Deck 7: Revenue and Collection Cycle

Question 1

An objective for an audit is to obtain evidence related to management's financial statement assertions.
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Answer 1

True

Question 2

The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.
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Answer 2

True

Question 3

Custody of inventory is transferred to the shipping area upon authorization of

A)the customer order.
B)the shipping order.
C)the invoice.
D)the purchase order.

Answer 3

B

Question 4

If control risk is assessed very low,the substantive audit procedures on account balances must be expanded.
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Question 5

A computer generally cannot be used for scanning large files of accounts receivable for unusual credit balances.
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Question 6

Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures.
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Question 7

"Bill and hold" refers to an arrangement where

A)sales are recorded but are not shipped.
B)sales are shipped but are not recorded.
C)sales are billed but not collected.
D)inventory is held but not billed.

Question 8

Credit checks should be performed by the sales department before credit is approved.
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Question 9

The SEC requires all of the following for revenue to be recognized except

A)cash is collected.
B)persuasive evidence of an arrangement exists.
C)delivery has occurred or services have been rendered.
D)the seller's price to the buyer is fixed or determinable.

Question 10

To be recognized,revenues must also be realized or realizable and

A)foreseeable.
B)collected.
C)earned.
D)shipped.

Question 11

The document that generates recording of a sale is the

A)customer order.
B)shipping order.
C)invoice.
D)purchase order.

Question 12

A confirmation procedure scheduled on the year-end date with a large sample of customer account balances is necessary if tests of controls reveal control weaknesses.
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Question 13

When obtaining evidence about accounts receivable,auditors must put emphasis on the completeness and obligations assertions.
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Question 14

The sum of customers' unpaid balances that is compared to the general ledger balance comes from

A)a total of sales invoices.
B)a total of shipping orders.
C)the sales journal.
D)the accounts receivable trial balance.

Question 15

The aging information for accounts receivable is typically used in connection with assessing the allowance for doubtful accounts.
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Question 16

The accountants who record cash receipts and credits to customer accounts should not handle the cash.
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Question 17

A comparison of checks listed on a sample of deposit slips to the detail of customer credits posted to customer accounts receivable can be an audit test for lapping.
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Question 18

Confirmations yield evidence about existence and the gross valuation of a receivable balance.
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Question 19

A price list master file contains the product unit prices that are used for billing customers.
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Question 20

Inquiries of management usually do not provide very convincing evidence about the existence and rights assertions.
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Question 21

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

A)Completeness.
B)Accuracy.
C)Occurrence.
D)Classification.

Question 22

A customer reply on a positive confirmation says "We dispute the $250 charge.We believe it is excessive." This confirmation

A)provides evidence of existence.
B)does not provide evidence of existence because the customer may refuse to pay the $250 charge.
C)provides evidence that the account was understated.
D)provides evidence that the account should be written off.

Question 23

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

A)The balance is immaterial.
B)Confirmations would be ineffective.
C)The client requests alternative procedures be performed instead.
D)Other procedures provide sufficient competent evidence.

Question 24

If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable,the auditor's opinion should be unqualified and could be expected to

A)disclose the fact that alternative procedures were used due to client-imposed scope limitation.
B)disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
C)avoid mentioning the alternative procedures.
D)include an explanatory paragraph that discloses the performance of alternative procedures.

Question 25

To determine whether sales transactions have been recorded in the proper accounting period,the auditor performs cutoff tests.Which of the following best describes the overall approach used when performing cutoff tests?

A)Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.
B)Analyze transactions occurring within a few days before and after year-end.
C)Confirm year-end transactions with regular customers.
D)Examine cash receipts in the subsequent period.

Question 26

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 of 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 IT 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 27

Which of the following audit procedures is the most effective in testing sales for understatement?

A)Analyze the aged trial balance of recorded accounts receivable.
B)Confirm recorded accounts receivable.
C)Trace a sample of shipping documents to sales invoices recorded in the sales journal.
D)Vouch a sample of recorded sales from the sales journal to shipping documents.

Question 28

The file that contains sales transactions that were initiated in the system but are not yet completed is the

A)credit check file.
B)sales detail.
C)inventory master.
D)pending order master.

Question 29

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when

A)no reply to a positive confirmation request is received.
B)no reply to a negative confirmation request is received.
C)collectability of the receivables is in doubt.
D)pledging of the receivables is probable.

Question 30

In determining the adequacy of the allowance for uncollectible accounts,the least valuable evidence would be obtained from

A)an aging schedule of past due accounts that the auditor has tested.
B)correspondence with the client's collection agency.
C)financial statements of individual customers.
D)no reply to negative confirmations.

Question 31

Accountants should be under orders to record sales and accounts receivable when

A)the customer's order is received.
B)all supporting documentation of shipping is in order.
C)the item has been paid for.
D)the terms are agreed upon.

Question 32

A small business owner can best offset the lack of separation of duties by

A)creating an internal audit department.
B)installing the latest computer equipment and software.
C)being actively involved in the accounting process.
D)relying on the external auditor to detect errors.

Question 33

Confirmations of accounts receivable provide the most evidence for which of the following assertions?

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

Question 34

When an account receivable is considered uncollectible,the person who generally authorizes the write-off is the client's

A)credit manager.
B)treasurer.
C)accountant.
D)internal auditor.

Question 35

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

A)Recorded sales in the sales journal are supported by invoices.
B)Invoices,shipping documents,and sales orders are prenumbered and the numerical sequence is checked.
C)Sales are recorded in the proper account.
D)Invoice quantities are compared to shipment and customer order quantities.

Question 36

Alpha Brewery Corporation recorded sales through January 4,2018,dating them December 31,2017.This situation is an example of a violation of which of the following assertions?

A)Existence or occurrence.
B)Completeness.
C)Classification.
D)Accuracy.

Question 37

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except

A)preparing the confirmation letters.
B)mailing the confirmation letters.
C)receiving the confirmation letters.
D)None of the above.

Question 38

The most effective audit procedure for determining the collectability of an account receivable is the

A)review of the subsequent cash collections.
B)examination of the related sales invoice(s).
C)confirmation of the account.
D)review of authorization of credit sales to the customer and the previous history of collections.

Question 39

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of

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

Question 40

The assertion that auditors will probably emphasize in the revenue and collection cycle is

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

Question 41

Which of the following accounts is not normally part of the revenue and collection cycle?

A)Sales.
B)Accounts Receivable.
C)Cash.
D)Purchases Returns and Allowances.

Question 42

Which of the following controls most likely would help ensure that all credit sales transactions of an entity are recorded?

A)The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
B)The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.
C)The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
D)The billing department supervisor matches prenumbered shipping documents with entries in the sales journal.

Question 43

Revenues are normally considered to have been earned when

A)all possibility of return has expired.
B)the company has substantially accomplished what it must to be entitled to the benefits.
C)the cash is collected.
D)goods have been shipped.

Question 44

Negative confirmation of accounts receivable is less effective than positive confirmation of accounts receivable because

A)a majority of recipients usually lacks the willingness to respond objectively.
B)some recipients may report incorrect balances that require extensive follow up.
C)the auditor cannot infer that all nonrespondents have verified their account information.
D)negative confirmations do not produce evidential matter that is statistically quantifiable.

Question 45

Elm Tree Inc.has a December 31 year end.On October 15,the auditor evaluated and tested Elm Tree's internal control procedures over the sales recording process and finds the controls to be effective.At a minimum,the auditor's year-end procedures for testing internal control procedures must include

A)confirmations of year-end accounts that were examined on October 15.
B)test the client's internal control procedures from October 15 through the year end.
C)tests of compliance with internal control for a random sample of transactions throughout the audit period.
D)a comparison of the responses to the auditor's internal control questionnaire with a detailed flowchart of control procedures at year end.

Question 46

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 47

When auditing the revenue and collection cycle,auditors normally select balances to confirm from the

A)sales journal.
B)accounts receivable listing.
C)general ledger.
D)cash receipts listing.

Question 48

The control activity "credit sales approved by credit department" is directed toward which transaction assertion?

A)Occurrence.
B)Completeness.
C)Accuracy.
D)Cutoff.

Question 49

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

A)Review the cash receipts journal for the month prior to the year-end.
B)Intensify the study of the internal control structure concerning the revenue cycle.
C)Increase the assessed level of detection risk for the existence assertion.
D)Inspect the shipping records documenting the merchandise sold to the debtors.

Question 50

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 51

In evaluating the adequacy of the allowance for doubtful accounts,an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of

A)existence.
B)valuation or allocation.
C)completeness.
D)rights and obligations.

Question 52

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 53

Sales are normally recorded on the date of the

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

Question 54

In the revenue and collection cycle,the auditor checks the numerical sequence of shipping documents.This procedure is related to which of the following assertions?

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

Question 55

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

A)Shipments lacking sales invoices and shipping documents.
B)Excessive write-offs of accounts receivable.
C)Unrecorded sales at year-end.
D)Lapping of year-end accounts receivable.

Question 56

Which of the following statements is correct concerning the use of negative confirmation requests?

A)Unreturned negative confirmation requests rarely provide significant explicit evidence.
B)Negative confirmation requests are effective when detection risk is low.
C)Unreturned negative confirmation requests indicate that alternative procedures are necessary.
D)Negative confirmation requests are effective when understatements of account balances are suspected.

Question 57

Tracing shipping documents to prenumbered sales invoices provides evidence that

A)no duplicate shipments or billings occurred.
B)shipments to customers were properly invoiced.
C)all goods ordered by customers were accounted for.
D)all prenumbered sales invoices were accounted for.

Question 58

The auditor selects a sample of recorded sales invoices and vouches them to shipping documents.This procedure is related to which of the following assertions?

A)Occurrence.
B)Completeness.
C)Accuracy.
D)Cutoff.

Question 59

Which of the following would be the best protection for a company that wishes to prevent the "lapping" of trade accounts receivable?

A)Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
B)Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.
C)Have customers send payments directly to the company's depository bank.
D)Request that customer's payment checks be made payable to the company and addressed to the treasurer.

Question 60

The primary consideration when planning whether to send confirmations of accounts receivable before the balance sheet date is the

A)type of confirmation to be used.
B)client's internal control over transactions affecting receivables.
C)availability of staff auditors.
D)number of customer accounts.

Question 61

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)Understating the sales journal.
B)Overstating the accounts receivable control account.
C)Overstating the accounts receivable subsidiary ledger.
D)Understating the cash receipts journal.

Question 62

An auditor noted that client sales had increased 10 percent for the year.At the same time,cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent.The auditor interviewed the sales manager who stated that the increase in sales without a corresponding increase in cost of goods sold was due to a price increase enacted by the company during the year.How would the auditor best test the sales manager's representation?

A)Perform additional inquiries with sales personnel.
B)Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.
C)Send confirmations asking customers about unit prices paid for product.
D)Vouch vender invoices to payments made after year-end.

Question 63

Write-offs of doubtful accounts should be approved by

A)the salesperson.
B)the credit manager.
C)the treasurer.
D)the cashier.

Question 64

When a sample of customer accounts receivable is selected for vouching debits,auditors will vouch them to

A)sales invoices with shipping documents.
B)records of accounts receivable write-offs.
C)cash remittance lists and bank deposit slips.
D)credit files and reports.

Question 65

When an audit team does not receive a response on a positive accounts receivable confirmation,auditors should do all of the following except

A)send a second request.
B)do nothing for immaterial balances.
C)examine shipping documents.
D)examine client correspondence files.

Question 66

An auditor noted that client sales had increased 10 percent for the year.At the same time,cost of goods sold as a percentage of sales had decreased from 45 percent to 40 percent and year-end accounts receivable had increased by 8 percent.The auditor is most likely concerned about

A)unrecorded costs.
B)improper credit approvals.
C)improper sales cut-off.
D)fictitious sales.

Question 67

Which of the following internal control activities will most likely prevent the concealment of a cash shortage by improperly writing off 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 receivables 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 68

When accounts receivable are confirmed at an interim date,auditors need not be concerned with

A)obtaining a summary of receivables transactions from the interim date to the year-end date.
B)obtaining a year-end trial balance of receivables,comparing it to the interim trial balance,and obtaining evidence and explanations for large variations.
C)sending negative confirmations to all the customers as of the year-end date.
D)considering the necessity for some additional confirmations as of the balance sheet date if balances have increased materially.

Question 69

The negative request form of accounts receivable confirmation is useful particularly when the $$\begin{array} { | l | l | l | } \hline \begin{array} { l } \text { Assessed Level of Risk of Material } \\\text { Misstatement Relating to Receivables Is }\end{array} & \begin{array} { l } \text { Number of Small } \\\text { Balances Is }\end{array} & \begin{array} { l } \text { Proper Consideration by } \\\text { the Recipient Is }\end{array} \\\hline \text { A. Low } & \text { Many } & \text { Likely } \\\hline \text { B. Low } & \text { Few } & \text { Unlikely } \\\hline \text { C. High } & \text { Few } & \text { Likely } \\\hline \text { D. } \text { High } & \text { Many } & \text { Likely } \\\hline\end{array}$$

A)Option A
B)Option B
C)Option C
D)Option D

Question 70

Which of the following is the best reason for prenumbering in sequence such documents as sales orders,shipping documents,and sales invoices?

A)Enables company personnel to determine the accuracy of each document.
B)Enables personnel to determine the proper period for recording of sales revenue and receivables.
C)Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.
D)Enables personnel to determine the validity of recorded transactions.

Question 71

To conceal defalcations involving receivables,a dishonest bookkeeper might charge which of the following accounts?

A)Miscellaneous income.
B)Petty cash.
C)Miscellaneous expense.
D)Sales returns.

Question 72

Auditors sometimes use comparisons of ratios as audit evidence.An unexplained decrease in the ratio of gross profit to sales may suggest which of the following possibilities?

A)Unrecorded purchases.
B)Unrecorded sales.
C)Merchandise purchases being charged to selling and general expense.
D)Fictitious sales.

Question 73

In the audit of accounts receivable,the most important emphasis should be on the

A)completeness assertion.
B)existence assertion.
C)rights and obligations assertion.
D)presentation and disclosure assertion.

Question 74

Confirmation of individual accounts receivable balances directly with debtors will,of itself,normally provide the strongest evidence concerning the

A)collectability of the balances confirmed.
B)ownership of the balances confirmed.
C)existence of the balances confirmed.
D)internal control over balances confirmed.

Question 75

Which of the following responses to an accounts receivable confirmation at December 31 would cause an audit team the most concern?

A)"This amount was paid on December 30^th."
B)"We received this shipment on January 2^nd."
C)"These goods were returned for credit on November 15^th."
D)"The balance does not reflect our sales discount for paying by January 5^th."

Question 76

Audit documentation often includes a client-prepared,aged trial balance of accounts receivable as of the balance sheet date.The audit team uses this aging primarily to

A)evaluate internal control over credit sales.
B)test the accuracy of recorded charge sales.
C)estimate credit losses.
D)verify the existence of the recorded receivables.

Question 77

A client has a separate sales group for its largest "preferred" customers.This is a select group of customers that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess of $1 million.Which of the following audit procedures would the auditor most likely perform?

A)Prepare a schedule of purchases and payments for these customers.
B)Send out negative confirmations on a large sample of these customers.
C)Inquire of the sales manager regarding the accounts receivable terms.
D)Send out positive confirmations on a large sample of these customers.

Question 78

When an audit team traces a sample of shipping documents to the related sales invoice copies,they are trying to find relevant evidence that

A)shipments to customers were invoiced.
B)shipments to customers were recorded as sales.
C)recorded sales were shipped.
D)invoiced sales were shipped.

Question 79

An audit team is auditing sales transactions.One step is to vouch a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices.The purpose of this audit procedure is to establish that

A)sales invoices represent bona fide sales.
B)all sales have been recorded.
C)all sales invoices have been properly posted to customer accounts.
D)entries in the accounts receivable subsidiary ledger were properly invoiced.

Question 80

Which of the following might be detected by auditors' cutoff review and examination of sales journal entries for several days prior to the balance sheet date?

A)Lapping year-end accounts receivable.
B)Inflating sales for the year.
C)Kiting bank balances.
D)Misappropriating merchandise.