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

Question 1

The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "bricks and mortar" business are:

A) unchanged.
B) expanded.
C) mitigated.
D) decreased.

Answer 1

A

Question 2

A ________ is a document that indicates a request for merchandise by a customer.

A) sales invoice
B) vendor invoice
C) customer order
D) sales order

Answer 2

C

Question 3

What event initiates a transaction in the sales and collection cycle?

A) receipt of cash
B) delivery of product to a customer
C) identification of a new customer
D) customer request for goods

Answer 3

D

Question 4

The sales and collection cycle applies to businesses that transfer goods to customers or provides services to businesses.

Question 5

The document that requires adjustments to the customers subsidiary ledger account is the:

A) bill of lading.
B) sales invoice.
C) credit memo.
D) monthly statement.

Question 6

Before goods are shipped on account, a properly authorized person must:

A) prepare the sales invoice.
B) approve the journal entry.
C) approve the customer's credit.
D) verify that the unit price is accurate.

Question 7

Which of the following is not an account affected by the sales and collection cycle?

A) Cash
B) Accounts receivable
C) Allowance for doubtful accounts
D) Sales of Accounts Receivables

Question 8

Which of the following is not a business function within the "Sales" class of transactions?

A) processing customer orders
B) granting credit
C) processing and recording sales returns and allowances
D) shipping goods

Question 9

Which of the following is not one of the five classes of transactions included in the sales and collection cycle?

A) Sales returns and allowances
B) Write-off of uncollectible accounts
C) Bad debt expense
D) Interest Income

Question 10

A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, any debit or credit memo issued, and the ending balance is the:

A) accounts receivable subsidiary ledger.
B) monthly statement.
C) remittance advice.
D) sales invoice.

Question 11

In the sales and collection cycle when is, generally, the earliest point at which revenue can be recognized?

A) sales approval
B) credit approval
C) cash collection
D) shipment of goods

Question 12

In the accounts receivable subsidiary ledger the length of time the account has been due can be useful to the client and the auditor in preparing the:

A) trial balance.
B) working trial balance.
C) accounts receivable trial balance.
D) aged accounts receivable trial balance.

Question 13

What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected?

A) determination of correct delivery address
B) credit approval
C) matching of shipping document with sales invoice
D) receipt of sales order from the customer

Question 14

The total of the individual account balances in the accounts receivable subsidiary ledger should equal the:

A) total sales for the period.
B) balance of the sales account in the general ledger.
C) total sales less the total cash received for the period.
D) balance of the accounts receivable account in the general ledger.

Question 15

The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with Accounting standards.

Question 16

A document prepared to initiate shipment of the goods sold by an independent shipper is the:

A) sales order.
B) bill of lading.
C) sales invoice.
D) customer order.

Question 17

The document used to indicate to the customer the amount of a sale and payment due date is the:

A) sales invoice.
B) bill of lading.
C) purchase order.
D) sales order.

Question 18

A ________ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped.

A) sales order
B) customer order
C) vendor invoice
D) sales invoice

Question 19

Most companies recognize sales revenue when:

A) sales are invoiced.
B) goods are received by the customer.
C) goods are shipped.
D) Both B and C are correct, depending upon the company's revenue recognition policies.

Question 20

The document that accompanies the customer's payment is the:

A) credit memo.
B) remittance advice.
C) vendor invoice.
D) monthly statement.

Question 21

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.

Question 22

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

A)
B)
C)
D)

Question 23

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

A)
B)
C)
D)

Question 24

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.

Question 25

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.

Question 26

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.

Question 27

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

Question 28

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

Question 29

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

Question 30

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

Question 31

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

Question 32

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.

Question 33

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

Question 34

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

Question 35

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.

Question 36

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.

Question 37

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

Question 38

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

Question 39

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.

Question 40

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.

Question 41

When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?

A) valuation
B) cutoff
C) completeness
D) classification

Question 42

In determining the level of audit efficiency, once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client, it is appropriate to decide whether:

A) substantive tests can be reduced sufficiently to justify costs of performing tests of controls.
B) substantive tests can be increased sufficiently to justify costs of performing tests of controls.
C) tests of controls can be increased sufficiently to justify costs of performing substantive tests.
D) tests of controls can be reduced sufficiently to justify costs of performing substantive tests.

Question 43

In many audits, no substantive tests of transactions are made for the ________ assertion on the grounds that understatement of sales is not a concern.

A) accuracy
B) existence
C) completeness
D) none of the above

Question 44

In a lockbox system, bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.

Question 45

When sales invoices are automatically calculated and posted by a computer, the auditor may be able to reduce substantive tests of transactions for which, if any, assertion?

A) accuracy
B) existence
C) completeness
D) none of the above

Question 46

Which one the following procedures performed for the billing function provides evidence for the completeness assertion?

A) Making sure that all shipments have been billed.
B) Making sure that no shipment has been billed more than twice.
C) Making sure that each shipment is billed at the correct amount.
D) Making sure that each shipment is billed to the proper customer.

Question 47

The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.

Question 48

A bill of lading is a written contract between the seller and the buyer.

Question 49

Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders, granting credit, shipping goods, billing customers, and recording sales.

Question 50

Which of the following procedures performed for the billing function may provide evidence that the accounts receivable subsidiary ledger is in agreement with the accounts receivable control account?

A) Making sure that all shipments have been billed.
B) Making sure that no shipment has been billed more than twice.
C) Making sure that each shipment is billed at the correct amount.
D) Making sure that each shipment is billed to the proper customer.

Question 51

A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.

Question 52

Which of the following documents is not commonly associated with the "cash receipts" class of transactions?

A) Remittance advice
B) Sales order
C) Prelisting of cash receipts
D) Cash receipts journal or listing

Question 53

The shipping point is critical because it is the first point at which company assets are released to another party.

Question 54

The auditor's primary concern about authorization centers on shipment of goods to customers.

Question 55

When a company prepares multi-copy, prenumbered sales invoices at the time customer orders are received, there is a higher likelihood of failure to bill the customers than when sales invoices are prepared only after goods have been shipped.

Question 56

Which one of the following statements is true? In deciding on substantive tests of transactions:

A) some procedures are commonly employed on every audit regardless of the circumstances.
B) all procedures are dependent on the adequacy of the controls and the results of the tests of controls.
C) results obtained in the prior year's audit will not affect the procedures used this year.
D) the materiality of the item will not influence the choice of procedures used.

Question 57

The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

Question 58

A bill of lading is a special type of sales invoice used when goods are shipped interstate.

Question 59

The preparation of a sales invoice is the final step in the sales and collection cycle.

Question 60

The document that the accounting staff will use as the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger is the:

A) sales order.
B) bill of lading.
C) sales journal.
D) sales invoice.

Question 61

An auditor needs to determine whether all customers of an electric utility company are being billed. The auditor should test from the:

A) sales register to the accounts receivable ledger.
B) sales register to the meter department records.
C) accounts receivable ledger to the sales register.
D) meter department records to the sales register.

Question 62

Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.

Question 63

An effective procedure to test for unbilled shipments is to trace from the:

A) sales journal to the shipping documents.
B) shipping documents to the sales journal.
C) sales journal to the accounts receivable ledger.
D) sales journal to the general ledger sales account.

Question 64

Tests of controls should never be performed using the client's computer system; that is, all tests of control should be performed either using the auditor's computers or performed manually by the auditor.

Question 65

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement.
• Sales included in the journals for which there was no shipment
• Sale recorded more than once
• Shipments made to nonexistent customers and recorded as sales

Question 66

Management's assertions for sales and collection activities remain the same whether sales are generated through traditional or e-commerce activities.

Question 67

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because:

A) understatements of assets and income are a greater concern than overstatements.
B) overstatements of assets and income are a greater concern than understatements.
C) it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct.
D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.

Question 68

Violations of the existence objective for sales are of greater concern to the auditor than violations of the completeness objective.

Question 69

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

A) The cashier prepares the daily deposit.
B) The cashier makes the daily deposit at a local bank.
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D) The cashier endorses the checks.

Question 70

In designing substantive audit procedures for tests of transactions for sales the auditor needs to test for evidence of misstatements due to errors or fraud. Describe at least 2 potential errors (unintentional) and at least 1 intentional (fraud).

Question 71

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Question 72

________ tests are for omitted transactions, while ________ tests are for nonexistent transactions.

A) Tracing, vouching
B) Vouching, tracing
C) Verifying, tracking
D) Tracking, verifying

Question 73

To test for recorded sales for which there were no actual shipments, the auditor vouches from the:

A) bill of lading to the sales journal.
B) sales journal to the shipping documents.
C) sales journal to the accounts receivable subsidiary ledger.
D) bill of lading to the supporting customer order and sales order.

Question 74

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:

A) the original invoices.
B) an approved master price list.
C) the amounts recorded in the sales journal for that transaction.
D) the amounts posted to the customer's account in the accounts receivable master file.

Question 75

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:

A) existence objective.
B) completeness objective.
C) ownership objective.
D) valuation objective.

Question 76

Tracing from source documents to the journal is useful for testing the existence objective.

Question 77

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?

A) B, C, and D should all be of concern to the auditor.
B) Credit must be authorized before the sale.
C) Goods must be shipped after the authorization.
D) Prices must be authorized.

Question 78

Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?

A) Sales being included in the journal for which no shipment was made.
B) Sales to related parties, such as officers and subsidiaries.
C) Sales recorded more than once.
D) Shipments being made to nonexistent customers and recorded as sales.

Question 79

Prenumbered documents will only be useful for control purposes if:

A) a different numerical sequence is used for each company.
B) the sequence is accounted for periodically.
C) employees are allowed to use documents out of numerical sequence.
D) the same numerical sequence is used each accounting period.

Question 80

Prenumbered documents are intended to help:

A)
B)
C)
D)