Ch.10 Auditing Sales And Receivables Verified Test Bank

CHAPTER 10

AUDITING SALES AND RECEIVABLES

CHAPTER LEARNING OBJECTIVES

1. Identify the audit objectives applicable to sales and receivables.

When auditing sales and receivables, the auditor’s objective is to obtain sufficient appropriate evidence about each significant assertion for the applicable classes of transactions and balances. Significant assertions for sales, cash receipts, and sales adjustments include occurrence, completeness, accuracy, cut-off, classification, and presentation. Significant assertions for accounts receivable and allowance for doubtful accounts include existence, completeness, accuracy, valuation, and allocation, classification and presentation. Evidence may be obtained by tests of controls or substantive testing depending on the audit strategy chosen.

2. Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

When auditing sales and receivables, the auditor’s objective is to obtain sufficient appropriate evidence about each significant assertion for the applicable classes of transactions and balances. Significant assertions for sales, cash receipts, and sales adjustments include occurrence, completeness, accuracy, cut-off, classification, and presentation. Significant assertions for accounts receivable and allowance for doubtful accounts include existence, completeness, accuracy, valuation, and allocation, classification and presentation. Evidence may be obtained by tests of controls or substantive testing depending on the audit strategy chosen. receipts, while sales adjustments include granting cash discounts, processing sales returns and allowances, and determining bad debts. Control procedures such as appropriate segregation of duties, authorizations, and use of documents and records should be interwoven into each process to reduce the risk of misstatement in the financial statements.

3. Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

To determine the appropriate audit strategy, the auditor starts with obtaining an understanding of the entity. This is necessary for the auditor to assess the inherent and control risks. For audit purposes, the most significant inherent risk is that of overstatement |of sales transactions and receivables balances to boost reported profits and assets.
For the entity, the greatest inherent risk is that of misappropriation of cash arising from sales transactions. The auditor assesses control risk by evaluating the design effectiveness of internal controls. The auditor drafts the audit program based on the preliminary assessment of control risk, identifying both tests of the operating effectiveness of controls and the reduced level of substantive procedures relevant to the control risk assessment. The auditor confirms the control risk assessment on completion of the tests of operating effectiveness.

4. Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Before designing substantive procedures, the auditor must determine the acceptable level of detection risk for each significant related assertion. This level of detection risk will be used by the auditor to determine the nature, timing, and extent of substantive procedures that need to be performed.

5. Design a substantive audit program for sales and receivables.

It is usually cost-effective to perform substantive tests on the balance of receivables rather than the transactions making up that balance. The most important test of transactions is that of cut-off at the year end. The major test of balances is the confirmation of accounts receivable. Given that customers are third parties, such evidence is highly reliable. If no response is received, the auditor performs alternative procedures, such as examining subsequent collections and vouching unpaid invoices and supporting documentation constituting customer balances. The auditor must also verify the estimate of the allowance for doubtful accounts.

TRUE-FALSE STATEMENTS

1. One of the key objectives in auditing sales and receivables is that the customer is

satisfied with the goods or services provided by the company.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to sales and receivables.

Section Reference: 10.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

2. The key issues relating to auditing sales and receivables are that the receivables do actually exist and are collectible with adequate allowances for doubtful accounts, and that the sales are genuine and neither overstated or understated.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to sales and receivables.

Section Reference: 10.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

3. Credit checks should be performed for all customers after sending the customer order to

the warehouse for processing, pickup, and delivery.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

4. A significant risk over cash receipts is that cash paid by customers is stolen before it is

recorded.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

5. Sales transactions are the main source of operating revenue for most business

enterprises, and thus, the accounts receivable produced by credit sales transactions are

material to the balance sheet for all businesses except where cash receipts are

predominant.

Difficulty: Easy

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

6. A substantive test for sales may include a sample of invoices from the sales journal which

would be vouched back to sales orders or shipping documents in order to test occurrence.

Difficulty: Easy

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

7. In terms of the accounts receivable, the main consideration is the gross amount due from

customers on credit sales and the related allowance for doubtful accounts.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

8. Accounts receivable can be verified without any consideration being given to sales on the

income statement.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

9. A substantive test for accounts receivable could include verifying accounts receivable and

the related allowance account by tracing the current period’s opening balances to the

closing audited balances in the previous year’s working papers.

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

10. The cut-off tests for sales are designed to ensure that both sales and receivables are

recorded in the correct accounting period and that inventories and accounts payable are

recorded in the same accounting period.

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

MULTIPLE CHOICE QUESTIONS

11. The account balance audit objective, “Accounts receivable presents gross claims on customers at balance date and agree with the sum of the accounts receivable subsidiary ledger”, is derived from the assertion category of

a) existence or occurrence.

b) completeness.

c) rights and obligations.

d) accuracy, valuation, and allocation.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to sales and receivables.

Section Reference: 10.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

12. Which of these is not a specific audit objective for sales and receivables?

a) existence or occurrence

b) completeness

c) representation

d) presentation

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to sales and receivables.

Section Reference: 10.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

13. Which assertion category does the following audit objective relate to? “Accounts receivable include all claims on customers at the balance sheet date.”

a) valuation

b) rights and obligations

c) disclosure

d) completeness

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to sales and receivables.

Section Reference: 10.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

14. Verifying the accuracy of the accounts receivable trial balance relates to the

a) existence or occurrence assertion.

b) completeness assertion.

c) accuracy, valuation, and allocation assertion.

d) rights and obligations assertion.

Difficulty: Easy

Learning Objective: Identify the audit objectives applicable to sales and receivables.

Section Reference: 10.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

15. In a credit sales environment, the document that usually initiates the activity in the sales cycle is

a) customer order.

b) sales order.

c) dispatch note.

d) sales invoice.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

16. Which of the following is not normally considered a step in the credit sales functions?

a) accepting customer orders

b) approving credit

c) acquiring goods to fill the order

d) billing customers

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

17. In a credit sales environment, the document that serves as the basis for internal processing of an order is

a) customer order.

b) sales order.

c) dispatch note.

d) sales invoice.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

18. In a credit sales environment, the best place to vest credit approval is in

a) accounts receivable.

b) the sales department.

c) the cashier area where receipts will eventually be sent.

d) an independent credit department.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

19. Controls over approving credit relate to the

a) existence or occurrence assertion.

b) completeness assertion.

c) accuracy, valuation, and allocation assertion.

d) rights and obligations assertion.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

20. To enhance controls in the credit sales area, the warehouse should be instructed not to release (or dispatch) goods until

a) they received a faxed copy of the sales requisition.

b) they have a completed sales invoice.

c) they receive an approved sales order.

d) the shipping department requests the goods.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

21. Accounting for the numerical sequence of dispatch notes used in tracing will primarily meet the

a) existence or occurrence assertion.

b) completeness assertion.

c) accuracy, valuation, and allocation assertion.

d) presentation assertion.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

22. From the following which would not be an appropriate control procedure for the invoicing of customers?

a) checking the existence of a dispatch note matching the approved sales order before an invoice is prepared

b) using an authorized price list when preparing the invoice

c) comparing totals for dispatch notes with totals for invoices

d) segregating filling and dispatching sales orders

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

23. Use of an authorized price list in preparing the sales invoices meets primarily the

a) existence or occurrence assertion.

b) completeness assertion.

c) accuracy, valuation, and allocation assertion.

d) rights and obligations assertion.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

24. The main control objective of the recording of sales function is

a) that only actual deliveries are invoiced.

b) that sales are recorded accurately and in the proper period.

c) that cash will be received for the sale.

d) to produce a monthly customer statement.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

25. Which of these is not an example of a sales adjustment transaction?

a) cash discount

b) sales return or allowance

c) short payment of customer account

d) bad debt write-off

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

26. A cash register or point-of-sale terminal provides

a) an immediate visual display for the customer of the amount of the cash sale and the cash tendered.

b) a printed receipt for the customer and an internal record of the transaction.

c) a printed control totals of the day’s receipts.

d) all of the above

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

27. For entities involved in the business of selling goods and services which of the following function(s) will apply?

a) sales

b) sales and cash receipts

c) cash receipts

d) sales, cash receipts, and sales adjustments

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

28. Information processing controls specific to credit sales transactions include

a) proper authorization.

b) documents and records.

c) independent checks.

d) all of the above

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

29. In recording sales, the primary control objective is to

a) ensure sales invoices are recorded.

b) ensure sales invoices are recorded accurately and in the right period.

c) ensure cash receipts are recorded accurately and in the right period.

d) both b and c

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

30. When an entity receives mail receipts, it is preferable to have at least two clerks responsible for opening the mail. This control

a) ensures both clerks are punctual.

b) reduces the risk of cash receipts received in the mail being misappropriated.

c) ensures receipts are processed to the appropriate general ledger account.

d) ensures all cheques received are accompanied by a remittance advice.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

31. ‘Depositing receipts intact’ means

a) all receipts are deposited, that is, not used to make payments.

b) all receipts are placed in a security envelope prior to banking.

c) both mail receipts and over-the-counter receipts are banked together.

d) mail receipts are banked separately to receipts received over-the-counter.

Difficulty: Easy

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

32. Controls useful in reducing the risk of fraud associated with sales adjustment transactions include

a) proper authorization of all sales adjustment transactions.

b) proper authorization of credit for returned or damaged goods.

c) proper authorization for the writing off of bad debts.

d) all of the above

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

33. Access controls should permit read-only access to transaction and master files except for authorized individuals. Which of the following illustrates such an exception?

a) credit controller can override marginal breaches of a customer’s credit limit.

b) sales manager can amend a price for a sales transaction.

c) sales manager can amend a discount for a customer.

d) any of the above

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

34. Which of the following is not an example of a programmed application control?

a) numerical continuity of documents is assured

b) unreasonable quantities, amounts, and dates are queried

c) only orders for goods in the entity’s product range are accepted

d) duplicate document numbers are accepted

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

35. Use of point-of-sale terminals to record over-the-counter cash sales provides all of the following except

a) assurance that all cash sales are processed through the system.

b) an immediate visual display for the customer to verify the accuracy of price and cash tendered.

c) a printed receipt for the customer.

d) printed control totals of the day’s receipts processed on the device.

Difficulty: Easy

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

36. Standard control procedures over customer remittances received through the mail include having the mailroom personnel

a) forward the remittances, unopened, directly to the accounts receivable clerk.

b) open the mail, restrictively endorse the cheques, and then forward the remittances directly to the cashier.

c) open the mail, restrictively endorse the cheques, and then forward the remittances directly to the accounts receivable clerk.

d) open the mail, restrictively endorse the cheques, and then list each remittance on a prelist.

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

37. After making the deposit, the daily cash summary should be forwarded by the cashier directly to

a) the chief financial officer.

b) the accounts receivable clerk.

c) general accounting.

d) the cash receipts clerk.

Difficulty: Easy

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

38. When undertaking tests of controls for revenues, auditors are more concerned with controls associated with the occurrence assertion than they are with the completeness assertion because

a) clients are more likely to overstate than understate revenues.

b) clients are more likely to understate than overstate revenues.

c) it is difficult to determine when services have been performed.

d) the allowance for doubtful accounts often is understated.

Difficulty: Easy

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

39. The control an entity should have in place in order to ensure all credit sales have proper credit approval is

a) an approved sales order for all goods released to dispatch.

b) a check on customer’s credit limit prior to each sale and a credit department credit check on all new customers.

c) determination that customer is on an approved customer list.

d) both a and c

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

40. When testing the operating effectiveness of controls pertaining to the function of the recording of sales, the auditor may vouch recorded sales to supporting documents. The vouching of recorded sales to supporting documents pertains to the audit objective of

a) existence or occurrence.

b) rights and obligations.

c) accuracy, valuation, and allocation.

d) all of the above

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

41. In most credit sales audits, the auditor's concern over sales adjustment transactions is based upon the

a) sheer number and value of these transactions.

b) lack of proper authorization for these transactions.

c) potential use of these transactions to conceal a theft of cash.

d) poor controls normally found over these transactions and the inherent lack of documentation.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

42. The write-off of accounts receivable should be authorized by the

a) cashier

b) controller.

c) accounts receivable clerk.

d) chief financial officer.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

43. After completing the testing of controls over cash receipts and sales adjustments, the auditor assesses the level of control risk to be higher than expected. How would this affect the auditor’s substantive audit work on accounts receivable?

a) More work would need to be performed to ensure that the allowance for doubtful debts is fairly stated.

b) Less work would need to be performed on following up non-responses from the auditor’s customers’ circularization.

c) The auditor may consider changing the date of the customers’ circularization from one month before the year-end, to the actual year-end date.

d) More analytical review tests could be performed on debtors as a substitute for other substantive tests.

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

44. An inherent risk for sales and receivables is

a) promising large bonuses for meeting sales targets.

b) the susceptibility of cash to misappropriation.

c) not requiring employees to take regular annual leave.

d) all of the above

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

45. The type of computer assisted audit technique (CAAT) that would be least suitable for testing controls where credit sales transactions are processed using real time systems is

a) systems control and audit file.

b) integrated test facility.

c) embedded audit facility.

d) test data approach.

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

46. When examining sales transactions, which of the following would not be possible using generalized audit software?

a) inquiring about segregation of duties for invoicing customers

b) selecting a sample of invoices for inspection

c) re-performing invoice pricing and reporting differences

d) ensuring the sales journal is correctly totalled

Difficulty: Easy

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

47. A key control environment factor in reducing the risk of fraudulent financial reporting through the overstatement of sales and accounts receivable is

a) management’s adoption and adherence to high standards of integrity and ethical values.

b) reducing the emphasis on sales targets.

c) establishing an effective audit committee.

d) all of the above

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

48. A potential misstatement for the function of approving credit is

a) goods may be released from the warehouse for unauthorized orders.

b) goods dispatched may not agree with goods ordered.

c) sales may be made without credit approval.

d) all of the above

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

49. A potential misstatement for the function of filling sales orders is

a) goods may be released from the warehouse for unauthorized orders.

b) sales may be made without credit approval.

c) sales may be made to unauthorized customers.

d) all of the above

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

50. Which of these is not a potential misstatement for the function of recording cash receipts?

a) cash may not be deposited intact daily

b) some receipts may not be recorded

c) errors may be made in journalizing receipts

d) receipts may be posted to the wrong customer account

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

51. The best procedure for dealing with a non-response to a third positive request for confirmation of an accounts receivable is

a) assume that the debtor’s value is correct.

b) write-off the balance as a bad debt.

c) examine subsequent cash collections.

d) involve the client in chasing up the debtor.

Difficulty: Medium

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

52. For accounts receivables and sales, analytical procedures provide evidence that relates to

a) existence or occurrence assertion.

b) completeness assertion.

c) valuation or measurement assertion.

d) all of the above

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

53. An unusual feature of cut-off tests is that they

a) are always performed at year-end to verify a recorded balance even though they are tests of transactions.

b) are never performed at year-end to verify a recorded balance because they are tests of transactions.

c) are always performed at year-end to verify transactions even though they are tests of details of balances.

d) none of the above

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

54. Confirming accounts receivable is an accepted audit procedure whenever

a) they are material in amount.

b) it is reasonable to presume debtors will respond.

c) they are material and it is reasonable to presume debtors will respond.

d) a large number of small balances is involved.

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

55. When detection risk is high, the timing of the receivables confirmations would be expected to be

a) at balance date.

b) prior to balance date.

c) prior to balance date provided analytical procedures are performed between the confirmations and balance date.

d) prior to balance date provided analytical procedures and tests of control are performed between the confirmations and balance date.

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

56. In the processing of accounts receivable confirmations, the auditor would not normally be expected to

a) personally prepare the confirmations.

b) personally post the requests.

c) include his/her own return address envelope.

d) maintain custody of the confirmations until they are mailed.

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

57. When the positive form of accounts receivable confirmation is used and no response is received, the auditor should normally

a) assume the account is in error.

b) send a second positive request.

c) assume the account is correct.

d) send a negative confirmation.

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

58. The summary of the results from confirming accounts receivable contained in the auditor’s working papers would not normally provide statistical data on the

a) market value of the confirmation sample.

b) number of confirmations sent and responses received.

c) proportion of the population total covered by the sample.

d) relationship between the audited and book values of items included in the sample.

Difficulty: Easy

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

59. Which of these is not an approach that might be adopted by an auditor in evaluating the adequacy of an allowance for bad debts?

a) reviewing subsequent events

b) reviewing and testing the process used by management

c) use the percentages adopted by the client

d) use an independent estimate

Difficulty: Medium

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

60. When reviewing and testing the process used by management in determining the allowance for bad debts, which of the following would not be involved?

a) reviewing projected allowances for future periods

b) ascertaining management’s procedures for determining the estimate and considering their reliability

c) ensuring that the procedures have been properly followed

d) identifying the assumptions underlying the estimate and considering their reasonableness

Difficulty: Medium

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

SHORT ANSWER QUESTIONS

61. Identify the assertion relating to classes of transactions that corresponds with the following descriptions.

1. All sales, cash receipts, and sales adjustment transactions are recorded in the correct accounts.
2. Sales recorded represent goods that were shipped to customers during the period.
3. Particularly relevant to transactions around the year end; all sales, cash receipts, and sales adjustment transactions arising before the period end are recorded in the current period and those arising after the period end are included in the next accounting period.
4. All goods shipped to customers during the period are recorded.
5. All sales, cash receipts, and sales adjustment transactions are properly recorded.
6. Cash receipts represent cash received from customers during the period.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to sales and receivables

Section Reference: 10.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

62. Identify the assertion relating to account balances that corresponds with the following descriptions.

1. Accounts receivable represent gross claims on customers at the end of the reporting period and agree with the sum of the accounts receivable subsidiary ledger.
2. All amounts owed by customers at the end of the reporting period are included in accounts receivable.
3. Accounts receivable at the end of the sales reporting period represent legal claims of the entity on customers for payment.
4. Accounts receivable represent amounts owed by customers at the end of the reporting period.
5. The allowance for doubtful accounts represents a reasonable estimate of the difference between gross accounts receivable and their net realizable value.

Difficulty: Medium

Learning Objective: Identify the audit objectives applicable to sales and receivables

Section Reference: 10.1 Audit objectives

CPA Competency: Audit and Assurance

AACSB: Analytic

63. Provide an appropriate control procedure that relates to the audit assertions and objectives provided in the table below.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

64. Identify the five functions in the processing of credit sales transactions and any documents and records that are used in these functions.

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

65. Identify the three functions in the processing of cash receipts transactions and any documents and records that are used in these functions.

pts: The daily cash summary is used to enter the cash receipts journal, distinguishing between receipts from cash sales and from credit sales. The credit sales receipts are then posted to the accounts receivable ledger using remittance advices, and cash receipts are posted to the general ledger.

Bloomcode: Application

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

66. Provide three relevant analytical procedures related to the audit of sales and receivables.

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustment transactions

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

67. Identify factors that ought to be considered in the assessment of inherent and control risks for sales and accounts receivable.

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

68. Identify a necessary control for each of the following potential misstatements in relation to credit sales transactions:

1. Sales may be made to unauthorized customers.

2. Sales may be made without credit approval.

3. Goods may be released from the warehouse for unauthorized orders.

4. Unauthorized shipments may be made.

5. Some shipments may not be invoiced.

6. Invoices may not be journalized or posted to customer accounts.

7. Invoices may be posted to the wrong customer account.

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

69. For each of the following functions of cash receipts, identify a potential misstatement and a necessary control:

1. Receiving cash receipts.

2. Depositing cash in the bank.

3. Recording the receipts.

pts: Cash sales may not be registered. Use of cash registers or point-of-sale devices. Mail receipts may be lost or misappropriated after receipt. Restrictive endorsement of cheques. Preparation of a rough cash book or prelist of mail receipts.

2. Depositing cash in the bank: Amounts may not agree with the cash count list or prelist. Independent check of agreement of cash and cheques with register totals and prelist.

Cash may not be deposited intact daily. Independent check of agreement of validated deposit slip with daily cash summary.

3. Recording the receipts: Some receipts may not be recorded. Independent check of agreement of amounts journalized and posted with the daily cash summary.

Errors may be made in journalizing receipts. Preparation of periodic bank reconciliations.

Receipts may be posted to the wrong customer account. Mailing of monthly statements to customers.

Bloomcode: Application

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables.

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

70. Provide three inherent risks related to the audit of sales and receivables.

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

71. Describe a preventative control for each of the WCGW (what can go wrong) provided in the table below.

Difficulty: Medium

Learning Objective: Indicate the factors relevant to determining an acceptable level of detection risk for the audit of sales and receivables

Section Reference: 10.4 Determining an acceptable level of detection risk

CPA Competency: Audit and Assurance

AACSB: Analytic

72. There are three stages in applying analytical procedures to sales and receivables in the final audit. Briefly explain each stage.

Difficulty: Medium

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

73. Confirmations are considered to be the most efficient procedure for obtaining sufficient appropriate audit evidence to support the existence and rights assertions of accounts receivable. However, there are still circumstances under which other procedures may be more effective. List four situations in which confirmations are unlikely to be effective.

Difficulty: Medium

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

74. Differentiate between the two different forms of confirmation of accounts receivable balances and explain the conditions for which each would be used.

Difficulty: Medium

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

75. List the steps involved when the auditor reviews and tests the process used by management to estimate the bad debts and the allowance for doubtful accounts.

Difficulty: Medium

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

76.

1. What is the initial starting point for auditing accounts receivables?

2. Identify and describe three tests of details of transactions that would be performed in auditing accounts receivable.

3. Identify and describe the two most important tests of details of balances in relation to accounts receivable.

Difficulty: Medium

Learning Objective: Design a substantive audit program for sales and receivables.

Section Reference: 10.5 Designing substantive procedures

CPA Competency: Audit and Assurance

AACSB: Analytic

ESSAY QUESTIONS

77. Describe the process that a company should follow when granting credit sales transactions to a new customer.

Difficulty: Medium

Learning Objective: Describe the functions and control procedures normally found in information systems for processing sales, cash receipts, and sales adjustment transactions.

Section Reference: 10.2 The process for credit sales transactions

CPA Competency: Audit and Assurance

AACSB: Analytic

78. Explain why sales adjustment transactions attract the attention of auditors and list the audit risks associated wi­th sales adjustments.

Difficulty: Medium

Learning Objective: Outline audit strategy considerations including the risk of material misstatement and tests of controls for sales, cash receipts, and sales adjustments transactions.

Section Reference: 10.3 Audit strategy

CPA Competency: Audit and Assurance

AACSB: Analytic

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