Question 1

The transaction-related audit objectives and the client's methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences.What are the two differences from the auditor's perspective?

Accepted Answer

The answer of The transaction-related audit objectives and the client's...

Question 2

When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective.

Accepted Answer

When auditing sales returns and allowances, the emphasis is normally on testing the occurrence and accuracy objectives to ensure that recorded returns and allowances actually occurred and are accurately recorded, rather than primarily focusing on completeness.

Question 3

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

Accepted Answer

Violations of the existence objective for sales involve instances where a sale is recorded even though no actual sale has taken place. This can have a significant impact on the financial statements and may indicate fraud or errors. On the other hand, violations of the completeness objective relate to instances where some sales have not been recorded, which may be less serious. Therefore, violations of the existence objective are of greater concern to the auditor.

Question 4

Which of the following test of controls is useful to test the completeness objective for cash receipts?

Accepted Answer

Observing endorsement of incoming checks would be the most useful test of controls to test the completeness objective for cash receipts, as it would indicate that all incoming checks have been properly received and recorded by the entity. Option A tests the occurrence objective by indicating that all shipping documents (related to sales) have been properly recorded in sales records. Option C tests the accuracy objective by ensuring that the receivable master file accurately reflects activity in the general ledger. Option D tests the existence objective to ensure that the bank account balance is accurate and that all recorded transactions are reflected in the account.

Question 5

The appropriate test of controls for separation of duties are ordinarily restricted to the auditor's observations of activities and discussions with personnel.

Accepted Answer

Test of controls for separation of duties involve direct observations of activities and discussions with personnel to ensure that no individual has complete control over a transaction or process from start to finish. Therefore, the statement is true.

Question 6

To prevent fraud, management should deny cash access to anyone responsible for:

Accepted Answer

The options are not easily understandable due to unique identifiers. However, based on the question's context, it can be inferred that the correct answer is option C because it is the only option that is complete and makes grammatical sense: "To prevent fraud, management should deny cash access to anyone responsible for [option C]."

Question 7

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

Accepted Answer

The occurrence objective relates to whether the sales return and allowance transactions actually occurred and were properly authorized, recorded and reported. Therefore, auditors place a primary emphasis on occurrence when evaluating sales returns and allowances.

Question 8

When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that:

Accepted Answer

The answer of When designing tests of controls and substantive...

Question 9

The audit procedure referred to as proof of cash receipts is particularly useful to test:

Accepted Answer

The audit procedure referred to as proof of cash receipts is particularly useful to test whether all recorded cash receipts have been deposited in the bank. This is done by comparing the bank deposit slips with the cash receipts recorded in the accounting system. This test helps the auditor to verify that all the cash receipts have been recorded accurately and that there are no unrecorded transactions. It also helps to detect any misappropriation of funds by identifying any discrepancies between the recorded cash receipts and the bank deposit slips.

Question 10

An audit procedure that compares the name, amount, and dates shown on remittance advices, either paper of electronic via direct deposit, with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:

Accepted Answer

This procedure helps detect lapping, which involves concealing the theft of cash by delaying the recording of cash receipts. By comparing remittance advices with cash receipts and deposit slips, discrepancies can be identified, indicating potential lapping.

Question 11

An effective procedure to test the existence objective for sales is to vouch sales journal entries to copies of sales orders, shipping documents, and sales invoices.

Accepted Answer

Vouching sales journal entries to supporting documents such as sales orders, shipping documents, and sales invoices is a reliable way to confirm the existence objective for sales. This testing procedure ensures that the transactions recorded in the sales journal have actually occurred and can be supported by physical evidence.

Question 12

Sales returns and allowances are often ignored by auditors because they are often immaterial.

Accepted Answer

This statement is generally true. Sales returns and allowances are often immaterial amounts that are not significant enough to affect the overall financial statements. However, it is important for auditors to still review these transactions to ensure they are recorded accurately and the appropriate accounting policies are being followed. Additionally, if there is evidence of potential fraud or misappropriation, sales returns and allowances may become more significant and require further investigation by auditors.

Question 13

Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable?

Accepted Answer

Having customers send payments directly to the company's depository bank would eliminate the possibility of lapping by the bookkeeper or any other employee handling incoming mail or customer payments. This option would provide the strongest segregation of duties and control over the cash receipts process. Option A and B only partially segregate duties and still leave room for potential lapping. Option D is not as effective as having payments go directly to the company's depository bank as checks can still be intercepted or altered before reaching the treasurer.

Question 14

Cash receipts from sales on account have been misappropriated.Which of the following acts would conceal this fraud and be least likely to be detected by an auditor?

Accepted Answer

The answer of Cash receipts from sales on account have...

Question 15

For each significant internal control deficiency identified by the auditor, he or she should design one or more tests of controls to assess the extent of the deficiency and its effect on the financial statements.

Accepted Answer

This statement is true. When an auditor identifies a significant internal control deficiency, they should design tests of controls to determine the extent of the deficiency and its impact on the financial statements. This helps the auditor determine the level of risk associated with the deficiency and adjust their audit approach accordingly.

Question 16

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:

Accepted Answer

Requiring receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved is the best option as it ensures that credit memos are issued only for legitimate returns. This process will help prevent any fraudulent activity by the accounts receivable clerk or any other employee. Prenumbering and accounting for all credit memos and having independent sales and accounts receivable departments are also important internal control procedures, but they may not be as effective in preventing fictitious credit memos as requiring supporting documentation for all credit memos. Mailing monthly statements to customers is a standard practice but does not specifically address the issue of fictitious credit memos.

Question 17

Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to:

Accepted Answer

A proof of cash is a reconciliation tool that helps identify discrepancies between the bank statement and the company's cash records. If cash receipts were not recorded in the accounting records, they would not appear in the proof of cash, making it ineffective in discovering such differences.

Question 18

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customer's account that employee may be suspected of:

Accepted Answer

This scenario describes the act of lapping, where an employee misdirects incoming payments and covers up the shortfall by applying subsequent payments from other customers to balance out the accounts. Kiting involves intentionally inflating bank account balances by exploiting the time delay in processing checks, while floating refers to the intentional delay in depositing checks to have access to the funds for a longer period. Shorting is not related to this scenario.

Question 19

Sales should be billed and recorded as soon as possible after the shipment takes place.

Accepted Answer

Sales should be recorded and billed as soon as possible to ensure accurate and timely financial reporting. Delaying billing could lead to inaccurate financial statements and could affect cash inflows for the business.

Question 20

Explain what lapping means, and discuss the internal control deficiency that allows it to occur.Also discuss the procedures the auditor can perform to detect lapping.

Accepted Answer

The answer of Explain what lapping means, and discuss the...

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