Question 1

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer.The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned.The most effective procedure for preventing this activity is to:

Accepted Answer

A) prenumber and account for all credit memorandums. 
B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved. 
C) have independent sales and accounts receivable departments. 
D) mail monthly statements to customers.

Question 2

Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.

Accepted Answer

A) True 
 B)False

Question 3

Generally, when is the earliest point in the sales and collection cycle in which revenue can be recognized?

Accepted Answer

A) When the sale is approved 
B) When the credit approval process is finalized 
C) When the cash is collected 
D) When the goods have been shipped

Question 4

When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?

Accepted Answer

A) Valuation 
B) Cutoff 
C) Completeness 
D) Classification

Question 5

The appropriate test of controls for separation of duties are ordinarily restricted to the auditor's observations of activities and discussions with personnel.

Accepted Answer

A) True 
 B)False

Question 6

When assessing risk control, the auditor must do all of the following except:

Accepted Answer

A) assess control risk for each objective by evaluating the controls and deficiencies for each objective. 
B) perform the detailed test of balances. 
C) identify the key internal controls and deficiencies. 
D) associate the key controls and deficiencies with the objectives.

Question 7

Most companies recognize sales revenue when:

Accepted Answer

A) sales are invoiced. 
B) payment is received from the customer. 
C) goods are shipped. 
D) the customer's order is received.

Question 8

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customer's account that employee may be suspected of:

Accepted Answer

A) kiting. 
B) lapping. 
C) floating. 
D) shorting.

Question 9

The document that accompanies the customer's payment is the:

Accepted Answer

A) credit memo. 
B) remittance advice. 
C) vendor invoice. 
D) monthly statement.

Question 10

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:

Accepted Answer

A) existence objective. 
B) completeness objective. 
C) ownership objective. 
D) valuation objective.

Question 11

Which of the following is not one of the five classes of transactions included in the sales and collection cycle?

Accepted Answer

A) Sales returns and allowances 
B) Write-off of uncollectible accounts 
C) Bad debt expense 
D) Interest Income

Question 12

An essential part of the auditors responsibility in auditing cash receipts is to identify deficiencies in internal control that increase the likelihood of fraud.

Accepted Answer

A) True 
 B)False

Question 13

________ tests are for omitted transactions, while ________ tests are for nonexistent transactions.

Accepted Answer

A) Tracing, vouching 
B) Vouching, tracing 
C) Verifying, tracking 
D) Tracking, verifying

Question 14

There should generally be correspondence in the client's file establishing the uncollectibility of their account.

Accepted Answer

A) True 
 B)False

Question 15

The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.

Accepted Answer

A) True 
 B)False

Question 16

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement.
•Sales included in the journals for which there was no shipment
•Sale recorded more than once
•Shipments made to nonexistent customers and recorded as sales

Accepted Answer

The answer of For each of the following potential misstatements,...

Question 17

The estimation of bad debts expense relates to the write-off of uncollectible accounts.

Accepted Answer

A) True 
 B)False

Question 18

Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to:

Accepted Answer

A) deposits in transit. 
B) collections on the company's behalf by the bank which are deposited directly to the company's account. 
C) cash receipts that were not recorded in the relevant accounting records. 
D) service charges.

Question 19

Which one the following procedures performed for the billing function provides evidence for the completeness assertion?

Accepted Answer

A) Making sure that all shipments have been billed 
B) Making sure that no shipment has been billed more than twice 
C) Making sure that each shipment is billed at the correct amount 
D) Making sure that each shipment is billed to the proper customer

Question 20

Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.

Accepted Answer

The answer of Discuss the four business functions that result...

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

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a Smith's customer.The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned.The most effective procedure for preventing this activity is to:

Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.

Generally, when is the earliest point in the sales and collection cycle in which revenue can be recognized?

When designing audit procedures, tracing of source documents to the customers subsidiary ledger and subsequently to the general ledger is done to satisfy what assertion?

The appropriate test of controls for separation of duties are ordinarily restricted to the auditor's observations of activities and discussions with personnel.

When assessing risk control, the auditor must do all of the following except:

Most companies recognize sales revenue when:

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger, purposefully enters cash received into the wrong customer's account that employee may be suspected of:

The document that accompanies the customer's payment is the:

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:

Which of the following is not one of the five classes of transactions included in the sales and collection cycle?

An essential part of the auditors responsibility in auditing cash receipts is to identify deficiencies in internal control that increase the likelihood of fraud.

tests are for omitted transactions, while tests are for nonexistent transactions.

There should generally be correspondence in the client's file establishing the uncollectibility of their account.

The prelisting of cash receipts should be prepared by the individual who has primary responsibility for the recording of cash receipts.

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement. •Sales included in the journals for which there was no shipment •Sale recorded more than once •Shipments made to nonexistent customers and recorded as sales

The estimation of bad debts expense relates to the write-off of uncollectible accounts.

Preparation of a proof of cash would not be useful in discovering differences between the actual and reported cash balances if the differences were due to:

Which one the following procedures performed for the billing function provides evidence for the completeness assertion?

Discuss the four business functions that result in sales transactions in a typical sales and collection cycle and, for each function, state the key documents and records involved.