Deck 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Question 1

Below are listed possible misstatements that could occur in the sales and collections cycle. Provide the analytical procedure that would be most useful in detecting the possible misstatement.
a. Overstatement of sales and accounts receivable
b. Uncollectible accounts receivable that have not been provided for
c. Overstatement of sales returns and allowances

Answer 1

a. compare gross margin percentage with previous year by product line; compare sales by month, (by product line), over time
b. compare bad debt expense as a percentage of sales from previous years
c. compare sales returns and allowances as a percentage of gross sales with previous years

Question 2

The net realizable value of accounts receivable is equal to:

A) gross accounts receivable less allowance for uncollectible accounts.
B) gross accounts receivable less bad debt expense.
C) gross accounts receivable less returns and allowances.
D) gross accounts receivable less sales discounts.

Answer 2

A

Question 3

The audit procedure of tracing sales invoices to shipping documents will provide the auditor evidence that:

A) billed sales were shipped.
B) shipments were recorded as receivables in the subsidiary ledger.
C) the accounts receivable master file and the accounts receivable subsidiary ledger reconcile.
D) goods shipped were billed to customers.

Answer 3

A

Question 4

For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.

Question 5

The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.

Question 6

For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related audit objective.

Question 7

An auditor selects a sample of shipping documents in order to determine if the related sales invoices were prepared. This test would gather evidence concerning which audit objective?

A) Completeness
B) Detail tie-in
C) Occurrence
D) Realizable value

Question 8

A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding, is the:

A) customer list.
B) aged trial balance.
C) accounts receivable ledger.
D) schedule of accounts receivable.

Question 9

In performing your audit you noticed that often times goods are shipped that are not matched with the corresponding sales invoice. This control deficiency could cause:

A) understatement of revenues and overstatement of inventory.
B) overstatement of revenues and understatement of inventory.
C) understatement of revenues and inventory.
D) overstatement of revenues and inventory.

Question 10

The understatement of sales and accounts receivable is best uncovered by:

A) confirming receivables.
B) reviewing the aged trial balance.
C) test of transactions for shipments made but not recorded.
D) reconciling the accounts receivable general ledger account with the schedule of accounts receivable.

Question 11

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an:

A) efficiency basis.
B) effectiveness basis.
C) audit objectives basis.
D) none of the above.

Question 12

The two primary classes of transactions in the sales and collection cycle are:

A) sales and sales discounts.
B) sales and cash receipts.
C) sales and sales returns.
D) sales and accounts receivable.

Question 13

For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives?

A) Timing and realizable value.
B) Completeness and existence.
C) Existence and accuracy.
D) Realizable value and cutoff.

Question 14

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objective?

A) Existence
B) Completeness
C) Rights
D) Detail tie-in

Question 15

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objective?

A) Existence
B) Completeness
C) Rights
D) Detail tie-in

Question 16

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.

Question 17

Which of the following types of receivables would not deserve the special attention of the auditor?

A) Accounts receivables with credit balances.
B) Accounts that have been outstanding for a long time.
C) Receivables from related parties.
D) Each of the above would receive special attention.

Question 18

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally:

A) reduce the extent of tests of details of balances.
B) reduce the extent of tests of controls.
C) reduce the tests of transactions.
D) reduce all of the other tests.

Question 19

An auditor learns that collections of accounts receivable during the first ten days of January were debited to cash and credited to accounts receivable as of December 31. The effect generally will be to:

A) overstate the current ratio with no effect on working capital at December 31.
B) overstate both working capital and the current ratio at December 31.
C) overstate working capital with no effect on the current ratio at December 31.
D) leave both working capital and the current ratio unchanged at December 31.

Question 20

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?

A) Accuracy
B) Completeness
C) Rights
D) Detail tie-in

Question 21

When do most companies record sales returns and allowances?

A) During the month in which the sale occurs.
B) During the accounting period in which the return occurs.
C) Whenever the customer contacts the company regarding the credit.
D) During the month after the sale occurs.

Question 22

For which of the following accounts is cutoff least important?

A) Sales
B) Sales returns and allowances
C) Cash collections
D) Inventory

Question 23

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective?

A) realizable value
B) existence
C) completeness
D) occurrence

Question 24

The correct accounting for accounts receivable accounts with credit balances, provided they are significant, would be:

A) written off.
B) moved to the debit side.
C) reclassified as accounts payable.
D) corrected by making adjusting entries.

Question 25

Which of the following audit procedure would normally be included in the audit plan when auditing the allowance for doubtful accounts?

A) Send positive confirmations.
B) Inquire of the client's credit manager.
C) Send negative confirmations.
D) Examine sales invoices.

Question 26

Cutoff misstatements occur when:

A)
B)
C)
D)

Question 27

Which of the following is likely to be determined first when performing tests of details for accounts receivable?

A) Recorded accounts receivable exist.
B) Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.
C) Accounts receivable are owned.
D) Existing accounts receivable are included.

Question 28

Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested?

A) Accounts receivable master file
B) Customer file
C) Aged trial balance
D) Sales register

Question 29

Which of the following most likely would be detected by a review of a client's sales cutoff?

A) Excessive sales discounts
B) Unrecorded sales for the year
C) Unauthorized goods returned for credit
D) Lapping of year-end accounts receivable

Question 30

A customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31. This represents:

A)
B)
C)
D)

Question 31

Cutoff misstatements occur:

A) either by error or fraud.
B) by error only.
C) by fraud only.
D) randomly without causes related to errors or fraud.

Question 32

Audit procedures designed to uncover credit sales made after the client's fiscal year end that relate to the current year being audited provide evidence for which of the following audit objective?

A) realizable value
B) accuracy
C) cutoff
D) existence

Question 33

The most important test of details of balances to determine the existence of recorded accounts receivable is:

A) tracing details of sales invoices to shipping documents.
B) tracing the credits in accounts receivable to bank deposits.
C) tracing sales returns entries to credit memos issued and receiving room reports.
D) the confirmation of customers' balances.

Question 34

Generally accepted accounting principles require that revenue be reported net of sales returns and allowances:

A) if practical.
B) if required by industry practice.
C) if the amounts are material.
D) any of the above.

Question 35

Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include:

A)
B)
C)
D)

Question 36

The most important aspect of evaluating the client's method of obtaining a reliable cutoff is to:

A) perform extensive detailed testing of cutoff.
B) evaluate the client's control procedures around cutoff.
C) confirm a sample of transactions near period end with customers.
D) confirm transaction with customers.

Question 37

Which of the following audit procedures would not likely detect a client's decision to pledge or factor accounts receivable?

A) A review of the minutes of the board of directors' meetings.
B) Discussions with the client.
C) Confirmation of receivables.
D) Examination of correspondence files.

Question 38

If the client's internal control for recording sales returns and allowances is evaluated as ineffective:

A) a larger sample may be needed to verify cutoff.
B) sampling is not appropriate.
C) all sales returns must be traced to supporting documentation.
D) all sales returns must be confirmed with the customer.

Question 39

Most tests of accounts receivable are based on what schedule, file, or listing?

A) Sales master file.
B) Aged accounts receivable trial balance.
C) Accounts receivable master file.
D) Accounts receivable general ledger account.

Question 40

Cutoff misstatements can occur for:

A)
B)
C)
D)

Question 41

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.

Question 42

Confirmation of accounts receivable provide evidence related to the existence, accuracy and cutoff objectives.

Question 43

Confirmation is the most common test of details of balances for the accuracy of accounts receivable.

Question 44

Describe how the auditor tests the accuracy objective for accounts receivable.

Question 45

Auditors often use analytical procedures in gathering audit evidence. For example, an unexplained decrease in the amount of accounts receivable may indicate:

A) Sales were overstated.
B) Inventory purchases were curtailed.
C) Cost of Goods sold was overstated.
D) Accounts Receivables were sold.

Question 46

Assuming the client's internal controls are adequate, describe how the auditor can verify proper cutoff of sales transactions.

Question 47

The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.

Question 48

A procedure to test for a cash receipts cutoff error is:

A) reconciling the bank statement.
B) performing a four-column proof-of-cash.
C) observing the counting of cash at the balance sheet date.
D) tracing recorded cash receipts to bank deposits on the bank statement of a different period.

Question 49

You are auditing Rodgers and Company and have noticed that accounts receivables have increased from the previous year because of financial problems with its customers. Your likely first response would be to:

A) expand tests regarding account balance collectability.
B) increase the allowance for uncollectible accounts for the client.
C) communicate to the client that credit policy must be reviewed.
D) increase the sample size of past due accounts.

Question 50

You are reviewing sales to discover cutoff problems. If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:

A) before the merchandise was shipped.
B) at the time the merchandise was shipped.
C) several days subsequent to shipment.
D) at a time after the point at which title passed.

Question 51

Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit.

Question 52

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve:

A) employee overtime wages.
B) credit granted to customers.
C) write-offs of customer accounts.
D) cash disbursements.

Question 53

For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash:

A) is detected and correct when cash is separately audited.
B) is unlikely to have a material impact on the balance sheet or the income statement.
C) affects items on the balance sheet but does not affect net income.
D) rarely occurs given the control consciousness of most entities.

Question 54

Cutoff misstatements can occur for sales, sales returns, and cash receipts. List below the threefold approach an auditor performs for each account above to determine the reasonableness of the cutoff.

Question 55

When performing tests of controls and tests of transactions for sales, the auditor generally defines the population as:

A) all accounts receivable transactions for the year.
B) all sales invoices for the year.
C) all cash receipts transactions for the year.
D) all sales invoices less sales return credit memos.

Question 56

How might the auditor determine whether a client has limited rights to accounts receivable?

A)
B)
C)
D)

Question 57

Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle.

Question 58

The balance-related audit objectives of realizable value and rights are not affected by assessed control risk.

Question 59

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:

A) accuracy.
B) existence.
C) control.
D) completeness.

Question 60

Discuss the audit procedures performed when testing the detail tie-in objective for accounts receivable, and explain why this objective is ordinarily tested before any other objectives for accounts receivable.

Question 61

Confirmation of accounts receivable balances normally provides evidence concerning the:

A) valuation of the balances.
B) rights of the balances.
C) existence of the balances.
D) completeness of the balances.

Question 62

If the auditor decides not to confirm accounts receivable, the auditor should:

A) always use alternative procedures to audit the accounts receivable.
B) include copies of customer statements in the audit files.
C) document the reasons for such a decision in the audit files.
D) include copies of customer sales invoices in the audit files.

Question 63

An auditor would be least likely to use confirmations in connection with the examination of:

A) inventories.
B) long-term debt.
C) property, plant, and equipment.
D) stockholders' equity.

Question 64

For most audits, a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff.

Question 65

When should auditors not perform alternative procedures in testing the accounts receivable balance?

A) When customers do not return positive confirmation requests.
B) When customers do not return negative confirmation requests.
C) When confirmations are deemed to be ineffective as an audit procedure.
D) When confirmations are too costly to use.

Question 66

Discuss the advantages and disadvantages of using negative accounts receivable confirmations rather than positive confirmations.

Question 67

Which of the following is the principle "weakness" of using negative confirmations for your tests of details of balances for accounts receivable?

A) can only be used for large balance accounts
B) cannot not be used when account balances "bunch" around a mean value
C) conclusions drawn from receiving no reply may not be correct
D) response rates are generally too low to draw any conclusions

Question 68

Auditing standards require the confirmation of accounts receivable in normal circumstances. What are the three exceptions to this requirement?

Question 69

The most effective audit evidence gathered for accounts receivable is the:

A) detail tie-in of the records.
B) analysis of the allowance for doubtful accounts.
C) confirmation of accounts receivable.
D) examination of sales invoices.

Question 70

The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is:

A) confirmations.
B) recalculation of the aged receivables and uncollectible accounts.
C) tracing credit memos for returned merchandise to receiving room reports.
D) tracing from shipping documents to journals to the accounts receivable ledger.

Question 71

Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a:

A) representation letter.
B) negative confirmation.
C) bank confirmation.
D) positive confirmation.

Question 72

A positive confirmation is more reliable evidence than a negative confirmation because:

A) fewer confirmations can be sent out.
B) the auditor has a document which can be used in court.
C) the debtor's lack of response indicates agreement with the stated balance.
D) follow-up procedures are performed if a response is not received from the debtor.

Question 73

The positive (as opposed to the negative) form of receivables confirmation may be preferred when:

A) internal control surrounding accounts receivable is considered to be effective.
B) there is reason to believe that a substantial number of accounts may be in dispute.
C) a large number of small balances are involved.
D) there is reason to believe a significant portion of the requests will be made.

Question 74

When positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure?

A) Send a second confirmation request.
B) Examine subsequent cash receipts to determine if the receivable has been paid.
C) Examine shipping documents to verify that the merchandise was shipped.
D) Examine customer's purchase order and the duplicate sales invoice to determine that the merchandise was ordered.

Question 75

Describe the differences between positive and negative confirmations. Which type is generally viewed as more reliable?

Question 76

Briefly describe the circumstances in which it is acceptable to use negative confirmation requests.

Question 77

The most reliable evidence from confirmations is obtained when they are sent:

A) as close to the balance sheet date as possible.
B) at various times throughout the year to different segments of the sample, so that the entire sample is representative of account balances scattered throughout the year.
C) several months before the year-end, so the auditor will have adequate time to perform alternate procedures if they are required.
D) at various times throughout the year to the same group in the sample, so that the sample will not have a time bias.

Question 78

A type of positive confirmation known as a blank confirmation:

A) requests the recipient to fill in the amount of the balance.
B) is considered less reliable than the regular positive confirmation.
C) generates as high a response rate as the regular positive confirmation form.
D) is used when the auditor is confirming several small balances.

Question 79

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

A) no reply to a positive confirmation request is received.
B) no reply to a negative confirmation request is received.
C) collectability of the receivables is in doubt.
D) pledging of the receivables is probable.

Question 80

Discuss the alternative procedures an auditor can perform to test the existence objective for accounts receivable when customers do not respond to confirmation requests.