Question 1

Explain each of the following types of documents and indicate the class of transactions in which they are commonly used.
1.Customer order
2.Shipping document
3.Remittance advice
4.Sales returns and allowance journal
5.Uncollectible account authorization form

Accepted Answer

The answer of Explain each of the following types of...

Question 2

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?

Accepted Answer

The sales order is the document that initiates the sales and collections cycle, and it includes information on the approval of credit for the customer. Recording the credit approval on this document ensures that there is a clear record of the customer's credit status and that sales are only made to customers who have been approved for credit. This helps to reduce the risk of bad debt and improve the overall efficiency of the sales and collections process.

Question 3

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.

Accepted Answer

A bill of lading is a legal document that outlines the details of a shipment of goods, including the carrier, the buyer, the points of origin and destination, and the goods being transported. It serves as a contract between the carrier and the seller, protecting both parties in the event of damaged or lost goods. The other options (sales invoice, picking ticket, remittance advice) are also important documents in the shipping and logistics process, but they do not serve as the contract between the carrier and seller.

Question 4

Credit memos are normally issued to:

Accepted Answer

Credit memos are issued to adjust the customer's balance due to returned goods or allowances. They are used to reduce the amount owed by the customer and reflect the corrected balance. Option B refers to aging of accounts receivable and not credit memos. Option C is not a direct purpose of credit memos but rather a potential indirect benefit. Option D is incorrect as credit memos are issued to inform the customer of a reduction in the balance due, not the balance due itself.

Question 5

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

Accepted Answer

The answer of When posting items from the sales journal,...

Question 6

Some companies have customers send payments directly to an address maintained by a bank.This is called a(n)________ system.

Accepted Answer

The described system is a lockbox system, where the bank maintains an address where customers can send payments directly, and then the bank processes the payments and deposits them into the company's account. Direct deposit refers to payments made by an employer to an employee's bank account, funds transfer typically refers to moving money between different accounts, and interbank transfer refers to transferring funds between different banks.

Question 7

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

Accepted Answer

A sales invoice is a document that indicates the details of a sale, including the products or services sold, the price, and any applicable taxes or fees. It is not necessarily an indication of credit approval.

Question 8

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

Accepted Answer

It is important for the seller to verify the creditworthiness of the customer and confirm the credit approval before shipping the goods. This helps to minimize the risk of non-payment or default by the customer.

Question 9

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

Accepted Answer

The answer of Customer billing is a critical process which...

Question 10

Sales should be recorded, at the earliest, when:

Accepted Answer

Sales should be recorded when the shipment takes place because this is when the transfer of ownership occurs, and the revenue recognition principle is satisfied.

Question 11

Which of the following is a business function related to sales returns and allowances?

Accepted Answer

Processing and recording credit memos are related to sales returns and allowances. This function involves crediting the customer's account for returned merchandise or price adjustments due to defects or discounts.

Question 12

You are an audit manager for Rodgers & Co.and have recently taken on a new 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.

Accepted Answer

The answer of You are an audit manager for Rodgers...

Question 13

A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:

Accepted Answer

A bill of lading is a legal document that serves as a receipt of goods shipped, a contract between the shipper and carrier, and a document of title for the goods. It includes the description of the merchandise, the quantity shipped, and the customer name and address.

Question 14

Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?

Accepted Answer

When a company uses a lockbox, the bank is responsible for opening the receipts and depositing the funds into the company's account. This helps speed up the handling of cash receipts because the bank is able to process the deposits quickly and efficiently. Therefore, bank employees are generally responsible for opening receipts when a company uses a lockbox.

Question 15

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

Accepted Answer

Credit approval typically occurs after a customer's order is received but before the order is processed and shipped, to ensure the customer has the means to pay.

Question 16

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

Accepted Answer

The preparation of a sales invoice is an early step in the sales and collection cycle, typically followed by the delivery of goods or services, receipt of payment, and the recording of the payment in the financial records.

Question 17

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

Accepted Answer

The customer order is the first step in the sales process, and the sales and collection cycle cannot begin until an order is received.

Question 18

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.

Accepted Answer

The answer of Discuss the four business functions that result...

Question 19

When processing and recording cash receipts, an important fact to consider is:

Accepted Answer

While it is important to deposit cash at regular intervals and have procedures in place to prevent theft, the possibility of theft is a crucial factor to consider when processing and recording cash receipts. It is important to have controls in place to mitigate the risk of dishonest employees, fraudulent activities, or robbery. Therefore, option B is the best choice.

Question 20

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

Accepted Answer

The answer of The shipping point is critical because it...

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

Explain each of the following types of documents and indicate the class of transactions in which they are commonly used. 1.Customer order 2.Shipping document 3.Remittance advice 4.Sales returns and allowance journal 5.Uncollectible account authorization form