Exam 9: Auditing the Revenue Cycle

Lithgow and Harris, CPAs are performing the audit of WildFlower Grocery Stores. Lithgow and Harris relates annual revenue by sales per square feet and sales per customer. What type of analysis is Lithgow and Harris most likely performing?

An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion.

For many clients, the valuation assertion is the most significant assertion in testing revenue.

Which of the following audit procedures does not address existence/occurrence for accounts receivables and sales?

The purpose of summarizing confirmation results is to list the extent of sales tested in relation to the response rate.

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

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

An appropriate mix of evidence for a low risk client could include 20% tests of details, 40% analytics, and 40% tests of controls; an appropriate mix of evidence for a high risk client could include 60% tests of details, 20% analytics, and 20% tests of controls.

The basic concept for revenue recognition is the realization of cash.

Accounts receivable confirmation letters should be prepared on the auditing firm's letterhead.

An example of a test for completeness in the revenue cycle includes the sampling of shipping documents and tracing them to the sales journal and general ledger.

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

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

The auditor traces recorded sales to invoices, sales orders and shipping documents in order to substantiate which assertion?

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

Analytical Procedures. Explain ratio analysis as an analytical procedure used by auditor. Give examples of the ratios that auditor might want to compute for revenue cycle accounts.

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?

If control risk is assessed high, the auditor may send significantly fewer confirmations for a sample of accounts receivable than if the control risk is assessed low.

Which of the following evidences delivery of product to customers sufficient for company recording as revenues?

Monthly statements provide a detailed list of the customer's activity for the previous month and a statement of all open items.