Question 1

The total of the individual account balances in the accounts receivable master file should equal the

Accepted Answer

The accounts receivable master file contains the individual account balances for all customers who owe money to the company. The balance of the accounts receivable account in the general ledger represents the total amount owed by all customers, and therefore, should equal the sum of all individual account balances in the accounts receivable master file. Option A is incorrect because total sales for the period include cash sales as well, which are not reflected in the accounts receivable master file. Option B is incorrect because the sales account in the general ledger only reflects sales revenue, not accounts receivable balances. Option C is incorrect because it assumes that all sales made during the period were on credit, which may not be the case.

Question 2

Name the five classes of transactions included in the sales and collection cycle.

Accepted Answer

Sales (cash and sales on account); cash receipts; sales returns and allowances; write-off of uncollectable accounts; and estimate of bad debt expense.

Question 3

Which of the following is not an important aspect of billing?

Accepted Answer

While credit approval is important for sales on account, it is not directly related to the process of billing. A, B, and C are crucial aspects of billing to ensure accuracy and proper payment.

Question 4

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

Accepted Answer

The auditor's objectives remain unchanged regardless of whether the client operates primarily as an e-commerce business or a "brick and mortar" business. The fundamental principles of auditing, including the assessment of the risk of material misstatement and the verification of financial statement accuracy, apply in both contexts.

Question 5

In the accounts receivable master file, the length of time the account has been due can be useful to the client and the auditor in preparing the

Accepted Answer

The length of time the account has been due is used to produce an aged accounts receivable trial balance, which provides valuable information to both the client and auditor about the status of accounts and the effectiveness of the company's credit and collections policies. The other options listed are not directly related to the use of the accounts receivable master file.

Question 6

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

Accepted Answer

Before goods are shipped on account, the company must verify the customer's credit to ensure that they will pay for the goods. This is typically done by a properly authorized person, such as a credit manager, who approves the customer's credit. A, B, and D are all important steps in the process of shipping goods on account, but they do not necessarily require authorization by a specific person.

Question 7

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

Accepted Answer

Interest income is not a part of the sales and collection cycle. The five classes of transactions included in the sales and collection cycle are sales, cash receipts, sales returns and allowances, write-off of uncollectible accounts, and bad debt expense. Interest income is a separate transaction related to the investment cycle.

Question 8

Most companies recognize sales revenue when

Accepted Answer

Most companies recognize sales revenue when goods are shipped, as this typically marks the point at which ownership and risks associated with the goods are transferred to the buyer, aligning with the revenue recognition principle that revenue is recognized when it is earned and realizable.

Question 9

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

Accepted Answer

The customer request for goods or services initiates the transaction in the sales and collection cycle. This request triggers the sales order process, which leads to the delivery of the products or services to the customer and ultimately the collection of payment. Receipt of cash, delivery of product to a customer, and identification of a new customer may occur after the transaction is initiated.

Question 10

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.

Accepted Answer

The objective of 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. This includes assessing the accuracy, completeness, and cut-off of sales transactions, as well as the existence, valuation, and rights and obligations of accounts receivable. By conducting a thorough audit of these areas, the auditor can provide reasonable assurance that the financial statements are free from material misstatement due to errors, fraud, or other irregularities in the sales and collection cycle.

Question 11

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

Accepted Answer

Accounts payable are not part of the sales and collection cycle as they represent amounts owed by the company to suppliers for goods or services received, rather than revenue generated by the company's own sales activities.

Question 12

The sales and collection cycle applies to businesses that sell goods to customers or provide services to customers.

Accepted Answer

The sales and collection cycle is a critical accounting cycle for businesses that sell goods or services to customers. This cycle involves the sale of goods or services, the invoicing or billing process, and the collection of payments from customers. It is important for businesses to manage this cycle effectively to ensure timely payments, maintain accurate records, and manage cash flow.

Question 13

A ________ is a document for communicating the description, quantity, and related information for goods ordered by a customer.

Accepted Answer

A sales order is a document used by a business when a customer purchases goods or services. It includes information such as the description of the goods ordered, the quantity, price, and delivery date. The sales order is used as a reference by the business to pick, pack, and ship the order to the customer.

Question 14

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

Accepted Answer

Credit approval must take place before goods can be shipped to assure that the customer has the means to pay for the goods. Matching shipping documents with sales invoices and receiving sales orders are important steps in the shipping process, but credit approval is critical to ensuring payment. Determining the correct delivery address is also important, but it does not directly impact payment assurance.

Question 15

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

Accepted Answer

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

Question 16

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

Accepted Answer

The answer of Which of the following is not a...

Question 17

One type of shipping document is the ________, which is a written contract between the carrier and the seller of the receipt and shipment of goods.

Accepted Answer

The bill of lading is a shipping document that serves as a contract between the carrier and the seller, detailing the receipt and shipment of goods. The sales order is a document used by the seller to acknowledge the order placed by the customer, the sales invoice is a document issued by the seller to the buyer that details the products and services provided and their respective costs, and the customer order is an instruction from the buyer to the seller to purchase a product or service.

Question 18

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

Accepted Answer

A monthly statement is a document sent to each customer that provides a summary of their accounts receivable activity for a given period, typically a month. It includes the beginning balance, all transactions during the period (sales, payments, debit/credit memos), and the ending balance. This serves as a reminder to the customer of any outstanding balances and can help reconcile their records with the company's records. The other options listed are not comprehensive enough to provide this level of detail for a customer's accounts receivable.

Question 19

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

Accepted Answer

A sales invoice is a document that indicates the amount of a sale and the payment due date for a customer. It is typically sent to the customer after a sale has been made and serves as a record of the transaction for both the customer and the seller. The bill of lading, purchase order, and sales order are all important documents in the business world, but they do not serve the same purpose as a sales invoice.

Question 20

There are no differences in the nature and the account titles in the sales and collection cycle for a service industry, a retail company, and an insurance company, for example.

Accepted Answer

There may be some differences in the nature and account titles in the sales and collection cycle for different industries, as they have unique ways of making sales and collecting payments. For example, a retail company may have accounts like "Cost of Goods Sold" and "Inventory", while an insurance company may have accounts like "Premium Revenue" and "Claim Payable". A service industry may have accounts like "Service Revenue" and "Accrued Revenue".

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