Complete Test Bank Auditing the Revenue Process Chapter 11 - Auditing Data Analytics 1e Test Bank by Raymond N. Johnson. DOCX document preview.
Chapter 11
Auditing the Revenue Process
Question Type: True or False
For companies that sell goods or services on account, there is significant interaction between sales and accounts receivable.
A. True
B. False
Understanding how the entity earns and recognizes revenue assists the auditor in developing an expectation of total revenues by understanding the client’s capacity, market place, and customers.
A. True
B. False
Analytical procedures are an optional part of every audit as part of audit planning.
A. True
B. False
Management often has more incentives to understate revenues than to overstate revenues.
A. True
B. False
Risks associated with revenue recognition are such that auditors often consider the occurrence of revenues and the existence of receivables assertions to be a significant inherent risk.
A. True
B. False
A debit memo is a form stating the particulars of a credit to accounts receivable, including the specific items returned, prices, and amount credited to a customer’s account.
A. True
B. False
The cash receipts function, which includes the process of receipts from cash and credit sales, involves the following subfunctions: (1) disbursing cash, (2) depositing cash, and (3) recording the receipts.
A. True
B. False
The effectiveness of IT controls usually depends on both effective entity level controls and effective IT general controls.
A. True
B. False
If the client relies on IT controls and the auditor plans to assess control risk as low for specific
(e.g., revenue process) assertions, the auditor will usually test the effectiveness of IT general controls.
The auditor will usually test the effectiveness of IT general controls as part of testing entity-level controls.
Most auditors plan to test controls in the revenue cycle because of the relatively low volume of routine transactions in this cycle.
A. True
B. False
Question Type: Multiple choice
An audit must be customized each year because inherent risk factors for a client _______.
A. will vary from year to year
B. should be invariant throughout the industry
C. should be fixed over time
D. should be discussed with regulatory agencies
There is significant interaction between cash receipt transactions and accounts receivable because _______.
A. the creation of an account receivable indicates receipt of cash
B. a misstatement of cash receipts will result in a misstatement of accounts receivable.
C. a misstatement of cash receipts will result in a misstatement of interest payments
D. the settlement of an account receivable will result in a decrease to the cash account
If discounts are given for early payment, _______.
A. sales discounts are recorded when recording the cash receipt and reducing a customer’s receivable
B. the customer’s account payable balance should be decreased accordingly
C. the company should credit the Sales Discount account
D. an increase in equity will result from a customer taking the discount
Gross sales refers to _______.
A. total revenues before any deductions, such as deductions for sales returns and allowances.
B. total revenues, net of deductions for sales returns and allowances
C. earnings before interest and taxes
D. operating income
A primary account balance in the revenue cycle is _______.
A. accounts payable
B. accounts receivable
C. cost of goods sold
D. gross profit
For companies that sell goods or services on account, if revenue is recognized prematurely, what would be overstated: sales or accounts receivable?
A. Both sales and accounts receivable
B. Sales, not accounts receivable
C. Accounts receivable, not sales
D. Neither sales nor accounts receivable
In the revenue cycle, which of the following assertions does not apply to the relevant account balances in the revenue cycle?
A. Existence
B. Completeness
C. Valuation
D. Classification
To which part of the revenue cycle does the assertion of valuation at historical cost and at net realizable value pertain?
A. Account balances
B. Transaction classes
C. Disclosures
D. All of these answer choices are correct
Key factors for the auditor to consider regarding the entity and its environment in the revenue process are _______.
A. corporate governance and related party transactions
B. regulatory oversight of the profession
C. recent actions of competitors inside and outside the industry
D. the client’s maintenance of an attorney on retainer
With respect to performing analytical procedures to understand total revenue, the auditor should understand _______.
A. revenue recognition methods of all firms within the industry
B. how the firm relates its cost of goods sold to revenue recognition
C. the entity’s capacity, the maximum volume of sales that it could generate if it fully utilized its facilities and employees to manufacture and deliver products and services
D. how the client firm handles depreciation entries related to contra-revenue accounts
When rights of return exist, or are likely to be accepted, _______.
A. the firm should simply expense them as incurred
B. should restrict cash to cover any potential right of return or warranty claim
C. a reasonable estimate of refunds should be made when revenue is recognized.
D. a company should consult with other firms in the industry with respect to best practices
If a reasonable estimate of potential refunds cannot be made, _______.
A. the firm should simply disregard any expense and handle on a case-by-case basis
B. revenue should not be recognized until the material uncertainty is resolved
C. a portion of the revenue should recognized immediately upon sale
D. no revenue recognition should occur during the life of the refund obligation
The purpose of a disclosure committee _______.
A. is to supervise the internal audit function
B. is to handle all communications with firm attorneys
C. is to work with the CFO or controller to review disclosures
D. is to ensure that the firm receives a ‘clean’ audit opinion
The fraud risk assessment is an important part of the audit that the auditor needs to approach with _______.
A. due diligence
B. professional skepticism
C. the assistance of the internal audit function
D. careful consideration
The starting point for every audit test is _______.
A. agreeing fee schedules and compensation
B. contact with the predecessor auditor
C. is obtaining an understanding of the business and industry
D. agreement with the client as to what kind of audit opinion they can expect
It is particularly important in growth companies for auditors to monitor the entity’s collection period because any growth in sales is usually accompanied by ________.
A. growth in accounts receivables that consume operating cash
B. increase in premium gross margins
C. decrease in the client’s collection period
D. increase in the market share for the client’s product
Which of the following ratios, when small, may indicate an inadequate estimation process?
A. Uncollectible accounts expense to accounts receivable write-offs
B. Uncollectible accounts expense to net credit sales
C. Accounts receivable growth to sales growth
D. Accounts receivable turnover in days
The accounts receivable growth to sales growth ratio = _________.
A. ((Accounts Receivable t ÷ Accounts Receivable t − 1) – 1) ÷ ((Sales t ÷ Sales t −1) – 1)
B. ((Accounts Receivable t ÷ Accounts Receivable t − 1) + 1) ÷ ((Sales t ÷ Sales t − 1) + 1)
C. ((Accounts Receivable t ÷ Accounts Receivable t + 1) – 1) ÷ ((Sales t ÷ Sales t + 1) – 1)
D. ((Accounts Receivable t ÷ Accounts Receivable t + 1) + 1) ÷ ((Sales t ÷ Sales t + 1) + 1)
Among analytical procedures commonly used to audit the revenue cycle, what is the audit significance of the sales to capacity ratio?
A. Assessing the reasonableness of total revenues
B. Comparing manufacturing to other asset-based companies
C. Evaluating the reasonableness of uncollectible accounts expense
D. Evaluating the reasonableness of prior period’s uncollectible accounts expense
The market share ratio is useful in assessing the reasonableness of ________.
A. both total revenues and gross margins
B. total revenues, not gross margins
C. gross margins, not total revenues
D. None of these answer choices are correct.
The uncollectible accounts expense to net credit sales ratio is useful in evaluating the reasonableness of __________.
A. uncollectible accounts expense
B. total revenues
C. gross margins
D. prior period’s uncollectible accounts expense
If receivables are growing faster than sales, it may be an indication that the company is _________.
A. accomplishing sales growth by taking on increased credit risk
B. accomplishing sales growth by taking steps to reduce credit risk
C. slowing down sales growth by taking on increased credit risk
D. slowing down sales growth by taking steps to reduce credit risk
Understanding how the entity earns and recognizes revenue assists the auditor in ________.
A. determining control risk related to accounts payable
B. discussing the audit with the predecessor auditor
C. developing an expectation of total revenues by understanding the client’s capacity, market place, and customers
D. developing an expectation of total revenues by understanding the capacities of the client’s key competitors
An example of a sales-related factor that would increase inherent risk would be ________.
A. significant legal compliance issues when making sales
B. a history of complying with all laws and regulations
C. strong oversight of management by the board of directors
D. revenue recognition is relatively straightforward, with no significant accounting issue
An example of a sales-related factor that would decrease inherent risk would be ________.
A. complicated revenue recognition policies
B. lax oversight of management by the board of directors
C. nominal legal compliance issues when making and collecting sales
D. existence of excessive sales goals/targets
After evaluating inherent risk and control risk, the auditor ________.
A. is in a position to begin the audit work
B. can conclude the audit and issue an audit opinion
C. should confirm with management to ensure the auditors findings are agreed with
D. is in a position to evaluate fraud risk
A common scheme to conceal the misappropriation of cash receipts ________.
A. is known as lapping
B. is known as kiting
C. is usually committed by senior management and members of the board of directors
D. should be handled by the internal audit function, not the external auditors
Which of the following may occur in a transaction between a manufacturer and a wholesaler when the seller retains title to inventory in the wholesaler’s possession, and the sale is completed when the wholesaler sells the inventory forward?
A. Consignment sales
B. Bill and hold transactions
C. Refund rights
D. Write-off of accounts receivable
What is the nature of a sale under refund rights?
A. The sale is made with the right to return the goods for a full refund, even if the goods are not defective.
B. The sale is made with the right to return the goods for a full refund, if the goods are defective.
C. The sale is made with no right to return the goods for a refund, even if the goods are defective.
D. The sale is made with no right to return the goods for a refund, even if the goods are not defective.
Recognizing revenues without shipping would lead to ________ gross margins and _______ accounts receivable turnover in days.
A. increased; low
B. decreased; low
C. increased; high
D. decreased; high
The classification of the transaction as a sale or a borrowing may be incorrect when _________.
A. factoring receivables with recourse
B. estimating the likelihood of collection within the next year
C. writing off customers’ balances as uncollectible
D. debating over the timing and amount of revenue to be recognized
Which of the following computer actions is a control for the classification assertion of the sales and receivables?
A. Starts with the population of daily sales invoices and compares the date on the sales invoice with the date on the underlying bill of lading.
B. Starts with the population of daily sales invoices and compares customer numbers with the sales order, specifically addressing customer account coding errors.
C. Starts with the population of daily sales invoices and compares quantities with the underlying packing slips, compares prices to the underlying sales order, and checks the mathematical accuracy of the sales invoice.
D. Starts with the population of daily sales invoices and develops a one for one match with underlying shipping documents to ensure that each sales invoice is supported by a bill of lading.
A credit sale should always include debits to accounts receivable and cost of goods sold, and credits to ________.
A. sales discounts and allowances
B. sales and inventory
C. sales and sales discounts
D. sales discounts and inventory
As an important control for the occurrence assertion related to sales, the computer starts with the population of daily sales invoices and develops a one for one match with underlying shipping documents to ensure that each sales invoice is supported by a ________.
A. bill of lading
B. packing slip
C. sales order
D. sales invoice
A walkthrough is important as _________.
A. different companies often have different documents and transaction flows
B. the volume of routine transactions in the revenue cycle is very high
C. companies with dominant market shares often obtain premium gross margins
D. any growth in sales is usually accompanied by receivable growth that consumes operating cash
The process used for developing an audit strategy for various assertions begins with _________.
A. understanding the flow of transactions in a given transaction cycle
B. identifying what can go wrong from initiating the transaction to the recording in the general ledger
C. assessing whether controls exist to mitigate what can go wrong
D. identifying relevant controls, performing tests of controls, and evaluating results
Which of the following provides the basis for recording a sale in the sales journal?
A. Sales invoice
B. Packing slip
C. Bill of lading
D. Master price file
Which of the following represents the start of the transaction trail of documentary evidence?
A. Sales order
B. Credit approval
C. Sales journal
D. Bill of lading
At the warehouse, when goods are pulled from inventory, which of the following is normally produced to detail the items that will be shipped to the customer and the quantity of each item shipped?
A. Packing slip
B. Sales order
C. Sales invoice
D. Bill of lading
During which of the following functions is the auditor primarily concerned that sales invoices are recorded accurately and in the proper period?
A. Recording sales
B. Shipping sales orders
C. Filling sales orders
D. Accepting customer orders
A major risk in processing cash receipts transactions ________.
A. is that the bank often erroneously double-counts entries
B. is the possible theft of cash before or after a record of the receipt is made
C. is the possible theft of cash only before record of the receipt is made
D. relates to inaccuracies caused by only one person counting the cash receipts
A lockbox system ________.
A. is only used by large companies that can afford to pay for this service
B. deals with cash being received at a post office box that is controlled by the company’s bank
C. increases a company’s inherent risk, as the firm is now more susceptible to fraud and error
D. enables a firm to completely eliminate/outsource its accounts receivable function
Recording cash receipts involves ________.
A. journalizing cash received by a bank
B. receiving cash over-the-counter
C. recording cash received via mail receipt
D. all the above
Which of the following risks is addressed by preparing periodic independent bank reconciliations?
A. Errors being made in journalizing cash receipts
B. Receipts being posted to the wrong customer account
C. Cash sales may not be recorded.
D. Cash not being deposited intact daily
As a control for the assertion of cutoff of cash receipts, a daily exception report is generated for which of the following?
A. Any cash receipts recorded in the incorrect time period
B. Any recorded values of cash received not supported by an underlying remittance report
C. Any recorded cash receipts not supported by the bank remittance report
D. Any cash receipts posted to the incorrect customer
What do over-the-counter receipts devices such as a cash register or point-of-sale terminal provide?
A. All of these answer choices are correct.
B. Immediate visual display for the customer of the amount of the cash sale and the cash tendered
C. An internal record of the transaction on a computer file or a tape locked inside the register
D. Printed control totals of the day’s receipts processed on the device
What is a remittance advice?
A. A document prepared by the bank showing the details of electronic funds transfers received by the bank from customers
B. A receipt from the bank showing the total amount deposited to the client’s account at the bank
C. A document received from the customer showing the details of payments made by the customer
D. A daily report showing cash recorded in the cash receipts journal identifying customers making payments on account and the amounts received
Which of the following is a receipt from the bank showing the total amount deposited to the client’s account at the bank?
A. Remittance advice
B. Remittance report from the bank
C. Monthly statements of receivable balances
D. Bank deposit slip
In the performance of which transaction(s) does segregation of duties serve as an important internal control?
A. Cash receipts, not credit sales
B. Credit sales, not cash receipts
C. Both cash receipts and credit sales
D. None of these answer choices are correct.
As a control for cash receipts, which assertion is addressed when the computer starts with the population of daily cash receipts recorded in the daily remittance report (or cash receipts journal) and develops a one for one match with the underlying bank remittance report
A. Accuracy
B. Classification
C. Occurrence
D. Completeness
Which of the following is a control for the completeness (of cash receipts assertion)?
A. The computer compares each item on the underlying information in the bank remittance report to develop a one for one match with recorded cash receipts in the daily remittance report.
B. The computer starts with the population of daily cash receipts recorded in the daily remittance report and develops a one for one match with the underlying bank remittance report.
C. The computer starts with the population of daily cash receipts recorded in the daily remittance report and it compares the dollar amount of each recorded cash receipt with the underlying bank remittance report.
D. The computer starts with the population of daily cash receipts recorded in the daily remittance report and compares the date recorded in the daily remittance report with the date received and deposited by the bank.
Control activities useful in reducing the risk of fraud focus on establishing the validity and occurrence of such transactions and include ________.
A. a portion of sales returns should be authorized by sales management
B. all sales returns should be authorized by sales management
C. the computer should match the debit memo information with the sales order
D. ensuring top management approves all credit memos before agreeing to a reduction in accounts receivable
What is a credit memo?
A. A form stating the particulars of a credit to accounts receivable, including the specific items returned, prices, and amount credited to a customer’s account
B. A document used to record adjustments such as a provision for bad debt expense or an accounts receivable write-off in the general ledger
C. A report prepared on the receipt of goods from customers showing the kinds and quantities of goods received
D. A form showing the description, quantity, and other data pertaining to goods the customer is authorized to return
Which of the following serves as the basis for initiating the sales return and internal processing of the customer return by the seller?
A. Cash receipts journal
B. Sales return authorization
C. Credit memo
D. Receiving report
Which of the following is a form showing the description, quantity, and other data pertaining to goods the customer is authorized to return?
A. Sales return authorization
B. Authorization for accounts receivable write-off
C. Cash receipts journal
D. Journal entry
Good internal controls over the write-off of uncollectible accounts include appropriate review of ________ by management to ensure the appropriateness of the transaction.
A. journal entries
B. debit memos
C. receiving reports
D. cash receipts journal
The document that serves as the basis for initiating the sales return and internal processing of the customer return by the seller is referred to as a ________.
A. credit memo
B. receiving report
C. sales return authorization
D. debit memo
The auditor often makes inquiries of personnel responsible for clearing exceptions ________.
A. to determine that all exceptions have been automatically approved
B. to ensure that no employees that handle exception reports are lapping
C. to determine their awareness of the types of misstatements that might appear on exception reports
D. to ensure that it is always one type of misstatement that will appear on the report
With respect to understanding the client’s revenue process, it is particularly important that the auditor ________.
A. makes some preliminary inquiries with the client’s attorney
B. be knowledgeable about the entity, how the entity earns revenues, and particular revenue recognition issues that may be relevant to the entity
C. examines other firms within the client’s industry to determine acceptable practices
D. uses accounting standards as an optional guide to determining what the client should be recording
Segregation of duties ________.
A. should always be considered an important internal control
B. should be of primary concern to larger, more complex companies
C. should be instituted by the auditor
D. refers to ensuring employees take on as many tasks as possible, to save labor costs
Many clients build in redundant controls such that if one control does not detect a misstatement, ________.
A. no other control will find the same misstatement
B. an exception report is generated
C. another control will detect the problem
D. the control should immediately be eliminated
Good internal controls over the write-off of uncollectible accounts ________.
A. are optional if the company is smaller in size
B. are typically expensive and cumbersome to implement
C. are important to prevent write-offs from being used to conceal fraud in processing cash receipts
D. are less important if accounts receivable are outsourced
If the client relies on computer controls and the auditor plans to assess control risk as low for revenue cycle assertions, the auditor will usually ________.
A. test the effectiveness of general controls
B. perform substantive testing, to increase the confidence level
C. test the whole population as opposed to a sample
D. drastically increase the sample size
While examining internal control weaknesses, the auditor may need to change the timing of planned substantive tests related to an assertion from interim testing to testing ________ balances.
A. year-end
B. end-of-quarter
C. month-end
D. None of these answer choices are correct.
The auditor will usually test the effectiveness of computer general controls as part of testing _______ level controls.
A. entity
B. division
C. transaction
D. function
Which of the following is an act of fraud?
A. Lapping
B. Lockbox
C. Walkthrough
D. Disclosure
An analytical procedure related to substantive testing of revenue would be ________.
A. developing an understanding of the client’s system of internal control
B. ensuring that all efficiency audits conducted by the internal audit function are properly planned
C. to check revenue and the related accounts payable accounts on a sample basis
D. to analyze ratio results relative to expectations based on prior years
An example of a factor that provides the incentive for management to misstate revenue cycle assertions would be ________.
A. realistic sales targets within the firm
B. strong support from top management of an ethical culture
C. pressures to overstate revenues to achieve revenue or profitability targets that were not achieved
D. pressures to accurately report revenues to achieve revenue or profitability targets that were achieved
Auditing the cutoff assertion pertaining to cash receipts is important because ________.
A. the auditor needs to ensure expenses are being matched with revenues
B. the bank may have recorded cash receipts in incorrect period
C. the client should have recorded cash receipts in the correct period
D. the recording of revenue and the corresponding receipt of cash should always be in the same fiscal period
Public company auditors test controls in order to ________.
A. determine if they should be eliminated
B. support an opinion on internal controls
C. decide if responsibility for internal control should be reassigned from management to the internal auditors
D. determine their audit opinion without regard to substantive testing
If the auditor’s expectations regarding effective controls are not confirmed, ________.
A. the auditor should proceed with testing of controls
B. the auditor will need to evaluate the significance of the weaknesses noted and determine if the client has a compensating control in place that the auditor might rely on.
C. the auditor will need to evaluate the significance of the weaknesses noted and simply document this
D. the auditor should withdraw from the engagement
An auditor’s use of analytical procedures ________.
A. should be the same for every audit client, for reasons of uniformity
B. may be tailored to the particular client and the industry in which the client operates
C. is not required if an auditor has assessed control risk as low
D. are designed to help the auditor provide absolute assurance
The first step in planning the use of audit data analytics ________.
A. is determining the overall purpose of the test
B. is collection of evidence
C. is collection of data
D. is to poll management to determine which data they would like included
The sales cutoff test is designed to obtain reasonable assurance that ________.
A. sales were actually made
B. sales have been recorded for the correct amounts
C. sales have been recorded in the correct accounts
D. sales and accounts receivable are recorded in the accounting period in which the transactions occurred
Confirmation of accounts receivable involves ________.
A. confirming accounts receivable with the client
B. confirming accounts receivable with the bank
C. direct written communication between the client’s customers and the auditor
D. direct written communication between the client’s customers and the client
When no response has been received after the second or third positive confirmation request to a customer, ________.
A. alternative procedures should ordinarily be performed
B. the auditor should assume that no news is good news
C. the auditor should simply confirm with the client instead
D. the auditor should make inquiries of the client’s legal counsel
Which of the following involves direct written communication between the client’s customers and the auditor?
A. Confirmation of accounts receivable
B. Performing cutoff tests for sales and sales returns
C. Trace revenue transactions
D. Bank confirmations
Which assertion do auditors test when they trace a sample of sales, cash receipts, and sales adjustment transactions to their recording in the accounting records?
A. Completeness
B. Accuracy
C. Cutoff
D. Classification
Under an FOB shipping point arrangement, title passes from seller to buyer when goods ________.
A. are shipped
B. are invoiced
C. arrive at the customer’s warehouse
D. arrive at the seller’s warehouse
To which of the following tests is the determination of FOB destination and FOB shipping point critical?
A. Sales cutoff test
B. Details of balances
C. Vouch revenue transactions
D. Trace revenue transactions
Question Type: Drop down
Match each of the ratios commonly used in analytical procedures for auditing the revenue cycle, listed here in the left column, with its formula in the right column.
A. Sales to Capacity
||Net Sales ÷ Nonfinancial Measure of Capacity
B. Market Share
||Client’s Net Sales ÷ Net Sales of Industry
C. Sales to Total Assets
||Sales ÷ Average Total Assets
D. Accounts Receivable Turnover in Days
||Average Accounts Receivable ÷ Sales x 365
Question Type: Multiple choice multi select
What are the classes of transactions in the revenue cycle included for a merchandising company?
A. Credit sales
B. Cash receipts
C. Sale adjustments
D. Gross sales
Which of the following describe analytical procedures in audit planning?
A. They are required in every audit.
B. They are often effective in identifying potential misstatements in the financial statements.
C. The most effective analytical procedures rely on the auditor’s knowledge of the business and industry.
D. They form an effective method but present a huge burden in relation to cost.
Under which of the following conditions could consignment sales occur in a transaction between a manufacturer and a wholesaler?
A. Seller retains title to inventory in the wholesaler’s possession
B. Sale is completed when the wholesaler sells the inventory forward
C. Seller retains title to inventory in the manufacturer’s possession
D. Sale is completed before the wholesaler sells the inventory forward
If a selling company changes the right of return near the end of the period to offer more generous terms, the company should not be able to recognize revenue until ________. (Select two conditions.)
A. material uncertainties are resolved
B. subsequent cash collections are assured
C. all goods that the company has billed are shipped
D. the company forfeits all rights associated with the goods
Which two of the following are true of bill and hold transactions?
A. A customer is billed for goods, but goods are not shipped.
B. The customer must have a sound economic reason for purchasing the goods and asking the seller to continue to hold the goods.
C. The transaction must be initiated by the seller.
D. Accounting principles have very broad criteria for when revenue can be recognized for a bill and hold transaction.
Which of the following factors could contribute to misstatements in the revenue cycle?
A. Misappropriation of liquid assets generated through cash receipt transactions
B. Difficulties in estimating the likelihood of collection within the next year
C. Low volume of sales, cash receipts, and sales adjustment transactions
D. Strict definition of the timing and amount of revenue to be recognized
Which of the following actions may lead to sales adjustment transactions being used to conceal thefts of cash received from customers?
A. Overstating discounts
B. Recording fictitious sales returns
C. Writing off customers’ balances as uncollectible
D. Misclassifying receivables as current or noncurrent
Which two of the following primarily constitute the process of recording sales?
A. Preparing and sending pre-numbered sales invoices to customers
B. Recording sales invoices accurately and in the proper accounting period
C. Determining that goods pulled from the warehouse are appropriately authorization
D. Determining that goods taken from the warehouse agree with the details of the sales order
During the recording sales function, which of the following are the auditor’s major concerns regarding billing of customers?
A. Billing for all shipments
B. Billing only for actual shipments
C. Billing at authorized prices
D. Billing to match sales journal posts
Which elements of the transaction flow for sales are associated with unauthorized customers?
A. Customer master file
B. Sales order
C. Receivable statement
D. Sales invoice
What risks are eliminated through the use of electronic funds transfers directly to bank or establishing a lockbox arrangement with the bank?
A. Mail receipts lost or misappropriated after receipt
B. Cash not deposited intact daily
C. Inappropriate cash discounts taken by customers
D. Mail receipts lost or misappropriated after receipt
To address the assertion of accuracy for cash receipts, which of the following are exception reports generated daily?
A. Any recorded values of cash received not supported by an underlying remittance report or cash receipts journal
B. Inappropriate discounts taken by customers for early payment
C. Any cash receipts recorded in the incorrect time period
D. Any recorded cash receipts not supported by the bank remittance report
What controls will address the risk of mail receipts being lost or misappropriated after receipt?
A. Immediate preparation of prelist of mail receipts
B. Restrictive endorsement of checks immediately upon receipt
C. Preparation of periodic independent bank reconciliations
D. Independent check of agreement of remittance advices with prelisting of cash received
Which of the following may be found in a journal entry in the general ledger?
A. A provision for bad debt expense
B. An accounts receivable write-off
C. A procedure taken to attempt collection
D. A sales adjustment for damaged goods
Which of the following are part of a sales adjustment transaction?
A. Granting sales returns and allowances
B. Determining uncollectible accounts
C. Showing the procedures taken to attempt collection
D. Listing cash receipts from cash sales
Which of the following control activities are useful in reducing the risk of fraud?
A. All sales returns should be authorized by sales management
B. Goods should be received only with a proper sales return authorization
C. An independent count of goods returned should be recorded on a receiving report
D. The duties of authorizing sales returns and receiving goods should be combined
In order to serve as a control activity useful in reducing the risk of fraud, the computer should match the credit memo information with the _________ (choose three).
A. sales order
B. authorization of sales return
C. receiving report
D. sales invoice
By sending monthly statements to customers, most companies control three assertions related to receivables at historical cost. Which ones are those?
A. Completeness
B. Existence
C. Valuation
D. Classification
Which two of the following individuals often lead a disclosure committee?
A. Chief finance officer
B. Chief legal officer
C. Verification officer
D. Chief operating officer
In order to test programmed application controls in the revenue cycle and determine whether expected results appear on exception reports, an auditor might submit a/an _________ (choose two options).
A. missing customer code
B. order that exceeds a customer’s credit limit
C. valid product code
D. invoice quantity matching quantity on shipping documents
Which of the following help the fraudster sometimes solve the problem of having to continue the process of lapping?
A. Falsifying a sale adjustment to reduce the receivable
B. Writing off part of a customer’s balance through a journal entry
C. Covering the shortage from a customer with funds from another customer
D. Accounting for a payment as coming from two different customers
In the initial procedures of the audit program for substantive tests of revenue cycle assertions, to determine that the trial balance is an accurate and complete representation of the underlying accounting records, the auditor should compare a sample of the customer balances shown in the ________ with that in the _________ .
A. aged trial balance; subsidiary ledger
B. subsidiary ledger; aged trial balance
C. general ledger control account; allowance account
D. sales journal; general ledger control account
In the initial procedures of the audit program for the revenue cycle, which of the following substantive tests come under the category of tests of details of transactions?
A. Vouch recorded revenue transactions to supporting sales invoices, shipping documents, and sales orders.
B. Vouch cash receipt transactions to supporting bank remittance reports, remittance advices.
C. Vouch sales adjustment transactions to authorizations for sales returns and allowance or uncollectible account write-offs.
D. Vouch subsequent cash receipts identifiable with items comprising account balance at confirmation date to supporting documentation.
In vouching revenue transactions, the auditor selects a sample of sales invoices to vouch to the supporting source documents in order to provide evidence pertaining to four assertions. Which ones are these (choose two options)?
A. Occurrence and accuracy
B. Classification and cutoff
C. Completeness and existence
D. Understandability and classification
In which of the following cases are revenue transaction vouching tests performed more extensively?
A. When the applicable level of detection risk to be achieved is low
B. When confirmation procedures are not practicable
C. When used to supplement confirmation procedures
D. When confirming receivables and the related follow-up procedures
When performing cutoff tests for sales, a misstatement of one of which two assertions will be caused if January sales are recorded in December for a calendar-year client?
A. Existence
B. Occurrence
C. Completeness
D. Accuracy
PCAOB AS 2310, The Confirmation Process and AU-C 505 state there is a presumption that the auditor will request the confirmation of receivables during an audit unless there are special conditions. Which of the following are among these conditions?
A. Accounts receivable are immaterial to the financial statements.
B. The use of confirmations would be ineffective as an audit procedure.
C. The auditor's assessed level of risk of material misstatement at the relevant assertion level is high.
D. No other planned substantive procedures address the assessed risk.
Question Type: Short Answer
During an audit of LCG, Co, you discover that one employee is responsible for receiving cash and recording the cash receipts in the accounting system. A second employee is responsible for making the daily deposits to cash. Evaluate the segregation of duties over cash receipts.
When shopping at Lucky Donuts for coffee and a bagel before heading into work, the cashier asked Susan Donahue if she wanted her receipt. Susan had paid cash, so she didn't really need her receipt. However, she noticed a sign on the register that said "please ask for a receipt". Why is it in the interest of the owner of Lucky Donuts to have the customer ask for a receipt?
Evaluate the following segregation of duties concerning accounts receivable write-offs.
Erica Snoder is an accounts receivable clerk for Wonder Entertainment, Inc. Wonder Entertainment runs a lean accounting team. As such, Erica is responsible for collecting cash receipts in the mail and creating the listing of checks received and making the bank deposit. Another employee, Gretchen Baxter, uses the listing of checks received to record the cash receipts in the accounts receivable ledger. Because Gretchen records the accounts receivable, Erica has been assigned the authorization and recording of customer write-offs.
Good internal controls include the following procedures:
- All write-offs of uncollectible accounts should be authorized by an appropriate level of management and supported by documentation, such as correspondence with the customer or collection agencies, and
- Appropriate review of journal entries by management to ensure the appropriateness of the transaction.
Provide two potential non-misstatement timing differences that could cause a discrepancy between a client's receivable records and his/her customer's records.
- Client shipped to customer before year-end, but customer received after year-end
- Customer sent payment to client before year-end, but client received after year end.
- Develop an expectation for accounts receivable using knowledge of the entity’s business activity, market share, normal trade terms, and its history of accounts receivable turnover in days.
- Calculate ratios:
- Compare sales to the entity’s capacity.
- Compare sales growth and receivable growth.
- Accounts receivable turnover in days.
- Uncollectible accounts expense to net credit sales
- Uncollectible accounts expense to accounts receivable write-offs
3. Analyze ratio results relative to expectations based on prior years, industry data, budgeted amounts, or other data.
You are the auditor for DBA Health Products, Inc. As part of the audit of account receivable, DBA has provided to you the electronic file containing its accounts receivable as of its fiscal year end. The file includes the customer name, customer address, customer number, sales invoice number, sales invoice date, and account balance. Describe three or more substantive audit procedures you might perform using computer assisted audit tools and techniques (CAATs) with this computer file.
A. The following substantive tests could be performed with CAATs.
1. Compute the total accounts receivable by adding the sales invoice amounts. Compare to general ledger control account total (manual).
2. Scan the sales invoice date field for any dates after the year-end.
3. Prepare an aged accounts receivable trial balance using the sales invoice date and amount.
4. Select and print accounts for confirmation of accounts receivable.
5. Scan the sales invoice amount for negative balances.