Exam 9: Auditing the Revenue Cycle

Internal control over the revenue cycle. White Floyd, Inc., a retail store, is concerned about the lack of control procedures over the recording of sales transactions. The company is concerned that the transactions might not be recorded accurately and valued properly in accordance with GAAP. Recommend control procedures to help ensure that transactions are recorded accurately and valued properly.

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

A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it leases until the customer is ready for the product should record the delivery as revenue.

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.

Negative confirmations are more expensive to administer than positive confirmations because of the added costs of investigating non-responses.

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 significance of the bill of lading is to provide which of the following?

Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.

Current auditing standards do not require the confirmation of receivables if accounts receivable are not material.

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.

In planning an audit for the revenue cycle, the auditor must realize the integrated relationship of evidence found between the accounts receivable and the notes payable accounts.

In the audit of the revenue of Hiram Manufacturing Company, the auditors obtain a number of shipping documents shortly before year-end and immediately following the year under audit. The auditors compare the documents to the sales journal in order to test which of the following assertions?

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?

A key indicator of fraud in the revenue cycle is the auditor's detection of which of the following?

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.

When the auditor seeks evidence concerning the allowance for doubtful accounts he or she would most likely use an aged trial balance to help identify past due balances.