Question 1

Tracing a sample of recorded cash receipts from the cash receipts journal to the bank statement is an audit procedure designed to satisfy the control objective of ________.

Accepted Answer

Tracing cash receipts from the journal to the bank statement ensures that the receipts recorded in the journal were actually deposited into the bank, thus verifying the validity of the recorded transactions.

Question 2

Which of the following procedures is an auditor most likely to perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

Accepted Answer

Inspecting the shipping records documenting the merchandise sold to the debtors is a direct way to verify the existence and accuracy of accounts receivable balances when confirmation replies are not received. This approach provides evidence that the sales transactions occurred, supporting the existence of the receivables.

Question 3

If tests of controls revealed a significant weakness regarding the completeness of recording of cash receipts,additional substantive testing towards which assertions should result?

Accepted Answer

The answer of If tests of controls revealed a significant...

Question 4

In the audit of accounts receivable,negative confirmations are not normally used if ________.

Accepted Answer

Negative confirmations are not appropriate when account balances are in dispute because customers may not respond accurately or at all, leading to unreliable audit evidence.

Question 5

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

Accepted Answer

When there is no response to a positive confirmation request, auditors perform alternative procedures to verify the existence of accounts receivable, as it directly impacts the audit evidence regarding the existence assertion.

Question 6

In choosing to use blank positive confirmations,the auditor should consider what possible trade-off will occur?

Accepted Answer

Blank positive confirmations may result in a higher detection rate, but at the cost of a lower response rate. This means that there may be more errors or misstatements detected, but the confirmation process will require more follow-up and may take longer to complete. Therefore, the primary trade-off with using blank positive confirmations is between detection rate and response rate, and option C is the best choice. Option A is incorrect because a higher response rate is not a typical trade-off associated with blank positive confirmations. Option B and D are incorrect because cost and benefit are not typically impacted by the choice to use blank positive confirmations.

Question 7

The most effective audit procedure for determining if an account receivable will be collected is ________.

Accepted Answer

Examining cash collections subsequent to the year-end provides direct evidence that the receivable has been collected, making it the most effective procedure for determining collectibility.

Question 8

To gather evidence about transactions with related parties,an auditor would most likely ________.

Accepted Answer

Scanning the aged trial balance for names of officers and directors is a direct method to identify transactions with related parties, as these individuals are often involved in such transactions. This helps the auditor to focus on potential areas where related party transactions might occur, ensuring that they are properly disclosed and accounted for in the financial statements.

Question 9

The bank confirmation provides the most evidence for which of the following assertions about cash?

Accepted Answer

Bank confirmations primarily serve to verify the existence of cash balances reported by a company, ensuring that the amounts reflected in the financial statements actually exist at the bank.

Question 10

In the audit of accounts receivable,the positive form of confirmation request is most likely to be used when ________.

Accepted Answer

The positive form of confirmation request is most likely used when the combined assessed level of inherent and control risk relative to accounts receivable is high, as it requires a response from the recipient confirming the accuracy of the information, providing a higher level of assurance.

Question 11

Your analysis of ABC Company's financial statements revealed a substantial increase in the number of days' sales in accounts receivable.Based on those results,additional substantive audit evidence would most likely be directed towards which of these assertions?

Accepted Answer

An increase in the number of days' sales in accounts receivable indicates that there may be an issue with the valuation of accounts receivable. Therefore, additional substantive audit evidence would be directed towards the valuation assertion to ensure that accounts receivable are fairly valued.

Question 12

A customer replies to a positive confirmation as follows: "We dispute the $250 charge from your client as the goods were never received." This confirmation ________.

Accepted Answer

The customer's dispute over the charge because the goods were never received indicates that there is a question about the existence of the asset (the receivable from the customer's perspective). Since the customer is disputing the charge, it suggests that the valuation of the receivable (the $250 charge) cannot be considered accurate until the dispute is resolved. This does not necessarily provide evidence that the goods were never shipped or that the account should be written off; it simply highlights a discrepancy that needs to be addressed.

Question 13

The control objective associated with selecting a sample of cash receipts remittance lists (or daily cash reports)and tracing them through to the cash receipts journal is ________.

Accepted Answer

The control objective associated with selecting a sample of cash receipts remittance lists (or daily cash reports) and tracing them through to the cash receipts journal is completeness. This ensures that all cash receipts are recorded correctly and completely in the cash receipts journal. Validity is focused on ensuring that the transactions are genuine, existence is focused on verifying the physical existence of assets, and authorization is focused on verifying that the transactions have been approved by the appropriate authority.

Question 14

Scanning sales invoices to determine whether there are any numbers missing in the sequence is a control over which of the following objectives?

Accepted Answer

The objective that is being controlled in this scenario is completeness. By scanning sales invoices, the control is ensuring that all invoices have been included in the sequence and none have been missed, hence achieving completeness. Accuracy relates to whether the data is free from errors, validity relates to whether the data is relevant to the objective being tested, and classification relates to whether the data has been categorized correctly.

Question 15

If it is impracticable to confirm accounts receivable but the auditor obtains sufficient,appropriate evidence to verify the receivable balance by performing alternative procedures,the auditor's opinion should be unqualified.The audit report should ________.

Accepted Answer

When an auditor is able to obtain sufficient, appropriate evidence through alternative procedures, despite not being able to confirm accounts receivable, they can issue an unqualified (clean) opinion without the need to mention the alternative procedures in the audit report. This is because the auditor's primary responsibility is to determine whether the financial statements are free of material misstatement, regardless of the methods used to arrive at that conclusion.

Question 16

The control objective associated with selecting a sample of recorded sales invoices from the sales journal and matching the recording date to the shipping date per the shipping documents is ________.

Accepted Answer

This control objective ensures that sales are recorded in the correct accounting period, aligning the recording date with the shipping date to maintain proper period reporting.

Question 17

In which of the following circumstances is the use of the negative form of accounts receivable confirmation most likely to be justified?

Accepted Answer

Negative confirmations are more justified when there are many customers with small balances and a low risk of dispute, as they assume that recipients will respond only if they disagree with the stated amount.

Question 18

Auditors ordinarily send a standard bank confirmation to all banks with which the client has done business during the year under audit,regardless of whether the client has closed its account.One reason for doing so is to ________.

Accepted Answer

Sending a standard bank confirmation to all banks, including those with closed accounts, helps auditors uncover unrecorded liabilities and security agreements that the client may not have disclosed.

Question 19

Selecting a sample of debits from customer accounts receivable records and vouching them to supporting sales invoices is an audit procedure designed to obtain evidence about the control objective of ________.

Accepted Answer

The audit procedure of selecting a sample of debits from customer accounts receivable records and vouching them to supporting sales invoices is designed to obtain evidence about the control objective of validity, which ensures that the recorded transactions are genuine and represent actual sales made to customers. This procedure helps the auditor verify that the recorded debits are supported by sales invoices and that the company has adequate controls in place to ensure that only valid sales transactions are recorded in the accounts receivable ledger.

Question 20

The primary consideration when planning to confirm accounts receivable before the balance sheet date is the ________.

Accepted Answer

The client's internal control over transactions affecting receivables is the primary consideration when planning to confirm accounts receivable before the balance sheet date. This is because strong internal controls can reduce the risk of errors or fraud in the accounts, making confirmation procedures more effective. The type of confirmation to be used, availability of staff auditors, and number of customer accounts are also important factors, but they are secondary considerations in comparison to the strength of the client's internal controls.

Quiz 11: The Revenues, receivables, and Receipts Process and Cash Account Balance