Deck 9: Auditing the Revenue Cycle

Question 1

An appropriate mix of evidence for a low-risk client could include 20% tests of details,40% analytics,and 40% tests of controls;an appropriate mix of evidence for a high-risk client could include 60% tests of details,20% analytics,and 20% tests of controls.

Answer 1

True

Question 2

The shipping department confirms the shipment of goods by completing the packing slip and returning it to the purchasing department.

Answer 2

False

Question 3

The intentional loading of sales at the end of a period to customers that do not need the goods at that time should not be recorded as revenues.

Answer 3

True

Question 4

The revenue cycle considered by auditors includes the sales process but not collections.

Question 5

Invoices are normally prepared when the organization receives confirmation that goods were delivered to customers.

Question 6

The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization.

Question 7

Formal procedures for approving acceptance of returns are an appropriate control procedure for identifying and recording returned goods.

Question 8

A consistent pattern of earnings growth would eliminate the auditor's concern for fraud in revenue recognition.

Question 9

Monthly statements provide a detailed list of the customer's activity for the previous month and a statement of all open items.

Question 10

Ratio analysis performed by the audit team may include the comparison of gross profit percentage to industry averages.

Question 11

One of the benefits of establishing a formal credit policy for granting credit is that management is freed from the burden of monitoring accounts receivable.

Question 12

The revenue cycle involves the procedures in generating a sales order,shipping the products,recording the transaction,and collecting the receivable.

Question 13

In a control risk assessment questionnaire,each negative (or "No")answer to a question represents a potential internal control deficiency.

Question 14

A tendency for fraud may exist when the granting of stock options is dependent on reaching an earnings goal.

Question 15

As required by auditing standards,auditors should ordinarily presume there is a risk of material misstatement caused by fraud relating to revenue recognition.

Question 16

Substantive tests of details for revenue transactions focus primarily on the completeness assertion.

Question 17

The basic concept for revenue recognition is the realization of cash.

Question 18

A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it leases until the customer is ready for the product should record the delivery to the warehouse as revenue.

Question 19

The auditor should be alert to the risk of material misstatements when cash flows from operations are negative and net income and revenues have increased.

Question 20

When lapping occurs,all or most customer account balances will be overstated at any one time,making it relatively easy for auditors to detect the scheme.

Question 21

Material debit balances in accounts payable for amounts due from vendors should be reclassified as accounts receivable.

Question 22

If control risk is assessed high,the auditor may send significantly fewer confirmations for a sample of accounts receivable than if the control risk is assessed low.

Question 23

The use of data analytics tools makes the audit of the revenue cycle more effective,but not more efficient.

Question 24

Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.

Question 25

When the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high,the auditor is more likely to use negative confirmations.

Question 26

An auditor would test controls over the occurrence of sales transactions by sampling recorded revenues and tracing them back to invoices and shipping documents.

Question 27

Positive accounts receivable confirmations should be used on all accounts which represent small immaterial balances.

Question 28

When the auditor seeks evidence concerning the allowance for doubtful accounts,he or she would most likely use an aged trial balance to help identify past due balances.

Question 29

The auditor has determined that the control risk for the existence assertion is low;therefore,the auditor may reduce the number of items tested on a substantive basis.

Question 30

Current auditing standards do not require the confirmation of receivables if accounts receivable are not material.

Question 31

Accounts receivable confirmation letters should be prepared on the auditing firm's letterhead.

Question 32

The auditor's determination that the number of days' sales in accounts receivable increased from 44 days to 100 days would usually be found through the use of ratio analysis.

Question 33

Use of reasonableness tests by Bono Mullins,PC,will include relationships between financial but not non-financial data.

Question 34

In planning an audit for the revenue cycle,the auditor must consider the integrated relationship of evidence found between the accounts receivable and the notes payable accounts.

Question 35

Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been sold to the bank on a recourse basis.

Question 36

An example of a control over the sales cycle is the authorization of price lists by the appropriate sales and marketing manager.

Question 37

The auditor would examine a sample of sales transactions throughout the entire period to determine if sales were recorded in the proper period when performing a sales cutoff test.

Question 38

Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence.

Question 39

A method of testing for the completeness of sales is to test the sequence of sales invoices used during the period under audit.

Question 40

Edge and Gregg,LLP would most likely discover a client's first-time use of channel stuffing through the use of trend analysis.

Question 41

Which of the following is a formal document that conveys responsibility for shipped merchandise to the shipper?

A)Sales invoice.
B)Receiving report.
C)Bill of lading.
D)Purchase order.

Question 42

Customer complaints noted in returned accounts receivable confirmations may be an indicator of fraud.

Question 43

Which of the following processes are not included in the revenue cycle?

A)Sending payments to suppliers.
B)Obtaining credit approval.
C)Preparing and sending monthly statements to customers.
D)Shipping products to customers.

Question 44

An aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful accounts.

Question 45

Negative confirmations are considered to be more persuasive than positive confirmations.

Question 46

Exceptions found in the confirmation of accounts receivable balances need not be projected as errors to the population as they are typically isolated errors.

Question 47

An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion.

Question 48

Which of the following is the fifth step in the five-step revenue recognition process prescribed by ASC 606?

A)Satisfaction of a performance obligation.
B)Execution of an enforceable contract for the transfer of goods or services.
C)Collection of substantially all of the transaction price from the customer.
D)None of the above.

Question 49

While electronic confirmations of receivables are more efficient,they are seldom used because they are not considered as reliable as paper confirmations.

Question 50

Testing cutoff involves procedures applied to sales transactions selected from those recorded immediately prior to period end and immediately following period end.

Question 51

An example of a test for completeness in the revenue cycle includes the sampling of shipping documents and tracing them to the sales journal and general ledger.

Question 52

A timing difference type of exception in the confirmation process may arise when goods are in transit at the confirmation date.

Question 53

Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales.

Question 54

Confirmation of accounts receivable is generally not effective in addressing the existence of fictitious sales recorded by the client.

Question 55

The audit team typically reviews journal entries in the receivables ledger for unusual entries that may be indicators of fraudulent activity.

Question 56

Negative confirmations are more expensive to administer than positive confirmations because of the added costs of investigating non-responses.

Question 57

Pre-numbered shipping and billing documents are examples of controls related to the completeness of sales transactions.

Question 58

Valid evidence obtained in an audit for testing the cutoff of sales includes receiving reports for returned merchandise.

Question 59

An auditor might test the reasonableness of the client's estimate of the allowance for doubtful accounts by developing an independent estimate of the allowance for doubtful accounts that is compared to the recorded allowance.

Question 60

Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives?

A)To determine revenue recognition policies.
B)To ensure customer satisfaction.
C)To prevent lapping by the accounts receivable department.
D)To minimize credit losses.

Question 61

In an audit of financial statements,risks related to a high rate of return of products sold include which of the following?

A)Sales that are recorded improperly.
B)An estimate of accrued returns that reduces net income.
C)A reduction of net sales for an increase to the sales returns and allowance account.
D)Consignment goods that are returned and forwarded to third parties.

Question 62

Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations?

A)Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors.
B)Gross margin is equivalent in the current period to previous periods and is below that of the industry.
C)Sales are higher in the month preceding each quarter end.
D)Sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction.

Question 63

The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management.The purpose for this procedure is to substantiate which assertion?

A)Existence of receivables.
B)Cutoff of receivables.
C)Valuation of receivables.
D)Rights to receivables.

Question 64

Which of the following evidences delivery of product to customers sufficient for company recording as revenues?

A)A check received from the customer.
B)An agreement to purchase product signed by the customer.
C)A pick ticket in the warehouse.
D)A bill of lading and tracking number with the shipper.

Question 65

Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following?

A)Substantiate cutoff and the occurrence of net sales transactions.
B)Test the sufficiency of cash balances to cover refunds.
C)Monitor customer satisfaction for disclosure.
D)Assess the nature of procedures that will be performed for the next period's audit.

Question 66

Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing which of the following?

A)Trend analysis.
B)Ratio analysis.
C)Reasonableness testing.
D)Nonstatistical sampling.

Question 67

A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following?

A)Use of prenumbered shipping,invoice and sales documents.
B)Use of prenumbered statements,inventory lists and credit memos.
C)Reconciliation of invoices with customer statements.
D)Use of pre-authorized price lists.

Question 68

The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total.This process is performed for which purpose?

A)Drafting financial statements.
B)Monitoring revenue transactions.
C)Providing management reports to the controller.
D)Providing suggestions for operational improvement.

Question 69

The risk of material misstatement due to fraud relating to revenue recognition should be

A)approached in a manner that is identical to control risk assessment.
B)given lower priority to the risk of embezzlement.
C)ordinarily presumed by the auditor.
D)assumed to have been considered by the FASB.

Question 70

Lithgow and Harris,CPAs,are performing the audit of Wild Flower Grocery Stores.Lithgow and Harris relates annual revenue to sales per square feet and sales per customer.What type of analysis is Lithgow and Harris most likely performing?

A)Ratio analysis.
B)Critical analysis.
C)Reasonableness tests.
D)Nonstatistical analysis.

Question 71

A method used by companies to fraudulently inflate revenues includes which of the following?

A)Use of hidden "side letters" giving the customer an irrevocable right to return the product.
B)Recording of fictitious sales.
C)Shipment of product not ordered by customers.
D)All of the above.

Question 72

The purpose of the bill of lading is to provide which of the following?

A)The warehouse personnel with the product that must be shipped to customers.
B)Invoices to customers for proper collection.
C)A credit application for customer approval.
D)Evidence of title transfer of goods to customers.

Question 73

Much of the understanding of revenue transactions for compliance with GAAP can be performed by accomplishing which of the following tasks?

A)Examining sales contracts and inquiry of management.
B)Confirming sales with customers.
C)Discussing the transactions with qualified members of the Financial Accounting Standards Board.
D)Comparing shipping documents with invoices.

Question 74

An analysis of monthly sales compared with past years and budgets is a form of what type of testing?

A)Regression analysis.
B)Common size analysis.
C)Ratio analysis.
D)Trend analysis.

Question 75

The auditor traces recorded sales to invoices,sales orders,and shipping documents in order to substantiate which assertion?

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

Question 76

The major risk associated with receivables is related to which of the following?

A)They may be sold to a bank with recourse.
B)They may be recorded as long-term when in fact they will be realized in the current period.
C)They will not be realized for the entire amount due.
D)They are pledged as collateral as disclosed in the footnotes to financial statements.

Question 77

Sales transactions should be documented at initiation in order to accomplish which of the following objectives?

A)To provide the customer a copy of the transaction.
B)To provide evidence of authorization and recording.
C)To offer credit to customers.
D)To generate back orders.

Question 78

What evidence is utilized by the auditor for analytical purposes in substantiating the completeness of the allowance for bad debt estimate?

A)Accounts receivable aging schedule.
B)Copies of checks received from customers.
C)Confirmations returned without exception.
D)Stock prices of customer companies.

Question 79

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?

A)Electronic authorization prior to posting.
B)Use of sequentially numbered sales documents.
C)Random statements to customers.
D)Review of transactions by upper management or the board.

Question 80

Which of the following must exist prior to the recognition of revenue by a company from the sale of a product?

A)Cash is realized on the sale of the product.
B)A price is discussed based upon the customer's resale of the product.
C)The customer is given the option to return the product at any time.
D)The product is transferred to the customer.