Question 1

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

Accepted Answer

Separating the employees who handle credit-granting from those who are responsible for sales can reduce the incentive to make sales at the expense of higher bad debt write-offs. This separation would allow for the credit-granting function to be conducted more objectively and without influence from the sales function. The other choices may provide some level of control, but not as effective in addressing the specific issue of sales personnel maximizing sales volume at the expense of high bad debt write-offs.

Question 2

Immediately upon receipt of cash, a responsible employee should:

Accepted Answer

Preparing a control listing immediately upon receipt of cash helps ensure that all cash received is accounted for and provides a record for reconciliation purposes.

Question 3

Which is not a key segregation of duties for the revenue process? Different parties should:

Accepted Answer

A key segregation of duties in the revenue process is to separate the tasks of preparing shipping orders and preparing bills of lading. This helps to prevent errors or fraud related to shipping and billing. However, in option A, both tasks are assigned to the same party which is contrary to the segregation of duties principle. Therefore, A is the answer.

Options B, C, and D all involve separating different tasks related to the revenue process, which align with the key segregation of duties principle. For example, performing credit and billing functions or separating the tasks of shipping and billing can help to prevent errors and fraud. Similarly, receiving cash and adjusting accounts receivable should be assigned to different parties to ensure that the cash is properly recorded and accounted for.

Question 4

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of:

Accepted Answer

The auditor is checking to ensure that for every shipment, there is a corresponding invoice, which addresses the completeness assertion. This assertion concerns whether all transactions and accounts that should have been recorded have been recorded.

Question 5

All of the following are important controls over credit memos except:

Accepted Answer

While proper segregation of duties is important, this control specifically addresses sales discounts taken, not credit memos. Therefore, choice A is not an important control over credit memos. Choices B, C, and D are all important controls over credit memos.

Question 6

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

Accepted Answer

Reviewing credit ratings of customers with delinquent accounts receivable helps an auditor evaluate whether the accounts receivable are valued correctly and if the allowance for doubtful accounts is adequately allocated, addressing the accuracy, valuation, and allocation assertions.

Question 7

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the:

Accepted Answer

The most direct way to determine whether all customers are being billed is to trace from the source of the meter department records to the billing (sales) register, as this will provide assurance that all sales have been recorded and billed to customers. Tracing in the opposite direction (B) would not provide the same level of assurance, as it would only show that the meter department records match the billing register, but not necessarily that all customers have been billed. The accounts receivable ledger (C) is not necessary to test for completeness of billing, as it only reflects amounts owed by customers that have already been billed. Tracing from the billing (sales) register to the accounts receivable ledger (D) would only confirm that bills have been recorded as accounts receivable, but would not provide direct evidence that all customers have been billed.

Question 8

Which of the following is the best argument against the use of negative accounts receivable confirmations?

Accepted Answer

Negative accounts receivable confirmations are sent to customers with the intention of gathering evidence that the balance they hold as accounts receivable is actually owed by the buyer. However, if the recipient does not respond, it does not necessarily mean that the balance is owed. There may be several reasons why the confirmation was not responded to, including it being lost in the mail or the recipient being too busy to respond. Therefore, the inference drawn from receiving no reply may not be correct.

Question 9

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

Accepted Answer

Using prenumbered sales invoices ensures that all shipments are accounted for and billed, preventing any from being missed.

Question 10

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?

Accepted Answer

A combination of positive and negative confirmation forms can be used based on the auditor's judgment, often with positive confirmations for larger balances due to their higher risk and negative confirmations for smaller balances.

Question 11

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an:

Accepted Answer

The inadequate control activities allow goods to be shipped without being invoiced, leading to an understatement of revenues and receivables. Since the goods are not being invoiced, they are not being recognized as part of the inventory, resulting in an overstatement of inventory. Therefore, option C is the correct answer.

Question 12

To determine whether the system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the:

Accepted Answer

The bills of lading file is the correct choice because it contains records of shipments made. By comparing this file to invoices, an auditor can determine if there were any shipments that were not invoiced, thus assessing the effectiveness of internal controls over invoicing.

Question 13

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an:

Accepted Answer

Invoicing goods that are not shipped would lead to recording revenue and receivables for sales that did not actually occur, thus overstating revenues and receivables. Since the goods were not shipped but invoiced, they would be incorrectly removed from inventory, leading to an understatement of inventory.

Question 14

In auditing accounts receivable, the negative form of confirmation request most likely would be used when:

Accepted Answer

The negative form of confirmation is typically used when the assessed level of inherent and control risk relative to accounts receivable is low. This is because the recipient is not asked to respond unless they disagree with the information provided, which is less intrusive than the positive form of confirmation. When the risks are low, the auditor can rely on other substantive procedures to obtain evidence, such as analytical procedures or vouching transactions. Choices A, C, and D do not reflect the typical circumstances in which the negative form of confirmation would be used.

Question 15

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

Accepted Answer

Comparing daily sales summaries to daily postings to the accounts receivable ledger would ensure that all billed sales are correctly posted to the ledger. This would identify any discrepancies and allow for correction before the transactions are recorded. The other options provide controls for other aspects of the sales process, but do not directly address ensuring accurate posting to the accounts receivable ledger.

Question 16

Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because:

Accepted Answer

Auditors are more concerned with the occurrence assertion for revenues because entities are more likely to overstate revenues than understate them. This is because entities usually have an incentive to overstate revenues in order to improve their financial position or meet analyst expectations. On the other hand, the completeness assertion is more relevant for expenses, as entities are more likely to understate expenses in order to improve their net income.

Question 17

Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to:

Accepted Answer

The aged trial balance of accounts receivable is used by the auditor to evaluate the allowance for doubtful accounts, which is a valuation account that estimates the portion of accounts receivable that may not be collected. The aging helps the auditor estimate the likelihood of collection for each account, and the appropriateness of the recorded allowance for doubtful accounts. The other choices are not explicitly related to the use of an aged trial balance.

Question 18

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

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 function (posting to accounts), which should be separated to maintain internal control and reduce the risk of errors or fraud.

Question 19

Data Corporation has just computerized its billing and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of Data Corporation. Which of the following audit techniques could not be performed through a computer program?

Accepted Answer

Resolving differences reported by customers on confirmation requests involves judgment and interpretation, which cannot be performed through a computer program. This task requires human intervention to analyze and resolve the issues.

Question 20

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?

Accepted Answer

The credit manager's opinion is the least reliable method for determining the adequacy of the allowance for uncollectible accounts because it is subjective and may not be based on systematic analysis or historical data, unlike the other options which involve more objective and quantifiable methods.

Quiz 10: Auditing the Revenue Process