Chapter 11 HW

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

FALSE

To test the existence assertion for recorded receivables, an auditor 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.

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts? A. Reviewing an aging of accounts receivable. B. Examination of cash receipts subsequent to the balance sheet date. C. Confirming current (0-30 day) year-end accounts receivable. D. Reviewing credit files for selected account

C. Confirming current (0-30 day) year-end accounts receivable.

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts. T/F

TRUE

Receivables judged to be uncollectible should be written off. T/F

TRUE

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.

ASend positive confirmation requests.

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests? A. Examine bills of lading. B. Physically examine items sold. C. Examine correspondence. D. Examine subsequent cash receipts.

B. Physically examine items sold.

An auditor decides to use the blank form of positive accounts receivable confirmation. The auditor should be aware that the blank form may be ineffective because: A. All accounts do not have an equal opportunity to be selected for confirmation. B. Accounts unconfirmed may have already been written off as uncollectible. C. Few responses may occur because more effort is required of recipients. D. Accounts actually confirmed may not be representative of the population.

C. Few responses may occur because more effort is required of recipients.

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address. T/F

FALSE

Credit approval should be obtained after the goods are shipped, but before the related sales invoice is prepared. T/F

FALSE

The accounts receivable section of the accounting department should open incoming mail and post checks and credit card payments to the customer's accounts. T/F

FALSE

The auditors should perform alternative auditing procedures on all negative confirmation requests that are not returned. T/F

FALSE

When it is impossible to confirm accounts receivable, the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures. T/F

TRUE

When properly controlled, serial numbers on shipping documents and sales invoices may be used to help provide assurance that all goods shipped are billed to customers and recorded as sales. T/F

TRUE

In their work on accounts receivable and elsewhere in an audit, the independent auditors often make use of confirmation requests. a. What is an audit confirmation request? b. What characteristics should an audit confirmation response possess if a CPA firm is to consider it to be valid evidence? c. Distinguish between a positive confirmation request and a negative confirmation request in the auditors' examination of accounts receivable. d. In confirming a client's accounts receivable, what characteristics should be present in the accounts if the CPA firm is to use negative confirmations?

a. An audit confirmation request is a written communication received by the auditors directly from a party outside the client organization. The written communication usually affirms the existence of, and rights to, an amount recorded in the client's accounting records. b. To be valid evidence, an audit confirmation response must be received directly by the CPA firm from the outside party who has replied to the confirmation request. c. A positive confirmation request requires a reply from the client's customer in every case. A negative confirmation request requires a reply only if the balance for which confirmation has been requested is incorrect. d. Negative confirmation requests may be used for situations in which (1) the combined assessed level of inherent and control risk is low; (b) a large number of small balances are involved; and (c) the auditors have no reason to believe that the recipients of the requests are not likely to give them consideration.

You are involved with the audit of Jelco Company for year 1 and have been asked to consider the confirmation reply results indicated below. For each confirmation reply, select the proper action to be taken from the following possible actions: (Each of the "Action" items may be used once, more than once, or not at all.) (1)Exception; propose an adjustment. (2)Send a second confirmation request to the customer.(3)Examine shipping documents and/or subsequent cash receipts. (4)Verify whether the additional invoices noted on the confirmation reply pertain to the year under audit or the subsequent year. (5)Not an exception; no further audit work is necessary. A. "We mailed the check for this on December 31." B. "We returned those goods on December 2." You have been able to determine that the goods were received by the client on December 29, but not recorded until January 2. C. "We also owe for two more invoices for purchases we made around year-end; I'm not sure of the exact date." D. "We are very satisfied with Jelco and plan to purchase from them in the future." E. "While that's what we owe, we didn't owe it on December 31 because we didn't receive the goods until January 2 of year 2." F. You received no reply to a negative confirmation request to Adams Company G. You received no reply to a positive confirmation request to Blake Company Subsequently you recalled that Blake Company has a policy of not responding to confirmations—in writing or orally.

A. 3 B. 1 C. 4 D. 5 E. 3 F. 5 G. 3

An auditor may use confirmations of accounts receivable. Reply as to whether the following statements are correct or incorrect with respect to the confirmation process when applied to accounts receivable. A. The confirmation requests should be mailed to respondents by the CPAs. B. A combination of positive and negative request forms must be used if receivables are significant. C. Second requests are ordinarily sent for positive form confirmation requests when the first request is not returned. D. Confirmations address existence more than they address completeness. E. Confirmation of accounts receivable is a generally accepted auditing standard. F. The auditors ordinarily should confirm accounts receivable. G. Auditors should always confirm the total balances of accounts rather than individual portions (e.g., if the balance is made up of three sales, all three should be confirmed). H. Auditors may ignore individually immaterial accounts when confirming accounts receivable. I. The best way to evaluate the results of the confirmation process is to compare the total misstatements identified to the account's tolerable misstatements amounts. J. Accounts receivable are ordinarily confirmed on a standard form developed by the American Institute of Certified Public Accountants and the Financial Executives Institute.

A. correct b. incorrect c. correct d. correct e. incorrect f. correct g. incorrect h. correct i. incorrect j. incorrect

For each of the procedures described in the table below, identify the audit procedure performed and classification of the audit procedure using the following: Audit Procedures: Classification of Audit Procedure: (1)Analytical procedure (9)Substantive procedures (2)Confirmation (10)Test of controls (3)Inquiry (4)Inspection of records or documents (5)Inspection of tangible assets (6)Observation (7)Recalculation (8)Reperformance A. Requested responses directly from customers as to amounts due. B. Compared total bad debts this year with the totals for the previous two years. C. Questioned management about likely total uncollectible accounts. D. Watched the accounting clerk record the daily deposit of cash receipts. E. Examined invoice to obtain evidence in support of the ending recorded balance of a customer. F. Compared a sample of sales invoices to credit files to determine whether the customers were on the approved customer list. G. Examined a sample of sales invoices to see if they were initialized by the credit manager indicating credit approval.

Audit Procedure Classification of audit Procedures A. 2 9 B. 1 9 C. 3 9 D. 6 10 E. 4 9 F. 8 10 G. 4 10

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

B. Confirmation requests should be signed by the auditors.

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts? A. Accounts receivable divided by Cost of goods sold. B. Aging of accounts receivable. C. Cash Sales divided by Accounts receivable. D. Year 2 accounts receivable compared to year one accounts receivable.

B. Aging of accounts receivable.

Which of the assertions related to accounts receivable will confirmations be least likely to provide evidence in support of? A. Rights and obligations B. Completeness C. Allocation and valuation D. Existence

B. Completeness

The confirmation of accounts receivable is most closely associated with: A. Business risk. B. Detection risk. C. Inherent risk. D. Relative risk.

B. Detection risk.

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. Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period. B. Confirm year-end transactions with regular customers. C. Examine cash receipts in the subsequent period. D. Analyze transactions occurring within a few days before and after year-end.

D. Analyze transactions occurring within a few days before and after year-end.

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.

Which of the following is the best argument against the use of negative accounts receivable confirmation requests? A. The cost-per-response is excessively high. B. There is no way of knowing if the intended recipients received them. C. Recipients are likely to feel that in reality the confirmation is a subtle request for payment. D. The inference drawn from receiving no reply may not be

D. The inference drawn from receiving no reply may not be.