Exam 9: Auditing the Revenue Cycle

The auditor of James Corporation should be alert to the risk of material misstatements when James Corporation's cash flows from operations are negative and net income (rather than loss)is reported.

Financial accounting personnel who do not have the proper education,experience and backgrounds may signal the auditor to the risk of financial statement fraud.

It is beneficial in the testing of notes receivable to confirm not only the balance of the notes,but also their terms.

Much of the understanding of revenue transactions for compliance with GAAP can be performed by accomplishing which of the following tasks?

Formal procedures for approving acceptance of returns that are beyond the warranty period are an appropriate control procedure for identifying and recording returned goods.

A certain tendency for fraud exists when stock options are close to becoming exercised by executives and financial personnel.

The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management.The purpose for this procedure is to substantiate which assertion?

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

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

The audit team is required by auditing standards to make an ordinary presumption of the risk of fraud due to revenue misstatements on every engagement.

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

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

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

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

Exceptions found in the confirmations of accounts receivable balances need not be projected as errors to the population as they are typically isolated errors.

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

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

Invoices are processed,including their mailing to customers,only subsequent to proof of valid delivery to customers.

Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been pledged or discounted.

A comprehensive chart of accounts and a review of complex or unusual transactions by supervisory personnel are control procedures necessary for proper classification of accounts.