Deck 9: Auditing Sales and Receivables

Question 1

The account balance audit objective, "Accounts receivable presents gross claims on customers at balance date and agree with the sum of the accounts receivable subsidiary ledger", is derived from the assertion category of

A) existence or occurrence.
B) completeness.
C) rights and obligations.
D) accuracy, valuation, and allocation.

Answer 1

D

Question 2

The key issues relating to auditing sales and receivables are that the receivables do actually exist and are collectible with adequate allowances for doubtful accounts, and that the sales are genuine and neither overstated or understated.

Answer 2

True

Question 3

In a credit sales environment, the documents that serves as the basis for internal processing of an order is

A) customer order.
B) sales order.
C) dispatch note.
D) sales invoice.

Answer 3

B

Question 4

The cut-off tests for sales are designed to ensure that both sales and receivables are
recorded in the correct accounting period and that inventories and accounts payable are
recorded in the same accounting period.

Question 5

A substantive test for sales may include a sample of invoices from the sales journal which
would be vouched back to sales orders or shipping documents in order to test occurrence.

Question 6

Which of the following is not normally considered a step in the credit sales functions?

A) accepting customer orders
B) approving credit
C) acquiring goods to fill the order
D) billing customers

Question 7

Credit checks should be performed for all customers after sending the customer order to
the warehouse for processing, pickup and delivery.

Question 8

Which assertion category does the following audit objective relate to? "Accounts receivable include all claims on customers at the balance sheet date."

A) valuation
B) rights and obligations
C) disclosure
D) completeness

Question 9

To enhance controls in the credit sales area, the warehouse should be instructed not to release (or dispatch) goods until

A) they received a faxed copy of the sales requisition.
B) they have a completed sales invoice.
C) they receive an approved sales order.
D) the shipping department requests the goods.

Question 10

Verifying the accuracy of the accounts receivable trial balance relates to the

A) existence or occurrence assertion.
B) completeness assertion.
C) accuracy and valuation assertion.
D) rights and obligations assertion.

Question 11

In terms of the accounts receivable, the main consideration is the gross amount due from
customers on credit sales and the related allowance for doubtful accounts.

Question 12

In a credit sales environment, the best place to vest credit approval is in

A) accounts receivable.
B) the sales department.
C) the cashier area where receipts will eventually be sent.
D) an independent credit department.

Question 13

Which of these is not a specific audit objective for sales and receivables?

A) existence or occurrence
B) completeness
C) representation
D) presentation

Question 14

A substantive test for accounts receivable could include verifying accounts receivable and
the related allowance account is to trace the current period's opening balances to the
closing audited balances in the previous year's working papers.

Question 15

In a credit sales environment, the document that usually initiates the activity in the sales cycle is

A) customer order.
B) sales order.
C) dispatch note.
D) sales invoice.

Question 16

One of the key objectives in auditing sales and receivables is that the customer is
satisfied with the goods or services provided by the company.

Question 17

Controls over approving credit relate to the

A) existence or occurrence assertion.
B) completeness assertion.
C) accuracy, valuation or allocation assertion.
D) rights and obligations assertion.

Question 18

Sales transactions are the main source of operating revenue for most business
enterprises, and thus, the accounts receivable produced by credit sales transactions are
material to the balance sheet for all businesses except where cash receipts are
predominant.

Question 19

A significant risk over cash receipts is that cash paid by customers is stolen before it is
recorded.

Question 20

Accounts receivable can be verified without any consideration being given to sales on the
income statement.

Question 21

Accounting for the numerical sequence of dispatch notes used in tracing will primarily meet the

A) existence or occurrence assertion.
B) completeness assertion.
C) accuracy, valuation or allocation assertion.
D) presentation assertion.

Question 22

Standard control procedures over customer remittances received through the mail include having the mailroom personnel

A) forward the remittances, unopened, directly to the accounts receivable clerk.
B) open the mail, restrictively endorse the cheques and then forward the remittances directly to the cashier.
C) open the mail, restrictively endorse the cheques and then forward the remittances directly to the accounts receivable clerk.
D) open the mail, restrictively endorse the cheques and then list each remittance on a prelist.

Question 23

From the following which would not be an appropriate control procedure for the invoicing of customers?

A) checking the existence of a dispatch note matching the approved sales order before an invoice is prepared
B) using an authorized price list when preparing the invoice
C) comparing totals for dispatch notes with totals for invoices
D) segregating filling and dispatching sales orders

Question 24

When an entity receives mail receipts, it is preferable to have at least two clerks responsible for opening the mail. This control

A) ensures both clerks are punctual.
B) reduces the risk of cash receipts received in the mail being misappropriated.
C) ensures receipts are processed to the appropriate general ledger account.
D) ensures all cheques received are accompanied by a remittance advice.

Question 25

Which of these is not an example of a sales adjustment transaction?

A) cash discount
B) sales return or allowance
C) short payment of customer account
D) bad debt write-off

Question 26

For entities involved in the business of selling goods and services which of the following function(s) will apply?

A) sales
B) sales and cash receipts
C) cash receipts
D) sales, cash receipts, and sales adjustments

Question 27

In recording sales, the primary control objective is to

A) ensure sales invoices are recorded.
B) ensure sales invoices are recorded accurately and in the right period.
C) ensure cash receipts are recorded accurately and in the right period.
D) both b and c

Question 28

The main control objective of the recording of sales function is

A) that only actual deliveries are invoiced.
B) that sales are recorded accurately and in the proper period.
C) that cash will be received for the sale.
D) to produce a monthly customer statement.

Question 29

Controls useful in reducing the risk of fraud associated with sales adjustment transactions include

A) proper authorization of all sales adjustment transactions.
B) proper authorization of credit for returned or damaged goods.
C) proper authorization for the writing off of bad debts.
D) all of the above

Question 30

Use of an authorized price list in preparing the sales invoices meets primarily the

A) existence or occurrence assertion.
B) completeness assertion.
C) accuracy, valuation, or allocation assertion.
D) rights and obligations assertion.

Question 31

When testing the operating effectiveness of controls pertaining to the function of the recording of sales, the auditor may vouch recorded sales to supporting documents. The vouching of recorded sales to supporting documents pertains to the audit objective of

A) existence or occurrence.
B) rights and obligations.
C) accuracy, valuation and allocation.
D) all of the above

Question 32

Which of the following is not an example of a programmed application control?

A) numerical continuity of documents is assured
B) unreasonable quantities, amounts and dates are queried
C) only orders for goods in the entity's product range are accepted
D) duplicate document numbers are accepted

Question 33

Use of point-of-sale terminals to record over-the-counter cash sales provides all of the following except

A) assurance that all cash sales are processed through the system.
B) an immediate visual display for the customer to verify the accuracy of price and cash tendered.
C) a printed receipt for the customer.
D) printed control totals of the day's receipts processed on the device.

Question 34

Information processing controls specific to credit sales transactions include

A) proper authorization.
B) documents and records.
C) independent checks.
D) all of the above

Question 35

After making the deposit, the daily cash summary should be forwarded by the cashier directly to

A) the chief financial officer.
B) the accounts receivable clerk.
C) general accounting.
D) the cash receipts clerk.

Question 36

The control an entity should have in place in order to ensure all credit sales have proper credit approval is

A) an approved sales order for all goods released to dispatch.
B) a check on customer's credit limit prior to each sale and a credit department credit check on all new customers.
C) determination that customer is on an approved customer list.
D) both a and c

Question 37

A cash register or point-of-sale terminal provides

A) an immediate visual display for the customer of the amount of the cash sale and the cash tendered.
B) a printed receipt for the customer and an internal record of the transaction.
C) a printed control totals of the day's receipts.
D) all of the above

Question 38

Access controls should permit read-only access to transaction and master files except for authorized individuals. Which of the following illustrates such an exception?

A) credit controller can override marginal breaches of a customer's credit limit.
B) sales manager can amend a price for a sales transaction.
C) sales manager can amend a discount for a customer.
D) any of the above

Question 39

'Depositing receipts intact' means

A) all receipts are deposited, that is, not used to make payments.
B) all receipts are placed in a security envelope prior to banking.
C) both mail receipts and over-the-counter receipts are banked together.
D) mail receipts are banked separately to receipts received over-the-counter.

Question 40

When undertaking tests of controls for revenues, auditors are more concerned with controls associated with the occurrence assertion than they are with the completeness assertion because

A) clients are more likely to overstate than understate revenues.
B) clients are more likely to understate than overstate revenues.
C) it is difficult to determine when services have been performed.
D) the allowance for doubtful accounts often is understated.

Question 41

After completing the testing of controls over cash receipts and sales adjustments, the auditor assesses the level of control risk to be higher than expected. How would this affect the auditor's substantive audit work on accounts receivable?

A) More work would need to be performed to ensure that the allowance for doubtful debts is fairly stated.
B) Less work would need to be performed on following up non-responses from the auditor's debtors' circularisation.
C) The auditor may consider changing the date of the debtors' circularisation from one month before the year-end, to the actual year-end date.
D) More analytical review tests could be performed on debtors as a substitute for other substantive tests.

Question 42

In the processing of accounts receivable confirmations, the auditor would not normally be expected to

A) personally prepare the confirmations.
B) personally post the requests.
C) include his/her own return address envelope.
D) maintain custody of the confirmations until they are mailed.

Question 43

An inherent risk for sales and receivables is

A) promising large bonuses for meeting sales targets
B) the susceptibility of cash to misappropriation
C) not requiring employees to take regular annual leave
D) all of the above

Question 44

When examining sales transactions, which of the following would not be possible using generalized audit software?

A) inquiring about segregation of duties for invoicing customers
B) selecting a sample of invoices for inspection
C) re-performing invoice pricing and report differences
D) ensuring the sales journal is correctly totalled

Question 45

When the positive form of accounts receivable confirmation is used and no response is received, the auditor should normally

A) assume the account is in error.
B) send a second positive request.
C) assume the account is correct.
D) send a negative confirmation.

Question 46

A potential misstatement for the function of approving credit is

A) goods may be released from the warehouse for unauthorized orders.
B) goods dispatched may not agree with goods ordered.
C) sales may be made without credit approval.
D) all of the above

Question 47

Confirming accounts receivable is an accepted audit procedure whenever

A) they are material in amount.
B) it is reasonable to presume debtors will respond.
C) they are material and it is reasonable to presume debtors will respond.
D) a large number of small balances is involved.

Question 48

For accounts receivables and sales, analytical procedures provide evidence that relates to

A) existence or occurrence assertion.
B) completeness assertion.
C) valuation or measurement assertion.
D) all of the above

Question 49

When reviewing and testing the process used by management in determining the allowance for bad debts, which of the following would not be involved?

A) reviewing projected allowances for future periods
B) ascertaining management's procedures for determining the estimate and considering their reliability
C) ensuring that the procedures have been properly followed
D) identifying the assumptions underlying the estimate and considering their reasonableness

Question 50

Which of these is not a potential misstatement for the function of recording cash receipts?

A) cash may not be deposited intact daily
B) some receipts may not be recorded
C) errors may be made in journalizing receipts
D) receipts may be posted to the wrong customer account

Question 51

Which of these is not an approach that might be adopted by an auditor in evaluating the adequacy of an allowance for bad debts?

A) reviewing subsequent events
B) reviewing and testing the process used by management
C) use the percentages adopted by the client
D) use an independent estimate

Question 52

In most credit sales audits, the auditor's concern over sales adjustment transactions is based upon the

A) sheer number and value of these transactions.
B) lack of proper authorisation for these transactions.
C) potential use of these transactions to conceal a theft of cash.
D) poor controls normally found over these transactions and the inherent lack of documentation.

Question 53

An unusual feature of cut-off tests is that they

A) are always performed at year-end to verify a recorded balance even though they are tests of transactions.
B) are never performed at year-end to verify a recorded balance because they are tests of transactions.
C) are always performed at year-end to verify transactions even though they are tests of details of balances.
D) none of the above

Question 54

The best procedure for dealing with a non-response to a third positive request for confirmation of an accounts receivable is

A) assume that the debtor's value is correct.
B) write-off the balance as a bad debt.
C) examine subsequent cash collections.
D) involve the client in chasing up the debtor.

Question 55

When detection risk is high, the timing of the receivables confirmations would be expected to be

A) at balance date.
B) prior to balance date.
C) prior to balance date provided analytical procedures are performed between the confirmations and balance date.
D) prior to balance date provided analytical procedures and tests of control are performed between the confirmations and balance date.

Question 56

The write-off of accounts receivable should be authorized by the

A) cashier
B) controller.
C) accounts receivable clerk.
D) chief financial officer.

Question 57

A key control environment factor in reducing the risk of fraudulent financial reporting through the overstatement of sales and accounts receivable is

A) management's adoption and adherence to high standards of integrity and ethical values.
B) reducing the emphasis on sales targets.
C) establishing an effective audit committee.
D) all of the above

Question 58

The type of computer assisted audit technique (CAAT) that would be least suitable for testing controls where credit sales transactions are processed using real time systems is

A) systems control and audit file.
B) integrated test facility.
C) embedded audit facility.
D) test data approach.

Question 59

A potential misstatement for the function of filling sales orders is

A) goods may be released from the warehouse for unauthorized orders.
B) sales may be made without credit approval.
C) sales may be made to unauthorized customers.
D) all of the above

Question 60

The summary of the results from confirming accounts receivable contained in the auditor's working papers would not normally provide statistical data on the

A) market value of the confirmation sample.
B) number of confirmations sent and responses received.
C) proportion of the population total covered by the sample.
D) relationship between the audited and book values of items included in the sample.

Question 61

Confirmations are considered to be the most efficient procedure for obtaining sufficient appropriate audit evidence to support the existence and rights assertions of accounts receivable. However, there are still circumstances under which other procedures may be more effective. List four situations in which confirmations are unlikely to be effective.

Question 62

Differentiate between the two different forms of confirmation of accounts receivable balances and explain the conditions for which each would be used.

Question 63

List the steps involved when the auditor reviews and tests the process used by management to estimate the bad debts and the allowance for doubtful accounts .
1. What is the initial starting point for auditing accounts receivables?
2. Identify and describe three tests of details of transactions that would be performed in auditing accounts receivable.
3. Identify and describe the two most important tests of details of balances in relation to accounts receivable.

Question 64

There are three stages in applying analytical procedures to sales and receivables in the final audit. Briefly explain each stage.

Question 65

Identify factors that ought to be considered in the assessment of inherent and control risks sales and accounts receivable.

Question 66

Identify a necessary control for each of the following potential misstatements in relation to credit sales transactions:
1. Sales may be made to unauthorised customers.
2. Sales may be made without credit approval.
3. Goods may be released from the warehouse for unauthorized orders.
4. Unauthorized shipments may be made.
5. Some shipments may not be invoiced.
6. Invoices may not be journalized or posted to customer accounts.
7. Invoices may be posted to the wrong customer account.

Question 67

Identify the five functions in the processing of credit sales transactions and any documents and records that are used in these functions.

Question 68

For each of the following functions of cash receipts, identify a potential misstatement and a necessary control:
1. Receiving cash receipts.
2. Depositing cash in the bank.
3. Recording the receipts.

Question 69

Identify the three functions in the processing of cash receipts transactions and any documents and records that are used in these functions.

Question 70

Describe the process that a company should follow when granting credit sales transactions to a new customer.

Question 71

Explain why sales adjustment transactions attract the attention of audits and list the audit risks associated wi?th sales adjustments.