Exam 12: Audit of the Revenue Cycle

As part of the audit testing, the auditor is conducting substantive analytical review over time (trend analysis) of bad debts to evaluate the quality of the accounts receivable. Which audit assertion is this associated with?

The auditor obtains corroborating audit evidence for accounts receivable by using positive or negative confirmation requests. Under which of the following circumstances might the negative form of the accounts receivable confirmation be useful?

Trade accounts receivable should exclude

As part of audit planning, you have calculated gross margin for the last five years and compared gross margin to industry averages. Your client's gross margin has increased by about 5% in the current year, while the industry gross average has declined. One possible cause of this increased gross margin is

The overall objective in the audit of the sales and collection cycle is to evaluate whether

Which of the following key controls helps ensure that sales transactions are classified to the correct account?

One of the reasons that the auditor considers the type of information system and its functions is to

A document prepared for shipment of the goods sold using a trucking company is called the

Which of the following circumstances would indicate that positive confirmations should be used on this engagement?

Two accounts receivable balance-related audit objectives are not affected by assessed control risk for the sales and cash receipts classes of transactions. These objectives are

Which of the following control procedures may prevent the failure to bill customers for some shipments?

Comparing bad debt expense as a percentage of gross sales with previous years will detect what kind of possible misstatement?

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

A document that describes which accounts receivable accounts are to be written off and why is called a(n)

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when

Your audit client has many different types of accounts receivable: Canadian, American, and other international accounts; and short- and long-term accounts. There are also some sales on consignment. The company has used forward exchange contracts to reduce its exposure due to foreign exchange fluctuations. How will this affect the audit engagement?

Frag Jones Company has a December year end with a tight reporting deadline, so the auditors confirmed the accounts receivable as of November 30 using positive confirmations. In addition to following up confirmation discrepancies, the auditor should

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.

Some companies use a lockbox system, whereby customers mail payments to a post office box address. The lockbox contents could be handled by a bank, another external organization, or the owner of the company. One of the advantages of using a lockbox is that it

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.