Exam 9: Auditing the Revenue Cycle

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

A sample of positive confirmations is mailed for material accounts receivable balances.Frequently there is a lack of response.Which of the following is not an acceptable alternative procedure?

In an audit of financial statements,the risk of the high rate of return of products sold includes relates to which of the following?

Which of the following is not a form of ratio analysis?

Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client's statement and return the letters directly to the auditor indicating whether they agree with the indicated balance,are known by which of the following terms?

The risk of material misstatement due to fraud relating to revenue recognition should be

The most important control to ensure completeness of sales and shipping is pre-numbered shipping and billing documents.

Hardman and Jennings,LLP,an audit firm,compares bad debt expense of a client in the current period to bad debt recorded for the past three periods.Hardman and Jennings is performing which type of analysis?

Improper revenue recognition Historically the accounting profession has come under fire for fraudulent financial reporting due to questionable improper revenue recognition.Identify at least six examples of questionable revenue recognition practices that an auditor must consider in performing an audit engagement.

Negative confirmations are used as an appropriate test with statistical sampling techniques.

A control that may be implemented to ensure all sales that occur are recorded in the general ledger includes which of the following?

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

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

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

A timing difference type of exception in the confirmation process may include a misunderstanding by the reader as to the date being confirmed.

Confirmations of receivables You are the auditor of Maple Bank for the year 2010.Maple has a large number of customers with consumer loan accounts.The loan accounts have balances averaging $800 in a homogeneous population and the customers usually pay close attention to their balances. Your preliminary assessment of internal control over the loan area is that control risk is low and results of tests of controls support that assessment.Inherent risk is deemed to be lower as well. Discuss the confirmation process and the types of confirmations that may be used for the audit of Maple Bank.Which confirmation type would you select for Maple and why?

The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization.

A red flag that may alert the auditor to fraud in the revenue cycle is a trend of revenue growth that is consistent with industry results.

Confirmations of receivables at an interim date When internal controls are strong,the auditor may decide to confirm receivables before year end.Roll-forward procedures are then used to obtain adequate evidence for the roll-forward period.Discuss why the auditor would want to confirm receivables before balance sheet date,the risks involved,and at least three of the roll-forward procedures that the auditor performs to gain assurance on the roll-forward period.

The auditor will come up with an independent estimation of the allowance for doubtful accounts based on a thorough understanding of the client and the client's business that is compared to the recorded allowance.