Question 1

The most effective audit evidence gathered for accounts receivable is the
A)detail tie-in of the records.
B)analysis of the allowance for doubtful accounts.
C)confirmation of accounts receivable.
D)examination of sales invoices.

Accepted Answer

Confirmation of accounts receivable provides external and reliable evidence of the existence and accuracy of the balances. It is considered the most effective audit evidence for accounts receivable as it directly confirms whether the customer owes the balance on the company's record. Detail tie-in, analysis of the allowance for doubtful accounts, and examination of sales invoices provide some evidence but do not provide the same level of reliability as confirmation.

Question 2

After the auditor is satisfied with the allowance for uncollectible accounts,it is easy to verify bad debt expense.

Accepted Answer

Once the auditor is satisfied with the allowance for uncollectible accounts, verifying bad debt expense becomes easier because it directly relates to changes in the allowance and the year's write-offs, providing a clear basis for verification.

Question 3

Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a
A)representation letter.
B)negative confirmation.
C)bank confirmation.
D)positive confirmation.

Accepted Answer

The communication described in the question is a positive confirmation. Positive confirmation requests the debtor to respond with a confirmation of the accuracy of the balance. This is different from a negative confirmation, which requests the debtor to only respond if the provided balance is incorrect. A bank confirmation is a specific type of positive confirmation sent to a financial institution to confirm account balances. A representation letter is a document signed by management that details the accuracy of financial information.

Question 4

The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is
A)confirmations.
B)recalculation of the aged receivables and uncollectible accounts.
C)tracing credit memos for returned merchandise to receiving room reports.
D)tracing from shipping documents to journals to the accounts receivable ledger.

Accepted Answer

Confirmations provide direct external evidence of the existence and accuracy of accounts receivable balances. This is the most appropriate evidence for performing test of details of balances for accounts receivable. Recalculation of the aged receivables and uncollectible accounts and tracing credit memos for returned merchandise to receiving room reports are relevant procedures, but they do not provide as strong of evidence as confirmations. Tracing from shipping documents to journals to the accounts receivable ledger can provide evidence of accuracy, but it does not provide evidence of existence.

Question 5

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.

Accepted Answer

Tests of the realizable value balance-related audit objective are indeed performed to evaluate the allowance for doubtful accounts. The objective of these tests is to determine if the allowance is properly stated and if it accurately reflects the collectibility of accounts receivable.

Question 6

For most audits,a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff since cash only affects the balance sheet,and not earnings.

Accepted Answer

The answer of For most audits,a proper cash receipts cutoff...

Question 7

The most reliable evidence from confirmations is obtained when they are sent
A)as close to the balance sheet date as possible.
B)at various times throughout the year to different segments of the sample,so that the entire sample is representative of account balances scattered throughout the year.
C)several months before the year-end,so the auditor will have adequate time to perform alternate procedures if they are required.
D)at various times throughout the year to the same group in the sample,so that the sample will not have a time bias.

Accepted Answer

Confirmations sent as close to the balance sheet date as possible provide the most reliable evidence because they reflect the account balances at the end of the reporting period. Confirmations sent earlier in the year may not represent the account balances at the year-end and could be affected by subsequent transactions.

Question 8

If the auditor decides not to confirm accounts receivable that are material,the auditor should
A)always use alternative procedures to audit the accounts receivable.
B)include copies of customer statements in the audit files.
C)document the reasons for such a decision in the audit files.
D)include copies of customer sales invoices in the audit files.

Accepted Answer

If the auditor decides not to confirm accounts receivable that are material, they should document the reasons for this decision in the audit files. This documentation is necessary to support the auditor's conclusion and to demonstrate that alternative procedures were performed to obtain sufficient evidence regarding the completeness and accuracy of the accounts receivable balance. Including copies of customer statements or sales invoices may be helpful as alternative procedures, but documenting the reasons for the decision is the most critical step.

Question 9

Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit.

Accepted Answer

Tests of presentation and disclosure-related objectives are typically performed during the completion phase of the audit as this is when the auditor evaluates the overall adequacy of financial statement presentation and disclosure.

Question 10

Confirmation of accounts receivable balances normally provides evidence concerning the
A)valuation of the balances.
B)rights of the balances.
C)existence of the balances.
D)completeness of the balances.

Accepted Answer

Confirmation of accounts receivable balances provides evidence of their existence, confirming that customers owe money to the company. This procedure alone does not provide evidence about the valuation, rights, or completeness of the balances.

Question 11

A type of positive confirmation known as a blank confirmation
A)requests the recipient to fill in the amount of the balance.
B)is considered less reliable than the regular positive confirmation.
C)generates as high a response rate as the regular positive confirmation form.
D)is used when the auditor is confirming several small balances.

Accepted Answer

A blank confirmation requests the recipient to fill in the amount of the balance, which can provide more reliable information compared to a regular positive confirmation. It is best used for confirming several small balances as it saves time and effort.

Question 12

When positive confirmations are used,auditing standards require alternative procedures for confirmations not returned by the customer.Which of the following would not be considered an alternative procedure?
A)Send a second confirmation request.
B)Examine subsequent cash receipts to determine if the receivable has been paid.
C)Examine shipping documents to verify that the merchandise was shipped.
D)Examine sales invoice to verify the actual issuance of a sales invoice and the actual date of the billing.

Accepted Answer

Sending a second confirmation request is not considered an alternative procedure for unreturned confirmations. Alternative procedures typically involve examining other evidence to verify the account balance, such as subsequent cash receipts, shipping documents, or sales invoices.

Question 13

A positive confirmation is more reliable evidence than a negative confirmation because
A)fewer confirmations can be sent out.
B)the auditor has a document which can be used in court.
C)the debtor's lack of response indicates agreement with the stated balance.
D)follow-up procedures are performed if a response is not received from the debtor.

Accepted Answer

A positive confirmation requires a response from the debtor, whereas a negative confirmation only requires a response if the stated balance is incorrect. Therefore, a lack of response from the debtor in a positive confirmation can be followed up with further procedures, providing more reliable evidence. Additionally, the fact that the debtor responds in a positive confirmation indicates agreement with the stated balance, further increasing the reliability of the evidence.

Question 14

The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.

Accepted Answer

The answer of The criterion used by most merchandising and...

Question 15

Confirmation is the most common test of details of balances for the accuracy of accounts receivable.

Accepted Answer

Confirmation is a commonly used test of details of balances for accounts receivable to ensure the accuracy of the balances.

Question 16

When should auditors not perform alternative procedures in testing the accounts receivable balance?
A)when customers do not return positive confirmation requests
B)when customers do not return negative confirmation requests
C)when confirmations are deemed to be ineffective as an audit procedure
D)when confirmations are too costly to use

Accepted Answer

The answer of When should auditors not perform alternative procedures...

Question 17

Which of the following is the principle "weakness" of using negative confirmations for the tests of details of balances for accounts receivable?
A)They can only be used for large balance accounts.
B)They cannot not be used when account balances "bunch" around a mean value.
C)Conclusions drawn from receiving no reply may not be correct.
D)Response rates are generally too low to draw any conclusions.

Accepted Answer

Conclusions drawn from receiving no reply may not be correct. This is because there could be various reasons why a customer did not respond to a negative confirmation, such as the communication getting lost or the customer not understanding the request. Therefore, not receiving a response does not necessarily indicate that the account balance is accurate.

Question 18

A type of positive confirmation in which an individual invoice is confirmed,rather than the customer's entire accounts receivable balance is the ________ confirmation.
A)invoice
B)specific
C)balance
D)voucher

Accepted Answer

Invoice confirmation specifically requests verification of individual invoices, making it distinct from confirming the entire accounts receivable balance.

Question 19

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when
A)no reply to a positive confirmation request is received.
B)no reply to a negative confirmation request is received.
C)collectibility of the receivables is in doubt.
D)pledging of the receivables is probable.

Accepted Answer

When no reply is received to a positive confirmation request, auditors perform alternative procedures to verify the existence of accounts receivable, as positive confirmations are direct requests for information from debtors and lack of response raises questions about the receivable's existence. Negative confirmations, concerns about collectibility, or pledging do not directly relate to the existence verification process in the same way.

Question 20

The positive (as opposed to the negative)form of receivables confirmation may be preferred when
A)internal control surrounding accounts receivable is considered to be effective.
B)there is reason to believe that a substantial number of accounts may be in dispute.
C)a large number of small balances are involved.
D)the auditor believes that the recipients of the confirmations will give the requests adequate consideration.

Accepted Answer

The answer of The positive (as opposed to the negative)form...

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

The most effective audit evidence gathered for accounts receivable is the

After the auditor is satisfied with the allowance for uncollectible accounts,it is easy to verify bad debt expense.

Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a

The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.

For most audits,a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff since cash only affects the balance sheet,and not earnings.

The most reliable evidence from confirmations is obtained when they are sent

If the auditor decides not to confirm accounts receivable that are material,the auditor should

Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit.

Confirmation of accounts receivable balances normally provides evidence concerning the

A type of positive confirmation known as a blank confirmation

When positive confirmations are used,auditing standards require alternative procedures for confirmations not returned by the customer.Which of the following would not be considered an alternative procedure?

A positive confirmation is more reliable evidence than a negative confirmation because

The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.

Confirmation is the most common test of details of balances for the accuracy of accounts receivable.

When should auditors not perform alternative procedures in testing the accounts receivable balance?

Which of the following is the principle "weakness" of using negative confirmations for the tests of details of balances for accounts receivable?

A type of positive confirmation in which an individual invoice is confirmed,rather than the customer's entire accounts receivable balance is the ________ confirmation.

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when

The positive (as opposed to the negative) form of receivables confirmation may be preferred when