Question 1

Most companies recognize sales revenue when:

Accepted Answer

A)  sales are invoiced. 
B)  goods are received by the customer. 
C)  goods are shipped. 
D)  Both B and C are correct, depending upon the company's revenue recognition policies. 
A)  sales are invoiced. 
B)  goods are received by the customer. 
C)  goods are shipped. 
D)  Both B and C are correct, depending upon the company's revenue recognition policies.

Question 2

The most important audit concern in the processing and recording cash receipts function is not tracing the cash receipts from customers to their subsidiary ledger accounts.

Accepted Answer

A) True 
 B)False

Question 3

You are an audit manager for Rodgers & Co. and have recently taken on as a client Manufacturing Company. You are in the initial stages of planning the audit and have decided to start gathering information about the Sales/Collection Cycle of the business. List below the classes of transactions that you need to gather audit evidence for in designing your audit procedures.

Accepted Answer

The five classes of transactions that co

Question 4

The sales and collection cycle applies to businesses that transfer goods to customers or provides services to businesses.

Accepted Answer

A) True 
 B)False

Question 5

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

Accepted Answer

A)  Tracing, vouching 
B)  Vouching, tracing 
C)  Verifying, tracking 
D)  Tracking, verifying 
A)  Tracing, vouching 
B)  Vouching, tracing 
C)  Verifying, tracking 
D)  Tracking, verifying

Question 6

Prenumbered documents will only be useful for control purposes if:

Accepted Answer

A)  a different numerical sequence is used for each company. 
B)  the sequence is accounted for periodically. 
C)  employees are allowed to use documents out of numerical sequence. 
D)  the same numerical sequence is used each accounting period. 
A)  a different numerical sequence is used for each company. 
B)  the sequence is accounted for periodically. 
C)  employees are allowed to use documents out of numerical sequence. 
D)  the same numerical sequence is used each accounting period.

Question 7

The document that the accounting staff will use as the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger is the:

Accepted Answer

A)  sales order. 
B)  bill of lading. 
C)  sales journal. 
D)  sales invoice. 
A)  sales order. 
B)  bill of lading. 
C)  sales journal. 
D)  sales invoice.

Question 8

The auditor's primary concern about authorization centers on shipment of goods to customers.

Accepted Answer

A) True 
 B)False

Question 9

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

Accepted Answer

A) True 
 B)False

Question 10

Violations of the existence objective for sales are of greater concern to the auditor than violations of the completeness objective.

Accepted Answer

A) True 
 B)False

Question 11

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:

Accepted Answer

A)  the original invoices. 
B)  an approved master price list. 
C)  the amounts recorded in the sales journal for that transaction. 
D)  the amounts posted to the customer's account in the accounts receivable master file. 
A)  the original invoices. 
B)  an approved master price list. 
C)  the amounts recorded in the sales journal for that transaction. 
D)  the amounts posted to the customer's account in the accounts receivable master file.

Question 12

The transaction-related audit objectives and the client's methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor's perspective?

Accepted Answer

The first difference is materiality. In

Question 13

A sales invoice is a document that usually indicates credit approval.

Accepted Answer

A) True 
 B)False

Question 14

Which one of the following statements is true? In deciding on substantive tests of transactions:

Accepted Answer

A)  some procedures are commonly employed on every audit regardless of the circumstances. 
B)  all procedures are dependent on the adequacy of the controls and the results of the tests of controls. 
C)  results obtained in the prior year's audit will not affect the procedures used this year. 
D)  the materiality of the item will not influence the choice of procedures used. 
A)  some procedures are commonly employed on every audit regardless of the circumstances. 
B)  all procedures are dependent on the adequacy of the controls and the results of the tests of controls. 
C)  results obtained in the prior year's audit will not affect the procedures used this year. 
D)  the materiality of the item will not influence the choice of procedures used.

Question 15

Explain what lapping means, and discuss the internal control deficiency that allows it to occur. Also discuss the procedures the auditor can perform to detect lapping.

Accepted Answer

Lapping, which is a common type of embez

Question 16

In determining the level of audit efficiency, once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client, it is appropriate to decide whether:

Accepted Answer

A)  substantive tests can be reduced sufficiently to justify costs of performing tests of controls. 
B)  substantive tests can be increased sufficiently to justify costs of performing tests of controls. 
C)  tests of controls can be increased sufficiently to justify costs of performing substantive tests. 
D)  tests of controls can be reduced sufficiently to justify costs of performing substantive tests. 
A)  substantive tests can be reduced sufficiently to justify costs of performing tests of controls. 
B)  substantive tests can be increased sufficiently to justify costs of performing tests of controls. 
C)  tests of controls can be increased sufficiently to justify costs of performing substantive tests. 
D)  tests of controls can be reduced sufficiently to justify costs of performing substantive tests.

Question 17

Credit memos are normally issued for what purpose(s)?

Accepted Answer

A)  To adjust the customers balance to the amount owed to the company. 
B)  To assist in the aging of accounts receivable. 
C)  To reduce customer frustration and sales losses. 
D)  To inform the customer of the balance due. 
A)  To adjust the customers balance to the amount owed to the company. 
B)  To assist in the aging of accounts receivable. 
C)  To reduce customer frustration and sales losses. 
D)  To inform the customer of the balance due.

Question 18

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

Accepted Answer

A)  granting of credit 
B)  shipment of goods 
C)  determination of discounts 
D)  selling of goods for cash 
A)  granting of credit 
B)  shipment of goods 
C)  determination of discounts 
D)  selling of goods for cash

Question 19

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

Accepted Answer

A)  Making sure that all shipments have been billed. 
B)  Making sure that no shipment has been billed more than twice. 
C)  Making sure that each shipment is billed at the correct amount. 
D)  Making sure that each shipment is billed to the proper customer. 
A)  Making sure that all shipments have been billed. 
B)  Making sure that no shipment has been billed more than twice. 
C)  Making sure that each shipment is billed at the correct amount. 
D)  Making sure that each shipment is billed to the proper customer.

Question 20

The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "bricks and mortar" business are:

Accepted Answer

A)  unchanged. 
B)  expanded. 
C)  mitigated. 
D)  decreased. 
A)  unchanged. 
B)  expanded. 
C)  mitigated. 
D)  decreased.

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

Most companies recognize sales revenue when:

The most important audit concern in the processing and recording cash receipts function is not tracing the cash receipts from customers to their subsidiary ledger accounts.

The sales and collection cycle applies to businesses that transfer goods to customers or provides services to businesses.

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

Prenumbered documents will only be useful for control purposes if:

The document that the accounting staff will use as the primary basis for recording sales transactions and updating the customers accounts receivable subsidiary ledger is the:

The auditor's primary concern about authorization centers on shipment of goods to customers.

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

Violations of the existence objective for sales are of greater concern to the auditor than violations of the completeness objective.

To determine that sales are accurately recorded, the unit prices on the duplicate sales invoices are normally compared with:

The transaction-related audit objectives and the client's methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor's perspective?

A sales invoice is a document that usually indicates credit approval.

Which one of the following statements is true? In deciding on substantive tests of transactions:

Explain what lapping means, and discuss the internal control deficiency that allows it to occur. Also discuss the procedures the auditor can perform to detect lapping.

In determining the level of audit efficiency, once the auditor has identified the key internal controls and identified any deficiencies in order to determine the level of control risk appropriate for a private company client, it is appropriate to decide whether:

Credit memos are normally issued for what purpose(s)?

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

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

The auditor's objectives for the sales and cash collections activities when the client is primarily an e-commerce business as compared to a "bricks and mortar" business are:

The Demand for Audit and Other Assurance Services

The CPA Profession

Audit Reports

Professional Ethics

Legal Liability

The CPA Profession

Audit Evidence

Audit Planning and Analytical Procedures

Materiality and Risk

Section 404 Audits of Internal Control and Control Risk

Fraud Auditing

The Impact of Information Technology on the Audit Process

Overall Audit Plan 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 and Balances

Audit of the Acquisition and Payment Cycle: Tests of Controls and 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 Balances

Completing the Audit

Other Assurance Services

Internal and Governmental Financial Auditing and Operational Auditing

Filters

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