Question 1

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

Accepted Answer

If the balance is immaterial, auditors may choose to not take further action beyond sending the initial confirmation request. However, they should still follow up on any non-responses for material balances by sending a second request, examining shipping documents, and reviewing client correspondence files.

Question 2

Which of the following internal control activities most likely would deter lapping of collections from customers?

Accepted Answer

Lapping occurs when a fraudulent employee takes money from one customer's account and then takes money from another customer's account to cover the theft. Separation of duties between receiving cash and posting the accounts receivable ledger would create a system of checks and balances, making it more difficult for one employee to manipulate both functions and carry out this type of fraud. The other internal control activities listed may help prevent other types of fraud but are not specifically designed to prevent lapping of collections.

Question 3

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?

Accepted Answer

Understating the sales journal would conceal the defalcation by making it appear as though fewer sales occurred, thus aligning with the reduced cash receipts, and it would be less likely to be detected because it doesn't directly affect the accounts receivable records.

Question 4

Smith Manufacturing Company's accounts receivable clerk has a friend who is also Smith's customer. The accounts receivable clerk, on occasion, has issued fictitious credit memorandums to his friend for goods supposedly returned (these returns did not exist). The most effective control for preventing this activity is to:

Accepted Answer

Requiring receiving reports to support all credit memorandums before they are approved ensures that there is physical or documented evidence of a return, making it difficult to issue fictitious credits without actual returns. This control directly addresses the issue of issuing credit for non-existent returns.

Question 5

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

Accepted Answer

Sending negative confirmations to all the customers as of the year-end date is not a necessary concern when accounts receivable are confirmed at an interim date. Negative confirmations are less commonly used and are not a requirement in this context.

Question 6

Which of the following controls is designed to meet the completeness assertion?

Accepted Answer

Prenumbering invoices, shipping documents, and sales orders ensure that all sales have been properly recorded and none have been omitted, meeting the completeness assertion. This control helps in ensuring that all sales transactions are recorded in the sales journal and are properly accounted for in the financial statements.

Question 7

In confirming a client's accounts receivable in prior years, an auditor discovered many differences between recorded account balances and confirmation replies. These differences were resolved and were not misstatements. In defining the sampling unit for the current year's audit, the auditor most likely would choose:

Accepted Answer

Given the history of differences that were eventually resolved without indicating misstatements, the auditor is likely to focus on a detailed level of testing to better understand the nature of these differences. Choosing individual invoices as the sampling unit allows for a more granular examination of accounts receivable, facilitating the identification and resolution of any discrepancies.

Question 8

Favorite Soda Company distributes beverages in the Portland, Oregon area. Which of the following would be the test to determine that shipments made were actual sales?

Accepted Answer

The answer of Favorite Soda Company distributes beverages in the...

Question 9

The pending sales orders can be reviewed for evidence of the _______ of recorded _______ and _______.

Accepted Answer

The answer of The pending sales orders can be reviewed...

Question 10

While performing interim audit procedures of accounts receivable, numerous unexpected errors are found resulting in a change of risk assessment. Which of the following audit responses would be most appropriate?

Accepted Answer

Using more experienced audit team members to perform year-end testing would be the most appropriate response in this scenario. The finding of unexpected errors during interim procedures indicates that the risk of material misstatement in accounts receivable is higher than originally assessed. Using more experienced audit team members can help ensure that the year-end testing is thorough and that any material misstatements are identified and corrected. Moving detailed analytical procedures from year end to interim or increasing the dollar threshold of vouching customer invoices wouldn't necessarily address the higher risk of material misstatement identified during interim procedures. Sending negative accounts receivable confirmations instead of positive accounts receivable confirmations could be considered, but using more experienced audit team members is still the most appropriate response.

Question 11

Which of the following questions included in an internal control questionnaire would evaluate the valuation objective of revenues?

Accepted Answer

The answer of Which of the following questions included in...

Question 12

Write-offs of doubtful accounts should be approved by:

Accepted Answer

The treasurer is typically responsible for the financial management and oversight within an organization, which includes approving write-offs of doubtful accounts to ensure they are handled according to the company's financial policies and controls.

Question 13

The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable. An independent audit is being carried out and the auditors send a positive confirmation to Mr. Dennis. What is the most likely reason as to why a positive confirmation rather than a negative confirmation was used here?

Accepted Answer

A positive confirmation is sent when inherent risk is high and there is a greater likelihood of errors or misstatements. In this case, the auditors may have wanted to confirm the accuracy of the receivable since there is already an outstanding balance. A negative confirmation would only be used if control risk was low and there was a lower risk of errors or misstatements.

Question 14

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

Accepted Answer

The negative request form is useful when there is a high volume of accounts receivable confirmations to be sent out and the company does not want to inundate its customers with requests for confirmation. Instead, the negative request form asks customers to only respond if there is a discrepancy in the account balance, thereby reducing the number of responses that need to be processed. Option A is the only choice that mentions this specific scenario as the reason for using the negative request form. Options B, C, and D do not provide relevant explanations for when the negative request form would be useful.

Question 15

Information about the internal control system can be gathered by completing an _______.

Accepted Answer

The answer of Information about the internal control system can...

Question 16

Internal control assessment is important because it governs the _______, _______ and _______ of substantive procedures.

Accepted Answer

The answer of Internal control assessment is important because it...

Question 17

Another way to obtain information about the internal control system is to take a single example of a transaction and _______ the process from its initiation to its recording in the accounting records.

Accepted Answer

The answer of Another way to obtain information about the...

Question 18

In the revenue and collection cycle, the order of the activities in the cycle is best illustrated by:

Accepted Answer

The revenue and collection cycle begins with processing customer orders, followed by granting credit to eligible customers, delivering goods or services to the customer, and finally billing the customer for the goods or services received. Once the billing is done, the cycle ends with the processing of cash receipts from the customer.

Question 19

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

Accepted Answer

Tracing shipping documents to sales invoices helps verify that all shipments made to customers have been invoiced, ensuring completeness of sales records.

Question 20

In tests of controls auditing, auditors need to define "deviations" in advance. Give seven examples of control compliance deviations related to a client's processing of credit sales transactions and the related assertion that was violated.

Accepted Answer

The answer of In tests of controls auditing, auditors need...

Quiz 7: Revenue and Collection Cycle 279