Question 1

For each control on which the auditor plans to rely to reduce assessed control risk, he or she must
A) design one or more tests of controls to verify effectiveness.
B) report all weaknesses in the management letter.
C) quantitatively determine the effect on sampling error.
D) ensure that the test applies to several different transaction audit objectives.

Accepted Answer

To rely on a control to reduce assessed control risk, the auditor must perform tests of controls to verify its effectiveness. Hence, the auditor must design one or more tests of controls to verify the control's effectiveness. Therefore, Option A is the best choice. Option B is incorrect because the auditor is not required to report all weaknesses in the management letter. Option C is irrelevant because there is no direct relationship between the auditor's reliance on a control and the impact on sampling error. Option D is incorrect as the test need not apply to several transaction audit objectives.

Question 2

Which of the following is an example of a data entry input edit that could be used to improve the accuracy of online data entry of sales orders?
A) matching of customer number to master file
B) automatic posting of sales to the general ledger account
C) reconciliation of the customer master file to accounts receivable
D) daily point-of-sales control totals matched to cash receipts

Accepted Answer

Matching the customer number to a master file can help reduce errors by ensuring that the correct customer information is entered into the sales order. This edit can also catch any duplicate customer numbers or incorrect customer information before the order is processed. The other options listed are not input edits for data entry of sales orders.

Question 3

Which of the following presentation and disclosure-related audit objectives has a matching transaction-related audit objective, but not a matching balance-related audit objective?
A) accuracy
B) classification
C) occurrence
D) completeness

Accepted Answer

The presentation and disclosure-related audit objective of classification has a matching transaction-related audit objective (i.e. classifying transactions in the correct accounts or categories), but not a matching balance-related audit objective (as balances are not typically classified). The other three audit objectives (accuracy, occurrence, and completeness) have matching transaction-related and balance-related audit objectives.

Question 4

Three presentation and disclosure audit objectives are not affected by assessed control risk for the sales transactions. These are
A) rights and obligations, valuation, and understandability.
B) understandability, valuation, and occurrence.
C) valuation, rights and obligations, and classification.
D) classification, understandability, and rights and obligations.

Accepted Answer

The answer of Three presentation and disclosure audit objectives are...

Question 5

Which of the following procedures would ordinarily be expected to best reveal unrecorded sales at the balance sheet date?
A) Compare shipping documents with sales invoices.
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.

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 6

To test for recorded sales for which there were no actual shipments, the auditor traces from the
A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.

Accepted Answer

Tracing from the sales journal to the shipping documents would help the auditor determine if there were any recorded sales for which there were no actual shipments. This is because the shipping documents would provide evidence of the actual shipment of goods, and if there are no corresponding shipping documents for a recorded sale in the sales journal, it could indicate that the sale was not actually completed.

Question 7

To determine that sales are accurately charged, the unit prices on the duplicate sales invoices are normally compared with
A) the original invoices.
B) the amounts recorded in the sales journal for that transaction.
C) the amounts posted to the customer's account in the accounts receivable master file.
D) an approved item master file.

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 8

When a company uses purchased software packages for its accounting software, such packages normally do not permit the company to change the software package's functionality. This means that the auditor will consider
A) access controls as being poor.
B) program change controls as poor.
C) program change controls as excellent.
D) access controls as being excellent.

Accepted Answer

The answer of When a company uses purchased software packages...

Question 9

A document that is used to describe and authorize additions, changes, or deletion of sales prices or customer data is called a(n)
A) uncollectible account authorization form.
B) journal entry authorization form.
C) master file change form.
D) transaction file change form.

Accepted Answer

A master file change form is used to authorize additions, changes, or deletions of sales prices or customer data in a company's master file. This form is important for maintaining the accuracy and integrity of the company's database. Choice A, an uncollectible account authorization form, is used to write off customer debts that are deemed uncollectible. Choice B, a journal entry authorization form, is used to authorize changes to a company's financial records. Choice D, a transaction file change form, is used to authorize changes to individual transactions, rather than the overall master file.

Question 10

Invoices are prepared using a date equal to the shipping date. This control pertains to which transaction-related audit objective?
A) posting and summarization
B) classification
C) cutoff
D) completeness

Accepted Answer

This control pertains to the cutoff audit objective, which ensures that transactions are recorded in the correct accounting period. Invoices should be recorded in the period in which they are shipped, and using the shipping date as the invoice date helps to ensure this is the case.

Question 11

When there are problems with program change procedures or with access controls, the auditor may choose to
A) rely less on manual controls since control risk has been increased.
B) not rely on programmed or interdependent application controls.
C) reduce control risk, which reduces the level of substantive testing.
D) use an information technology audit specialist to assess programmed application controls.

Accepted Answer

When there are issues with program change procedures or access controls, the auditor may choose not to rely on programmed or interdependent application controls due to increased control risk.

Question 12

Which of the following controls pertains to audit trails in the batch processing of sales transactions?
A) groups of documents are totalled
B) audit trail is available in electronic form
C) the focus is on preventing incorrect transactions
D) remittance advice information is matched to sales invoice numbers

Accepted Answer

The answer of Which of the following controls pertains to...

Question 13

What information would be considered semi-permanent as well as transaction information?
A) customer number or code
B) customer credit limit
C) transaction amount
D) current balance outstanding

Accepted Answer

Customer number or code is considered semi-permanent as it typically remains the same over time, and it is also used in transactions to identify the customer.

Question 14

Which of the following control procedures 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.

Accepted Answer

The answer of Which of the following control procedures may...

Question 15

Which of the following is an example of a key internal control for an online system that would help ensure that recorded sales are for the amount of goods shipped and are accurately billed and recorded?
A) Shipping documents are matched to invoices.
B) Shipping details are automatically used as the invoicing source.
C) Shipping documents are prenumbered and accounted for.
D) Transactions are summarized daily for posting to the general ledger.

Accepted Answer

Using shipping details as the invoicing source ensures that the sales recorded match the goods shipped, thus ensuring accuracy in billing and recording.

Question 16

One of the reasons that the auditor considers the type of information system and its functions is to
A) assess whether hardware functioning affects applications.
B) evaluate design effectiveness of internal controls.
C) complete risk assessment by audit assertion for cycles.
D) assess whether programmed controls can be relied upon.

Accepted Answer

The answer of One of the reasons that the auditor...

Question 17

A risk of material misstatement in accounts receivable associated with the accuracy balance-related audit objective is that "sales recorded at the incorrect price result in revenue and accounts receivable that are over- or understated." Which of the following tests of detail of balances would respond to this risk?
A) Select a sample of master file change forms and verify that all sales prices changes were appropriately authorized.
B) Use audit software to match sales invoice price details to authorized prices in the sales price master files.
C) Enquire with management with respect to the procedures used to update the sales price master file.
D) Match shipping details for a sample of invoices to the invoice details on an item by item basis.

Accepted Answer

This test of detail of balances involves using audit software to match sales invoice price details to authorized prices in the sales price master files. This would enable the auditor to identify any sales recorded at the incorrect price and determine if revenue and accounts receivable are overstated or understated. Option A involves testing the authorization of sales price changes but does not directly address the risk of incorrect prices being recorded during the sales process. Option C involves enquiring with management and is not a substantive audit procedure. Option D relates to another balance-related audit objective and is not specific to accuracy.

Question 18

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

Accepted Answer

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

Question 19

The information systems audit specialist on your audit team has indicated that the general controls over program changes are excellent for all application cycles. What impact does this have on your audit of sales invoice processing?
A) Generalized audit software should be used to select a sample of sales transactions for control testing.
B) Tests of controls should be omitted; only substantive tests may be conducted.
C) There could be problems with the accuracy of calculations for sales taxes and goods and excise taxes.
D) The auditor can place reliance on the program's performance of sales calculations.

Accepted Answer

The excellent general controls over program changes indicate that the program's performance is reliable and trustworthy. Therefore, the auditor can place reliance on the program's performance of sales calculations, and substantive tests of sales transactions might not be necessary.

Question 20

Which of the following presentation and disclosure-related audit objectives does not have a parallel audit objective for both the transaction-related audit objectives and balance-related audit objectives?
A) allocation
B) classification
C) understandability
D) rights and obligations

Accepted Answer

The presentation and disclosure-related audit objective of understandability only pertains to the clarity and comprehensibility of the information presented in the financial statements, and does not have a direct parallel in the transaction-related or balance-related audit objectives. Allocation and classification are applicable to both transaction-related and balance-related audit objectives, while rights and obligations relate specifically to balance-related audit objectives.

Quiz 12: Audit of the Revenue Cycle

For each control on which the auditor plans to rely to reduce assessed control risk, he or she must

Which of the following is an example of a data entry input edit that could be used to improve the accuracy of online data entry of sales orders?

Which of the following presentation and disclosure-related audit objectives has a matching transaction-related audit objective, but not a matching balance-related audit objective?

Three presentation and disclosure audit objectives are not affected by assessed control risk for the sales transactions. These are

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

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

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

When a company uses purchased software packages for its accounting software, such packages normally do not permit the company to change the software package's functionality. This means that the auditor will consider

A document that is used to describe and authorize additions, changes, or deletion of sales prices or customer data is called a(n)

Invoices are prepared using a date equal to the shipping date. This control pertains to which transaction-related audit objective?

When there are problems with program change procedures or with access controls, the auditor may choose to

Which of the following controls pertains to audit trails in the batch processing of sales transactions?

What information would be considered semi-permanent as well as transaction information?

Which of the following control procedures may prevent the failure to bill customers for some shipments?

Which of the following is an example of a key internal control for an online system that would help ensure that recorded sales are for the amount of goods shipped and are accurately billed and recorded?

One of the reasons that the auditor considers the type of information system and its functions is to

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

The information systems audit specialist on your audit team has indicated that the general controls over program changes are excellent for all application cycles. What impact does this have on your audit of sales invoice processing?

Which of the following presentation and disclosure-related audit objectives does not have a parallel audit objective for both the transaction-related audit objectives and balance-related audit objectives?