Question 1

Material debit balances in accounts payable for amounts due from vendors should be reclassified as accounts receivable.

Accepted Answer

Material debit balances in accounts payable represent amounts due to the company from vendors. These are not liabilities of the company, but assets in the form of accounts receivable. Therefore, they should be reclassified as accounts receivable on the balance sheet.

Question 2

If control risk is assessed high,the auditor may send significantly fewer confirmations for a sample of accounts receivable than if the control risk is assessed low.

Accepted Answer

When control risk is assessed as high, the auditor is likely to increase testing, including sending more confirmations for accounts receivable, to gain assurance due to the lack of reliance on the entity's internal controls.

Question 3

The use of data analytics tools makes the audit of the revenue cycle more effective,but not more efficient.

Accepted Answer

The use of data analytics tools in auditing the revenue cycle not only makes the process more effective by enhancing the accuracy and relevance of audit findings but also more efficient by streamlining the audit process, reducing manual work, and allowing auditors to analyze large datasets quickly.

Question 4

Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.

Accepted Answer

Lapping of accounts receivable is more likely to occur when there is an inadequate segregation of duties, as this lack of proper controls makes it easier for an individual to manipulate the records without detection.

Question 5

When the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high,the auditor is more likely to use negative confirmations.

Accepted Answer

When the assessed level of control risk is high, auditors are more likely to use positive confirmations to directly verify the existence and accuracy of accounts receivable, as negative confirmations provide less persuasive evidence. Positive confirmations require a response regardless of whether the debtor agrees with the stated amount, making them more reliable in situations with high control risk.

Question 6

An auditor would test controls over the occurrence of sales transactions by sampling recorded revenues and tracing them back to invoices and shipping documents.

Accepted Answer

This is a common procedure in testing controls over the occurrence of sales transactions, as it helps the auditor ensure that revenue is being properly recorded and recognized.

Question 7

Positive accounts receivable confirmations should be used on all accounts which represent small immaterial balances.

Accepted Answer

Positive accounts receivable confirmations are typically only used on accounts which represent significant balances, as they require significant time and resources to execute. Small immaterial balances can be confirmed through alternative means, such as review of internal records or follow-up phone calls.

Question 8

When the auditor seeks evidence concerning the allowance for doubtful accounts,he or she would most likely use an aged trial balance to help identify past due balances.

Accepted Answer

An aged trial balance categorizes accounts receivable by the length of time they have been outstanding. By analyzing the aged trial balance, the auditor can identify past due balances that may require an allowance for doubtful accounts.

Question 9

The auditor has determined that the control risk for the existence assertion is low;therefore,the auditor may reduce the number of items tested on a substantive basis.

Accepted Answer

If control risk is low for an assertion, the auditor may rely on controls to a greater extent and reduce the number of items tested substantively.

Question 10

Current auditing standards do not require the confirmation of receivables if accounts receivable are not material.

Accepted Answer

Auditing standards require the confirmation of receivables if they are material. However, if they are not material, confirmation may not be necessary.

Question 11

Accounts receivable confirmation letters should be prepared on the auditing firm's letterhead.

Accepted Answer

Accounts receivable confirmation letters should be prepared on the client's letterhead to ensure that the recipient recognizes the request as coming from the client and not the auditor.

Question 12

The auditor's determination that the number of days' sales in accounts receivable increased from 44 days to 100 days would usually be found through the use of ratio analysis.

Accepted Answer

The number of days' sales in accounts receivable can be calculated using the accounts receivable turnover ratio, which is calculated by dividing net credit sales by the average accounts receivable balance. If this ratio decreases, it indicates that the company is collecting its receivables more quickly, resulting in a decrease in the number of days' sales in accounts receivable. Conversely, if the ratio increases, it indicates that the company is collecting its receivables more slowly, resulting in an increase in the number of days' sales in accounts receivable. Therefore, the auditor would use ratio analysis to determine the change in the number of days' sales in accounts receivable.

Question 13

Use of reasonableness tests by Bono Mullins,PC,will include relationships between financial but not non-financial data.

Accepted Answer

Reasonableness tests can include both financial and non-financial data to assess the plausibility and logical consistency of information.

Question 14

In planning an audit for the revenue cycle,the auditor must consider the integrated relationship of evidence found between the accounts receivable and the notes payable accounts.

Accepted Answer

The auditor must consider the integrated relationship of evidence found between the accounts receivable and revenue accounts, not notes payable. Notes payable is related to debt financing and not directly linked to the revenue cycle.

Question 15

Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been sold to the bank on a recourse basis.

Accepted Answer

The answer of Confirmations of bank accounts may help the...

Question 16

An example of a control over the sales cycle is the authorization of price lists by the appropriate sales and marketing manager.

Accepted Answer

This statement is true. Authorization of price lists can help control the sales cycle by ensuring that salespeople are pricing products/services appropriately and in accordance with company policies and strategies. Sales and marketing managers are typically responsible for setting and reviewing pricing policies, so authorizing price lists is a key aspect of their role in controlling the sales cycle.

Question 17

The auditor would examine a sample of sales transactions throughout the entire period to determine if sales were recorded in the proper period when performing a sales cutoff test.

Accepted Answer

The answer of The auditor would examine a sample of...

Question 18

Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence.

Accepted Answer

This statement is true. Alternative procedures to the confirmation of receivables can include reviewing subsequent collections and examining supporting evidence, such as invoice copies, customer correspondence, or shipping documents.

Question 19

A method of testing for the completeness of sales is to test the sequence of sales invoices used during the period under audit.

Accepted Answer

Testing the sequence of sales invoices is a valid method of testing for completeness of sales, as it helps ensure that no sales have been omitted from the accounting records.

Question 20

Edge and Gregg,LLP would most likely discover a client's first-time use of channel stuffing through the use of trend analysis.

Accepted Answer

Trend analysis involves analyzing trends and patterns in financial data over time, which can reveal unusual or suspicious activity such as sudden increases in sales that are not supported by underlying demand, which may indicate channel stuffing. Therefore, it is likely that Edge and Gregg, LLP would use trend analysis to identify a client's first-time use of channel stuffing.

Quiz 9: Auditing the Revenue Cycle