ACC 450 - Chapter 11

Which assertion relating to sales is most directly addressed when the auditors compare a sample of shipping documents to related sales invoices? Existence or occurrence. Completeness. Rights and obligations. Presentation and disclosure.

Completeness

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? Answer Sales. Cash. Inventory. Accounts receivable.

Inventory.

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

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

A receiving department compares inventory items received with copies of purchase orders. The purchase orders list the name of the vendor and do not list the quantities of the material ordered. Using the purchase orders, the receiving department is most likely to detect: Answer Partial deliveries. Unapproved sales orders. Deliveries of a greater quantity of items than those ordered. Deliveries for which no purchase order was issued.

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Which of the following is not true relating to the auditors' observation of the client's physical inventory? Answer The auditors should evaluate the adequacy of the client's counting procedures. The auditors should evaluate the client's planning of the physical inventory. The auditors should take test counts of the client's inventory. The auditors should make certain that consigned items from suppliers are included in physical inventory totals.

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

AR Subsidiary Ledger

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

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.

Which of the following is least likely to be accurate statement concerning characteristics of an audit? Answer Use of a perpetual rather than a periodic inventory system is likely to affect the nature of cutoff errors made at year-end. Characteristics of the double entry bookkeeping system make it possible to test for overstated sales when tests of accounts receivable are being performed. An analysis of inventory turnover addresses whether the proper method of determining inventory costs--as contrasted to market values--is being applied. The direction of tests for overstatement errors is generally directed from the recorded entry to source documents.

An analysis of inventory turnover addresses whether the proper method of determining inventory costs--as contrasted to market values--is being applied.

There is a presumption that auditors will confirm accounts receivable unless the auditors' assessment of the risk of material misstatement is low. And accounts receivable are immaterial, or the use of confirmations would be ineffective. And accounts receivable are composed of large accounts. And the effectiveness of confirmations is absolutely determined. Or accounts receivable are from extremely reputable customers.

And accounts receivable are immaterial, or the use of confirmations would be ineffective.

Which of the following would provide the most assurance concerning the valuation of accounts receivable? Trace amounts in the accounts receivable subsidiary ledger to details on shipping documents. Compare receivable turnover ratios to industry statistics for reasonableness. Inquire about receivables pledged under loan agreements. Assess the allowance for uncollectible accounts for reasonableness.

Assess the allowance for uncollectible accounts for reasonableness.

An auditor suspects that certain client employees are ordering merchandise for themselves over the Internet without recording the purchase or receipt of the merchandise. When vendors' invoices arrive, one of the employees approves the invoices for payment. After the invoices are paid, the employee destroys the invoices and the related vouchers. In gathering evidence regarding the fraud, the auditor most likely would select items for testing from the file of all Answer Receiving reports. Vendors' invoices. Approved vouchers. Cash disbursements.

Cash Disbursements

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 Answer Sale of long-term debt. Collection of receivables. Purchase of merchandise inventory. Payment of accounts payable.

Collection of receivables.

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

Confirmation requests should be signed by the auditors

Which of the following is not among the criteria that ordinarily exist for revenue to be recognized? Collectibility is reasonably assured. correct Delivery has occurred or is scheduled to occur in the near future. Persuasive evidence of an arrangement exists. The seller's price to the buyer is fixed or determinable.

Delivery has occurred or is scheduled to occur in the near future.

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

Determine the expected day of collection of each of the receivables

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

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

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: Answer Verify the validity of the recorded receivables. Estimate credit losses. Test the accuracy of recorded charge sales. Consider internal control over credit sales.

Estimate credit losses.

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

Examine cash receipts received after year-end.

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: Answer Expand tests of collectibility. Increase the balance in the allowance for bad debts accounts. Review the credit and collection policy. Review the going concern ramifications.

Expand tests of collectibility.

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

Inflated sales for the year

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

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

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

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

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when: Answer No reply to a negative confirmation request is received. Pledging of the receivables is probable. Collectibility of the receivables is in doubt. No reply to a positive confirmation request is received.

No reply to a positive confirmation request is received

Tracing recorded sales transactions to the bills of lading provides evidence about the: Answer Collectibility of sales transactions. Occurrence of sales transactions. Billing of all sales transactions. Completeness of sales transactions.

Occurrence of sales transactions

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

Oral responses obtained by the auditor through a telephone call

Which of the following is least likely to be considered an inherent risk relating to receivables and revenues? Restrictions placed on sales by laws and regulations. Decline in sales due to economic declines. Decline in sales due to product obsolescence. Over-recorded sales due to a lack of control over the sales entry function.

Over-recorded sales due to a lack of control over the sales entry function.

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

Physically examine items sold.

Which of the following is an effective control that encourages receiving department personnel to count and inspect all merchandise received? Answer Vouchers are prepared by accounts payable department personnel only after they match item counts on the receiving report with the purchase order. Internal auditors periodically examine, on a surprise basis, the receiving department copies of receiving reports. Quantities ordered are excluded from the receiving department copy of the purchase order. Receiving department personnel are expected to match and reconcile the receiving report with the purchase order.

Quantities ordered are excluded from the receiving department copy of the purchase order.

The accuracy of perpetual inventory records may be established, in part, by comparing perpetual inventory records with: Answer Purchase orders. Purchase requisitions. Receiving reports. Vendor payments.

Receiving Reports

A "bill and hold" scheme is most likely to include: Answer Shipment of items to a customer beyond what the customer has ordered. Recording as sales items that the company retains as of year-end. Selling items at substantial discounts near year-end. Billing of items that are held by customers for future revenue production purposes.

Recording as sales items that the company retains as of year-end.

Which of the following is most likely to be an example of fraudulent financial reporting relating to sales? Inaccurate billing due to a lack of controls. Lapping of accounts receivable. Misbilling a client due to a data input error. Recording sales when the customer is likely to return the goods.

Recording sales when the customer is likely to return the goods.

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

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

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? Answer Cash receipts. Purchases. Payroll. Sales.

Sales.

Cooper, CPA, is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely: Send positive confirmation requests. Send negative confirmation requests. Examine evidence of subsequent cash receipts. Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

Send positive confirmation requests

To determine that all sales have been recorded, the auditors would select a sample of transactions from the: Shipping documents file. Sales journal. Accounts receivable subsidiary ledger. Remittance advices.

Shipping Document File

In verifying credits to perpetual inventory records of a non-manufacturing firm, the auditor would be most interested in examining the: Answer Vendors' invoices. Receiving reports. Purchase orders. Shipping documents.

Shipping documents.

Effective internal control for purchases generally can be achieved in a well-planned organizational structure with a separate purchasing department that has: Answer A direct reporting responsibility to controller of the organization. The ability to prepare payment vouchers based on the information on a vendor's invoice. The authority to make purchases of requisitioned materials and services. The responsibility of reviewing purchase orders issued by user departments.

The authority to make purchases of requisitioned materials and services.

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

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? Answer 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. Internal control activities over the recording of cash receipts have been improved since the end of the prior year.

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

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use? Answer The positive form used for trade receivables and the negative form for other receivables. The positive form used for large balances and the negative form for the small balances. The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory. The positive form for small balances, and the negative form for large balances.

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

Which of the following is an internal control weakness for a company whose inventory of supplies consists of a large number of individual items? Answer Perpetual inventory records are maintained only for items of significant value. The cycle basis is used for physical counts. The storekeeper is responsible for maintenance of perpetual inventory records. Supplies of relatively little value are expensed when purchased.

The storekeeper is responsible for maintenance of perpetual inventory records.

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

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

Which of the following is an example of misappropriation of assets relating to sales? Accidentally recording cash that represents a liability as revenue. Holding the sales journal open to record next year's sales as having occurred in the current year. Intentionally recording cash received from a new debt agreement as revenue. Theft of cash register sales.

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

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: Answer Tracing sales invoices to shipping documents to tests the completeness of reported sales. Tracing sales invoices to shipping documents to test the occurrence of reported sales. Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable. Tracing shipping documents to sales invoices to test the occurrence of reported sales.

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

Identify the control that is most likely to prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable: Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. Write-offs must be approved by the accounts receivable department. Write-offs must be authorized by the shipping department. Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence.

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

he billing department accounts for all shipping documents.