Exam 14: Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer.The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned.The most effective procedure for preventing this activity is to:

Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.

Generally, when is the earliest point in the sales and collection cycle in which revenue can be recognized?

When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?

The appropriate test of controls for separation of duties are ordinarily restricted to the auditor's observations of activities and discussions with personnel.

When assessing risk control, the auditor must do all of the following except:

Most companies recognize sales revenue when:

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customer's account that employee may be suspected of:

The document that accompanies the customer's payment is the:

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:

Which of the following is not one of the five classes of transactions included in the sales and collection cycle?

An essential part of the auditors responsibility in auditing cash receipts is to identify deficiencies in internal control that increase the likelihood of fraud.

________ tests are for omitted transactions, while ________ tests are for nonexistent transactions.

There should generally be correspondence in the client's file establishing the uncollectibility of their account.

The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement. •Sales included in the journals for which there was no shipment •Sale recorded more than once •Shipments made to nonexistent customers and recorded as sales

The estimation of bad debts expense relates to the write-off of uncollectible accounts.

Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to:

Which one the following procedures performed for the billing function provides evidence for the completeness assertion?

Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.