Question 1

If a company uses a periodic inventory system, the shipping records are used to update the inventory quantities.

Accepted Answer

A) True 
 B)False

Question 2

A proof of cash receipts may be useful when the auditor concludes internal controls in the cash recording function are deficient.

Accepted Answer

A) True 
 B)False

Question 3

Computer programs or independent personnel should check that the processing and recording of sales transactions fulfill each transaction-related audit objective. Examples include reviewing financial statements and footnote disclosures for proper aggregation, relevance, and understandability.

Accepted Answer

A) True 
 B)False

Question 4

When the PCAOB issued guidance in May 2017 to assist auditors of public companies implementing the new revenue recognition standard, the PCAOB did not mention the importance of auditing any transition adjustment recorded by management as part of the implementation of the new standard.

Accepted Answer

A) True 
 B)False

Question 5

A ________ indicates a reduction in the amount due from a customer because of returned goods or an allowance.

Accepted Answer

A)  bill of lading 
B)  sales invoice 
C)  credit memo 
D)  monthly statement 
A)  bill of lading 
B)  sales invoice 
C)  credit memo 
D)  monthly statement

Question 6

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?

Accepted Answer

A)  valuation 
B)  cutoff 
C)  completeness 
D)  classification 
A)  valuation 
B)  cutoff 
C)  completeness 
D)  classification

Question 7

One of the most important aspects of billing is ensuring all shipments made are billed (completeness); inaccurate billing can always be corrected at a later date.

Accepted Answer

A) True 
 B)False

Question 8

Customer billing is a critical process which auditors must understand. What are the most important aspects of billing and what are the related objectives?

Accepted Answer

The most important aspects of billing ar

Question 9

The most difficult type of cash embezzlement for auditors to detect is when it occurs

Accepted Answer

A)  after the merchandise has been shipped. 
B)  before the merchandise has been shipped. 
C)  before the cash is recorded in the cash receipts journal or other cash listing. 
D)  after the cash is recorded in the cash receipts journal or other cash listing. 
A)  after the merchandise has been shipped. 
B)  before the merchandise has been shipped. 
C)  before the cash is recorded in the cash receipts journal or other cash listing. 
D)  after the cash is recorded in the cash receipts journal or other cash listing.

Question 10

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

Accepted Answer

A) True 
 B)False

Question 11

The document that accompanies the customer's payment is the

Accepted Answer

A)  credit memo. 
B)  remittance advice. 
C)  vendor invoice. 
D)  monthly statement. 
A)  credit memo. 
B)  remittance advice. 
C)  vendor invoice. 
D)  monthly statement.

Question 12

Which of the following is an accurate statement relating to separation of duties?

Accepted Answer

A)  Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer. 
B)  All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable. 
C)  The credit granting function should be separate from the sales function. 
D)  All of the above are accurate statements. 
A)  Management should deny cash access to anyone responsible for entering sales and cash receipts transaction information into the computer. 
B)  All disagreements on the monthly statements should be directed to a designated person who has no responsibility for handling cash or recording sales or accounts receivable. 
C)  The credit granting function should be separate from the sales function. 
D)  All of the above are accurate statements.

Question 13

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is an account that is not affected by the sales and collection cycle?

Accepted Answer

A)  cash 
B)  accounts receivable 
C)  allowance for doubtful accounts 
D)  accounts payable 
A)  cash 
B)  accounts receivable 
C)  allowance for doubtful accounts 
D)  accounts payable

Question 15

What event initiates a transaction in the sales and collection cycle?

Accepted Answer

A)  receipt of cash 
B)  delivery of product to a customer 
C)  identification of a new customer 
D)  customer request for goods or services 
A)  receipt of cash 
B)  delivery of product to a customer 
C)  identification of a new customer 
D)  customer request for goods or services

Question 16

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

Accepted Answer

The potential audit tests include the fo

Question 17

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because

Accepted Answer

A)  understatements of assets and income are a greater concern than overstatements. 
B)  overstatements of assets and income are a greater concern than understatements. 
C)  it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct. 
D)  the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading. 
A)  understatements of assets and income are a greater concern than overstatements. 
B)  overstatements of assets and income are a greater concern than understatements. 
C)  it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct. 
D)  the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.

Question 18

The total of the individual account balances in the accounts receivable master file should equal the

Accepted Answer

A)  total sales for the period. 
B)  balance of the sales account in the general ledger. 
C)  total sales less the total cash received for the period. 
D)  balance of the accounts receivable account in the general ledger. 
A)  total sales for the period. 
B)  balance of the sales account in the general ledger. 
C)  total sales less the total cash received for the period. 
D)  balance of the accounts receivable account in the general ledger.

Question 19

The sales journal is generated from the sales transaction file.

Accepted Answer

A) True 
 B)False

Question 20

Which of the following is not a key control for sales and cash receipts?

Accepted Answer

A)  active board of directors 
B)  adequate separation of duties 
C)  internal verification procedures 
D)  adequate documents and records 
A)  active board of directors 
B)  adequate separation of duties 
C)  internal verification procedures 
D)  adequate documents and records

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

If a company uses a periodic inventory system, the shipping records are used to update the inventory quantities.

A proof of cash receipts may be useful when the auditor concludes internal controls in the cash recording function are deficient.

Computer programs or independent personnel should check that the processing and recording of sales transactions fulfill each transaction-related audit objective. Examples include reviewing financial statements and footnote disclosures for proper aggregation, relevance, and understandability.

When the PCAOB issued guidance in May 2017 to assist auditors of public companies implementing the new revenue recognition standard, the PCAOB did not mention the importance of auditing any transition adjustment recorded by management as part of the implementation of the new standard.

A ________ indicates a reduction in the amount due from a customer because of returned goods or an allowance.

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?

One of the most important aspects of billing is ensuring all shipments made are billed (completeness); inaccurate billing can always be corrected at a later date.

Customer billing is a critical process which auditors must understand. What are the most important aspects of billing and what are the related objectives?

The most difficult type of cash embezzlement for auditors to detect is when it occurs

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

The document that accompanies the customer's payment is the

Which of the following is an accurate statement relating to separation of duties?

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

Which of the following is an account that is not affected by the sales and collection cycle?

What event initiates a transaction in the sales and collection cycle?

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

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because

The total of the individual account balances in the accounts receivable master file should equal the

The sales journal is generated from the sales transaction file.

Which of the following is not a key control for sales and cash receipts?

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

Audit Responsibilities and Objectives

Audit Evidence

Audit Planning and Materiality

Assessing the Risk of Material Misstatement

Fraud Auditing

Internal Control and Coso Framework

Assessing Control Risk and Reporting on Internal Controls

Overall Audit Strategy and Audit Program

Audit Sampling for Tests of Controls and Substantive Tests of Transactions

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Audit Sampling for Tests of Details of Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls, Substantive Tests of Transactions, and Accounts Payable

Completing the Tests in the Acquisition and Payment Cycle: Verification of Selected Accounts

Audit of the Payroll and Personnel Cycle

Audit of the Inventory and Warehousing Cycle

Audit of the Capital Acquisition and Repayment Cycle

Audit of Cash and Financial Instruments

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

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