Deck 10: Auditing the Revenue Process

Question 1

Tracing shipping documents to prenumbered sales invoices provides evidence that:

A)no duplicate shipments or billings occurred.
B)shipments to customers were properly billed.
C)all goods ordered by customers were shipped.
D)all prenumbered sales invoices were accounted for.

Answer 1

B

Question 2

Tracing copies of sales invoices to shipping documents will provide evidence that all:

A)shipments to customers were recorded as receivables.
B)billed sales were shipped.
C)accounts receivable ledger is complete.
D)shipments to customers were billed.

Answer 2

B

Question 3

An auditor tests an entity's policy of obtaining credit approval before shipping goods to customers in support of management's assertion about account balances of:

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

Answer 3

A

Question 4

A positive confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.

Question 5

Which of the following is not an inherent risk factor for the revenue process?

A)Complexity of revenue recognition issues.
B)Difficulty of auditing transactions.
C)Special industry practices.
D)The entity does not follow its stated policies for sales order approvals.

Question 6

Accounting standards require entities to follow a five-step approach for recognizing revenue.

Question 7

Revenue is realized when a product or service is exchanged for inflows or other enhancement of assets.

Question 8

A negative confirmation requests that customers respond whether they agree or not with the amount due to the entity stated in the confirmation.

Question 9

The return of vendor purchases is a part of the revenue process.

Question 10

Channel stuffing is an improper practice used to boost sales by inducing distributors to buy more inventory than they can promptly resell.

Question 11

According to FASB ASC 606, which of the following is not part of the five-step approach for revenue recognition?

A)Identify the contract(s)with a customer.
B)Determine the transaction price.
C)Determine whether the buyer will take a discount.
D)Identify the performance obligations in the contract.

Question 12

What is channel stuffing?

A)A company records revenue before delivery terms can be arranged.
B)A company records revenue on goods that will be shipped overseas.
C)A company induces distributors to buy substantially more inventory than they can promptly resell.
D)A company alters the terms and conditions of recorded sales to entice customers to accept delivery of goods.

Question 13

Tests designed to detect credit sales made after the end of the year that have been recorded in the current year provide assurance about management's assertion of:

A)classification.
B)cutoff.
C)occurrence.
D)authorization and accuracy.

Question 14

A remittance advice is used to track purchases.

Question 15

In general, revenue is recognized when:

A)goods are shipped.
B)an entity satisfies a performance obligation.
C)it is recorded in the sales journal.
D)it is received in cash.

Question 16

Credit authorization is used to determine if a customer is able to pay for goods.

Question 17

Which of the following tests of controls most likely would help assure an auditor that goods shipped are properly billed?

A)Scan the sales journal for sequential and unusual entries.
B)Examine shipping documents for matching sales invoices.
C)Compare the accounts receivable ledger to daily sales summaries.
D)Inspect unused sales invoices for consecutive prenumbering.

Question 18

The revenue process affects numerous accounts in the financial statements.

Question 19

At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor?

A)Granting of credit.
B)Shipment of goods.
C)Determination of discounts.
D)Selling of goods for cash.

Question 20

Order entry is the initial function in the revenue cycle.

Question 21

Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?

A)Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
B)Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts.
C)Employees involved in the credit-granting function are separated from the sales function.
D)Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.

Question 22

Immediately upon receipt of cash, a responsible employee should:

A)record the amount in the cash receipts journal.
B)prepare a control listing.
C)update the subsidiary accounts receivable records.
D)prepare a deposit slip in triplicate.

Question 23

Which is not a key segregation of duties for the revenue process? Different parties should:

A)prepare shipping orders and prepare bills of lading.
B)perform the credit and billing functions.
C)perform the shipping and billing functions.
D)receive cash and adjust accounts receivable.

Question 24

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to assess the assertion of:

A)authorization and accuracy.
B)completeness.
C)cutoff.
D)occurrence.

Question 25

All of the following are important controls over credit memos except:

A)proper segregation of duties to ensure that sales discounts taken were earned.
B)credit memos should be approved by someone other than whoever initiated it.
C)credit memos should be supported by a receiving document for returned goods.
D)proper segregation of duties between access to customer records and authorizing credit memos.

Question 26

An auditor's purpose in reviewing credit ratings of customers with delinquent accounts receivable most likely is to obtain evidence concerning management's assertions about:

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

Question 27

A CPA auditing an electric utility wishes to determine whether all customers are being billed. The CPA's best direction of test is from the:

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

Question 28

Which of the following is the best argument against the use of negative accounts receivable confirmations?

A)The cost-per-response is excessively high.
B)There is no way of knowing if the intended recipients received them.
C)Recipients are likely to feel that, in reality, the confirmation is a subtle request for payment.
D)The inference drawn from receiving no reply may not be correct.

Question 29

Which of the following control activities may prevent the failure to bill customers for some shipments?

A)Each shipment should be supported by a prenumbered sales invoice that is accounted for.
B)Each sales order should be approved by authorized personnel.
C)Sales journal entries should be reconciled to daily sales summaries.
D)Each sales invoice should be supported by a shipping document.

Question 30

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Which of the following statements is true regarding the auditor's use of confirmations?

A)The positive confirmation form must always be used to confirm all balances regardless of size.
B)A combination of the two confirmation types can be used, with the positive form used for large balances and the negative form used for small balances.
C)A combination of the two confirmation types can be used, with the positive form used for trade receivables and the negative form for other receivables.
D)The positive confirmation form should be used when controls related to receivables are satisfactory and the negative confirmation form should be used when controls related to receivables are unsatisfactory.

Question 31

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be shipped that are not invoiced. The inadequate control activities could cause an:

A)understatement of revenues, receivables, and inventory.
B)overstatement of revenues and receivables and an understatement of inventory.
C)understatement of revenues and receivables and an overstatement of inventory.
D)overstatement of revenues, receivables, and inventory.

Question 32

To determine whether the system of internal control operated effectively to minimize errors of failure to invoice a shipment, the auditor would select a sample of transactions from the population represented by the:

A)customer order file.
B)bills of lading file.
C)open invoice file.
D)sales invoice file.

Question 33

Alpha Company uses its sales invoices for posting perpetual inventory records. Inadequate control activities over the invoicing function allow goods to be invoiced that are not shipped. The inadequate control activities could cause an:

A)understatement of revenues, receivables, and inventory.
B)overstatement of revenues and receivables and an understatement of inventory.
C)understatement of revenues and receivables and an overstatement of inventory.
D)overstatement of revenues, receivables, and inventory.

Question 34

In auditing accounts receivable, the negative form of confirmation request most likely would be used when:

A)recipients are likely to return positive confirmation requests without verifying the accuracy of the information.
B)the combined assessed level of inherent and control risk relative to accounts receivable is low.
C)a small number of accounts receivable are involved but a relatively large number of errors are expected.
D)the auditor performs a dual purpose test that assesses control risk and obtains substantive evidence.

Question 35

Which of the following internal control activities most likely would ensure that all billed sales are correctly posted to the accounts receivable ledger?

A)Daily sales summaries are compared to daily postings to the accounts receivable ledger.
B)Each sales invoice is supported by a prenumbered shipping document.
C)The accounts receivable ledger is reconciled daily to the control account in the general ledger.
D)Each shipment on credit is supported by a prenumbered sales invoice.

Question 36

Auditors are more concerned with the occurrence assertion for revenues than the completeness assertion because:

A)entities are more likely to overstate than understate revenues.
B)entities 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 37

Audit documents often include an aged trial balance of accounts receivable as of the balance sheet date. This aging is used by the auditor to:

A)evaluate internal control over credit sales.
B)test the accuracy of recorded credit sales.
C)evaluate the allowance for doubtful accounts.
D)verify the existence of the recorded receivables.

Question 38

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 39

Data Corporation has just computerized its billing and accounts receivable record keeping. You want to make maximum use of the new computer in your audit of Data Corporation. Which of the following audit techniques could not be performed through a computer program?

A)Tracing audited cash receipts to accounts receivable credits.
B)Selecting accounts to be confirmed on a random basis.
C)Examining sales invoices for completeness, consistency between different items, valid conditions, and reasonable amounts.
D)Resolving differences reported by customers on confirmation requests.

Question 40

In determining the adequacy of the allowance for uncollectible accounts, the least reliance should be placed upon which of the following?

A)The credit manager's opinion.
B)An aging schedule of past due accounts.
C)Subsequent year collections of amounts in accounts receivable at the balance sheet date.
D)Ratios calculated showing the past relationship of the valuation allowance to net credit sales.

Question 41

Which of the following might be detected by an auditor's review of the entity's sales cutoff?

A)Excessive goods returned for credit.
B)Unrecorded sales discounts.
C)Lapping of year-end accounts receivable.
D)Overstated sales for the year.

Question 42

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn about which of the following?

A)One of the cashiers has been covering a personal embezzlement by lapping.
B)One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C)One of the EDP control clerks has been removing all sales invoices applicable to his account from the data file.
D)The credit manager has misappropriated remittances from customers whose accounts have been written off.

Question 43

To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivable, an auditor most likely would:

A)validate the sender of electronic information.
B)examine subsequent cash receipts for the accounts in question.
C)consider the electronic responses to the confirmations to be exceptions.
D)mail second requests to the electronic respondents.

Question 44

An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting:

A)opening and closing inventory balances.
B)cash receipts and accounts receivable.
C)receiving activities.
D)cutoffs of sales and purchases.

Question 45

Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?

A)Compare shipping documents with sales records.
B)Apply gross profit rates to inventory disposed of during the period.
C)Trace payments received subsequent to the balance sheet date.
D)Send accounts receivable confirmation requests.

Question 46

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders?

A)Billing.
B)Shipping.
C)Credit.
D)Sales Order.

Question 47

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following?

A)An October invoice was improperly computed.
B)An October check from a customer was posted in error to the account of another customer with a similar name.
C)An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period.
D)An account balance is past due and should be written off.

Question 48

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the:

A)cash receipts journal to the sales journal.
B)sales journal to the cash receipts journal.
C)shipping documents to the accounting records.
D)accounting records to the shipping documents.

Question 49

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:

A)many customers merely sign and return the confirmation without verifying its details.
B)recipients usually respond only if they disagree with the information on the request.
C)customers may not be inclined to report understatement errors in their accounts.
D)auditors typically select many accounts with low recorded balances to be confirmed.

Question 50

Which of the following is not an issue related to the valuation of accounts receivable?

A)The credit granting function.
B)A proper allowance for doubtful accounts.
C)The net realizable value of accounts receivable.
D)Proper cutoff.

Question 51

Which of the following misstatements is not related to the completeness assertion for revenue?

A)Goods are shipped, but revenue is not recorded.
B)This year's revenue is recorded next year.
C)Next year's revenue is recorded this year.
D)Revenue is not recognized for services that have been performed.

Question 52

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?

A)Fictitious purchases.
B)Fictitious sales.
C)Selling and general expenses erroneously being recorded as merchandise purchases.
D)Unrecorded sales.

Question 53

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

A)A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
B)A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
C)A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
D)A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Question 54

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a control listing. A copy of the listing should be sent to the:

A)internal auditor to investigate the listing for unusual transactions.
B)treasurer to compare the listing with the monthly bank statement.
C)accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D)entity's bank to compare the listing with the deposit slip.

Question 55

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to:

A)increase the balance in the allowance for bad debts account.
B)review the going concern ramifications.
C)require the entity to tighten its credit policy.
D)expand tests regarding the collectability of receivables.

Question 56

Which of the following is a test of controls for the transaction assertion of completeness for revenue?

A)Test a sample of sales invoices for authorized customer orders.
B)Review sales orders for proper credit approval.
C)Trace shipping documents to sales invoices and the sales journal.
D)Examine reconciliation of subsidiary ledger to general ledger control account.

Question 57

Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process?

A)Final authorization of credit memos by personnel in the Sales Department could permit an employee defalcation scheme.
B)Fictitious transactions could be recorded, causing an understatement of revenues and an overstatement of receivables.
C)Irregularities in recording transactions in the subsidiary accounts could result in a delay in goods shipped.
D)Omission of shipping documents could go undetected, causing an understatement of inventory.

Question 58

In the confirmation of accounts receivable, the auditor would most likely:

A)send negative confirmations when the assessed risk of material misstatement is high.
B)seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.
C)require confirmation of all receivables from agencies of the federal government.
D)require that confirmation requests be sent as soon as possible after fiscal year-end.

Question 59

Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely:

A)send positive confirmation requests.
B)send negative confirmation requests.
C)examine evidence of subsequent cash receipts.
D)inspect the internal records, such as copies of the tax invoices that were mailed to the residents.

Question 60

Confirmation is least likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables':

A)valuation.
B)classification.
C)existence.
D)completeness.

Question 61

Describe the two types of confirmations and indicate which one is more reliable and why.

Question 62

An auditor is reviewing sales cutoff as of March 31, 2019. All sales are shipped FOB destination and the company records sales three days after shipment. The auditor notes the following transactions: If the entity records the required adjustments, the net effect on income (in thousands of dollars)for the period ended March 31, 2019 is

A)an increase of 12.
B)an increase of 8.
C)a decrease of 12.
D)a decrease of 8.

Question 63

Listed below are six of the seven assertions about classes of transactions and events made in the revenue process. For each, give an example of how an auditor could use one of the types of documents contained in the revenue process to test the assertion.
Occurrence
Completeness
Authorization
Accuracy
Cutoff
Classification

Question 64

When a sample of sales transactions recorded in the sales journal is traced back to the customer orders and shipping documents, the auditor is testing the ________ assertion.

A)cutoff
B)authorization and accuracy
C)completeness
D)occurrence

Question 65

Customers having substantial year-end past due balances fail to reply after second request confirmation forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?

A)Examine shipping documents.
B)Review collections during the year being examined.
C)Intensify the study of the entity's system of internal control with respect to receivables.
D)Increase the balance in the allowance for uncollectible accounts.

Question 66

When tracing a sample of shipping documents from throughout the year to the details of the sales invoices and to the sales journal and customers' accounts receivable subsidiary ledger, the auditor is testing the ________ assertion.

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

Question 67

Smith is engaged in the audit of a cable TV firm that services a rural community. All receivable balances are small, customers are billed monthly, and internal control is effective. To determine the existence of the accounts receivable balances at the balance sheet date, Smith would most likely:

A)send positive confirmation requests.
B)send negative confirmation requests.
C)examine evidence of subsequent cash receipts instead of sending confirmation requests.
D)use statistical sampling instead of sending confirmation requests.

Question 68

Assume you are working on a 12/31 year-end audit. It is now March 31ˢᵗ and the 12/31 accounts receivable aging shows a large receivable that was outstanding on 12/31 for 120 days. Further, the entity's receivables are typically collected in less than 45 days. You anticipate that the entity's allowance for doubtful account should be increased and inform the entity about your disposition. Management disagrees. Is there an alternative substantive procedure that you could perform that would provide convincing evidence that this balance is collectible? If so, explain.

Question 69

Explain how revenue recognition is important to the audit of the revenue process.

Question 70

Which of the following most likely would give the most assurance concerning the valuation assertion for accounts receivable?

A)Tracing amounts in the subsidiary ledger to details on shipping documents.
B)Comparing receivable turnover ratios to industry statistics for reasonableness.
C)Inquiring about receivables pledged under loan agreements.
D)Assessing the allowance for uncollectible accounts for reasonableness.

Question 71

Which of the following strategies most likely could improve the accuracy of the confirmation of accounts receivable?

A)Including a monthly statement of the customer's account with the confirmation.
B)Restricting the selection of accounts to be confirmed to those customers with relatively large balances.
C)Requesting customers to respond to the confirmation requests directly to the auditor by fax or e-mail.
D)Notifying the recipients that second requests will be mailed if they fail to respond in a timely manner.

Question 72

When reviewing bank confirmations for any liens on receivables, the auditor is testing the ________ assertion.

A)valuation and allocation
B)rights and obligations
C)existence
D)completeness

Question 73

What inherent risk factors should an auditor consider when auditing the revenue process of a computer manufacturer?

Question 74

When comparing prices and terms on a sample of sales invoices with the authorized price list and terms of trade, the auditor is testing the ________ assertion.

A)cutoff
B)authorization and accuracy
C)occurrence
D)completeness

Question 75

Assume an account receivable confirmation is returned with a note to the auditor describing a difference between your client's records and the customer's records. Clearly describe below two potential non-misstatement timing differences that could cause a discrepancy between a client's receivable records and his/her customer's records. The timing differences you describe should be such that after investigation you would determine that your client's receivable balance is not misstated due to these differences.

Question 76

Identify whether the following tests are tests of controls, substantive analytical procedures, tests of details of transactions, or tests of details of account balances.
1)Select a sample of customer receivables and send positive confirmations to each customer.
2)Examine monthly bank reconciliations for the internal auditors' initials indicating internal verification and review of the reconciliation.
3)Select a sample of entries in the sales journal and trace each to the shipping documents.
4)Compute receivable turnover and compare with previous years.
5)For a sample of new customers, determine whether credit approval was properly administered and documented.
6)Compare the dates on a sample of sales invoices with the dates of shipment and the dates the transactions were recorded in the sales journal.

Question 77

During a review of a small business entity's internal control system, the auditor discovered that the accounts receivable clerk approves credit memos and has access to cash. Which of the following controls would be most effective in offsetting this weakness?

A)The owner reviews errors in billings to customers and postings to the subsidiary ledger.
B)A controller receives the monthly bank statement directly and reconciles the checking accounts.
C)The owner reviews credit memos before they are recorded.
D)The controller reconciles the total of the detailed accounts receivable accounts to the amount shown in the ledger.

Question 78

The XYZ Company billing department has decided to assign one employee to each of its customers. This employee will be responsible for granting credit to the entity and then handling the billing. XYZ believes this will result in better customer service, because the entity will only have to deal with one person and that one person will be very familiar with the credit terms. As an auditor, would you agree with XYZ's decision?

Question 79

Which of the following procedures most likely would not be an internal control activity designed to reduce the risk of errors in the billing process?

A)Comparing control totals for shipping documents with corresponding totals for sales invoices.
B)Using computer programmed controls on the pricing and mathematical accuracy of sales invoices.
C)Matching shipping documents with approved sales orders before invoice preparation.
D)Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.

Question 80

In confirming accounts receivable, an auditor decided to confirm customers' account balances rather than individual invoices. Which of the following most likely would be included with the entity's confirmation letter?

A)An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct.
B)A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent.
C)An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor.
D)A client-prepared statement of account showing the details of the customer's account balance.