Chapter 11 LSM
T or F: Any adjustments to sales for allowances and returns must be supported by serially numbered credit memorandum that is signed by an employee that is responsible for the maintenance of customers' ledgers.
False
T or F: When performing any tests of sales transactions, auditors do not need to be concerned with consigned items.
False
This department contributes to the monitoring of internal control over the revenue cycle by periodically taking over the monthly statement process, sending confirmations to customers, and reviewing revenue cycle documentation.
Internal audit
Which department is typically responsible for taking and controlling customers' orders?
Sales
Audit documentation (working papers) for receivables and revenue include:
comparative analysis of revenue analysis of other accounts receivable
External factors that can influence the revenue cycle include:
competition, customer demand, regulations, and economic conditions
Interest earned (interest reconciliation)
computed based on the terms of note (source)
Ending accrued interest receivable (interest reconciliation)
computed by the auditors (source)
Audit evidence obtained as a direct written response to the auditors from a third party in paper form or by electronic or other medium is an external
confirmation
The process of writing-off uncollectible receivables should be initiated by the:
credit manager
Beginning accrued interest receivable (interest reconciliation)
prior year audit workpaper (source)
Accounts receivable can be confirmed at an interim date rather than at year-end if risk of material misstatement for existence is:
low
The billing department is responsible for:
preparing and mailing the sales invoice reviewing the information in formal contracts with customers comparing shipping documents with sales orders and customers' purchase orders
For related party transactions, the primary audit objective is:
presentation and disclosure
Proper internal controls over credits for merchandise that has been returned typically will include a stipulation that ________ before credit can be given.
the goods be received and fully examined
For a reasonableness test, the accounts receivable turnover ratio for the current year should be compared to:
the ratio from last year average ratios for the industry budgeted ratios
Response to confirmation request prepared and delivered.
Customer of audit client (responsible for completing confirmation process)
Management's commitment to integrity and ethical values is an important component in the control of revenue and receivables
True
Confirming accounts receivable is generally required by
U.S. auditing standards only
In obtaining assurance that all shipments have been billed, auditors should:
account for all documents by serial number.
A listing of individual customers' accounts classified by the number of days each account has been outstanding is a(n) ___________ of trade accounts recivables.
aged trial balance
When a customer's credit is not approved, the customer should be notified and:
an effort to negotiate other terms should be made.
Auditors should be most concerned with investigating charge-offs of a note or account receivable from:
an officer, stockholder, or director.
Sales that are invoiced but not shipped are called ______ and _______ transactions
bill, hold
The shipping document created at the time of loading the goods into cars or trucks is called a(n) ________ of _______.
bill, lading
For effective control, the custodian of notes receivable should not have access to:
both cash and general accounting records.
Notes receivable on hand should be inspected at the same time as the count of ________ to prevent the concealment of shortages
cash and securities
Problems auditors may encounter in auditing revenue recognition include:
cash receipts form franchising fees may be inappropriately recognized before services are rendered notes receivables may need to be discounted to present value
The employee responsible for controlling and depositing checks should be the:
cashier
To address the threat of fictitious sales at year-end, auditors should be aware of and investigate all of the following excepts:
changes in accounting principles that lead to decreases in recorded revenue
To strengthen controls over credit sales and reduce the opportunity for fraud, companies should ______ for all revenue cycle activities.
divide duties between different departments
Audit documentation (working papers) for receivables and revenues include:
documentation of Internal controls aged trial balance of trade accounts receivable analysis of allowance for uncollectible accounts and notes.
When positive confirmations are used and there are non-respondents, the auditors should:
follow up with a second request for information.
If management refuses to allow the auditors to perform external confirmation procedures:
management's reasons must be evaluated alternative procedures must be performed to obtain relevant and reliable evidence
A customer's response to a receivable confirmation restrictive language concerning its use, the restriction ________ the reliability of the response as audit evidence.
may or may not invalidate
Internal factors that can influence the revenue cycle include:
new type of sales transactions new products and services
Auditors can gather evidence of the _______ pledging of receivables, which assigns the claim against the receivable as security for a debt, through external confirmations.
pledging
initial steps in controlling a customer's order (before preparation of sales order) include:
registering the customer's purchase order and determining if the order can be filled within a reasonable time.
Positive (confirmation request)
request addressed to the debtor asking for a reply
Auditors test management's estimate for the allowance for uncollectible accounts by:
reviewing and testing management's method of developing the estimate developing their own estimate and comparing it to management's
Management monitoring activities over the revenue cycle include all of the following:
reviewing the aging of accounts receivable report soliciting feedback from customer about billing accuracy reviewing sales performance reports
For auditors, the audit of revenue represents an area of __________ risk.
significant
Risks identified by auditors that require special audit consideration are referred to as ________ significant risks.
significant
To identify related party transactions, auditors should review all of the following:
SEC filings or proxy statements transactions with customers or suppliers that have unusual terms conflict of interest statements completed by management
Negative (confirmation request)
Request asking for a reply only if the balance shown is incorrect.
Differences reported by customers in confirmation replies typically arise because of:
timing lags in recording sales transactions timing lags in recording cash receipts
Notes receivable are typically used for transactions of substantial amounts with customers an typically represent the single most important asset for
Banks
Confirmation request prepared and delivered
Auditors (responsible for completing confirmation process)
Auditors perform an independence computation of interest earned during the year on notes receivable to audit the valuation of:
discount amortization interest income interest receivable
Auditors perform an independent computation of the interest earned during the year on notes receivable to audit the valuation of:
discount amortization interest income interest receivable
The auditor's assessment of the risks of material misstatement include assessment of _______ risk and _______ risk, which are used to design further audit procedures.
inherent, control
To develop thier own estimate of the allowance for uncollectible accounts auditors may:
investigate the credit ratings for delinquent and unusually large accounts review collectible status of each delinquent account with credit manager review confirmation exceptions for indications of amounts in dispute.
Interest collected (interest reconciliation)
traced to cash receipts records (source)
