Chapter 11 Accounts, Receivable, Notes Receivable, and Revenue

The department approving a sales transaction should be the shipping department.

False

When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.

True

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?

Fictitious revenues

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.

True

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.

True

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

True

Confirmation of accounts receivable provides some assurance that no lapping or other manipulation affecting accounts receivable is being carried on.

True

Material accounts receivable from related parties should be stated separately from other receivables.

True

Tracing copies of sales invoices to shipping documents will provide evidence that all

Billed sales were shipped.

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? A) A substantial number of accounts are in disputes. B) The combination of inherent risk and control risk is high. C) Client records include a large number of relatively small balances. D) The auditors believe that recipients of the requests are unlikely to give them consideration.

Client records include a large number of relatively small balances.

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

Collection of receivables

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?

Confirming accounts receivable.

The confirmation of accounts receivable is most closely associated with:

Detection risk.

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:

Estimate credit losses.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:

No reply to a positive confirmation request is received.

Tracing recorded sales transactions in the sales journal to the shipping documents (bills of lading) provides evidence about the:

Occurrence of sales transactions.

Tracing recorded sales transactions to the bills of lading provides evidence about the:

Occurrence of sales transactions.

The individual looking for guidance on revenue recognition is most likely to appropriately review:

SAB 104.

For effective internal control, the billing function should not be performed by the:

Sales department.

A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a:

Test of a control.

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:

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

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:

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

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:

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

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

A) Collectibility is certain.

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

A) Examine cash receipts received after year-end.

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? A) The account balances as of year-end will generally be confirmed. B) The auditors will in general use blank rather than positive confirmation requests. C) The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year end. D) Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

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

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

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

Accounts receivable that are written-off should not be turned over to a collection agency.

False

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

A)Yes Yes

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?

Accounts receivable are overstated at December 31, 20X0.

To test the existence assertion for recorded receivables, an auditor would select a sample from the.

Accounts receivable subsidiary ledger.

After the CPAs have selected particular accounts receivable for confirmation:

All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.

CPAs use negative accounts receivable confirmation requests more frequently than positive accounts receivable confirmation requests.

False

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

B) Aging of accounts receivable.

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

B) Closing the sales journal prior to year-end.

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

B) Confirmation requests should be signed by the auditors.

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A) Examine sales invoices. B) Inclusion of the information in the engagement letter. C) Examine correspondence. D) Examine any subsequent cash receipts.

B) Inclusion of the information in the engagement letter.

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

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

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

B) Oral responses obtained by the auditor through a telephone call.

Which of the following is least likely to be typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A) Examine bills of lading. B) Physically examine items sold. C) Examine correspondence. D) Examine subsequent cash receipts.

B) 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? A) Investigate confirmation exceptions for indication of amounts in dispute. B) Review accounts which have been written off as uncollectible prior to year-end. C) Investigate credit ratings for large accounts receivable. D) Discuss with the credit manager the current status of doubtful accounts.

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

receivable. Of the following, which combination is it most likely that the auditors will use? A) The positive form for small balances, and the negative form for large balances. B) The positive form used for large balances and the negative form for the small balances. C) The positive form used for trade receivables and the negative form for other receivables. D) The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

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

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.

False

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

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

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

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

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

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

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? A) Sales. B) Cash. C) Inventory. D) Accounts receivable.

C) Inventory.

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

C) 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? A) A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year. B) Internal control activities over the recording of cash receipts have been improved since the end of the prior year. C) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet. D) The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

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

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

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

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

D) A large number of accounts receivable are in dispute.

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

D) Collection of receipts on account and maintaining accounts receivable records.

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

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

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: A) It understates liabilities. B) It overstates revenues C) It overstates net income. D) It overstates assets.

D) It overstates assets.

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

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

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.

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:

Expand tests of collectibility.

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if:

Internal control over receivables is good.

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:

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

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?

Sales.

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:

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

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific program steps to apply to the accounts and transactions. In a particular case, s/he might do this by:

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