Chapter 7: Revenue And Collection Cycle
Which of the following SEC criteria for revenue recognition is incorrect?
A delivery or service has been promised.
Match the tests of controls to the assertion tested.
Accuracy of revenue and accounts receivable - Vouch prices to approved price list. Accuracy of revenue - Observe client comparing shipping quantities to quantities recorded as sold. Cutoff of revenue - Trace shipping documents to sales invoice date. Check FOB terms. Classification of accounts receivable - Trace posting of intercompany sales, sales returns, etc. to sales.
Which of the following statements regarding confirmations are correct?
Auditors may choose to ask about entire account balances or specific invoices only. A negative form is acceptable when the client's customers are expected to consider the confirmations properly. The positive form is the more common one used.
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 Reason: Confirmations is considered a required auditing procedure.
True or false: When vouching invoices and sales journal entries to price lists, the auditor must be sure to have the most up-to-date price list available.
False Reason: The auditor must be sure to have the price list that was in effect at the time of the customer's order.
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.
Which of the following statements regarding confirmations are correct?
Nonresponding positive confirmation customers should be audited by alternative procedures. The lack of response to a negative confirmation is not a guarantee it was read or received. When exceptions cannot be resolved auditors should consider if fraud has occurred.
"Frequent deficiencies related to the design and performance of audit procedures that address the assessed risk of material misstatement, particularly when auditing revenue" was observed in a 2018 inspection conducted by the ______.
PCAOB
Which of the following is NOT a basic activity in the revenue and collection cycle for a typical manufacturing company?
Purchasing raw materials
Revenue generally is realized or realizable and earned when persuasive evidence of an arrangement exists, delivery has occurred or services have been rendered, the price is fixed or determinable and collectability is reasonably ensured according to ______ standards.
SEC
True or false: Auditors typically achieve an understanding of controls by completing a walkthrough of the processes in the revenue and collection cycle.
True
True or false: Physical protection of accounts receivable files is an important facet of control.
True
True or false: Prenumbered documents are an example of an internal control.
True
True or false: There is no such thing as a typical revenue and collection cycle.
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
To help assess the allowance for doubtful accounts, auditors use the ______.
aged trial balance
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
If a control is missing or ineffective, ______.
auditors need to design substantive procedures related to control failure the risk of material misstatement increases
Access to accounts receivable records gives an individual ______,
authorization recording responsibility
Pending order files should be reviewed frequently to ______.
avoid failure to bill and record shipment
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
To determine that customers were sent the goods ordered at the correct price and quantity, customer invoices should be compared to ______.
bills of lading customer orders
Adjusting and correcting entries that can result from the bank account reconciliation are found in the ______ ______ journal.
cash receipts
The population of entries that should be reflected in the credits to accounts receivable for customer payments are found in the ______ ______ journal.
cash receipts
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
Prenumbered documents are important in testing the ______ assertion and the ______ assertion.
completeness occurence
Examining evidence of client review and follow up of sales data related to specific classes of products or locations is a test of control for ______.
completeness of revenue and accounts receivable
Including a sample of zero-balance accounts in the confirmation process tests for ______.
completeness of revenue and accounts receivable
Justifications for not using confirmations may include ______.
confirmations would be ineffective receivables are not material other procedures provide sufficient, competent evidence
When using confirmations, auditors should ______.
consider features of the reply follow-up on electronic and telephone responses control the mailing
It is important to maintain an up-to-date customer master file to ensure ______.
credit limits are appropriate files are accurate
For current status, including up-to-date credit limit information, auditors may test a sample of the ______ ______ file.
customer master
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
Customer statements ______.
detail what has been billed and paid help with control over cash receipts
In the basic three-step approach for using the audit risk model to plan an engagement, ______ risk is set at the significant account and assertion level based on the level of audit risk and the risk of material misstatement.
detection
Substantive procedures ______.
differ from tests of controls in their basic purpose are designed to obtain direct evidence about account balances
Confirmation should be returned ______,
directly to the auditor
An audit test that provides evidence on both controls and relevant assertions is called a(n) ______ ______ procedure.
dual purpose
Which of the following documents should be matched before recording revenue?
evidence of shipment customer invoice customer sales order
Ways to determine if a company has factored accounts receivable include ______.
examining support for large cash receipts inquiring of management
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 ______ testing.
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
The auditor typically obtains evidence to satisfy the ______ assertion for accounts receivable through a combination of analytical procedures and confirmations.
existence
When considering relevant assertions and obtaining evidence about accounts receivable and other assets, auditors must emphasize the ______ assertion.
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
Because fictitious sales may be used to overstate assets, the ______ assertion is important in the audit of accounts receivables and the ______ assertion is important for sales.
existence occurence
Accounts receivable confirmation is a substantive procedure designed to obtain evidence of the ______ of customers' balances directly from the customer.
existence rights & obligations
Since auditors generally presume management has an incentive to overstate revenues, all other things being equal, auditors may assess inherent risk for ______.
existence to be higher than for completeness
In order to obtain cash immediately, companies may sell or ______ their accounts receivable.
factor
The sales detail (journal) file can be checked for ______.
fictitious sales sales recorded before shipment
When planning an engagement, AS 2110 indicates that the auditor should presume that there is a(n) ______ risk involving improper revenue recognition.
fraud
The person who has the ability to change invoices should not ______.
have recording responsibilities have custody of assets
Customers statements should be sent ______.
if there is any account activity
Audit risk is manifested when a material misstatement enters the financial reporting process, which is known as ______ risk.
inherent
The risk of material misstatement is a combination of ______ risk and ______ risk.
inherent control
A blank form confirmation ______.
may result in a lower response rate may produce better evidence than a positive confirmation
The issuance of FASB ASC 606 has likely made difficulties with auditing revenues ______ challenging.
more
If a customer confirms that an account exists, the auditor ______.
must still review the account for collectability
A customer is asked to respond only if something is wrong with the account balance when a(n) ______ confirmation is used.
negative
A lack of response to a(n) ______ confirmation is considered evidence that the account is fairly stated.
negative
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
A blank form is a variation of the ______ confirmation.
positive
A customer is asked to respond whether the balance is correct or incorrect on a(n) ______ confirmation.
positive
One of the reasons that auditors complete a checklist at the end of the audit of the revenue cycle is because revenue recognition policies and the amount of the allowance for doubtful accounts are examples of items that require specific ______ and ______.
presentation disclosures
When auditors are satisfied that controls have been examined and transactions and balances have been appropriately tested, they must still consider ______.
presentation and disclosure
Systems may automatically produce customer invoices, but billings will be incorrect if the ______ ______ master file is incorrect.
price list
Information required for business segment disclosures is provided by sales classified by ______.
product line
According to accounting standards, to be recognized, revenue must be ______ or ______ and earned.
realized realizable
When complete separation of duties in a small business is not possible, the owner must have active involvement in the accounting process in order for the auditors to obtain ______ ______ that financial controls are intact.
reasonable assurance
Separation of duties in the revenue cycle should include different people and departments performing ______.
record keeping for sales, receivables, inventory and cash receipts custody of goods and cash sales and credit authorization
To look for unusually high or low sales volume, the auditor may look to a sales analysis reported classified by ______.
region sales employee
According to AS 2201.A9, a financial statement assertion is ______ if it has a "reasonable possibility of containing a misstatement or misstatements that would cause the financial statements to be materially misstated."
relevant
Once all significant accounts and disclosures have been identified, the auditor needs to identify the ______ assertions.
relevant
Sales must be realized or realizable and earned in order to be recorded under the accounting standards related to ______ ______.
revenue recognition
Confirmations provide evidence of ______.
rights and obligations existence
Inspecting bank confirmations, loan agreements and board of director minutes provides evidence regarding ______.
rights and obligations of accounts receivable
The bill sent to a customer indicating the amount due and payment terms is called a ______.
sales invoice
Regarding the revenue process, management should ______.
scrutinize total write-offs of accounts receivables continually review revenues and compare them to budgeted and forecasts review merchandise returns
If a confirmation exception cannot be resolved, the auditor ______.
should determine the cause
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
A review of the adequacy of the provision for bad debt expense is an example of a ______.
substantive analytical procedure
Sending confirmations to customers to substantiate the existence and rights and obligations assertions of accounts receivable is an example of a ______.
substantive test of details
When a retailer accepts third-party credit cards, ______.
the authorization function is performed electronically data security is a significant issue
When a retailer accepts third-party credit cards, ______.
they can become liable for customer losses for failing to adequately protect information authorization controls are minimized
A company should always compare daily credit sales totals in the sales journal to the ______.
total debits posted to accounts receivable
The starting point for selecting accounts for confirmation is the accounts receivable ______.
trial balance
Confirmations do not provide strong evidence of ______.
valuation
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
Auditors typically achieve an understanding of controls by completing a(n) ______ of the processes in the revenue and collection cycle.
walkthrough
