Deck 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Question 1

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an

A) efficiency basis.
B) effectiveness basis.
C) objective-by-objective basis.
D) none of the above

Answer 1

C

Question 2

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

A) existence
B) completeness
C) rights
D) detail tie-in

Answer 2

A

Question 3

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns?

A) controls over cutoff
B) controls that prevent or detect embezzlements
C) controls over sales discounts
D) controls related to the allowance for uncollectible accounts

Answer 3

C

Question 4

The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised.

Question 5

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

A) existence
B) completeness
C) rights
D) detail tie-in

Question 6

Auditors use the results of the substantive tests of transactions of sales and the collection cycle to determine the extent to which inherent risk is satisfied for each accounts receivable balance-related audit objective.

Question 7

Recording a sale that did not occur violates the occurrence transaction-related audit objective and the existence balance-related audit objective.

Question 8

It is not common for audit clients to misstate cutoff either by error or through fraud.

Question 9

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

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

Question 10

The auditor studies the client's industry and external environment, and also evaluates management objectives and business processes to identify significant client risks that could affect the accounts receivable balance.

Question 11

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

Question 12

Which of the following types of receivables would not deserve the special attention of the auditor?

A) accounts receivables with credit balances
B) accounts that have been outstanding for a long time
C) receivables from related parties
D) Each of the above would receive special attention.

Question 13

For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.

Question 14

If sales returns and allowances and write-off of uncollectible accounts receivable are significant, the assessed control risk must be considered for these two classes of transactions.

Question 15

Name the nine balance-related general audit objectives specifically applied to an audit of accounts receivable:

Question 16

The auditor assesses inherent risk for accounts receivable, considering client risk and the nature of the audit client and the nature of the industry which the client is operating in.

Question 17

When allocating the preliminary judgment about materiality for the financial statements, accounts receivable is typically one of the most material accounts in the financial statements for companies selling on credit.

Question 18

Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle?

A) Auditors must perform substantive tests related to assertions deemed to have significant risks.
B) The auditor must relate control risk for transaction-related audit objectives to balance-related audit objectives in deciding planned inherent risk.
C) The realizable value balance-related audit objectives are affected by assessed control risk for classes of transactions.
D) All of the above are accurate statements.

Question 19

It is common for clients to unintentionally or fraudulently misstate the allowance for doubtful accounts due to the difficulty in estimating the correct balance in this account.

Question 20

For most audits, revenue recognition is considered to be a significant risk.

Question 21

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally

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

Question 22

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective?

A) realizable value
B) existence
C) completeness
D) occurrence

Question 23

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is

A) overstatement or understatement of sales.
B) overstatement or understatement of accounts receivable.
C) overstatement or understatement of bad debt expense.
D) overstatement or understatement of sales returns and allowances.

Question 24

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

A)
B)
C)
D)

Question 25

A listing of the balances in the accounts receivable master file at the balance sheet date, including individual customer balances outstanding and a breakdown of each balance by the time passed between the date of the sale and the balance sheet date, is the

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

Question 26

When analytical procedures in the sales and collection cycle uncover unusual fluctuations, the auditor should make additional inquiries of management.

Question 27

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?

A) accuracy
B) completeness
C) rights
D) detail tie-in

Question 28

Name three data visualization techniques which can be used by the auditor for evaluating disaggregated data which may be helpful in identifying unexpected amounts, relationships, or trends in accounts receivable.

Question 29

Auditors perform both planning and substantive analytical procedures for the entire sales and collection cycle, not just accounts receivable.

Question 30

Cutoff misstatements occur

A) either by error or fraud.
B) by error only.
C) by fraud only.
D) randomly without causes related to errors or fraud.

Question 31

Which of the following is a correct statement regarding analytical procedures?

A) If an auditor identifies a possible misstatement in sales using analytical procedures, accounts payable will be the likely offsetting misstatement.
B) Auditors should also compare the results of their analytical procedures to budgets and industry trends.
C) If sales are overstated, the income statement will be incorrect, but the balance sheet will be correct.
D) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is involved.

Question 32

A high inherent risk increases planned detection risk and decreases planned substantive tests.

Question 33

Audit procedures designed to uncover credit sales made after the client's fiscal year-end that relate to the current year being audited provide evidence for which of the following audit objectives?

A) realizable value
B) accuracy
C) cutoff
D) existence

Question 34

Analytical procedures

A) are only done during the planning of the audit and when performing detailed tests.
B) performed during the detailed testing phase are done before tests of details of balances.
C) performed during the detailed testing phase are done before the balance sheet date.
D) are performed only on accounts receivable, not on the entire sales and collection cycle.

Question 35

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

Question 36

The understatement of sales and accounts receivable is best uncovered by

A) testing internal controls.
B) testing the aged accounts receivable trial balance.
C) substantive tests of transactions for shipments made but not recorded.
D) substantive tests of transactions for bad debts.

Question 37

Cutoff misstatements occur when

A)
B)
C)
D)

Question 38

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

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

Question 39

Below are listed possible misstatements that could occur in the sales and collections cycle. Provide the analytical procedure that would be most useful in detecting the possible misstatement.
a. overstatement of sales and accounts receivable
b. uncollectible accounts receivable that have not been provided for
c. overstatement of sales returns and allowances

Question 40

Which of the following is likely to be determined first when performing tests of details for accounts receivable?

A) Recorded accounts receivable exist.
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) The client has a right to the accounts receivable.
D) Existing accounts receivable are included.

Question 41

For which of the following accounts is cutoff least important?

A) sales
B) sales returns and allowances
C) cash collections
D) inventory

Question 42

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

A) a larger sample may be needed to verify cutoff.
B) sampling is not appropriate.
C) all sales returns must be traced to supporting documentation.
D) all sales returns must be confirmed with the customer.

Question 43

Generally accepted accounting principles require that revenue be reported net of sales returns and allowances

A) if practical.
B) if required by industry practice.
C) if the amounts are material.
D) any of the above

Question 44

Cutoff misstatements can occur for

A)
B)
C)
D)

Question 45

Which of the following audit procedures would normally be included in the audit plan when auditing the allowance for doubtful accounts?

A) Send positive confirmations.
B) Inquire of the client's credit manager.
C) Send negative confirmations.
D) Examine sales invoices.

Question 46

If material, all of the following are required to be separately disclosed in the financial statements except for

A) accounts receivable from officers.
B) accounts receivable from affiliates.
C) sales and assets for different business segments.
D) sales for the last ten days of the fiscal year.

Question 47

For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash

A) is detected and correct when cash is separately audited.
B) is unlikely to have a material impact on the balance sheet or the income statement.
C) affects items on the balance sheet but does not affect net income.
D) rarely occurs given the control consciousness of most entities.

Question 48

Which of the following audit procedures would not likely detect a client's decision to pledge or factor accounts receivable?

A) a review of the minutes of the board of directors' meetings
B) discussions with the client
C) confirmation of receivables
D) examination of correspondence files

Question 49

A customer mails and records a check 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 organizations will be different on December 31. This represents

A)
B)
C)
D)

Question 50

Most tests of accounts receivable are based on what schedule, file, or listing?

A) sales master file
B) aged accounts receivable trial balance
C) accounts receivable master file
D) accounts receivable general ledger account

Question 51

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

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

Question 52

When do most companies record sales returns and allowances?

A) during the month in which the sale occurs
B) during the accounting period in which the return occurs
C) whenever the customer contacts the company regarding the credit
D) during the month after the sale occurs

Question 53

Confirmation of accounts receivable selected from the trial balance is the most common test of details of balances for the ________ of accounts receivable.

A) presentation
B) valuation
C) accuracy
D) detail tie-in

Question 54

A procedure to test for a cash receipts cutoff error is

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

Question 55

How might the auditor determine whether a client has limited rights to accounts receivable?

A)
B)
C)
D)

Question 56

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve

A) employee overtime wages.
B) credit granted to customers.
C) write-offs of customer accounts.
D) cash disbursements.

Question 57

One of the shortcomings in evaluating the allowance for uncollectible accounts by reviewing individual noncurrent balances on the aged trial balance is I. it is difficult to compare the results of the current year with those of the previous year.
II) current accounts are ignored in establishing the adequacy of the allowance.

A) I only
B) II only
C) both I and II
D) neither I nor II

Question 58

The most important aspect of evaluating the client's method of obtaining a reliable cutoff is to

A) perform extensive detailed testing of cutoff.
B) evaluate the client's control procedures around cutoff.
C) confirm a sample of transactions near period end with customers.
D) confirm transaction with customers.

Question 59

Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested?

A) accounts receivable master file
B) customer file
C) aged trial balance
D) sales register

Question 60

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 the time the merchandise was shipped.
C) several days subsequent to shipment.
D) at a time after the point at which title passed.

Question 61

The net realizable value of accounts receivable is equal to:

A) gross accounts receivable less allowance for uncollectible accounts.
B) gross accounts receivable less bad debt expense.
C) gross accounts receivable less returns and allowances.
D) gross accounts receivable less sales discounts.

Question 62

Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit.

Question 63

For most audits, a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff since cash only affects the balance sheet, and not earnings.

Question 64

The auditor must have a thorough understanding of the accounting standards, including presentation and disclosure requirements, for accounts receivable when performing the audit of accounts receivable.

Question 65

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is to satisfy the audit objective of

A) accuracy.
B) existence.
C) control.
D) completeness.

Question 66

Audit data analytics can be used to test accuracy of invoices outstanding at the end of the year by matching these invoices to subsequent cash receipts after year-end.

Question 67

Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle.

Question 68

Many manufacturing and merchandising audit clients record sales based on shipment of goods criterion and make the necessary adjustments at period end to record revenues in the proper period.

Question 69

Significant credit balances in accounts receivable should be reclassified as accounts payable.

Question 70

The auditor can use audit data analytics to identify potential situations where sales returns are understated or the allowance for doubtful accounts is understated for specific customers.

Question 71

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.

Question 72

It is acceptable under generally accepted accounting principles for the client to include material related party receivables together with trade receivables on the balance sheet.

Question 73

When designing tests of details of balances, an important point to remember is

A) auditors emphasize income statement accounts.
B) the audit procedures selected depends heavily on whether planned evidence for a given objective is low, medium, or high.
C) if accounts receivable are overstated, then sales will be understated.
D) sales cutoff is the most important test of details of accounts receivable.

Question 74

Confirmation is the most common test of details of balances for the accuracy of accounts receivable.

Question 75

As a test of the occurrence transaction-related audit objective for sales and the accuracy balance-related audit objective for accounts receivable, auditors can use audit data analytics to match, for example, cash receipts to invoiced sales amounts.

Question 76

The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.

Question 77

After the auditor is satisfied with the allowance for uncollectible accounts, it is easy to verify bad debt expense.

Question 78

When an auditor tests to determine if all existing accounts receivable are included in the aged trial balance,

A) they cannot rely on the self-balancing nature of the accounts receivable master file.
B) if all sales to a customer are omitted from the sales journal, it is easy to uncover the understatement of accounts receivable by tests of details of balances.
C) auditors rarely send accounts receivable confirmations to customers with zero balances.
D) unrecorded sales to a new customer are easy to identify for confirmation because that customer is included in the accounts receivable master file.

Question 79

If sales are made FOB (free on board) shipping point or FOB destination at a period end, revenue does not need to be adjusted in either situation.

Question 80

For retailers, the auditor should examine supporting documentation for a sample of sales returns and allowances recorded for several weeks after year end to determine if the allowance for returns and allowances is adequate.