Chapter 9

The following was taken from the bank transfer schedule prepared during the audit of Fox Co.'s financial statements for the year ended December 31, Year 1. Assume all checks are dated and issued on December 30, Year 1. Disbursement DateReceipt DateCheckBank AccountsPerPerPerPer No.FromToBooksBankBooksBank101NationalFederalDec. 30Jan. 4Dec. 30Jan. 3202CountyStateJan. 3Jan. 2Dec. 30Dec. 31303FederalAmericanDec. 31Jan. 3Jan. 2Jan. 2404StateRepublicJan. 2Jan. 2Dec. 31Jan. 2 Which of the following checks might indicate kiting?

#202 and #404.

Fact Pattern:Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, for late December and early in the following January. Your answer choice for each question should be selected from this list. Bank Account OneBank Account Two Disbursing DateReceiving Date (Month/Day)(Month/Day) PerPerPerPer BankBooksBankBooks1.12/3112/3012/3112/302.1/212/3012/3112/313.1/312/311/21/24.1/312/311/212/31 Which of the cash transfers would not appear as an outstanding check on the December 31 bank reconciliatio

1

A CPA is engaged in the annual audit of a calendar year client. The client took a complete physical inventory under the CPA's observation on December 15 and adjusted its inventory account and detailed perpetual inventory records to agree with the physical inventory. The client considers a sale to be made in the period that goods are shipped. Listed below are four items taken from the CPA's sales cutoff test worksheet. Which item does not require an adjusting entry on the client's books? Recorded Credited to Shipped as Sale Inventory 12/31 1/2 12/31 12/10 12/19 12/12 12/14 12/16 12/16 1/2 12/31 12/31

12/10 12/19 12/12

Fact Pattern:Listed below are four of a client's interbank cash transfers, indicated by the numbers 1, 2, 3, and 4, for late December and early in the following January. Your answer choice for each question should be selected from this list. Bank Account OneBank Account Two Disbursing DateReceiving Date (Month/Day)(Month/Day) PerPerPerPer BankBooksBankBooks1.12/3112/3012/3112/302.1/212/3012/3112/313.1/312/311/21/24.1/312/311/212/31 Which of the cash transfers would appear as a deposit in transit on the December 31 bank reconciliation?

4

If the objective of a test of details is to detect overstatements of sales, the auditor should compare transactions in the Source documents with the accounting records. Sales journal with the cash receipts journal. Accounting records with the source documents. Cash receipts journal with the sales journal.

Accounting records with the source documents.

An inappropriate audit procedure relative to accounts receivable is to determine that the Client has rights in the accounts receivable. Accounts are collected by the balance sheet date. Accounts exist and are properly valued. Accounts represent the complete transaction process.

Accounts are collected by the balance sheet date.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts? Common stock. Allowance for doubtful accounts. Purchase returns and allowances. Noncontrolling interest of a subsidiary purchased during the year.

Allowance for doubtful accounts.

Which of the following most likely would give the most assurance concerning the valuation assertion about accounts receivable? Vouching amounts in the subsidiary ledger to details on shipping documents. Inquiring about receivables pledged under loan agreements. Assessing the allowance for uncollectible accounts for reasonableness. Comparing receivable turnover ratios with industry statistics for reasonableness.

Assessing the allowance for uncollectible accounts for reasonableness.

The best evidence regarding year-end bank balances is documented in the Bank reconciliations. Interbank transfer schedule. Cutoff bank statement. Bank deposit lead schedule.

Bank reconciliations.

An auditor most likely would limit substantive audit tests of sales transactions when the risks of material misstatement are assessed as low for the existence and occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting Shipping and receiving activities. Cash receipts and accounts receivable. Cutoffs of sales and purchases. Opening and closing inventory balances.

Cash receipts and accounts receivable.

An auditor most likely would review an entity's periodic accounting for the numerical sequence of shipping documents and invoices to support management's financial statement assertion of Occurrence. Valuation and allocation. Rights and obligations. Completeness.

Completeness

The primary purpose of sending a standard confirmation request to financial institutions with which the client has done business during the year is to Request information about contingent liabilities and secured transactions. Corroborate information regarding deposit and loan balances. Provide the data necessary to prepare a proof of cash. Detect kiting activities that may otherwise not be discovered.

Corroborate information regarding deposit and loan balances.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose Individual overdue balances. Small account balances. Customers with credit balances. Individual invoices.

Individual invoices.

Which of the following might be detected by an auditor's review of the client's sales cutoff? Inflated sales for the year. Unrecorded sales discounts. Excessive goods returned for credit. Lapping of year-end accounts receivable.

Inflated sales for the year.

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? Intensify the study of internal control concerning the revenue cycle. Inspect the shipping records documenting the merchandise sold to the debtors. Increase the assessed level of detection risk for the existence assertion. Review the cash receipts journal for the month prior to year end.

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

The negative request form of accounts receivable confirmation may be used when the Risk of Number of Consideration Material Small by the Misstatement is Balances is Recipient is Low Many Likely Low Few Unlikely High Many Likely High Few Likely

Low, Many, Likley

An auditor is required to confirm accounts receivable if the accounts receivable balances are Material to the financial statements. Subject to valuation estimates. Smaller than expected. Older than the prior year.

Material to the financial statements.

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn of which of the following? One of the computer control clerks has been removing all sales invoices applicable to his account from the data file. One of the sales clerks has not been preparing charge slips for credit sales to family and friends. The credit manager has misappropriated remittances from customers whose accounts have been written off. One of the cashiers has been covering a personal embezzlement by lapping.

One of the cashiers has been covering a personal embezzlement by lapping.

Which of the following procedures would an auditor most likely perform to identify unusual sales transactions? Performing a trend analysis of quarterly sales. Examining duplicate sales invoices for credit approval by the credit manager. Tracing credits in the accounts receivable ledger to source documentation. Tracing cash receipt entries to the bank statement deposit for amount and date.

Performing a trend analysis of quarterly sales.

In the confirmation of accounts receivable, the auditor would most likely Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables. Require confirmation of all receivables from agencies of the federal government. Require that confirmation requests be sent within 1 month of the fiscal year end. Request confirmation of a sample of the inactive accounts.

Request confirmation of a sample of the inactive accounts.

The most effective audit procedure for determining the collectibility of an account receivable is the Confirmation of the account. Review of the subsequent cash collections. Examination of the related sales invoice(s). Review of authorization of credit sales to the customer and the previous history of collections.

Review of the subsequent cash collections.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year end? Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end. Resend confirmation requests for any significant customer balances remaining at year end. Send confirmation requests for all new customer balances incurred from the interim date to year end. Review cash collections subsequent to the interim date and the year end.

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year end.

The auditing standards define external confirmation as "a direct written response to the auditor from a third party (the confirming party), either in paper form or by electronic or other medium." The assertions for which confirmation of accounts receivable balances provides primary evidence are Existence and completeness. Valuation and rights and obligations. Rights and obligations and existence. Completeness and valuation.

Rights and obligations and existence.

An auditor ordinarily sends a standard confirmation request to all banks with which the client has done business during the year under audit, regardless of the year-end balance. A purpose of this procedure is to Request that a cutoff bank statement and related checks be sent to the auditor. Provide the data necessary to prepare a proof of cash. Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation. Detect kiting activities that may otherwise not be discovered.

Seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would Increase the assessed risks of material misstatement for the revenue cycle. Increase the assessed risks of material misstatement for the valuation and completeness assertions. Inspect the allowance account to verify whether the accounts were subsequently written off. Send the customer a second confirmation request.

Send the customer a second confirmation request.

Tracing shipping documents to prenumbered sales invoices provides evidence that No duplicate shipments or billings occurred. Shipments to customers were properly invoiced. All prenumbered sales invoices were accounted for. All goods ordered by customers were shipped.

Shipments to customers were properly invoiced.

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

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

The accounts receivable turnover ratio increased significantly over a two-year period. This trend could indicate that The company is more aggressively collecting customer accounts. The company has eliminated its discount policy. The accounts receivable aging has deteriorated. Customer sales have substantially decreased.

The company is more aggressively collecting customer accounts.

An independent auditor asked a client's internal auditor to assist in preparing a standard financial institution confirmation request for a payroll account that had been closed during the year under audit. After the internal auditor prepared the form, the controller signed it and mailed it to the bank. What was the major flaw in this procedure? The internal auditor did not sign the form. The form was mailed by the controller. The form was prepared by the internal auditor. The account was closed, so the balance was zero.

The form was mailed by the controller.

When scheduling the audit work to be performed on an engagement, the auditor should consider confirming accounts receivable balances at an interim date if The risk of material misstatement relative to financial statement assertions about receivables is acceptably low. There is a simultaneous audit of cash and accounts receivable. Subsequent collections are to be reviewed. Negative confirmations are to be used.

The risk of material misstatement relative to financial statement assertions about receivables is acceptably low.

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 The aging of accounts receivable was improperly performed in both years. There was an improper cutoff of sales at the end of the year. Obsolete inventory has not yet been reduced to fair market value. An unusually large receivable was written off near the end of the year.

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

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning relevant assertions about Valuation and allocation. Classification and understandability. Rights and obligations. Existence.

Valuation and allocation.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of Completeness. Existence. Valuation and allocation. Rights and obligations.

Valuation and allocation.

During the process of confirming receivables as of December 31, Year 1, a positive confirmation was returned indicating the "balance owed as of December 31 was paid on January 9, Year 2." The auditor would most likely Verify that the amount was received. Determine whether a customary trade discount was taken by the customer. Determine whether any changes in the account occurred between January 1 and January 9, Year 2. Reconfirm the zero balance as of January 10, Year 2.

Verify that the amount was received.