Question 1

Which of the following might be detected by an auditor's review of the entity's sales cutoff?

Accepted Answer

An auditor's review of the entity's sales cutoff would involve verifying that all sales made up to the end of the reporting period have been recorded in that period. If sales have been overstated for the year by recording sales made after the end of the period, this would be detected in the review of cutoff procedures.

Question 2

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents' exceptions and comments. By this procedure, the auditor would be most likely to learn about which of the following?

Accepted Answer

Confirming open accounts receivable primarily helps in identifying discrepancies in the recorded amounts versus what the customers acknowledge they owe. Lapping, which involves manipulating accounts receivable to cover up embezzlement, is likely to be detected through this process because it directly affects the balances of customer accounts. Other options involve activities that wouldn't directly impact the balances of open accounts receivable in a way that confirmation would typically uncover.

Question 3

To reduce the risks associated with accepting electronic responses to requests for confirmation of accounts receivable, an auditor most likely would:

Accepted Answer

Validating the sender of electronic information can reduce the risk of accepting fraudulent confirmations. This can be done through verifying the sender's identity and credentials, and using secure communication channels.

Answer: B
 Examining subsequent cash receipts can provide additional evidence that the accounts receivable balances are valid and accurate, which can reduce the risk of accepting false confirmations.

Answer: C
 Considering electronic responses as exceptions can increase the risk of overlooking discrepancies and errors, as well as potential fraud. Treating all electronic responses as exceptions without proper follow-up can lead to unreliable audit evidence.

Answer: D
 Mailing second requests to electronic respondents may not reduce the risks associated with accepting electronic responses, as the same risks may still be present. However, sending second requests can serve as a follow-up to non-responses or incomplete responses, and may increase the chances of obtaining reliable audit evidence.

Question 4

An auditor most likely would limit substantive tests of sales transactions when control risk is assessed as low for the existence or occurrence assertions concerning sales transactions and the auditor has already gathered evidence supporting:

Accepted Answer

When control risk is assessed as low for the existence or occurrence assertions concerning sales transactions, and evidence supporting cash receipts and accounts receivable has already been gathered, an auditor is more likely to limit substantive tests of sales transactions. This is because evidence on cash receipts and accounts receivable directly supports the existence and completeness of recorded sales, indicating that the sales transactions have indeed occurred and are accurately recorded.

Question 5

Which of the following procedures would ordinarily be expected to best reveal improper cutoff of sales at the balance sheet date?

Accepted Answer

Comparing shipping documents with sales records is the best method to reveal improper cutoff of sales at the balance sheet date. This procedure helps ensure that sales are recorded in the correct accounting period by matching the physical movement of goods with the recorded sales transactions.

Question 6

To achieve good internal control, which department should perform the activities of matching shipping documents with sales orders?

Accepted Answer

Billing department is responsible for preparing invoices and tracking shipments. Therefore, it would be appropriate for the billing department to perform the activity of matching shipping documents with sales orders to ensure accuracy and completeness of the transactions.

Question 7

An auditor reconciles the total of the accounts receivable subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor would be most likely to learn about which of the following?

Accepted Answer

Reconciling the subsidiary ledger to the general ledger helps identify discrepancies in balances, such as an improperly carried forward opening balance.

Question 8

If the objective of a test of details is to detect the overstatement of sales, the auditor should trace transactions from the:

Accepted Answer

The answer of If the objective of a test of...

Question 9

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:

Accepted Answer

Customers may not have an incentive to report if their account balance is understated, as this would not be in their financial interest, making confirmations less reliable for testing completeness.

Question 10

Which of the following is not an issue related to the valuation of accounts receivable?

Accepted Answer

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

Question 11

Which of the following misstatements is not related to the completeness assertion for revenue?

Accepted Answer

The completeness assertion for revenue is concerned with ensuring that all revenue transactions that should have been recorded have indeed been recorded. Option C, "Next year's revenue is recorded this year," relates to the accuracy or cutoff assertion, not completeness. It involves recording revenue in the wrong period, rather than failing to record revenue that should have been recorded.

Question 12

Auditors sometimes use ratios as audit evidence. For example, an unexplained increase in the ratio of gross profit to sales may suggest which of the following possibilities?

Accepted Answer

An unexplained increase in the ratio of gross profit to sales suggests that there may be fictitious sales being recorded, as gross profit is calculated by deducting cost of goods sold from sales. If cost of goods sold is not actually being incurred due to fictitious sales, it would cause an increase in the gross profit to sales ratio.

Question 13

In which of the following circumstances would the use of the negative form of accounts receivable confirmation most likely be justified?

Accepted Answer

Negative confirmations are more effective when there are many small balances and a low risk of material misstatement, as they assume that recipients will respond only if they disagree with the stated amount.

Question 14

Upon receipt of customers' checks in the mailroom, a responsible employee should prepare a control listing. A copy of the listing should be sent to the:

Accepted Answer

The accounts receivable bookkeeper should update the subsidiary accounts receivable records with the control listing to ensure that customer payments are accurately recorded and applied to the correct customer accounts. This process helps in maintaining accurate financial records and managing the accounts receivable effectively.

Question 15

Once a CPA has determined that accounts receivable has increased because of slow collection in a "tight money" environment, the CPA would be likely to:

Accepted Answer

If slow collection of accounts receivable is identified as a result of a tight money environment, the CPA would need to expand tests regarding the collectability of receivables. This would allow the CPA to determine whether the increase in accounts receivable is due to a liquidity issue or a credit quality issue. Expanding tests may include reviewing aging schedules, contacting customers directly, and analyzing payment terms. The other options (increasing the balance in the allowance for bad debts account, reviewing the going concern ramifications, and requiring the entity to tighten its credit policy) would not directly address the issue of slow collection of accounts receivable caused by a tight money environment.

Question 16

Which of the following is a test of controls for the transaction assertion of completeness for revenue?

Accepted Answer

Tracing shipping documents (which represent completion of the sale) to sales invoices and the sales journal ensures that all sales have been recorded and no sales have been omitted, verifying the completeness assertion for revenue transactions. Option A tests for the authorization assertion, option B tests for the accuracy assertion, and option D tests for the valuation and allocation assertion.

Question 17

Which of the following most likely would be the result of ineffective internal control policies and procedures in the revenue process?

Accepted Answer

Ineffective internal control policies and procedures in the revenue process could allow personnel in the Sales Department to have final authorization of credit memos, potentially enabling an employee defalcation scheme. This is because such controls are meant to prevent unauthorized transactions and ensure the integrity of financial records.

Question 18

In the confirmation of accounts receivable, the auditor would most likely:

Accepted Answer

Confirmation requests are typically sent as soon as possible after the fiscal year-end to ensure that the information is current and to maximize the response rate from confirmees, which helps in obtaining evidence regarding the existence and accuracy of accounts receivable balances.

Question 19

Cooper, CPA is auditing the financial statements of a small rural municipality. The receivable balances represent residents' delinquent real estate taxes. Internal control at the municipality is weak. To determine the existence of the accounts receivable balances at the balance sheet date, Cooper would most likely:

Accepted Answer

Positive confirmation requests are used to verify the existence of accounts receivable by directly contacting the debtor to confirm the amount owed, which is particularly useful when internal controls are weak.

Question 20

Confirmation is least likely to be a relevant form of evidence with regard to assertions about accounts receivable when the auditor has concerns about the receivables':

Accepted Answer

Confirmation of accounts receivable is a direct means of verifying the existence and amount of receivables reported by a company. It is less relevant for assessing classification issues, which are more about how receivables are presented in financial statements (e.g., current vs. non-current) rather than confirming their existence or amount.

Quiz 10: Auditing the Revenue Process