Exam 12: Audit of the Revenue Cycle

A)Describe the differences between positive and negative confirmations.Which type is more reliable?B)Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.C)Discuss the circumstances in which it is acceptable to use negative confirmation requests.D)The auditor's decision regarding the type of accounts receivable confirmation to use involves a continuum,starting with using no confirmations in some circumstances,to using only negatives,to using both positives and negatives,to using only positives.Discuss the primary factors affecting this decision.

Which of the following procedures would ordinarily be expected to best reveal unrecorded sales at the balance sheet date?

Positive accounts receivable confirmations were circularized,and there were many differences where the client stated that the goods had not been received as of the date of the confirmation.In addition to the possibility that the goods were not received by the client,this type of reported difference could be an indication of

Following are three different situations with respect to the audit of accounts receivable and sales.For each,specify the evidence mix that you would use (tests of control,substantive tests,type of confirmation/timing),and explain why.A)The client is in a volatile industry,selling products that can quickly become obsolete.Total accounts receivable is $65 million with a bad debt allowance of $7 million.The company has recently laid off three accounting staff to save money.B)A small company has 45 different customers with balances ranging from $500 to $25 000 per customer.There is one accountant on staff and a professional accountant comes in once per week for three hours to review the staff accountant's work and prepare journal entries.Bad debts are rare,as the owner is actively involved in accounts receivable collection.C)Big Department Store Finance Corporation has fifty staff in the accounting department,a sophisticated software package,and about $250 million in accounts receivable.The corporation manages the department store's credit cards.About 100 000 credit card customers have balances less than $300 on their accounts,while the balances for the remaining customers range up to a maximum of $5000.

Which of the following presentation and disclosure-related audit objectives does not have a parallel audit objective for both the transaction-related audit objectives and balance-related audit objectives?

Cash receipts from sales on account have been misappropriated.Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

You are the audit senior responsible for a large photofinishing centre and camera store.The store uses automated cash registers tied to inventory (also known as point-of-sale devices).The point-of-sale devices take advantage of automated procedures and controls that can be programmed to reduce errors and improve controls over completeness of transactions. Required: Provide examples of interdependent controls that should be used to complement the programmed controls.

A)State the five specific transaction-related audit objectives for cash receipts and describe one common test of controls for each objective.B)Discuss what is meant by proof of cash receipts and explain its purpose.

After the items for confirmation have been selected,the auditor must maintain control of the confirmations until

Which of the following lists outlines the best order for a typical sequence of activities in the revenue and collection cycle?

A risk of material misstatement in accounts receivable associated with the accuracy balance-related audit objective is that "sales recorded at the incorrect price result in revenue and accounts receivable that are over- or understated." Which of the following tests of detail of balances would respond to this risk?

When the client's internal control structure is adequate,the cutoff can usually be verified by

As part of audit planning,you have calculated accounts receivable turnover for the last five years and compared it to industry averages.Your client's accounts receivable has decreased by about 1.25 times in the current year,while the industry rate has improved.One possible cause of this lowered accounts receivable turnover is

A)Assuming the client's internal controls are adequate,describe how the auditor can verify proper cutoff of sales transactions.B)Describe how the auditor tests the rights objective for accounts receivable.

An audit procedure that compares the name,amount,and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting

The auditor has elected to conduct the following audit tests: reperform addition of the aged accounts receivable trial balance for the total column and for the columns depicting the aging.Which audit objective is associated with these audit tests?

The most difficult type of cash defalcation for the auditor to detect is that which occurs

The appropriate test of controls for separation of duties is

Audit risk is assessed for

Which of the following is an example of a data entry input edit that could be used to improve the accuracy of online data entry of sales orders?