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

Question 1

The total of the individual account balances in the accounts receivable subsidiary ledger 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.

Answer 1

D

Question 2

A ________ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped.

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

Answer 2

A

Question 3

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.

Answer 3

True

Question 4

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.

Question 5

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 6

The sales and collection cycle applies to businesses that transfer goods to customers or provides services to businesses.

Question 7

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.

Question 8

The document that requires adjustments to the customers subsidiary ledger account is the:

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

Question 9

A document prepared to initiate shipment of the goods sold by an independent shipper is the:

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

Question 10

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

Question 11

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 12

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 13

In the accounts receivable subsidiary ledger 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 14

Generally, when is the earliest point in the sales and collection cycle in which revenue can be recognized?

A)When the sale is approved
B)When the credit approval process is finalized
C)When the cash is collected
D)When the goods have been shipped

Question 15

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

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

Question 16

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 17

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 18

The document that accompanies the customer's payment is the:

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

Question 19

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 20

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 21

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 22

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 23

The ________ is a contract between a carrier (e.g., a trucking company)and the seller of goods that dictates the details surrounding the shipment of goods.

A)bill of lading
B)sales invoice
C)picking ticket
D)remittance advice

Question 24

Credit memos are normally issued to:

A)adjust the customers balance to the amount owed to the company because of returned goods or an allowance.
B)assist in the aging of accounts receivable.
C)reduce customer frustration and sales losses.
D)inform the customer of the balance due.

Question 25

When posting items from the sales journal, details of the journal and journal totals are posted to which items?

A)
B)
C)
D)

Question 26

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 27

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

Question 28

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

Question 29

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 30

Sales should be recorded, at the earliest, when:

A)the order is received.
B)the order is received and credit is approved.
C)credit is approved and it is verified that there is enough inventory to fill the order.
D)the shipment takes place.

Question 31

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 32

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 33

A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:

A)bill of lading.
B)sales invoice.
C)picking ticket.
D)vendor invoice.

Question 34

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 35

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

Question 36

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

Question 37

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

Question 38

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 39

When processing and recording cash receipts, an important fact to consider is:

A)the most important concern is depositing cash at least twice daily.
B)the most important concern is the possibility of theft.
C)theft can occur only after the receipts are entered in the records.
D)it the customer fails to include a remittance advice, the check should be returned to the customer.

Question 40

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

Question 41

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

Question 42

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

Question 43

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 44

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

Question 45

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 46

The sales journal is generated from the sales transaction file.

Question 47

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 48

In determining the level of audit efficiency, once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client, it is appropriate to decide whether:

A)substantive tests can be reduced sufficiently to justify costs of performing tests of controls.
B)substantive tests can be increased sufficiently to justify costs of performing tests of controls.
C)tests of controls can be increased sufficiently to justify costs of performing substantive tests.
D)tests of controls can be reduced sufficiently to justify costs of performing substantive tests.

Question 49

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 50

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 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

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

Question 53

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 54

The document that the accounting staff will use as the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger is the:

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

Question 55

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 56

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

Question 57

An effective procedure to test for unbilled 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 58

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 59

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 60

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

A)
B)
C)
D)

Question 61

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 62

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 63

Management's assertions for sales and collection activities remain the same whether sales are generated through traditional or e-commerce activities.

Question 64

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 65

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

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

Question 66

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 67

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 at least 2 potential errors (unintentional)and at least 1 intentional (fraud).

Question 68

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

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 69

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

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

Question 70

In converting from a design format audit program to a performance format audit program, procedures are combined.

Question 71

When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points.Discuss each of these three points.

Question 72

Tracing from source documents to the journal is useful for testing the existence objective.

Question 73

Prenumbered documents are intended to help:

A)
B)
C)
D)

Question 74

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Question 75

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

Question 76

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 77

Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?

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

Question 78

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 79

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 80

Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences.Which of the following are two key differences?

A)Risk and emphasis on the completeness objective.
B)Materiality and emphasis on the accuracy objective
C)Risk and emphasis on the classification objective
D)Materiality and emphasis on the occurrence objective