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Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

"These goods were returned for credit on November 15."

Which of the following does not demonstrate an inappropriate segregation of duties?

A billing clerk prepares invoices and records the resulting increase in accounts receivable.

During the confirmation of accounts receivable, an auditor receives a confirmation via the client's fax machine. Which of the following actions should the auditor take?

Accept the confirmation but verify the source and content through a telephone call to the respondent.

Required: The following is a question taken from an internal control questionnaire. For the question, determine what error or fraud could occur if the question were answered "no" or if you found the control was not effective. QUESTION: Are customer accounts regularly balanced with the control account?

Accounting entries could be made inaccurately or incompletely and the control account may be overstated or understated.

In order to obtain sufficient appropriate evidence after an auditor has tested controls and performed substantive tests of transactions what is the most important substantive test of details of balances procedure an auditor will perform with regard to the revenue and collection cycle?

Accounts Receivable Confirmations

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a remittance listing that is forwarded to the cashier. A copy of the listing should be sent to the:

Accounts receivable bookkeeper to update the subsidiary accounts receivable records.

Which of the following circumstances most likely would cause an auditor to believe that material misstatements may exist in an entity's financial statements?

Accounts receivable confirmation requests yield significantly fewer responses than expected.

When auditing the revenue and collection cycle, auditors normally select balances to confirm from the

Accounts receivable listing.

Symbol A most likely represents:

Accounts receivable master file.

The control procedure "credit sales approved by credit department" is directed toward which transaction assertion?

Accuracy

Error/Objective: Goods shipped to a bad credit risk customer Required: For the error/control objective (above), identify the assertion (a-g) about classes of transactions and events most benefited by the control.

Accuracy/Valuation

Error/Objective: Sales billed at the wrong price or wrong quantity Required: For the error/control objective (above), identify the assertion (a-g) about classes of transactions and events most benefited by the control.

Accuracy/Valuation

Auditors commonly set inherent risk as high for valuation of accounts receivable. Which of the following is/are controls would help reduce the likelihood of uncollectible accounts?

All of the above

Which of the following tests would most likely provide relevant evidence relating to sales recorded more than once?

All of the above.

If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?

Allowance for doubtful accounts.

An auditor's tests of controls for completeness for the revenue cycle usually include determining whether:

An invoice is prepared for each shipping document.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor most likely would:

Ask the client to contact the customers to request that the confirmations be returned.

The negative request form of accounts receivable confirmation is useful particularly when the

Assessed Level of Risk of Material Misstatement Relating to Receivables is: Low Number of Small Balances is: Many Proper Consideration by the Recipient is: Likely

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Authorization of credit memos by personnel who receive cash may permit the misappropriation of cash.

A manufacturer that uses a third-party carrier to ship its goods to customers would use which of the following documents as the primary determinant of when they should record revenue

Bill of lading.

Which of the following tests would most likely provide relevant evidence relating to recorded sales for which there was no shipment?

Both a and c

An auditor most likely would limit substantive audit tests of sales transactions when control risk is assessed as low for the occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting:

Cash receipts and accounts receivable.

Error/Objective: Product line A sales recorded as Product line B Required: For the error/control objective (above), identify the assertion (a-g) about classes of transactions and events most benefited by the control.

Classification

While performing tests of controls, Thaw and Associates, LLP, traces a sample of cash receipts to postings in the correct customers' subsidiary receivable account. This is a test of controls primarily providing evidence related to which management transaction assertion?

Classification

When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations:

Client-prepared statements of account that show the details of the account balances.

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Collection of receivables.

Error/Objective: Failure to post charges to customers for sales Required: For the error/control objective (above), identify the assertion (a-g) about classes of transactions and events most benefited by the control.

Completeness

Error/Objective: Goods shipped, sales not recorded Required: For the error/control objective (above), identify the assertion (a-g) about classes of transactions and events most benefited by the control.

Completeness

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

Completeness

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Below is an accounts receivable assertion: Assertion: Accounts receivable represent all amounts owed to the client company at the balance sheet date. Required: For the assertion described above identify the assertion

Completeness.

Which of the following management assertion is most closely related to the audit objective that verifies all sales have been recorded?

Completeness.

As a result of tests of controls, an auditor assesses control risk too high. This incorrect assessment most likely occurred because

Control risk based on the auditor's sample is greater than the true operating effectiveness of the client's control activity.

Error/Objective: January sales recorded in December Required: For the error/control objective (above), identify the assertion (a-g) about classes of transactions and events most benefited by the control.

Cutoff

Tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management's assertion regarding:

Cutoff

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also prepares the:

Daily deposit slip.

When an audit team does not receive a response on a positive accounts receivable confirmation, auditors should do all of the following except

Do nothing for immaterial balances.

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

Employees involved in the credit-granting function are separated from the sales function.

Which of the following is the best reason for prenumbering in numerical sequence documents such as sales orders, shipping documents, and sales invoices?

Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.

An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit procedure is to establish that

Entries in the accounts receivable subsidiary ledger were properly invoiced.

Required: The following is a question taken from an internal control questionnaire. For the question, determine what error or fraud could occur if the question were answered "no" or if you found the control was not effective. QUESTION: Are sales invoices checked for the accuracy of quantities billed? Prices used? Mathematical calculations?

Errors on the invoice could cause lost billings and lost revenue or overcharges to customers that are not collectible.

Possible alternative procedures for accounts receivable include (select all that apply)

Establishing the existence of the client's customers by reference to other sources of identification. Examining subsequent cash receipts and matching such receipts with the actual items being paid.

Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. The audit team uses this aging primarily to

Estimate credit losses.

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

Examine shipping documents for matching sales invoices.

In the audit of accounts receivable, the most important emphasis should be on the

Existence assertion.

A key internal control in the sales and collection cycle is the separation of duties between cash handling and record keeping. The objective most directly associated with this control is to verify that

Existing cash receipts are recorded.

Which of the following would not overstate current-period net income?

Failing to record a check paying an item in Vouchers Payable.

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Accounts receivable subsidiary totaled and reconciled to accounts receivable control account

Failure to post charges to customers for sales

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Periodic sales total compared to same period accounts receivable postings

Failure to post charges to customers for sales

A debit memo is a form stating the particulars of a credit to accounts receivable, including the specific items returned, prices, and amount credited to a customer's account.

False

Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures for any assertion when determining what constitutes sufficient and appropriate evidence.

False

If control risk is assessed very low, the substantive audit procedures on account balances must be expanded.

False

In order to achieve appropriate separation of duties the sales personnel should review and approve all credit checks.

False

When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and obligations assertions.

False

Credit checks should be performed by the sales department before credit is approved.

False.

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:

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

Required: The following is a question taken from an internal control questionnaire. For the question, determine what error or fraud could occur if the question were answered "no" or if you found the control was not effective. QUESTION: Do customers receive a monthly statement even when the ending balance on the account is zero?

Fictitious sales could be recorded and not detected.

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor is most likely concerned about

Fictitious sales.

Which of the following best demonstrates the concept of materiality?

Focusing on items that have a more significant quantitative effect on the entity's financial statements.

In creating lead schedules for an audit engagement, a CPA often uses automated workpaper software. What client information is needed to begin this process?

General ledger information such as account numbers, prior-year account balances, and current-year unadjusted information

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Credit files updated for customer payment history

Goods shipped to a bad credit risk customer

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Sales order approved for credit

Goods shipped to a bad credit risk customer

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Sales invoice checked to sales order

Goods shipped to a bad credit risk customer Goods shipped, sales not recorded Sales recorded, goods not shipped

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Overdue customer accounts investigated for collection

Goods shipped to a bad credit risk customer Sales recorded, goods not shipped Sales billed at the wrong price or wrong quantity

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Prenumbered sales invoices, sequence checked

Goods shipped, sales not recorded

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Prenumbered shipping doc prepared, sequence checked

Goods shipped, sales not recorded

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

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

Which of the following strategies most likely could improve the response rate of the confirmations of accounts receivable?

Include a list of items or invoices that constitute the customers' account balances.

When an auditor does not receive replies to positive requests for year-end accounts receivable confirmations, the auditor would least likely:

Increase the assessed level of detection risk for the valuation assertion.

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

Individual invoices.

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

Inflating sales for the year.

The financial records of the Movitz Company show that R. Dennis owes $4,100 on an account receivable. An independent audit is being carried out, and the auditors send a positive confirmation to R. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

Inherent risk was particularly high for accounts receivable.

Required: The following is a question taken from an internal control questionnaire. For the question, determine test of controls procedure you could use to find out whether the control technique was really functioning. (Select all that apply) QUESTION: Are customer accounts regularly balanced with the control account?

Inquire with client staff about process. Review the client's documentation showing the balancing/reconciliation and reperform the balancing yourself.

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Inspect the shipping records documenting the merchandise sold to the debtors.

In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?

Internal controls during the remaining period are effective.

Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues?

Is customer credit approved before orders are shipped?

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Accountants have instructions to date sales on the date of shipment

January sales recorded in December

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Sales entry date compared to shipping doc date

January sales recorded in December

Required: The following is a question taken from an internal control questionnaire. For the question, determine test of controls procedure you could use to find out whether the control technique was really functioning. (Select all that apply) QUESTION: Are the duties of the accounts receivable bookkeeper separate from all cash functions?

Look to see who is performing bookkeeping and cash functions. Determine who is assigned to each function and ask employees.

An auditor is required to confirm accounts receivable if the accounts receivable balances are

Material to the financial statements.

An auditor decides to use the blank form of accounts receivable confirmation rather than the positive form. The auditor should be aware that the blank form may be less efficient because:

More nonresponses are likely to occur.

The blank form of accounts receivable confirmations may be less efficient than the positive form because:

More nonresponses to the requests are likely to ccur.

Required: The following is a question taken from an internal control questionnaire. For the question, determine test of controls procedure you could use to find out whether the control technique was really functioning. (Select all that apply) QUESTION: Are sales invoices prenumbered and are all numbers accounted for?

Observe client checking for sequence. Inspection sales invoices for numerical sequence.

Which of the following procedures concerning accounts receivable would an auditor most likely perform to obtain audit evidence supporting the effective operation of controls?

Observing an entity's employee prepare the schedule of past due accounts receivable.

An auditor noted that client sales increased 10 percent for the year. At the same time, Cost of Goods Sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent. Based on this information, the auditor interviewed the sales manager, who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year. How would the auditor test the sales manager's representation?

Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.

Error/Objective: Sales recorded, goods not shipped Required: For the error/control objective (above), identify the assertion (a-g) about classes of transactions and events most benefited by the control.

Occurrence

Lipham Company uses its sales invoices for posting perpetual inventory records. Inadequate internal control over the invoicing function allows goods to be invoiced that do not get shipped. The inadequate controls could cause an

Overstatement of revenues and receivables and an understatement of inventory.

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Below is an accounts receivable assertion: Assertion: Accounts receivable represent all amounts owed to the client company at the balance sheet date. Required: Select the audit procedure(s) that is(are) best suited to address the assertion in the audit plan. Select all that apply.

Perform sales cutoff tests to obtain assurance that sales transactions and corresponding entries for inventories and cost of goods sold are recorded in the same and proper period.

Required: The following is a question taken from an internal control questionnaire. For the question, determine test of controls procedure you could use to find out whether the control technique was really functioning. (Select all that apply) QUESTION: Are blank sales invoices available only to authorized personnel?

Pick some up yourself to see what happens.

Which of the following controls is designed to meet the completeness assertion?

Prenumbering invoices, shipping documents, and sales orders.

Sound internal control dictates that, immediately upon receiving checks from customers by mail, a responsible employee should:

Prepare a duplicate listing of checks received.

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Below is an accounts receivable assertion: Assertion: Accounts receivable are properly described and presented in the financial statements. Required: For the assertion described above identify the assertion.

Presentation and Disclosure.

Davis, Kaczala, and Brittain, CPAs are auditing a wholesaling business that sells goods both in a store for cash and sells goods to other retailers on credit. At which point in an ordinary sales transaction for this business is authorization of least concern to the auditors in the conduct of the audit?

Processing of cash sales by store cashiers.

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: General ledger code checked for sales product lines

Product line A sales recorded as Product line B

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Intercompany accounts reconciled with subsidiary company records

Product line A sales recorded as Product line B Failure to post charges to customers for sales January sales recorded in December

Which of the following data is least likely to be used in an audit data analytic procedure when the auditor is performing substantive testing related to the occurrence of sales transactions and the accuracy of accounts receivable?

Purchase order number.

In auditing revenue, an auditor is least likely to which of the following documents as part of their testing procedures?

Purchase order.

Which of the following accounts is not normally part of the revenue and collection cycle?

Purchases Returns and Allowances.

Under which of the following circumstances would using the blank form of confirmation of accounts receivable most likely be preferable to other types of positive confirmations?

Recipients are likely to sign other types of positive confirmations without careful investigation.

Which of the following procedures most likely would not be an internal control designed to reduce the risk of errors in the billing process?

Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

In a credit sales and cash receipts system flowchart symbol X could represent:

Remittance advices.

After receiving responses to accounts receivable confirmations, the auditor determined that the evidence was not sufficient to form a conclusion regarding the accounts receivable balance. Which of the following actions should the auditor take next concerning the accounts receivable balance?

Request additional confirmations and perform alternative procedures.

When performing an audit, a CPA notes that bad debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?

Require credit checks on all new customers.

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Below is an accounts receivable assertion: Assertion: The client company has a legal right to all accounts receivable at the balance sheet date. Required: Select the audit procedure(s) that is(are) best suited to address the assertion in the audit plan. Select all that apply.

Review loan agreements for indications of whether accounts receivable have been factored or pledged. Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances.

An auditor confirmed accounts receivable as of an interim date, and all confirmations were returned and appeared reasonable. Which of the following additional procedures most likely should be performed at year-end?

Review supporting documents for new large balances occurring after the interim date, and evaluate any significant changes in balances at year-end.

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Below is an accounts receivable assertion: Assertion: Accounts receivable are properly described and presented in the financial statements. Required: Select the audit procedure(s) that is(are) best suited to address the assertion in the audit plan. Select all that apply

Review the accounts receivable trial balance for amounts due from officers and employees. Obtain an understanding of the business purpose of transactions that resulted in accounts receivable balances. Review loan agreements for indications of whether accounts receivable have been factored or pledged.

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Below is an accounts receivable assertion: Assertion: Accounts receivable are stated at net realizable value. Required: Select the audit procedure(s) that is(are) best suited to address the assertion in the audit plan. Select all that apply.

Review the aged trial balance for significant past due accounts to determine if they are realizable.

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Below is an accounts receivable assertion: Assertion: The client company has a legal right to all accounts receivable at the balance sheet date. Required: For the assertion described above identify the assertion.

Rights and Obligations.

After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management's financial statement assertion(s) of:

Rights and Obligations: No Valuation and Allocation: Yes

Two assertions for which confirmation of accounts receivable balances provides primary evidence are:

Rights and obligations and existence.

With regard to the occurrence of sales transactions an important audit objective is to ensure that recorded sales occurred. Which of the following statements are true with regard to types of misstatements and possible causes of those misstatements related to this objective. Select all that apply.

Sale was recorded more than once can be either an error fraud. Recorded sale for which there was no shipment can be either an error or fraud.

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Invoiced prices compared to approved price list

Sales billed at the wrong price or wrong quantity

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Shipping document quantity compared to sales invoice

Sales billed at the wrong price or wrong quantity Sales recorded, goods not shipped Goods shipped, sales not recorded

Tracing copies of computer-prepared sales invoices to copies of the corresponding computer prepared shipping documents provides evidence that:

Sales billed to customers were actually shipped.

Anderson, Zhang, Darnell, Jarquin, and Cortman, LLP wants to test whether a client's internal controls were effective in preventing the failure to post sales invoices to the customers' accounts ledger. The auditor should select a sample of transactions from the population represented by the

Sales invoice file.

Sales are normally recorded on the date of the

Sales invoice.

When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to

Sales invoices with shipping documents and customer sales invoices.

Symbol B most likely represents:

Sales invoices.

If the objective of an auditor's test of details is to detect the overstatement of sales, the auditor should trace transactions from the:

Sales journal to the shipping documents.

Which of the following represents the start of the transaction trail of documentary evidence?

Sales order.

Which of the following best represents a key control for ensuring sales are properly authorized when assessing control risks for sales?

Sales orders are sent to the credit department for approval.

For the control procedure (below), select all of the error(s) (1-7) the procedure is likely to control by prevention, detection, or correction. Select all that apply. If more than one assertion applies, then the primary assertion is worth 50% of the total question points. CONTROL PROCEDURE: Sales dollar batch totals compared to sales journal

Sales recorded, goods not shipped Product line A sales recorded as Product line B Goods shipped, sales not recorded

To conceal a theft involving receivables, a dishonest bookkeeper might charge which of the following accounts?

Sales returns.

An auditor suspects that a client is fraudulently overstating revenue by recording fictitious sales. Which of the following audit procedures would most likely be used to identify this situation?

Select a sample of sales invoices and trace to the related shipping documents.

Which of the following courses of action is most appropriate if an auditor concludes that there is a high risk of material misstatement?

Select more effective substantive tests.

Which of the following procedures would be appropriate to test the existence assertion during an audit of accounts receivable?

Send confirmations to customers.

A client has a separate sales group for its largest "preferred" customers, a select group of customers who normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million. Which of the following audit procedures would the auditor most likely perform?

Send out positive confirmations on a large sample of these customers.

When accounts receivable are confirmed at an interim date, auditors need not be concerned with

Sending negative confirmations to all customers as of the year-end date.

During a recent audit of the revenue cycle, a CPA found the client had $1 million in accounts receivable recorded for fictitious customers. Which of the following tests most likely facilitated identification of the fraud?

Sending positive confirmations to all of the client's customers with balances on December 31.

Tracing bills of lading to sales invoices provides evidence that:

Shipments to customers were invoiced.

When an audit team traces a sample of shipping documents to the related sales invoice copies, they are trying to find relevant evidence that

Shipments to customers were invoiced.

Tracing shipping documents to prenumbered sales invoices provides evidence that:

Shipments to customers were properly invoiced.

An auditor is determining if internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of transactions from the population represented by the:

Shipping document file.

To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the:

Shipping document file.

If the objective of an auditor's test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the:

Shipping documents to the sales invoices.

Required: The following is a question taken from an internal control questionnaire. For the question, determine what error or fraud could occur if the question were answered "no" or if you found the control was not effective. QUESTION: Are blank sales invoices available only to authorized personnel?

Someone could pick up a blank sales invoice and make a fictitious sale.

When scheduling the audit work to be performed on an engagement, the auditor should likely perform revenue cycle procedures at year end if

The auditor assessed detection risk as low.

Generally accepted auditing procedures have not been followed in which of the following situations?

The auditor receives several faxed and emailed confirmation responses indicating that the amount stated is correct. The auditor does not perform any additional procedures related to these electronic responses.

An audit client sells 15 to 20 units of product annually. A large portion of the annual sales occur in the last month of the fiscal year. Annual sales have not materially changed over the past five years. Which of the following approaches would be most effective concerning the timing of audit procedures for revenue?

The auditor should inspect transactions occurring in the last month of the fiscal year and review the related sale contracts to determine that revenue was posted in the proper period.

Which of the following would be a consideration in planning an auditor's sample for a test of controls?

The auditor's allowable risk of assessing control risk is too low.

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Required: The following is a question taken from an internal control questionnaire. For the question, determine what error or fraud could occur if the question were answered "no" or if you found the control was not effective. QUESTION: Are the duties of the accounts receivable bookkeeper separate from all cash functions?

The bookkeeper might be able to embezzle cash and manipulate the accounting records to give the customer credit and hide the theft.

In auditing accounts receivable the negative form of confirmation request most likely would be used when:

The combined assessed level of inherent and control risk relative to accounts receivable is low.

Revenues are normally considered to have been earned when

The company has substantially accomplished what it must to be entitled to the benefits.

Auditing standards presume that auditors will request confirmation of the client's accounts receivable. All of the following represent situations where the auditor can justify omitting confirmations except (select all that apply)

The evidence expected to be provided by analytical procedures or other substantive procedures is insufficient to reduce audit risk to an acceptably low level for the applicable financial statement assertions. When the information is deemed necessary, but too expensive to collect.

Which of the following factors will affect the reliability of confirmations (select all that apply)

The respondent. Prior experience with similar clients.

An auditor determines that there is a high level of control risk surrounding the revenue cycle. Which situation is most likely to have given rise to this assessment?

The sales manager does not enforce the client's stated policies regarding authorization and approval of sales transactions.

A service organization provides processing services for a client's sales orders. Which of the following information is relevant when gathering data for the report on the service organization's internal controls?

The service organization's system calculates accounts receivable balances.

Write-offs of doubtful accounts should be approved by

The treasurer.

A confirmation procedure scheduled on the year-end date with a large sample of customer account balances is necessary if tests of controls reveal control weaknesses.

True

A price list master file contains the product unit prices that are used for billing customers.

True

When auditing revenue and cash collections, the auditor should first consider the entity-level controls before assessing the transaction-level controls.

True

An auditor observes the mailing of monthly statements to a client's customers and reviews evidence of follow-up on errors reported by the customers. This test of controls most likely is performed to support management's financial statement assertions of:

Understandability and Classification: No Existence: Yes

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

Understating the sales journal.

An auditor compares annual revenues and expenses with similar amounts from the prior year and investigates all changes exceeding 10%. This procedure most likely could indicate that:

Unrealized gains from increases in the value of available-for-sale securities were recorded in the income account for trading securities.

Which of the following most likely would be detected by an auditor's review of a client's sales cut-off?

Unrecorded sales at year-end.

Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

Unrecorded sales.

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

Use more experienced audit team members to perform year-end testing.

Required: The following is a question taken from an internal control questionnaire. For the question, determine what error or fraud could occur if the question were answered "no" or if you found the control was not effective. QUESTION: Are sales invoices prenumbered and are all numbers accounted for?

Valid sales may not be recorded or may not be recorded on a timely basis.

In the audit of accounts receivable, auditors develop specific audit assertions related to the receivables. They then design specific substantive procedures to obtain evidence about each of these assertions. Below is an accounts receivable assertion: Assertion: Accounts receivable are stated at net realizable value. Required: For the assertion described above identify the assertion.

Valuation and Allocation.

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

Valuation and allocation.

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

Valuation and allocation.

An audit client has a valid reason for requesting that a certain account receivable that the auditor has selected for confirmation not be confirmed. Under these circumstances, the auditor should:

Verify the account balance by inspecting the client's bank statements and cash receipt records.

In general, accountants should be under orders to record sales and accounts receivable when:

all supporting documentation of shipping is in order.

A small business owner can best offset the lack of separation of duties by:

being actively involved in the accounting process.

The SEC requires all of the following for revenue to be recognized except:

cash is collected.

To be recognized, revenues must also be realized or realizable and:

earned.

The document that generates recording of a sale is the:

invoice.

An auditor who accepts an audit engagement and does not possess the industry expertise of the business entity should:

obtain a knowledge of matters that relate to the nature of the entity's business.

The assertion that auditors will probably emphasize in the revenue and collection cycle is:

occurrence

The file that contains sales transactions that were initiated in the system but are not yet completed is the:

pending order master.

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 (these returns did not exist). The most effective control for preventing this activity is to:

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

"Bill and hold" refers to an arrangement where:

sales are recorded but are not shipped.

The cutoff assertion for sales means _______.

that transactions have been recorded in the proper accounting period.

The sum of customers' unpaid balances that is compared to the general ledger balance comes from:

the accounts receivable trial balance.

Custody of inventory is transferred to the shipping area upon authorization of:

the shipping order.

When an account receivable is considered uncollectible, the person who generally authorizes the write-off is the client's:

treasurer