Deck 13: Completing tests in the sales and collection cycle: Accounts receivable

Question 1

If accounts receivable accounts with credit balances are significant, they should be:

A) corrected by making adjusting entries.
B) reclassified as accounts payable.
C) moved to the debit side.
D) written off.

Answer 1

B

Question 2

Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure which would normally include:

A) tracing a sample of individual balances to supporting documents.
B) comparing the total of the trial balance with the general ledger accounts receivable account.
C) test footing the total column and the columns depicting the aging.
D) all of the above

Answer 2

D

Question 3

Setting tolerable error for accounts receivable is part of which phase of the audit?

A) Phase I
B) Phase II
C) Phase III
D) Phase IV

Answer 3

A

Question 4

When do cutoff mistakes most commonly occur?

A) The auditor mistakenly asks the bank for the end-of-year bank statement instead of the statement which would include the two succeeding weeks.
B) Subsequent period transactions are recorded in the current period.
C) Current period transactions are recorded in the subsequent period.
D) B and C

Question 5

Design and perform tests of controls for the sales and collection cycle is part of which phase of the audit?

A) Phase I
B) Phase II
C) Phase III
D) Phase IV

Question 6

A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the time the component parts have been outstanding, is the:

A) customer list.
B) aged trial balance.
C) accounts receivable ledger.
D) schedule of accounts receivable.

Question 7

Tests of details of balances focus on:

A) balance sheet accounts.
B) income and cash flow statement accounts.
C) income statement accounts.
D) all of the above

Question 8

Most tests of accounts receivable and the allowance for uncollectible accounts are based on the:

A) results of analytical procedures.
B) results of confirmations.
C) aged trial balance.
D) general ledger balance of each account.

Question 9

Tests of details of balances are directed to:

A) balance sheet accounts for all cycles.
B) income statement accounts for all cycles.
C) all general ledger accounts for all cycles.
D) balance sheet accounts for some cycles and income statement accounts for other cycles.

Question 10

Which one of the following is NOT an accounts receivable balance-related audit objective?

A) Recorded accounts receivable exist.
B) Internal controls for accounts receivable are adequate.
C) Accounts receivable is stated at realisable value.
D) The client has rights to accounts receivable.

Question 11

Design and perform analytical procedures for accounts receivable balance is part of which phase of the audit?

A) Phase I
B) Phase II
C) Phase III
D) Phase IV

Question 12

Assess control risk for accounts receivable is part of which phase of the audit?

A) Phase I
B) Phase II
C) Phase III
D) Phase IV

Question 13

Recording a cash receipt that did NOT occur violates the existence transaction-related audit objective for the sales and collections cycle.Which balance-related audit objective for accounts receivable does it violate?

A) accuracy
B) existence
C) completeness
D) realisable value

Question 14

The following audit procedure tests primarily which balance-related audit objective for accounts receivable: trace accounts from the accounts receivable master file to the aged trial balance.

A) rights and obligations
B) completeness
C) presentation and disclosure
D) cutoff

Question 15

In the sales and collection cycle, the results of the tests of controls determine:

A) whether positive or negative confirmations should be used for this engagement.
B) if tests of details of balances need to be performed.
C) the extent to which planned detection risk is satisfied for each accounts receivable objective.
D) whether assessed control risk for sales and cash receipts needs to be revised.

Question 16

Which one of the following types of receivables would NOT require special attention from the auditor?

A) accounts that have been outstanding for a long time
B) accounts with credit balances
C) accounts where no reply was received to a negative confirmation request
D) receivables from affiliated companies

Question 17

When are analytical procedures performed?

A) as a part of completing the audit
B) during the planning phase
C) when performing detailed tests
D) all of the above

Question 18

If the results of the analytical procedures are favourable, they will reduce:

A) the extent of tests of details of balances.
B) all of the other tests.
C) the tests of transactions.
D) the extent of tests of controls.

Question 19

The most important test of details of balances to determine the existence of recorded accounts receivable is:

A) the confirmation of customers' balances.
B) tracing sales returns entries to credit notes issued and receiving room reports.
C) tracing sales entries to shipping documents.
D) tracing the credits in accounts receivable to bank deposits.

Question 20

Which of the audit objectives is performed first when doing the tests of details of balances for accounts receivable?

A) Accounts receivable are owned.
B) Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.
C) Existing accounts receivable are included.
D) Recorded accounts receivable exist.

Question 21

If the client's internal control for recording sales returns and allowances is evaluated as effective:

A) a sample of sales returns and allowances subsequent to closing date are examined.
B) all sales returns must be traced to supporting documentation.
C) a larger sample is needed to verify cutoff.
D) all sales returns must be confirmed with the customer.

Question 22

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

A) lapping of year-end accounts receivable
B) excessive sales discounts
C) unrecorded sales for the year
D) unauthorised goods returned for credit

Question 23

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date.This aging is BEST used by the auditor to:

A) evaluate internal control over credit sales.
B) estimate credit losses.
C) test the accuracy of recorded charge sales.
D) verify the validity of the recorded receivables.

Question 24

When customers do NOT respond to positive confirmation requests, auditors:

A) cannot complete the engagement and must issue a disclaimer.
B) cannot express an unqualified opinion.
C) must examine supporting documents.
D) must rely on inquiry of client.

Question 25

What is a common reported type of difference regarding confirmations?

A) Goods have been returned.
B) Goods haven't been received.
C) Payment has already been made.
D) all of the above

Question 26

Which one of the following would NOT be a part of the approach used in determining the reasonableness of cutoff?

A) Evaluate whether the client has established adequate procedures to ensure a reasonable cutoff.
B) Review the client's December 31 and January 2 entries for cutoff problems.
C) Decide on the appropriate criteria for cutoff.
D) Test whether a reasonable cutoff was obtained.

Question 27

The primary purpose of accounts receivable confirmation is to satisfy the:

A) accuracy and cutoff objectives.
B) existence objective.
C) existence and cutoff objectives.
D) existence, accuracy, and cutoff objectives.

Question 28

When the client's rights to accounts receivable are limited, detection can be accomplished by:

A) reviewing minutes of directors meetings.
B) inquiries of the financial controller.
C) confirmation with banks.
D) all of the above

Question 29

It is easy to test for a cash receipts cutoff error by:

A) performing a four-column proof of cash.
B) reconciling the bank statement.
C) observing the counting of cash at the balance sheet date.
D) tracing recorded cash receipts to bank deposits on the bank statement of a subsequent period.

Question 30

A client's failure to record a credit note could result from:

A) improper recording of sales returns.
B) timing differences.
C) improper recording of sales allowances.
D) all of the above

Question 31

What is the most important test of details of balances for accounts receivable?

A) obtaining confirmations from the client's customers
B) recalculating the aged receivables and uncollectible accounts
C) tracing credit memos for returned merchandise to receiving room reports
D) tracing from shipping documents to journals to the accounts receivable ledger

Question 32

How is the client's estimate of the total amount of uncollectible receivables represented?

A) by the provision for doubtful debts account
B) by the bad debts expense account on the income statement
C) by the accounts with credit balances in the accounts receivable subsidiary ledger
D) in a footnote disclosure in the financial statements

Question 33

The most important test for the existence/occurrence objective for accounts receivable is:

A) internal control over balances confirmed.
B) ownership of the balances confirmed.
C) existence of the balances confirmed.
D) collectability of the balances confirmed.

Question 34

The criterion used by most clients for determining when a sale takes place is when:

A) cash is exchanged.
B) the order is received.
C) the goods are shipped.
D) the costs are incurred.

Question 35

You are reviewing sales to discover cutoff problems.If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:

A) before the merchandise was shipped.
B) at a time other than the point at which title passed.
C) at the time the merchandise was shipped.
D) several days subsequent to shipments.

Question 36

The starting point for the evaluation of the allowance for doubtful debts is:

A) last year's audit findings.
B) a review of controls related to the auditee's credit policy.
C) an analysis of write-off authorisations.
D) the aged trial balance.

Question 37

This year is the first time that, as a normal practice in a client's business, accounts receivable may be pledged, assigned, factored, or sold at discount.The audit procedure which would disclose these practices is:

A) discussions with the client.
B) a review of the minutes of the board of directors meetings.
C) examination of correspondence files.
D) all of the above

Question 38

Communication addressed to the debtor requesting confirmation on whether the balance as stated on the communication is correct or incorrect is known as a:

A) negative confirmation.
B) positive confirmation.
C) bank confirmation.
D) management letter.

Question 39

The understatement of sales and accounts receivable is BEST uncovered by:

A) reviewing the aged trial balance.
B) reconciling the accounts receivable general ledger account with the schedule of accounts receivable.
C) test of transactions for shipments made but not recorded.
D) confirming receivables.

Question 40

The auditor learns that collections of accounts receivable during the first ten days of January were entered as debits to cash and credits to accounts receivable as of December 31.The effect generally will be to:

A) overstate working capital with no effect on the current ratio at December 31.
B) overstate the current ratio with no effect on working capital at December 31.
C) overstate both working capital and the current ratio at December 31.
D) leave both working capital and the current ratio unchanged at December 31.

Question 41

It may NOT be necessary for an auditor to confirm accounts receivable when:

A) accounts receivable are immaterial.
B) the auditor considers confirmations ineffective evidence because response rates will likely be inadequate or unreliable.
C) the combined level of inherent risk and control risk is low and other substantive evidence can be accumulated to provide sufficient evidence.
D) all of the above

Question 42

When positive confirmations are used, ASA 505 requires follow-up procedures for confirmations not returned by the customer.In such a situation, which of the following would NOT be classified as an alternative procedure?

A) Send a second confirmation request.
B) Examine subsequent cash receipts to determine if the receivable has been paid.
C) Examine the customer's purchase order and the duplicate sales invoice to determine if the merchandise was ordered.
D) Examine shipping documents to verify that the merchandise was shipped.

Question 43

When no reply to a positive confirmation is received, the auditor:

A) examines subsequent cash receipts.
B) treats the non-response as a misstatement.
C) examines duplicate sales invoices.
D) both A and C

Question 44

A customer mails and records a cheque to a client for payment of an unpaid account on December 30.The client receives and records the amount on January 2.The records of the two organisations will be different on December 31.

A) This is a timing difference.
B) This is a cutoff misstatement.
C) both A and B
D) none of the above

Question 45

Which one of the following circumstances would indicate that negative confirmations should NOT be used on an engagement?

A) A significant portion of the total accounts receivable is represented by a small number of accounts with large balances.
B) The auditor is unaware of disputed or inaccurate accounts.
C) The internal control over receivables is good.
D) The recipients are mostly businesses rather than individuals.

Question 46

The auditor should evaluate the qualitative nature of misstatements found in a sample of debtors' confirmations:

A) only for large balances.
B) regardless of the dollar amount.
C) only for related party balances.
D) only for large differences.

Question 47

The use of the positive (as opposed to the negative)form of receivables confirmation is preferred when:

A) there is reason to believe a significant portion of the requests will receive responses.
B) internal control surrounding accounts receivable is considered to be effective.
C) there is reason to believe that a substantial number of accounts may be in dispute.
D) a large number of small balances are involved.

Question 48

________ to positive confirmations do NOT provide audit evidence.

A) Responses
B) Follow-ups
C) Non-responses
D) all of the above

Question 49

The following audit procedure tests primarily which balance-related audit objective for accounts receivable: confirm accounts receivable, using positive confirmations.

A) existence
B) completeness
C) classification
D) all of the above

Question 50

After items to be confirmed have been selected, the auditor must maintain control of the confirmations until the:

A) sealed envelopes are provided to the client's personnel to be mailed.
B) names are provided to the client's personnel to type the envelopes.
C) responses are received by the client with the return mail.
D) responses are received by the auditor from the customer.

Question 51

When positive confirmations have been used, it is normally desirable to account for unconfirmed balances with alternative procedures:

A) even if the amounts are small.
B) only if the amounts are large.
C) only if the amounts are material.
D) if it does not increase the audit firm's costs.

Question 52

What is the advantage of using the negative form of confirmations?

A) Customer's silence proves that the balance is correct.
B) Larger sample sizes can be used without increasing the costs above what would have been required for positive confirmations.
C) It is appropriate in all circumstances.
D) Follow-up procedures are scheduled automatically.

Question 53

When the confirmation requests are returned by the customer, in many cases, they are caused by ________ between the client's and the customer's records.

A) valuation disputes
B) timing differences
C) miscommunication
D) none of the above

Question 54

Each auditee misstatement of accounts receivable must be analysed to determine whether it:

A) represents a timing difference.
B) is consistent with the original assessed level of control risk.
C) is symptomatic of fraud.
D) all of the above

Question 55

A positive confirmation is more reliable evidence than a negative confirmation because:

A) fewer confirmations can be sent out.
B) the debtor's lack of response indicates agreement with the stated balance.
C) the auditor has a document which can be used in court.
D) follow-up procedures can be performed if a response is not received from the debtor.

Question 56

The following audit procedure tests primarily which balance-related audit objective for accounts receivable: inquire of management whether there are any related-party loans.

A) existence
B) completeness
C) classification
D) all of the above.

Question 57

The most reliable evidence from confirmations is obtained when they are sent:

A) at various times throughout the year to different sections of the samples, so that the entire sample is representative of account balances scattered throughout the year.
B) several months before the year-end, so the auditor will have adequate time to perform alternate procedures if they are required.
C) at various times throughout the year to the same group in the sample, so that the sample will not have a time bias.
D) as close to the balance sheet date as possible.

Question 58

The following audit procedure tests primarily which balance-related audit objective for accounts receivable: review accounts receivable trial balance for large and unusual receivables.

A) existence
B) completeness
C) classification
D) all of the above

Question 59

Which of the following is NOT a factor affecting sample size for confirming accounts receivable?

A) type of confirmation
B) tolerable misstatement
C) control risk
D) assessed detection risk

Question 60

Returns of positive confirmation requests for accounts receivable were very poor.As an alternative procedure, the auditor decided to check subsequent collections.The auditor had satisfied himself that the client satisfactorily listed the customer name next to each cheque listed on the deposit slip; hence, he decided that for each customer from whom a confirmation was not received, he would add all amounts shown for that customer on each validated deposit slip for the two months following the balance sheet date.The major fallacy in the auditor's procedure is that:

A) the deposit slip would not be received directly by the auditor as a confirmation would be.
B) checking of subsequent collections is not an accepted alternative auditing procedure for confirmation of accounts receivable.
C) a customer may not have made a payment during the two-month period.
D) by looking only at the deposit slip, the auditor would not know if the payment was for the receivable at the balance sheet date or for a subsequent transaction.

Question 61

For most audits, inherent risk for accounts receivable is usually moderate or low except for the realisable value objective and the cutoff objective.

Question 62

The following audit procedure tests primarily which balance-related audit objective for accounts receivable: review the minutes of the board of directors meetings for any indication of pledged receivables.

A) existence
B) presentation and disclosure
C) rights and obligations
D) both B and C

Question 63

The bad debt expense is a residual balance that can be verified by a reperformance test.

Question 64

The criterion used by most merchandising and manufacturing clients for determining when a sale takes place is whether an order for goods has been received from a customer.

Question 65

Inherent risk for accounts receivable is normally assessed at the objective level rather than at the account level.

Question 66

In confirming accounts receivable balances, the auditor finds overstatements caused by mistakes in billing customers which will then overstate both accounts receivable and sales.

Question 67

The results of substantive tests of sales and cash receipts transactions are used to determine the level of planned detection risk for each accounts receivable balance-related audit objective.

Question 68

The accounts receivable balance-related audit objective net realisable value is not affected by assessed control risk for sales or cash receipts.

Question 69

Tests of details of balances focus on testing the year-end balances of balance sheet accounts.

Question 70

For most audits, a proper cash receipts cutoff is more important than either the sales or the sales returns and allowances cutoff.

Question 71

Client business risks affecting accounts receivable are considered in the auditor's evaluation of inherent risk.

Question 72

It is easy to test for a cash receipts cutoff misstatement by tracing recorded cash receipts to subsequent-period bank deposits on the bank statement.

Question 73

The auditor may consider it unnecessary to confirm accounts receivable response rates from the confirmations that are likely to be unreliable.

Question 74

Sales returns should be recorded in the period in which the return occurs.

Question 75

Cutoff misstatements exist when subsequent period transactions are recorded in the current period.

Question 76

For sales, the existence transaction-related objective affects the existence balance-related objective for accounts receivable, but for cash receipts, the existence transaction-related objective affects the completeness balance-related objective for accounts receivable.

Question 77

Comparing the provision for doubtful debts as a percentage of accounts receivable with previous years can help detect errors in the bad debts expense account.

Question 78

The allowance for doubtful debts account is capable of precise calculation.

Question 79

Favourable results from analytical procedures reduce the extent to which the auditor needs to test details of balances.

Question 80

The realisable value of accounts receivable equals gross accounts receivable less the allowance for doubtful debts account.