Chapter 11: Accounts Receivable, Notes Receivable, and Revenue

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.

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

B.) Billed sales were shipped.

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. This will close it sooner.

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

B.) Confirming accounts receivable.

The confirmation of accounts receivable is most closely associated with: A.) Business risk. B.) Detection risk. C.) Inherent risk. D.) Relative risk.

B.) Detection risk.

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 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.

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: A.) The cash receipts journal was closed before year-end. B.) The cash receipts journal was held open after year-end. C.) There are many unrecorded liabilities. D.) The sales journal was held open after year-end.

B.) The cash receipts journal was held open after year-end. This means more sales to work for that customer. A positive A/R is when you don't put any amounts and you just return confirmation request confirmation requests to the client.

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

C.) Accounts receivable subsidiary ledger.

After the CPAs have selected particular accounts receivable for confirmation: A.) 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. B.) 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. C.) 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. D.) All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

C.) 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.

The audit of 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: A.) Consider internal control over credit sales. B.) Test the accuracy of recorded charge sales. C.) Estimate credit losses. D.) Verify the validity of the recorded receivables.

C.) Estimate credit losses.

Tracing recorded sales transactions to the bills of lading provides evidence about the: A.) Completeness of sales transactions. B.) Collectibility of sales transactions. C.) Occurrence of sales transactions. D.) Billing of all sales transactions.

C.) Occurrence of sales transactions.

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.

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.

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: A.) Tracing sales invoices to shipping documents to tests the completeness of reported sales. B.) Tracing shipping documents to sales invoices to test the occurrence of reported sales. C.) Tracing sales invoices to shipping documents to test the occurrence of reported sales. D.) Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

C.) Tracing sales invoices to shipping documents to test the occurrence of reported sales. Sales invoices -> Shipping documents = Occurrence

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? A.) Cash receipts. B.) Payroll. C.) Purchases. D.) Sales.

D. Sales.

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 understates assets.

D.) It understates assets.

To verify that all sales have been shipped to customers have been recorded a test of transactions should be completed on a representative sample drawn from: A.) The sales journal. B.) The billing clerk's files of sales orders. C.) Duplicate copies of sales invoices. D.) The shipping clerk's file of duplicate copies of bills of lading.

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

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

False.

The department approving a sales transaction should be the shipping department. True or false?

False.

Accounts receivable that are written off should not be turned over to a collection agency. True or false?

False. If it's more than 90 days, accounts receivable needs to be turned over.

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

True.

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

True.

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable. True or false?

True.

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

True.

Materials accounts receivable from related parties should be stated separately from other receivables. True or false?

True.

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.

For effective internal control, the billing function should not be performed by the: A.) Sales department. B.) Accounting department. C.) Finance department. D.) Information Processing department

A.) Sales department.

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. If sent to internal auditors, they may affect or alter the requests, which is fraud. Mailroom is on the lookout for the requests. The confirmation request should not be mailed back to the client.