Question 1

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

Accepted Answer

A)  the client company concludes that an amount is no longer collectible. 
B)  the customer files for bankruptcy. 
C)  a collection agency cannot inspire the customer to pay the debt. 
D)  the account is at least six months old. 
A)  the client company concludes that an amount is no longer collectible. 
B)  the customer files for bankruptcy. 
C)  a collection agency cannot inspire the customer to pay the debt. 
D)  the account is at least six months old.

Question 2

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.

Accepted Answer

A)It is likely that internal controls ar

Question 3

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

Accepted Answer

A)  recording subsequent period sales as current period sales 
B)  the use of "bill and holds" (goods are invoiced but not shipped) 
C)  understatement of bad debts 
D)  creation of fictitious sales that are misclassified as revenue 
A)  recording subsequent period sales as current period sales 
B)  the use of "bill and holds" (goods are invoiced but not shipped) 
C)  understatement of bad debts 
D)  creation of fictitious sales that are misclassified as revenue

Question 4

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

Accepted Answer

A)  higher cost of goods sold. 
B)  increased bad debt expenses. 
C)  fictitious revenue. 
D)  fictitious expenses. 
A)  higher cost of goods sold. 
B)  increased bad debt expenses. 
C)  fictitious revenue. 
D)  fictitious expenses.

Question 5

Invoices are prepared using a date equal to the shipping date. This control pertains to which transaction-related audit objective?

Accepted Answer

A)  posting and summarization 
B)  classification 
C)  cutoff 
D)  completeness 
A)  posting and summarization 
B)  classification 
C)  cutoff 
D)  completeness

Question 6

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

Accepted Answer

A)  higher cost of goods sold. 
B)  increased bad debt expenses. 
C)  premature revenue recognition. 
D)  fictitious expenses. 
A)  higher cost of goods sold. 
B)  increased bad debt expenses. 
C)  premature revenue recognition. 
D)  fictitious expenses.

Question 7

The auditor traces items from the journals back to the source documents in order to satisfy the

Accepted Answer

A)  occurrence objective. 
B)  completeness objective. 
C)  ownership objective. 
D)  valuation objective. 
A)  occurrence objective. 
B)  completeness objective. 
C)  ownership objective. 
D)  valuation objective.

Question 8

If the internal controls for recording sales returns and allowances are evaluated as ineffective,

Accepted Answer

A)  a larger sample is needed to verify cutoff. 
B)  sampling is not appropriate. 
C)  all sales returns must be traced to supporting documentation. 
D)  all sales returns must be confirmed with the customer. 
A)  a larger sample is needed to verify cutoff. 
B)  sampling is not appropriate. 
C)  all sales returns must be traced to supporting documentation. 
D)  all sales returns must be confirmed with the customer.

Question 9

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

Accepted Answer

A)  cutoff error. 
B)  timing difference. 
C)  error in presentation. 
D)  lack of communication between the two companies. 
A)  cutoff error. 
B)  timing difference. 
C)  error in presentation. 
D)  lack of communication between the two companies.

Question 10

Audit risk is assessed for

Accepted Answer

A)  the financial statements as a whole and is not usually allocated to various accounts or objectives. 
B)  the financial statements as a whole and then allocated to various accounts. 
C)  various accounts but not for the financial statements as a whole. 
D)  various accounts and objectives, and the sum is then assigned to the financial statements as a whole. 
A)  the financial statements as a whole and is not usually allocated to various accounts or objectives. 
B)  the financial statements as a whole and then allocated to various accounts. 
C)  various accounts but not for the financial statements as a whole. 
D)  various accounts and objectives, and the sum is then assigned to the financial statements as a whole.

Question 11

A risk of material misstatement in accounts receivable associated with the allocation balance-related audit objective is that "long-term service revenue is recorded as current revenue or in the wrong period, overstating revenue and accounts receivable." Which of the following tests of detail of balances would respond to this risk?

Accepted Answer

A)  Read customer contracts and audit the criteria used to allocate revenue to components of the sales contract. 
B)  Check cash received after the year end and trace to accounts receivable master file. 
C)  Read the notes to the financial statements and compare to audited financial information. 
D)  Enquire with management about the process used to make sure that revenue is recorded in the correct period. 
A)  Read customer contracts and audit the criteria used to allocate revenue to components of the sales contract. 
B)  Check cash received after the year end and trace to accounts receivable master file. 
C)  Read the notes to the financial statements and compare to audited financial information. 
D)  Enquire with management about the process used to make sure that revenue is recorded in the correct period.

Question 12

The emphasis for the audit of sales return and allowances is often placed on testing the existence of recorded transactions. However, the most important objective to consider is

Accepted Answer

A)  cutoff. 
B)  valuation. 
C)  accuracy. 
D)  completeness. 
A)  cutoff. 
B)  valuation. 
C)  accuracy. 
D)  completeness.

Question 13

It is common to test sales for proper classification as part of testing for

Accepted Answer

A)  cutoff. 
B)  accuracy. 
C)  valuation. 
D)  completeness. 
A)  cutoff. 
B)  accuracy. 
C)  valuation. 
D)  completeness.

Question 14

Discuss three examples of analytical procedures an auditor might perform while auditing the sales and collection cycle. Also discuss the potential misstatement(s) that may be revealed by each analytical procedure.
Note: students could also be asked to separately discuss ratios for planning and ratios as substantive tests.

Accepted Answer

Analytical procedures applicab

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

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

Invoices are prepared using a date equal to the shipping date. This control pertains to which transaction-related audit objective?

The auditor traces items from the journals back to the source documents in order to satisfy the

If the internal controls for recording sales returns and allowances are evaluated as ineffective,

Audit risk is assessed for

The emphasis for the audit of sales return and allowances is often placed on testing the existence of recorded transactions. However, the most important objective to consider is

It is common to test sales for proper classification as part of testing for

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Legal Liability

Professional Judgment and Ethics

Audit Responsibilities and Objectives

Client Acceptance and Planning the Audit

Materiality and Risk

Internal Controls and Control Risk

Audit Evidence

Audit Strategy and Audit Program

Audit Sampling Concepts

Audit of the Acquisition and Payment Cycle

Audit of the Inventory and Distribution Cycle

Audit of the Human Resources and Payroll Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Audit Reports on Financial Statements

Other Assurance and Nonassurance Services

Filters

Exam 12: Audit of the Revenue Cycle

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

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

Invoices are prepared using a date equal to the shipping date. This control pertains to which transaction-related audit objective?

The auditor traces items from the journals back to the source documents in order to satisfy the

If the internal controls for recording sales returns and allowances are evaluated as ineffective,

Audit risk is assessed for

The emphasis for the audit of sales return and allowances is often placed on testing the existence of recorded transactions. However, the most important objective to consider is

It is common to test sales for proper classification as part of testing for

The Demand for Audit and Other Assurance Services

The Public Accounting Profession and Audit Quality

Legal Liability

Professional Judgment and Ethics

Audit Responsibilities and Objectives

Client Acceptance and Planning the Audit

Materiality and Risk

Internal Controls and Control Risk

Audit Evidence

Audit Strategy and Audit Program

Audit Sampling Concepts

Audit of the Acquisition and Payment Cycle

Audit of the Inventory and Distribution Cycle

Audit of the Human Resources and Payroll Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash Balances

Completing the Audit

Audit Reports on Financial Statements

Other Assurance and Nonassurance Services

Filters