Question 1

One key internal control to prevent fictitious transactions in the sales and collection cycle is:
A) assign a specific customer number for each customer in the computer files.
B) to account for the integrity of the numerical sequence of sales orders.
C) to include the sales price list of all products in the computer files.
D) having bank reconciliations prepared by one who is independent of the treasury function.

Accepted Answer

The answer of One key internal control to prevent fictitious...

Question 2

When posting items from the sales journal, details of the journal and journal totals are posted to which items?
A) 
B) 
C) 
D)

Accepted Answer

Details of the sales journal and journal totals are posted to the general ledger, which is represented by account numbers. The account number listed in option C is most likely the general ledger account number where the sales journal totals would be posted.

Question 3

Which of the following is the appropriate point at which the auditor deems authorization to be critical?
A) 
B) 
C) 
D)

Accepted Answer

The answer of Which of the following is the appropriate...

Question 4

A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:
A) bill of lading.
B) sales invoice.
C) picking ticket.
D) vendor invoice.

Accepted Answer

A bill of lading is the document that initiates shipment of goods and contains details such as description of the merchandise, quantity shipped and customer name and address.

Question 5

Match seven of the terms for documents and records (a-k) with the descriptions provided below (1-7):
a. Customer order form
b. Sales order
c. Bill of lading
d. Sales invoice
e. Summary sales report
f. Accounts receivable master file
g. Monthly statement
h. Remittance advice
i. Prelisting of cash receipts
j. Credit memo
k. Uncollectible account authorization form
________ 1. A list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and has no access to the accounting records. It is used to verify whether cash received was recorded and deposited at the correct amounts and on a timely basis.
________ 2. A document indicating a reduction in the amount due from a customer because of returned goods or an allowance.
________ 3. A document prepared to initiate shipment of goods, indicating the description of the merchandise, the quantity shipped, and other relevant data. It is a written contract between the carrier and seller of the receipt and shipment of goods.
________ 4. A document for communicating the description, quantity, and related information for goods ordered by a customer. This is frequently used to indicate credit approval and authorization for shipment.
________ 5. A document mailed to the customer and typically returned to the seller with the cash payment.
________ 6. A document used internally to indicate authority to write-off an account receivable as uncollectible.
________ 7. A document or electronic record indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data.

Accepted Answer

The answer of Match seven of the terms for documents...

Question 6

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to:
A) prenumber and account for all credit memorandums.
B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
C) have independent sales and accounts receivable departments.
D) mail monthly statements to customers.

Accepted Answer

Requiring receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved would prevent the accounts receivable clerk from issuing fictitious credit memos to his friend. This ensures that all credits are legitimate and have proper documentation to support them. Other options may also help prevent fraud, but B is the most effective in this scenario.

Question 7

For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents?
A) sales order
B) sales invoice
C) customer order
D) remittance advice

Accepted Answer

Indicating credit approval is a part of the sales order process where the customer's creditworthiness is checked before accepting the order. This information is recorded on the sales order and serves as the basis for credit approval for the sales transaction. The sales invoice is generated after the goods or services are delivered, and the customer order relates to the customer's request for the product but does not involve credit approval. Remittance advice is related to payment received and not credit approval. Therefore, the correct answer is A) Sales order.

Question 8

Credit should be approved before a customer's order is received.

Accepted Answer

Credit approval typically occurs after a customer's order is received but before the order is processed and shipped, to ensure the customer has the means to pay.

Question 9

Customer billing is a critical process which auditors must understand. What are the most important aspects of billing and what are the related objectives?

Accepted Answer

The answer of Customer billing is a critical process which...

Question 10

Some companies have customers send payments directly to a post office box address maintained by a bank. This is called a(n) ________ system.
A) direct deposit
B) funds transfer
C) lockbox
D) interbank transfer

Accepted Answer

A lockbox system is when a company has their customers send payments directly to a post office box address maintained by a bank. The bank collects the payments and deposits them into the company's account. The other options, direct deposit and interbank transfer, would involve the customer initiating a transfer of funds from their own account to the company's account, which is not how a lockbox system works. Transfer funds could refer to both direct deposit and interbank transfers.

Question 11

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?
A) granting of credit
B) shipment of goods
C) determination of discounts
D) selling of goods for cash

Accepted Answer

Selling of goods for cash does not require a specific authorization to conduct the sales transaction as it does not involve credit, shipment, or determination of discounts.

Question 12

Sales should be recorded, at the earliest, when:
A) the order is received.
B) the order is received and credit is approved.
C) credit is approved and it is verified that there is enough inventory to fill the order.
D) the shipment takes place.

Accepted Answer

The answer of Sales should be recorded, at the earliest,...

Question 13

Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?
A) company personnel
B) temporary employees in the town where the lockbox is located
C) bank employees
D) company controller

Accepted Answer

Bank employees are generally responsible for opening receipts when a company uses a lockbox. The main purpose of a lockbox is to speed up the handling of cash receipts by enabling the customers to send payments directly to a dedicated post office box owned by the bank. Once the bank receives the payments in the lockbox, its employees open and process them according to the company's instructions. This reduces the time and effort required for the company to collect and deposit cash receipts, which can be particularly beneficial for businesses that receive high volumes of payments or have multiple locations.

Question 14

A sales invoice is a document that usually indicates credit approval.

Accepted Answer

A sales invoice is a document that indicates the sale of goods or services and includes details about the transaction such as the quantity, price, and payment terms. It does not necessarily indicate credit approval.

Question 15

Credit memos are normally issued for what purpose(s)?
A) To adjust the customers balance to the amount owed to the company.
B) To assist in the aging of accounts receivable.
C) To reduce customer frustration and sales losses.
D) To inform the customer of the balance due.

Accepted Answer

Credit memos are usually issued to adjust the customer's balance to the amount owed to the company. This may be due to a pricing error, returned merchandise, or other reasons where the customer has been overcharged. It helps to ensure that the customer is only charged for what they owe, and it keeps the company's accounting records accurate.

Answer: C
 While credit memos can serve multiple purposes, one of their main benefits is reducing customer frustration and potential sales losses. If a customer has an incorrect charge on their account, they may become frustrated with the company and choose to take their business elsewhere. By issuing a credit memo to correct the error, the customer is more likely to continue doing business with the company.

Question 16

Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.

Accepted Answer

The answer of Discuss the four business functions that result...

Question 17

Credit should be approved before goods are shipped to a customer.

Accepted Answer

It is a good business practice to approve the credit of a customer before shipping goods to them to ensure that they are financially capable of paying for the goods. This helps to protect the company from potential losses and unpaid debts.

Question 18

The ________ is a contract between a carrier (e.g., a trucking company) and the seller of goods that dictates the details surrounding the shipment of goods.
A) bill of lading
B) sales invoice
C) picking ticket
D) remittance advice

Accepted Answer

A bill of lading is a legal document that outlines the agreement between the carrier and seller regarding the shipment of goods. It includes details such as the type of goods being shipped, their destination, and the terms of transportation. The other options listed are not typically involved in the shipment of goods.

Question 19

In designing audit procedures for the sales returns and allowances account, the auditor would primarily rely on the following accounts, except for:
A) sales returns and allowances transaction file.
B) accounts receivable master file.
C) cash receipts journal.
D) sales returns and allowances will be recorded in all of the above.

Accepted Answer

While sales returns and allowances may impact accounts receivable and cash receipts, the primary source of information for auditing this account would be the sales returns and allowances transaction file, which records all transactions related to returns and allowances. The accounts receivable master file would provide some information, but may not capture all returns and allowances. The cash receipts journal would only be relevant if the returns and allowances were processed as refunds to customers.

Question 20

You are an audit manager for Rodgers & Co. and have recently taken on as a client Manufacturing Company. You are in the initial stages of planning the audit and have decided to start gathering information about the Sales/Collection Cycle of the business. List below the classes of transactions that you need to gather audit evidence for in designing your audit procedures.

Accepted Answer

The answer of You are an audit manager for Rodgers...

Quiz 14: Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

One key internal control to prevent fictitious transactions in the sales and collection cycle is:

When posting items from the sales journal, details of the journal and journal totals are posted to which items?

Which of the following is the appropriate point at which the auditor deems authorization to be critical?

A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to:

For a firm that practices good internal controls in the sales and collections cycle, the function of indicating credit approval should be recorded on which of the following documents?

Credit should be approved before a customer's order is received.

Customer billing is a critical process which auditors must understand. What are the most important aspects of billing and what are the related objectives?

Some companies have customers send payments directly to a post office box address maintained by a bank. This is called a(n) ________ system.

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?

Sales should be recorded, at the earliest, when:

Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?

A sales invoice is a document that usually indicates credit approval.

Credit memos are normally issued for what purpose(s) ?

Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.

Credit should be approved before goods are shipped to a customer.

The ________ is a contract between a carrier (e.g., a trucking company) and the seller of goods that dictates the details surrounding the shipment of goods.

In designing audit procedures for the sales returns and allowances account, the auditor would primarily rely on the following accounts, except for: