Question 1

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an
A) efficiency basis.
B) effectiveness basis.
C) objective-by-objective basis.
D) none of the above

Accepted Answer

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an objective-by-objective basis. This means that the nature, timing, and extent of audit procedures should be based on the specific objectives of each audit procedure. This approach ensures that the audit procedures are relevant and sufficient to achieve the audit objectives, and minimizes the risk of over-auditing or under-auditing. Therefore, answer C is the best choice.

Question 2

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?
A) existence
B) completeness
C) rights
D) detail tie-in

Accepted Answer

The occurrence transaction-related audit objective ensures that recorded sales transactions actually occurred, which directly affects the existence balance-related audit objective by confirming that the recorded sales exist.

Question 3

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns?
A) controls over cutoff
B) controls that prevent or detect embezzlements
C) controls over sales discounts
D) controls related to the allowance for uncollectible accounts

Accepted Answer

Controls over sales discounts are indeed important, but when considering the primary concerns of auditors in the sales and collection cycle, the focus is typically on cutoff procedures to ensure transactions are recorded in the correct accounting period, prevention or detection of embezzlements to safeguard assets, and controls related to the allowance for uncollectible accounts to ensure receivables are accurately stated. Controls over sales discounts, while relevant, are not usually highlighted as a major concern in comparison to the others listed.

Question 4

The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised.

Accepted Answer

The tests of controls are designed to evaluate the effectiveness of the internal controls in place, and determine whether they can be relied upon to prevent or detect material misstatements in the financial statements. Based on the results of these tests, the auditor can determine whether assessed control risk needs to be revised for the relevant accounts and assertions.

Question 5

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?
A) existence
B) completeness
C) rights
D) detail tie-in

Accepted Answer

The answer of For cash receipts, the occurrence transaction-related audit...

Question 6

Auditors use the results of the substantive tests of transactions of sales and the collection cycle to determine the extent to which inherent risk is satisfied for each accounts receivable balance-related audit objective.

Accepted Answer

Auditors use the results of substantive tests of transactions to assess the effectiveness of internal controls and to detect material misstatements, not to determine the extent to which inherent risk is satisfied. Inherent risk is assessed earlier in the audit process, during the risk assessment phase, and influences the nature, timing, and extent of further audit procedures.

Question 7

Recording a sale that did not occur violates the occurrence transaction-related audit objective and the existence balance-related audit objective.

Accepted Answer

Recording a sale that did not occur violates the occurrence transaction-related audit objective, as it means that a transaction was recorded even though it did not occur, and the existence balance-related audit objective, as it means that the balance of accounts receivable or inventory may be overstated.

Question 8

It is not common for audit clients to misstate cutoff either by error or through fraud.

Accepted Answer

Misstatements in cutoff are common, and it is a significant risk in many audits. Cutoff misstatements can occur due to errors, fraud, or intentional manipulation of financial information. Adequate testing of cutoff is necessary to detect such misstatements.

Question 9

The two primary classes of transactions in the sales and collection cycle are
A) sales and sales discounts.
B) sales and cash receipts.
C) sales and sales returns.
D) sales and accounts receivable.

Accepted Answer

The two primary classes of transactions in the sales and collection cycle are sales and cash receipts. Sales represent the revenue earned by the company from the sale of goods or services, while cash receipts represent the collection of cash from customers against the sales made. Other transactions such as sales returns, sales discounts, and accounts receivable are secondary to the primary transactions of sales and cash receipts.

Question 10

The auditor studies the client's industry and external environment, and also evaluates management objectives and business processes to identify significant client risks that could affect the accounts receivable balance.

Accepted Answer

This statement accurately describes the process of assessing risks related to accounts receivable during an audit.

Question 11

The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.

Accepted Answer

The accounts receivable balance-related audit objective of net realizable value is not affected by the assessed control risk for sales or cash receipts. This is because net realizable value is a measurement of the accounts receivable balance's estimated collectible amount, which depends on factors like customer creditworthiness and the age of the receivables. It is not impacted by the level of control risk in the sales or cash receipts process.

Question 12

Which of the following types of receivables would not deserve the special attention of the auditor?
A) accounts receivables with credit balances
B) accounts that have been outstanding for a long time
C) receivables from related parties
D) Each of the above would receive special attention.

Accepted Answer

Each of the options listed (accounts receivables with credit balances, accounts that have been outstanding for a long time, and receivables from related parties) would indeed receive special attention from an auditor due to their unique risks and implications for financial statement accuracy.

Question 13

For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.

Accepted Answer

The completeness transaction-related audit objective ensures that all transactions that should have been recorded are indeed recorded, while the existence balance-related audit objective ensures that balances that appear on the financial statements actually exist. These objectives address different aspects of the financial statements and do not directly affect each other.

Question 14

If sales returns and allowances and write-off of uncollectible accounts receivable are significant, the assessed control risk must be considered for these two classes of transactions.

Accepted Answer

Sales returns and allowances and write-off of uncollectible accounts receivable are both potential indications of control deficiencies in the sales and collections processes, and could lead to material misstatements in the financial statements. Therefore, if these two classes of transactions are significant, the auditor would need to consider the control risk for these areas to determine the extent of audit testing required.

Question 15

Name the nine balance-related general audit objectives specifically applied to an audit of accounts receivable:

Accepted Answer

The answer of Name the nine balance-related general audit objectives...

Question 16

The auditor assesses inherent risk for accounts receivable, considering client risk and the nature of the audit client and the nature of the industry which the client is operating in.

Accepted Answer

This statement is true. The auditor does assess inherent risk for accounts receivable, taking into account various factors including client risk and the characteristics of the company and industry in which it operates.

Question 17

When allocating the preliminary judgment about materiality for the financial statements, accounts receivable is typically one of the most material accounts in the financial statements for companies selling on credit.

Accepted Answer

Accounts receivable represents the amounts owed to a company by its customers and is usually a significant portion of a company's assets. As it involves estimates of credit risk and potential bad debts, the misstatement in accounts receivable can have a material impact on the financial statements, making it one of the most material accounts for companies selling on credit. Hence, allocating the preliminary judgment about materiality for the financial statements involves considering accounts receivable.

Question 18

Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle?
A) Auditors must perform substantive tests related to assertions deemed to have significant risks.
B) The auditor must relate control risk for transaction-related audit objectives to balance-related audit objectives in deciding planned inherent risk.
C) The realizable value balance-related audit objectives are affected by assessed control risk for classes of transactions.
D) All of the above are accurate statements.

Accepted Answer

The risk assessment process of phase I of the audit process for the sales and collection cycle requires auditors to perform substantive tests related to assertions deemed to have significant risks in order to identify any potential misstatements in the financial statements.  Choice B and C are not accurate statements.

Question 19

It is common for clients to unintentionally or fraudulently misstate the allowance for doubtful accounts due to the difficulty in estimating the correct balance in this account.

Accepted Answer

The allowance for doubtful accounts is based on estimates and judgment, leading to the possibility of unintentional or fraudulent misstatements. Estimating the correct balance can be challenging, particularly when the business has a large number of accounts receivable or when there are changes in the economic environment or sales patterns.

Question 20

For most audits, revenue recognition is considered to be a significant risk.

Accepted Answer

Revenue recognition is often considered a significant risk in audits because it involves complex accounting principles and estimation judgments, and misstatements can have a material impact on financial statements.

Quiz 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is not one of their major concerns?