Question 1

Analytical procedures performed during an audit indicate that accounts receivable doubled since the end of the prior year. However, the allowance for doubtful accounts as a percentage of accounts receivable remained about the same. Which of the following client explanations would satisfy the auditor?
A) A greater percentage of accounts receivable are listed in the "more than 120 days overdue" category than in the prior year.
B) Internal control activities over the recording of cash receipts have been improved since the end of the prior year.
C) The client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet.
D) The client tightened its credit policy during the current year and sold considerably less merchandise to customers with poor credit ratings.

Accepted Answer

Explanation: If the client opened a second retail outlet during the current year and its credit sales approximately equaled the older outlet, this would explain why accounts receivable doubled. The allowance for doubtful accounts remaining about the same percentage of accounts receivable suggests that the credit quality of the new sales was similar to the existing sales, making this explanation satisfactory to the auditor.

Question 2

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that:
A) The cash receipts journal was closed before year-end.
B) The cash receipts journal was held open after year-end.
C) There are many unrecorded liabilities.
D) The sales journal was held open after year-end.

Accepted Answer

If the cash receipts journal was held open after year-end, payments received from customers after the year-end might not have been recorded in the financial statements of the current year. This would lead to the financial statements showing a higher receivable balance than what the customers believe they owe, as they would have already made payments that were not accounted for.

Question 3

Which of the following would indicate the need to use positive accounts receivable confirmation requests?
A) A large population consisting of small balances.
B) Good internal control over accounts receivable.
C) Most accounts are with large reputable companies.
D) A large number of accounts receivable are in dispute.

Accepted Answer

Positive accounts receivable confirmation requests are typically used when there are a large number of accounts receivable in dispute. This is because positive confirmation requests require the customer to respond directly to the auditor, providing evidence that they agree with the balance in question. This can help to resolve any disputes and provide more reliable evidence for the auditor. Options A, B, and C are not reasons to use positive confirmation requests.

Question 4

Which of the following is not true about the confirmation of accounts receivable?
A) Confirmation requests should bear the auditors' return address.
B) Confirmation requests should be signed by the auditors.
C) Confirmation requests should be mailed directly by the auditors.
D) Confirmation requests should include a return envelope addressed to the office of the auditors.

Accepted Answer

Confirmation requests are typically signed by the client's management, not the auditors. The auditors are responsible for selecting which accounts to confirm, preparing the confirmation requests, and mailing them, but the requests are sent on behalf of the client, hence they should be signed by the client.

Question 5

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?
A) Merchandise received is not promptly reconciled to the outstanding purchase order file.
B) Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.
C) The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
D) Fictitious transactions are recorded that cause an understatement of revenue and overstatement of receivables.

Accepted Answer

The lack of effective internal controls in the revenue cycle could allow personnel who handle cash receipts to also write off receivables, creating an opportunity for them to misappropriate cash without detection. This is because the same individual would have control over both recording transactions and handling assets, violating the principle of segregation of duties.

Question 6

Tracing recorded sales transactions to the bills of lading provides evidence about the:
A) Completeness of sales transactions.
B) Collectibility of sales transactions.
C) Occurrence of sales transactions.
D) Billing of all sales transactions.

Accepted Answer

Tracing recorded sales transactions to bills of lading provides evidence that the sales transactions actually occurred, indicating the occurrence of sales transactions. It does not necessarily provide evidence about completeness or collectibility, nor does it confirm that all sales transactions were billed.

Question 7

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?
A) Accounts receivable divided by Cost of goods sold.
B) Aging of accounts receivable.
C) Cash Sales divided by Accounts receivable.
D) Year 2 accounts receivable compared to year one accounts receivable.

Accepted Answer

The aging of accounts receivable is a common method used to estimate the amount of accounts receivable that may not be collectible. This method involves segregating accounts receivable by the length of time they have been outstanding and applying historical collection patterns to estimate the amount that may not be collected. The other options listed do not provide a direct indication of the likelihood of accounts not being collected.

Question 8

After the CPAs have selected particular accounts receivable for confirmation:
A) As a control measure, the CPAs should carefully list the audited values of all of those accounts before turning the letters over to the client to type and mail.
B) It is important that every account selected that has a material balance ultimately be verified by confirmation or the application of alternative procedures; immaterial balances never require any follow-up through alternative procedures.
C) All requests for confirmation should be mailed in envelopes bearing the CPA firm's return address and should include a return envelope addressed to the CPA firm.
D) All differences between confirmation replies and book values should be reconciled by the CPAs, rather than the client.

Accepted Answer

Including the CPA firm's return address and a return envelope addressed to the CPA firm ensures that the confirmation requests are more likely to be returned directly to the CPAs, rather than being intercepted or mishandled by the client or by third parties. This helps to ensure the reliability and independence of the confirmation process. Choices A, B, and D are incorrect because they do not accurately reflect best practices for handling confirmation requests or addressing discrepancies. Specifically, it is not necessary to list audited values of accounts or reconcile all differences between confirmation replies and book values. Additionally, immaterial balances may still require follow-up through alternative procedures if there is reason to suspect errors or irregularities.

Question 9

Which of the following is not true about the auditors' verification of notes receivable?
A) The interest revenue on notes receivable is usually audited by independent computation.
B) Inspecting the notes is sufficient evidence of existence of the notes.
C) The auditors may evaluate the collectibility of notes by inspecting credit files.
D) Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.

Accepted Answer

Inspecting the notes alone is not sufficient evidence of existence of the notes. The auditors should also obtain confirmations from the holders of the notes or from the maker of the note, and perform tests for the completeness of the recorded notes.

Question 10

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?
A) Reviewing an aging of accounts receivable.
B) Examination of cash receipts subsequent to the balance sheet date.
C) Confirming current (0-30 day) year-end accounts receivable.
D) Reviewing credit files for selected account.

Accepted Answer

Confirming current (0-30 day) year-end accounts receivable generally provides the least evidence regarding the valuation of the allowance for doubtful accounts because these accounts are typically the most current and least likely to be uncollectible. The focus on doubtful accounts is more relevant for older receivables, which are more likely to be uncollectible.

Question 11

The confirmation of accounts receivable is most closely associated with:
A) Business risk.
B) Detection risk.
C) Inherent risk.
D) Relative risk.

Accepted Answer

The confirmation of accounts receivable is primarily used to obtain evidence about the existence and completeness of these assets. This relates to detection risk, which is the risk that the auditor will fail to detect a material misstatement in the financial statements. Confirmation does not specifically address business risk (the risk that the company's operations or environment will negatively impact its financial performance), inherent risk (the risk of material misstatement in a financial statement line item before considering the effectiveness of internal controls), or relative risk (a term not typically used in auditing).

Question 12

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by:
A) Tracing sales invoices to shipping documents to tests the completeness of reported sales.
B) Tracing shipping documents to sales invoices to test the occurrence of reported sales.
C) Tracing sales invoices to shipping documents to test the occurrence of reported sales.
D) Tracing sales invoices to shipping documents to test the completeness of recorded accounts receivable.

Accepted Answer

The answer of An audit basically consists of having the...

Question 13

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:
A) The sales journal.
B) The billing clerk's file of sales orders.
C) Duplicate copies of sales invoices.
D) The shipping clerk's file of duplicate copies of bills of lading.

Accepted Answer

The shipping clerk's file of duplicate copies of bills of lading would be the most appropriate source to verify that all sales shipped to customers have been recorded, as bills of lading provide evidence that goods have been shipped. The other options, such as the sales journal or billing clerk's file of sales orders, may not necessarily provide evidence of shipment and could potentially include transactions that were not actually shipped to customers.

Question 14

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:
A) Collection of receivables.
B) Purchase of merchandise inventory.
C) Payment of accounts payable.
D) Sale of long-term debt.

Accepted Answer

The transaction cycle approach to assessing control risk involves examining the various activities within a specific cycle to identify and assess risks. When testing control activities related to transactions involving the sale of goods to customers, the collection of receivables is directly related because it is part of the revenue cycle. The collection process is a key control area to ensure that sales are accurately recorded and that receivables are properly managed and collected. The other options (B, C, D) relate to different transaction cycles (purchases and payments cycle, financing cycle) that are not directly involved in the sale of goods to customers.

Question 15

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?
A) Footing the sales journal.
B) Confirming accounts receivable.
C) Tracing the total sales in the sales journal to the general ledger.
D) Observation of the physical inventory count at year-end.

Accepted Answer

Confirming accounts receivable would reveal that the same customer has been credited twice for the same sale, indicating a potential error in recording transactions. Footing the sales journal or tracing the total sales in the sales journal to the general ledger may not detect the error as it is limited to identifying mathematical errors or omissions, and not duplications. Observation of the physical inventory count is also irrelevant in this scenario.

Question 16

Which of the following is consistent with effective internal control over sales transactions?
A) The accounting department prepares a shipping report authorizing the shipment of goods.
B) The accounting department accounts for all receiving reports.
C) The billing department accounts for all shipping documents.
D) The accounts payable department annually approves the extension of credit to customers.

Accepted Answer

The billing department accounting for all shipping documents ensures that sales transactions are properly recorded and billed, aligning with effective internal control principles by ensuring that revenue is recognized when goods are shipped, and documentation is complete.

Question 17

Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts?
A) Investigate confirmation exceptions for indication of amounts in dispute.
B) Review accounts which have been written off as uncollectible prior to year-end.
C) Investigate credit ratings for large accounts receivable.
D) Discuss with the credit manager the current status of doubtful accounts.

Accepted Answer

Reviewing accounts which have already been written off as uncollectible prior to year-end is least likely to provide auditors with information for assessing the adequacy of management's accounting estimate of the allowance for doubtful accounts. This is because once an account has been written off, it no longer affects the balance of the allowance account, which is based on estimates of accounts that are still outstanding. The other options, such as investigating confirmation exceptions, reviewing credit ratings, and discussing with the credit manager, are all procedures that could provide auditors with useful information on the adequacy of the allowance estimate.

Question 18

Which of the following manipulations would understate receivables on the financial statements?
A) Understatement of cash sales.
B) Closing the sales journal prior to year-end.
C) Closing the cash receipts journal prior to year-end.
D) Underestimating the allowance for doubtful accounts.

Accepted Answer

The answer of Which of the following manipulations would understate...

Question 19

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:
A) Trace a sample of the bills of lading to sales invoices.
B) Confirm a sample of accounts payable.
C) Review the aging of accounts receivable.
D) Trace a sample of recorded sales to shipping documents.

Accepted Answer

The answer of To obtain the best evidence regarding the...

Question 20

For effective internal control, the billing function should not be performed by the:
A) Sales department.
B) Accounting department.
C) Finance department.
D) Information Processing department.

Accepted Answer

The billing function involves creating and sending invoices to customers, which directly relates to revenue recognition and accounts receivable. When performed by the sales department, there is a risk of collusion or conflict of interest as sales personnel may be incentivized to inflate sales figures to meet targets or earn commissions. Separating the billing function from sales and assigning it to an independent department such as accounting or finance helps to ensure proper checks and balances, accuracy of billing information, and prevention of fraud or errors. The information processing department may handle the technical aspects of generating invoices, but should not have responsibility for the actual billing process.

Quiz 11: Accounts Receivable, Notes Receivable, and Revenue

You were surprised to note that approximately 95% of returned positive accounts receivable confirmation requests indicated that the customers thought that they owed a larger balance than the amount that had been printed by your client on the confirmation. This might be explained by the fact that:

Which of the following would indicate the need to use positive accounts receivable confirmation requests?

Which of the following is not true about the confirmation of accounts receivable?

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal controls in the revenue cycle?

Tracing recorded sales transactions to the bills of lading provides evidence about the:

Which of the following is most likely to be used in determining a proper amount to be included in the allowance for doubtful accounts?

After the CPAs have selected particular accounts receivable for confirmation:

Which of the following is not true about the auditors' verification of notes receivable?

Which of the following generally provides the least evidence regarding the valuation of the allowance for doubtful accounts?

The confirmation of accounts receivable is most closely associated with:

An audit basically consists of having the auditor form an opinion regarding management's financial statement assertions. The auditor therefore develops general and specific procedures to apply to the accounts and transactions. In a particular case, s/he might do this by:

To verify that all sales that have been shipped to customers have been recorded, a test of transactions should be completed on a representative sample drawn from:

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Which procedure would be of most assistance to an auditor discovering a large credit sale that has erroneously been recorded twice?

Which of the following is consistent with effective internal control over sales transactions?

Which of the following procedures is least likely to help auditors to assess the adequacy of management's accounting estimate of the allowance for doubtful accounts?

Which of the following manipulations would understate receivables on the financial statements?

To obtain the best evidence regarding the completeness of recorded accounts receivable, the auditors:

For effective internal control, the billing function should not be performed by the: