Question 1

Hardman and Jennings,LLP,an audit firm,compares bad debt expense of a client in the current period to bad debt recorded for the past three periods.Hardman and Jennings is performing which type of analysis?
A)trend
B)ratio
C)critical
D)reasonableness

Accepted Answer

Hardman and Jennings, LLP is comparing the bad debt expense of the current period to bad debt recorded for the past three periods, which is a trend analysis. This type of analysis involves examining changes in data over time to identify any patterns or trends that may be significant. Trend analysis can help auditors identify potential areas of risk or inconsistencies that need further investigation.

Question 2

Which of the following provides evidence that the delivery of a product by a company to one of its customers is sufficient for the company to record revenue?
A)A check received from the customer.
B)An agreement to purchase product signed by the customer.
C)A pick ticket in the warehouse.
D)A bill of lading and tracking number with the shipper.

Accepted Answer

A bill of lading and tracking number with the shipper provides evidence that the product has been shipped, indicating that the delivery obligation has been fulfilled, allowing the company to recognize revenue.

Question 3

Which of the following must exist prior to the recognition of revenue by a company from the sale of a product?
A)The cash is realized on the sale of the product.
B)A price is discussed based upon the customer's resale of the product.
C)The customer is given the option to return the product at any time.
D)The product is adequately delivered to the customer.

Accepted Answer

Revenue recognition requires the delivery of the product to the customer. The other options (A, B, and C) do not necessarily need to exist before revenue recognition.

Question 4

Which of the following is the major risk associated with receivables?
A)they may be sold to a bank with recourse.
B)they may be recorded as long-term when in fact they will be realized in the current period.
C)they will not be realized for the entire amount due.
D)they are pledged as collateral as disclosed in the footnotes to financial statements.

Accepted Answer

The major risk associated with receivables is that they may not be realized for the full amount due. This can happen if customers fail to pay their debts or if they default on their payments. This risk is called credit risk or default risk, and it is a significant concern for companies that rely heavily on receivables to fund their operations. Options A, B, and D do not accurately reflect the major risk associated with receivables.

Question 5

The significance of the bill of lading is to provide which of the following?
A)the warehouse personnel with the product that must be shipped to customers.
B)invoices to customers for proper collection.
C)a credit application for customer approval.
D)evidence of title transfer of goods to customers.

Accepted Answer

The bill of lading serves as evidence of title transfer of goods to customers or their agents. It also provides a receipt of the goods shipped and outlines the terms and conditions of the shipment.

Question 6

Much of the understanding of revenue transactions for compliance with GAAP can be performed by which of the following procedures?
A)examining sales contracts and inquiry of management.
B)confirming sales with customers.
C)discussing the transactions with qualified members of the Financial Accounting Standards Board.
D)comparing shipping documents with invoices.

Accepted Answer

Examining sales contracts and inquiry of management would provide insight into the terms and conditions of the revenue transactions. This would allow the auditor to ensure that the transactions are recorded in compliance with GAAP. Confirming sales with customers and comparing shipping documents with invoices can provide additional evidence, but they are not sufficient on their own to verify the accuracy of revenue transactions. Discussing transactions with members of the Financial Accounting Standards Board would not provide practical guidance on specific revenue transactions.

Question 7

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?
A)Electronic authorization prior to posting.
B)Use of sequentially numbered sales documents.
C)Random statements to customers.
D)Review of transactions by upper management or the board.

Accepted Answer

The answer of Which of the following is a proper...

Question 8

The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total.This process is performed for the purpose of
A)drafting financial statements.
B)monitoring revenue transactions.
C)providing management reports to the controller.
D)providing suggestions for operational improvement.

Accepted Answer

The purpose of reviewing electronic exceptions reports for sales transactions over $10,000 is to monitor revenue transactions for any potential errors or fraud. This helps the internal audit department ensure the accuracy and reliability of financial information. None of the other options mentioned relate to this specific purpose.

Question 9

Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing
A)trend analysis.
B)ratio analysis.
C)reasonableness testing.
D)non-statistical sampling.

Accepted Answer

Turnover of receivables is a ratio that is used to test the efficiency of a company's collections of accounts receivable. It is calculated by dividing net credit sales by the average accounts receivable balance over a certain period. This calculation falls under ratio analysis, which is used by auditors to evaluate a company's financial performance and determine potential areas of risk.

Question 10

What evidence is utilized by the auditor for analytical purposes in substantiating the allowance for bad debt estimate?
A)Accounts receivable aging schedule
B)Copies of checks received from customers.
C)Confirmations returned without exception.
D)Stock prices of customer companies.

Accepted Answer

The accounts receivable aging schedule is used to analyze the company's receivables and identify potential bad debt. It helps the auditor to substantiate the allowance for bad debt estimate by identifying the amount and age of outstanding receivables. B is not relevant to the allowance for bad debt estimate, as copies of checks received from customers only confirm the occurrence of transactions, not the collectability. C is relevant but not exclusively used for analytical purposes in substantiating the allowance for bad debt estimate. D is not relevant to the allowance for bad debt estimate, as stock prices of customer companies do not provide information about the collectability of outstanding receivables.

Question 11

Which of the following is a control that may be implemented to ensure all sales that occur are recorded in the general ledger?
A)use of prenumbered shipping,invoice and sales documents.
B)use of prenumbered statements,inventory lists and credit memos.
C)reconciliation of invoices with customer statements.
D)use of pre-authorized price lists.

Accepted Answer

The use of prenumbered shipping, invoice, and sales documents ensures that each sale is recorded in the general ledger. This control enables the company to track each sale to ensure that all transactions are being recorded accurately and completely. The prenumbered documents make it easy to monitor and track sales and ensure that no sales go unrecorded.

Question 12

Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations?
A)Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors.
B)Gross margin is equivalent in the current period to previous periods and is below that of the industry.
C)Sales are higher in the month preceding each quarter end.
D)The sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction.

Accepted Answer

Sales being higher in the month preceding each quarter end is a red flag for revenue recognition fraud, as it suggests sales may be artificially inflated to meet quarterly targets or projections. The other options do not necessarily indicate fraud related to revenue recognition.

Question 13

In an audit of financial statements,the risk of the high rate of return of products sold includes that of
A)sales that are recorded improperly.
B)an estimate of accrued returns that reduces net income.
C)a reduction of net sales for an increase to the sales returns and allowance account.
D)consignment goods that are returned and forwarded to third parties.

Accepted Answer

The high rate of return of products sold indicates a possibility of products being returned by customers. This presents a risk of sales being recorded improperly, such as recording returned products as new sales, which can cause an overstatement of revenue and net income.

Question 14

Which of the following is a method used by companies to fraudulently inflate revenues?
A)use of hidden "side letters" giving the customer an irrevocable right to return the product.
B)recording of fictitious sales.
C)shipment of product not ordered by customers.
D)all of the above.

Accepted Answer

All of the options listed are methods used by companies to fraudulently inflate revenues. Using hidden "side letters" allows companies to book revenue even if the customer may return the product later. Recording fictitious sales involves claiming revenue for products or services that were never actually sold. Shipping product not ordered by customers leads to an overstatement of revenue since it appears as though customers are buying more product than they actually are.

Question 15

The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management.The purpose for this procedure is to substantiate which of the following assertions?
A)existence of receivables
B)completeness of receivables
C)valuation of receivables
D)rights to receivables

Accepted Answer

The purpose of comparing the auditor's estimate of the allowance for doubtful accounts to the estimate provided by management is to substantiate the valuation of receivables. This assertion ensures that the receivables are appropriately recorded at their true economic value, which reflects the likelihood of collection. The existence, completeness, and rights assertions relate to whether the receivables are real, complete, and the company has the right to collect them, respectively.

Question 16

Sales transactions should be documented at initiation in order to do which of the following?
A)provide the customer a copy of the transaction.
B)provide evidence of authorization and recording.
C)offer credit to customers.
D)generate back orders.

Accepted Answer

Documenting sales transactions at initiation provides evidence of authorization and recording, which is important for record-keeping, auditing, and potential disputes. Providing a copy to the customer is also a good practice, but it is not the main reason for documenting the transaction at the outset. Offering credit or generating back orders may be related to sales transactions, but they are not directly impacted by documentation at initiation.

Question 17

Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following?
A)substantiate cutoff and the occurrence of net sales transactions.
B)test the sufficiency of cash balances to cover refunds.
C)monitor customer satisfaction for disclosure.
D)assess the nature of procedures that will be performed for the next period's audit.

Accepted Answer

Auditors will examine significant sales returns immediately subsequent to the period under audit in order to substantiate cutoff and the occurrence of net sales transactions. This means that auditors will verify whether sales transactions occurred during the period under audit or not and whether revenue from these transactions were recorded in the financial statements for that period.

Question 18

Lithgow and Harris,CPAs are performing the audit of WildFlower Grocery Stores.Lithgow and Harris relates annual revenue by sales per square feet and sales per customer.What type of analysis is Lithgow and Harris most likely performing?
A)Ratio analysis.
B)Trend analysis
C)Reasonableness tests.
D)Non-statistical analysis.

Accepted Answer

Reasonableness tests involve comparing financial data with expected values based on relationships or benchmarks, such as sales per square foot or sales per customer, to assess if the figures appear reasonable.

Question 19

The auditor traces recorded sales to invoices,sales orders and shipping documents in order to substantiate which of the following assertions?
A)cutoff.
B)completeness.
C)legality.
D)occurrence/existence.

Accepted Answer

The auditor traces recorded sales to invoices, sales orders, and shipping documents in order to substantiate the occurrence/existence assertion that the sales actually occurred and the recorded amounts are accurate. This ensures that the sales are not fictitious and have been properly accounted for. The other assertions are not directly related to this procedure.

Question 20

The risk of material misstatement due to fraud relating to revenue recognition should be
A)approached in a manner that is identical to control risk assessment.
B)given lower priority to the risk of embezzlement.
C)ordinarily presumed by the auditor.
D)assumed to have been considered by the audit committee.

Accepted Answer

The risk of material misstatement due to fraud relating to revenue recognition is generally considered a significant risk and should be presumed by the auditor, regardless of the control risk assessment. It should be given equal priority to the risk of embezzlement, and the fact that it was considered by the audit committee does not alleviate the auditor's responsibility to evaluate and address this risk.

Quiz 10: Auditing Revenue and Related Accounts

Hardman and Jennings,LLP,an audit firm,compares bad debt expense of a client in the current period to bad debt recorded for the past three periods.Hardman and Jennings is performing which type of analysis?

Which of the following provides evidence that the delivery of a product by a company to one of its customers is sufficient for the company to record revenue?

Which of the following must exist prior to the recognition of revenue by a company from the sale of a product?

Which of the following is the major risk associated with receivables?

The significance of the bill of lading is to provide which of the following?

Much of the understanding of revenue transactions for compliance with GAAP can be performed by which of the following procedures?

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?

The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total.This process is performed for the purpose of

Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing

What evidence is utilized by the auditor for analytical purposes in substantiating the allowance for bad debt estimate?

Which of the following is a control that may be implemented to ensure all sales that occur are recorded in the general ledger?

Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations?

In an audit of financial statements,the risk of the high rate of return of products sold includes that of

Which of the following is a method used by companies to fraudulently inflate revenues?

The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management.The purpose for this procedure is to substantiate which of the following assertions?

Sales transactions should be documented at initiation in order to do which of the following?

Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following?

Lithgow and Harris,CPAs are performing the audit of WildFlower Grocery Stores.Lithgow and Harris relates annual revenue by sales per square feet and sales per customer.What type of analysis is Lithgow and Harris most likely performing?

The auditor traces recorded sales to invoices,sales orders and shipping documents in order to substantiate which of the following assertions?

The risk of material misstatement due to fraud relating to revenue recognition should be