Deck 14: Audit of the Sales and Collection Cycle: Tests of Controls

Question 1

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,any debit or credit memo issued,and the ending balance is the

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

Answer 1

B

Question 2

Most companies recognize sales revenue when

A)sales are invoiced.
B)payment is received from the customer.
C)goods are shipped.
D)the customer's order is received.

Answer 2

C

Question 3

One type of shipping document is the ________,which is a written contract between the carrier and the seller of the receipt and shipment of goods.

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

Answer 3

B

Question 4

What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected?

A)determination of correct delivery address
B)credit approval
C)matching of shipping document with sales invoice
D)receipt of sales order from the customer

Question 5

Which of the following is not one of the five classes of transactions included in the sales and collection cycle?

A)sales returns and allowances
B)write-off of uncollectible accounts
C)bad debt expense
D)interest income

Question 6

The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "brick and mortar" business are

A)unchanged.
B)expanded.
C)mitigated.
D)decreased.

Question 7

In the accounts receivable master file,the length of time the account has been due can be useful to the client and the auditor in preparing the

A)trial balance.
B)working trial balance.
C)accounts receivable trial balance.
D)aged accounts receivable trial balance.

Question 8

A ________ indicates a reduction in the amount due from a customer because of returned goods or an allowance.

A)bill of lading
B)sales invoice
C)credit memo
D)monthly statement

Question 9

A ________ is a document for communicating the description,quantity,and related information for goods ordered by a customer.

A)sales order
B)customer order
C)vendor invoice
D)sales invoice

Question 10

The document used to indicate to the customer the amount of a sale and payment due date is the

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

Question 11

Which of the following is not an important aspect of billing?

A)All shipments made have been billed.
B)No shipment has been billed more than once.
C)Each customer is billed for the proper amount.
D)Credit is approved to customers for sales on account.

Question 12

The sales and collection cycle applies to businesses that sell goods to customers or provide services to customers.

Question 13

What event initiates a transaction in the sales and collection cycle?

A)receipt of cash
B)delivery of product to a customer
C)identification of a new customer
D)customer request for goods or services

Question 14

Which of the following is an account that is not affected by the sales and collection cycle?

A)cash
B)accounts receivable
C)allowance for doubtful accounts
D)accounts payable

Question 15

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

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

Question 16

The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with accounting standards.

Question 17

Which of the following is not a business function within the "Sales" class of transactions?

A)processing customer orders
B)granting credit
C)processing and recording sales returns and allowances
D)shipping goods

Question 18

The total of the individual account balances in the accounts receivable master file should equal the

A)total sales for the period.
B)balance of the sales account in the general ledger.
C)total sales less the total cash received for the period.
D)balance of the accounts receivable account in the general ledger.

Question 19

The document that accompanies the customer's payment is the

A)credit memo.
B)remittance advice.
C)vendor invoice.
D)monthly statement.

Question 20

A ________ is a document that indicates a request for merchandise by a customer.

A)sales invoice
B)vendor invoice
C)customer order
D)sales order

Question 21

Which of the following is a business function related to sales returns and allowances?

A)processing customer orders
B)writing off uncollectible accounts
C)processing and recording credit memos
D)granting credit

Question 22

Credit should be approved before goods are shipped to a customer.

Question 23

Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and,for each function,state the key documents and records involved.

Question 24

Customer billing is a critical process which auditors must understand.What are the most important aspects of billing and what are the related objectives?

Question 25

Which document or record is used in the write-off of uncollectible accounts classes of transactions?

A)general journal
B)remittance advice
C)sales transaction file
D)sales order

Question 26

You are an audit manager for Rodgers & Co.and have recently taken on a new client,Manufacturing Company.You are in the initial stages of planning the audit and have decided to start gathering information about the sales/collection cycle of the business.List below the classes of transactions that you need to gather audit evidence for in designing your audit procedures.

Question 27

Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?

A)company personnel
B)temporary employees in the town where the lockbox is located
C)bank employees
D)company controller

Question 28

Some companies have customers send payments directly to an address maintained by a bank.This is called a(n)________ system.

A)direct deposit
B)funds transfer
C)lockbox
D)interbank transfer

Question 29

Which accounts are involved in the sales class of transactions?

A)accounts receivable and sales returns and allowances
B)cash and allowance for uncollectible accounts
C)sales allowances and accounts receivable
D)accounts receivable and sales

Question 30

When posting items sold on account from the sales journal

A)
B)
C)
D)

Question 31

A ________ is a list prepared when cash is received by someone who has no responsibility for recording sales,accounts receivable,or cash,and who has no access to the accounting records.

A)prelisting of cash receipts.
B)sales invoice.
C)packing ticket.
D)vendor invoice.

Question 32

Which of the following is a correct statement regarding the shipment of goods?

A)The shipping document must be in paper form.
B)The shipping document is used to update the perpetual inventory records.
C)Only one copy of the shipping document is needed.
D)All of the above are correct statements.

Question 33

Explain each of the following types of documents and indicate the class of transactions in which they are commonly used.
1. customer order
2. shipping document
3. remittance advice
4. sales returns and allowance journal
5. uncollectible account authorization form

Question 34

The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

Question 35

A sales invoice is a document that usually indicates credit approval.

Question 36

The preparation of a sales invoice is the final step in the sales and collection cycle.

Question 37

Credit should be approved before a customer's order is received.

Question 38

When dealing with the processing and recording of cash receipts,

A)the most important concern is the theft of cash.
B)theft can only occur before the receipts are entered into the records.
C)cash receipts should be deposited at least monthly.
D)the monthly statement is used to prepare the cash receipts journal.

Question 39

For a firm that practices good internal controls in the sales and collections cycle,the function of indicating credit approval should be recorded on which of the following documents?

A)sales order
B)sales invoice
C)customer order
D)remittance advice

Question 40

A bill of lading is a special type of sales invoice used when goods are shipped interstate.

Question 41

The shipping point is critical because it is the first point at which company assets are released to another party.

Question 42

The sales journal is generated from the sales transaction file.

Question 43

When customers purchase goods by credit card,the issuer of the credit card uses EFT to transfer funds into the company's bank account.

Question 44

When designing audit procedures,tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?

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

Question 45

A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.

Question 46

When assessing risk control,the auditor must do all of the following except

A)assess control risk for each objective by evaluating the controls and deficiencies for each objective.
B)perform the detailed test of balances.
C)identify the key internal controls and deficiencies.
D)associate the key controls and deficiencies with the objectives.

Question 47

Which one the following procedures performed for the billing function provides evidence for the completeness assertion?

A)making sure that all shipments have been billed
B)making sure that no shipment has been billed more than twice
C)making sure that each shipment is billed at the correct amount
D)making sure that each shipment is billed to the proper customer

Question 48

If a company uses a periodic inventory system,the shipping records are used to update the inventory quantities.

Question 49

In many audits,no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.

A)accuracy
B)existence
C)completeness
D)none of the above

Question 50

A bill of lading is a written contract between the seller and the buyer.

Question 51

Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders,granting credit,shipping goods,billing customers,and recording sales.

Question 52

The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.

Question 53

When sales invoices are automatically calculated and posted by a computer,the auditor may be able to reduce substantive tests of transactions for which,if any,assertion?

A)accuracy
B)existence
C)completeness
D)none of the above

Question 54

The theft of cash can occur before receipts are entered in the records or after they are entered in the records.

Question 55

Which of the following is an accurate statement relating to separation of duties?

A)Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer.
B)All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable.
C)The credit granting function should be separate from the sales function.
D)All of the above are accurate statements.

Question 56

When assessing planned control risk for sales,

A)the key internal controls and deficiencies for sales will be the same for every company.
B)the audit objectives for sales will differ from company to company.
C)a flowchart is required to help assess control risk for sales.
D)assessing control risk for sales is a highly subjective decision.

Question 57

Which of the following is not a key control for sales and cash receipts?

A)active board of directors
B)adequate separation of duties
C)internal verification procedures
D)adequate documents and records

Question 58

Which one of the following statements is True? In deciding on substantive tests of transactions

A)some procedures are commonly employed on every audit regardless of the circumstances.
B)all procedures are dependent on the adequacy of the controls and the results of the tests of controls.
C)results obtained in the prior year's audit will not affect the procedures used this year.
D)the materiality of the item will not influence the choice of procedures used.

Question 59

In a lockbox system,bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.

Question 60

Which of the following is the appropriate point at which the auditor deems authorization to be critical?

A)
B)
C)
D)

Question 61

As a test of control,the auditor examines sales invoices for supporting documents.The relevant transaction-related audit objective is

A)accuracy.
B)occurrence.
C)classification.
D)timing.

Question 62

The accurate recording of sales transactions concerns all of the following except for

A)proper credit authorization.
B)shipping the amount of goods ordered.
C)accurately billing for the amount of goods shipped.
D)accurately recording the amount billed in the accounting records.

Question 63

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

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

Question 64

Separation of duties in the sales and collection cycle should mandate that the credit-granting function be separate from the sales function.

Question 65

For each of the following potential misstatements,provide one potential audit test that could be used to detect the misstatement.
• sales included in the journals for which there was no shipment
• sale recorded more than once
• shipments made to nonexistent customers and recorded as sales

Question 66

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?

A)granting of credit
B)shipment of goods
C)determination of discounts
D)selling of goods for cash

Question 67

________ tests are for omitted transactions,while ________ tests are for nonexistent transactions.

A)Tracing;vouching
B)Vouching;tracing
C)Verifying;tracking
D)Tracking;verifying

Question 68

The auditor is concerned about authorization at three key points.What are the key points?

Question 69

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?

A)Credit must be authorized before the sale.
B)Goods must be shipped after the authorization
C)Prices must be authorized.
D)All of the above should be of concern to the auditor.

Question 70

Which type of misstatement is always a fraud?

A)sales included in the journals for which no shipment was made
B)sales to related parties,such as officers and subsidiaries
C)shipments made to nonexistent customers and recorded as sales
D)sales recorded more than once.

Question 71

Prenumbered documents will only be useful for control purposes if

A)a different numerical sequence is used for each company.
B)the sequence is accounted for periodically.
C)employees are allowed to use documents out of numerical sequence.
D)the same numerical sequence is used each accounting period.

Question 72

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

A)The cashier prepares the daily deposit.
B)The cashier makes the daily deposit at a local bank.
C)The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D)The cashier endorses the checks.

Question 73

In designing substantive audit procedures for tests of transactions for sales,the auditor needs to test for evidence of misstatements due to errors or fraud.Describe two potential errors (unintentional)and one intentional (fraud).

Question 74

Prenumbered documents are intended to help

A)
B)
C)
D)

Question 75

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because

A)understatements of assets and income are a greater concern than overstatements.
B)overstatements of assets and income are a greater concern than understatements.
C)it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct.
D)the unrecorded sales cause a reduction of accounts receivable;therefore,the ratios of the two financial statements will not be misleading.

Question 76

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

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

Question 77

An auditor needs to determine whether all customers of an electric utility company are being billed.The auditor should test from the

A)sales register to the accounts receivable ledger.
B)sales register to the meter department records.
C)accounts receivable ledger to the sales register.
D)meter department records to the sales register.

Question 78

To test for recorded sales for which there were no actual shipments,the auditor vouches 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 79

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the

A)existence objective.
B)completeness objective.
C)ownership objective.
D)valuation objective.

Question 80

The extent of tests of controls in audits of nonpublic companies depends on the effectiveness of the controls and the extent to which the auditor believes they can be relied on to reduce control risk.