Chapter 7 - smartbook auditing

Audit processes to gather evidence on the assertions in account balances are called ___________ ___________.

Blank 1: substantive Blank 2: procedures

Accuracy of revenue

Observe client comparing shipping quantities to quantities recorded as sold.

To look for unusually high or low sales volume, the auditor may look to a sales analysis reported classified by Blank______. Multiple select question. product line region sales employee

region sales employee

According to AS 2201.A9, a financial statement assertion is _________ if it has a "reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated."

relevant

Auditors typically achieve an understanding of controls by completing a(n)_________ of the processes in the revenue and collection cycle.

walkthrough

Which of the following statements are correct? Multiple select question. Auditors may not receive an oral response to a confirmation. Confirmations of accounts, loans, and notes receivable produces sufficient evidence of the rights assertion. Confirmation returned as "undeliverable" are always a red flag. Confirming a specific transaction is often more effective than confirming the account balance.

-Confirmation returned as "undeliverable" are always a red flag. -Confirming a specific transaction is often more effective than confirming the account balance.

When an auditor receives an oral response to a confirmation Blank______. Multiple select question. -a written response still needs to be requested -the definition of external confirmation has been met -alternative audit procedures may be warranted

-a written response still needs to be requested -alternative audit procedures may be warranted

Which of the following SEC criteria for revenue recognition is incorrect? Multiple choice question. The price is fixed or determinable. Persuasive evidence of an arrangement exists. Collectability is reasonably ensured. A delivery or service has been promised.

A delivery or service has been promised.

According to accounting standards, to be recognized, revenue must be ________ or ________ and earned. (Enter only one word per blank.)

Blank 1: realized Blank 2: realizable

Because fictitious sales may be used to overstate assets, the __________ assertion is important in the audit of accounts receivables and the __________assertion is important for sales.

Blank 1: existence Blank 2: occurrence

True or false: When vouching invoices and sales journal entries to price lists, the auditor must be sure to have the most up-to-date price list available.

False

Revenue generally is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably ensured according to Blank______ standards. Multiple choice question. PCAOB SEC GAAP FASB

SEC

Which of the following statements regarding the revenue cycle are correct? Multiple select question. Most auditing clients have inadequate controls. There is always a presumptive risk of fraud. It consists of routine transactions. Tests of controls often support a reduction in control risk.

There is always a presumptive risk of fraud. It consists of routine transactions. Tests of controls often support a reduction in control risk.

Classification of accounts receivable

Trace posting of intercompany sales, sales returns, etc. to sales.

Cutoff of revenue

Trace shipping documents to sales invoice date. Check FOB terms.

True or false: Prenumbered documents are an example of an internal control.

True

Accuracy of revenue and accounts receivable

Vouch prices to approved price list.

To help assess the allowance for doubtful accounts, auditors use the Blank______. Multiple choice question. cash receipts listing customer master file aged trial balance sales detail file

aged trial balance

Substantive procedures are Blank______. Multiple choice question. never performed in the revenue cycle always performed in the revenue cycle only performed if inherent risk is assessed as high only performed in the revenue cycle if control risk is high

always performed in the revenue cycle

The auditor assess inherent risk to determine where a material misstatement could enter the process Blank______ the consideration of any internal controls. Multiple choice question. during before after

before

The form the carrier signs to verify goods are shipped is a(n) Blank______. Multiple choice question. bill of lading shipping order shipment record packing slip

bill of lading

When a retailer accepts third-party credit cards, Blank______. Multiple select question. data security is a significant issue the risk of nonpayment must be considered transactions are considered credit sales the authorization function is performed electronically

data security is a significant issue the authorization function is performed electronically

In the basic three-step approach for using the audit risk model to plan an engagement, _________ risk is set at the significant account and assertion level based on the level of audit risk and the risk of material misstatement.

detection

Confirmation should be returned Blank______, Multiple choice question. directly to the auditor to the client's internal audit department to the client's audit committee

directly to the auditor

Which of the following documents should be matched before recording revenue? Multiple select question. customer credit authorization evidence of shipment customer invoice customer sales order

evidence of shipment customer invoice customer sales order

A way to subject all items in a population of occurrences for a particular control activity in the revenue cycle is to use ________ testing.

exception

An automated procedure designed to test all items in a population in order to identify violations of a particular control activity is called________ testing.

exception

When planning an engagement, AS 2110 indicates that the auditor should presume that there is a(n) _________ risk involving improper revenue recognition.

fraud

Which of the following statements regarding confirmations are correct? Multiple select question. Auditors may choose to ask about entire account balances or specific invoices only. On a single audit, auditors must choose to use either positive or negative confirmations, not both. A negative form is acceptable when the client's customers are expected to consider the confirmations properly. The positive form is the more common one used.

-Auditors may choose to ask about entire account balances or specific invoices only. -A negative form is acceptable when the client's customers are expected to consider the confirmations properly. -The positive form is the more common one used.

Which of the following statements regarding confirmations are correct? Multiple select question. Second and third requests should be sent for all confirmations. When exceptions cannot be resolved auditors should consider if fraud has occurred. Nonresponding positive confirmation customers should be audited by alternative procedures. The lack of response to a negative confirmation is not a guarantee it was read or received.

-When exceptions cannot be resolved auditors should consider if fraud has occurred. -Nonresponding positive confirmation customers should be audited by alternative procedures. -The lack of response to a negative confirmation is not a guarantee it was read or received.

When a retailer accepts third-party credit cards, ______. Multiple select question. -authorization controls are minimized -transactions are considered receivables until payment is received -they can become liable for customer losses for failing to adequately protect information -the credit card company pays the retailer a processing fee

-authorization controls are minimized -they can become liable for customer losses for failing to adequately protect information

Substantive procedures Blank______. Multiple select question. are designed to obtain evidence about the company's performance of its control activities are also called dual-purpose procedures differ from tests of controls in their basic purpose are designed to obtain direct evidence about account balances

-differ from tests of controls in their basic purpose -are designed to obtain direct evidence about account balances

If a control is missing or ineffective, Blank______. Multiple select question. the risk of material misstatement increases there is most certainly an error or fraud in the financial statements auditors need to design substantive procedures related to control failure

-the risk of material misstatement increases -auditors need to design substantive procedures related to control failure

One of the reasons that auditors complete a checklist at the end of the audit of the revenue cycle is because revenue recognition policies and the amount of the allowance for doubtful accounts are examples of items that require specific __________ and __________.

Blank 1: presentation Blank 2: disclosures or disclosure

When complete separation of duties in a small business is not possible, the owner must have active involvement in the accounting process in order for the auditors to obtain ___________ ___________ that financial controls are intact. (Enter only one word per blank.)

Blank 1: reasonable Blank 2: assurance

"Frequent deficiencies related to the design and performance of audit procedures that address the assessed risk of material misstatement, particularly when auditing revenue" was observed in a 2018 inspection conducted by the Blank______. Multiple choice question. AICPA FASB SEC PCAOB

PCAOB

Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company? Multiple choice question. Purchasing raw materials Delivering goods and services Collecting and depositing cash Billing customers Receiving and processing customer orders

Purchasing raw materials

The risk that an unqualified opinion will be issued on financial statements that contain a material misstatement is the definition of_________ risk.

audit

Pending order files should be reviewed frequently to Blank______. Multiple choice question. validate that customers received goods at the proper quantity and price help validate the allowance for doubtful accounts avoid failure to bill and record shipment ensure than fictitious sales are not recorded

avoid failure to bill and record shipment

Including a sample of zero-balance accounts in the confirmation process tests for Blank______. Multiple choice question. -completeness of revenue and accounts receivable -rights and obligations of accounts receivable -classification of accounts receivable

completeness of revenue and accounts receivable

For current status, including up-to-date credit limit information, auditors may test a sample of the _________ ________ files.

customer or client master

Customers statements should be sent Blank______. Multiple choice question. only if there is a balance at the end of the month only at year end if there is any account activity only to customers who request them

if there is any account activity

A blank form confirmation: Multiple select question. may result in a lower response rate. may produce better evidence than a positive confirmation. is a variation of a negative confirmation. requires the customer to confirm a balance.

may result in a lower response rate. may produce better evidence than a positive confirmation.

A blank form is a variation of the _________ confirmation.

positive

Difficulties in estimating the allowance for doubtful accounts can be due to Blank______. Multiple select question. a decrease in sales revised credit policies changing economic conditions change in customer base

revised credit policies changing economic conditions change in customer base

Inspecting bank confirmations, loan agreements and board of director minutes provides evidence regarding Blank______. Multiple choice question. -classification of accounts receivable -rights and obligations of accounts receivable -completeness of revenue and accounts receivable

rights and obligations of accounts receivable

If a confirmation exception cannot be resolved, the auditor Blank______. Multiple choice question. should select another account to be confirmed may ignore it if the account balance is immaterial should determine the cause

should determine the cause

A company should always compare daily credit sales totals in the sales journal to the Blank______. Multiple choice question. price list master file sales analysis report total debits posted to accounts receivable total daily invoices issued to customers

total debits posted to accounts receivable

The starting point for selecting accounts for confirmation is the accounts receivable Blank______. Multiple choice question. trial balance control account aging schedule

trial balance

True or false: Auditors typically achieve an understanding of controls by completing a walkthrough of the processes in the revenue and collection cycle.

true

True or false: Physical protection of accounts receivable files is an important facet of control.

true

True or false: There is no such thing as a typical revenue and collection cycle.

true

Confirmations do not provide strong evidence of Blank______. Multiple choice question. valuation existence rights and obligations

valuation

Reviewing accounts for collectability and determining the adequacy of the allowance for doubtful accounts is done in support of the _________assertion.

valuation

When the auditor evaluates the reasonableness of the allowance for doubtful accounts,__________ is a high risk assertion. (Enter only one word per blank.)

valuation

Adjusting and correcting entries that can result from the bank account reconciliation are found in the _________ __________ journal.

cash receipts

Auditors review items in the pending order file for evidence of the Blank______ of recorded sales and accounts receivable. Multiple choice question. presentation and disclosure occurrence completeness rights and obligations

completeness

Auditors review items in the pending order file for evidence of the____________ of recorded sales and accounts receivable. (Enter only one word per blank.)

completeness

Prenumbered documents are important in testing the___________ assertion and the___________ assertion. (Enter only one word per blank.)

completeness, occurrence

Justifications for not using confirmations may include Blank______. Multiple select question. confirmations would be ineffective other procedures require less of the auditor's time receivables are not material other procedures provide sufficient, competent evidence

confirmations would be ineffective receivables are not material other procedures provide sufficient, competent evidence

Audit risk is manifested when a material misstatement enters the financial reporting process, which is known as Blank______ risk. Multiple choice question. control inherent detection misstatement

inherent

Confirmations provide evidence of Blank______. Multiple select question. valuation rights and obligations existence presentation and disclosure

rights and obligations existence

The population of entries that should be reflected in the credits to accounts receivable for customer payments are found in the _________ ________ journal.

cash receipts

The risk of material misstatement is a combination of __________ risk and __________ risk.

control inherent

The sales detail (journal) file can be checked for Blank______. Multiple select question. appropriate credit limits fictitious sales sales recorded before shipment

fictitious sales sales recorded before shipment

It is important to maintain an up-to-date customer master file to ensure Blank______. Multiple select question. files are accurate all sales invoices are recorded credit limits are appropriate

files are accurate credit limits are appropriate

Examining evidence of client review and follow up of sales data related to specific classes of products or locations is a test of control for Blank______. Multiple choice question. accuracy of revenue and accounts receivable classification of accounts receivable cutoff of revenue completeness of revenue and accounts receivable

completeness of revenue and accounts receivable

Examining evidence of client review and follow up of sales data related to specific classes of products or locations is a test of control for Blank______. Multiple choice question. accuracy of revenue and accounts receivable cutoff of revenue completeness of revenue and accounts receivable classification of accounts receivable

completeness of revenue and accounts receivable

To determine that customers were sent the goods ordered at the correct price and quantity, customer invoices should be compared to Blank______. Multiple select question. packing slips customer orders bills of lading customer credit authorizations

customer orders bills of lading

To ensure sales are recorded in the proper period, auditors use sales ________ tests.

cutoff

Tracing shipping documents before and after year-end to the sales journal and vouching credit memos for returns after year end to receiving reports are done to test the _____________ assertion.

cutoff

Verifying the dates on sales documents helps reduce the risk of misstatement related to the ____________ assertion of revenue. (Enter only one word per blank.)

cutoff

Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the __________ and rights and obligations of customers' balances directly from the customer.

existence

The auditor typically obtains evidence to satisfy the ___________ assertion for accounts receivable through a combination of analytical procedures and confirmations.

existence

When considering relevant assertions and obtaining evidence about accounts receivable and other assets, auditors must emphasize the __________ assertion.

existence

When customers are not willing or able to return confirmations, examining subsequent cash receipts, sales orders, invoices, and shipping documents, and correspondence files for past-due accounts are alternative procedures that may be performed to ensure __________.

existence

Since auditors generally presume management has an incentive to overstate revenues, all other things being equal, auditors may assess inherent risk for Blank______. Multiple choice question. completeness to be higher than for existence existence to be higher than for completeness existence to be equal to completeness

existence to be higher than for completeness

Since auditors generally presume management has an incentive to overstate revenues, all other things being equal, auditors may assess inherent risk for Blank______. Multiple choice question. existence to be higher than for completeness completeness to be higher than for existence existence to be equal to completeness

existence to be higher than for completeness

In order to obtain cash immediately, companies may sell or ________their accounts receivable.

factor

True or false: Auditing standards recommend but generally do not require the use of confirmations for accounts receivable.

false

When using confirmations, auditors should Blank______. Multiple select question. follow-up on electronic and telephone responses consider features of the reply control the mailing have them returned to the client's accounts payable department

follow-up on electronic and telephone responses consider features of the reply control the mailing

The person who has the ability to change invoices should not Blank______. Multiple select question. have custody of assets have recording responsibilities be responsible for mailing invoices

have custody of assets have recording responsibilities

Customer statements ______. Multiple select question. help with control over cash receipts should not be sent if the ending balance is zero detail what has been billed and paid

help with control over cash receipts detail what has been billed and paid

Ways to determine if a company has factored accounts receivable include Blank______. Multiple select question. inquiring of management sending confirmations to customers examining support for large cash receipts

inquiring of management examining support for large cash receipts

The issuance of FASB ASC 606 has likely made difficulties with auditing revenues Blank______ challenging. Multiple choice question. more less

more

If a customer confirms that an account exists, the auditor Blank______. Multiple choice question. has adequate evidence to support collectability and valuation must still review the account for collectability has evidence to support the adequacy of the allowance for doubtful accounts

must still review the account for collectability

A customer is asked to respond only if something is wrong with the account balance when a(n) __________ confirmation is used.

negative

A lack of response to a(n) ___________ confirmation is considered evidence that the account is fairly stated.

negative

A strong entity-level control in the revenue process is Blank______. Multiple choice question. interim auditing procedures by the external auditors overall performance review by management involvement of the internal audit department in the revenue process

overall performance review by management

A description of the goods being shipped as well as the quantity shipped is found on the Blank______. Multiple choice question. packing slip shipment record shipping order

packing slip

A customer is asked to respond whether the balance is correct or incorrect on a(n)__________confirmation.

positive

When auditors are satisfied that controls have been examined and transactions and balances have been appropriately tested, they must still consider Blank______. Multiple choice question. classification and understandability rights and obligations accuracy and valuation presentation and disclosure

presentation and disclosure

Systems may automatically produce customer invoices, but billings will be incorrect if the _________ _________ master file is incorrect.

price list

Information required for business segment disclosures is provided by sales classified by ______. Multiple choice question. sales employee product line region

product line

Access to accounts receivable records gives an individual Blank______, Multiple select question. recording responsibility custody of assets authorization

recording responsibility authorization

Once all significant accounts and disclosures have been identified, the auditor needs to identify the Blank______ assertions. Multiple choice question. control inherent significant relevant

relevant

Sales must be realized or realizable and earned in order to be recorded under the accounting standards related to _________ ________.

revenue recognition

Regarding the revenue process, management should Blank______. Multiple select question. review merchandise returns scrutinize total write-offs of accounts receivables continually review revenues and compare them to budgeted and forecasts evaluate the timeliness of accounts payable payments

review merchandise returns scrutinize total write-offs of accounts receivables continually review revenues and compare them to budgeted and forecasts

Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the Blank______ of customers' balances directly from the customer. Multiple select question. payment terms collectability rights & obligations existence

rights & obligations existence

Separation of duties in the revenue cycle should include different people and departments performing Blank______. Multiple select question. sales and credit authorization custody of goods and cash record keeping for sales, receivables, inventory and cash receipts payments for inventory and other cash disbursements

sales and credit authorization custody of goods and cash record keeping for sales, receivables, inventory and cash receipts

The bill sent to a customer indicating the amount due and payment terms is called a Blank______. Multiple choice question. sales invoice shipping order bill of lading packing slip

sales invoice

The most effective alternative procedure to confirmations to ensure existence is examining Blank______. Multiple choice question. subsequent cash receipts sales order, invoices and shipping documents correspondence files for past-due accounts

subsequent cash receipts

If controls are not in place or personnel are not performing control activities effectively, auditors need to design_________ procedures to try to detect whether control failures have produced material misstatements in the financial statements. (Enter only one word per blank.)

substantive

A review of the adequacy of the provision for bad debt expense is an example of a Blank______. Multiple choice question. test of controls substantive test of details dual-purpose procedure substantive analytical procedure

substantive analytical procedure

Sending confirmations to customers to substantiate the existence and rights and obligations assertions of accounts receivable is an example of a Blank______. Multiple choice question. test of controls substantive analytical procedure substantive test of details dual-purpose procedure

substantive test of details