chapter 9

What evidence is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate? a. Accounts receivable aging schedule. b. Copies of checks received from customers. c. Confirmations returned without exception. d. Stock prices of customer companies.

a. Accounts receivable aging schedule.

Much of the understanding of revenue transactions for compliance with GAAP can be performed by accomplishing which of the following tasks? a. Examining sales contracts and inquiry of management. b. Confirming sales with customers. c. Discussing the transactions with qualified members of the Financial Accounting Standards Board. d. Comparing shipping documents with invoices.

a. Examining sales contracts and inquiry of management.

The allowance for doubtful accounts balance will not be a precise amount because of which of the following reasons? a. It is an accounting estimate based upon judgment. b. GAAP is not clear on the calculation of the allowance. c. It is merely a reserve that is reversed by the client as income is needed for profitable results. d. The precision is determined by the results of confirmation responses.

a. It is an accounting estimate based upon judgment.

In an audit of financial statements, risks related to a high rate of return of products sold include which of the following? a. Sales that are recorded improperly. b. An estimate of accrued returns that reduces net income. c. A reduction of net sales for an increase to the sales returns and allowance account. d. Consignment goods that are returned and forwarded to third parties.

a. Sales that are recorded improperly.

Which of the following is the fifth step in the five-step revenue recognition process prescribed by ASC 606? a. Satisfaction of a performance obligation. b. Execution of an enforceable contract for the transfer of goods or services. c. Collection of substantially all of the transaction price from the customer. d. None of the above.

a. Satisfaction of a performance obligation.

Which of the following processes are not included in the revenue cycle? a. Sending payments to suppliers. b. Obtaining credit approval. c. Preparing and sending monthly statements to customers. d. Shipping products to customers.

a. Sending payments to suppliers.

Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following? a. Shipping documents and tracing them to the sales journal. b. Accounts receivable and tracing them to cash receipts. c. Recorded sales transactions and tracing them to the general ledger. d. Inventory records and tracing them to the shipping documents.

a. Shipping documents and tracing them to the sales journal.

Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following? a. Substantiate cutoff and the occurrence of net sales transactions. b. Test the sufficiency of cash balances to cover refunds. c. Monitor customer satisfaction for disclosure. d. Assess the nature of procedures that will be performed for the next period's audit.

a. Substantiate cutoff and the occurrence of net sales transactions.

Accounts receivable confirmations usually provide strong evidence about which of the following? a. The existence of receivables. b. The completeness of receivables. c. The presentation and disclosure of receivables. d. The obligations of receivables.

a. The existence of receivables.

The primary difference between positive and negative confirmations used in the audit of accounts receivable is which of the following? a. The mode of response. b. The amount of information included. c. The control of the confirmation process by the auditor. d. The method in which accounts are selected for confirmation.

a. The mode of response.

Which of the following audit procedures does not address existence/occurrence for accounts receivables and sales? a. Trace bill of lading to sales invoice and sales journal. b. Confirm balances of unpaid invoices with customers. c. Examine subsequent collections. d. Scan sales journal for duplicate entries.

a. Trace bill of lading to sales invoice and sales journal.

A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following? a. Use of prenumbered shipping, invoice and sales documents. b. Use of prenumbered statements, inventory lists and credit memos. c. Reconciliation of invoices with customer statements. d. Use of pre-authorized price lists.

a. Use of prenumbered shipping, invoice and sales documents.

Homer and Moe, PC are auditing the financial statements of Lyoncraft, Inc. and decide to confirm a sample of accounts receivable. This test is performed by Homer and Moe primarily to substantiate which of the following assertions? a. Existence of related party transactions. b. Existence of accounts receivable. c. Obligation of debt. d. Cutoff of the allowance for bad debt.

b. Existence of accounts receivable.

A sample of positive confirmations is mailed for material accounts receivable balances. Frequently there is a lack of response. Which of the following is not an acceptable alternative procedure? a. Reviewing collections on the account subsequent to the confirmation date. b. Inquiry of management. c. Mailing second and third confirmations. d. Examination of supporting documents.

b. Inquiry of management.

The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total. This process is performed for which purpose? a. Drafting financial statements. b. Monitoring revenue transactions. c. Providing management reports to the controller. d. Providing suggestions for operational improvement.

b. Monitoring revenue transactions.

Which of the following is not a form of ratio analysis? a. Turnover of receivables. b. Monthly sales analysis compared with past years. c. Gross margin analysis. d. Sales in last month to total sales.

b. Monthly sales analysis compared with past years.

Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing which of the following? a. Trend analysis. b. Ratio analysis. c. Reasonableness testing. d. Nonstatistical sampling.

b. Ratio analysis.

Alternative procedures that would provide evidence of the existence of receivables would include which of the following? a. Physical observation of customer facilities. b. Review of subsequent collections. c. Analysis of the aged trial balance. d. A confirmation to the client management for customer accounts.

b. Review of subsequent collections.

Unreturned positive confirmations for accounts receivable warrant which of the following actions? a. Replacing the sample selection with a new customer. b. Sending second requests and possibly performing subsequent procedures. c. The projection of larger misstatements to the population. d. Requesting that the client send additional audit correspondence to customers.

b. Sending second requests and possibly performing subsequent procedures.

Sales transactions should be documented at initiation in order to accomplish which of the following objectives? a. To provide the customer a copy of the transaction. b. To provide evidence of authorization and recording. c. To offer credit to customers. d. To generate back orders.

b. To provide evidence of authorization and recording.

The aged accounts receivable report is utilized by the auditor to accomplish which of the following? a. Encourage the client to collect on receivables that are long past due. b. Select the type of confirmations that will be sent to banks. c. Assess the adequacy of the allowance for doubtful accounts. d. Identify debits in the receivables balance that should be reclassified to payables.

c. Assess the adequacy of the allowance for doubtful accounts.

Which of the following is a formal document that conveys responsibility for shipped merchandise to the shipper? a. Sales invoice. b. Receiving report. c. Bill of lading. d. Purchase order.

c. Bill of lading.

In the audit of the revenue of Hiram Manufacturing Company, the auditors obtain a number of shipping documents shortly before year-end and immediately following the year under audit. The auditors compare the documents to the sales journal in order to test which of the following assertions? a. Existence of sales. b. Presentation and disclosure of receivables. c. Cutoff of sales transactions. d. Completeness of receivables.

c. Cutoff of sales transactions.

According to auditing standards, accounts receivable confirmations are required to be used in which of the following situations? a. On every audit engagement. b. If the client agrees in writing to the procedure. c. If the accounts receivable balance is material. d. If environmental risk is low.

c. If the accounts receivable balance is material.

Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client's statement and return the letters directly to the auditor indicating whether they agree with the indicated balance, are known by which of the following terms? a. Direct confirmations. b. Indirect confirmations. c. Positive confirmations. d. Negative confirmations.

c. Positive confirmations.

Lithgow and Harris, CPAs, are performing the audit of Wild Flower Grocery Stores. Lithgow and Harris relates annual revenue to sales per square feet and sales per customer. What type of analysis is Lithgow and Harris most likely performing? a. Ratio analysis. b. Critical analysis. c. Reasonableness tests. d. Nonstatistical analysis.

c. Reasonableness tests.

To determine whether any accounts receivable are pledged or assigned to others, the auditor would most likely perform which of the following procedures? a. Examine subsequent collections. b. Test a sample of transactions to the general ledger. c. Review loan agreements and board of directors' meeting minutes. d. Derive an independent estimate of the allowance and compare it to pledged assets.

c. Review loan agreements and board of directors' meeting minutes.

An example of alternative procedures for the confirmation of accounts receivable includes which of the following actions? a. Inquiry of management. b. Tracing source documents to recorded amounts. c. Review of subsequent collections on account by the client. d. Providing an estimate of the allowance for doubtful accounts to be recorded by the client.

c. Review of subsequent collections on account by the client.

Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations? a. Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors. b. Gross margin is equivalent in the current period to previous periods and is below that of the industry. c. Sales are higher in the month preceding each quarter end. d. Sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction.

c. Sales are higher in the month preceding each quarter end.

Management has been found involved in many fraudulent schemes; a common one is "channel stuffing." What does "channel stuffing" involve? a. Overly complex transactions. b. Growth through stock acquisitions. c. Shipment of goods not ordered. d. Management compensation schemes.

c. Shipment of goods not ordered.

Which one of the following procedures would be considered improper by the auditor in the process of confirming receivables? a. The auditor allows the client's staff to prepare the confirmation letters after the auditor has chosen the items to be confirmed. b. The auditor allows the client to sign the confirmations after they are prepared. c. The auditor allows the client's staff to mail the confirmation letters after he or she has proofed the typing of the letters. d. The auditor asks the addressee to return the confirmation to the audit firm's office.

c. The auditor allows the client's staff to mail the confirmation letters after he or she has proofed the typing of the letters.

Substantive tests of the revenue cycle typically do not provide evidence of which of the following? a. Sales transactions exist and are properly valued. b. Accounts receivable exist. c. The balance in the allowance account is correct. d. Fraudulent transactions are not included in the financial statements.

c. The balance in the allowance account is correct.

The major risk associated with receivables is related to which of the following? a. They may be sold to a bank with recourse. b. They may be recorded as long-term when in fact they will be realized in the current period. c. They will not be realized for the entire amount due. d. They are pledged as collateral as disclosed in the footnotes to financial statements.

c. They will not be realized for the entire amount due.

The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management. The purpose for this procedure is to substantiate which assertion? a. Existence of receivables. b. Cutoff of receivables. c. Valuation of receivables. d. Rights to receivables.

c. Valuation of receivables.

The risk of material misstatement due to fraud relating to revenue recognition should be a. approached in a manner that is identical to control risk assessment. b. given lower priority to the risk of embezzlement. c. ordinarily presumed by the auditor. d. assumed to have been considered by the FASB.

c. ordinarily presumed by the auditor.

Which of the following evidences delivery of product to customers sufficient for company recording as revenues? a. A check received from the customer. b. An agreement to purchase product signed by the customer. c. A pick ticket in the warehouse. d. A bill of lading and tracking number with the shipper.

d. A bill of lading and tracking number with the shipper.

For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate? a. A retail truck and trailer sales company with high inherent risk and moderate control risk over the revenue cycle. b. A utility company with control risk over the revenue cycle assessed high. c. A mortgage banking company with excellent control over the purchasing cycle. d. A cable company with control risk over the revenue cycle assessed low.

d. A cable company with control risk over the revenue cycle assessed low.

In the audit of accounting estimates, such as the allowance for doubtful accounts, the auditor strives to provide reasonable assurance about which of the following? a. All material accounting estimates have been developed properly. b. The estimates are reasonable. c. The estimates are presented in accordance with GAAP. d. All of the above are true.

d. All of the above are true.

A method used by companies to fraudulently inflate revenues includes which of the following? a. Use of hidden "side letters" giving the customer an irrevocable right to return the product. b. Recording of fictitious sales. c. Shipment of product not ordered by customers. d. All of the above.

d. All of the above.

Sources of audit planning information may come from which of the following? a. Knowledge of client's business and industry. b. Assessment of risk of material misstatement. c. Results of analytical procedures. d. All of the above.

d. All of the above.

Which of the following criteria must be met in order to recognize revenue in the current accounting period? a. Goods or services have been transferred to the customer. b. The transaction price has been determined. c. Collectability is reasonably assured. d. All of the above.

d. All of the above.

A key indicator of fraud in the revenue cycle is the auditor's detection of which of the following? a. Customer collections that are over 90 days past due. b. Credit entries in customer accounts receivable for authorized write-offs. c. Recurring entries in the sales journal. d. Altered shipping documents and invoices.

d. Altered shipping documents and invoices.

The purpose of the bill of lading is to provide which of the following? a. The warehouse personnel with the product that must be shipped to customers. b. Invoices to customers for proper collection. c. A credit application for customer approval. d. Evidence of title transfer of goods to customers.

d. Evidence of title transfer of goods to customers.

The auditor traces recorded sales to invoices, sales orders, and shipping documents in order to substantiate which assertion? a. Cutoff. b. Completeness. c. Legality. d. Occurrence.

d. Occurrence.

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger? a. Electronic authorization prior to posting. b. Use of sequentially numbered sales documents. c. Random statements to customers. d. Review of transactions by upper management or the board.

d. Review of transactions by upper management or the board.

. An auditor's examination of the sales account using a cutoff test would most likely detect which of the following? a. Kiting. b. Sales made with improper credit terms. c. Lapping of accounts receivable. d. Sales recorded in the wrong period.

d. Sales recorded in the wrong period.

Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because of which of the following reasons? a. Confirmations are selected based upon zip codes. b. A P.O. box is more reliable than a street address. c. Confirmations should be sent only to business addresses and not residential. d. The address may be routed to the client for retrieval and fraudulent signing.

d. The address may be routed to the client for retrieval and fraudulent signing.

Which of the following must exist prior to the recognition of revenue by a company from the sale of a product? a. Cash is realized on the sale of the product. b. A price is discussed based upon the customer's resale of the product. c. The customer is given the option to return the product at any time. d. The product is transferred to the customer.

d. The product is transferred to the customer.

Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives? a. To determine revenue recognition policies. b. To ensure customer satisfaction. c. To prevent lapping by the accounts receivable department. d. To minimize credit losses.

d. To minimize credit losses.

An analysis of monthly sales compared with past years and budgets is a form of what type of testing? a. Regression analysis. b. Common size analysis. c. Ratio analysis. d. Trend analysis.

d. Trend analysis.