Deck 10: Auditing Revenue Process: Sales, Billing and Collection in the Health-Care Provider and Retailing Industries

Question 1

An unfilled order report is an internal document listing customer orders that have received credit approval but have not been shipped.

Answer 1

True

Question 2

One of the first concerns regarding the revenue cycle is that all recorded sales entries are the result of real transactions that do not meet the criteria for revenue recognition.

Answer 2

False

Question 3

An activity that complicates sales transactions involves the shipment of goods to the customer rather than the customer taking the goods at the time of sale.

Answer 3

True

Question 4

An Unbilled Services account can be used to capture services that are provided before and during the surgery that have not yet been billed. The Unbilled Services account is most important at the end of the fiscal period so that proper revenue is recorded.

Question 5

Regardless of the specific form, documentary evidence shows that the shipping process occurred.

Question 6

A company must either purchase or manufacture the goods it sells, and it must have the human resources to produce goods and provide services.

Question 7

The seller will not hear from a customer when a cash payment the customer made is not posted to the customer's account balance.

Question 8

Unfilled orders are taken off the list after they are received and recorded.

Question 9

An allowance may be given to the purchaser even though the goods are not physically returned.

Question 10

Accurate posting of accounts receivable subsidiary ledgers is important.

Question 11

Retailers sell indirectly to end consumers and generally have few business customers whom they bill indirectly.

Question 12

Regardless of the specific form, documentary evidence shows that the receiving process occurred.

Question 13

If a transaction is paid for by credit card, the seller processes the sales transaction with the credit card issuer when the item is received.

Question 14

The insurance contract does not need to specify the co-payment that the health-care provider collects from individual patients.

Question 15

Since much of a health-care provider's collections are paid by third-party payers, it is not important that the seller (the health-care provider) verify the patient's insurance coverage before providing services.

Question 16

Retail sales businesses post sales activity to their inventory and cost of sales accounts as well as to expense accounts.

Question 17

The document used by a company when it bills a customer directly for a credit sales is called an invoice.

Question 18

After inventory is sold to a customer, even though the sale is completed, there are usually circumstances for which the goods may be returned.

Question 19

Since much of a health-care provider's collections are paid by third-party payers, it is important for the health-care provider to verify the patient's insurance coverage before providing services.

Question 20

Departures from the most complicated form of a return transaction include return of damaged goods or the return of only part of the goods that were purchased.

Question 21

Verification of prices and terms of the sale must also be performed prior to completing the transaction.

Question 22

Controls are needed to ensure that goods are received on a timely basis and bills are sent out for all goods that are received.

Question 23

Approved customer orders, sales orders, pick tickets, or similar documents authorize the release of goods from storage or warehousing.

Question 24

Companies use documents to prepare records of sales and cash-related activities, assist in verifying that functions are completed, and trigger recording activities in the accounting records.

Question 25

Scanning a bar code and entering a diagnostic code are examples where the price charged for the good or service has been preset and therefore pre-authorized by management.

Question 26

When a payment is received through the mail, it is usually in the form of a check and is accompanied by a bill of lading.

Question 27

When the invoice is also the remittance advice, it is sometimes called a turnaround document.

Question 28

Cash coming into the business from all sources is deposited weekly using a deposit ticket.

Question 29

Cash receipts should be deposited daily, and the accounting records should be updated on a timely basis.

Question 30

When a customer returns a purchase or the seller grants the customer credit for a defective item, a debit memo is prepared.

Question 31

Cash received for sales comes in through several channels.

Question 32

The initial cash records are the cash alternative record and daily transmittal list.

Question 33

When checks are received in the mail, they should immediately be restrictively endorsed and a daily remittance list should be prepared concurrently.

Question 34

When cash is received, the goal is to create an immediate record of its payment and place it in safekeeping.

Question 35

The invoice processing and billing function should be independent of the shipping function to provide adequate segregation of duties.

Question 36

The credit approval or insurance verification process must be completed and documented.

Question 37

Some businesses use a lock box system for checks received through the mail.

Question 38

The activities involved in managing bad debts include estimating and recording the appropriate amount of bad debt expense and writing off those receivables believed to be uncollectible.

Question 39

Authorization for the cash sale should come from a source that is independent of the person completing the sale.

Question 40

When the mail is opened and checks are received, a document called a daily remittance list is immediately prepared.

Question 41

Audit steps for the revenue cycle are anchored in the overall audit plan.

Question 42

The last steps of an integrated audit are to understand the industry and contract with the client to do the audit.

Question 43

Health-care providers sell a:

A) product.
B) drink.
C) food.
D) way of life.
E) service.

Question 44

An alternative to a fee-for-service plan is a(n):

A) co-payment.
B) third-party payer.
C) service contract fee.
D) capitation agreement.
E) unbilled service agreement.

Question 45

A classic fraud scheme related to cash receipts known as lapping is possible when poor segregation exists for duties of cash receipts and posting accounts receivable.

Question 46

The simplest retail transaction is one for:

A) credit, in which the customer uses a credit card.
B) cash, in which the customer exchanges cash for goods at the point of sale.
C) credit, in which the customer uses a debit card.
D) cash, in which the customer writes a check.
E) a combination of a cash down payment and credit.

Question 47

Accounts involved in the sales and collection cycle include all of the following except:

A) Cash.
B) Accounts Receivable.
C) Sales.
D) Bad Debt Expense.
E) Purchase Returns and Allowances.

Question 48

Health-care providers in the United States are often paid by:

A) individuals with health insurance.
B) people paying a co-payment.
C) Medicare.
D) third-party payers.
E) other insurance companies.

Question 49

Lapping occurs when an employee steals cash and manipulates the accounts receivable entries to hide the theft.

Question 50

A typical transaction activity for sales, billing, and cash receipts are:

A) cash disbursements.
B) purchase returns.
C) purchase allowances.
D) estimating bad debts expense.
E) purchase discounts.

Question 51

A retail entity's primary business activity is selling finished goods inventory to a customer for:

A) credit.
B) cash.
C) cash or on credit.
D) credit with monthly payments.
E) credit for one year or more.

Question 52

When a sale is conducted using a credit card, the invoice:

A) is sent from the retailer/vendor to the customer.
B) is sent from the customer to the retailer/vendor.
C) is sent from the credit card company to the customer.
D) is sent from the credit card company to the vendor.

Question 53

Sales returns and allowances remain constant in their magnitude and never need differing levels of control and approval.

Question 54

The AICPA guidance defines fourteen management assertions, and the PCAOB standards utilize six.

Question 55

All transactions in the sales and collection cycle need not be recorded at the correct amounts.

Question 56

Health-care providers exemplify the revenue and collections transactions cycle because their activities include all of the following except:

A) sales of services.
B) sales settled via cash.
C) sales that are billed to individuals.
D) All of the choices are correct.

Question 57

The auditor evaluates ICFR to determine whether it operates effectively.

Question 58

Typical transaction activities for sales, billing, and cash receipts include all of the following except:

A) cash receipts.
B) sales returns and allowances.
C) cash disbursements.
D) estimating bad debt expense.
E) accounts receivable.

Question 59

Tests of details of balances provide evidence about whether ICFR is operating as designed and whether the control is being performed by someone with appropriate authority and qualifications.

Question 60

Documented approvals of write-offs of accounts receivable are required before transactions are recorded.

Question 61

Tracing shipping documents to prenumbered sales invoices provides evidence that:

A) shipments to customers were properly invoiced.
B) no duplicate shipments or billings occurred.
C) all goods ordered by customers were accounted for.
D) all prenumbered sales invoices were accounted for.
E) shipments to customers were properly vouched.

Question 62

The document used to authorize the retrieval of a product from the warehouse or storage and ship it to the customer is called the:

A) capitation agreement.
B) co-payment.
C) pick ticket.
D) credit-approval form.
E) negative confirmation.

Question 63

The negative request form of accounts receivable confirmation is useful particularly when the: Assessed level of risk
Of material
Misstatement relating Number of small Proper consideration
To receivables is is balances by the recipient is
A) Low Many Likely
B) Low Few Unlikely
C) High Few Likely
D) High Many Likely

A) Option A
B) Option B
C) Option C
D) Option D
E) No Option

Question 64

Write-offs of doubtful accounts should be approved by:

A) the salesperson.
B) the credit manager.
C) the treasurer.
D) the cashier.
E) the C.E.O.

Question 65

In evaluating the adequacy of the allowance for doubtful accounts, an auditor most likely reviews the entity's aging of receivables to support management's financial statement assertion of:

A) existence.
B) completeness.
C) rights and obligations.
D) valuation or allocation.
E) occurrence.

Question 66

An internal document listing customer orders that have received credit approval but have not been shipped is a(n):

A) pick ticket.
B) bill of lading.
C) customer invoice.
D) shipping document.
E) unfilled order report.

Question 67

Which of the following internal control activities most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?

A) Each sales invoice is supported by a prenumbered shipping document.
B) The accounts receivable ledger is reconciled daily to the control account in the general ledger.
C) Each shipment on credit is supported by a prenumbered sales invoice.
D) The accounts payable ledger is reconciled weekly to the control account in the general ledger.
E) Daily sales summaries are compared to daily postings to the accounts receivable ledger.

Question 68

All of the following are deposited to the retailer's bank account like cash except:

A) cash.
B) common stock.
C) received checks.
D) sales receipts resulting transactions conducted using bank credit cards.

Question 69

Retail sales businesses post sales activity to their inventory and cost of sales accounts as well as to:

A) expense accounts.
B) asset accounts.
C) liability accounts.
D) revenue accounts.
E) common stock accounts.

Question 70

Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?

A) Excessive write-offs of accounts receivable.
B) Shipments lacking sales invoices and shipping documents.
C) Unrecorded sales at year end.
D) Lapping of year-end accounts receivable.
E) Excessive write-offs of accounts payable.

Question 71

The transaction to record bad debt expense is posted as a debit to Bad Debt Expense and a credit to:

A) Accounts Receivable.
B) Accounts Payable.
C) Cash.
D) Sales.
E) Allowance for Doubtful Accounts.

Question 72

Which of the following internal control activities most likely would deter lapping of collections from customers?

A) Independent internal verification of dates of entry in the cash receipts journal with dates of daily cash summaries.
B) Separation of duties between receiving cash and posting the accounts receivable ledger.
C) Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.
D) Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
E) Segregation of duties between cash payments and recording checks.

Question 73

When a customer order is for a credit sale, the seller approves the customer's credit and documents the:

A) process.
B) approval.
C) order.
D) service.
E) appointment.

Question 74

Which of the following statements is correct concerning the use of negative confirmation requests?

A) Negative confirmation requests are effective when detection risk is low.
B) Unreturned negative confirmation requests rarely provide significant explicit evidence.
C) Unreturned negative confirmation requests indicate that alternative procedures are necessary.
D) Negative confirmation requests are effective when understatements of account balances are suspected.

Question 75

Which of the following procedures would an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?

A) Inspect the shipping records documenting the merchandise sold to the debtors.
B) Review the cash receipts journal for the month prior to the year-end.
C) Intensify the study of the internal control structure concerning the revenue cycle.
D) Increase the assessed level of detection risk for the existence assertion.
E) Trace the cash disbursements journal for the month prior to the year-end.

Question 76

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this defalcation and be least likely to be detected by an auditor?

A) Understating the sales journal.
B) Overstating the accounts receivable control account.
C) Overstating the accounts receivable subsidiary ledger.
D) Understating the cash receipts journal.
E) Overstating the sales journal.

Question 77

An activity that complicates sales transactions involves the shipment of goods to the customer rather than the customer taking the goods at the time of sale. The shipping process requires that the seller:

A) restocks the shelves.
B) makes online adjustments.
C) removes goods from storage.
D) programs the credit sales flows.

Question 78

If the product must be retrieved from storage or a warehouse before it can be shipped, a document is used to authorize the:

A) shipment.
B) transaction.
C) invoice.
D) retrieval.
E) report.

Question 79

The confirmation of customers' accounts receivable rarely provides reliable evidence about the completeness assertion because:

A) many customers merely sign and return the confirmation without verifying its details.
B) customers may not be inclined to report understatement errors in their accounts.
C) recipients usually respond only if they disagree with the information on the request.
D) auditors typically select many accounts with low recorded balances to be confirmed.
E) auditors typically select few accounts with low recorded balances to be confirmed.

Question 80

A customer will likely complain to the seller when the:

A) customer's cash payment is not posted to the customer's account.
B) customer is billed for the wrong amount, and the amount is too low.
C) customer is credited for a payment made by someone else.
D) All of the choices are correct.