Question 1

An audit procedure that compares the name, amount, and dates shown on remittance advices, either paper of electronic via direct deposit, with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:

Accepted Answer

A)  kiting. 
B)  lapping. 
C)  illicit write-offs of customers as uncollectible accounts. 
D)  sales without proper credit authorization.

Question 2

In designing audit procedures for the sales returns and allowances account, the auditor would primarily rely on the following accounts, except for:

Accepted Answer

A)  sales returns and allowances transaction file. 
B)  accounts receivable master file. 
C)  cash receipts journal. 
D)  sales returns and allowances will be recorded in all of the above.

Question 3

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 4

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

Question 5

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 6

Tracing from source documents to the journal is useful for testing the existence objective.

Accepted Answer

A) True 
 B)False

Question 7

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 8

What event initiates a transaction in the sales and collection cycle?

Accepted Answer

A)  receipt of cash 
B)  delivery of product to a customer 
C)  identification of a new customer 
D)  customer request for goods

Question 9

In designing substantive audit procedures for tests of transactions for sales the auditor needs to test for evidence of misstatements due to errors or fraud. Describe at least 2 potential errors (unintentional) and at least 1 intentional (fraud).

Accepted Answer

The answer of In designing substantive audit procedures for tests...

Question 10

Footing the sales journal and tracing the totals to the general ledger are tests relating to the accuracy objective for sales.

Accepted Answer

A) True 
 B)False

Question 11

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

Accepted Answer

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

Question 12

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...

Question 13

Which of the following audit procedures would normally be best expected to test the completeness objective (assertion) for sales?

Accepted Answer

A)  Compare shipping documents with sales records. 
B)  Apply gross profit rates to inventory disposed of during the period. 
C)  Trace payments received subsequent to the balance sheet date. 
D)  Send accounts receivable confirmation requests.

Question 14

Which of the following documents is not commonly associated with the "cash receipts" class of transactions?

Accepted Answer

A)  Remittance advice 
B)  Sales order 
C)  Prelisting of cash receipts 
D)  Cash receipts journal or listing

Question 15

A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:

Accepted Answer

A)  bill of lading. 
B)  sales invoice. 
C)  picking ticket. 
D)  vendor invoice.

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

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Accepted Answer

A) True 
 B)False

Question 18

The shipping point is critical because it is the first point at which company assets are released to another party.

Accepted Answer

A) True 
 B)False

Question 19

For each significant internal control deficiency identified by the auditor, he or she should design one or more tests of controls to assess the extent of the deficiency and its effect on the financial statements.

Accepted Answer

A) True 
 B)False

Question 20

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

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

An audit procedure that compares the name, amount, and dates shown on remittance advices, either paper of electronic via direct deposit, with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting:

In designing audit procedures for the sales returns and allowances account, the auditor would primarily rely on the following accounts, except for:

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

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.

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

Tracing from source documents to the journal is useful for testing the existence objective.

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?

What event initiates a transaction in the sales and collection cycle?

In designing substantive audit procedures for tests of transactions for sales the auditor needs to test for evidence of misstatements due to errors or fraud. Describe at least 2 potential errors (unintentional) and at least 1 intentional (fraud).

Footing the sales journal and tracing the totals to the general ledger are tests relating to the accuracy objective for sales.

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

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.

Which of the following audit procedures would normally be best expected to test the completeness objective (assertion) for sales?

Which of the following documents is not commonly associated with the "cash receipts" class of transactions?

A document that initiates shipment of goods and indicates the description of the merchandise, the quantity shipped, and customer name and address is the:

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

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

The shipping point is critical because it is the first point at which company assets are released to another party.

For each significant internal control deficiency identified by the auditor, he or she should design one or more tests of controls to assess the extent of the deficiency and its effect on the financial statements.

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