Question 1

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 of which of the following?
A) One of the cashiers has been covering a personal embezzlement by lapping.
B) One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C) One of the EDP control clerks has been removing all sales invoices applicable to his account from the data file.
D) The credit manager has misappropriated remittances from customers whose accounts have been written-off.

Accepted Answer

The confirmation of accounts receivable can reveal discrepancies such as lapping, where a cashier covers up embezzlement by using subsequent receipts to cover previous thefts.

Question 2

An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertion concerning sales transactions and the auditor has already gathered evidence supporting
A) Opening and closing inventory balances.
B) Cash receipts and accounts receivable.
C) Shipping and receiving activities.
D) Cutoffs of sales and purchases.

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 3

Which of the following control activities may prevent the failure to bill customers for some shipments?
A) Each shipment should be supported by a prenumbered sales invoice that is accounted for.
B) Each sales order should be approved by authorized personnel.
C) Sales journal entries should be reconciled to daily sales summaries.
D) Each sales invoice should be supported by a shipping document.

Accepted Answer

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

Question 4

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
A) Meter department records to the billing (sales) register.
B) Billing (sales) register to the meter department records.
C) Accounts receivable ledger to the billing (sales) register.
D) Billing (sales) register to the accounts receivable ledger.

Accepted Answer

The answer of A CPA auditing an electric utility wishes...

Question 5

Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because
A) Clients are more likely to overstate than understate revenues.
B) Clients are more likely to understate than overstate revenues.
C) It is difficult to determine when services have been performed.
D) The allowance for doubtful accounts often is understated.

Accepted Answer

Auditors are more concerned with the occurrence assertion for revenues because clients are more likely to overstate than understate revenues. This is because revenue is a key metric that is closely watched by investors, analysts, and other stakeholders, and companies may feel pressure to report high revenue numbers to meet expectations or demonstrate growth. Therefore, auditors need to be particularly diligent in verifying that the reported revenue is accurate and has actually been earned by the company.

Question 6

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 of which of the following?
A) An October invoice was improperly computed.
B) An October check from a customer was posted in error to the account of another customer with a similar name.
C) An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
D) An account balance is past due and should be written-off.

Accepted Answer

Reconciling the subsidiary ledger to the general ledger control account helps identify discrepancies in balances, such as an improperly carried forward opening balance.

Question 7

Which of the following might be detected by an auditor's review of the client's sales cutoff?
A) Excessive goods returned for credit.
B) Unrecorded sales discounts.
C) Lapping of year-end accounts receivable.
D) Overstated sales for the year.

Accepted Answer

Sales cutoff procedures are designed to ensure that all sales and related revenue are recorded in the appropriate period. Therefore, an auditor's review of the client's sales cutoff could detect overstated sales for the year, indicating that some sales were recorded in the wrong period or that the cutoff date was incorrect. Excessive goods returned for credit could be detected by reviewing returns and allowances account, but this would not necessarily relate to sales cutoff. Unrecorded sales discounts could be picked up by examining invoices or sales journals, but again, this may not specifically relate to sales cutoff. Lapping of year-end accounts receivable would affect accounts receivable, not sales cutoff.

Question 8

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
A) Authorization and accuracy.
B) Completeness.
C) Cutoff.
D) Occurrence.

Accepted Answer

The answer of An auditor selects a sample from the...

Question 9

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
A) Send positive confirmation requests.
B) Send negative confirmation requests.
C) Examine evidence of subsequent cash receipts.
D) Inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

Accepted Answer

Sending positive confirmation requests would be the best way for Cooper to determine the existence of the accounts receivable balances. This is because internal control is weak, meaning there may be a higher risk of errors or fraud. Positive confirmation requests require the recipient to respond to confirm the accuracy of the balance, reducing the risk of misstatement. Examining evidence of subsequent cash receipts or inspecting internal records may not be sufficient to confirm the existence of the balances, as there may be instances where residents do not pay their taxes or records have been misstated. Negative confirmation requests would not be appropriate for this scenario as they only require a response if the balance is incorrect, which may not be reliable if internal control is weak.

Question 10

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?
A) Daily sales summaries are compared to daily postings to the accounts receivable ledger.
B) Each sales invoice is supported by a prenumbered shipping document.
C) The accounts receivable ledger is reconciled daily to the control account in the general ledger.
D) Each shipment on credit is supported by a prenumbered sales invoice.

Accepted Answer

By comparing daily sales summaries to daily postings to the accounts receivable ledger, any discrepancies can be identified and resolved in a timely manner. This ensures that all billed sales are correctly posted to the accounts receivable ledger. The other options focus on ensuring that all sales are supported by proper documentation, but do not necessarily guarantee accurate posting to the accounts receivable ledger.

Question 11

Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?
A) Compare shipping documents with sales records.
B) Apply gross profit rates to inventory disposed of during the period.
C) Trace payments received subsequent to the balance sheet date.
D) Send accounts receivable confirmation requests.

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 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
A) Customer order file.
B) Bills of lading file.
C) Open invoice file.
D) Sales invoice file.

Accepted Answer

The answer of To determine whether the system of internal...

Question 13

Which of the following is not an issue related to the valuation of accounts receivable?
A) The valuation of revenue that makes up the detail of accounts receivable.
B) A proper allowance for doubtful accounts.
C) The net realizable value of accounts receivable.
D) Proper cut-off.

Accepted Answer

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

Question 14

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
A) Increase the balance in the allowance for bad debts account.
B) Review the going concern ramifications.
C) Require the client to tighten their credit policy.
D) Expand tests regarding the collectability of receivables.

Accepted Answer

If accounts receivable has increased because of slow collection in a "tight money" environment, it indicates the possibility that some of the receivables may not be collected at all. Therefore, to ensure the collectability of such receivables, the CPA would expand the testing regarding the collectability of receivables, which includes confirming with customers and analyzing the aging of receivables, among others. Increasing the balance in the allowance for bad debts account, reviewing the going concern ramifications, and requiring the client to tighten their credit policy are methods to mitigate the risk of bad debts, but they do not address the underlying issue of slow collection.

Question 15

Which of the following is a test of controls for the transaction assertion of completeness for revenue?
A) Test a sample of sales invoices for authorized customer orders.
B) Review sales orders for proper credit approval.
C) Trace shipping documents to sales invoices and the sales journal.
D) Examine reconciliation of subsidiary ledger to general ledger control account.

Accepted Answer

Tracing shipping documents to sales invoices and the sales journal ensures that all sales transactions have been recorded and included in the financial statements, thus testing the completeness assertion. A is a test for the authorization assertion, B is a test for the accuracy assertion, and D is a test for the existence and accuracy assertions.

Question 16

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?
A) Fictitious purchases.
B) Fictitious sales.
C) Selling and general expenses erroneously being recorded as merchandise purchases.
D) Unrecorded sales.

Accepted Answer

An increase in the ratio of gross profit to sales suggests that either the cost of goods sold has decreased or the revenue from sales has increased. If the revenue from sales has increased, but there is no corresponding increase in expenses, it could be due to fictitious sales being recorded.

Question 17

In the confirmation of accounts receivable,the auditor would most likely
A) Randomly select a representative sample of accounts for confirmation.
B) Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.
C) Require confirmation of all receivables from agencies of the federal government.
D) Require that confirmation requests be sent within one month of the fiscal year-end.

Accepted Answer

The auditor would likely randomly select a representative sample of accounts for confirmation, rather than seeking to confirm a specific percentage of the total dollar amount of receivables or requiring confirmation from specific entities. Sending confirmation requests within one month of the fiscal year-end is a good practice, but it is not the most likely priority for the auditor in terms of determining the accuracy of accounts receivable.

Question 18

If the objective of a test of details is to detect the overstatement of sales,the auditor should trace transactions from the
A) Cash receipts journal to the sales journal.
B) Sales journal to the cash receipts journal.
C) Shipping documents to the accounting records.
D) Accounting records to the shipping documents.

Accepted Answer

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

Question 19

To achieve good internal control,which department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries?
A) Billing.
B) Shipping.
C) Credit.
D) Sales Order.

Accepted Answer

The billing department should perform the activities of matching shipping documents with sales orders and preparing daily sales summaries. This is because they are responsible for invoicing customers and ensuring that all sales are recorded accurately. By matching shipping documents with sales orders, they can verify that the correct items were shipped and billed to the customer. Daily sales summaries can help them reconcile their records and identify any discrepancies or errors.

Question 20

Which of the following misstatements is not related to the completeness assertion for revenue?
A) Goods are shipped, but revenue is not recorded.
B) This year's revenue is recorded next year.
C) Next year's revenue is recorded this year.
D) Revenue is not recognized for services that have been performed.

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.

Quiz 10: Auditing the Revenue Process

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 of which of the following?

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

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

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

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

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 of which of the following?

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

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

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

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

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

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

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

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

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?

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

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

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

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