480 Ch 9

Which of the following evidences delivery of product to customers sufficient for company recording as revenues?

A bill of lading and tracking number with the shipper.

For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate?

A cable company with control risk over the revenue cycle assessed low.

What evidence is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate?

Accounts receivable aging schedule.

Which of the following criteria must be met in order to recognize revenue in the current accounting period?

All of the Above

A method used by companies to fraudulently inflate revenues includes which of the following?

All of the above.

In the audit of accounting estimates, such as the allowance for doubtful accounts, the auditor strives to provide reasonable assurance about which of the following?

All the above

A key indicator of fraud in the revenue cycle is the auditor's detection of which of the following?

Altered shipping documents and invoices.

The aged accounts receivable report is utilized by the auditor to accomplish which of the following?

Assess the adequacy of the allowance for doubtful accounts.

An auditor performs tests of controls in the revenue cycle. First, the auditor makes inquiries of company personnel about credit-granting policies. The auditor then selects a sample of sales transactions recorded in the general ledger and examines documentary evidence of credit approval. Which of the financial statement assertion(s) does this test of controls most likely support?

B (No Completeness, Yes Valuation or Allocation)

Which of the following is a formal document that conveys responsibility for shipped merchandise to the shipper?

Bill of lading.

In the audit of the revenue of Hiram Manufacturing Company, the auditors obtain a number of shipping documents shortly before year-end and immediately following the year under audit. The auditors compare the documents to the sales journal in order to test which of the following assertions?

Cutoff of sales transactions.

The purpose of the bill of lading is to provide which of the following?

Evidence of title transfer of goods to customers.

Much of the understanding of revenue transactions for compliance with GAAP can be performed by accomplishing which of the following tasks?

Examining sales contracts and inquiry of management.

Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample of accounts receivable. This test is performed by Homer and Moe primarily to substantiate which of the following assertions?

Existence of accounts receivable

According to auditing standards, accounts receivable confirmations are required to be used in which of the following situations?

If the accounts receivable balance is material.

A sample of positive confirmations is mailed for material accounts receivable balances. Frequently there is a lack of response. Which of the following is not an acceptable alternative procedure?

Inquiry of management.

The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total. This process is performed for which purpose?

Monitoring revenue transactions.

Which of the following is not a form of ratio analysis?

Monthly sales analysis compared with past years.

The auditor traces recorded sales to invoices, sales orders, and shipping documents in order to substantiate which assertion?

Occurence

The risk of material misstatement due to fraud relating to revenue recognition should be

Ordinarily presumed by the auditor.

Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client's statement and return the letters directly to the auditor indicating whether they agree with the indicated balance, are known by which of the following terms?

Positive Confirmation

Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing which of the following?

Ratio Analysis

Lithgow and Harris, CPAs, are performing the audit of Wild Flower Grocery Stores. Lithgow and Harris relates annual revenue to sales per square feet and sales per customer. What type of analysis is Lithgow and Harris most likely performing?

Reasonableness tests.

To determine whether any accounts receivable are pledged or assigned to others, the auditor would most likely perform which of the following procedures?

Review loan agreements and board of directors' meeting minutes.

An example of alternative procedures for the confirmation of accounts receivable includes which of the following actions?

Review of subsequent collections on account by the client.

Alternative procedures that would provide evidence of the existence of receivables would include which of the following?

Review of subsequent collections.

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?

Review of transactions by upper management or the board.

Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations?

Sales are higher in the month preceding each quarter end.

An auditor's examination of the sales account using a cutoff test would most likely detect which of the following?

Sales recorded in the wrong period.

In an audit of financial statements, risks related to a high rate of return of products sold include which of the following?

Sales that are recorded improperly.

Which of the following is the fifth step in the five-step revenue recognition process prescribed by ASC 606?

Satisfaction of a performance obligation.

Which of the following processes are not included in the revenue cycle?

Sending payments to customers

Unreturned positive confirmations for accounts receivable warrant which of the following actions?

Sending second requests and possibly performing subsequent procedures.

Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following?

Shipping documents and tracing them to the sales journal.

Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following?

Substantiate cutoff and the occurrence of net sales transactions.

Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because of which of the following reasons?

The address may be routed to the client for retrieval and fraudulent signing.

Which one of the following procedures would be considered improper by the auditor in the process of confirming receivables?

The auditor allows the client's staff to mail the confirmation letters after he or she has proofed the typing of the letters.

Substantive tests of the revenue cycle typically do not provide evidence of which of the following?

The balance in the allowance account is correct.

Accounts receivable confirmations usually provide strong evidence about which of the following?

The existence of receivables

The primary difference between positive and negative confirmations used in the audit of accounts receivable is which of the following?

The mode of response

Which of the following must exist prior to the recognition of revenue by a company from the sale of a product?

The product is transferred to the customer.

The major risk associated with receivables is related to which of the following?

They will not be realized for the entire amount due.

Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives?

To minimize credit losses.

Sales transactions should be documented at initiation in order to accomplish which of the following objectives?

To provide evidence of authorization and recording.

Which of the following audit procedures does not address existence/occurrence for accounts receivables and sales?

Trace bill of lading to sales invoice and sales journal.

An analysis of monthly sales compared with past years and budgets is a form of what type of testing?

Trend analysis.

A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following?

Use of prenumbered shipping, invoice and sales documents.

The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management. The purpose for this procedure is to substantiate which assertion?

Valuation of receivables.

To test the completeness of sales, the auditor would select a sample of transactions from which of the following populations?

a. Bill of lading file.

Which of the following statements is true regarding assertions in the revenue cycle?

a. If a client has an incentive to overstate revenues, the existence assertion would be more relevant than the completeness assertion.

The auditor is concerned that the client has recorded fictitious sales. Which of the following procedures would be the best audit procedure to identify fictitious sales?

a. Select a sample of recorded sales invoices and trace to shipping documents (bills of lading and packing slips) to verify shipment of goods.

Responding to identified risks involves developing an audit approach that addresses those risks. Which of the following statements about the planned audit approach is true for the revenue cycle?

a. The audit approach will typically require more evidence for higher risk assertions than lower risk areas.

Assume that an auditor expected that the client's activities related to sales and accounts receivable would be similar to industry averages. Which of the following relationships detected as part of planning analytical procedures would not suggest a heightened risk of material misstatement in the revenue cycle?

a. The number of days' sales in accounts receivable decreased from sixty-five days in the prior year to forty-seven days in the current year. The industry average increased from forty-five to forty-seven days.

After identifying the risks of material misstatement, the auditor develops an audit plan in response to those risks. Which of the following plans for testing revenue would be most likely when the auditor believes that control risk is high?

a. The only evidence the auditor plans to obtain is from tests of details.

Which of the following factors is not a motivation for clients to fraudulently misstate revenue?

b. Controls over revenue process are ineffective.

Which of the following statements about the Medicis fraud is false?

b. The PCAOB found that EY and its partners failed to properly evaluate a material component of the company's financial statements—its allowance for doubtful accounts.

Which of the following procedures can organizations use to address credit risk most effectively?

c. A periodic review of the credit policy by key executives to determine whether changes are dictated either by current economic events or by deterioration of the receivables.

Which of the following explanations best describes the purpose of lapping?

c. Lapping is a technique used by client personnel to cover up the embezzlement of cash.

Under the FASB's guidance on revenue recognition, which of the following is not criteria that must be met in order for a contract to exist?

c. The auditor has ensured that the contract's valuation is reasonable in all material respects.

Which of the following statements is false regarding the fraud at ArthroCare?

c. Two of ArthroCare's sales executives overstated ending inventory that improperly inflated company revenue and earnings.

When auditing a nonpublic company, the auditor would generally make a decision not to test the operating effectiveness of controls in which of the following situations?

d. All of these are situations when the auditor would likely not test the operating effectiveness of controls.

Which of the following statements is false regarding planning analytical procedures in the revenue cycle?

d. All of these statements are false.

Which of the following statements is true regarding the processing and recording of revenue transactions?

d. Sales transactions typically begin with the receipt of a purchase order from a customer.