Exam 12: Audit of the Revenue Cycle

You and your audit team went to a local mall for your lunch break. While there, you dropped off a roll of film at a photo store, and planned to pick it up after work that day. You strike up a conversation with your supervisor about digital versus film photography and your supervisor says, "Next week, you are going to be working at a client that just happens to be a group of photography stores. Tell me, what controls do you think should be programmed into the store cash registers to help ensure that sales transactions are accurate and complete?" Required: Answer your supervisor's question.

The auditor would like to conduct dual purpose tests verifying that the programs performing the totaling and aging of accounts receivable are functioning correctly as well as quantifying any errors. Which of the following is a dual purpose test that the auditor could use?

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom? The cashier

Celebra sold some goods to Frankfurt Corp. Frankfurt sent a cheque to Celebra to pay for the goods on December 24th. Celebra received the check on January 4th. At December 31st, Celebra still showed an account receivable from Frankfurt while Frankfurt no longer had an account payable to Celebra. This situation represents a

When errors are found, a common and standard assumption in practice is to assume

Which of the following actions is more likely to be a result of error rather than fraud?

State the five specific balance-related audit objectives as applied to accounts receivable.

There are three main types of revenue manipulations. Which of the following revenue manipulations affects the cutoff objective?

A) An auditor is concerned that accounts receivable may be understated due to sales to customers that have been omitted from the sales journal and from the accounts receivable master file. Describe the procedure(s) the auditor should perform in these circumstances. B) Describe how the auditor tests the classification objective for accounts receivable.

For each control on which the auditor plans to rely to reduce assessed control risk, he or she must

Proper accounting requires that an account receivable must be written off by the client when

A document sent to each customer showing his or her beginning accounts receivable balance and the amount and date of each sale, cash payment received, credit memo issued, and the ending balance is the

A common way to evaluate the adequacy of the bad debt allowance is to

A) State the five specific transaction-related audit objectives for sales and describe one common test of controls for each objective. B) Describe three tests of controls commonly used to test the accuracy objective for sales.

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.

The primary purpose of accounts receivable confirmation is to satisfy the

Chong Manufacturing Limited (CML) is a small manufacturer that supplies parts to the automotive industry. CML deals primarily with second-tier companies and does not deal with car manufacturers directly. Last year, CML was required to implement EDI (electronic data interchange), otherwise two of its major customers would have taken their business elsewhere. The installation was provided by Simon's Computer Company, a local computer store with expertise in EDI. One of CML's customers, Delta Parts Limited, also sent a purchasing agent to CML to help train staff at CML in the use of EDI and to walk through the first few transactions with CML accounting personnel to ensure that they could use the system effectively. A typical EDI sale is processed as follows: - A customer (e.g., Delta) sends a purchase order to CML, which is received via the Internet into an EDI in-basket. CML empties the EDI in-basket using its EDI software every hour, and the EDI software edits the purchase order for completeness and obvious errors. If there are no problems, then the purchase order is printed out and used by CML to process the order. - Once the order has been processed, CML prepares its shipping documentation and invoice using its normal packaged accounting software. The shipping document and the electronic invoice are transferred to the EDI software and placed in an EDI out-basket. Accounting staff transmit the contents of the EDI out-basket to their customer. - Once the customer receives the electronic shipping documents and electronic invoices, it will transfer the funds electronically to CML's bank account to pay for the goods delivered. This means that CML receives payment much faster than when invoices were mailed to customers. Required: A) What is the impact of the new EDI system on the audit engagement? B) List some controls that should be included in the new EDI system.

Which of the following presentation and disclosure-related audit objectives has a matching transaction-related audit objective, but not a matching balance-related audit objective?

Tamra is performing a test of control consisting of looking at the numerical sequence of credit memos issued by the company. Tamra is performing a block test by looking for any missing number in the sequence. This test will provide evidence of

A) Describe the four business functions that result in sales transactions in a typical sales and collection cycle and state the key documents and records involved in each function. B) State the five classes of transactions that comprise the sales and collection cycle. C) The sales and collections cycle is comprised of nine business functions. The first four functions result in sales transactions. Discuss the remaining five business functions that occur after sales transactions and identify the key documents and records involved in each of the five functions.