Question 1

To determine whether sales transactions have been recorded in the proper accounting period,the auditor performs cutoff tests.Which of the following best describes the overall approach used when performing cutoff tests?
A) Ascertain that management has included in the representation letter a statement that transactions have been accounted for in the proper accounting period.
B) Analyze transactions occurring within a few days before and after year-end.
C) Confirm year-end transactions with regular customers.
D) Examine cash receipts in the subsequent period.

Accepted Answer

The overall approach used in performing cutoff tests is to analyze transactions occurring within a few days before and after year-end to ensure that they have been recorded in the proper accounting period. This involves examining sales invoices and purchase orders to determine the date of the transaction and comparing them to the date of shipment, receipt, or delivery to confirm that the transaction has been recorded in the correct period.

Question 2

Which of the following audit procedures is the most effective in testing sales for understatement?
A) Analyze the aged trial balance of recorded accounts receivable.
B) Confirm recorded accounts receivable.
C) Trace a sample of shipping documents to sales invoices recorded in the sales journal.
D) Vouch a sample of recorded sales from the sales journal to shipping documents.

Accepted Answer

Tracing shipping documents to sales invoices helps ensure that all shipments are invoiced and recorded as sales, effectively testing for understatement of sales.

Question 3

When an account receivable is considered uncollectible,the person who generally authorizes the write-off is the client's
A) credit manager.
B) treasurer.
C) accountant.
D) internal auditor.

Accepted Answer

The treasurer is typically responsible for the company's cash and financial liquidity, making them the appropriate person to authorize the write-off of an account receivable considered uncollectible. This decision impacts the company's financial statements and cash flow, falling under the treasurer's purview.

Question 4

A small business owner can best offset the lack of separation of duties by
A) creating an internal audit department.
B) installing the latest computer equipment and software.
C) being actively involved in the accounting process.
D) relying on the external auditor to detect errors.

Accepted Answer

Since there is no separation of duties in a small business, the owner must be actively involved in the accounting process. This will help to identify any errors or irregularities in a timely manner. Creating an internal audit department may not be feasible due to cost constraints, and relying solely on the external auditor may not provide enough oversight. Installing the latest computer equipment and software may be useful, but it is not a substitute for actively monitoring the accounting processes.

Question 5

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?
A) Completeness.
B) Accuracy.
C) Occurrence.
D) Classification.

Accepted Answer

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy the completeness assertion, as it ensures that all sales transactions have been recorded in the sequence and none of them are missing.

Question 6

The most effective audit procedure for determining the collectability of an account receivable is the
A) review of the subsequent cash collections.
B) examination of the related sales invoice(s).
C) confirmation of the account.
D) review of authorization of credit sales to the customer and the previous history of collections.

Accepted Answer

Reviewing subsequent cash collections directly addresses the collectability of an account receivable by providing evidence that the receivable has been or can be converted into cash, which is the ultimate test of its collectability.

Question 7

Alpha Brewery Corporation recorded sales through January 4,2005,dating them December 31,2004.This situation is an example of a violation of which of the following assertions?
A) Existence or occurrence.
B) Completeness.
C) Classification.
D) Accuracy.

Accepted Answer

The recording of sales in a different period is a violation of the completeness assertion, which requires that all transactions be recorded in the proper period to ensure that financial statements are complete and accurate. The existence or occurrence assertion relates to whether assets and liabilities exist, while classification refers to the proper categorization of transactions. Accuracy pertains to the correct amount being recorded.

Question 8

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when
A) no reply to a positive confirmation request is received.
B) no reply to a negative confirmation request is received.
C) collectability of the receivables is in doubt.
D) pledging of the receivables is probable.

Accepted Answer

If no reply to a positive confirmation request is received, it indicates a higher risk of material misstatement in accounts receivable. Therefore, the auditor should perform alternative procedures such as analyzing subsequent cash receipts or reviewing shipping documents to substantiate the existence of accounts receivable. However, the other options, B) no reply to a negative confirmation request is received, C) collectability of the receivables is in doubt, and D) pledging of the receivables is probable, may require different types of alternative procedures to be performed by the auditor.

Question 9

Confirmations of accounts receivable provide the most evidence for which of the following assertions?
A) Existence.
B) Valuation or allocation.
C) Rights and obligations.
D) Completeness.

Accepted Answer

Confirmations of accounts receivable confirm the existence of the balances recorded in the financial statements.

Question 10

Accountants should be under orders to record sales and accounts receivable when
A) the customer's order is received.
B) all supporting documentation of shipping is in order.
C) the item has been paid for.
D) the terms are agreed upon.

Accepted Answer

Recording sales and accounts receivable should be done when all supporting documentation of shipping is in order. This ensures that the transaction is complete and that the company has fulfilled its obligations to deliver the product or service to the customer. Recording the sale before the documentation is complete may result in inaccurate financial reporting and potential legal issues. The other options listed do not necessarily indicate that the transaction is complete and may lead to incomplete or inaccurate accounting records.

Question 11

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?
A) The balance is immaterial.
B) Confirmations would be ineffective.
C) The client requests alternative procedures be performed instead.
D) Other procedures provide sufficient competent evidence.

Accepted Answer

The auditor's decision on whether to send accounts receivable confirmations should be based on the effectiveness and relevance of the confirmation process, the materiality of the balances, and the sufficiency of other audit evidence available, not merely on the client's request for alternative procedures.

Question 12

In determining the adequacy of the allowance for uncollectible accounts,the least valuable evidence would be obtained from
A) an aging schedule of past due accounts that the auditor has tested.
B) correspondence with the client's collection agency.
C) financial statements of individual customers.
D) no reply to negative confirmations.

Accepted Answer

Negative confirmations, where the recipient is asked to respond only if they disagree with the information provided, are considered less reliable evidence compared to other options. This is because the lack of response does not necessarily confirm the accuracy of the account balance, as it could be due to the recipient overlooking the request or choosing not to respond for other reasons.

Question 13

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 of which of the following?
A) One of the cashiers has been covering a personal embezzlement by lapping.
B) One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C) One of the IT control clerks has been removing all sales invoices applicable to his account from the data file.
D) The credit manager has misappropriated remittances from customers whose accounts have been written off.

Accepted Answer

Confirming accounts receivable primarily helps in identifying discrepancies in the amounts owed by customers as recorded by the company. Lapping, which involves manipulating accounts to cover embezzlement, could be detected through confirmation discrepancies, as customers might report different balances than those recorded. Other options are less likely to be discovered through this method since they involve unrecorded transactions or manipulations not directly related to customer account balances.

Question 14

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?
A) Recorded sales in the sales journal are supported by invoices.
B) Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked.
C) Sales are recorded in the proper account.
D) Invoice quantities are compared to shipment and customer order quantities.

Accepted Answer

Control activities that satisfy the accuracy control objective for sales invoices include comparing invoice quantities to shipment and customer order quantities to ensure that the invoices are accurate. Therefore, option D is the correct choice. Option A satisfies the completeness control objective, option B satisfies the completeness and occurrence control objectives, and option C satisfies the classification and accuracy control objectives.

Question 15

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of
A) occurrence.
B) completeness.
C) classification.
D) accuracy.

Accepted Answer

The answer of Vouching debits from a sample selection of...

Question 16

The file that contains sales transactions that were initiated in the system but are not yet completed is the
A) credit check file.
B) sales detail.
C) inventory master.
D) pending order master.

Accepted Answer

The pending order master is the file that contains sales transactions that were initiated but not yet completed. The credit check file contains information about credit checks, the sales detail file contains information about completed sales transactions, and the inventory master file contains information about inventory levels and locations.

Question 17

A customer reply on a positive confirmation says "We dispute the $250 charge.We believe it is excessive." This confirmation
A) provides evidence of existence.
B) does not provide evidence of existence because the customer may refuse to pay the $250 charge.
C) provides evidence that the account was understated.
D) provides evidence that the account should be written off.

Accepted Answer

The confirmation provides evidence of existence because it confirms that the customer is aware of a $250 charge on their account, even if they dispute the amount.

Question 18

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except
A) preparing the confirmation letters.
B) mailing the confirmation letters.
C) receiving the confirmation letters.
D) None of the above.

Accepted Answer

The answer of The auditor maintains control of the mailing...

Question 19

The assertion that auditors will probably emphasize in the revenue and collection cycle is
A) occurrence.
B) completeness.
C) accuracy.
D) classification.

Accepted Answer

Auditors are likely to emphasize occurrence in the revenue and collection cycle, which means they will focus on ensuring that recorded transactions actually occurred and are legitimate. This is important because revenue recognition can be easily manipulated, and fraudulent transactions can be recorded to manipulate financial statements. Therefore, auditors need to check whether the recorded revenue is supported by proper documentation and is consistent with the contractual terms and conditions.

Question 20

If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable,the auditor's opinion should be unqualified and could be expected to
A) disclose the fact that alternative procedures were used due to client-imposed scope limitation.
B) disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
C) avoid mentioning the alternative procedures.
D) include an explanatory paragraph that discloses the performance of alternative procedures.

Accepted Answer

The answer of If the auditor obtains sufficient competent evidence...

Quiz 7: Revenue and Collection Cycle

To determine whether sales transactions have been recorded in the proper accounting period,the auditor performs cutoff tests.Which of the following best describes the overall approach used when performing cutoff tests?

Which of the following audit procedures is the most effective in testing sales for understatement?

When an account receivable is considered uncollectible,the person who generally authorizes the write-off is the client's

A small business owner can best offset the lack of separation of duties by

Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what assertion?

The most effective audit procedure for determining the collectability of an account receivable is the

Alpha Brewery Corporation recorded sales through January 4,2005,dating them December 31,2004.This situation is an example of a violation of which of the following assertions?

An auditor should normally perform alternative procedures to substantiate the existence of accounts receivable when

Confirmations of accounts receivable provide the most evidence for which of the following assertions?

Accountants should be under orders to record sales and accounts receivable when

Which of the following is not a valid reason for an auditor deciding not to send accounts receivable confirmations?

In determining the adequacy of the allowance for uncollectible accounts,the least valuable evidence would be obtained from

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 of which of the following?

Which of the following is an example of a control activity that satisfies the accuracy control objective for sales invoices?

Vouching debits from a sample selection of customers' accounts receivable records to supporting sales invoices is an audit procedure designed to obtain evidence about the assertion of

The file that contains sales transactions that were initiated in the system but are not yet completed is the

A customer reply on a positive confirmation says "We dispute the $250 charge.We believe it is excessive." This confirmation

The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the following except

The assertion that auditors will probably emphasize in the revenue and collection cycle is

If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by alternative procedures because it is impractical to confirm accounts receivable,the auditor's opinion should be unqualified and could be expected to