Deck 11: The Revenues, receivables, and Receipts Process and Cash Account Balance

Question 1

Which of the following lists outlines the best order for a typical sequence of activities in the revenue and collection cycle?

A)Delivering goods,billing customers,credit granting,collection activity.
B)Customer ordering,delivering goods,billing customer,cash receipts.
C)Customer ordering,delivering goods,credit granting,collection activity.
D)Credit granting,billing customers,delivering goods,cash receipts.

Answer 1

B

Question 2

Which of the following controls is most likely to help ensure that all credit sales transactions are recorded?

A)The billing department supervisor sends copies of approved sales orders to the credit department for comparison to authorized credit limits and current customer account balances.
B)The accounting department supervisor independently reconciles the accounts receivable subsidiary ledger to the accounts receivable control account monthly.
C)The accounting department supervisor controls the mailing of monthly statements to customers and investigates any differences reported by customers.
D)The billing department supervisor matches pre-numbered shipping documents with entries in the sales journal.

Answer 2

D

Question 3

When the credit manager decides a customers' account is considered to be uncollectible,the decision should be reviewed by the controller to ________.

A)ensure the bad debts account is within budget
B)ensure the credit manager has not written off the account as a favour to a friend
C)begin a lawsuit to collect the money
D)inform the police

Answer 3

B

Question 4

Which of the following audit procedures is the most effective when testing sales for understatement?

A)Scrutinize the accounts receivable aged trial balance.
B)Confirm a sample of recorded accounts receivable.
C)Trace a sample of shipping documents to sales invoices recorded in the sales journal.
D)Vouch a sample of recorded sales from the sales journal to shipping documents.

Question 5

The most frequent reconciliation is the comparison of the sum of customers' unpaid balances with the accounts receivable control account total.Usually,this reconciliation is done with a(n)________.

A)aged trial balance
B)capital asset sub-ledger
C)bank statement
D)customer statement

Question 6

In evaluating the adequacy of the allowance for doubtful accounts,an auditor is most likely to review the aging of receivables as evidence and support for management's financial statement assertion of ________.

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

Question 7

Tracing the processing of a transaction from initiation to its recording in the records is called:

A)A control risk assessment
B)A walk-through
C)An internal control test
D)A substantive test of transactions

Question 8

To determine whether sales transactions have been recorded in the proper accounting period,the auditor performs cutoff tests.Which of the following best describes the overall approach used when performing cutoff tests?

A)Ascertain that management's letter of representation includes the statement that transactions have been accounted for in the proper accounting period.
B)Analyze transactions occurring within a few days before and after year-end.
C)Confirm year-end transactions with regular customers.
D)Examine cash receipts in the subsequent period.

Question 9

An auditor is most likely to review an entity's practice of periodically accounting for the numerical sequence of shipping documents and invoices as evidence and support for management's financial statement assertion of ________.

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

Question 10

Which of the following is most likely to be detected by an auditor's review of a client's sales cut off?

A)Shipments lacking sales invoices and shipping documents.
B)Excessive write-off of accounts receivable.
C)Fictitious or improperly recorded sales entered at year-end.
D)Lapping of year-end accounts receivable.

Question 11

Which of the following procedures would best lead to an understanding of the transaction flow in the revenue and collection cycle?

A)Inquiry.
B)Observation.
C)Confirmations.
D)Inspecting a sample of documents.

Question 12

A fictitious entry in the cash receipts journal provides evidence of which assertion misstatement for accounts receivable?

A)Ownership
B)Completeness
C)Valuation
D)Existence

Question 13

Infotech is a small software company with few billings.It sends out invoices to clients using the preparation date as the invoice number.As a result,which of the following assertions about billings cannot be tested?

A)Validity.
B)Completeness.
C)Classification.
D)Proper period accounting.

Question 14

A control test procedure that simultaneously tests bot validity and completeness control procedures,is called a

A)dual-purpose test.
B)cut-off test
C)two-direction test
D)walk-through test

Question 15

A control weakness for revenues and receivables processing that could lead to theft of inventory is ______.

A)when accounting staff can update the accounts receivable files
B)when the stockkeeper authorizes release of the inventory
C)when no period confirmation of the balance owing from the customer is made.
D)when shipping personnel have the power to alter the quantities shipped on the shipping documents

Question 16

Which of the following audit procedures is an auditor most likely to perform in testing controls related to management's assertion about the occurrence of sales?

A)Verify that extensions and footings on the entity's sales invoices and monthly customer statements have been recomputed.
B)Inspect the entity's reports of pre-numbered shipping documents that have not been recorded in the sales journal.
C)Compare the invoiced prices on pre-numbered sales invoices to the entity's authorized price list.
D)Vouch sales entries in sales journal to supporting shipping documents.

Question 17

Which of the following source documents are typically NOT involved in the revenue and collection cycle?

A)purchase requisitions
B)shipping documents
C)customer orders
D)sales invoices

Question 18

Tracing bills of lading to sales invoices provides evidence that ________.

A)shipments to customers were invoiced
B)shipments to customers were recorded as sales
C)recorded sales were shipped
D)invoiced sales were shipped

Question 19

Which of the following controls helps to achieve the accuracy objective over sales invoices?

A)Recorded sales in the sales journal are supported by invoices.
B)Invoices,shipping documents,and sales orders are pre-numbered and the numerical sequence is checked.
C)Sales are recognized in accordance with generally accepted accounting principles.
D)Quantities invoiced are agreed to quantities shipped and quantities ordered by the customer as evidenced in source documentation.

Question 20

Upon receipt of customer cheques in the mailroom,a responsible employee should prepare a remittance listing and forward it to the cashier.A copy of the listing should be sent to the ________.

A)internal auditor to investigate the listing for unusual transactions
B)controller to compare the listing with the monthly bank statement
C)accounts receivable bookkeeper to update the subsidiary accounts receivable records
D)entity's bank to compare the listing with the cashier's deposit slip

Question 21

Tracing a sample of recorded cash receipts from the cash receipts journal to the bank statement is an audit procedure designed to satisfy the control objective of ________.

A)completeness
B)validity
C)accuracy
D)authorization

Question 22

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

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

Question 23

If tests of controls revealed a significant weakness regarding the completeness of recording of cash receipts,additional substantive testing towards which assertions should result?

A)Existence of cash and completeness of accounts receivable
B)Completeness of cash and accounts receivable.
C)Completeness of cash and existence of accounts receivable.
D)Existence of cash and accounts receivable.

Question 24

In the audit of accounts receivable,negative confirmations are not normally used if ________.

A)internal control is considered effective
B)there are a large number of small balances
C)customers can be expected to consider the confirmation properly
D)account balances are in dispute

Question 25

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when ________.

A)there is no response to a positive confirmation request
B)there is no response to a negative confirmation request
C)collectability of the receivables is in doubt
D)pledging of the receivables is probable

Question 26

In choosing to use blank positive confirmations,the auditor should consider what possible trade-off will occur?

A)A higher response rate but lower detection rate.
B)A lower cost but higher benefit
C)A higher detection rate but lower response rate
D)Higher cost but lower benefit

Question 27

The most effective audit procedure for determining if an account receivable will be collected is ________.

A)examination of cash collections subsequent to the year-end
B)examination of sales invoice(s)
C)confirmation of the account
D)the review of the customer's file to determine previous collection experience and to check sales orders from the customer for evidence credit approval

Question 28

To gather evidence about transactions with related parties,an auditor would most likely ________.

A)send account confirmations
B)perform analysis of receivables turnover
C)scan the receivables sub-ledger for credit balances
D)scan the aged trial balance for names of officers and directors

Question 29

The bank confirmation provides the most evidence for which of the following assertions about cash?

A)Existence.
B)Presentation.
C)Valuation.
D)Completeness.

Question 30

In the audit of accounts receivable,the positive form of confirmation request is most likely to be used when ________.

A)recipients are unlikely to respond to negative confirmation requests
B)the combined assessed level of inherent and control risk relative to accounts receivable is high
C)a large number of accounts receivable is involved but a relatively small number of errors are expected
D)the auditor performs a dual-purpose test that assesses control risk and obtains substantive evidence

Question 31

Your analysis of ABC Company's financial statements revealed a substantial increase in the number of days' sales in accounts receivable.Based on those results,additional substantive audit evidence would most likely be directed towards which of these assertions?

A)Completeness
B)Valuation
C)Presentation
D)ownership

Question 32

A customer replies to a positive confirmation as follows: "We dispute the $250 charge from your client as the goods were never received." This confirmation ________.

A)provides evidence of existence but not valuation
B)does not provide evidence of existence so valuation is irrelevant
C)provides evidence that the goods were never shipped
D)provides evidence that the account should be written off

Question 33

The control objective associated with selecting a sample of cash receipts remittance lists (or daily cash reports)and tracing them through to the cash receipts journal is ________.

A)validity
B)completeness
C)existence
D)authorization

Question 34

Scanning sales invoices to determine whether there are any numbers missing in the sequence is a control over which of the following objectives?

A)Completeness.
B)Accuracy.
C)Validity.
D)Classification.

Question 35

If it is impracticable to confirm accounts receivable but the auditor obtains sufficient,appropriate evidence to verify the receivable balance by performing alternative procedures,the auditor's opinion should be unqualified.The audit report should ________.

A)disclose the fact that alternative procedures were used because of a client-imposed scope limitation
B)disclose in the opinion paragraph that confirmation of accounts receivable was impracticable
C)not mention the alternative procedures
D)include an explanatory paragraph that discloses the performance of alternative procedures

Question 36

The control objective associated with selecting a sample of recorded sales invoices from the sales journal and matching the recording date to the shipping date per the shipping documents is ________.

A)proper period
B)completeness
C)validity
D)accuracy

Question 37

In which of the following circumstances is the use of the negative form of accounts receivable confirmation most likely to be justified?

A)A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
B)A substantial number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.
C)A small number of accounts may be in dispute and the accounts receivable balance arises from sales to a few major customers.
D)A small number of accounts may be in dispute and the accounts receivable balance arises from sales to many customers with small balances.

Question 38

Auditors ordinarily send a standard bank confirmation to all banks with which the client has done business during the year under audit,regardless of whether the client has closed its account.One reason for doing so is to ________.

A)provide the data necessary to prepare a summary of cash
B)request that a cutoff bank statement and cancelled cheques be sent to the auditor
C)detect lapping activities that might otherwise not be discovered
D)obtain information about unrecorded liabilities and security agreements

Question 39

Selecting a sample of debits from customer accounts receivable records and vouching them to supporting sales invoices is an audit procedure designed to obtain evidence about the control objective of ________.

A)validity
B)completeness
C)authorization
D)accuracy

Question 40

The primary consideration when planning to confirm accounts receivable before the balance sheet date is the ________.

A)type of confirmation to be used
B)client's internal control over transactions affecting receivables
C)availability of staff auditors
D)number of customer accounts

Question 41

An unrecorded cheque issued during the last week of the year would most likely be discovered by the auditor when the ________.

A)cheque register for the last month is reviewed
B)cutoff bank statement is reconciled
C)bank confirmation is reviewed
D)search for unrecorded liabilities is performed

Question 42

Cash receipts procedures should include steps for authorizing and recording discounts when the customer takes them.

Question 43

Money laundering refers to the proper processing of cash receipts.

Question 44

An auditor should trace cancelled cheques and cleared deposits for the last part of the current audit period and the first part of the subsequent period to detect whether ________.

A)the cash receipts journal was held open for a few days after the year-end
B)the last cheques recorded before the year-end were actually mailed by the year-end
C)cash balances were overstated because of kiting
D)any unusual payments to or receipts from related parties occurred

Question 45

Fidelity bonds can help prevent and detect embezzlement.

Question 46

In the course of examining the cutoff bank statement for a client,an auditor is puzzled to discover that none of the cheques listed as outstanding on the year-end bank reconciliation has cleared the bank.This could be an indication that the client ________.

A)is engaged in kiting
B)has overstated the year-end balance of cash
C)mailed the cheques to vendors after the year-end
D)left the cash receipts journal open after the year-end.

Question 47

In a manual data processing system,the custody of cash and the recording of cash receipts in the cash journal should be combined for maximum control.

Question 48

A lock box system is an effective way to segregate the custody of cash.

Question 49

In a manual system for the recording of cash receipts,the same person should make the journal entries to the control account and the subsidiary records.

Question 50

The revenue and collection process encompasses all activities from receiving and processing the initial sales order through to collecting and depositing cash received from the customer.

Question 51

The packing slip authorizes the transfer of inventory from the warehouse to the shipping department and then to the customer.

Question 52

The open (or pending)sales order file can be reviewed for evidence of the completeness of recorded sales.

Question 53

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates exceptions and comments noted by respondents.By this procedure,the auditor is most likely to learn of which of the following?

A)One of the cashiers has been covering a personal embezzlement by lapping.
B)One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
C)One of the EDP control clerks has been removing all sales invoices applicable to his account from the data file.
D)The credit manager has misappropriated remittances from customers whose accounts have been written off.

Question 54

Which of the following audit procedures is most likely to detect lapping by the accounts receivable clerk?

A)Use the cutoff bank statement to trace all cheques dated before the balance sheet date to the outstanding cheque list on the bank reconciliation.
B)Use the cutoff bank statement to determine if the bank recorded all deposits in transit per the bank reconciliation on the first business day after the balance sheet date.
C)Compare the detail of cheques listed on a sample of deposit slips to the detail of customer credits listed on the day's posting to the customer accounts in the subsidiary ledger.
D)Prepare a schedule of inter-bank transfers for a few days before and after the balance sheet date.

Question 55

Substantive procedures for the audit of cash would include which of the following?

A)Ask that a cutoff bank statement be mailed directly to the client.
B)Enquire if the client has prepared bank reconciliations for all bank accounts on a monthly basis.
C)Prepare a schedule of inter-bank transfers for a period of ten business days before and after year-end date.
D)Obtain written descriptions from the client about its cash receipts procedures.

Question 56

Cash receipts from sales on account terms of 2/10,net 30 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 subsidiary ledger
C)understating the accounts receivable subsidiary ledger
D)understating the cash receipts journal

Question 57

The accountant who records cash receipts and credits to customer accounts should also handle the cash received and the bank deposits.

Question 58

In determining the adequacy of the allowance for uncollectible accounts,the least valuable evidence would be obtained from ________.

A)an aging schedule of past due accounts that the auditor has tested
B)correspondence with the client's collection agency
C)financial statements of individual customers
D)lack of a reply to negative confirmations

Question 59

In the audit of cash,the auditor obtains a bank cutoff statement primarily to ________.

A)identify old outstanding cheques that the client may exclude from the year-end bank reconciliation in order to misappropriate cash
B)obtain sufficient information to reconcile the client's bank account as at the year-end
C)obtain direct confirmation of the client's bank balances as at the year-end
D)test the propriety of items appearing on the client's year-end bank reconciliation

Question 60

Obtaining a schedule of bank transfers between the auditee's accounts a few days before and after the year-end date and testing the propriety of items included,is a procedure done primarily to detect what type of misstatement?

A)Overstatement of Accounts receivable due to lapping
B)Theft of cash receipts from customers
C)Cheques written before year-end but not mailed until after year-end.
D)Overstatement of cash balances due to cheque kiting.

Question 61

Evidence of ownership can be obtained by studying the title documents for assets.

Question 62

Canadian Auditing Standards require auditors to always presume fraud risk to be present in the audit of revenues.

Question 63

A nonresponse to a negative confirmation is considered evidence the balance confirmed is correct.

Question 64

Is the confirmation of cash and accounts receivable required according to Canadian Auditing Standards? Explain.

Question 65

Confirmations of accounts receivable provides strong evidence of both the existence and ownership assertions.

Question 66

One of the key assertions to consider in obtaining evidence about accounts receivable is completeness.

Question 67

Selecting a sample of recorded sales invoices from the sales journal and comparing the quantity billed to the quantity shipped is an example of a test to satisfy the control objective of accuracy.

Question 68

Tests of controls results ultimately determine the amount of substantive audit procedures to be performed.

Question 69

In the analysis of financial statements,a continuity schedule is a working paper that shows the movements in the account balances and the other financial statements amounts that should tie with them.

Question 70

If an auditor selects a sample of customer accounts receivable and traces payment credits to remittance worksheets and bank deposits,the auditor is testing the control objective of completeness.

Question 71

What is two-direction testing?

Question 72

Substantive procedures are designed to obtain direct evidence about the dollar amounts in account balances.

Question 73

A cutoff bank statement is a special statement printed by the bank which does not include all paid cheques and deposit slips.

Question 74

A bank confirmation is an excellent form of evidence to test the completeness of cash.

Question 75

The use of positive confirmations provides better evidence than the use of negative confirmations.

Question 76

Will the confirmation of accounts,loans,and notes receivable always provide sufficient appropriate audit evidence to cover the ownership assertion made by the client?

Question 77

Auditors should consider the possibility of kiting if there are frequent deposits of round amounts.

Question 78

What are the general internal control objectives for the revenue cycle?