Question 1

Confirmations that are sent to customers asking them to review the current balance due the client and return the letters directly to the auditor indicating whether they agree with the indicated balance,are known as

Accepted Answer

Positive confirmations involve directly asking the customer to confirm the accuracy of the account balance. This is in contrast to indirect confirmations which rely on the customer's lack of response as an indication of agreement with the balance, or negative confirmations which ask the customer to only respond if they disagree with the balance. Direct confirmations may also be used, but these involve the auditor directly contacting the customer rather than sending a letter for the customer to respond to. Therefore, the best choice is C) positive confirmations.

Question 2

Which one of the following procedures would be considered improper for an auditor in the process of confirming receivables?

Accepted Answer

The answer of Which one of the following procedures would...

Question 3

In the audit of the revenue of Hiram Manufacturing Company,the auditors obtain a number of shipping documents shortly before year-end and immediately following the year under audit.The auditors compare the documents to the sales journal in order to test which of the following?

Accepted Answer

By comparing the shipping documents to the sales journal, the auditors are testing the cutoff of sales transactions, which ensures that the revenue is recorded in the correct accounting period. This testing helps to establish whether sales recorded at year-end actually occurred in the same year or in the subsequent period.

Question 4

The primary difference between positive and negative confirmations used in the audit of accounts receivable is

Accepted Answer

The primary difference between positive and negative confirmations is the mode of response. Positive confirmation requires the recipient to respond whether the information provided is correct or incorrect, whereas negative confirmation requires the recipient to respond only if the information provided is incorrect.

Question 5

A key indicator of fraud in the revenue cycle is the auditor's detection of which of the following?

Accepted Answer

Altered shipping documents and invoices can be a sign of fraudulent activity in the revenue cycle, such as falsifying sales or hiding returns. Collections past due or credit entries for write-offs may indicate legitimate issues with customers, while recurring entries in the sales journal are a normal aspect of business operations.

Question 6

Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following?

Accepted Answer

By selecting a sample of shipping documents and tracing them to the sales journal, the auditor can ensure that all sales transactions have been recorded in the sales journal, thereby testing the completeness of revenues. Option B tests the accuracy of recording revenue, while option C tests the posting of sales transactions to the general ledger. Option D tests the existence of inventory, not the completeness of revenues.

Question 7

In the audit of accounting estimates,such as the allowance for doubtful accounts,the auditor strives to provide reasonable assurance that

Accepted Answer

In the audit of accounting estimates, the auditor's objective is to provide reasonable assurance that all material accounting estimates (A) have been developed properly, that the estimates are reasonable (B), and that they are presented in accordance with GAAP (C). Therefore, choice (D) is the correct answer as it includes all of the above.

Question 8

To determine whether any accounts receivable are pledged or assigned to others,the auditor would most likely perform which of the following?

Accepted Answer

Reviewing loan agreements and board of directors' minutes would provide information about any accounts receivables that have been pledged or assigned to others. This information may not be available through examining subsequent collections or testing transactions to the general ledger. Deriving an independent estimate of the allowance and comparing it to pledged assets is not a relevant procedure to determine whether accounts receivable have been pledged or assigned to others.

Question 9

Which of the following criteria must be met in order to recognize revenue in the current accounting period?

Accepted Answer

All of the criteria listed (delivery or services rendered, fixed or determinable price, and collectibility reasonably assured) must be met in order to recognize revenue in the current accounting period.

Question 10

Auditors are concerned with the addresses provided for customers in the confirmation of accounts receivable because

Accepted Answer

The address provided in the confirmation of accounts receivable may be routed to the client for retrieval and fraudulent signing. This puts the reliability of the confirmation responses into question, which is a concern for auditors. Therefore, auditors need to ensure that the confirmation is sent to the correct address and that the response received is authentic.

Question 11

According to auditing standards,accounts receivable confirmations are required to be used

Accepted Answer

Auditing standards require accounts receivable confirmations to be used if the balance is material. This ensures that the auditor has obtained sufficient and appropriate audit evidence to support the completeness and valuation of the accounts receivable balance. The use of accounts receivable confirmations may not be necessary for every audit engagement, and is not dependent on the client's agreement or environmental risk.

Question 12

Alternative procedures that would provide evidence of the existence of receivables would include which of the following?

Accepted Answer

Review of subsequent collections provides evidence that receivables exist, as it shows that customers have paid their outstanding balances.

Question 13

An example of alternative procedures for the confirmation of accounts receivable includes which of the following?

Accepted Answer

Review of subsequent collections on account by the client is an alternative procedure to confirm the existence and accuracy of accounts receivable when direct confirmation is not possible.

Question 14

An auditor's examination of the sales account using a cut-off test would most likely detect which of the following?

Accepted Answer

A cut-off test is used to determine whether transactions have been recorded in the correct accounting period. Therefore, it is likely to detect sales recorded in the wrong period. Kiting and lapping of accounts receivable are not related to the sales account, and the detection of sales that should be deferred would require a different type of testing such as variable consideration testing in revenue recognition.

Question 15

Homer and Moe,PC are auditing the financial statements of Lyoncraft,Inc.and decide to confirm a sample of accounts receivable.This test is performed by Homer and Moe primarily to substantiate which of the following?

Accepted Answer

Confirming a sample of accounts receivable helps Homer and Moe to substantiate the existence of accounts receivable, which is a key account balance on the financial statements. By confirming the balances with the customers, they can ensure that the amounts are valid and accurate. The other options listed may require different audit procedures to test for these assertions.

Question 16

The allowance for doubtful accounts will not be precise by either the client or the auditor because of which of the following?

Accepted Answer

The allowance for doubtful accounts is an accounting estimate that involves judgment and is based on historical data, industry trends, and economic conditions. The level of precision in calculating this estimate may vary between the client and the auditor due to their different perspectives and expertise. Also, GAAP provides guidance on how to estimate the allowance, but it allows for some flexibility in the calculation. Therefore, the allowance for doubtful accounts may not be precisely determined by either the client or the auditor.

Question 17

Unreturned positive confirmations for accounts receivable warrant which of the following by the auditor?

Accepted Answer

When positive confirmations are not returned, the auditor should send second requests and possibly perform alternative procedures to obtain evidence regarding the accounts receivable balance. Replacing the sample selection with a new customer or requesting that the client send additional audit correspondence to customers may not necessarily address the issue of unreturned confirmations. The projection of larger misstatements to the population may be necessary if the error rate in the sample is high, but this is not the first step that the auditor should take.

Question 18

Accounts receivable confirmations usually provide strong evidence about which of the following?

Accepted Answer

Accounts receivable confirmations are primarily used to verify the existence of receivables by confirming with the debtor that the amount owed is accurate and exists as recorded.

Question 19

For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate?

Accepted Answer

Negative confirmations are most appropriate when control risk is assessed as low, as this implies that the internal controls are strong and reliable. Therefore, option D, a cable company with control risk over the revenue cycle assessed low, is the most appropriate choice. Options A, B, and C all have either high inherent risk or high control risk, which would make negative confirmations less appropriate.

Question 20

The aged accounts receivable report is utilized by the auditor to

Accepted Answer

The aged accounts receivable report provides information on receivables that are outstanding for an extended period, allowing the auditor to assess the adequacy of the allowance for doubtful accounts. The report shows the amount of outstanding receivables by age, which the auditor can use to determine whether the client has appropriately accounted for the risk of non-payment. Therefore, choice C is the best answer. A, B, and D are not significant uses of the aged accounts receivable report for the auditor.

Quiz 10: Auditing Revenue and Related Accounts