Auditing & Assurance Chapter 7

Accuracy

- Are all credit sales approved by the credit department prior to shipment? - Are invoice quantities compared to shipped quantities? - Are summary journal entries approved before posting? - Are sales prices and terms based on approved standards? - Are periodic sales data reported directly to general ledger accounting independent of accounts receivable accounting?

Completeness

- Are sales invoice blanks prenumbered? - Are prenumbered bill of lading prepared in the shipping department?

Occurrence

- Is access to sales invoice blanks restricted? - Are returned sales credits supported by documentation?

Sales invoice

A bill sent to customers for payment showing the amount due and payment terms

Packing slip

A document included in a shipment that shows the description and quantity of the goods being shipped

Negative confirmation

A form sent to a customer by auditors requesting that the customer respond whether the balance shown on it is incorrect or not

bill and hold

A fraudulent financial reporting activity by which a company recognizes a sale even though it does not ship the merchandise to the customer but holds it in its own warehouse

Positive confirmation

A letter sent to a customer by auditors requesting that the customer respond whether the balance show is correct or not

Aged Trial Balance

A schedule that lists each individual receivable and indicates whether it is current or past due for how long

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

dual purpose procedure

An audit procedure that simutaneously serves the substantive purpose(obtain direct evidence abou the dollars in the account balances) and the test of controls purpose(obtain evidence about the companies performance of its own control activities)

________ needs to be assured in order to recognize revenue.

Collectibility

Valuation of assets

Compare the amount of credits given to customers in the subsequent period to the amount estimated by management

Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004. This situation is an example of a violation of which of the following assertions?

Completeness

Existence of assets

Confirm a sample of receivables by direct communication with the debtors

______ communication with debtors is the most conclusive step in verifying accounts receivable.

Direct

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except

Do nothing for immaterial balances.

Cutoff

Does the accounting manual contain instructions to date sales invoices on the shipment date?

Recording sales in the wrong period based on incorrect shipping information

Error

Revenue earned from franchise is incorrectly calculated.

Error

Confirmations of accounts receivable provide the most evidence for which of the following assertions?

Existence

Holding sales journal open to record next year's sales in the current year.

Fraud

Intentional overshipment of goods.

Fraud

Recording a fictitious sale without receiving a customer order for the goods.

Fraud

Recording a sale for goods that the customer is anticipated to return.

Fraud

The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

Inherent risk was particularly high for accounts receivable.

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

Invoice quantities are compared to shipment and customer order quantities.

Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues?

Is customer credit approved before orders are shipped?

Which of the following controls is designed to meet the completeness assertion?

Prenumbering invoices, shipping documents, and sales orders.

Financial statement presentation and disclosure of assets

Provide a list of related parties to all members of the audit team to assist in identification of the transactions

Which of the following accounts is not normally part of the revenue and collection cycle?

Purchases Returns and Allowances

Rights to assets

Review confirmations of liabilities to determine if receivables have been sold

Sales are normally recorded on the date of the

Sales invoice.

To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following accounts?

Sales returns

A client has a separate sales group for its largest "preferred" customers. This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

Send out positive confirmations on a large sample of these customers.

When accounts receivable are confirmed at an interim date, auditors need not be concerned with

Sending negative confirmations to all customers as of the year-end date.

Factor

The action to sell accounts receivable to another party (the factor) at a discount from face value

Revenue Recognition

The recording of revenues in the general ledger often done fraudulently by schemes such as bill and hold

Sales cutoff Tests

The tests that ensure that sales are recorded in the proper period when they are shipped--and that the cost of the sales is recorded and removed from this inventory

Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?

Unrecorded sales at year-end

Which of the following statements is correct concerning the use of negative confirmation requests?

Unreturned negative confirmation requests rarely provide significant explicit evidence.

Cutoff of transactions

Vouch sales and cash receipt transactions occurring near period end

bill of lading

a contract between a seller and a common carrier to verify shipment of goods

Revenues are deemed to be earned when the company has ______ what it must do to fulfill its obligation.

accomplished

Side _________ can substantially alter the terms of a sale.

agreements

Accountants should be under orders to record sales and accounts receivable when

all supporting documentation of shipping is in order.

Receivables that have been sold should not remain as a(n) _____ on the company's books.

asset

Confirmations do not necessarily mitigate the risk of _________.

bad debt

A small business owner can best offset the lack of separation of duties by

being actively involved in the accounting process.

The SEC requires all of the following for revenue to be recognized except

cash is collected.

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of

completeness.

Testing the reconciliation for accounts receivable to the general ledger ensures that the software is programmed _________.

correctly

Overstatement may occur when sales for the next period are recorded in the _______ period.

current

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because

customers may not be inclined to report understatement errors in their accounts.

One way to avoid misstatement of revenue is to ensure the client has proper ________.

cutoff policies

To be recognized, revenues must also be realized or realizable and

earned.

The document that generates recording of a sale is the

invoice.

Confirmations are more persuasive than subsequent cash receipts as they help mitigate the risk of _______.

lapping

To test collectibility of receivables, auditors may consider credit ratings for debtors of _____receivables.

large

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when

no reply to a positive confirmation request is received.

AR confirmations can be sent electronically or via ________.

paper form

The file that contains sales transactions that were initiated in the system but are not yet completed is the

pending order master.

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except

preparing the confirmation letters.

In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by

processing customer orders, granting credit, delivering goods, and billing customers.

When accounts receivables are confirmed at an interim date, auditors need not be concerned with

sending negative confirmations to all the customers as of the year-end date.

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that

shipments to customers were invoiced.

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the

Accounts receivable listing.

Completeness of assets

Select a sample of sales invoices in the subsequent period, and examine the related shipping documents for date of shipment to ascertain whether some of those shipments at the end of the period were inadvertently not recorded

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that

entries in the accounts receivable subsidiary ledger were properly invoiced.

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to

estimate credit losses.

In the audit of accounts receivable, the most important emphasis should be on the

existence assertion.

Management may have fraudulently overstated revenue by making __________ journal entries.

inappropriate

Many instances of misstatement are based on the inappropriate recognition of ______.

revenue

Elm Tree Inc. has a December 31 year end. On October 15, the auditor evaluated and tested Elm Tree's internal control procedures over the sales recording process and finds the controls to be effective. At a minimum, the auditor's year-end procedures for testing internal control procedures must include

tests of the client's internal control procedures from October 15 through the year end.

Revenues are normally considered to have been earned when

the company has substantially accomplished what it must to be entitled to the benefits.

Write-offs of doubtful accounts should be approved by

the treasurer.

When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the client's

treasurer.