CH 11 (Connect)

The best evidence of interest revenue on notes receivable is confirmation with the maker of the note. True False

False

When merchandise is shipped, the shipping department completes a document known as a sales order. True False

False

Accounts receivable that are pledged as collateral for loans should be reclassified as noncurrent assets. True False

False

Accounts with zero balances and accounts that have been written off as uncollectible are not confirmed by the auditors. True False

False

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

A) Shipping documents file. The goal is to determine the population to be sampled from to determine that all sales have been recorded; therefore, the sample should be taken from a population of source documents, here the shipping documents file. None of the other three answers represent source documents that may be sampled from to determine that all sales have been recorded.

The use of the positive (as opposed to the negative) form of receivables confirmation is indicated when: A) there is reason to believe that a substantial number of accounts may be in dispute. B) a large number of small balances are involved. C) there is reason to believe a significant portion of the requests will be answered. D) control risk for accounts receivable is assessed as low.

A) there is reason to believe that a substantial number of accounts may be in dispute.

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

B) Completeness. Comparing shipping documents to related sales invoices addresses the completeness assertion relating to sales. More specifically, it addresses whether all items that have been shipped have been recorded as sales.

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

B) Delivery has occurred or is scheduled to occur in the near future. Answer (2) is not among the criteria because of the portion of the answer that states "scheduled to occur in the near future." Ordinarily delivery must have occurred. Answers (2), (3) and (4) all describe circumstances required to recognize revenue.

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

C) Accounts receivable subsidiary ledger. The objective is to determine the population the auditors would sample from to test the existence assertion for recorded receivables. The direction of testing should be from the accounts receivable subsidiary ledger to the available support, such as sales invoices, bills of lading, sales orders, and customers' orders.

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

D) Assess the allowance for uncollectible accounts for reasonableness. Answer (4) is correct because receivables are valued at net realizable value, and assessing the allowance for uncollectible accounts for reasonableness will help the auditor determine the proper amount. Answer (1) is incorrect because the limited information in the accounts receivable ledger will not make possible tracing details to the shipping documents—also, the shipping documents may not even capture the total sales price that is included in the accounts receivable ledger. Answer (2) is incorrect because while comparing turnover ratios may provide some information on the collectibility of receivables, it is very imprecise. Answer (3) is incorrect because it relates to presentation and disclosure more directly than valuation.

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

D) Inflated sales for the year. Detecting overstated sales is a primary reason for the auditors' review of a client's sales cutoff. For example, shipments made in the first part of January may be improperly included in the December sales total.

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

D) Theft of cash register sales. Theft of cash register sales is an example of misappropriation of assets. Answer (1) is an example of an error while answers (2) and (3) are examples of fraudulent financial reporting.

A note receivable from an officer is considered a related party receivable. True False

True

Accounts receivable should be valued at their net realizable value. True False

True

Receivables judged to be uncollectible should be written off. True False

True

The auditors should mail confirmation requests, and the enclosed envelope for the customer's reply should be addressed to the auditors' office. True False

True

Inspection of notes receivable is adequate evidence of the existence of the notes. True False

False

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

A) And accounts receivable are immaterial, or the use of confirmations would be ineffective. A presumption that receivables will be confirmed requires a combined assessment of inherent risk and controls risk at the low level, immaterial receivables, or circumstances in which the use of confirmations would be ineffective.

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: A) Send positive confirmation requests. B) Send negative confirmation requests. C) Examine evidence of subsequent cash receipts. D) Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

A) Send positive confirmation requests. The auditor would send positive confirmations rather than negative confirmations because the fact that the balances are delinquent may indicate that amounts are in dispute. Examining subsequent cash receipts, answer (3), is unlikely to be effective since many of the accounts will not have been collected. Inspection of internal records, answer (4), is likely to result in less credibility evidential matter than confirming the accounts.

Which of the following is an effective control over accounts receivable? A) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records. B) Only persons who handle cash receipts should be responsible for the preparation of documents that reduce accounts receivable balances. C) Responsibility for approval of the write-off of uncollectible accounts receivable should be assigned to the cashier. D) Balances in the subsidiary accounts receivable ledger should be reconciled to the general ledger control account once a year, preferably at year end.

A) The billing function should be assigned to persons other than those responsible for maintaining accounts receivable subsidiary records.

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: A) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. B) Write-offs must be approved by the accounts receivable department. C) Write-offs must be authorized by the shipping department. D) Write-offs must be supported by an aging schedule showing that only receivables overdue by several months have been written off.

A) Write-offs must be approved by a responsible official after review of credit department recommendations and supporting evidence. Write-offs of receivables should be approved by a responsible officer after a review of the account by the credit department. Answer (2) is incorrect because accounts receivable, a recordkeeping function, should not authorize such entries. Answer (3) is incorrect because other procedures (e.g., a review of shipping documents) may be used to determine that the goods were received and because the shipping department would have no other information on whether the receivable is likely to be collectible. Answer (4) is incorrect because the account need not be overdue by several months as a "current" receivable may become worthless due to, for example, a bankruptcy.

The auditors have not been able to confirm a large account receivable, but they have satisfied themselves as to the proper amount of the receivable by means of alternative auditing procedures. The auditors' report on the financial statements should include: A) neither a comment on the use of alternative auditing procedures nor an opinion qualification. B) both a scope qualification and an opinion qualification. C) an opinion qualification, but reference to the use of alternative auditing procedures is not required. D) a description of the limitation on the scope of their audit and the alternative auditing procedures used, but an opinion qualification is not required.

A) neither a comment on the use of alternative auditing procedures nor an opinion qualification.

Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to: A) require receiving reports to support all credit memorandums before they are approved. B) have the sales department independent of the accounts-receivable department. C) mail monthly statements. D) prenumber and account for all credit memorandums.

A) require receiving reports to support all credit memorandums before they are approved.

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable? A) Request that customers' payment checks be made payable to the company and addressed to the treasurer. B) Have customers send payments directly to the company's depository bank. C) Segregate duties so that no employee has access to both checks from customers and currency from daily cash receipts. D) Segregate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.

B) Have customers send payments directly to the company's depository bank.

For effective internal control, the billing function should be performed by the: A) shipping department. B) accounting department. C) sales department. D) credit and collection department.

B) accounting department.

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31, 20X0. By this procedure, the auditor would be most likely to learn of which of the following? A) An October invoice was improperly computed. B) An account balance is past due and should be written off. C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period. D) An October check from a customer was posted in error to the account of another customer with a similar name.

C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.

To determine that sales transactions have been recorded in the proper accounting period, the auditors perform a cutoff review. Which of the following best describes the overall approach used when performing a cutoff review? A) Examine cash receipts in the subsequent period. B) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. C) Analyze transactions occurring within a few days before and after year end. D) Confirm year-end transactions with regular customers.

C) Analyze transactions occurring within a few days before and after year end

Which of the following statements regarding the audit of negotiable notes receivable is correct? A) Notes receivable discounted without recourse are confirmed via the standard form for confirmation of deposits and loans at financial institutions used in the audit of cash. B) Physical inspection of a note by the auditors provides conclusive evidence. C) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection. D) Notes receivable discounted with recourse need not be confirmed.

C) Confirmation in writing from the holder of the note is considered an acceptable alternative to inspection.

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

D) 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 relates to control risk not inherent risk. The other three replies all relate to inherent risk.

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

D) Recording sales when the customer is likely to return the goods. A sale either shouldn't be recorded, or a proper allowance for returns should be established when a customer is likely to return the goods. Thus, simply recording the sale is an example of fraudulent financial reporting when the customer is likely to record the goods. Answers (1) and (3) are examples of errors, while answer (2) is an example of misappropriation of assets.

Which of the following audit procedures is most effective in testing credit sales for understatement? A) Trace sample of recorded sales from ledger to initial sales slip. B) Confirm accounts receivable. C) Age accounts receivable. D) Trace sample of initial sales slips through summaries to recorded general ledger sales.

D) Trace sample of initial sales slips through summaries to recorded general ledger sales.

The confirmation of the client's trade accounts receivable is a means of obtaining evidential matter and is specifically considered to be a generally accepted auditing: A) standard. B) principle. C) practice. D) procedure.

D) procedure.

The auditor examines copies of sales invoices only for the initials of the person responsible for checking the extensions. This is an example of a: A) substantive procedure. B) dual purpose test. C) test of balances. D) test of controls.

D) test of controls.

Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared. True False

False

Sales can be recorded in the sales journal directly from serially numbered purchase orders, thus eliminating the need for sales invoices to be serially numbered. True False

False

Since customers that cannot pay are ordinarily asked not to reply, mailing of confirmations is a test of collectibility of accounts receivable. True False

False

The accounts receivable section of the accounting department should open incoming mail and post collections to the customer's accounts. True False

False

The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned. True False

False

The person maintaining the accounts receivable subsidiary ledger should reconcile the subsidiary ledger to the accounts receivable controlling account at least once a month. True False

False

The primary control that prevents the shipping department from making unauthorized shipments of merchandise is the use of serially numbered shipping documents. True False

False

Tracing a sample of shipping documents to recorded sales is designed to test the existence of recorded sales. True False

False

When it is "impossible" to confirm accounts receivable, the auditors can never issue an unmodified opinion on the client's financial statements. True False

False

The auditors will generally confirm a proportionately larger sample of accounts with large balances than accounts with small balances. True False

True

The use of serial numbers on shipping documents and sales invoices provides assurance that all goods shipped are billed to customers and recorded as sales. True False

True