Deck 14: Auditing Sales and Receivables

Question 1

In most credit sales audits, the auditor's concern over sales adjustment transactions is based upon the:

A) sheer number and value of these transactions.
B) lack of proper authorisation for these transactions.
C) potential use of these transactions to conceal a theft of cash.
D) poor controls normally found over these transactions and the inherent lack of documentation.

Answer 1

C

Question 2

From the following which would not be an appropriate control procedure for the invoicing of customers?

A) checking the existence of a dispatch note matching the approved sales order before an invoice is prepared.
B) using an authorised price list when preparing the invoice.
C) comparing totals for dispatch notes with totals for invoices.
D) segregating filling and dispatching sales orders.

Answer 2

D

Question 3

To enhance controls in the credit sales area, the warehouse should be instructed not to release (or dispatch) goods until:

A) they received a faxed copy of the sales requisition.
B) they have a completed sales invoice.
C) they receive an approved sales order.
D) the shipping department requests the goods.

Answer 3

C

Question 4

Which of the following is not an example of a programmed application control?

A) numerical continuity of documents is assured.
B) unreasonable quantities, amounts and dates are queried.
C) only orders for goods in the entity's product range are accepted.
D) duplicate document numbers are accepted.

Question 5

The write-off of accounts receivable should be authorised by the:

A) cashier
B) controller.
C) accounts receivable clerk.
D) chief financial officer.

Question 6

Use of an authorised price list in preparing the sales invoices meets primarily the:

A) existence or occurrence assertion.
B) completeness assertion.
C) accuracy, valuation or allocation assertion.
D) rights and obligations assertion.

Question 7

After making the deposit, the daily cash summary should be forwarded by the cashier directly to:

A) the chief financial officer.
B) the accounts receivable clerk.
C) general accounting.
D) the cash receipts clerk.

Question 8

In a credit sales environment, the document that usually initiates the activity in the sales cycle is:

A) customer order.
B) sales order.
C) dispatch note.
D) sales invoice.

Question 9

Controls over approving credit relate to the:

A) existence or occurrence assertion.
B) completeness assertion.
C) accuracy, valuation or allocation assertion.
D) rights and obligations assertion.

Question 10

The account balance audit objective, "Accounts receivable represent gross claims on customers at balance date and agree with the sum of the accounts receivable subsidiary ledger", is derived from the assertion category of:

A) existence or occurrence.
B) completeness.
C) rights and obligations.
D) valuation and allocation.

Question 11

Which of the following is not normally considered a step in the credit sales functions?

A) accepting customer orders.
B) approving credit.
C) acquiring goods to fill the order.
D) billing customers.

Question 12

Which of these is not a specific audit objective for sales and receivables?

A) existence or occurrence.
B) completeness.
C) representation.
D) presentation and disclosure.

Question 13

In a credit sales environment, the best place to vest credit approval is in:

A) accounts receivable.
B) the sales department.
C) the cashier area where receipts will eventually be sent.
D) an independent credit department.

Question 14

The main control objective of the recording of sales function is:

A) that only actual deliveries are invoiced.
B) that sales are recorded accurately and in the proper period.
C) that cash will be received for the sale.
D) to produce a monthly customer statement.

Question 15

Access controls should permit read-only access to transaction and master files except for authorised individuals. Which of the following illustrates such an exception?

A) credit controller can override marginal breaches of a customer's credit limit.
B) sales manager can amend a price for a sales transaction.
C) sales manager can amend a discount for a customer.
D) any of the above.

Question 16

Standard control procedures over customer remittances received through the mail include having the mailroom personnel:

A) forward the remittances, unopened, directly to the accounts receivable clerk.
B) open the mail, restrictively endorse the cheques and then forward the remittances directly to the cashier.
C) open the mail, restrictively endorse the cheques and then forward the remittances directly to the accounts receivable clerk.
D) open the mail, restrictively endorse the cheques and then list each remittance on a prelist.

Question 17

The best procedure for dealing with a non-response to a third positive request for confirmation of an accounts receivable is:

A) assume that the debtor's value is correct
B) write-off the balance as a bad debt
C) examine subsequent cash collections
D) involve the client in chasing up the debtor

Question 18

In a credit sales environment, the documents that serves as the basis for internal processing of an order is:

A) customer order.
B) sales order.
C) dispatch note.
D) sales invoice.

Question 19

Use of point-of-sale terminals to record over-the-counter cash sales provides all of the following except:

A) assurance that all cash sales are processed through the system.
B) an immediate visual display for the customer to verify the accuracy of price and cash tendered.
C) a printed receipt for the customer.
D) printed control totals of the day's receipts processed on the device.

Question 20

Accounting for the numerical sequence of dispatch notes used in tracing will primarily meet the:

A) existence or occurrence assertion.
B) completeness assertion.
C) accuracy, valuation or allocation assertion.
D) presentation or disclosure assertion.

Question 21

Identify the five functions in the processing of credit sales transactions and any documents and records that are used in these functions.

Question 22

Which of these is not an approach that might be adopted by an auditor in evaluating the adequacy of an allowance for bad debts?

A) reviewing subsequent events.
B) reviewing and testing the process used by management.
C) use the percentages adopted by the client.
D) use an independent estimate.

Question 23

In the processing of accounts receivable confirmations the auditor would not normally be expected to:

A) personally prepare the confirmations.
B) personally post the requests.
C) include his/her own return address envelope.
D) maintain custody of the confirmations until they are mailed.

Question 24

Confirming accounts receivable is an accepted audit procedure whenever:

A) they are material in amount.
B) it is reasonable to presume debtors will respond.
C) they are material and it is reasonable to presume debtors will respond.
D) a large number of small balances is involved.

Question 25

When detection risk is high, the timing of the receivables confirmations would be expected to be:

A) at balance date.
B) prior to balance date.
C) prior to balance date provided analytical procedures are performed between the confirmations and balance date.
D) prior to balance date provided analytical procedures and tests of control are performed between the confirmations and balance date.

Question 26

An inherent risk for sales and receivables is:

A) promising large bonuses for meeting sales targets
B) the susceptibility of cash to misappropriation
C) not requiring employees to take regular annual leave
D) all of the above.

Question 27

Identify the three functions in the processing of cash receipts transactions and any documents and records that are used in these functions.

Question 28

Which of these is not a potential misstatement for the function of recording cash receipts?

A) cash may not be deposited intact daily.
B) some receipts may not be recorded.
C) errors may be made in journalising receipts.
D) receipts may be posted to the wrong customer account.

Question 29

A key control environment factor in reducing the risk of fraudulent financial reporting through the overstatement of sales and accounts receivable is:

A) management's adoption and adherence to high standards of integrity and ethical values.
B) reducing the emphasis on sales targets.
C) establishing an effective audit committee.
D) all of the above.

Question 30

For accounts receivables and sales, analytical procedures provide evidence that relates to:

A) existence or occurrence assertion.
B) completeness assertion.
C) valuation or measurement assertion.
D) all of the above.

Question 31

When reviewing and testing the process used by management in determining the allowance for bad debts, which of the following would not be involved?

A) reviewing projected allowances for future periods.
B) ascertaining management's procedures for determining the estimate and considering their reliability.
C) ensuring that the procedures have been properly followed.
D) identifying the assumptions underlying the estimate and considering their reasonableness.

Question 32

A potential misstatement for the function of filling sales orders is:

A) goods may be released from the warehouse for unauthorised orders.
B) sales may be made without credit approval.
C) sales may be made to unauthorised customers.
D) all of the above

Question 33

The summary of the results from confirming accounts receivable contained in the auditor's working papers would not normally provide statistical data on the:

A) market value of the confirmation sample.
B) number of confirmations sent and responses received.
C) proportion of the population total covered by the sample.
D) relationship between the audited and book values of items included in the sample.

Question 34

Identify factors that ought to be considered in the assessment of inherent and control risks sales and accounts receivable.

Question 35

A potential misstatement for the function of approving credit is:

A) goods may be released from the warehouse for unauthorised orders.
B) goods dispatched may not agree with goods ordered.
C) sales may be made without credit approval.
D) all of the above

Question 36

An unusual feature of cut-off tests is that they:

A) are always performed at year-end to verify a recorded balance even though they are tests of transactions.
B) are never performed at year-end to verify a recorded balance because they are tests of transactions.
C) are always performed at year-end to verify transactions even though they are tests of details of balances.
D) none of the above.

Question 37

The type of computer assisted audit technique (CAAT) that would be least suitable for testing controls where credit sales transactions are processed using real time systems is:

A) systems control and audit file.
B) integrated test facility.
C) embedded audit facility.
D) test data approach.

Question 38

Verifying the accuracy of the accounts receivable trial balance relates to the:

A) existence or occurrence assertion.
B) completeness assertion.
C) valuation or measurement assertion.
D) rights and obligations assertion.

Question 39

When examining sales transactions, which of the following would not be possible using generalised audit software?

A) inquiring about segregation of duties for invoicing customers.
B) selecting a sample of invoices for inspection.
C) re-performing invoice pricing and report differences.
D) ensuring the sales journal is correctly totalled.

Question 40

When the positive form of accounts receivable confirmation is used and no response is received, the auditor should normally:

A) assume the account is in error.
B) send a second positive request.
C) assume the account is correct.
D) send a negative confirmation.

Question 41

Confirmations are considered to be the most efficient procedure for obtaining sufficient appropriate audit evidence to support the existence and rights assertions of accounts receivable. However, there are still circumstances under which other procedures may be more effective. List four situations in which confirmations are unlikely to be effective.

Question 42

1. What is the initial starting point for auditing accounts receivables?
2.Identify and describe three tests of details of transactions that would be performed in auditing accounts receivable.
3.Identify and describe the two most important tests of details of balances in relation to accounts receivable.

Question 43

Identify a necessary control for each of the following potential misstatements in relation to credit sales transactions:
1.Sales may be made to unauthorised customers.
2.Sales may be made without credit approval.
3.Goods may be released from the warehouse for unauthorised orders.
4.Unauthorised shipments may be made.
5.Some shipments may not be invoiced.
6.Invoices may not be journalised or posted to customer accounts.
7.Invoices may be posted to the wrong customer account.

Question 44

There are three stages in applying analytical procedures to sales and receivables in the final audit. Briefly explain each stage.

Question 45

Differentiate between the two different forms of confirmation of accounts receivable balances and explain the conditions for which each would be used.

Question 46

List the steps involved when the auditor reviews and tests the process used by management to estimate the bad and doubtful debts allowance.

Question 47

For each of the following functions of cash receipts, identify a potential misstatement and a necessary control:
1.Receiving cash receipts.
2.Depositing cash in the bank.
3.Recording the receipts.