Deck 12: Audit of the Revenue Cycle

Question 1

Audit risk is assessed for

A) the financial statements as a whole and is not usually allocated to various accounts or objectives.
B) the financial statements as a whole and then allocated to various accounts.
C) various accounts but not for the financial statements as a whole.
D) various accounts and objectives, and the sum is then assigned to the financial statements as a whole.

Answer 1

A

Question 2

Zhang Corporation returned $6000 of defective goods to Meli Inc. Meli has a strict policy of no cash refund. Meli should

A) write off the account receivable.
B) issue a credit memo to Zhang.
C) wait until Zhang places its next order to record the return.
D) not adjust their accounting records since $6000 is not material for Meli.

Answer 2

B

Question 3

Your audit client has many different types of accounts receivable: Canadian, American, and other international accounts; and short- and long-term accounts. There are also some sales on consignment. The company has used forward exchange contracts to reduce its exposure due to foreign exchange fluctuations. How will this affect the audit engagement?

A) control risk will increase
B) inherent risks of error will decrease
C) risk of material misstatement increases
D) audit risk will be increased

Answer 3

C

Question 4

The two primary classes of transactions in the sales and collection cycle are

A) sales and sales returns.
B) sales and sales discounts.
C) sales and accounts receivable.
D) sales and cash receipts.

Question 5

As the quality of the enterprise risk management process declines, and the overall quality of internal controls declines,

A) risk of fraud decreases.
B) risk of fraud increases.
C) the extent of control testing increases.
D) the extent of substantive testing decreases.

Question 6

Which of the following data elements would be included in the customer master file as semi-permanent information?

A) transaction date
B) credit limit
C) transaction amount
D) amount paid

Question 7

Most companies recognize sales when

A) a customer order is received.
B) the merchandise is shipped.
C) the merchandise is received by the customer.
D) cash is received on account.

Question 8

There are three main types of revenue manipulations. Which of the following revenue manipulations affects the cutoff objective?

A) avoiding recording of returns and allowances for the year
B) recording subsequent period sales as current period sales
C) understatement of bad debts
D) creation of fictitious sales that are misclassified as revenue

Question 9

Some companies use a lockbox system, whereby customers mail payments to a post office box address. The lockbox contents could be handled by a bank, another external organization, or the owner of the company. One of the advantages of using a lockbox is that it

A) improves segregation of duties.
B) results in more accurate bank deposits.
C) results in more accurate accounts receivables.
D) provides more detailed bank deposit information.

Question 10

A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, credit memo issued, and the ending balance is the

A) accounts receivable subsidiary ledger.
B) monthly statement.
C) remittance advice.
D) sales invoice.

Question 11

A document that describes which accounts receivable accounts are to be written off and why is called a(n)

A) uncollectible account authorization form.
B) journal entry authorization form.
C) master file change form.
D) sales returns and allowances journal.

Question 12

There are three main types of revenue manipulations. Which of the following revenue manipulations affects the valuation objective?

A) recording subsequent period sales as current period sales
B) the use of "bill and holds" (goods are invoiced but not shipped)
C) understatement of bad debts
D) creation of fictitious sales that are misclassified as revenue

Question 13

There are three main types of revenue manipulations. Which of the following revenue manipulations affects the occurrence objective?

A) recording subsequent period sales as current period sales
B) the use of "bill and holds" (goods are invoiced but not shipped)
C) understatement of bad debts
D) creation of fictitious sales that are misclassified as revenue

Question 14

A) Describe the four business functions that result in sales transactions in a typical sales and collection cycle and state the key documents and records involved in each function.
B) State the five classes of transactions that comprise the sales and collection cycle.
C) The sales and collections cycle is comprised of nine business functions. The first four functions result in sales transactions. Discuss the remaining five business functions that occur after sales transactions and identify the key documents and records involved in each of the five functions.

Question 15

Poor controls over credit limit approval or in changing the credit limit in the master file may result in

A) confused and frustrated customers.
B) incomplete sales records.
C) financial statement errors for sales and AR accounts.
D) excessive bad debts and uncollectible account receivables.

Question 16

A document prepared for shipment of the goods sold using a trucking company is called the

A) sales order.
B) bill of lading.
C) sales invoice.
D) customer order.

Question 17

Which of the following control weaknesses could result in problems with collectability of accounts receivable?

A) Unauthorized individuals can establish or change credit limits.
B) Matching shipping documents to sales records is done weekly.
C) When there is one error in a batch of transactions, the whole batch is rejected.
D) Cash receipts are matched to the customer accounts rather than against specific invoices.

Question 18

Before goods are shipped on account to a new customer, a properly authorized person must

A) prepare the sales invoice.
B) approve the journal entry.
C) approve credit.
D) verify that the unit price is accurate.

Question 19

Which of the following documents and records is used to record the packages, weights, and sizes shipped using an external trucking company?

A) remittance advice
B) shipping advice containing shipment tracking number
C) returns receiving report
D) bill of lading

Question 20

The most difficult type of cash defalcation for the auditor to detect is that which occurs

A) before the cash is recorded.
B) after cash is recorded but before it goes to the bank.
C) out of the balance kept in a cash register.
D) in amounts under $100.

Question 21

The defalcation process that postpones entries for the collection of accounts receivable to conceal an existing cash shortage is referred to as

A) kiting.
B) lapping.
C) computer fraud.
D) financial statement fraud.

Question 22

For sales, the occurrence transaction-related audit objective affects the existence balance-related audit objective. For cash receipts, the occurrence transaction-related audit objective affects which balance-related audit objective?

A) existence
B) completeness
C) cutoff
D) valuation

Question 23

Which of the following internal control procedures will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable?

A) Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
B) Write-offs must be supported by an aging schedule showing that only receivables overdue several months have been written off.
C) Write-offs must be approved by the cashier who is in a position to know if the accounts receivable have, in fact, been collected.
D) Write-offs must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.

Question 24

For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related audit objective of accounts receivable. Which accounts receivable balance-related audit objective does the cash receipts transaction-related audit objective of completeness affect?

A) allocation
B) completeness
C) rights and obligations
D) existence

Question 25

Comparison of individual customer balances with previous years will detect what type of possible misstatement?

A) misstatement in gross profit and bad debt expense
B) overstatement or understatement of bad debt expense
C) overstatement or understatement of allowance for uncollectible accounts
D) misstatements in accounts receivable and related income statement accounts

Question 26

Discuss three examples of analytical procedures an auditor might perform while auditing the sales and collection cycle. Also discuss the potential misstatement(s) that may be revealed by each analytical procedure.
Note: students could also be asked to separately discuss ratios for planning and ratios as substantive tests.

Question 27

As part of audit planning, you have calculated accounts receivable turnover for the last five years and compared it to industry averages. Your client's accounts receivable has decreased by about 1.25 times in the current year, while the industry rate has improved. One possible cause of this lowered accounts receivable turnover is

A) higher cost of goods sold.
B) increased bad debt expenses.
C) fictitious revenue.
D) fictitious expenses.

Question 28

You are conducting an audit and have obtained the following figures with respect to sales and accounts receivable:
2015 2014
Accounts receivable $ 3 343 000 $ 2 694 000
Allowance for doubtful accounts 212 150 207 660
Sales 25 640 000 24 630 000
Required:

A) What are the audit implications of these figures?
B) Identify key audit steps that you would perform for any of the above accounts.

Question 29

Comparing bad debt expense as a percentage of gross sales with previous years will detect what kind of possible misstatement?

A) cutoff errors in recording cash receipts
B) overstatement of sales and accounts receivable
C) understatement of sales and accounts receivable
D) understatement of allowance for uncollectible accounts

Question 30

As part of audit planning, you have calculated gross margin for the last five years and compared gross margin to industry averages. Your client's gross margin has increased by about 5% in the current year, while the industry gross average has declined. One possible cause of this increased gross margin is

A) higher cost of goods sold.
B) increased bad debt expenses.
C) fictitious revenue.
D) fictitious expenses.

Question 31

A) State the five specific transaction-related audit objectives for cash receipts and describe one common test of controls for each objective.
B) Discuss what is meant by proof of cash receipts and explain its purpose.

Question 32

Which of the following actions is more likely to be a result of error rather than fraud?

A) consignment sales are knowingly recorded as revenue
B) orders are shipped to a customer with a bad credit rating
C) fictitious revenue transactions are recorded and reported
D) subsequent period revenue is deliberately recorded in the current period

Question 33

You are the auditor for GreenAcres, a non-profit home for homeless elderly. GreenAcres has a December 31 year end. It receives government funding and also relies on donations for revenue. GreenAcres has a major funding drive in November, when it collects pledges by means of activities at a garage sale, a walkathon, and bake sales in the community.
In late February you had a meeting with Ellen Famous, the President of GreenAcres, at the organization's premises. Ellen reviews and approves bank statements and is the second and final cheque signer. Two other accounting staff have the following responsibilities:
• Paul approves pledge write-offs (which normally average about 15%), opens the mail, endorses cheques received in the mail, prepares and delivers bank deposits, and posts transactions into the accounting system.
• Diana, a retired bookkeeper, volunteers about 10 hours per week to reconcile the bank account, review journal entries posted to the general ledger, and prepare payroll and accounts payable transactions for processing.
Ellen normally reviews pledge write-offs, but was very busy in February, so she took a look while you were there. To her surprise, she found that about 40% of the pledges had been written off. She asked Diana to investigate, and Diana found that most of the write-offs had actually been paid.
Required:

A) What are possible causes of the inconsistency with the pledge write-offs?
B) What are the weaknesses in internal control that could allow the excess write-offs to occur? Provide recommendations for improvement.
C) Identify audit procedures that you would complete to quantify any potential misstatement with respect to the pledges receivable balance as at December 31.

Question 34

The appropriate test of controls for separation of duties is

A) documentation.
B) confirmation.
C) examination.
D) observation.

Question 35

Two accounts receivable balance-related audit objectives are not affected by assessed control risk for the sales and cash receipts classes of transactions. These objectives are

A) valuation; allocation.
B) allocation; rights and obligations.
C) valuation; rights and obligations.
D) accuracy; existence.

Question 36

As part of audit planning, you have calculated gross margin for the last five years and compared gross margin to industry averages. Your client's gross margin has increased by about 5% in the current year, while the industry gross average has declined. One possible cause of this increased gross margin is

A) higher cost of goods sold.
B) increased bad debt expenses.
C) premature revenue recognition.
D) fictitious expenses.

Question 37

Stefano is performing a review of the accounts receivable for large and unusual amounts. Of the following accounts receivables, Stefano should pay special attention to an account receivable

A) from a related party.
B) for a large dollar amount.
C) recorded close to year end.
D) that is recurring.

Question 38

An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting

A) kiting.
B) lapping.
C) illicit write-offs of customers as uncollectible accounts.
D) sales without proper credit authorization.

Question 39

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? The cashier

A) prepares the daily deposit.
B) makes the daily deposit at a local bank.
C) records the receipts to the customer files.
D) endorses the cheques with the company endorsement stamp.

Question 40

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?

A) postponing recording of cash receipt entries
B) overstating the accounts receivable control account
C) overstating the accounts receivable subsidiary ledger
D) recording cash receipt entries early

Question 41

Which of the following control procedures may prevent the failure to bill customers for some shipments?

A) Each shipment should be supported by a prenumbered sales invoice that is accounted for.
B) Each sales order should be approved by authorized personnel.
C) Sales journal entries should be reconciled to daily sales summaries.
D) Each sales invoice should be supported by a shipping document.

Question 42

To determine that sales are accurately charged, the unit prices on the duplicate sales invoices are normally compared with

A) the original invoices.
B) the amounts recorded in the sales journal for that transaction.
C) the amounts posted to the customer's account in the accounts receivable master file.
D) an approved item master file.

Question 43

For each control on which the auditor plans to rely to reduce assessed control risk, he or she must

A) design one or more tests of controls to verify effectiveness.
B) report all weaknesses in the management letter.
C) quantitatively determine the effect on sampling error.
D) ensure that the test applies to several different transaction audit objectives.

Question 44

Which of the following is an example of a key internal control for an online system that would help ensure that recorded sales are for the amount of goods shipped and are accurately billed and recorded?

A) Shipping documents are matched to invoices.
B) Shipping details are automatically used as the invoicing source.
C) Shipping documents are prenumbered and accounted for.
D) Transactions are summarized daily for posting to the general ledger.

Question 45

What information would be considered semi-permanent as well as transaction information?

A) customer number or code
B) customer credit limit
C) transaction amount
D) current balance outstanding

Question 46

The information systems audit specialist on your audit team has indicated that the general controls over program changes are excellent for all application cycles. What impact does this have on your audit of sales invoice processing?

A) Generalized audit software should be used to select a sample of sales transactions for control testing.
B) Tests of controls should be omitted; only substantive tests may be conducted.
C) There could be problems with the accuracy of calculations for sales taxes and goods and excise taxes.
D) The auditor can place reliance on the program's performance of sales calculations.

Question 47

Which of the following controls pertains to audit trails in the batch processing of sales transactions?

A) groups of documents are totalled
B) audit trail is available in electronic form
C) the focus is on preventing incorrect transactions
D) remittance advice information is matched to sales invoice numbers

Question 48

Tamra is performing a test of control consisting of looking at the numerical sequence of credit memos issued by the company. Tamra is performing a block test by looking for any missing number in the sequence. This test will provide evidence of

A) completeness.
B) occurrence and completeness.
C) occurrence and accuracy.
D) accuracy and completeness.

Question 49

Three presentation and disclosure audit objectives are not affected by assessed control risk for the sales transactions. These are

A) rights and obligations, valuation, and understandability.
B) understandability, valuation, and occurrence.
C) valuation, rights and obligations, and classification.
D) classification, understandability, and rights and obligations.

Question 50

Which of the following presentation and disclosure-related audit objectives does not have a parallel audit objective for both the transaction-related audit objectives and balance-related audit objectives?

A) allocation
B) classification
C) understandability
D) rights and obligations

Question 51

Which of the following procedures would ordinarily be expected to best reveal unrecorded sales at the balance sheet date?

A) Compare shipping documents with sales invoices.
B) Apply gross profit rates to inventory disposed of during the period.
C) Trace payments received subsequent to the balance sheet date.
D) Send accounts receivable confirmation requests.

Question 52

To test for recorded sales for which there were no actual shipments, the auditor traces from the

A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.

Question 53

One of the reasons that the auditor considers the type of information system and its functions is to

A) assess whether hardware functioning affects applications.
B) evaluate design effectiveness of internal controls.
C) complete risk assessment by audit assertion for cycles.
D) assess whether programmed controls can be relied upon.

Question 54

Invoices are prepared using a date equal to the shipping date. This control pertains to which transaction-related audit objective?

A) posting and summarization
B) classification
C) cutoff
D) completeness

Question 55

When a company uses purchased software packages for its accounting software, such packages normally do not permit the company to change the software package's functionality. This means that the auditor will consider

A) access controls as being poor.
B) program change controls as poor.
C) program change controls as excellent.
D) access controls as being excellent.

Question 56

A document that is used to describe and authorize additions, changes, or deletion of sales prices or customer data is called a(n)

A) uncollectible account authorization form.
B) journal entry authorization form.
C) master file change form.
D) transaction file change form.

Question 57

Which of the following presentation and disclosure-related audit objectives has a matching transaction-related audit objective, but not a matching balance-related audit objective?

A) accuracy
B) classification
C) occurrence
D) completeness

Question 58

A risk of material misstatement in accounts receivable associated with the accuracy balance-related audit objective is that "sales recorded at the incorrect price result in revenue and accounts receivable that are over- or understated." Which of the following tests of detail of balances would respond to this risk?

A) Select a sample of master file change forms and verify that all sales prices changes were appropriately authorized.
B) Use audit software to match sales invoice price details to authorized prices in the sales price master files.
C) Enquire with management with respect to the procedures used to update the sales price master file.
D) Match shipping details for a sample of invoices to the invoice details on an item by item basis.

Question 59

When there are problems with program change procedures or with access controls, the auditor may choose to

A) rely less on manual controls since control risk has been increased.
B) not rely on programmed or interdependent application controls.
C) reduce control risk, which reduces the level of substantive testing.
D) use an information technology audit specialist to assess programmed application controls.

Question 60

Which of the following is an example of a data entry input edit that could be used to improve the accuracy of online data entry of sales orders?

A) matching of customer number to master file
B) automatic posting of sales to the general ledger account
C) reconciliation of the customer master file to accounts receivable
D) daily point-of-sales control totals matched to cash receipts

Question 61

Outline the key areas that the auditor would review as part of general controls.

Question 62

A) State the five specific transaction-related audit objectives for sales and describe one common test of controls for each objective.
B) Describe three tests of controls commonly used to test the accuracy objective for sales.

Question 63

Tests of details of balances relate to which part of the Audit Risk Model?

A) control risk
B) inherent risk
C) substantive risk
D) planned detection risk

Question 64

The document that is used to prepare and reconcile the deposit of cash and improve control over the custody of assets (cash) is the

A) sales invoice.
B) credit memo.
C) remittance advice.
D) cash receipts journal.

Question 65

You and your audit team went to a local mall for your lunch break. While there, you dropped off a roll of film at a photo store, and planned to pick it up after work that day. You strike up a conversation with your supervisor about digital versus film photography and your supervisor says, "Next week, you are going to be working at a client that just happens to be a group of photography stores. Tell me, what controls do you think should be programmed into the store cash registers to help ensure that sales transactions are accurate and complete?"
Required:
Answer your supervisor's question.

Question 66

After the auditor has identified the key internal controls and weaknesses and assessed control risk, it is appropriate to decide whether

A) substantive tests will be increased sufficiently to justify the cost of performing tests of controls.
B) substantive tests will be reduced sufficiently to justify the cost of performing tests of controls.
C) tests of controls will be increased sufficiently to justify the cost of performing substantive tests.
D) tests of controls will be reduced sufficiently to justify the cost of performing substantive tests.

Question 67

A risk of material misstatement in accounts receivable associated with the allocation balance-related audit objective is that "long-term service revenue is recorded as current revenue or in the wrong period, overstating revenue and accounts receivable." Which of the following tests of detail of balances would respond to this risk?

A) Read customer contracts and audit the criteria used to allocate revenue to components of the sales contract.
B) Check cash received after the year end and trace to accounts receivable master file.
C) Read the notes to the financial statements and compare to audited financial information.
D) Enquire with management about the process used to make sure that revenue is recorded in the correct period.

Question 68

At every audit engagement the auditor is required to consider that there could be significant risks of misstatement for revenue recognition. At ABC Ltd., the auditor has concluded that, yes, there are material risks of misstatement associated with revenue recognition. How does this affect the extent of testing for accounts receivable?

A) Audit risk will be increased.
B) Inherent risks will be decreased.
C) Decreased control testing is required.
D) Increased substantive testing is required.

Question 69

Following are three different situations with respect to the audit of accounts receivable and sales. For each, specify the evidence mix that you would use (tests of control, substantive tests, type of confirmation/timing), and explain why.

A) The client is in a volatile industry, selling products that can quickly become obsolete. Total accounts receivable is $65 million with a bad debt allowance of $7 million. The company has recently laid off three accounting staff to save money.
B) A small company has 45 different customers with balances ranging from $500 to $25 000 per customer. There is one accountant on staff and a professional accountant comes in once per week for three hours to review the staff accountant's work and prepare journal entries. Bad debts are rare, as the owner is actively involved in accounts receivable collection.
C) Big Department Store Finance Corporation has fifty staff in the accounting department, a sophisticated software package, and about $250 million in accounts receivable. The corporation manages the department store's credit cards. About 100 000 credit card customers have balances less than $300 on their accounts, while the balances for the remaining customers range up to a maximum of $5000.

Question 70

Proper accounting requires that an account receivable must be written off by the client when

A) the client company concludes that an amount is no longer collectible.
B) the customer files for bankruptcy.
C) a collection agency cannot inspire the customer to pay the debt.
D) the account is at least six months old.

Question 71

You are the audit senior responsible for a large photofinishing centre and camera store. The store uses automated cash registers tied to inventory (also known as point-of-sale devices). The point-of-sale devices take advantage of automated procedures and controls that can be programmed to reduce errors and improve controls over completeness of transactions.
Required:
Provide examples of interdependent controls that should be used to complement the programmed controls.

Question 72

Office Design Inc. (ODI) has been your audit client for five years. ODI designs and sells office furniture such as desks, cabinets, and couches used in office reception areas. ODI has sales in Canada and the U.S., with five distribution locations where furniture is available to prospective purchasers to try out before purchasing. These locations are in Toronto, Montreal, Halifax, New York, and Chicago. The company uses custom-designed software for its order processing and sales, which is kept current by one of the five information systems personnel.
The Vice President of Finance is new. Executive management is paid a salary and a bonus based on the annual net income of ODI. Unfortunately, the accounting staff at the head office (in Montreal) has been downsized from ten people to six due to a recent slowdown in sales. Your review of the aged accounts receivable trial balance revealed that one third of the accounts have been outstanding for more than one year. ODI's profits have declined substantially from last year. Its line of credit and bank loans are at their maximum and the company is considering selling its U.S. operations to provide cash flow.
Prior year working papers revealed few errors and indicate that you considered management integrity to be good. However, due to segregation issues, you did not rely on the internal controls in the prior year.
Required:

A) What issues in corporate governance and in the control environment affect your assessment of internal controls for revenue? How does this affect the decision to conduct substantive testing (i.e. exclusion of tests of controls)?
B) What is the likely assessment of computer general controls? How does this affect the type of audit testing conducted at ODI?

Question 73

In the planning phase, Denis conducted an analytical procedure to compare the allowance for doubtful accounts balance to the accounts receivable balance. In the prior years, the allowance for the doubtful accounts/accounts receivable ratio was between 2.5% to 3.5%. This year, the number is 1.25%. What should Denis do?

A) Change the assessed inherent risk
B) Conduct additional testing to justify the lower bad debt.
C) Advise management that they should increase the allowance for doubtful accounts provision.
D) Document this difference and continue with audit work to see if this is pervasive bias of management.

Question 74

One of the key internal controls to prevent transactions in the sales and collection cycle to fictitious customers is to

A) have the bank reconciliation done by someone who is independent of the treasury function.
B) account for the integrity of the numerical sequence of sales orders.
C) compare customer numbers entered to the customer master file.
D) include the sales price list of all products in the computer files.

Question 75

Your audit client is a large retail chain with its own credit card. It has annual sales of about $100 million. On December 31, there were approximately 40 000 open accounts with total receivables of approximately $18.5 million. Very few customer balances exceed $1000. The company's general office maintains the accounts receivable records. The large volume of transactions processed by the company has necessitated extensive segregation of duties and frequent balancing of data during processing. Accordingly, the company's general and system controls are considered to be very good. A complete record of each customer's account is stored on a relational database and includes the following information:
Description of field contents
Type of account (personal, corporate) Customer account number
Customer name and address Credit limit (code for 8 credit levels)
Status code (active, inactive, bad debt) Number of transactions this month
Current month's charges Current month's payments
Total outstanding balance Aged balance over 30 days
Aged balance over 60 days Aged balance over 90 days
Aged balance over 120 days Year account opened
Year last active Total purchases this year to date
Total returns this year to date Number of months active
Total purchases last year Number of months active last year
Source transactions are store purchase invoices, payments, and adjustments. Daily, all the orders are received, entered into the computer, and processed against the customer master file. Each account is updated and automatically analyzed to determine whether the transactions just processed have created a condition that should be brought to the attention of the authorization or collection departments. Exception reports are automatically printed and forwarded to these groups.
The company sends monthly statements to customers on a cyclical basis. About 2000 statements are mailed each billing day.As the accounts are updated, the day's transactions are accumulated and added to the starting control figure for each cycle. The new control figures are balanced with the sum of all the individual accounts in the cycle (accumulated as each account is processed). In addition, a detailed transaction and cycle control report is prepared, providing an audit trail in customer account number sequence.
Required:
Describe the audit procedures you would perform in your year-end audit work for this company's accounts receivable. For each audit test, state the relevant audit assertion(s). Be sure to include different types of tests as necessary (e.g. manual or computer-assisted audit techniques), and clearly identify those tests that can be completed using CAATs.

Question 76

Gonzo is an online dating agency. Gonzo has been in business for 5 years and was able to reach revenues of $1 million last year. Given its recent expansion, Gonzo's shareholders have required that the company's financial statements be audited for the first time this year. You have been assigned to the audit team for this mandate.
The senior manager has asked you to review the process description for the sales of Gonzo. You need to identify the controls in place that could be tested and used for the audit and also identify any controls that might be missing and briefly explain the impact on the audit.
Gonzo's CEO has provided you with the following description of the company's processes and activities for the past year.
Sales
Gonzo's website is operational 24 hours per day. All of the sales for Gonzo are completed online when a customer opens a profile. Each customer pays $50 to open a profile and then pays $10 per month to keep his or her profile active. Most customers pay online with their credit cards and the sale is automatically recorded in Gonzo's sales ledger at the time of payment.
Gonzo also had a promotion for the last 3 months of the year: If a new customer subscribed for one year, they could pay $100 up front to keep their profile active for the full year instead of paying $10 each month for 12 months. This proved to be a popular sales tactic as customers enjoyed the $20 savings.
Website Security
In the past year, one hacker managed to compromise the website and stole the credit card information of 25 Gonzo customers. To ensure quality of customer service, Gonzo reimbursed a total of $10 000 to the customers to compensate them for the amounts that were stolen as a result of the intrusion on their website. Since then, Gonzo hired a third party, Mindster Box, to improve the security of their website. Mindster Box performs monthly updates to the security features and monitors any intrusion attempts. Gonzo has not had any website security problems since hiring Mindster.
Collection and Reconciliation
As most of the sales are done by credit card, Gonzo receives money from large credit card companies on a by-weekly basis. When money is received, Jo-Ann, the accounting manager at Gonzo, reconciles the details of the payments received from the credit card company to the sales ledger of Gonzo. Jo-Ann has often complained that this is nearly impossible to do since Gonzo's accounting system keeps track of the payment by the website user name, which is often very different from the actual name of the person as stated on the detailed report provided by the credit card company. Jo-Ann therefore mostly relies on the statement of the credit card company to record and adjust revenues reported by Gonzo.

Question 77

An effective procedure to test for unbilled shipments is to trace from the

A) sales history file to the shipping documents.
B) shipping documents to the sales history file.
C) sales history file to the accounts receivable ledger.
D) sales history file to the general ledger sales account.

Question 78

You have just been assigned to manage the audit of Cheap Music Downloads Inc. (CMD), a new large client of your firm. CMD is a subsidiary of a client of your firm that manufactures audio and video equipment for international distribution. CMD has been in operation for two years.
CMD runs a website that allows customers to order songs using their credit card. There are tens of thousands of small transactions daily. Once the credit card has been authorized by the credit card processing intermediary, CMD's web sales system generates a 16-digit sequential code that the customer uses to access the song via the website. CMD then records both the sale and the royalty for the song.
Quarterly, CMD remits royalties to artists based on the number of copies of each song that has sold if the accumulated royalty exceeds $25 for that artist. Artist royalties that do not exceed $25.00 will be paid every two years if there has not been a payment during that time.
All contracted royalty rates, artist names, and song titles are recorded in CMD's database tables.
Required:
Describe three internal controls that should exist over sales or royalty transactions or over the database tables. For each control:
1. State the control.
2. Describe (not just state) the audit assertion associated with the control (or state the purpose of the control).
3. Provide an audit test that you could use to test the control.

Question 79

Certain internal controls satisfy more than one objective. It is desirable to consider

A) each objective separately.
B) the objectives together.
C) the objectives that can be tested.
D) only the controls that satisfy more than one objective.

Question 80

State the five specific balance-related audit objectives as applied to accounts receivable.