Ch. 11

For effective internal control, the billing function should be performed by the

Accounting department.

For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000 respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions drawn?

Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.

Which of the following fraudulent activities could most likely be perpetrated due to the lack of effective internal controls in the revenue cycle?

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

An auditor would be most likely to limit substantive audit tests of sales transactions when control risk is assessed as low for the existence or occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting

Cash receipts and accounts receivable.

A cutoff test designed to detect credit sales made before the end of the fiscal year that have been recorded in the subsequent year provides assurance about which of the following management assertions?

Classification.

An auditor wants to determine that all sales adjustments are recorded. This relates to which of the following transaction-class assertions?

Completeness

Which of the following internal control procedures would most likely assure that all billed sales are correctly posted to the accounts receivable ledger?

Daily sales summaries are compared to daily postings to the accounts receivable ledger.

Which of the following circumstances would most likely cause an auditor to suspect that material misstatements exist in a client's financial statements?

Differences between reconciliations of control accounts and subsidiary records are not investigated.

Walk-throughs provide evidence that helps auditors to

Evaluate design effectiveness of controls.

If a customer pays its receivable in full but a client fails to record cash received from the customer, which of the following account balance assertions related to accounts receivable is misstated?

Existence.

When sending positive confirmations, which of the following would not be an appropriate way to address nonresponse by a customer?

If the customer's account balance is individually immaterial, conclude that no further work or analysis is necessary.

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?

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

Immediately upon receipt of cash, a responsible employee should

Prepare a remittance listing.

When performing an audit, a CPA notes that bad-debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?

Require credit checks on all new customers.

An auditor is studying a ratio of accounts receivable growth rate to sales growth rate. Which of the following indicates a potential risk of collection problem in accounts receivable?

Sales grew by 5% and receivables grew by 17% from year one to year two.

Which of the following internal control procedures would most likely deter lapping of collections from customers?

Segregation of duties between receiving cash and posting the accounts receivable ledger.

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor in the conduct of an audit?

Selling of goods for cash

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the

Shipping document file.

Assume that an auditor is auditing a public company client that manufactures computer hardware and markets significant maintenance and consulting services. The auditor should be concerned about which of the following?

Significant revenue issues associated with bundling products and services.

Which of the following situations increases the risk of fraud due to "lapping?"

The accounts receivable clerk also has responsibilities for receiving cash.

Which of the following could indicate source document fraud?

The same invoice number appears on different invoices.

Which of the following control activities would most likely assure that no fictitious billings have been posted to the sales journal?

The software application compares each sales invoice with the supporting shipping documents and notes any discrepancies.

Which of the following is a good example of an IT application control over the occurrence of revenue transactions?

The software application compares information on a sales invoice with information from the bill of lading to ensure that sales invoices are only prepared for actual shipments. Any exceptions are not processed and are set aside for manual follow-up.

Which of the following control activities would be a reasonable control over the accuracy of recorded sales?

The software application matches sales invoice quantities with the underlying packing slip and prices with the sales order.

A small manufacturing company makes only credit sales. If cash receipts from sales are misappropriated, which of the following acts would most likely conceal this fraud?

Understating the cash receipts journal.

To reduce the risks associated with accepting fax responses to requests for confirmations of accounts receivable, an auditor most likely would

Verify the sources and contents of the faxes in telephone calls to the senders.

An audit client that manufactures and sells goods to a network of authorized dealers may create the equivalent of a consignment sale if the client:

allows an unconditional right of return at any time until the goods are sold by the dealer.

Sound control activities dictate that defective merchandise returned by customers should be presented initially to:

the receiving department.