Question 1

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because:
A)understatements of assets and income are a greater concern than overstatements.
B)overstatements of assets and income are a greater concern than understatements.
C)it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct.
D)the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.

Accepted Answer

Overstatements of assets and income are a greater concern than understatements because overstatements can result in the company obtaining loans and credit it does not qualify for, while understatements may result in missed opportunities or tax savings. Therefore, auditors mainly focus on ensuring that all sales transactions have been recorded correctly and completely.

Question 2

Prenumbered documents will only be useful for control purposes if:
A)a different numerical sequence is used for each company.
B)the sequence is accounted for periodically.
C)employees are allowed to use documents out of numerical sequence.
D)the same numerical sequence is used each accounting period.

Accepted Answer

Prenumbered documents are useful for control purposes only if the sequence is accounted for periodically. This ensures that all the documents are accounted for and no missing documents or duplicates are created. The other options are not relevant for ensuring control over prenumbered documents.

Question 3

Management's assertions for sales and collection activities remain the same whether sales are generated through traditional or e-commerce activities.

Accepted Answer

Management's assertions relating to sales and collection activities such as completeness, accuracy, existence, and valuation should remain consistent regardless of whether sales are generated through traditional or e-commerce channels.

Question 4

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

Accepted Answer

Comparing the unit prices on duplicate sales invoices with an approved master price list is the best way to ensure that sales are accurately recorded. This is because the master price list should contain the correct prices for all products, and any discrepancies between the prices on the invoices and the master list can be investigated and corrected. Comparing the invoices to the original invoices, sales journal, or customer accounts may not provide the same level of accuracy or reliability.

Question 5

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?
A)B, C, and D should all be of concern to the auditor.
B)Credit must be authorized before the sale.
C)Goods must be shipped after the authorization.
D)Prices must be authorized.

Accepted Answer

The auditor should be concerned with all aspects of authorization in the sales/collections cycle, including credit authorization before sales, shipment authorization, and price authorization, to ensure proper controls and prevent fraud or errors.

Question 6

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:
A)existence objective.
B)completeness objective.
C)ownership objective.
D)valuation objective.

Accepted Answer

Tracing items from source documents to journals is a test of completeness objective, which aims to ensure that all transactions that should have been recorded were in fact recorded. It helps the auditor to ensure that no transaction is left unrecorded in the accounting systems.

Question 7

In designing substantive audit procedures for tests of transactions for sales the auditor needs to test for evidence of misstatements due to errors or fraud.Describe at least 2 potential errors (unintentional)and at least 1 intentional (fraud).

Accepted Answer

The answer of In designing substantive audit procedures for tests...

Question 8

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
A)The cashier prepares the daily deposit.
B)The cashier makes the daily deposit at a local bank.
C)The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D)The cashier endorses the checks.

Accepted Answer

The cashier posting receipts to the accounts receivable subsidiary ledger cards is considered an incompatible operation because it involves both the custody of assets (handling cash/checks) and the recording of those assets, which should be separated to ensure proper internal control and reduce the risk of fraud or errors.

Question 9

________ tests are for omitted transactions, while ________ tests are for nonexistent transactions.
A)Tracing, vouching
B)Vouching, tracing
C)Verifying, tracking
D)Tracking, verifying

Accepted Answer

Tracing tests are designed to ensure that transactions that should have been recorded are indeed in the records (omitted transactions), while vouching tests are used to verify that transactions recorded in the books actually occurred (nonexistent transactions).

Question 10

In converting from a design format audit program to a performance format audit program, procedures are combined.

Accepted Answer

The answer of In converting from a design format audit...

Question 11

When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points.Discuss each of these three points.

Accepted Answer

The answer of When assessing planned control risk for sales,...

Question 12

Tracing from source documents to the journal is useful for testing the existence objective.

Accepted Answer

Tracing from source documents to the journal is useful for testing completeness, not existence. Existence is tested by vouching from the journals to the source documents.

Question 13

Prenumbered documents are intended to help:
A) 
B) 
C) 
D)

Accepted Answer

The answer of Prenumbered documents are intended to help:
A) 
B)...

Question 14

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Accepted Answer

Misstatements involving the completeness objective for sales typically lead to understatements of assets and income, as they involve omitting or not recording sales transactions that should have been recorded.

Question 15

Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.

Accepted Answer

Separation of duties is an internal control measure that helps to minimize the risk of fraud, errors, and other types of financial reporting issues. In the sales/collection cycle, separating the credit-granting function from the sales function helps to ensure that sales staff do not have the ability to approve credit for customers or manipulate credit terms to close deals. This can help to prevent conflicts of interest and reduce opportunities for fraud.

Question 16

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?
A)Granting of credit
B)Shipment of goods
C)Determination of discounts
D)Selling of goods for cash

Accepted Answer

Selling of goods for cash does not require a specific authorization as the customer is paying the full amount upfront. Granting of credit, shipment of goods, and determination of discounts are all activities that require specific authorization to ensure that they are properly authorized and recorded.

Question 17

Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?
A)Sales being included in the journal for which no shipment was made
B)Sales to related parties, such as officers and subsidiaries
C)Sales recorded more than once
D)Shipments being made to nonexistent customers and recorded as sales

Accepted Answer

Sales to related parties are typically less of a concern for auditors in the context of designing substantive tests for the sales/collection cycle, as these transactions are often disclosed separately and are not inherently indicative of errors or fraud in the sales recording process.

Question 18

An auditor needs to determine whether all customers of an electric utility company are being billed.The auditor should test from the:
A)sales register to the accounts receivable ledger.
B)sales register to the meter department records.
C)accounts receivable ledger to the sales register.
D)meter department records to the sales register.

Accepted Answer

The meter department records would provide a record of all customers who are receiving electricity usage, and comparing this list to the sales register would help ensure that all customers are being billed. Option A and C would only provide information on customers who have made a payment, whereas option B does not provide enough relevant information for this specific audit objective.

Question 19

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement.
•Sales included in the journals for which there was no shipment
•Sale recorded more than once
•Shipments made to nonexistent customers and recorded as sales

Accepted Answer

The answer of For each of the following potential misstatements,...

Question 20

Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences.Which of the following are two key differences?
A)Risk and emphasis on the completeness objective.
B)Materiality and emphasis on the accuracy objective
C)Risk and emphasis on the classification objective
D)Materiality and emphasis on the occurrence objective

Accepted Answer

The answer of Transaction-related audit objectives are essentially the same...

Quiz 14: Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because:

Prenumbered documents will only be useful for control purposes if:

Management's assertions for sales and collection activities remain the same whether sales are generated through traditional or e-commerce activities.

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

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:

In designing substantive audit procedures for tests of transactions for sales the auditor needs to test for evidence of misstatements due to errors or fraud.Describe at least 2 potential errors (unintentional)and at least 1 intentional (fraud).

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

tests are for omitted transactions, while tests are for nonexistent transactions.

In converting from a design format audit program to a performance format audit program, procedures are combined.

When assessing planned control risk for sales, the auditor is concerned about proper authorization at three key points.Discuss each of these three points.

Tracing from source documents to the journal is useful for testing the existence objective.

Prenumbered documents are intended to help:

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?

Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?

An auditor needs to determine whether all customers of an electric utility company are being billed.The auditor should test from the:

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement. •Sales included in the journals for which there was no shipment •Sale recorded more than once •Shipments made to nonexistent customers and recorded as sales

Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences.Which of the following are two key differences?