Question 1

As part of audit planning,you have calculated accounts receivable turnover for the last five years and compared it to industry averages.Your client's accounts receivable has decreased by about 1.25 times in the current year,while the industry rate has improved.One possible cause of this lowered accounts receivable turnover is

Accepted Answer

Fictitious revenue can lead to an overstatement of accounts receivable, which would result in a lower accounts receivable turnover ratio.

Question 2

It is common to test sales for proper classification as part of testing for

Accepted Answer

Testing sales for proper classification will ensure that the sales are accurately recorded in the appropriate accounts, which is related to the accuracy assertion in the financial statements. Therefore, the best choice is B. 
Cutoff testing is used to ensure that transactions are recorded in the proper accounting period. 
Valuation testing ensures that accounts are recorded at the appropriate value.
Completeness testing ensures that all transactions are recorded.

Question 3

One of the most important test of details of balances for accounts receivable is

Accepted Answer

Confirmations are an important test for accounts receivable as they provide external verification of the balances. This involves sending letters to customers requesting them to confirm the amounts they owe to the company. This helps to identify any discrepancies or errors in the accounts, and also provides assurance about the collectability of the balances. Recalculation of aged receivables and tracing from shipping documents to journals and the accounts receivable ledger are also important tests, but they do not provide the same level of external verification as confirmations. Tracing credit memos for returned merchandise to receiving room reports is a test of the completeness of the accounts, rather than the accuracy of the balances.

Question 4

A)Assuming the client's internal controls are adequate,describe how the auditor can verify proper cutoff of sales transactions.B)Describe how the auditor tests the rights objective for accounts receivable.

Accepted Answer

The answer of A)Assuming the client's internal controls are adequate,describe...

Question 5

Tamra is performing a test of control consisting of looking at the numerical sequence of credit memos issued by the company.Tamra is performing a block test by looking for any missing number in the sequence.This test will provide evidence of

Accepted Answer

The answer of Tamra is performing a test of control...

Question 6

A)An auditor is concerned that accounts receivable may be understated due to sales to customers that have been omitted from the sales journal and from the accounts receivable master file.Describe the procedure(s)the auditor should perform in these circumstances.B)Describe how the auditor tests the classification objective for accounts receivable.

Accepted Answer

The answer of A)An auditor is concerned that accounts receivable...

Question 7

Which of the following audit procedures is a dual-purpose test?

Accepted Answer

A dual-purpose test is one that serves both as a test of controls and a substantive test. Calculating the accuracy of the accounts receivable aging can test the control over the aging process and substantively verify the accuracy of the aged balances.

Question 8

To determine that sales are accurately charged,the unit prices on the duplicate sales invoices are normally compared with

Accepted Answer

The unit prices on duplicate sales invoices are compared with an approved item master file to ensure accuracy. The item master file contains the correct prices for items, making it the appropriate reference for verifying that sales are accurately charged.

Question 9

If the internal controls for recording sales returns and allowances are evaluated as ineffective,

Accepted Answer

When internal controls are evaluated as ineffective, auditors typically increase the sample size for testing to gain a higher level of assurance, which includes verifying the cutoff of transactions like sales returns and allowances.

Question 10

The control objective associated with selecting a sample of recorded sales invoices from the sales journal and recalculating the cross totals of quantities and prices is

Accepted Answer

The objective of recalculating cross totals of quantities and prices is to ensure the accuracy of the sales invoices recorded in the sales journal. Therefore, the control objective associated with this procedure is accuracy.

Question 11

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

Accepted Answer

Comparing shipping documents with sales invoices helps in identifying whether all goods shipped have been invoiced, thus revealing any unrecorded sales at the balance sheet date. This method directly checks for goods that have been shipped but not billed, which is a common cause of unrecorded sales.

Question 12

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?

Accepted Answer

The overall approach used when performing cutoff tests is to analyze transactions occurring within a few days before and after year-end. This involves reviewing the dates on invoices, shipping documents, and other relevant documents to ensure that sales and purchases are recorded in the correct period. The other options listed do not accurately describe the overall approach used for cutoff tests.

Question 13

Scanning sales invoices to determine whether there are any numbers missing in the sequence is a control over which of the following objectives?

Accepted Answer

The control of scanning sales invoices to determine whether there are any numbers missing in the sequence is a control over the completeness objective. This is because the completeness objective relates to ensuring that all transactions that should have been recorded have actually been recorded, and checking for missing invoice numbers helps to identify any gaps in the recording process.

Question 14

The emphasis for the audit of sales return and allowances is often placed on testing the existence of recorded transactions.However,the most important objective to consider is

Accepted Answer

The most important objective to consider in the audit of sales returns and allowances is completeness. This ensures that all returns and allowances that should have been recorded are indeed recorded, addressing the risk of understating expenses and liabilities.

Question 15

What are the criteria the auditor should take into account in order for substantive analytical procedures to provide the necessary assurance?

Accepted Answer

The answer of What are the criteria the auditor should...

Question 16

An effective procedure to test for unbilled shipments is to trace from the

Accepted Answer

The most effective procedure to test for unbilled shipments is to trace from the shipping documents to the sales history file. This ensures that all shipments have been recorded in the sales history file, and any unbilled shipments can be identified and recorded in the accounts receivable ledger. Tracing from the sales history file to other documents or ledgers may not provide a complete picture of unbilled shipments.

Question 17

Stefano is performing a review of the accounts receivable for large and unusual amounts.Of the following accounts receivables,Stefano should pay special attention to an account receivable

Accepted Answer

Accounts receivable from a related party may require special attention due to potential conflicts of interest or non-arm's length transactions, which could affect the financial statements' accuracy.

Question 18

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

Accepted Answer

Sending external confirmations of customers' balances is the most important test of details of balances to determine the existence of recorded accounts receivable as it provides direct evidence from customers about the validity of their account balances. Tracing sales entries to shipping documents and tracing sales returns entries to credit memos issued and receiving room reports are important tests, but they only provide indirect evidence of the existence of accounts receivable. Tracing credits in accounts receivable to bank deposits is important for verifying the completeness of accounts receivable, but it does not directly address the existence assertion.

Question 19

Comparison of individual customer balances with previous years will detect what type of possible misstatement?

Accepted Answer

Comparing individual customer balances with previous years helps in identifying inconsistencies or unusual changes in accounts receivable, which could indicate misstatements in accounts receivable and related income statement accounts such as sales revenue, bad debt expense, and the allowance for doubtful accounts. This method is effective in detecting errors or fraud that could affect the accuracy of the financial statements.

Question 20

To test for recorded sales for which there were no actual shipments,the auditor traces from the

Accepted Answer

To test for recorded sales for which there were no actual shipments, the auditor should trace from the sales journal to the shipping documents. This ensures that each recorded sale has a corresponding shipment, verifying the existence of the sales transaction.

Quiz 12: Audit of the Revenue Cycle