Question 1

Which of the following is not an issue related to the valuation of accounts receivable?

Accepted Answer

The answer of Which of the following is not an...

Question 2

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

With daily comparison of sales summaries to the accounts receivable ledger, any differences or errors can be detected and corrected promptly. This internal control activity helps ensure that all billed sales are correctly posted to the accounts receivable ledger. Choices B, C, and D do not specifically address the issue of ensuring correct posting of billed sales to the accounts receivable ledger.

Question 3

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn about which of the following?

Accepted Answer

Confirming open accounts receivable primarily helps in identifying discrepancies in the recorded amounts versus what the customers acknowledge they owe. Lapping, which involves manipulating accounts receivable to cover up embezzlement, is likely to be detected through this process because it directly affects the balances of customer accounts. Other options involve activities that wouldn't directly impact the balances of open accounts receivable in a way that confirmation would typically uncover.

Question 4

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

Accepted Answer

Comparing shipping documents with sales records is the best method to reveal improper cutoff of sales at the balance sheet date. This procedure helps ensure that sales are recorded in the correct accounting period by matching the physical movement of goods with the recorded sales transactions.

Question 5

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to

Accepted Answer

The CPA would expand tests regarding the collectability of receivables to assess the impact of slow collections and determine the adequacy of the allowance for doubtful accounts.

Question 6

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

Completeness is the assertion that all transactions that should have been recorded have been recorded. The auditor's test of shipping documents is designed to determine whether all invoices have been prepared, which is a completeness assertion.

Question 7

In the confirmation of accounts receivable, the auditor would most likely

Accepted Answer

The auditor would most likely randomly select a representative sample of accounts for confirmation to obtain sufficient and reliable audit evidence. This approach ensures that the auditor reviews a variety of different types of accounts and customers, minimizing the risk of overlooking irregularities or errors in the financial statements. Additionally, selecting a representative sample provides an efficient means of testing the overall accuracy and completeness of the accounts receivable balance.

Question 8

Which of the following misstatements is not related to the completeness assertion for revenue?

Accepted Answer

The completeness assertion for revenue is concerned with ensuring that all revenue transactions that should have been recorded have indeed been recorded. Option C, "Next year's revenue is recorded this year," relates to the accuracy or cutoff assertion, not completeness. It involves recording revenue in the wrong period, rather than failing to record revenue that should have been recorded.

Question 9

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

To ensure all customers are billed, the CPA should trace from the meter department records, which show actual usage, to the billing register to verify that all recorded usage results in a bill.

Question 10

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following?

Accepted Answer

The answer of An auditor reconciles the total of the...

Question 11

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?

Accepted Answer

An unexplained increase in the ratio of gross profit to sales may suggest fictitious sales because gross profit is calculated by subtracting the cost of goods sold from sales, and an increase in gross profit without a corresponding increase in cost of goods sold could mean that sales have been fabricated.

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 auditor would select a sample from the bills of lading file because it represents shipments made. By verifying that each shipment has a corresponding invoice, the auditor can assess whether the internal controls are effective in ensuring all shipments are invoiced.

Question 13

Which of the following might be detected by an auditor's review of the entity's sales cutoff?

Accepted Answer

An auditor's review of the entity's sales cutoff is intended to identify any sales which have been recorded in the wrong period. If sales are recorded in the subsequent period (after year-end) it can artificially inflate sales for the year. Therefore, overstated sales for the year could be detected by an auditor's review of the entity's sales cutoff. The other options may be detected by other audit procedures, but not specifically by the review of sales cutoff.

Question 14

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

Accepted Answer

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

Question 15

An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting

Accepted Answer

When control risk is low and the auditor has evidence supporting cash receipts and accounts receivable, it indicates that sales transactions are likely recorded accurately, reducing the need for extensive substantive testing.

Question 16

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the

Accepted Answer

The answer of If the objective of a test of...

Question 17

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 revenue overstatement can lead to inflated profits, which can attract investors and increase shareholder value, while revenue understatement can depress profits and harm the company's reputation. Therefore, auditors must be diligent in ensuring that all reported revenues are valid, earned, and accurately recorded.

Question 18

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries?

Accepted Answer

The Billing department should perform these activities to ensure that sales are accurately recorded and billed, maintaining proper internal control over the sales process.

Question 19

Which of the following is a test of controls for the transaction assertion of completeness for revenue?

Accepted Answer

Tracing shipping documents to sales invoices and the sales journal ensures that all sales transactions have been recorded and included in the revenue accounts, therefore testing the completeness assertion. Reviewing sales orders for credit approval tests the accuracy assertion, testing a sample of sales invoices for authorized customer orders tests the authorization assertion, and examining the reconciliation of subsidiary ledger to general ledger control account tests the existence and valuation assertions.

Question 20

Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely

Accepted Answer

Since internal control is weak, positive confirmation requests are the most appropriate method for Cooper to use to obtain reliable evidence about the existence of the receivable balances. Positive confirmation requests require the person or organization being audited to respond directly back to the auditor and confirm or deny the details of the balances. This method provides the highest level of assurance that the balances exist as stated. Sending negative confirmation requests also provides evidence, but the risk of not receiving a response from the person or organization being audited is greater. Examining evidence of subsequent cash receipts and inspecting internal records are valid methods but do not provide as much assurance as the use of confirmation requests.

Quiz 10: Auditing the Revenue Process