Question 1

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.

Accepted Answer

Analytical procedures involve evaluating financial information through analysis of relationships and trends to identify potential issues or areas for further investigation. One such area could be the allowance for uncollectible accounts, where the auditor would use analytical procedures to assess whether the amount is reasonable and adequate based on past and current data.

Question 2

Which of the following is a likely procedure to test the adequacy of the allowance for doubtful accounts?

Accepted Answer

Examining cash receipts received after year-end helps determine if outstanding receivables are collectible, thus assessing the adequacy of the allowance for doubtful accounts.

Question 3

Confirmation of accounts receivable by direct communication with the debtor tests the existence of accounts receivable.

Accepted Answer

Confirmation of accounts receivable through direct communication with the debtor is a common method used by auditors to test the existence and accuracy of accounts receivable.

Question 4

Material accounts receivable from related parties should be stated separately from other receivables.

Accepted Answer

Material accounts receivable from related parties should be disclosed separately in the financial statements to provide users with a better understanding of the nature and extent of related party transactions. This information helps users to assess the company's exposure to related party risks and the potential impact of related party transactions on the company's financial position and performance. Therefore, the statement is true.

Question 5

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1,shipped FOB shipping point,which were recorded in December of 20X0 as credit sales?

Accepted Answer

Since the sales were FOB shipping point, the title and risk of ownership transferred from the seller to the buyer at the shipping point, which means that the revenue should have been recognized in January 20X1 when the goods were shipped. By recording the sales as credit sales in December 20X0, the accounts receivable would have been overstated at December 31, 20X0. Therefore, the CPA is most likely to discover that accounts receivable are overstated at December 31, 20X0.

Question 6

An aged trial balance of accounts receivable may provide evidence on the adequacy of the allowance for uncollectible accounts.

Accepted Answer

An aged trial balance of accounts receivable categorizes the outstanding balances by the length of time they have been outstanding. This information can be used to estimate the amount of uncollectible accounts that are likely to occur in the future. By comparing the estimated amount of uncollectible accounts with the current allowance for uncollectible accounts, auditors can assess whether the allowance is adequate or needs to be adjusted. Therefore, an aged trial balance of accounts receivable can provide evidence on the adequacy of the allowance for uncollectible accounts.

Question 7

The department approving a sales transaction should be the billing department.

Accepted Answer

The department approving a sales transaction should be the sales department, while the billing department is responsible for invoicing and collecting payment after the sale has been approved.

Question 8

When it is impossible to confirm accounts receivable,the auditors may be able to satisfy themselves as to the existence of accounts receivable by alternative procedures.

Accepted Answer

This statement is true. Auditors may use alternative procedures such as confirmation from third parties, reviewing subsequent cash receipts or examining supporting documents to satisfy themselves about the existence of accounts receivable when it is impossible to confirm them.

Question 9

Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control over the revenue cycle?

Accepted Answer

Authorization of credit memos by personnel who receive cash can allow them to misappropriate cash by issuing unauthorized credit memos to cover up the theft.

Question 10

Accounts receivable that are written off should not be turned over to a collection agency.

Accepted Answer

When accounts receivable are written off, they are typically considered uncollectible and may be turned over to a collection agency for further attempts at recovery.

Question 11

Confirmation requests should contain a "business reply" envelope addressed to the auditors at the client's address.

Accepted Answer

Confirmation requests should contain a "business reply" envelope addressed to the auditors, but at the auditor's address, not the client's, to ensure independence and confidentiality of the response.

Question 12

When control risk for the existence assertion is assessed at a high level,which of the following is a likely effect with respect to the auditors' confirmation of receivables?

Accepted Answer

When control risk for the existence assertion is assessed at a high level, auditors are likely to confirm account balances as of year-end to obtain direct evidence regarding the existence and accuracy of receivables. This approach helps in directly verifying the amounts owed by customers at the balance sheet date.

Question 13

Which of the following is least likely to be used as an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Accepted Answer

Physically examining items sold is not a practical alternative procedure for handling nonreplies to accounts receivable confirmation requests, as it can be time-consuming and costly. The other options, such as examining bills of lading, correspondence, and subsequent cash receipts, are more feasible and commonly used alternative procedures.

Question 14

Which of the following is not typically considered to be an alternate procedure for handling nonreplies to accounts receivable confirmation requests?

Accepted Answer

Tracing balances from accounts receivable ledger to the billing statements is not typically considered an alternate procedure for handling nonreplies to accounts receivable confirmation requests. This action does not provide direct evidence about the existence and accuracy of the receivable at the confirmation date. Alternate procedures usually involve examining sales invoices, correspondence, or subsequent cash receipts to provide evidence about the receivables.

Question 15

CPAs use positive accounts receivable confirmation requests more frequently than negative accounts receivable confirmation requests.

Accepted Answer

CPAs use positive accounts receivable confirmation requests more frequently because they provide stronger evidence of the existence and accuracy of the accounts receivable balance. Negative confirmation requests are less reliable because they only require a response if there is a discrepancy, which increases the risk of non-response bias.

Question 16

Your client performed the physical count of inventory as of November 30,one month prior to year-end.Subsequently,your client closed the sales journal on 12/29/XX,two days before year-end,and reported those two days' credit sales in January of the next year.Assuming the client uses a perpetual inventory system,which of the following is most likely to be overstated relating to the year XX financial statements?

Accepted Answer

Since the physical count was performed one month prior to year-end, any changes to the inventory during that month are not reflected in the inventory balance at year-end. Therefore, the inventory balance reported on the financial statements is likely to be overstated. The timing of the credit sales is not relevant to the inventory balance, and neither is cash or accounts receivable.

Question 17

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December.Such entries recorded in which journal are most likely to achieve this end?

Accepted Answer

Sales journal entries are most likely to achieve this end. By recording January transactions as if they occurred in December, the accounts receivable balance on the December 31 balance sheet will be overstated.

Question 18

Which of the following would be least likely to diminish the validity of evidence obtained through confirmation of accounts receivable?

Accepted Answer

Using the client's letterhead for confirmation requests is a standard practice that does not inherently diminish the validity of the evidence obtained. It is expected that official communications, such as confirmation requests, would be on the company's letterhead to ensure recipients recognize the sender and understand the nature of the request.

Question 19

To test the existence assertion for recorded receivables,an auditor would select a sample from the:

Accepted Answer

The accounts receivable subsidiary ledger contains individual customer accounts and corresponding recorded receivables. Selecting a sample from this ledger will enable an auditor to test the existence assertion for recorded receivables by verifying that the sampled accounts represent actual receivables owed to the company. Samples from sales orders or customer purchase orders would not necessarily provide evidence of receivables that have been recorded, while samples from shipping documents would test the completeness assertion rather than existence.

Question 20

Confirmation of accounts receivable provides absolute assurance that no lapping or other manipulation affecting accounts receivable is being carried on.

Accepted Answer

Confirmation of accounts receivable is a useful audit procedure, but it does not provide absolute assurance against lapping or other manipulations, as these schemes can involve complex fraud that confirmation alone might not uncover.

Quiz 11: Accounts Receivable, notes Receivable, and Revenue