Question 1

The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with accounting standards.

Accepted Answer

A) True 
 B)False  True

Question 2

Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders, granting credit, shipping goods, billing customers, and recording sales.

Accepted Answer

A) True 
 B)False  True

Question 3

You are an audit manager for Rodgers & Co.and have recently taken on a new 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 comprise the sales and collection cycle are:
•Sales
•Cash receipts
•Sales returns and allowances
•Write-off of uncollectible accounts
•Bad debt expense

Question 4

Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?

Accepted Answer

A)  Sales being included in the journal for which no shipment was made
B)  Sales to related parties, such as officers and subsidiaries
C)  Sales recorded more than once
D)  Shipments being made to nonexistent customers and recorded as sales

Question 5

A ________ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped.

Accepted Answer

A)  sales order
B)  customer order
C)  vendor invoice
D)  sales invoice

Question 6

What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected?

Accepted Answer

A)  Determination of correct delivery address
B)  Credit approval
C)  Matching of shipping document with sales invoice
D)  Receipt of sales order from the customer

Question 7

The total of the individual account balances in the accounts receivable subsidiary ledger should equal the:

Accepted Answer

A)  total sales for the period.
B)  balance of the sales account in the general ledger.
C)  total sales less the total cash received for the period.
D)  balance of the accounts receivable account in the general ledger.

Question 8

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because:

Accepted Answer

A)  understatements of assets and income are a greater concern than overstatements.
B)  overstatements of assets and income are a greater concern than understatements.
C)  it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct.
D)  the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.

Question 9

Which of the following is the appropriate point at which the auditor deems authorization to be critical?

Accepted Answer

A)   
B)   
C)   
D)

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

Before goods are shipped on account, a properly authorized person must:

Accepted Answer

A)  prepare the sales invoice.
B)  approve the journal entry.
C)  approve the customer's credit.
D)  verify that the unit price is accurate.

Question 12

The most difficult type of cash embezzlement for the auditor to detect is when the cash is stolen before it can be recorded in the cash receipts journal.

Accepted Answer

A) True 
 B)False

Question 13

In a lockbox system, bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.

Accepted Answer

A) True 
 B)False

Question 14

Which of the following is a business function related to sales returns and allowances?

Accepted Answer

A)  Processing customer orders
B)  Writing off uncollectible accounts
C)  Processing and recording credit memos
D)  Granting credit

Question 15

In converting from a design format audit program to a performance format audit program, procedures are combined.

Accepted Answer

A) True 
 B)False

Question 16

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

Accepted Answer

A)  The cashier prepares the daily deposit.
B)  The cashier makes the daily deposit at a local bank.
C)  The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D)  The cashier endorses the checks.

Question 17

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

Accepted Answer

A) True 
 B)False

Question 18

Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences.Which of the following are two key differences?

Accepted Answer

A)  Risk and emphasis on the completeness objective.
B)  Materiality and emphasis on the accuracy objective
C)  Risk and emphasis on the classification objective
D)  Materiality and emphasis on the occurrence objective

Question 19

A ________ is a document that indicates a request for merchandise by a customer.

Accepted Answer

A)  sales invoice
B)  vendor invoice
C)  customer order
D)  sales order

Question 20

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.

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

The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with accounting standards.

Sales transactions are the result of the following five functions in the sales and collection cycle: processing customer orders, granting credit, shipping goods, billing customers, and recording sales.

Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?

A ________ is a document that is matched with the customer order to assure that the correct quantity and type of goods are shipped.

What critical event must take place before goods can be shipped in order to assure payment can be reasonably expected?

The total of the individual account balances in the accounts receivable subsidiary ledger should equal the:

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because:

Which of the following is the appropriate point at which the auditor deems authorization to be critical?

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

Before goods are shipped on account, a properly authorized person must:

The most difficult type of cash embezzlement for the auditor to detect is when the cash is stolen before it can be recorded in the cash receipts journal.

In a lockbox system, bank employees are responsible for opening cash receipts and maintaining records of all payments made by customers at the lockbox address.

Which of the following is a business function related to sales returns and allowances?

In converting from a design format audit program to a performance format audit program, procedures are combined.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

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

Transaction-related audit objectives are essentially the same for processing credit memos as for sales with certain differences.Which of the following are two key differences?

A ________ is a document that indicates a request for merchandise by a customer.

Prenumbered documents will only be useful for control purposes if: