Question 1

Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to:
A) Increase the balance in the allowance for bad debts accounts.
B) Review the going concern ramifications.
C) Review the credit and collection policy.
D) Expand tests of collectibility.

Accepted Answer

The answer of Once a CPA has determined that accounts...

Question 2

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to:
A) Consider internal control over credit sales.
B) Test the accuracy of recorded charge sales.
C) Estimate credit losses.
D) Verify the validity of the recorded receivables.

Accepted Answer

The auditors can use the aged trial balance of accounts receivable to estimate credit losses. By analyzing the different aging categories (e.g. current, 30-60 days past due, 61-90 days past due, etc.), the auditors can make a reasonable estimate of the portion of the receivables that will not be collected. This estimate can be used to adjust the recorded amount of accounts receivable and the related bad debt expense. It is not the best tool to consider internal control over credit sales, test the accuracy of recorded charge sales, or verify the validity of the recorded receivables (these tasks would require other procedures and documents).

Question 3

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?
A) A substantial number of accounts are in disputes.
B) The combination of inherent risk and control risk is high.
C) Client records include a large number of relatively small balances.
D) The auditors believe that recipients of the requests are unlikely to give them consideration.

Accepted Answer

The negative form of the accounts receivable confirmation request might be useful when the client records include a large number of relatively small balances. This is because sending a positive confirmation request for each of those small balances would be time-consuming and expensive. Instead, the auditor can send a negative confirmation request asking the recipient to respond only if they disagree with the balance stated. This reduces the number of responses required, hence reducing the workload and cost.

Question 4

The individual looking for guidance on revenue recognition is most likely to appropriately review:
A) APB 99.
B) SAB 104.
C) ASR 44.
D) B1 Document.

Accepted Answer

SAB 104 provides guidance on revenue recognition and is relevant to publicly traded companies. APB 99 is no longer applicable, ASR 44 is specific to real estate transactions, and "B1 Document" is not a recognized accounting standard or guidance.

Question 5

A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a:
A) Test of a control.
B) Substantive test.
C) Cutoff test.
D) Statistical test.

Accepted Answer

This is an example of a test of a control because the CPA is verifying whether the control procedure of verifying the quantitative data with initials is being followed correctly.

Question 6

The confirmation process may be performed using a(n): $$\begin{array} { | l c | c | } 
\hline &{ \text { Paper form } } & \text { Electronic form } \
\hline \text { A. } & \text { Yes } & \text { Yes } \
\hline \text { B. } & \text { Yes } & \text { No } \
\hline \text { C. } & \text { No } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { No } \
\hline
\end{array}$$
A) Option A
B) Option B
C) Option C
D) Option D

Accepted Answer

The confirmation process may be performed using either a paper form or an electronic form.

Question 7

Which of the following is the best argument against the use of negative accounts receivable confirmation requests?
A) The cost-per-response is excessively high.
B) There is no way of knowing if the intended recipients received them.
C) Recipients are likely to feel that in reality the confirmation is a subtle request for payment.
D) The inference drawn from receiving no reply may not be correct.

Accepted Answer

Negative accounts receivable confirmation requests assume that no response is an indication of agreement with the stated account balance. However, the lack of reply may not accurately reflect the recipient's agreement due to various reasons such as oversight, misplacement, or misunderstanding of the request. This makes the inference drawn from no reply potentially incorrect, undermining the reliability of this audit procedure.

Question 8

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:
A) Obsolete inventory has not yet been reduced to fair market value.
B) There was an improper cutoff of sales at the end of the year.
C) An unusually large receivable was written off near the end of the year.
D) The aging of accounts receivable was improperly performed in both years.

Accepted Answer

A decrease in accounts receivable turnover could indicate a delay in collecting from customers, which could be caused by an improper cutoff of sales at the end of the year. The other options listed do not directly relate to accounts receivable turnover.

Question 9

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?
A) Preparation of monthly statements to customers and maintenance of the accounts payable subsidiary ledger.
B) Posting to the general ledger and approval of additions and terminations relating to the payroll.
C) Custody of unmailed signed checks and maintenance of expense subsidiary ledger.
D) Collection of receipts on account and maintaining accounts receivable records.

Accepted Answer

Collection of receipts on account and maintaining accounts receivable records are duties that should be separated to prevent an individual from being able to both handle cash receipts and adjust customer balances, which could allow for the misappropriation of funds without detection.

Question 10

Which of the following is not a primary objective of the auditors in the examination of accounts receivable?
A) Determine the approximate realizable value.
B) Consider the adequacy of internal control.
C) Establish the existence of receivables.
D) Determine the expected day of collection of each of the receivables.

Accepted Answer

While auditors may assess the timeline for collection of receivables, determining the exact day of collection is not a primary objective. The other objectives listed – establishing the existence of receivables, considering internal controls, and determining the realizable value of the receivables – are all primary objectives in the audit of accounts receivable.

Question 11

Tracing copies of sales invoices to shipping documents will provide evidence that all:
A) Shipments to customers were recorded as receivables.
B) Billed sales were shipped.
C) Debits to the subsidiary accounts receivable ledger are for sales shipped.
D) Shipments to customers were billed.

Accepted Answer

Tracing copies of sales invoices to shipping documents will provide evidence that billed sales were shipped. It confirms that the goods or products have been delivered to the customer which is necessary for recognizing revenue. This is an important control procedure to ensure that no sales are recorded that have not actually been shipped.

Question 12

Which of the following revenue related transactions is not linked to the accounts indicated?
A) Recognize revenues too early-accounts receivable and revenue.
B) Understate allowance for doubtful accounts-bad debt expense, allowance for doubtful accounts.
C) Don't write off uncollectible receivables-sales returns, sales discounts.
D) Don't record discounts given to customers-cash, sales discounts, accounts receivable.

Accepted Answer

Writing off uncollectible receivables should impact the allowance for doubtful accounts and bad debt expense, not sales returns and sales discounts.

Question 13

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?
A) The positive form for small balances, and the negative form for large balances.
B) The positive form used for large balances and the negative form for the small balances.
C) The positive form used for trade receivables and the negative form for other receivables.
D) The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

Accepted Answer

Auditors typically use the positive form of confirmation requests for large balances since they are material to the financial statements, while the negative form is used for small balances since the cost and time to send confirmations may exceed the benefits.

Question 14

Which of the following is not one of the criteria for revenue recognition?
A) Collectibility is certain.
B) Delivery has occurred or services have been rendered.
C) Evidence of an arrangement exists and is persuasive.
D) A fixed or determinable price to buyer exists.

Accepted Answer

Collectibility being certain is not one of the criteria for revenue recognition, although it is a factor that affects the estimation of revenue and bad debt expenses. The other three criteria (delivery or service, evidence of an arrangement, fixed or determinable price) are necessary for revenue recognition.

Question 15

Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except:
A) It understates liabilities.
B) It overstates revenues.
C) It overstates net income.
D) It overstates assets.

Accepted Answer

Recognizing a loan as revenue does not affect assets; it affects liabilities and income statement accounts.

Question 16

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if:
A) Subsequent collections are to be reviewed.
B) Internal control over receivables is good.
C) Negative confirmation requests are to be used.
D) There is a simultaneous examination of cash and accounts receivable.

Accepted Answer

The answer of When scheduling the audit work to be...

Question 17

It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be:
A) Examining subsequent receipts of year-end accounts receivable.
B) Reviewing accounts receivable aging schedules prepared at the balance sheet date and at a subsequent date.
C) Requesting that management increase the allowance for uncollectible accounts by an amount equal to some percentage of the balance in those accounts that cannot be confirmed.
D) Applying analytical procedures to accounts receivable and sales on a year-to-year basis.

Accepted Answer

The answer of It is sometimes impossible for the auditors...

Question 18

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:
A) No reply to a positive confirmation request is received.
B) No reply to a negative confirmation request is received.
C) Collectibility of the receivables is in doubt.
D) Pledging of the receivables is probable.

Accepted Answer

When no reply is received to a positive confirmation request, auditors perform alternative procedures to verify the existence of accounts receivable, as it indicates a lack of confirmation from the debtor.

Question 19

When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is:
A) Low, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.
B) High, and the individuals receiving the confirmation requests are likely to give them adequate consideration.
C) High, and the individuals receiving the confirmation requests are unlikely to give them adequate consideration.
D) Low, and the individuals receiving the confirmation requests are likely to give them adequate consideration.

Accepted Answer

The answer of When there are a large number of...

Question 20

In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely?
A) Fictitious revenues.
B) Timing differences.
C) Improper asset valuations.
D) Improper disclosures.

Accepted Answer

Fictitious revenues are likely involved if a significant increase in receivables is observed, especially if a large portion of these receivables were booked just before the end of the quarter. This could indicate that sales were recorded without actual delivery of goods or services, inflating revenue figures.

Quiz 11: Accounts Receivable, Notes Receivable, and Revenue

Once a CPA has determined that accounts receivable have increased due to slow collections in a "tight money" environment, the CPA would be likely to:

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to:

The auditors obtain audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?

The individual looking for guidance on revenue recognition is most likely to appropriately review:

A CPA examines a sample of copies of December and January sales invoices for the initials of the person who verified the quantitative data. This is an example of a:

Which of the following is the best argument against the use of negative accounts receivable confirmation requests?

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

Which of the following sets of duties would ordinarily be considered basically incompatible in terms of good internal control?

Which of the following is not a primary objective of the auditors in the examination of accounts receivable?

Tracing copies of sales invoices to shipping documents will provide evidence that all:

Which of the following revenue related transactions is not linked to the accounts indicated?

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?

Which of the following is not one of the criteria for revenue recognition?

Recognizing a loan received as revenue instead of as a liability has a positive effect on the reported financial statements for all of the following except:

When scheduling the audit work to be performed on an engagement, the auditors should consider confirming accounts receivable balances at an interim date if:

It is sometimes impossible for the auditors to use normal accounts receivable confirmation procedures. In such situations, the best alternative procedure the auditors might resort to would be:

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:

When there are a large number of relatively small account receivable balances, negative confirmation requests may be appropriate if the combination of inherent risk and control risk is: