Question 1

Explain what a sales return and allowance means.

Accepted Answer

When a customer is dissatisfied with the goods, the seller often accepts return of the goods or grants a reduction in the charges. The company normally prepares a receiving report for returned goods and returns them to storage. Returns and allowances are recorded in the sales returns and allowances transaction file and the accounts receivable master file. Credit notes are normally issued for returns and allowances to aid in maintaining control and to facilitate
record- keeping.

Question 2

State the six specific transaction- related audit objectives for sales and describe one common substantive test of transactions for each objective.

Accepted Answer

The six specific transaction- related audit objectives for sales and one common substantive test of transactions are as follows. (Student answers for substantive tests of transactions will vary).
· Recorded sales are for shipments actually made to non- fictitious customers (existence). Trace sales journal entries to copies of sales orders, sales invoices and shipping documents.
· Existing sales transactions are recorded (completeness). Trace shipping documents to sales invoices and sales journal entries and accounts receivable master file.
· Recorded sales are for the amount of goods shipped and are correctly billed and recorded (accuracy). Trace entries in sales journal to sales invoices.
· Sales transactions are properly classified (classification). Examine documents supporting sales transactions for proper classification.
· Sales are recorded on the correct dates (timing). Compare dates of recorded sales transactions with dates on shipping records.
· Sales transactions are properly included in the accounts receivable master file and are correctly summarised (posting and summarisation). Foot journals and trace postings to general ledger and accounts receivable master file.

Question 3

One of the key internal controls to prevent invalid (fictitious) transactions in the sales and collection cycle is:

Accepted Answer

A)  to include a list of customer numbers in the computer files. 
B)  to account for the integrity of the numerical sequence of sales orders. 
C)  to include the sales price list of all products in the computer files. 
D)  to have the bank reconciliation done by someone who is independent of the treasury function. 
A)  to include a list of customer numbers in the computer files. 
B)  to account for the integrity of the numerical sequence of sales orders. 
C)  to include the sales price list of all products in the computer files. 
D)  to have the bank reconciliation done by someone who is independent of the treasury function. A

Question 4

State the six specific transaction- related audit objectives for sales. For each objective, identify one key internal control. Then, for each internal control, describe one common test of controls.

Accepted Answer

The six specific transaction- related au

Question 5

Which of the following is NOT an example of an internal verification procedure?

Accepted Answer

A)  Checking accuracy of document preparation 
B)  Checking for authorisation of transactions 
C)  Reviewing reports for incorrect items 
D)  Accounting for numerical sequence of prenumbered documents 
A)  Checking accuracy of document preparation 
B)  Checking for authorisation of transactions 
C)  Reviewing reports for incorrect items 
D)  Accounting for numerical sequence of prenumbered documents

Question 6

The parts of the audit most affected by the tests of controls and substantive tests of transactions for the sales and collection cycle are the balances in: 1. accounts receivable.
2) cash.
3) bad debt expense .
4) provision for doubtful debts.

Accepted Answer

A)  1, 2, 3 
B)  1, 3, 4 
C)  2, 3, 4 
D)  1, 2, 3, 4 
A)  1, 2, 3 
B)  1, 3, 4 
C)  2, 3, 4 
D)  1, 2, 3, 4

Question 7

Discuss the types of misstatements the auditor is concerned with when testing the existence objective for sales.

Accepted Answer

The auditor is concerned with the possib

Question 8

The process which postpones entries for the collection of receivables to conceal an existing cash shortage is referred to as:

Accepted Answer

A)  cooking the books. 
B)  lapping. 
C)  kiting. 
D)  computer fraud. 
A)  cooking the books. 
B)  lapping. 
C)  kiting. 
D)  computer fraud.

Question 9

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Accepted Answer

A) True 
 B)False

Question 10

Most companies recognise sales when:

Accepted Answer

A)  the merchandise is received by the customer. 
B)  a customer order is received. 
C)  cash is received on account. 
D)  the merchandise is shipped. 
A)  the merchandise is received by the customer. 
B)  a customer order is received. 
C)  cash is received on account. 
D)  the merchandise is shipped.

Question 11

To test for nonexistent transactions, the direction of audit testing should be from the:

Accepted Answer

A)  externally generated documents. 
B)  ledger entries. 
C)  source documents. 
D)  journal entries. 
A)  externally generated documents. 
B)  ledger entries. 
C)  source documents. 
D)  journal entries.

Question 12

In many audits of sales transactions, no substantive tests of transactions are performed for the completeness objective because:

Accepted Answer

A)  the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading. 
B)  understatements of assets and income are a greater concern than overstatements. 
C)  overstatements of assets and income are a greater concern than understatements. 
D)  it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct. 
A)  the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading. 
B)  understatements of assets and income are a greater concern than overstatements. 
C)  overstatements of assets and income are a greater concern than understatements. 
D)  it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct.

Question 13

An effective procedure to test for unbilled shipments is to trace from the:

Accepted Answer

A)  sales journal to the shipping documents. 
B)  sales journal to the accounts receivable ledger. 
C)  sales journal to the general ledger sales account. 
D)  shipping documents to the sales journal. 
A)  sales journal to the shipping documents. 
B)  sales journal to the accounts receivable ledger. 
C)  sales journal to the general ledger sales account. 
D)  shipping documents to the sales journal.

Question 14

The total of the individual account balances in the accounts receivable master file equals the:

Accepted Answer

A)  total sales for the period. 
B)  balance of the accounts receivable account in the general ledger. 
C)  total sales less the total cash received for the period. 
D)  balance of the sales account in the general ledger. 
A)  total sales for the period. 
B)  balance of the accounts receivable account in the general ledger. 
C)  total sales less the total cash received for the period. 
D)  balance of the sales account in the general ledger.

Question 15

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:

Accepted Answer

A)  the original invoices. 
B)  an approved price list. 
C)  the amounts posted to the customer's account in the accounts receivable master file. 
D)  the amounts recorded in the sales journal for that transaction. 
A)  the original invoices. 
B)  an approved price list. 
C)  the amounts posted to the customer's account in the accounts receivable master file. 
D)  the amounts recorded in the sales journal for that transaction.

Question 16

The preparation of a sales invoice is the final step in the sales and collection cycle.

Accepted Answer

A) True 
 B)False

Question 17

A document prepared to initiate shipment of the goods sold is the:

Accepted Answer

A)  sales order. 
B)  customer order. 
C)  bill of lading. 
D)  sales invoice. 
A)  sales order. 
B)  customer order. 
C)  bill of lading. 
D)  sales invoice.

Question 18

The business functions mainly related to the allowance for doubtful debts account include:

Accepted Answer

A)  writing off uncollectible accounts receivable. 
B)  granting credit. 
C)  billing customers. 
D)  all of the above 
A)  writing off uncollectible accounts receivable. 
B)  granting credit. 
C)  billing customers. 
D)  all of the above

Question 19

A proof of cash receipts is generally performed on all audits.

Accepted Answer

A) True 
 B)False

Question 20

It is important that sales be billed and recorded in the journal as soon as possible after:

Accepted Answer

A)  shipment takes place. 
B)  the order is received. 
C)  credit is approved and it is verified that there is enough inventory to fill the order. 
D)  the order is received and credit is approved. 
A)  shipment takes place. 
B)  the order is received. 
C)  credit is approved and it is verified that there is enough inventory to fill the order. 
D)  the order is received and credit is approved.

Explain what a sales return and allowance means.

State the six specific transaction- related audit objectives for sales and describe one common substantive test of transactions for each objective.

One of the key internal controls to prevent invalid (fictitious) transactions in the sales and collection cycle is:

State the six specific transaction- related audit objectives for sales. For each objective, identify one key internal control. Then, for each internal control, describe one common test of controls.

Which of the following is NOT an example of an internal verification procedure?

The parts of the audit most affected by the tests of controls and substantive tests of transactions for the sales and collection cycle are the balances in: 1. accounts receivable. 2) cash. 3) bad debt expense . 4) provision for doubtful debts.

Discuss the types of misstatements the auditor is concerned with when testing the existence objective for sales.

The process which postpones entries for the collection of receivables to conceal an existing cash shortage is referred to as:

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Most companies recognise sales when:

To test for nonexistent transactions, the direction of audit testing should be from the:

In many audits of sales transactions, no substantive tests of transactions are performed for the completeness objective because:

An effective procedure to test for unbilled shipments is to trace from the:

The total of the individual account balances in the accounts receivable master file equals the:

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:

The preparation of a sales invoice is the final step in the sales and collection cycle.

A document prepared to initiate shipment of the goods sold is the:

The business functions mainly related to the allowance for doubtful debts account include:

A proof of cash receipts is generally performed on all audits.

It is important that sales be billed and recorded in the journal as soon as possible after:

Demand for Audit and Assurance Services

Auditors Legal Environment

Audit Quality and Ethics

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Documentation

Materiality and Risk

Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan and Audit Program

Completing Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling

Audit of Transaction Cycles and Financial Statement Balances I

Audit of Transaction Cycles and Financial Statement Balances II

Completing the Audit

Audit Reporting

Other Auditing and Assurance Engagements

Filters

Exam 12: Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Explain what a sales return and allowance means.

State the six specific transaction- related audit objectives for sales and describe one common substantive test of transactions for each objective.

One of the key internal controls to prevent invalid (fictitious) transactions in the sales and collection cycle is:

State the six specific transaction- related audit objectives for sales. For each objective, identify one key internal control. Then, for each internal control, describe one common test of controls.

Which of the following is NOT an example of an internal verification procedure?

The parts of the audit most affected by the tests of controls and substantive tests of transactions for the sales and collection cycle are the balances in: 1. accounts receivable. 2) cash. 3) bad debt expense . 4) provision for doubtful debts.

Discuss the types of misstatements the auditor is concerned with when testing the existence objective for sales.

The process which postpones entries for the collection of receivables to conceal an existing cash shortage is referred to as:

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Most companies recognise sales when:

To test for nonexistent transactions, the direction of audit testing should be from the:

In many audits of sales transactions, no substantive tests of transactions are performed for the completeness objective because:

An effective procedure to test for unbilled shipments is to trace from the:

The total of the individual account balances in the accounts receivable master file equals the:

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:

The preparation of a sales invoice is the final step in the sales and collection cycle.

A document prepared to initiate shipment of the goods sold is the:

The business functions mainly related to the allowance for doubtful debts account include:

A proof of cash receipts is generally performed on all audits.

It is important that sales be billed and recorded in the journal as soon as possible after:

Demand for Audit and Assurance Services

Auditors Legal Environment

Audit Quality and Ethics

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Documentation

Materiality and Risk

Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan and Audit Program

Completing Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling

Audit of Transaction Cycles and Financial Statement Balances I

Audit of Transaction Cycles and Financial Statement Balances II

Completing the Audit

Audit Reporting

Other Auditing and Assurance Engagements

Filters