Question 1

Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?

Accepted Answer

A)  company personnel 
B)  temporary employees in the town where the lockbox is located 
C)  bank employees 
D)  company controller

Question 2

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 3

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 4

Prenumbered documents are intended to help:

Accepted Answer

A)   
B)   
C)   
D)

Question 5

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 6

A bill of lading is a written contract between the seller and the buyer.

Accepted Answer

A) True 
 B)False

Question 7

Tests of controls should never be performed using the client's computer system; that is, all tests of control should be performed either using the auditor's computers or performed manually by the auditor.

Accepted Answer

A) True 
 B)False

Question 8

When posting items from the sales journal, details of the journal and journal totals are posted to which items?

Accepted Answer

A)   
B)   
C)   
D)

Question 9

The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

Accepted Answer

A) True 
 B)False

Question 10

Some companies have customers send payments directly to a post office box address maintained by a bank. This is called a(n) ________ system.

Accepted Answer

A)  direct deposit 
B)  funds transfer 
C)  lockbox 
D)  interbank transfer

Question 11

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 12

In the sales and collection cycle when is, generally, the earliest point at which revenue can be recognized?

Accepted Answer

A)  sales approval 
B)  credit approval 
C)  cash collection 
D)  shipment of goods

Question 13

Which of the following procedures performed for the billing function may provide evidence that the accounts receivable subsidiary ledger is in agreement with the accounts receivable control account?

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 14

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?

Accepted Answer

A)  B, C, and D should all be of concern to the auditor. 
B)  Credit must be authorized before the sale. 
C)  Goods must be shipped after the authorization. 
D)  Prices must be authorized.

Question 15

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 16

The auditor would expect that an account receivable from a customer would be written off by the client when which of the following occurs:

Accepted Answer

A)  the customer files for bankruptcy. 
B)  the account is at least six months old. 
C)  a collection agency cannot inspire customer to pay the debt. 
D)  the client company concludes that an amount is no longer collectible.

Question 17

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 18

Credit should be approved before a customer's order is received.

Accepted Answer

A) True 
 B)False

Question 19

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

Accepted Answer

A) True 
 B)False

Question 20

A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.

Accepted Answer

A) True 
 B)False

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

Who is generally responsible for opening receipts when a company uses a lockbox to speed the handling of cash receipts?

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

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

Prenumbered documents are intended to help:

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 bill of lading is a written contract between the seller and the buyer.

Tests of controls should never be performed using the client's computer system; that is, all tests of control should be performed either using the auditor's computers or performed manually by the auditor.

When posting items from the sales journal, details of the journal and journal totals are posted to which items?

The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

Some companies have customers send payments directly to a post office box address maintained by a bank. This is called a(n) ________ system.

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

In the sales and collection cycle when is, generally, the earliest point at which revenue can be recognized?

Which of the following procedures performed for the billing function may provide evidence that the accounts receivable subsidiary ledger is in agreement with the accounts receivable control account?

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?

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:

The auditor would expect that an account receivable from a customer would be written off by the client when which of the following occurs:

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.

Credit should be approved before a customer's order is received.

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

A credit memo is a document used internally that indicates authority to write-off an account receivable as uncollectible.