Audit Chapter 7
Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company?
Purchasing raw materials
Which of the following statements regarding the revenue cycle are correct?
Tests of controls often support a reduction in control risk. It consists of routine transactions. There is always a presumptive risk of fraud.
Which of the following statements regarding the revenue cycle are correct?
There is always a presumptive risk of fraud. It consists of routine transactions. Tests of controls often support a reduction in control risk.
True or false: Physical protection of accounts receivable files is an important facet of control.
True
When an auditor receives an oral response to a confirmation ______.
a written response still needs to be requested alternative audit procedures may be warranted
When an auditor receives an oral response to a confirmation ______.
alternative audit procedures may be warranted a written response still needs to be requested
Substantive procedures are ______.
always performed in the revenue cycle
The risk that an unqualified opinion will be issued on financial statements that contain a material misstatement is the definition of ______ risk.
audit
The risk that an unqualified opinion will be issued on financial statements that contain a material misstatement is the definition of
audit risk
If a control is missing or ineffective, ______.
auditors need to design substantive procedures related to control failure the risk of material misstatement increases
The auditor assess inherent risk to determine where a material misstatement could enter the process ______ the consideration of any internal controls.
before
The form the carrier signs to verify goods are shipped is a(n) ______.
bill of lading
Difficulties in estimating the allowance for doubtful accounts can be due to ______.
changing economic conditions revised credit policies change in customer base
Auditors review items in the pending order file for evidence of the ____ of recorded sales and accounts receivable.
completeness
Auditors review items in the pending order file for evidence of the ______ of recorded sales and accounts receivable.
completeness
Prenumbered documents are important in testing the ____ assertion and the ____
completeness occurence
Regarding the revenue process, management should ______.
continually review revenues and compare them to budgeted and forecasts review merchandise returns scrutinize total write-offs of accounts receivables
Which of the following documents should be matched before recording revenue?
customer invoice customer sales order evidence of shipment
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.
cutoff
A way to subject all items in a population of occurrences for a particular control activity in the revenue cycle is to use
exception
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
exception
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
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
Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the ______ of customers' balances directly from the customer.
existence rights & obligations
If a customer confirms that an account exists, the auditor ______.
must still review the account for collectability
Justifications for not using confirmations may include ______.
other procedures provide sufficient, competent evidence confirmations would be ineffective receivables are not material
A strong entity-level control in the revenue process is ______.
overall performance review by management
A description of the goods being shipped as well as the quantity shipped is found on the ______.
packing slip
The most effective alternative procedure to confirmations to ensure existence is examining ______.
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.
substantive
If a control is missing or ineffective, ______.
the risk of material misstatement increases auditors need to design substantive procedures related to control failure
True or false: Prenumbered documents are an example of an internal control.
true
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
valuation
When the auditor evaluates the reasonableness of the allowance for doubtful accounts, ____ is a high risk assertion.
valuation
typical manufacturing company-The basic activities in the revenue and collection cycle for a company like this are
(1) receiving and processing customer orders, including credit approval; (2) delivering goods and services to customers; (3) billing customers and accounting for accounts receivable; and (4) collecting and depositing cash received from customers
Prenumbered documents are important in testing the ___ assertion and the ___ assertion
1. completeness 2. occurrence
The risk of material misstatement is a combination of ____ risk and ____ risk.
1.inherent 2.control
Which of the following statements are correct?
Confirmation returned as "undeliverable" are always a red flag. Confirming a specific transaction is often more effective than confirming the account balance.
Which of the following statements are correct?
Confirming a specific transaction is often more effective than confirming the account balance. Confirmation returned as "undeliverable" are always a red flag.
True or false: Auditing standards recommend but generally do not require the use of confirmations for accounts receivable.
False
Which of the following statements regarding the revenue cycle are correct?
It consists of routine transactions. There is always a presumptive risk of fraud. Tests of controls often support a reduction in control risk.
According to accounting standards, to be recognized, revenue must be
realized or realizable and earned.
Access to accounts receivable records gives an individual ______,
recording responsibility authorization
There is no such thing as a typical
revenue and collection cycle.
Sales must be realized or realizable and earned in order to be recorded under the accounting standards related to
revenue recognition
Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the ______ of customers' balances directly from the customer.
rights & obligations existence