Question 1

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 2

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

If slow collection of accounts receivable is identified as a result of a tight money environment, the CPA would need to expand tests regarding the collectability of receivables. This would allow the CPA to determine whether the increase in accounts receivable is due to a liquidity issue or a credit quality issue. Expanding tests may include reviewing aging schedules, contacting customers directly, and analyzing payment terms. The other options (increasing the balance in the allowance for bad debts account, reviewing the going concern ramifications, and requiring the entity to tighten its credit policy) would not directly address the issue of slow collection of accounts receivable caused by a tight money environment.

Question 3

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 4

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 were recorded in the appropriate accounting records, thus providing evidence of completeness. Testing authorized customer orders and proper credit approval are tests of controls for the transaction assertion of accuracy, and examining reconciliation of subsidiary ledger to general ledger control account is a test of controls for the transaction assertion of posting and summarization.

Question 5

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

Accepted Answer

The auditor would likely randomly select a representative sample of accounts for confirmation in order to obtain a reasonable assurance that there are no material misstatements in the accounts receivable balance. This approach would allow the auditor to obtain sufficient evidence without incurring excessive time and cost.

Question 6

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 assessed as low, it indicates that the auditor believes the internal controls are effective. If the auditor has already gathered evidence supporting cash receipts and accounts receivable, it suggests that the sales transactions are likely to be valid and properly recorded, reducing the need for extensive substantive testing.

Question 7

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 8

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, sending positive confirmation requests to the residents would provide the most reliable evidence of the existence of the accounts receivable balances as it requires a response from the customer. Examining evidence of subsequent cash receipts may only provide evidence of past payments and not the existence of current balances. Inspecting internal records may not provide reliable evidence as there may be errors or omissions in the records. Sending negative confirmation requests is not appropriate as it does not provide reliable evidence of the existence of the balances.

Question 9

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 than the completeness assertion because entities are more likely to overstate than understate revenues. This means that auditors are more concerned with making sure that the recorded revenues actually occurred, rather than making sure that all revenues were recorded. Overstating revenues can lead to financial statement fraud, and occurrence assertion helps to prevent this.

Question 10

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 11

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 12

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, as the increase in gross profit could be due to the inclusion of non-existent sales in the numerator of the ratio.

Question 13

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 is responsible for creating invoices and ensuring that they are accurate and match with the sales orders and shipping documents. By performing the activities of matching shipping documents with sales orders and preparing daily sales summaries, the billing department can ensure that invoices are correct and complete, and that all sales are properly recorded. This helps to reduce errors and prevent fraud, and supports good internal control.

Question 14

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 15

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

Accepted Answer

Sales cutoff refers to the timing of when sales are recorded in the financial statements. Therefore, an auditor's review of the entity's sales cutoff may detect overstated sales for the year. Option A refers to the entity's return policy, Option B refers to sales discounts which are typically recorded at the time of sale, and Option C refers to lapping, which is a fraudulent practice where one receivable is offset with receipts from another receivable.

Question 16

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 17

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

By comparing daily sales summaries to daily postings in the accounts receivable ledger, any discrepancies can be identified and corrected in a timely manner, ensuring that all billed sales are correctly posted to the accounts receivable ledger. Choices B, C, and D do not directly address the accuracy of postings to the accounts receivable ledger.

Question 18

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 19

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

Accepted Answer

Proper cutoff is not an issue related to the valuation of accounts receivable.

Question 20

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.

Quiz 10: Auditing the Revenue Process