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

Realizable value is an essential balance-related audit objective for accounts receivable because collectibility of receivables is often a significant concern. Which of the following is not an internal control the auditor should evaluate to reduce the likelihood of uncollectible accounts?

Accounting principles do not require companies to record bad debt expense for the amount of customer receivables on the balance sheet they do not expect to collect until the customer has declared bankruptcy or after the customer's account has been turned over to a collection agency.

The term accounts receivable master file is sometimes called the accounts receivable subsidiary ledger or subledger.

It is equally important that companies maintain and have available to the auditor documents related to the sales and collection cycle in order for the auditor to test the controls in this transaction cycle.

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.

Which type of misstatement is always a fraud?

Sales returns and allowances are often ignored by auditors because they are often immaterial.

When performing a proof of cash receipts, the auditor will test if the total cash receipts recorded in the cash receipts journal for a given period agree with the actual deposits made to the respective bank account for the same period. A difference found during this test generally signals to the auditor a potential weakness in internal controls.

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

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?

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

Credit should be approved before a customer's order is received.

Credit should be approved before goods are shipped to a customer.

A bill of lading is a special type of sales invoice used when goods are shipped interstate.

You are part of the audit team that is auditing Hillsburg Hardware Co. and you have been assigned to the sales and collection cycle. You are testing whether the cash receipts are deposited and recorded at the amounts received (accuracy objective). List two tests of controls and one test of transactions that you would do to satisfy yourself regarding the accuracy objective.

For audit clients having a treasurer, the auditor should inquire whether the treasurer has reviewed the financial statement disclosures related to cash receipts for relevance and understandability.

In the accounts receivable master file, the length of time the account has been due can be useful to the client and the auditor in preparing the

Common tests of internal controls related to financial statement presentation and footnote disclosures include observing or examining an indication of management's review and approval of information presented and disclosed in the financial statements.

A bill of lading is a written contract between the seller and the buyer.

Which of the following is not an important aspect of billing?