Question 1

Which of the following is not true about the auditors' verification of notes receivable?

Accepted Answer

A)  The interest revenue on notes receivable is usually audited by independent computation. 
B)  Inspecting the notes is sufficient evidence of existence of the notes. 
C)  The auditors may evaluate the collectibility of notes by inspecting credit files. 
D)  Confirmation of notes payable to banks may be accomplished in conjunction with the confirmation of cash balances.

Question 2

The confirmation process may be performed using a(n): $$\begin{array} { | l c | c | } 
\hline &{ \text { Paper form } } & \text { Electronic form } \
\hline \text { A. } & \text { Yes } & \text { Yes } \
\hline \text { B. } & \text { Yes } & \text { No } \
\hline \text { C. } & \text { No } & \text { Yes } \
\hline \text { D. } & \text { No } & \text { No } \
\hline
\end{array}$$

Accepted Answer

A)  Option A 
B)  Option B 
C)  Option C 
D)  Option D

Question 3

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?

Accepted Answer

A)  Cash receipts. 
B)  Payroll. 
C)  Purchases. 
D)  Sales.

Question 4

Your client performed the physical count of inventory as of November 30, one month prior to year-end. Subsequently, your client closed the sales journal on 12/29/XX, two days before year-end, and reported those two days' credit sales in January of the next year. Assuming the client uses a perpetual inventory system, which of the following is most likely to be overstated relating to the year XX financial statements?

Accepted Answer

A)  Sales. 
B)  Cash. 
C)  Inventory. 
D)  Accounts receivable.

Question 5

Fraudulent sales are occasionally recorded at year-end as a means of overstating financial results. As examples, companies may engage in inappropriate bill and hold transactions or channel stuffing.
a. Describe two conditions that might indicate the recording of fraudulent sales.
b. Define bill and hold transactions and describe the audit significance of such transactions.
c. Define channel stuffing and describe the audit significance of this practice.

Accepted Answer

The answer of Fraudulent sales are occasionally recorded at year-end...

Question 6

Tracing recorded sales transactions to the bills of lading provides evidence about the:

Accepted Answer

A)  Completeness of sales transactions. 
B)  Collectibility of sales transactions. 
C)  Occurrence of sales transactions. 
D)  Billing of all sales transactions.

Question 7

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to:

Accepted Answer

A)  Consider internal control over credit sales. 
B)  Test the accuracy of recorded charge sales. 
C)  Estimate credit losses. 
D)  Verify the validity of the recorded receivables.

Question 8

Which of the following is not a primary objective of the auditors in the examination of accounts receivable?

Accepted Answer

A)  Determine the approximate realizable value. 
B)  Consider the adequacy of internal control. 
C)  Establish the existence of receivables. 
D)  Determine the expected day of collection of each of the receivables.

Question 9

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables?

Accepted Answer

A)  The account balances as of year-end will generally be confirmed. 
B)  The auditors will in general use blank rather than positive confirmation requests. 
C)  The auditors will be required to confirm accounts as of an interim date (during the year under audit) and as of year-end. 
D)  Confirmation will not in general be used as the auditor will rely primarily upon support such as vendors' invoices, purchase orders and receiving reports.

Question 10

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

Accepted Answer

A)  Collection of receivables. 
B)  Purchase of merchandise inventory. 
C)  Payment of accounts payable. 
D)  Sale of long-term debt.

Question 11

In your review of ABC Company's financials, you note that Receivables have increased approximately 200% from the previous year, while Cash has declined. Further investigation reveals that 70% of ABC's receivables were booked within 7 days of the end of the quarter. If financial statement fraud is involved, which type is most likely?

Accepted Answer

A)  Fictitious revenues. 
B)  Timing differences. 
C)  Improper asset valuations. 
D)  Improper disclosures.

Question 12

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?

Accepted Answer

A)  Accounts receivable are overstated at December 31, 20X0. 
B)  Accounts receivable are understated at December 31, 20X0. 
C)  Operating expenses are overstated for the 12 months ended December 31, 20X0. 
D)  Sales returns and allowance are overstated at December 31, 20X0.

Question 13

Material accounts receivable from related parties should be stated separately from other receivables.

Accepted Answer

A) True 
 B)False

Question 14

Accounts receivable that are written off should not be turned over to a collection agency.

Accepted Answer

A) True 
 B)False

Question 15

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?

Accepted Answer

A)  The positive form for small balances, and the negative form for large balances. 
B)  The positive form used for large balances and the negative form for the small balances. 
C)  The positive form used for trade receivables and the negative form for other receivables. 
D)  The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.

Question 16

Tracing copies of sales invoices to shipping documents will provide evidence that all:

Accepted Answer

A)  Shipments to customers were recorded as receivables. 
B)  Billed sales were shipped. 
C)  Debits to the subsidiary accounts receivable ledger are for sales shipped. 
D)  Shipments to customers were billed.

Question 17

Internal control over sales transactions is very important to the effectiveness of an organization.
a. For effective control over credit sales, describe four major functions that should be segregated.
b. In addition to adequate segregation of duties, describe two other internal controls over sales transactions.

Accepted Answer

The answer of Internal control over sales transactions is very...

Question 18

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

Accepted Answer

A)  Obsolete inventory has not yet been reduced to fair market value. 
B)  There was an improper cutoff of sales at the end of the year. 
C)  An unusually large receivable was written off near the end of the year. 
D)  The aging of accounts receivable was improperly performed in both years.

Question 19

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable?

Accepted Answer

A)  Fax responses. 
B)  Oral responses obtained by the auditor through a telephone call. 
C)  Written responses to negative confirmation requests. 
D)  Written response to confirmations sent out without balances due.

Question 20

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.

Accepted Answer

A) True 
 B)False

Exam 11: Accounts Receivable, Notes Receivable, and Revenue

Which of the following is not true about the auditors' verification of notes receivable?

A client might overstate December 31 accounts receivable balances by dating and recording January transactions in December. Such entries recorded in which journal are most likely to achieve this end?

Tracing recorded sales transactions to the bills of lading provides evidence about the:

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditors to:

Which of the following is not a primary objective of the auditors in the examination of accounts receivable?

When control risk for the existence assertion is assessed at a high level, which of the following is a likely effect with respect to the auditors' confirmation of receivables?

An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the:

What type of error is the CPA most likely to discover when he/she examines all shipping reports dated in January of 20X1, shipped FOB shipping point, which were recorded in December of 20X0 as credit sales?

Material accounts receivable from related parties should be stated separately from other receivables.

Accounts receivable that are written off should not be turned over to a collection agency.

Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. Of the following, which combination is it most likely that the auditors will use?

Tracing copies of sales invoices to shipping documents will provide evidence that all:

An auditor discovered that a client's accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that:

Which of the following does not meet the definition of an external confirmation in the context of accounts receivable?

Analytical procedures are used by auditors to gain evidence about the adequacy of the allowance for uncollectible accounts.