Question 1

Which of the following is a formal document that conveys responsibility for shipped merchandise to the shipper?

Accepted Answer

A bill of lading is a formal document that serves as a contract between the shipper and carrier, confirming receipt and delivery of goods, and conveying responsibility for shipped merchandise to the carrier. The other options listed are not specifically related to shipping and delivery of goods.

Question 2

Customer complaints noted in returned accounts receivable confirmations may be an indicator of fraud.

Accepted Answer

If customers are complaining about incorrect or unauthorized charges noted in returned accounts receivable confirmations, it could indicate that there is fraudulent activity happening within the company's financial records. Such complaints should be investigated thoroughly to ensure that fraudulent activities are detected and prevented.

Question 3

Which of the following processes are not included in the revenue cycle?

Accepted Answer

Sending payments to suppliers is a part of the expenditure cycle, not the revenue cycle. The revenue cycle includes activities such as obtaining credit approval, preparing and sending statements to customers, and shipping products to customers, all of which contribute to generating revenue for the business.

Question 4

An aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful accounts.

Accepted Answer

An aging of accounts receivable helps in analyzing the length of time that accounts have been outstanding and identifies accounts that are overdue. It helps in estimating the amount of potential bad debts and adjusting the allowance for doubtful accounts accordingly. Therefore, an aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful accounts.

Question 5

Negative confirmations are considered to be more persuasive than positive confirmations.

Accepted Answer

This statement is false. Positive confirmations are generally more persuasive than negative confirmations. This is because positive confirmations emphasize the desired behavior or outcome, while negative confirmations focus on what to avoid. Positive statements are more motivating and encourage action, while negative statements can create a defensive response.

Question 6

Exceptions found in the confirmation of accounts receivable balances need not be projected as errors to the population as they are typically isolated errors.

Accepted Answer

Exceptions found in the confirmation of accounts receivable balances should be considered for projection to the population because they may indicate systematic errors or fraud, not just isolated incidents.

Question 7

An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion.

Accepted Answer

The presentation and disclosure assertion ensures that related party transactions are appropriately disclosed in the financial statements, allowing users to assess the impact on the company's financial position and performance. Therefore, the auditor's focus on related party sales and receivables is primarily related to this assertion.

Question 8

Which of the following is the fifth step in the five-step revenue recognition process prescribed by ASC 606?

Accepted Answer

The fifth step in the five-step revenue recognition process prescribed by ASC 606 is the satisfaction of a performance obligation, which means that the customer has received and accepted the goods or services provided by the company. The other options listed are steps 1 (B) and 3 (C) in the process, but step 5 specifically relates to the fulfillment of the company's obligations to the customer.

Question 9

While electronic confirmations of receivables are more efficient,they are seldom used because they are not considered as reliable as paper confirmations.

Accepted Answer

Electronic confirmations of receivables are widely used because they are considered efficient, fast, and reliable due to advancements in security and verification technologies. They have become a common practice in modern auditing and financial transactions.

Question 10

Testing cutoff involves procedures applied to sales transactions selected from those recorded immediately prior to period end and immediately following period end.

Accepted Answer

Testing cutoff typically involves selecting transactions from immediately before and after the period end to ensure that sales are properly recorded in the correct period. This helps to prevent sales from being recorded in the wrong period, which can distort financial statements and mislead investors.

Question 11

An example of a test for completeness in the revenue cycle includes the sampling of shipping documents and tracing them to the sales journal and general ledger.

Accepted Answer

This statement is true. Sampling shipping documents and tracing them to the sales journal and general ledger is a way to test completeness in the revenue cycle since it ensures that all sales transactions have been recorded and accounted for in the appropriate financial records.

Question 12

A timing difference type of exception in the confirmation process may arise when goods are in transit at the confirmation date.

Accepted Answer

This is true because a timing difference may occur when the goods are still in transit at the time of confirmation, and thus may not have been received and counted by the buyer or seller yet. This timing difference can lead to discrepancies between the physical count and the accounting records, which may require adjustment.

Question 13

Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales.

Accepted Answer

Estimation of the allowance for doubtful accounts involves a complex decision-making process that takes into account various factors such as historical bad debt experience, economic conditions, customer creditworthiness, and specific industry factors. It is not based on a simple percentage of sales calculation.

Question 14

Confirmation of accounts receivable is generally not effective in addressing the existence of fictitious sales recorded by the client.

Accepted Answer

Confirmation of accounts receivable is an audit procedure specifically designed to verify the existence and accuracy of accounts receivable balances, thus it is effective in identifying fictitious sales recorded by the client.

Question 15

The audit team typically reviews journal entries in the receivables ledger for unusual entries that may be indicators of fraudulent activity.

Accepted Answer

The review of journal entries in the receivables ledger is a common practice in auditing to detect potential fraudulent activity. The audit team looks for unusual entries that do not have adequate supporting documentation or are out of the ordinary. Such entries may be an indication of fraudulent activity, and the audit team may recommend further investigation or examination of the accounts.

Question 16

Negative confirmations are more expensive to administer than positive confirmations because of the added costs of investigating non-responses.

Accepted Answer

Negative confirmations are generally considered less expensive because they do not require follow-up on non-responses, unlike positive confirmations where non-responses typically necessitate further action.

Question 17

Pre-numbered shipping and billing documents are examples of controls related to the completeness of sales transactions.

Accepted Answer

Pre-numbered shipping and billing documents can help ensure that every sale transaction is recorded and processed, therefore contributing to the completeness of sales transactions.

Question 18

Valid evidence obtained in an audit for testing the cutoff of sales includes receiving reports for returned merchandise.

Accepted Answer

Reports for returned merchandise can provide evidence of sales that occurred at the end of the period and should be included in the cutoff.

Question 19

An auditor might test the reasonableness of the client's estimate of the allowance for doubtful accounts by developing an independent estimate of the allowance for doubtful accounts that is compared to the recorded allowance.

Accepted Answer

This statement is true. An auditor may develop an independent estimate of the allowance for doubtful accounts to test the reasonableness of the client's estimate, which can then be compared to the recorded allowance to determine if any adjustments are necessary.

Question 20

Credit approval policies are implemented by organizations primarily to accomplish which of the following objectives?

Accepted Answer

Credit approval policies are implemented by organizations to minimize credit losses. These policies help in assessing the creditworthiness of the customer and deciding whether to extend credit or not. By doing so, the organization can avoid extending credit to high-risk customers who have a higher probability of defaulting on their payments, thus minimizing credit losses. Additionally, credit approval policies also help in defining credit terms that customers must adhere to, reducing the risk of default and maximizing the collection of accounts receivable.

Quiz 9: Auditing the Revenue Cycle