Deck 10: Auditing the Revenue Process

Question 1

A negative confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.

Answer 1

False

Question 2

Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of

A) Classification.
B) Cutoff.
C) Occurrence.
D) Authorization and accuracy.

Answer 2

B

Question 3

What is channel stuffing?

A) A company records revenue before delivery terms can be arranged.
B) A company records revenue on goods that will be shipped overseas.
C) A company induces distributors to buy substantially more inventory than they can promptly resell.
D) A company alters the terms and conditions of recorded sales to entice customers to accept delivery of goods.

Answer 3

C

Question 4

Tracing copies of sales invoices to shipping documents will provide evidence that all

A) Shipments to customers were recorded as receivables.
B) Billed sales were shipped.
C) Accounts receivable ledger is complete.
D) Shipments to customers were billed.

Question 5

The revenue process affects numerous accounts in the financial statements.

Question 6

A remittance advice is used to track purchases.

Question 7

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor?

A) Granting of credit.
B) Shipment of goods.
C) Determination of discounts.
D) Selling of goods for cash.

Question 8

Revenue must be realized (or realizable) and earned to be recognized.

Question 9

Channel stuffing is an improper practice used to boost sales by inducing distributors to buy more inventory than they can promptly resell.

Question 10

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's financial statement assertion of

A) Valuation or allocation.
B) Completeness.
C) Existence or occurrence.
D) Rights and obligations.

Question 11

Tracing shipping documents to prenumbered sales invoices provides evidence that

A) No duplicate shipments or billings occurred.
B) Shipments to customers were properly billed.
C) All goods ordered by customers were shipped.
D) All prenumbered sales invoices were accounted for.

Question 12

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

A) Scan the sales journal for sequential and unusual entries.
B) Examine shipping documents for matching sales invoices.
C) Compare the accounts receivable ledger to daily sales summaries.
D) Inspect unused sales invoices for consecutive prenumbering.

Question 13

Order entry is the initial function in the revenue cycle.

Question 14

In general, revenue is recognized when

A) Goods are shipped.
B) It is earned and realized.
C) It is recorded in the sales journal.
D) It is received in cash.

Question 15

According to the SEC's SAB No. 101, which of the following is not necessary for revenue recognition?

A) The seller's price to the buyer is fixed.
B) Collectibility is reasonably assured.
C) The seller has determined that the buyer will take the discount.
D) Persuasive evidence of an arrangement exists.

Question 16

Credit authorization is used to determine if a customer is able to pay for goods.

Question 17

A positive confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.

Question 18

The return of vendor purchases is a part of the revenue process.

Question 19

Revenue is realized when a product or service is exchanged for cash or a promise to pay cash or other assets that can be converted into cash.

Question 20

Tracing bills of lading to sales invoices provides evidence that

A) Shipments to customers were properly authorized.
B) Recorded sales were shipped.
C) Billed sales were shipped.
D) Shipments to customers were billed.

Question 21

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about

A) Valuation and allocation.
B) Completeness.
C) Existence.
D) Rights and obligations.

Question 22

Data Corporation has just computerized its billing and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of Data Corporation. Which of the following audit techniques could not be performed through a computer program?

A) Tracing audited cash receipts to accounts receivable credits.
B) Selecting accounts to be confirmed on a random basis.
C) Examining sales invoices for completeness, consistency between different items, valid conditions, and reasonable amounts.
D) Resolving differences reported by customers on confirmation requests.

Question 23

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?

A) The positive confirmation form must always be used to confirm all balances regardless of size.
B) A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.
C) A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables.
D) The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory.

Question 24

For the most effective internal control, monthly bank statements should be received directly from the banks and reviewed by the

A) Controller.
B) Cash receipts accountant.
C) Cash disbursement accountant.
D) Internal auditor.

Question 25

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?

A) The credit manager's opinion.
B) An aging schedule of past due accounts.
C) Subsequent year collections of amounts in accounts receivable at the balance sheet date.
D) Ratios calculated showing the past relationship of the valuation allowance to net credit sales.

Question 26

An auditor would consider a cashier's job description to contain compatible duties if the cashier receives remittances from the mailroom and also

A) Records the journal entry to recognize the cash receipt.
B) Prepares the monthly bank reconciliation.
C) Prepares the daily deposit slip.
D) Approves customer discounts.

Question 27

Which of the following is not an inherent risk factor for the revenue process?

A) Complexity of revenue recognition issues.
B) Difficulty of auditing transactions.
C) Special industry practices.
D) The entity does not follow its stated policies for sales order approvals.

Question 28

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

A) Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
B) Shipping documents and sales invoices are matched by an employee who does not have authority to write-off bad debts.
C) Employees involved in the credit-granting function are separated from the sales function.
D) Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

Question 29

Which is not a key segregation of duties for the revenue process? Different parties should

A) Prepare shipping orders and prepare bills of lading.
B) Perform the credit and billing functions.
C) Perform the shipping and billing function.
D) Receive cash and adjust accounts receivable.

Question 30

In auditing accounts receivable, the negative form of confirmation request most likely would be used when

A) Recipients are likely to return positive confirmation requests without verifying the accuracy of the information.
B) The combined assessed level of inherent and control risk relative to accounts receivable is low.
C) A small number of accounts receivable are involved but a relatively large number of errors are expected.
D) The auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

Question 31

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 32

An aged trial balance of accounts receivable is normally used by the auditor to

A) Verify the existence of recorded receivables.
B) Ensure that all accounts are promptly credited.
C) Evaluate the results of tests of controls.
D) Evaluate the provision for bad debts.

Question 33

Which of the following is the best argument against the use of negative accounts receivable confirmations?

A) The cost-per-response is excessively high.
B) There is no way of knowing if the intended recipients received them.
C) Recipients are likely to feel that, in reality, the confirmation is a subtle request for payment.
D) The inference drawn from receiving no reply may not be correct.

Question 34

Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to

A) Evaluate internal control over credit sales.
B) Test the accuracy of recorded credit sales.
C) Evaluate the allowance for doubtful accounts.
D) Verify the existence of the recorded receivables.

Question 35

All of the following are important controls over credit memos except:

A) Proper segregation of duties to ensure that sales discounts taken were earned.
B) Credit memos should be approved by someone other than whoever initiated it.
C) Credit memos should be supported by a receiving document for returned goods.
D) Proper segregation of duties between access to customer records and authorizing credit memos.

Question 36

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an

A) Understatement of revenues, receivables, and inventory.
B) Overstatement of revenues and receivables and an understatement of inventory.
C) Understatement of revenues and receivables and an overstatement of inventory.
D) Overstatement of revenues, receivables, and inventory.

Question 37

In connection with the examination of financial statements by an independent auditor, management suggests that members of the internal audit staff be utilized to minimize audit costs. Which of the following tasks could most appropriately be delegated to the internal audit staff?

A) Selection of accounts receivable for confirmation, based upon the internal auditor's judgment as to how many accounts and which accounts will provide sufficient coverage.
B) Preparation of schedules for negative accounts receivable responses.
C) Evaluation of the internal control for accounts receivable and sales.
D) Determination of the adequacy of the allowance for doubtful accounts.

Question 38

When evaluating internal control of an entity that processes revenue transactions on the Internet, an auditor would be most concerned about the

A) Potential for computer disruptions in recording sales.
B) Lack of sales invoice documents as an audit trail.
C) Frequency of archiving and data retention.
D) Inability to establish test data.

Question 39

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an

A) Understatement of revenues, receivables, and inventory.
B) Overstatement of revenues and receivables and an understatement of inventory.
C) Understatement of revenues and receivables and an overstatement of inventory.
D) Overstatement of revenues, receivables, and inventory.

Question 40

Immediately upon receipt of cash, a responsible employee should

A) Record the amount in the cash receipts journal.
B) Prepare a listing of remittances.
C) Update the subsidiary accounts receivable records.
D) Prepare a deposit slip in triplicate.

Question 41

Which of the following is not an issue related to the valuation of accounts receivable?

A) The valuation of revenue that makes up the detail of accounts receivable.
B) A proper allowance for doubtful accounts.
C) The net realizable value of accounts receivable.
D) Proper cutoff.

Question 42

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

A) Daily sales summaries are compared to daily postings to the accounts receivable ledger.
B) Each sales invoice is supported by a prenumbered shipping document.
C) The accounts receivable ledger is reconciled daily to the control account in the general ledger.
D) Each shipment on credit is supported by a prenumbered sales invoice.

Question 43

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn about which of the following?

A) One of the cashiers has been covering a personal embezzlement by lapping.
B) One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C) One of the EDP control clerks has been removing all sales invoices applicable to his account from the data file.
D) The credit manager has misappropriated remittances from customers whose accounts have been written-off.

Question 44

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

A) Compare shipping documents with sales records.
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 45

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to

A) Increase the balance in the allowance for bad debts account.
B) Review the going concern ramifications.
C) Require the entity to tighten its credit policy.
D) Expand tests regarding the collectability of receivables.

Question 46

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of

A) Authorization and accuracy.
B) Completeness.
C) Cutoff.
D) Occurrence.

Question 47

In the confirmation of accounts receivable, the auditor would most likely

A) Randomly select a representative sample of accounts for confirmation.
B) Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.
C) Require confirmation of all receivables from agencies of the federal government.
D) Require that confirmation requests be sent within one month of the fiscal year-end.

Question 48

Which of the following misstatements is not related to the completeness assertion for revenue?

A) Goods are shipped, but revenue is not recorded.
B) This year's revenue is recorded next year.
C) Next year's revenue is recorded this year.
D) Revenue is not recognized for services that have been performed.

Question 49

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the

A) Meter department records to the billing (sales) register.
B) Billing (sales) register to the meter department records.
C) Accounts receivable ledger to the billing (sales) register.
D) Billing (sales) register to the accounts receivable ledger.

Question 50

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following?

A) An October invoice was improperly computed.
B) An October check from a customer was posted in error to the account of another customer with a similar name.
C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
D) An account balance is past due and should be written-off.

Question 51

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?

A) Fictitious purchases.
B) Fictitious sales.
C) Selling and general expenses erroneously being recorded as merchandise purchases.
D) Unrecorded sales.

Question 52

To determine whether the system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the

A) Customer order file.
B) Bills of lading file.
C) Open invoice file.
D) Sales invoice file.

Question 53

Which of the following might be detected by an auditor's review of the entity's sales cutoff?

A) Excessive goods returned for credit.
B) Unrecorded sales discounts.
C) Lapping of year-end accounts receivable.
D) Overstated sales for the year.

Question 54

Which of the following control activities 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 55

An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting

A) Opening and closing inventory balances.
B) Cash receipts and accounts receivable.
C) Shipping and receiving activities.
D) Cutoffs of sales and purchases.

Question 56

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the

A) Cash receipts journal to the sales journal.
B) Sales journal to the cash receipts journal.
C) Shipping documents to the accounting records.
D) Accounting records to the shipping documents.

Question 57

Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because

A) Entities are more likely to overstate than understate revenues.
B) Entities are more likely to understate than overstate revenues.
C) It is difficult to determine when services have been performed.
D) The allowance for doubtful accounts often is understated.

Question 58

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries?

A) Billing.
B) Shipping.
C) Credit.
D) Sales Order.

Question 59

Which of the following is a test of controls for the transaction assertion of completeness for revenue?

A) Test a sample of sales invoices for authorized customer orders.
B) Review sales orders for proper credit approval.
C) Trace shipping documents to sales invoices and the sales journal.
D) Examine reconciliation of subsidiary ledger to general ledger control account.

Question 60

Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely

A) Send positive confirmation requests.
B) Send negative confirmation requests.
C) Examine evidence of subsequent cash receipts.
D) Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

Question 61

Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely

A) Send positive confirmation requests.
B) Send negative confirmation requests.
C) Examine evidence of subsequent cash receipts instead of sending confirmation requests.
D) Use statistical sampling instead of sending confirmation requests.

Question 62

Which of the following strategies most likely could improve the response rate of the confirmation of accounts receivable?

A) Including a monthly statement of the customer's account with the confirmation.
B) Restricting the selection of accounts to be confirmed to those customers with relatively large balances.
C) Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail.
D) Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner.

Question 63

An auditor is reviewing sales cutoff as of March 31, 2013. All sales are shipped FOB destination and the company records sales three days after shipment. The auditor notes the following transactions: If the entity records the required adjustments, the net effect on income (in thousands of dollars) for the period ended March 31, 2013 is

A) An increase of 12.
B) An increase of 8.
C) A decrease of 12.
D) A decrease of 8.

Question 64

Which of the following procedures most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?

A) Comparing control totals for shipping documents with corresponding totals for sales invoices.
B) Using computer programmed controls on the pricing and mathematical accuracy of sales invoices.
C) Matching shipping documents with approved sales orders before invoice preparation.
D) Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Question 65

To reduce the risks associated with accepting e-mail responses to requests for confirmation of accounts receivable, an auditor most likely would

A) Request the senders to mail the original forms to the auditor or the auditor may follow up with a telephone call to verify the response.
B) Examine subsequent cash receipts for the accounts in question.
C) Consider the e-mail responses to the confirmations to be exceptions.
D) Mail second requests to the e-mail respondents.

Question 66

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because

A) Many customers merely sign and return the confirmation without verifying its details.
B) Recipients usually respond only if they disagree with the information on the request.
C) Customers may not be inclined to report understatement errors in their accounts.
D) Auditors typically select many accounts with low recorded balances to be confirmed.

Question 67

When comparing prices and terms on a sample of sales invoices with the authorized price list and terms of trade, the auditor is testing the ____________ assertion.

A) Cutoff
B) Authorization
C) Occurrence
D) Completeness

Question 68

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

A) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
B) A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
C) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
D) A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Question 69

Mill Company uses a batch processing method to process its sales transactions. Data on Mill's sales transaction tapes are electronically sorted by customer number and are subjected to programmed edit checks in preparing its invoices, sales journals, and updated customer account balances. One of the direct outputs of the creation of these tapes most likely would be a

A) Report showing exceptions and control totals.
B) Printout of the updated inventory records.
C) Report showing overdue accounts receivable.
D) Printout of the sales price master file.

Question 70

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a listing of remittances that is forwarded to the cashier. A copy of the listing should be sent to the

A) Internal auditor to investigate the listing for unusual transactions.
B) Treasurer to compare the listing with the monthly bank statement.
C) Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D) Entity's bank to compare the listing with the cashier's deposit slip.

Question 71

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the entity's confirmation letter?

A) An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct.
B) A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent.
C) An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor.
D) A client-prepared statement of account showing the details of the customer's account balance.

Question 72

Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process?

A) Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme.
B) Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables.
C) Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped.
D) Omission of shipping documents could go undetected, causing an understatement of inventory.

Question 73

During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?

A) The owner reviews errors in billings to customers and postings to the subsidiary ledger.
B) A controller receives the monthly bank statement directly and reconciles the checking accounts.
C) The owner reviews credit memos before they are recorded.
D) The controller reconciles the total of the detailed accounts receivable accounts to the amount shown in the ledger.

Question 74

Customers having substantial year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?

A) Examine shipping documents.
B) Review collections during the year being examined.
C) Intensify the study of the entity's system of internal control with respect to receivables.
D) Increase the balance in the allowance for uncollectible accounts.

Question 75

Some firms that dispose of only a small part of their total output by consignment shipments fail to make any distinction between consignment shipments and regular sales. Which of the following would suggest that goods have been shipped on consignment?

A) Numerous shipments of small quantities.
B) Numerous shipments of large quantities and few returns.
C) Large debits to accounts receivable followed by small periodic credits.
D) Large debits to accounts receivable followed by large periodic credits.

Question 76

Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?

A) Tracing amounts in the subsidiary ledger to details on shipping documents.
B) Comparing receivable turnover ratios to industry statistics for reasonableness.
C) Inquiring about receivables pledged under loan agreements.
D) Assessing the allowance for uncollectible accounts for reasonableness.

Question 77

Confirmation is most likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables'

A) Valuation.
B) Classification.
C) Existence.
D) Completeness.

Question 78

Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipient?

A) "This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope."
B) "Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records."
C) "If you do not report any differences within 15 days, it will be assumed that this statement is correct."
D) "The following invoices have been selected for confirmation and represent amounts that are overdue."

Question 79

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of effective internal control?

A) Preparation of monthly statements to customers and maintenance of the accounts receivable subsidiary ledger.
B) Posting to the general ledger and approval of additions and terminations relating to the payroll.
C) Custody of unmailed signed checks and maintenance of expense subsidiary ledgers.
D) Collection of receipts on account and maintaining accounts receivable records.

Question 80

When a sample of sales transactions recorded in the sales journal is traced back to the customer orders and shipping documents, the auditor is testing the ____________ assertion.

A) Cutoff
B) Authorization
C) Completeness
D) Occurrence