Question 1

Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client's statement and return the letters directly to the auditor indicating whether they agree with the indicated balance, are known by which of the following terms?

Accepted Answer

A)  Direct confirmations. 
B)  Indirect confirmations. 
C)  Positive confirmations. 
D)  Negative confirmations.

Question 2

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

Accepted Answer

A) True 
 B)False

Question 3

One of the benefits of establishing a formal credit policy for granting credit is that management is freed from the burden of monitoring accounts receivable.

Accepted Answer

A) True 
 B)False

Question 4

Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following?

Accepted Answer

A)  Shipping documents and tracing them to the sales journal. 
B)  Accounts receivable and tracing them to cash receipts. 
C)  Recorded sales transactions and tracing them to the general ledger. 
D)  Inventory records and tracing them to the shipping documents.

Question 5

For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate?

Accepted Answer

A)  A retail truck and trailer sales company with high inherent risk and moderate control risk over the revenue cycle. 
B)  A utility company with control risk over the revenue cycle assessed high. 
C)  A mortgage banking company with excellent control over the purchasing cycle. 
D)  A cable company with control risk over the revenue cycle assessed low.

Question 6

Accounts receivable presentation and disclosure.
Develop a list of substantive tests to test whether pledged, discounted, assigned, and related-party accounts receivable are properly disclosed.

Accepted Answer

The answer of Accounts receivable presentation and disclosure.
Develop a list...

Question 7

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

Accepted Answer

A) True 
 B)False

Question 8

An attitude of professional skepticism by the auditor is not needed when internal controls over revenue have been tested and found to be effective.

Accepted Answer

A) True 
 B)False

Question 9

The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization.

Accepted Answer

A) True 
 B)False

Question 10

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.

Accepted Answer

A) True 
 B)False

Question 11

Which of the following criteria must be met in order to recognize revenue in the current accounting period?

Accepted Answer

A)  Delivery has occurred or the services have been rendered. 
B)  Price is fixed or determinable. 
C)  Collectibility if reasonably assured. 
D)  All of the above.

Question 12

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

Accepted Answer

A) True 
 B)False

Question 13

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

Accepted Answer

A) True 
 B)False

Question 14

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

Accepted Answer

A) True 
 B)False

Question 15

The allowance for doubtful accounts will not be precise by either the client or the auditor because of which of the following reasons?

Accepted Answer

A)  It is an accounting estimate based upon judgment. 
B)  GAAP is not clear on the calculation of the allowance. 
C)  It is merely a reserve that is reversed by the client as income is needed for profitable results. 
D)  The precision is determined by the results of confirmation responses.

Question 16

An auditor's examination of the sales account using a cut-off test would most likely detect which of the following?

Accepted Answer

A)  Kiting. 
B)  Sales made with improper credit terms. 
C)  Lapping of accounts receivable. 
D)  Sales recorded in the wrong period.

Question 17

Unreturned positive confirmations for accounts receivable warrant which of the following actions?

Accepted Answer

A)  Replacing the sample selection with a new customer. 
B)  Sending second requests and possibly performing subsequent procedures. 
C)  The projection of larger misstatements to the population. 
D)  Requesting that the client send additional audit correspondence to customers.

Question 18

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

Accepted Answer

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

Question 19

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

Accepted Answer

A) True 
 B)False

Question 20

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

Accepted Answer

A) True 
 B)False

Exam 9: Auditing the Revenue Cycle

Confirmations that are sent to select customers asking them to review the current balance due the client as shown on the client's statement and return the letters directly to the auditor indicating whether they agree with the indicated balance, are known by which of the following terms?

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

One of the benefits of establishing a formal credit policy for granting credit is that management is freed from the burden of monitoring accounts receivable.

Completeness of revenues may be tested by the auditor through the selection of a sample of which of the following?

For which of the following accounts receivable customer populations would the use of negative confirmations be most appropriate?

Accounts receivable presentation and disclosure. Develop a list of substantive tests to test whether pledged, discounted, assigned, and related-party accounts receivable are properly disclosed.

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

An attitude of professional skepticism by the auditor is not needed when internal controls over revenue have been tested and found to be effective.

The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization.

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.

Which of the following criteria must be met in order to recognize revenue in the current accounting period?

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

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

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

The allowance for doubtful accounts will not be precise by either the client or the auditor because of which of the following reasons?

An auditor's examination of the sales account using a cut-off test would most likely detect which of the following?

Unreturned positive confirmations for accounts receivable warrant which of the following actions?

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

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

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