Deck 11: Revenues, Receivables, and Receipts Process

Question 1

Selecting a sample of recorded sales invoices from the sales journal and comparing the quantity billed to the quantity shipped is an example of a test to satisfy the control objective of accuracy.

Answer 1

True

Question 2

Auditors should consider the possibility of kiting if there are frequent deposits of round amounts.

Answer 2

True

Question 3

Fidelity bonds can help prevent and detect embezzlement.

Answer 3

False

Question 4

A cut off bank statement is a special statement printed by the bank which does not include all paid cheques and deposit slips.

Question 5

The open (or pending) sales order file can be reviewed for evidence of the completeness of recorded sales.

Question 6

The audit team should immediately perform document vouching procedures to audit the account if a response is not received to the first confirmation request.

Question 7

The packing slip authorizes the transfer of inventory from the warehouse to the shipping department and to then to the customer.

Question 8

In delivering confirmations to intended recipients, it is acceptable for the auditor to allow the client to control the mailing.

Question 9

Substantive procedures are designed to obtain direct evidence about the dollar amounts in account balances.

Question 10

The revenue and collection process includes activities from preparing the initial sales order through recording the transaction in the sales journal.

Question 11

The use of positive confirmations provides better evidence than the use of negative confirmations.

Question 12

Which of the following lists outlines the best order for a typical sequence of activities in the revenue and collection cycle?

A)Delivering goods, billing customers, credit granting, collection activity.
B)Customer ordering, delivering goods, billing customer, cash receipts.
C)Customer ordering, delivering goods, credit granting, collection activity.
D)Credit granting, billing customers, delivering goods, cash receipts.

Question 13

In a manual data processing system, the custody of cash and the recording of cash receipts in the cash journal should be combined for maximum control.

Question 14

The accountant who records cash receipts and credits to customer accounts should also handle the cash received and the bank deposits.

Question 15

One of the key assertions to consider in obtaining evidence about accounts receivable is completeness.

Question 16

If an auditor selects a sample of customer accounts receivable and traces payment credits to remittance worksheets and bank deposits, the auditor is testing the control objective of completeness.

Question 17

Cash receipts procedures should include steps for authorizing and recording discounts when the customer takes them.

Question 18

Money laundering refers to the proper processing of cash receipts.

Question 19

A lock box system is an effective way to segregate the custody of cash.

Question 20

In a manual system for the recording of cash receipts, the same person should make the journal entries to the control account and the subsidiary records.

Question 21

An auditor is most likely to review an entity's practice of periodically accounting for the numerical sequence of shipping documents and invoices as evidence and support for management's financial statement assertion of

A)Existence or occurrence.
B)Rights and obligations.
C)Valuation or allocation.
D)Completeness.

Question 22

Which of the following controls is most likely to help ensure that all credit sales transactions are recorded?

A)The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
B)The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.
C)The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
D)The billing department supervisor matches pre-numbered shipping documents with entries in the sales journal.

Question 23

The most frequent reconciliation is the comparison of the sum of customers' unpaid balances with the accounts receivable control account total.Usually, this reconciliation is done with:

A)An aged trial balance.
B)A capital asset sub-ledger.
C)A bank statement
D)A customer statement.

Question 24

Which of the following procedures would best lead to an understanding of the transaction flow in the revenue and collection cycle?

A)Enquiry.
B)Observation.
C)Confirmations.
D)Inspecting a sample of documents.

Question 25

Which of the following audit procedures is an auditor most likely to perform in testing controls related to management's assertion about the completeness of sales?

A)Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
B)Inspect the entity's reports of pre-numbered shipping documents that have not been recorded in the sales journal.
C)Compare the invoiced prices on pre-numbered sales invoices to the entity's authorized price list.
D)Inquire about the entity

Question 26

The control objective associated with selecting a sample of cash receipts remittance lists
(or daily cash reports) and tracing them through to the cash receipts journal is:

A)Validity
B)Completeness
C)Existence
D)Authorization

Question 27

Tracing bills of lading to sales invoices provides evidence that

A)Shipments to customers were invoiced.
B)Shipments to customers were recorded as sales.
C)Recorded sales were shipped.
D)Invoiced sales were shipped.

Question 28

Which of the following controls helps to achieve the accuracy objective over sales invoices?

A)Recorded sales in the sales journal are supported by invoices.
B)Invoices, shipping documents, and sales orders are pre-numbered and the numerical sequence is checked.
C)Sales are recognized in accordance with generally accepted accounting principles.
D)Quantities invoiced are agreed to quantities shipped and quantities ordered by the customer as evidenced in source documentation.

Question 29

To determine whether sales transactions have been recorded in the proper accounting period the auditor performs cut off tests.Which of the following best describes the overall approach used when performing cut off tests?

A)Ascertain that management's letter of representation includes the statement that transactions have been accounted for in the proper accounting period.
B)Analyze transactions occurring within a few days before and after year-end.
C)Confirm year-end transactions with regular customers.
D)Examine cash receipts in the subsequent period.

Question 30

In evaluating the adequacy of the allowance for doubtful accounts, an auditor is most likely to review the aging of receivables as evidence and support for management's financial statement assertion of

A)Existence or occurrence.
B)Valuation or allocation.
C)Completeness.
D)Rights and obligations.

Question 31

Typical source documents involved in the revenue and collection cycle would be:

A)Cash disbursements
B)Shipping Documents
C)Inventory listings.
D)Vendor Invoices

Question 32

Which of the following is most likely to be detected by an auditor's review of a client's sales cut off?

A)Shipments lacking sales invoices and shipping documents.
B)Excessive write-off of accounts receivable.
C)Unrecorded sales at year-end.
D)Lapping of year-end accounts receivable.

Question 33

The control objective associated with selecting a sample of recorded sales invoices from the sales journal and recalculating the cross totals of quantities and prices:

A)Authorization
B)Completeness
C)Validity
D)Accuracy

Question 34

Upon receipt of customer cheques in the mailroom, a responsible employee should prepare a remittance listing and forward it to the cashier.A copy of the listing should be sent to the

A)Internal auditor to investigate the listing for unusual transactions.
B)Controller to compare the listing with the monthly bank statement.
C)Accounts receivable bookkeeper to update the subsidiary accounts receivable records.
D)Entity's bank to compare the listing with the cashier's deposit slip.

Question 35

A charity sells raffle tickets at community events.One ticket will be chosen to win a prize.The charity could reduce the risk of employee misappropriation of cash best by:

A)Insuring all employees with fidelity bonds.
B)Counting all cash in the presence of two people as soon as it comes back to the charity's offices.
C)Having auditors conduct surprise cash counts at the community events.
D)Using prenumbered tickets and accounting for all ticket numbers.

Question 36

Which of the following internal control procedures is most likely to ensure that all billed sales are correctly posted to the accounts receivable subsidiary ledger?

A)Daily sales summaries are compared to daily postings to the accounts receivable subsidiary ledger.
B)Each sales invoice is supported by a pre-numbered shipping document.
C)The accounts receivable subsidiary ledger is reconciled daily to the control account in the general ledger.
D)Each shipment on credit is supported by a pre-numbered sales invoice.

Question 37

When the credit manager decides a customer's account is considered to be uncollectible, the decision should be reviewed by the controller to:

A)Ensure the bad debts account is within budget.
B)Ensure the credit manager has not written off the account as a favour to a friend.
C)Begin a lawsuit to collect the money.
D)Inform the police.

Question 38

Infotech is a small software company with few billings.It sends out invoices to clients using the preparation date as the invoice number.As a result, which of the following assertions about billings cannot be tested?

A)Validity.
B)Completeness.
C)Classification.
D)Proper period accounting.

Question 39

Which of the following audit procedures is the most effective when testing sales for understatement?

A)Scrutinize the accounts receivable aged trial balance.
B)Confirm a sample of recorded accounts receivable.
C)Trace a sample of shipping documents to sales invoices recorded in the sales journal.
D)Vouch a sample of recorded sales from the sales journal to shipping documents.

Question 40

Tracing a sample of recorded cash receipts to the customers' accounts in the accounts receivable subsidiary ledger is an audit procedure designed to satisfy the control objective of

A)Completeness.
B)Validity.
C)Accuracy.
D)Accounting.

Question 41

Which of the following procedures is an auditor most likely to perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

A)Review the cash receipts journal for the month prior to the year-end.
B)Intensify the study of the internal control system over the revenue cycle.
C)Increase the assessed level of detection risk for the existence assertion.
D)Inspect the shipping records documenting the merchandise sold to the debtors.

Question 42

Auditors ordinarily send a standard bank confirmation to all banks with which the client has done business during the year under audit, regardless of whether the client has closed its account.One reason for doing so is to

A)Provide the data necessary to prepare a summary of cash.
B)Request that a cut off bank statement and cancelled cheques be sent to the auditor.
C)Detect lapping activities that might otherwise not be discovered.
D)Obtain information about unrecorded liabilities and security agreements.

Question 43

The bank confirmation provides the most evidence for which of the following assertions about cash?

A)Existence.
B)Presentation.
C)Valuation.
D)Completeness.

Question 44

In the audit of accounts receivable, negative confirmation are not normally used if:

A)Internal control is considered effective.
B)There are a large number of small balances.
C)Customers can be expected to consider the confirmation properly.
D)Account balances are in dispute.

Question 45

The most effective audit procedure for determining if an account receivable will be collected is:

A)Examination of cash collections subsequent to the year end.
B)Examination of sales invoice(s).
C)Confirmation of the account.
D)The review of the customer's file to determine previous collection experience and to check sales orders from the customer for evidence credit approval.

Question 46

In the course of examining the cut off bank statement for a client, an auditor is puzzled to discover that none of the cheques listed as outstanding on the year-end bank reconciliation has cleared the bank.This could be an indication that the client:

A)Is engaged in kiting.
B)Has overstated the year-end balance of cash.
C)Mailed the cheques to vendors after the year end.
D)Left the cash receipts journal open after the year end.

Question 47

Substantive procedures for the audit of cash would include which of the following?

A)Ask that a cut off bank statement be mailed directly to the client.
B)Enquire if the client has prepared bank reconciliations for all bank accounts on a monthly basis.
C)Prepare a schedule of inter-bank transfers for a period of ten business days before and after year-end date.
D)Obtain written descriptions from the client about its cash receipts procedures.

Question 48

In the audit of cash the auditor obtains a bank cut off statement primarily to

A)Identify old outstanding cheques that the client may exclude from the year-end bank reconciliation in order to misappropriate cash.
B)Obtain sufficient information to reconcile the client's bank account as at the year end.
C)Obtain direct confirmation of the client's bank balances as at the year end.
D)Test the propriety of items appearing on the client's year-end bank reconciliation.

Question 49

Selecting a sample of debits from customer accounts receivable records and vouching them to supporting sales invoices is an audit procedure designed to obtain evidence about the control objective of

A)Validity.
B)Completeness.
C)Authorization.
D)Accuracy.

Question 50

Scanning sales invoices to determine whether there are any numbers missing in the sequence is a control over which of the following objectives?

A)Completeness.
B)Accuracy.
C)Validity.
D)Classification.

Question 51

An auditor should trace cancelled cheques and cleared deposits for the last part of the current audit period and the first part of the subsequent period to detect whether

A)The cash receipts journal was held open for a few days after the year-end.
B)The last cheques recorded before the year-end actually mailed by the year-end.
C)Cash balances were overstated because of kiting.
D)Any unusual payments to or receipts from related parties occurred.

Question 52

In the audit of accounts receivable, the negative form of confirmation request is most likely to be used when

A)Recipients are likely to return positive confirmation requests without verifying the accuracy of the information.
B)The combined assessed level of inherent and control risk relative to accounts receivable is low.
C)A small number of accounts receivable is involved but a relatively large number of errors are expected.
D)The auditor performs a dual-purpose test that assesses control risk and obtains substantive evidence.

Question 53

A customer replies to a positive confirmation as follows: "We dispute the $250 charge from your client as the goods were never received." This confirmation

A)Provides evidence of existence but not valuation.
B)Does not provide evidence of existence so valuation is irrelevant.
C)Provides evidence that the goods were never shipped.
D)Provides evidence that the account should be written off.

Question 54

Which of the following audit procedures is most likely to detect lapping by the accounts receivable clerk?

A)Use the cut off bank statement to trace all cheques dated before the balance sheet date to the outstanding cheque list on the bank reconciliation.
B)Use the cut off bank statement to determine if the bank recorded all deposits in transit per the bank reconciliation on the first business day after the balance sheet date.
C)Compare the detail of cheques listed on a sample of deposit slips to the detail of customer credits listed on the day's posting to the customer accounts in the subsidiary ledger.
D)Prepare a schedule of inter-bank transfers for a few days before and after the balance sheet date.

Question 55

To gather evidence about transactions with related parties an auditor would most likely:

A)Send account confirmations.
B)Perform analysis of receivables turnover.
C)Scan the receivables sub ledger for credit balances.
D)Scan the aged trial balance for names of officers and directors.

Question 56

The primary consideration when planning to confirm accounts receivable before the balance sheet date is the

A)Type of confirmation to be used.
B)Client's internal control over transactions affecting receivables.
C)Availability of staff auditors.
D)Number of customer accounts.

Question 57

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when

A)There is no response to a positive confirmation request.
B)There is no response to a negative confirmation request.
C)Collectability of the receivables is in doubt.
D)Pledging of the receivables is probable.

Question 58

An auditor confirms a representative number of open accounts receivable as of December
31 and investigates exceptions and comments noted by respondents.By this procedure, the auditor is most likely to learn of which of the following?

A)One of the cashiers has been covering a personal embezzlement by lapping.
B)One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C)One of the EDP control clerks has been removing all sales invoices applicable to his account from the data file.
D)The credit manager has misappropriated remittances from customers whose accounts have been written off.

Question 59

In which of the following circumstances is the use of the negative form of accounts receivable confirmation most likely to be justified?

A)A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
B)A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
C)A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
D)A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Question 60

An unrecorded cheque issued during the last week of the year would most likely be discovered by the auditor when the

A)Cheque register for the last month is reviewed.
B)Cut-off bank statement is reconciled.
C)Bank confirmation is reviewed.
D)Search for unrecorded liabilities is performed.

Question 61

Define the response rate as it pertains to positive accounts receivable confirmations.Describe methods which can be utilized to increase the response rate.

Question 62

If it is impracticable to confirm accounts receivable but the auditor obtains sufficient, appropriate evidence to verify the receivable balance by performing alternative procedures, the auditor's opinion should be unqualified.The audit report should

A)Disclose the fact that alternative procedures were used because of a client-imposed scope limitation.
B)Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
C)Not mention the alternative procedures.
D)Include an explanatory paragraph that discloses the performance of alternative procedures.

Question 63

Will the confirmation of accounts, loans and notes receivable always provide sufficient appropriate audit evidence to cover the ownership assertion made by the client?

Question 64

What are the general internal control objectives for the revenue cycle?

Question 65

In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would be obtained from

A)An aging schedule of past due accounts which the auditor has tested.
B)Correspondence with the client's collection agency.
C)Financial statements of individual customers.
D)Lack of a reply to negative confirmations.

Question 66

In-Line Company records accounts receivable from customers arising from both the sale of in-line skates and the provision of repair service.The CA firm of King & King is auditing the financial statements of In-Line Company.Lyon, the audit manager, is aware that the confirmation of customer accounts receivable is a substantive procedure normally used in the audit of accounts receivable.Selected balances from In-Line's financial statements are as follows: accounts receivable, $7,000; current assets, $322,000; total assets, $630,000; shareholders' equity, $570,000; net income, $190,000.
Required:

A) How can Lyon justify deciding not to confirm In-Line's accounts receivable?
B) Briefly describe two types of positive confirmation Lyon could send to In-Line's customers.
C) What alternative procedures can Lyon perform if In-Line's customers fail to respond to the confirmation requests?

Question 67

What is dual-direction testing?

Question 68

Cash receipts from sales on account terms of 2/10, net 30 have been misappropriated.Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

A)Understating the sales journal.
B)Overstating the accounts receivable subsidiary ledger.
C)Understating the accounts receivable subsidiary ledger.
D)Understating the cash receipts journal.