ch. 11 hw
To test the existence assertion for recorded receivables, the auditors would select a sample from the: Sales orders file. Customer purchase orders. Accounts receivable subsidiary ledger. Shipping documents (bills of lading) file.
Accounts receivable subsidiary ledger. The objective is to determine the population the auditors would sample from to test the existence assertion for recorded receivables. The direction of testing should be FROM the accounts receivable subsidiary ledger TO the available support, such as sales invoices, bills of lading, sales orders, and customers' orders. RECORDS TO SOURCE
The auditors should confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low: And accounts receivable are immaterial, or the use of confirmations would be ineffective. And accounts receivable are composed of large accounts. And the effectiveness of confirmations is absolutely determined. Or accounts receivable are from extremely reputable customers.
And accounts receivable are immaterial, or the use of confirmations would be ineffective. Receivables should be confirmed unless the combined assessment of inherent risk and controls risk is at the low level, receivables are immaterial, or the existence of circumstances in which the use of confirmations would be ineffective.
Which of the following would provide the most assurance concerning the valuation of accounts receivable? Multiple Choice Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. Compare receivable turnover ratios to industry statistics for reasonableness. Inquire about receivables pledged under loan agreements. Assess the allowance for uncollectible accounts for reasonableness.
Assess the allowance for uncollectible accounts for reasonableness. Answer (Assess the allowance for uncollectible accounts for reasonableness.) is correct because receivables are valued at net realizable value, and assessing the allowance for uncollectible accounts for reasonableness will help the auditor determine the proper amount. Answer (Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents.) is incorrect because the limited information in the accounts receivable ledger will not make possible tracing details to the shipping documents—also, the shipping documents may not even capture the total sales price that is included in the accounts receivable ledger. Answer (Compare receivable turnover ratios to industry statistics for reasonableness.) is incorrect because while comparing turnover ratios may provide some information on the collectibility of receivables, it is very imprecise. Answer (Inquire about receivables pledged under loan agreements.) is incorrect because it relates to presentation and disclosure more directly than valuation.
Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? Multiple Choice Existence or occurrence. Completeness. Rights and obligations. Presentation and disclosure.
Completeness Comparing shipping documents to related sales invoices addresses the completeness assertion relating to sales. More specifically, it addresses whether all items that have been shipped have been recorded as sales.
Under SEC rules, which of the following is not among the criteria that ordinarily exist for revenue to be recognized? Multiple Choice Collectibility is reasonably assured. Delivery has occurred or is scheduled to occur in the near future. Persuasive evidence of an arrangement exists. The seller's price to the buyer is fixed or determinable.
Delivery has occurred or is scheduled to occur in the near future. Answer (Delivery has occurred or is scheduled to occur in the near future.) is not among the SEC criteria because of the portion of the answer that states "scheduled to occur in the near future." Ordinarily delivery must have occurred. Answers (Collectibility is reasonably assured.), (Persuasive evidence of an arrangement exists.) and (The seller's price to the buyer is fixed or determinable.) all describe circumstances required to recognize revenue.
Which of the following would most likely be detected by an auditor's review of the client's sales cutoff? Multiple Choice Excessive goods returned for credit. Unrecorded sales discounts. Lapping of year-end accounts receivable. Inflated sales for the year.
Inflated sales for the year. Detecting overstated sales is a primary reason the auditors' review of a client's sales cutoff. For example, shipments made in the first part of January may be improperly included in the December sales total.
Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? Restrictions placed on sales by laws and regulations. Decline in sales due to economic declines. Decline in sales due to product obsolescence. Over-recorded sales due to a lack of control over the sales entry function.
Over-recorded sales due to a lack of control over the sales entry function relates to control risk not inherent risk. The other three replies all relate to inherent risk.
Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: Send positive confirmation requests. Send negative confirmation requests. Examine evidence of subsequent cash receipts. Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.
Send positive confirmation requests. The auditor would send positive confirmations rather than negative confirmations because the fact that the balances are delinquent may indicate that amounts are in dispute. Examining subsequent cash receipts, answer (Examine evidence of subsequent cash receipts.), is unlikely to be effective since many of the accounts will not have been collected. Inspection of internal records, answer (Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.), is likely to result in less credibility evidential matter than confirming the accounts.
To determine that all sales have been recorded, the auditors would select a sample of transactions from the: Multiple Choice Shipping documents file. Sales journal. Accounts receivable subsidiary ledger. Remittance advices.
Shipping documents file. The goal is to determine the population to be sampled from to determine that all sales have been recorded; therefore, the sample should be taken from a population of source documents, here the shipping documents file. None of the other three answers represent source documents that may be sampled from to determine that all sales have been recorded.
Which of the following is an example of misappropriation of assets relating to sales? Multiple Choice Accidentally recording cash that represents a liability as revenue. Holding the sales journal open to record next year's sales as having occurred in the current year. Intentionally recording cash received from a new debt agreement as revenue. Theft of cash register sales.
Theft of cash register sales. Theft of cash register sales is an example of misappropriation of assets. Answer (Accidentally recording cash that represents a liability as revenue.) is an example of an error while answers (Holding the sales journal open to record next year's sales as having occurred in the current year.) and (Intentionally recording cash received from a new debt agreement as revenue.) are examples of fraudulent financial reporting.
Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? Inaccurate billing due to a lack of controls. Lapping of accounts receivable. Misbilling a client due to a data input error. Recording sales when the customer is likely to return the goods.
Recording sales when the customer is likely to return the goods. A sale either shouldn't be recorded or a proper allowance for returns should be established when a customer is likely to return the goods. Thus, simply recording the sale is an example of fraudulent financial reporting when the customer is likely to return the goods. Answers (Inaccurate billing due to a lack of controls.) and (Misbilling a client due to a data input error.) are examples of errors, while answer (Lapping of accounts receivable.) is an example of misappropriation of assets.
Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. Write-offs must be approved by the accounts receivable department. Write-offs must be authorized by the shipping department. Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.
Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. Write-offs of receivables should be approved by a responsible officer after a review of the account by the credit department. Answer (Write-offs must be approved by the accounts receivable department.) is incorrect because accounts receivable, a recordkeeping function, should not authorize such entries. Answer (Write-offs must be authorized by the shipping department.) is incorrect because other procedures (e.g., a review of shipping documents) may be used to determine that the goods were received and because the shipping department would have no other information on whether the receivable is likely to be collectible. Answer (Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.) is incorrect because the account need not be overdue by several months as a "current" receivable may become worthless due to, for example, a bankruptcy.