Deck 10: Auditing Revenue and Related Accounts

Question 1

Monthly statements provide a detailed list of the customer's activity for the previous month and a listing of all open items.

Answer 1

True

Question 2

A comprehensive chart of accounts and a review of complex or unusual transactions by supervisory personnel are control procedures necessary for proper classification of accounts.

Answer 2

True

Question 3

The shipping department confirms the shipment of goods by completing the packing slip and returning it to the purchasing department.

Answer 3

False

Question 4

The use of prenumbered sales invoices is the primary control procedure to satisfy the assertion of completeness.

Question 5

All companies attempting to comply with GAAP should refer to the Securities and Exchange Commission for guidance as it supersedes all AICPA,PCAOB,FASB and EITF literature.

Question 6

Monitoring is one of the five components of the COSO internal control framework.

Question 7

The intentional loading of sales at the end of a period to customers that do not need the goods at that time should not be recorded as revenues.

Question 8

Invoices are processed,including their mailing to customers,only subsequent to proof of valid delivery to customers.

Question 9

A tendency for fraud exists when stock options are close to becoming exercised by executives and financial personnel.

Question 10

The revenue cycle involves the procedures in generating a sales order,shipping the products,recording the transaction and collecting the receivable.

Question 11

The auditor of James Corporation should be alert to the risk of material misstatements when James Corporation's cash flows from operations are negative and net income (rather than loss)is reported.

Question 12

The revenue cycle considered by auditors includes the sales process but not cash collections.

Question 13

Financial accounting personnel who do not have the proper education,experience and backgrounds may signal the auditor to the risk of financial statement fraud.

Question 14

Ratio analysis performed by the audit team may include the comparison of gross sales to industry averages and previous periods.

Question 15

The audit team is required by auditing standards to make an ordinary presumption of the risk of fraud due to revenue misstatements on every engagement.

Question 16

Monitoring of the revenue cycle may be accomplished partially through the use of exception reporting

Question 17

A red flag that may alert the auditor to fraud in the revenue cycle is a trend of revenue growth that is consistent with industry results.

Question 18

A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it leases until the customer is ready for the product should record the delivery as revenue.

Question 19

One of the benefits of establishing a formal credit policy for granting credit is that management does not need to perform monitoring of accounts receivable.

Question 20

Formal procedures for approving acceptance of returns that are beyond the warranty period are an appropriate control procedure for identifying and recording returned goods.

Question 21

Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.

Question 22

The auditor would examine a sample of sales transactions throughout the entire period to determine if sales were recorded in the proper period when performing a sales cutoff test.

Question 23

Positive accounts receivable confirmations should be used on all accounts which represent small immaterial balances.

Question 24

The auditor has determined that the control risk for the existence assertion is low;therefore the auditor may reduce the number of items tested on a substantive basis.

Question 25

Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting documents.

Question 26

Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been pledged or discounted.

Question 27

Edge and Gregg,LLP would most likely discover channel stuffing in the financial statements of a client through the use of trend analysis.

Question 28

Accounts receivable confirmations should be prepared on the auditing firm's letterhead.

Question 29

In planning an audit for the revenue cycle,the auditor must realize the integrated relationship of evidence found between the accounts receivable and the notes payable accounts.

Question 30

A review of the terms of client debt agreements assists the audit of the presentation and disclosure assertion for accounts receivable.

Question 31

Use of reasonableness tests by Bono Mullins,PC will include relationships between financial but not non-financial data.

Question 32

An auditor would test controls related to the occurrence/existence of sales transactions by sampling recorded revenues and tracing them back to invoices and shipping documents

Question 33

When the auditor seeks evidence concerning the allowance for doubtful accounts he or she would most likely use an aged trial balance to help identify past due balances.

Question 34

Current auditing standards do not require the confirmation of receivables if accounts receivable are not material.

Question 35

The auditor's determination that day's sales in accounts receivable increased from 44 days to 100 days would usually be found through the use of ratio analysis.

Question 36

If control risk is assessed high,the auditor may send significantly fewer confirmations for a sample of accounts receivable than if the control risk is assessed low.

Question 37

An example of a control over the sales cycle is the authorization of price lists by the appropriate sales and marketing manager.

Question 38

A method of testing for the completeness of sales is to test the sequence of sales invoices used during the period under audit.

Question 39

The use of audit software makes the audit of the revenue cycle more effective,but not more efficient.

Question 40

When the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high,the auditor is more likely to use negative confirmations.

Question 41

The relationship between the sales cycle and an inventory system can best be noted in which of the following examples?

A)Credit is established prior to completion of a sales order.
B)Invoices are sent to customers only after shipment is evidenced.
C)Availability of products ordered are verified prior to processing a sale.
D)Billing information is added to the database for new customers.

Question 42

It is beneficial in the testing of notes receivable to confirm not only the balance of the notes,but also their terms.

Question 43

The most important control to ensure completeness of sales and shipping is pre-numbered shipping and billing documents.

Question 44

The purpose of summarizing confirmation results is to list the extent of sales tested in relation to the response rate.

Question 45

A timing difference type of exception in the confirmation process may include a misunderstanding by the reader as to the date being confirmed.

Question 46

Which of the following processes are included in the revenue cycle?

A)Shipping products to customers.
B)Payments to suppliers.
C)Issuance of capital stock.
D)Preparation of a time card.

Question 47

Negative confirmations are considered to be more persuasive than positive confirmations.

Question 48

An auditor's primary concern with identifying related party sales and receivables rests with the presentation and disclosure assertion.

Question 49

Credit approval policies are implemented by organizations primarily to

A)determine revenue recognition policies.
B)ensure customer satisfaction.
C)prevent lapping by the accounts receivable department.
D)ensure the realization of receivables.

Question 50

Exceptions found in the confirmations of accounts receivable balances need not be projected as errors to the population as they are typically isolated errors.

Question 51

Valid evidence obtained in an audit for testing the cutoff of gross sales includes receiving reports for returned merchandise.

Question 52

Negative confirmations are used to confirm material balances.

Question 53

An aging of accounts receivable is useful in estimating the reasonableness of the allowance for doubtful accounts.

Question 54

An example of a test for completeness in the revenue cycle includes the sampling of shipping documents and tracing them to the sales journal and general ledger.

Question 55

The audit team typically reviews journal entries in the receivables ledger for unusual entries that may be indicators of fraudulent activity.

Question 56

Testing cutoff involves procedures applied to sales transactions selected from those recorded several days prior to period end and several days following period end.

Question 57

Which of the following is the best example of the control objective in the revenue cycle that all transactions are recorded accurately?

A)Sales are recorded at the invoice price expected to be collected from customers.
B)Sales orders have sequential numbering.
C)Recorded sales transactions are evidenced by valid invoices and shipping documents.
D)Credits to customer accounts are classified as liabilities.

Question 58

Estimation of the allowance for doubtful accounts is a simple management decision as it is determined as a percentage of sales.

Question 59

The auditor will come up with an independent estimation of the allowance for doubtful accounts based on a thorough understanding of the client and the client's business that is compared to the recorded allowance.

Question 60

Customer complaints noted in returned accounts receivable confirmations may be an indicator of fraud.

Question 61

Hardman and Jennings,LLP,an audit firm,compares bad debt expense of a client in the current period to bad debt recorded for the past three periods.Hardman and Jennings is performing which type of analysis?

A)trend
B)ratio
C)critical
D)reasonableness

Question 62

Which of the following provides evidence that the delivery of a product by a company to one of its customers is sufficient for the company to record revenue?

A)A check received from the customer.
B)An agreement to purchase product signed by the customer.
C)A pick ticket in the warehouse.
D)A bill of lading and tracking number with the shipper.

Question 63

Which of the following must exist prior to the recognition of revenue by a company from the sale of a product?

A)The cash is realized on the sale of the product.
B)A price is discussed based upon the customer's resale of the product.
C)The customer is given the option to return the product at any time.
D)The product is adequately delivered to the customer.

Question 64

Which of the following is the major risk associated with receivables?

A)they may be sold to a bank with recourse.
B)they may be recorded as long-term when in fact they will be realized in the current period.
C)they will not be realized for the entire amount due.
D)they are pledged as collateral as disclosed in the footnotes to financial statements.

Question 65

The significance of the bill of lading is to provide which of the following?

A)the warehouse personnel with the product that must be shipped to customers.
B)invoices to customers for proper collection.
C)a credit application for customer approval.
D)evidence of title transfer of goods to customers.

Question 66

Much of the understanding of revenue transactions for compliance with GAAP can be performed by which of the following procedures?

A)examining sales contracts and inquiry of management.
B)confirming sales with customers.
C)discussing the transactions with qualified members of the Financial Accounting Standards Board.
D)comparing shipping documents with invoices.

Question 67

Which of the following is a proper control for the detection of unusual sales transactions recorded in the general ledger?

A)Electronic authorization prior to posting.
B)Use of sequentially numbered sales documents.
C)Random statements to customers.
D)Review of transactions by upper management or the board.

Question 68

The internal audit department at Monument Company receives electronic exceptions reports for all sales transactions entered over $10,000 in total.This process is performed for the purpose of

A)drafting financial statements.
B)monitoring revenue transactions.
C)providing management reports to the controller.
D)providing suggestions for operational improvement.

Question 69

Calculating the turnover of receivables is often used in testing the sales cycle by auditors when performing

A)trend analysis.
B)ratio analysis.
C)reasonableness testing.
D)non-statistical sampling.

Question 70

What evidence is utilized by the auditor for analytical purposes in substantiating the allowance for bad debt estimate?

A)Accounts receivable aging schedule
B)Copies of checks received from customers.
C)Confirmations returned without exception.
D)Stock prices of customer companies.

Question 71

Which of the following is a control that may be implemented to ensure all sales that occur are recorded in the general ledger?

A)use of prenumbered shipping,invoice and sales documents.
B)use of prenumbered statements,inventory lists and credit memos.
C)reconciliation of invoices with customer statements.
D)use of pre-authorized price lists.

Question 72

Fraud related to revenue recognition will most likely be identified by the auditor through which of the following independent situations?

A)Sales have increased 5% in the current period over the previous period and is consistent with the results of competitors.
B)Gross margin is equivalent in the current period to previous periods and is below that of the industry.
C)Sales are higher in the month preceding each quarter end.
D)The sales of a revolutionary new product are increasing beyond that of the competition in the periods immediately following its introduction.

Question 73

In an audit of financial statements,the risk of the high rate of return of products sold includes that of

A)sales that are recorded improperly.
B)an estimate of accrued returns that reduces net income.
C)a reduction of net sales for an increase to the sales returns and allowance account.
D)consignment goods that are returned and forwarded to third parties.

Question 74

Which of the following is a method used by companies to fraudulently inflate revenues?

A)use of hidden "side letters" giving the customer an irrevocable right to return the product.
B)recording of fictitious sales.
C)shipment of product not ordered by customers.
D)all of the above.

Question 75

The auditor of the revenue cycle of ABC Company computes an estimate of ABC's allowance for doubtful accounts and compares it to the estimate provided by ABC's management.The purpose for this procedure is to substantiate which of the following assertions?

A)existence of receivables
B)completeness of receivables
C)valuation of receivables
D)rights to receivables

Question 76

Sales transactions should be documented at initiation in order to do which of the following?

A)provide the customer a copy of the transaction.
B)provide evidence of authorization and recording.
C)offer credit to customers.
D)generate back orders.

Question 77

Auditors will examine significant sales returns immediately subsequent to the period under audit in order to do which of the following?

A)substantiate cutoff and the occurrence of net sales transactions.
B)test the sufficiency of cash balances to cover refunds.
C)monitor customer satisfaction for disclosure.
D)assess the nature of procedures that will be performed for the next period's audit.

Question 78

Lithgow and Harris,CPAs are performing the audit of WildFlower Grocery Stores.Lithgow and Harris relates annual revenue by sales per square feet and sales per customer.What type of analysis is Lithgow and Harris most likely performing?

A)Ratio analysis.
B)Trend analysis
C)Reasonableness tests.
D)Non-statistical analysis.

Question 79

The auditor traces recorded sales to invoices,sales orders and shipping documents in order to substantiate which of the following assertions?

A)cutoff.
B)completeness.
C)legality.
D)occurrence/existence.

Question 80

The risk of material misstatement due to fraud relating to revenue recognition should be

A)approached in a manner that is identical to control risk assessment.
B)given lower priority to the risk of embezzlement.
C)ordinarily presumed by the auditor.
D)assumed to have been considered by the audit committee.