Question 1

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years.A possible misstatement this procedure could uncover is
A)overstatement or understatement of sales.
B)overstatement or understatement of accounts receivable.
C)overstatement or understatement of bad debt expense.
D)overstatement or understatement of sales returns and allowances.

Accepted Answer

The procedure of comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years can uncover a misstatement in the overstatement or understatement of bad debt expense. This is because the calculation of the write-off of uncollectible accounts is directly linked to the estimation of bad debt expense, and any misstatement in the estimation will lead to a misstatement in the write-off. This misstatement could result in either an overstatement or understatement of bad debt expense.

Question 2

For sales,the completeness transaction-related audit objective affects the existence balance-related audit objective.

Accepted Answer

The completeness transaction-related audit objective ensures that all transactions that should have been recorded are indeed recorded, while the existence balance-related audit objective ensures that balances that appear on the financial statements actually exist. These objectives address different aspects of the financial statements and do not directly affect each other.

Question 3

The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised.

Accepted Answer

The results of tests of controls help in determining whether the assessed control risk needs to be revised or not for sales and cash receipts. If the controls are effective, then the assessed risk can be lower, whereas, if the controls are not effective, then the assessed risk needs to be higher.

Question 4

Which of the following types of receivables would not deserve the special attention of the auditor?
A)accounts receivables with credit balances
B)accounts that have been outstanding for a long time
C)receivables from related parties
D)each of the above would receive special attention.

Accepted Answer

All the listed types of receivables would require special attention from the auditor due to their potential impact on financial statements and risk of misstatement.

Question 5

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle.Which of the following is not one of their major concerns?
A)controls over cutoff
B)controls that prevent or detect embezzlements
C)controls over sales discounts
D)controls related to the allowance for uncollectible accounts

Accepted Answer

While controls over sales discounts are important, they are not one of the major concerns for auditors in the sales and collection cycle. The three main concerns for auditors in this cycle are controls over cutoff, controls that prevent or detect embezzlements, and controls related to the allowance for uncollectible accounts.

Question 6

For sales,the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?
A)existence
B)completeness
C)rights
D)detail tie-in

Accepted Answer

The occurrence transaction-related audit objective aims to ensure that all recorded transactions actually occurred and are valid. This is directly related to the existence balance-related audit objective, which aims to ensure that all recorded assets and liabilities actually exist. Therefore, the occurrence transaction-related audit objective affects the existence balance-related audit objective.

Question 7

For cash receipts,the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?
A)existence
B)completeness
C)rights
D)detail tie-in

Accepted Answer

The answer of For cash receipts,the occurrence transaction-related audit objective...

Question 8

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.

Accepted Answer

Analytical procedures can provide evidence for the reasonableness of balances which can reduce the need for extensive testing of details, but they cannot provide conclusive evidence on their own. Therefore, the extent of testing required ultimately depends on the auditor's professional judgment and risk assessments.

Question 9

Which of the following is a correct statement regarding analytical procedures?
A)If an auditor identifies a possible misstatement in sales using analytical procedures,accounts payable will be the likely offsetting misstatement.
B)Auditors should also compare the results of their analytical procedures to budgets and industry trends.
C)If sales are overstated,the income statement will be incorrect,but the balance sheet will be correct.
D)If an analytical procedure uncovers an unusual fluctuation,the auditor must assume fraud is involved.

Accepted Answer

Option B is correct because auditors should compare the results of their analytical procedures to budgets and industry trends to identify any significant fluctuations or potential misstatements. Option A is incorrect as it assumes a specific offsetting misstatement without any evidence. Option C is incorrect because overstated sales may impact both the Income statement and Balance sheet. Option D is incorrect because an unusual fluctuation does not necessarily mean fraud is involved, there may be other explanations as well.

Question 10

Analytical procedures
A)are only done during the planning of the audit and when performing detailed tests.
B)performed during the detailed testing phase are done before tests of details of balances.
C)performed during the detailed testing phase are done before the balance sheet date.
D)are performed only on accounts receivable,not on the entire sales and collection cycle.

Accepted Answer

Analytical procedures are performed during the planning and final review phases of the audit, as well as during the detailed testing phase. During the detailed testing phase, they are done before tests of details of balances, which focus on the ending balances of accounts. Analytical procedures are not limited to accounts receivable and can be applied to various accounts and cycles to detect any unusual fluctuations or patterns that may indicate potential misstatements.

Question 11

Analytical procedures are substantive tests and,if the results of the analytical procedures are favorable,the auditor would normally
A)reduce the extent of tests of details of balances.
B)reduce the extent of tests of controls.
C)reduce the tests of transactions.
D)reduce all of the other tests.

Accepted Answer

If the results of the analytical procedures are favorable, the auditor would normally reduce the extent of tests of details of balances, as substantial audit evidence has already been obtained through the analytical procedures. However, the auditor would not reduce the extent of tests of controls or transactions, as analytical procedures do not provide the same level of assurance as tests of controls and transactions.

Question 12

Recording a sale that did not occur violates the occurrence transaction-related audit objective and the existence balance-related audit objective.

Accepted Answer

Recording a sale that did not occur means that the sale did not exist and therefore violates both the occurrence and existence audit objectives. Occurrence requires that transactions recorded actually occurred and existence requires that assets or liabilities recorded actually exist.

Question 13

Auditors use the results of the substantive tests of transactions of sales and the collection cycle to determine the extent to which inherent risk is satisfied for each accounts receivable balance-related audit objective.

Accepted Answer

Auditors use the results of substantive tests of transactions to assess the effectiveness of internal controls and to detect material misstatements, not to determine the extent to which inherent risk is satisfied. Inherent risk is assessed earlier in the audit process, during the risk assessment phase, and influences the nature, timing, and extent of further audit procedures.

Question 14

When analytical procedures in the sales and collection cycle uncover unusual fluctuations,the auditor should make additional inquiries of management.

Accepted Answer

This is because unusual fluctuations in the sales and collection cycle may indicate potential misstatements or errors, and additional inquiries can help the auditor to gain further understanding and potentially identify any issues that need to be addressed.

Question 15

For most audits,revenue recognition is considered to be a significant risk.

Accepted Answer

Revenue recognition is often a significant risk in audits because it is a complex area with many rules and interpretations, and misstatements can have a significant impact on the financial statements. Auditors typically spend significant time and resources testing revenue recognition to ensure it has been properly accounted for.

Question 16

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an
A)efficiency basis.
B)effectiveness basis.
C)objective-by-objective basis.
D)none of the above

Accepted Answer

Tests of details are conducted to obtain evidence about specific assertions made in the financial statements. The appropriate and sufficient evidence to be obtained from these tests must be decided on an objective-by-objective basis, which means that the nature, timing and extent of the tests depend upon the specific assertion being tested. The auditor should plan the audit to achieve sufficient and appropriate evidence to support the conclusions reached on each relevant assertion. Therefore, option C is the most appropriate choice.

Question 17

The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.

Accepted Answer

The accounts receivable balance-related audit objective of net realizable value is not affected by the assessed control risk for sales or cash receipts. This is because net realizable value is a measurement of the accounts receivable balance's estimated collectible amount, which depends on factors like customer creditworthiness and the age of the receivables. It is not impacted by the level of control risk in the sales or cash receipts process.

Question 18

Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle?
A)Auditors must perform substantive tests related to assertions deemed to have significant risks.
B)The auditor must relate control risk for transaction-related audit objectives to balance-related audit objectives in deciding planned inherent risk.
C)The realizable value balance-related audit objectives are affected by assessed control risk for classes of transactions.
D)All of the above are accurate statements.

Accepted Answer

The risk assessment process in phase I of the audit process for the sales and collection cycle requires auditors to identify assertions that have significant risks and perform substantive tests related to those assertions.

Option B is incorrect as the auditor relates planned inherent risk to identified risks for transaction-related audit objectives, not balance-related audit objectives.

Option C is incorrect because realizable value balance-related audit objectives are not affected by assessed control risk for classes of transactions.

Option D is incorrect because Option C is not an accurate statement.

Question 19

The two primary classes of transactions in the sales and collection cycle are
A)sales and sales discounts.
B)sales and cash receipts.
C)sales and sales returns.
D)sales and accounts receivable.

Accepted Answer

The two primary classes of transactions in the sales and collection cycle are sales and cash receipts. Sales involve the transfer of goods or services to customers and result in an increase in accounts receivable. Cash receipts involve the collection of cash from customers and result in a decrease in accounts receivable. While sales returns and discounts are also important transactions in the cycle, they are not considered primary classes of transactions.

Question 20

Below are listed possible misstatements that could occur in the sales and collections cycle.Provide the analytical procedure that would be most useful in detecting the possible misstatement.
a. overstatement of sales and accounts receivable
b. uncollectible accounts receivable that have not been provided for
c. overstatement of sales returns and allowances

Accepted Answer

The answer of Below are listed possible misstatements that could...

Quiz 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years.A possible misstatement this procedure could uncover is

For sales,the completeness transaction-related audit objective affects the existence balance-related audit objective.

The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised.

Which of the following types of receivables would not deserve the special attention of the auditor?

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle.Which of the following is not one of their major concerns?

For sales,the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

For cash receipts,the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.

Which of the following is a correct statement regarding analytical procedures?

Analytical procedures

Analytical procedures are substantive tests and,if the results of the analytical procedures are favorable,the auditor would normally

Recording a sale that did not occur violates the occurrence transaction-related audit objective and the existence balance-related audit objective.

Auditors use the results of the substantive tests of transactions of sales and the collection cycle to determine the extent to which inherent risk is satisfied for each accounts receivable balance-related audit objective.

When analytical procedures in the sales and collection cycle uncover unusual fluctuations,the auditor should make additional inquiries of management.

For most audits,revenue recognition is considered to be a significant risk.

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an

The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.

Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle?

The two primary classes of transactions in the sales and collection cycle are