the Recipient is: Likely c. Assessed Level of Risk of Material Misstatement Relating to Receivables is: Low Number of Small Balances is: Many Proper Consideration by the Recipient is: Likely d. Assessed Level of Risk of Material Misstatement Relating to Receivables is: Low Number of Small Balances is: Few Proper Consideration by the Recipient is: Unlikely

c. Assessed Level of Risk of Material Misstatement Relating to Receivables is: Low Number of Small Balances is: Many Proper Consideration by the Recipient is: Likely

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations: a. Copies of the customers' purchase orders that support the account balances. b. Lists of the customers' recent payments that the client has already recorded. c. Client-prepared statements of account that show the details of the account balances. d. Copies of the client's shipping documents that support the account balances.

c. Client-prepared statements of account that show the details of the account balances.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests? a. Increase the assessed level of detection risk for the existence assertion. b. Review the cash receipts journal for the month prior to the year-end. c. Inspect the shipping records documenting the merchandise sold to the debtors. d. Intensify the study of the internal control structure concerning the revenue cycle.

c. Inspect the shipping records documenting the merchandise sold to the debtors.

During a recent audit of the revenue cycle, a CPA found the client had $1 million in accounts receivable recorded for fictitious customers. Which of the following tests most likely facilitated identification of the fraud? a. Reviewing the support for open sales orders not yet shipped at December 31. b. Reviewing the segregation of duties for staff who had responsibility for sales, shipping, and invoicing. c. Sending positive confirmations to all of the client's customers with balances on December 31. d. Examining the reconciliation between the subsidiary ledger and the general ledger control account.

c. Sending positive confirmations to all of the client's customers with balances on December 31.

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should the auditor take? a. Not accept the confirmation and treat it as an exception. b. Not accept the confirmation and select another customer's balance to confirm. c. Accept the confirmation and file it in the working papers. d. Accept the confirmation but verify the source and content through a telephone call to the respondent.

d. Accept the confirmation but verify the source and content through a telephone call to the respondent.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of: a. Existence. b. Completeness. c. Rights and obligations. d. Valuation and allocation.

d. Valuation and allocation.