ch7
Student: ___________________________________________________________________________
1.
To be recognized, revenues must also be realized or realizable and
A.
B.
C.
D.
2.
The SEC requires all of the following for revenue to be recognized except
A.
B.
C.
D.
3.
The customer order.
The shipping order.
The invoice.
The purchase order.
The sum of customers' unpaid balances that is compared to the general ledger balance comes from
A.
B.
C.
D.
7.
The customer order.
The shipping order.
The invoice.
The purchase order.
The document that generates recording of a sale is the
A.
B.
C.
D.
6.
Sales are recorded but are not shipped.
Sales are shipped but are not recorded.
Sales are billed but not collected.
Inventory is held but not billed.
Custody of inventory is transferred to the shipping area upon authorization of:
A.
B.
C.
D.
5.
Cash is collected.
Persuasive evidence of an arrangement exists.
Delivery has occurred or services have been rendered.
The seller's price to the buyer is fixed or determinable.
"Bill and Hold" refers to an arrangement where
A.
B.
C.
D.
4.
Foreseeable
Collected
Earned
Shipped
A total of sales invoices.
A total of shipping orders.
The sales journal.
The accounts receivable trial balance.
The file that contains sales transactions that were initiated in the system but are not yet completed is the:
A.
B.
C.
D.
Credit check file.
Sales detail.
Inventory master.
Pending order master.
8.
The assertion that auditors will probably emphasize in the revenue and collection cycle is:
A.
B.
C.
D.
9.
Occurrence.
Completeness.
Accuracy.
Classification.
A small business owner can best offset the lack of separation of duties by
A.
B.
C.
D.
Creating an internal audit department.
Installing the latest computer equipment and software.
Being actively involved in the accounting process.
Relying on the external auditor to detect errors.
10. Accountants should be under orders to record sales and accounts receivable when
A.
B.
C.
D.
The customer's order is received.
All supporting documentation of shipping is in order.
The item has been paid for.
The terms are agreed upon.
11. Which of the following is an example of a control activity that satisfies the accuracy control objective for
sales invoices?
A. Recorded sales in the sales journal are supported by invoices.
B. Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is checked.
C. Sales are recorded in the proper account.
D. Invoice quantities are compared to shipment and customer order quantities.
12. Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy what
assertion?
A.
B.
C.
D.
Completeness.
Accuracy.
Occurrence.
Classification.
13. Vouching debits from a sample selection of customers' accounts receivable records to supporting sales
invoices is an audit procedure designed to obtain evidence about the assertion of
A.
B.
C.
D.
Occurrence.
Completeness.
Classification.
Accuracy.
14. Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004. This
situation is an example of a violation of which of the following assertions?
A.
B.
C.
D.
Existence or occurrence.
Completeness.
Classification.
Accuracy.
15. Confirmations of accounts receivable provide the most evidence for which of the following assertions?
A.
B.
C.
D.
Existence.
Valuation or Allocation.
Rights and obligations.
Completeness.
16. The auditor maintains control of the mailing and receipt of confirmations by typically performing all of the
following except
A.
B.
C.
D.
Preparing the confirmation letters.
Mailing the confirmation letters.
Receiving the confirmation letters.
The auditor performs all of the above procedures.
17. If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by
alternative procedures because it is impractical to confirm accounts receivable, the auditor's opinion should
be unqualified and could be expected to
A.
B.
C.
D.
Disclose the fact that alternative procedures were used due to client imposed scope limitation.
Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
Not mention the alternative procedures.
Include an explanatory paragraph that discloses the performance of alternative procedures.
18. Which of the following is not a valid reason for an auditor deciding not to send accounts receivable
confirmations?
A.
B.
C.
D.
The balance is immaterial.
Confirmations would be ineffective.
The client requests alternative procedures be performed instead.
Other procedures provide sufficient competent evidence.
19. When an account receivable is considered uncollectible the person who generally authorizes the write-off is
the client's
A.
B.
C.
D.
Credit manager.
Treasurer.
Accountant.
Internal auditor.
20. Which of the following audit procedures is the most effective in testing sales for understatement?
A.
B.
C.
D.
Analyze the aged trial balance of recorded accounts receivable.
Confirm recorded accounts receivable.
Trace a sample of shipping documents to sales invoices recorded in the sales journal.
Vouch a sample of recorded sales from the sales journal to shipping documents.
21. 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 has included in the representation letter a 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.
22. The most effective audit procedure for determining the collectability of an account receivable is the
A.
B.
C.
D.
Review of the subsequent cash collections.
Examination of the related sales invoice(s).
Confirmation of the account.
Review of authorization of credit sales to the customer and the previous history of collections.
23. In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence would
be obtained from
A.
B.
C.
D.
An aging schedule of past due accounts which the auditor has tested.
Correspondence with the client's collection agency.
Financial statements of individual customers.
No reply to negative confirmations.
24. An auditor confirms a representative number of open accounts receivable as of December 31 and
investigates respondents' exceptions and comments. By this procedure, the auditor would be 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 IT 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.
25. An auditor should normally perform alternative procedures to substantiate the existence of accounts
receivable when
A.
B.
C.
D.
No reply to a positive confirmation request is received.
No reply to a negative confirmation request is received.
Collectability of the receivables is in doubt.
Pledging of the receivables is probable.
26. A customer reply on a positive confirmation says "We dispute the $250 charge. We believe it is excessive."
This confirmation
A. Provides evidence of existence.
B. Does not provide evidence of existence because the customer may refuse to pay the $250 charge.
C. Provides evidence that the account was understated.
D. Provides evidence that the account should be written off.
27. The primary consideration when planning whether to send confirmations of accounts receivable before the
balance sheet date is the
A.
B.
C.
D.
Type of confirmation to be used.
Client's internal control over transactions affecting receivables.
Availability of staff auditors.
Number of customer accounts.
28. In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents. This
procedure is related to which of the following assertions?
A.
B.
C.
D.
Existence.
Completeness.
Rights and obligations.
Valuation or allocation.
29. The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This
procedure is related to which of the following assertions?
A.
B.
C.
D.
Occurrence.
Completeness.
Accuracy.
Cutoff.
30. In which of the following circumstances would the use of the negative form of accounts receivable
confirmation most likely 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.
31. Which of the following controls most likely would help ensure that all credit sales transactions of an entity
are recorded?
AThe 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 prenumbered shipping documents with entries in the sales
journal.
32. Which of the following internal control activities most likely would assure that all billed sales are correctly
posted to the accounts receivable ledger?
A.
B.
C.
D.
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
Each sales invoice is supported by a prenumbered shipping document.
The accounts receivable ledger is reconciled daily to the control account in the general ledger.
Each shipment on credit is supported by a prenumbered sales invoice.
33. 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.
B.
C.
D.
Existence.
Valuation or allocation.
Completeness.
Rights and obligations.
34. 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.
B.
C.
D.
Review the cash receipts journal for the month prior to the year-end.
Intensify the study of the internal control structure concerning the revenue cycle.
Increase the assessed level of detection risk for the existence assertion.
Inspect the shipping records documenting the merchandise sold to the debtors.
35. Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?
A.
B.
C.
D.
Shipments lacking sales invoices and shipping documents.
Excessive write-offs of accounts receivable.
Unrecorded sales at year end.
Lapping of year-end accounts receivable.
36. Tracing shipping documents to prenumbered sales invoices provides evidence that
A.
B.
C.
D.
No duplicate shipments or billings occurred.
Shipments to customers were properly invoiced.
All goods ordered by customers were accounted for.
All prenumbered sales invoices were accounted for.
37. Which of the following statements is correct concerning the use of negative confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
D. Negative confirmation requests are effective when understatements of account balances are suspected.
38. The confirmation of customers' accounts receivable rarely provides reliable evidence about the
completeness assertion because
A.
B.
C.
D.
Many customers merely sign and return the confirmation without verifying its details.
Recipients usually respond only if they disagree with the information on the request.
Customers may not be inclined to report understatement errors in their accounts.
Auditors typically select many accounts with low recorded balances to be confirmed.
39. Negative confirmation of accounts receivable is less effective than positive confirmation of accounts
receivable because
A.
B.
C.
D.
A majority of recipients usually lack the willingness to respond objectively.
Some recipients may report incorrect balances that require extensive follow up.
The auditor cannot infer that all non-respondents have verified their account information.
Negative confirmations do not produce evidential matter that is statistically quantifiable.
40. Which of the following responses to a confirmation of balances at December 31 would be most troubling to
an auditor?
A.
B.
C.
D.
We paid this amount on December 28.
We received these goods on January 2.
We returned this amount on December 28 under our standing agreement with the company.
This amount isn't due until January 15.
Question also found in textbook
41. Revenues are normally considered to have been earned when
A.
B.
C.
D.
All possibility of return has expired.
The company has substantially accomplished what it must to be entitled to the benefits.
The cash is collected.
Goods have been shipped.
42. Sales are normally recorded on the date of the
A.
B.
C.
D.
Customer purchase order.
Bill of lading.
Sales invoice.
Payment check.
43. When auditing the revenue and collection cycle, auditors normally select balances to confirm from the
A.
B.
C.
D.
Sales journal.
Accounts receivable listing.
General ledger.
Cash receipts listing.
44. Which of the following accounts is not normally part of the revenue and collection cycle?
A.
B.
C.
D.
Sales
Accounts Receivable
Cash
Purchases Returns and Allowances
45. The control activity "credit sales approved by credit department" is directed toward which transaction
assertion?
A.
B.
C.
D.
Occurrence
Completeness
Accuracy
Cutoff
46. Which of the following would be the best protection for a company that wishes to prevent the "lapping" of
trade accounts receivable?
A. Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
B. Separate duties so that no employee has access to both checks from customers and currency from daily
cash receipts.
C. Have customers send payments directly to the company's depository bank.
D. Request that customer's payment checks be made payable to the company and addressed to the treasurer.
47. Which of the following internal control activities will most likely prevent the concealment of a cash
shortage by improperly writing-off a trade account receivable?
A.Write-offs must be approved by a responsible officer after review of credit department recommendations
and supporting evidence.
B. Write-offs must be supported by an aging schedule showing that only receivables overdue several
months have been written off.
C. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact,
been collected.
D Write-offs must be authorized by company field sales employees who are in a position to determine the
. financial standing of the customers.
48. Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of
gross profit to sales may suggest which of the following possibilities?
A.
B.
C.
D.
Unrecorded purchases.
Unrecorded sales.
Merchandise purchases being charged to selling and general expense.
Fictitious sales.
49. An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the
accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit
procedure is to establish that
A.
B.
C.
D.
Sales invoices represent bona fide sales.
All sales have been recorded.
All sales invoices have been properly posted to customer accounts.
Entries in the accounts receivable subsidiary ledger were properly invoiced.
An auditor noted that client sales had increased 10 percent for the year. At the same time COGS as a
percentage of sales had decreased from 45 percent to forty percent and year-end accounts receivable had
increased by 8 percent.
50. Based on the information above, the auditor is most likely concerned about
Refer To: 07-41
A.
B.
C.
D.
Unrecorded costs
Improper credit approvals
Improper sales cut-off
Fictitious sales
51. Based on the information above, the auditor interviewed the Sales manager who stated that the increase in
sales without a corresponding increase in COGS was due to a price increase enacted by the company during
the year. How would the auditor best test the sales manager's representation?
Refer To: 07-41
A.
B.
C.
D.
Perform additional inquiries with sales personnel.
Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.
Send confirmations asking customers about unit prices paid for product.
Vouch vender invoices to payments made after year-end.
52. To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the following
accounts?
A.
B.
C.
D.
Miscellaneous income.
Petty cash.
Miscellaneous expense.
Sales returns.
53. Which of the following responses to an accounts receivable confirmation at December 31 would cause an
audit team the most concern?
A.
B.
C.
D.
"This amount was paid on December 30th."
"We received this shipment on January 2nd."
"These goods were returned for credit on November 15th."
"The balance does not reflect our sales discount for paying by January 5th."
54. A client has a separate sales group for its largest "preferred" customers. This is a select group of customers
that normally make purchases in excess of $250,000 and often have accounts receivable balances in excess
of $1 million. Which of the following audit procedures would the auditor most likely perform?
A.
B.
C.
D.
Prepare a schedule of purchases and payments for these customers.
Send out negative confirmations on a large sample of these customers.
Inquire of the sales manager regarding the accounts receivable terms.
Send out positive confirmations on a large sample of these customers.
55. Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the
balance sheet date. The audit team uses this aging primarily to
A.
B.
C.
D.
Evaluate internal control over credit sales.
Test the accuracy of recorded charge sales.
Estimate credit losses.
Verify the existence of the recorded receivables.
56. Which of the following might be detected by auditors' cutoff review and examination of sales journal
entries for several days prior to the balance sheet date?
A.
B.
C.
D.
Lapping year-end accounts receivable.
Inflating sales for the year.
Kiting bank balances.
Misappropriating merchandise.
57. Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally
provide the strongest evidence concerning the
A.
B.
C.
D.
Collectability of the balances confirmed.
Ownership of the balances confirmed.
Existence of the balances confirmed.
Internal control over balances confirmed.
58. Which of the following is the best reason for prenumbering in numerical sequence such documents as sales
orders, shipping documents, and sales invoices?
A. Enables company personnel to determine the accuracy of each document.
B. Enables personnel to determine the proper period recording of sales revenue and receivables.
C. Enables personnel to check the numerical sequence for missing documents and unrecorded transactions.
D. Enables personnel to determine the validity of recorded transactions.
59. When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch them to
A.
B.
C.
D.
Sales invoices with shipping documents.
Records of accounts receivable write-offs.
Cash remittance lists and bank deposit slips.
Credit files and reports.
60. In the audit of accounts receivable, the most important emphasis should be on the
A.
B.
C.
D.
Completeness assertion.
Existence assertion.
Rights and obligations assertion.
Presentation and disclosure assertion.
61. When accounts receivable are confirmed at an interim date, auditors need not be concerned with
A. Obtaining a summary of receivables transactions from the interim date to the year-end date.
B Obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and obtaining
. evidence and explanations for large variations.
C. Sending negative confirmations to all the customers as of the year-end date.
D. Considering the necessity for some additional confirmations as of the balance sheet date if balances have
increased materially.
62. The negative request form of accounts receivable confirmation is useful particularly when the
A.
B.
C.
D.
Option A
Option B
Option C
Option D
63. When an audit team traces a sample of shipping documents to the related sales invoice copies, they are
trying to find relevant evidence that
A.
B.
C.
D.
Shipments to customers were invoiced.
Shipments to customers were recorded as sales.
Recorded sales were shipped.
Invoiced sales were shipped.
64. Write-offs of doubtful accounts should be approved by
A.
B.
C.
D.
The salesperson.
The credit manager.
The treasurer.
The cashier.
65. When an audit team does not receive a response on a positive accounts receivable confirmation, auditors
should do all of the following except:
A.
B.
C.
D.
Send a second request.
Do nothing for immaterial balances.
Examine shipping documents.
Examine client correspondence files.
66. 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.
B.
C.
D.
Understating the sales journal.
Overstating the accounts receivable control account.
Overstating the accounts receivable subsidiary ledger.
Understating the cash receipts journal.
67. 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. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.
C. Separation of duties between receiving cash and posting the accounts receivable ledger.
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
68. The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account receivable.
An independent audit is being carried out and the auditors send a positive confirmation to Mr. Jones. What
is the most likely reason as to why a positive confirmation rather than a negative confirmation was used
here?
A.
B.
C.
D.
Control risk was particularly low for accounts receivable.
Inherent risk was particularly high for accounts receivable.
Mr. Dennis's account was not yet due.
Mr. Dennis's account was not with a related party.
Question also found in Study Guide
69. In the revenue and collection cycle, the order of the activities in the cycle are best illustrated by
A.
B.
C.
D.
Delivering goods, billing customer, credit granting, collection activities.
Customer ordering, delivering goods, credit granting, billing customers.
Customer ordering, credit granting, delivering goods, billing customers.
Credit granting, billing customers, delivering goods, cash receipts.
70. Prenumbering invoices, shipping documents, and sales orders is a practice to achieve which of the
following assertions?
A.
B.
C.
D.
Completeness
Occurrence
Accuracy
Presentation or disclosure
71. An internal control questionnaire for evaluating the occurrence objective of revenues would not include
which of the following questions?
A.
B.
C.
D.
Is customer credit approved before orders are shipped?
Are customers' statements mailed monthly by the accounts receivable department?
Are direct confirmations of receivables obtained periodically by the internal auditor?
Are returned goods checked against necessary reports?
72. The positive form of confirmation is best used when
A.
B.
C.
D.
Account balances are relatively large.
Account balances are small in amount, but large in number.
Accounts are not in dispute.
Internal control is considered effective.
73. Which of the following is not an alternative procedure when a confirmation is not received?
A.
B.
C.
D.
Examine sales invoices and vouch them to underlying shipping documents.
Examine payments received before the end of the period.
Examine customer purchase orders.
Examine client correspondence with the customer.
74. A person who has access to both cash and accounts receivable records may be able to take cash receipts by
A.
B.
C.
D.
A kiting operation.
A lapping operation.
Overstating cash receipts.
Underfooting the bank reconciliation.
75. For each of the tests of controls for sales and receivables, indicate the assertion that is supported by placing
the correct letter in the blank.
1. Accuracy
__
Scan sales invoices for missing numbers in sequence.__
2.
Completeness
Perform arithmetic recalculation of a sample of recorded__
sales invoices.__
3. Occurrence
For a sample of recorded sales, determine whether credit__
was approved.__
4. Accuracy
Trace a sample of credit memos to postings in customers'__
accounts.__
5.
Completeness
Select a sample of customer accounts and vouch debits to__
sales invoices.__
Question also found in Study Guide
76. A price list master file contains the product unit prices that is used for billing customers.
True
False
77. The accountants who record cash receipts and credits to customer accounts should not handle the cash.
True
False
78. Credit checks should be performed by the sales department before credit is approved.
True
False
79. The aging information for accounts receivable is typically used in connection with assessing the allowance
for doubtful accounts.
True
False
80. A comparison of checks listed on a sample of deposit slips to the detail of customer credits posted to
customer accounts receivable can be an audit test for lapping.
True
False
81. If control risk is assessed very low, the substantive audit procedures on account balances must be
expanded.
True
False
82. A confirmation procedure scheduled on the year-end date with a large sample of customer account balances
is necessary if tests of controls reveal control weaknesses.
True
False
83. Auditors should not place total reliance on controls to the exclusion of other substantive testing procedures.
True
False
84. An objective for an audit is to obtain evidence related to management's financial statement assertions.
True
False
85. When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness and
the obligations assertions.
True
False
86. Inquiries to management usually do not provide very convincing evidence about the existence and rights
assertions.
True
False
87. A computer generally cannot be used for scanning large files of accounts receivable for unusual credit
balances.
True
False
88. The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.
True
False
89. Confirmations yield evidence about existence and the gross valuation of a receivable balance.
True
False
Question also Found in Study Guide
90. _________________________________ of accounts receivable records implies the power to alter them
directly or enter transactions to alter them.
________________________________________
91. The pending sales orders can be reviewed for evidence of the _________________________________ of
recorded _________________________________ and _________________________________.
________________________________________
92. Internal control assessment is important because it governs the _________________________________,
_________________________________ and _________________________________ of substantive
procedures.
________________________________________
93. Information about the internal control system can be gathered by completing an
_________________________________ _________________________________
_________________________________.
________________________________________
94. Another way to obtain information about the internal control system is take a single example of a
transaction and _________________________________the process from its initiation to its recording in
the accounting records.
________________________________________
95. The actions in tests of controls involve_________________________________,
_________________________________, _________________________________,
_________________________________ and _________________________________.
________________________________________
96. Dual direction testing involves samples of transactions selected to obtain evidence about
control over _________________________________ in one direction and control over
_________________________________ in the other direction.
________________________________________
97. A procedure to gather evidence on both account balances and controls is called a
_________________________________ _________________________________ procedure.
________________________________________
98. Assertions related to account balances are _________________________________,
_________________________________, _________________________________
_________________________________, _________________________________ and
_________________________________.
________________________________________
99. Confirmations provide evidence of _________________________________ and, to a limited extent, of
_________________________________of accounts and notes receivable.
________________________________________
100.____________________________may be used to access computerized receivable files to select and print
confirmations.
________________________________________
101.Two widely used confirmation forms to test accounts receivable are _______________________________
__ and _________________________________ confirmations.
________________________________________
102.____________________________ confirmation form is used when individual balances are
____________________________ or accounts are in _______________________________.
________________________________________
103.Auditing the details of customer payments listed in bank deposits in comparison to details of customer
payment postings can detect_________________________________.
________________________________________
104.What is dual direction testing?
105.Is the confirmation of cash and accounts receivable required according to auditing standards? Explain.
106.In tests of controls auditing, auditors need to define "deviations" in advance. Give seven examples of
control compliance deviations related to a client's processing of credit sales transactions and the related
assertion that was violated.
107.You are the auditor for Wilson Wholesale Products, Inc. As part of the audit of account receivable, Wilson
has provided to you an electronic file representing its accounts receivable as of its fiscal year end. The file
includes the customer name, customer address, customer number, sales invoice number, sales invoice date,
and amount.
Required: Describe three or more substantive audit procedures you might perform using computer assisted
audit tools and techniques (CAATs) with this computer file.
108.What procedures should an auditor perform for a positive confirmation that is not returned by the client's
customer?
Question also found in Study Guide
109.The following questions appeared on an internal control questionnaire for sales. Next to each of the
questions indicate the related assertion.
ch7 Key
1.
To be recognized, revenues must also be realized or realizable and
A.
B.
C.
D.
Foreseeable
Collected
Earned
Shipped
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
Louwers - Chapter 07 #1
2.
The SEC requires all of the following for revenue to be recognized except
A.
B.
C.
D.
Cash is collected.
Persuasive evidence of an arrangement exists.
Delivery has occurred or services have been rendered.
The seller's price to the buyer is fixed or determinable.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #2
3.
"Bill and Hold" refers to an arrangement where
A.
B.
C.
D.
Sales are recorded but are not shipped.
Sales are shipped but are not recorded.
Sales are billed but not collected.
Inventory is held but not billed.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Hard
Louwers - Chapter 07 #3
4.
Custody of inventory is transferred to the shipping area upon authorization of:
A.
B.
C.
D.
The customer order.
The shipping order.
The invoice.
The purchase order.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #4
5.
The document that generates recording of a sale is the
A.
B.
C.
D.
The customer order.
The shipping order.
The invoice.
The purchase order.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
Louwers - Chapter 07 #5
6.
The sum of customers' unpaid balances that is compared to the general ledger balance comes from
A.
B.
C.
D.
A total of sales invoices.
A total of shipping orders.
The sales journal.
The accounts receivable trial balance.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #6
7.
The file that contains sales transactions that were initiated in the system but are not yet completed is the:
A.
B.
C.
D.
Credit check file.
Sales detail.
Inventory master.
Pending order master.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #7
8.
The assertion that auditors will probably emphasize in the revenue and collection cycle is:
A.
B.
C.
D.
Occurrence.
Completeness.
Accuracy.
Classification.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Comprehension
Difficulty: Medium
Louwers - Chapter 07 #8
9.
A small business owner can best offset the lack of separation of duties by
A.
B.
C.
D.
Creating an internal audit department.
Installing the latest computer equipment and software.
Being actively involved in the accounting process.
Relying on the external auditor to detect errors.
Original
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #9
10.
Accountants should be under orders to record sales and accounts receivable when
A.
B.
C.
D.
The customer's order is received.
All supporting documentation of shipping is in order.
The item has been paid for.
The terms are agreed upon.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
Louwers - Chapter 07 #10
11.
Which of the following is an example of a control activity that satisfies the accuracy control objective
for sales invoices?
A. Recorded sales in the sales journal are supported by invoices.
B. Invoices, shipping documents, and sales orders are prenumbered and the numerical sequence is
checked.
C. Sales are recorded in the proper account.
D. Invoice quantities are compared to shipment and customer order quantities.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #11
12.
Scanning sales invoices for missing numbers in the sequence would be an activity intended to satisfy
what assertion?
A.
B.
C.
D.
Completeness.
Accuracy.
Occurrence.
Classification.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Easy
Louwers - Chapter 07 #12
13.
Vouching debits from a sample selection of customers' accounts receivable records to supporting sales
invoices is an audit procedure designed to obtain evidence about the assertion of
A.
B.
C.
D.
Occurrence.
Completeness.
Classification.
Accuracy.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #13
14.
Alpha Brewery Corporation recorded sales through January 4, 2005, dating them December 31, 2004.
This situation is an example of a violation of which of the following assertions?
A.
B.
C.
D.
Existence or occurrence.
Completeness.
Classification.
Accuracy.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Easy
Louwers - Chapter 07 #14
15.
Confirmations of accounts receivable provide the most evidence for which of the following assertions?
A.
B.
C.
D.
Existence.
Valuation or Allocation.
Rights and obligations.
Completeness.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #15
16.
The auditor maintains control of the mailing and receipt of confirmations by typically performing all of
the following except
A.
B.
C.
D.
Preparing the confirmation letters.
Mailing the confirmation letters.
Receiving the confirmation letters.
The auditor performs all of the above procedures.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #16
17.
If the auditor obtains sufficient competent evidence on the client's accounts receivable balance by
alternative procedures because it is impractical to confirm accounts receivable, the auditor's opinion
should be unqualified and could be expected to
A.
B.
C.
D.
Disclose the fact that alternative procedures were used due to client imposed scope limitation.
Disclose in the opinion paragraph that confirmation of accounts receivable was impracticable.
Not mention the alternative procedures.
Include an explanatory paragraph that discloses the performance of alternative procedures.
Original
AACSB: Communication
AICPA BB: Legal
AICPA FN: Reporting
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #17
18.
Which of the following is not a valid reason for an auditor deciding not to send accounts receivable
confirmations?
A.
B.
C.
D.
The balance is immaterial.
Confirmations would be ineffective.
The client requests alternative procedures be performed instead.
Other procedures provide sufficient competent evidence.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #18
19.
When an account receivable is considered uncollectible the person who generally authorizes the writeoff is the client's
A.
B.
C.
D.
Credit manager.
Treasurer.
Accountant.
Internal auditor.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #19
20.
Which of the following audit procedures is the most effective in testing sales for understatement?
A.
B.
C.
D.
Analyze the aged trial balance of recorded accounts receivable.
Confirm recorded accounts receivable.
Trace a sample of shipping documents to sales invoices recorded in the sales journal.
Vouch a sample of recorded sales from the sales journal to shipping documents.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #20
21.
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 has included in the representation letter a 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.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #21
22.
The most effective audit procedure for determining the collectability of an account receivable is the
A.
B.
C.
D.
Review of the subsequent cash collections.
Examination of the related sales invoice(s).
Confirmation of the account.
Review of authorization of credit sales to the customer and the previous history of collections.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #22
23.
In determining the adequacy of the allowance for uncollectible accounts, the least valuable evidence
would be obtained from
A.
B.
C.
D.
An aging schedule of past due accounts which the auditor has tested.
Correspondence with the client's collection agency.
Financial statements of individual customers.
No reply to negative confirmations.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #23
24.
An auditor confirms a representative number of open accounts receivable as of December 31 and
investigates respondents' exceptions and comments. By this procedure, the auditor would be 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 IT 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.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #24
25.
An auditor should normally perform alternative procedures to substantiate the existence of accounts
receivable when
A.
B.
C.
D.
No reply to a positive confirmation request is received.
No reply to a negative confirmation request is received.
Collectability of the receivables is in doubt.
Pledging of the receivables is probable.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #25
26.
A customer reply on a positive confirmation says "We dispute the $250 charge. We believe it is
excessive." This confirmation
A.
B.
C.
D.
Provides evidence of existence.
Does not provide evidence of existence because the customer may refuse to pay the $250 charge.
Provides evidence that the account was understated.
Provides evidence that the account should be written off.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #26
27.
The primary consideration when planning whether to send confirmations of accounts receivable before
the balance sheet date is the
A.
B.
C.
D.
Type of confirmation to be used.
Client's internal control over transactions affecting receivables.
Availability of staff auditors.
Number of customer accounts.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Comprehension
Difficulty: Medium
Louwers - Chapter 07 #27
28.
In the revenue and collection cycle, the auditor checks the numerical sequence of shipping documents.
This procedure is related to which of the following assertions?
A.
B.
C.
D.
Existence.
Completeness.
Rights and obligations.
Valuation or allocation.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #28
29.
The auditor selects a sample of recorded sales invoices and vouches them to shipping documents. This
procedure is related to which of the following assertions?
A.
B.
C.
D.
Occurrence.
Completeness.
Accuracy.
Cutoff.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #29
30.
In which of the following circumstances would the use of the negative form of accounts receivable
confirmation most likely 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.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #30
31.
Which of the following controls most likely would help ensure that all credit sales transactions of an
entity are recorded?
AThe 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 prenumbered shipping documents with entries in the sales
journal.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #31
32.
Which of the following internal control activities most likely would assure that all billed sales are
correctly posted to the accounts receivable ledger?
A.
B.
C.
D.
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
Each sales invoice is supported by a prenumbered shipping document.
The accounts receivable ledger is reconciled daily to the control account in the general ledger.
Each shipment on credit is supported by a prenumbered sales invoice.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #32
33.
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.
B.
C.
D.
Existence.
Valuation or allocation.
Completeness.
Rights and obligations.
AICPA
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #33
34.
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.
B.
C.
D.
Review the cash receipts journal for the month prior to the year-end.
Intensify the study of the internal control structure concerning the revenue cycle.
Increase the assessed level of detection risk for the existence assertion.
Inspect the shipping records documenting the merchandise sold to the debtors.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #34
35.
Which of the following most likely would be detected by an auditor's review of a client's sales cutoff?
A.
B.
C.
D.
Shipments lacking sales invoices and shipping documents.
Excessive write-offs of accounts receivable.
Unrecorded sales at year end.
Lapping of year-end accounts receivable.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #35
36.
Tracing shipping documents to prenumbered sales invoices provides evidence that
A.
B.
C.
D.
No duplicate shipments or billings occurred.
Shipments to customers were properly invoiced.
All goods ordered by customers were accounted for.
All prenumbered sales invoices were accounted for.
AICPA
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #36
37.
Which of the following statements is correct concerning the use of negative confirmation requests?
A. Unreturned negative confirmation requests rarely provide significant explicit evidence.
B. Negative confirmation requests are effective when detection risk is low.
C. Unreturned negative confirmation requests indicate that alternative procedures are necessary.
D. Negative confirmation requests are effective when understatements of account balances are
suspected.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #37
38.
The confirmation of customers' accounts receivable rarely provides reliable evidence about the
completeness assertion because
A.
B.
C.
D.
Many customers merely sign and return the confirmation without verifying its details.
Recipients usually respond only if they disagree with the information on the request.
Customers may not be inclined to report understatement errors in their accounts.
Auditors typically select many accounts with low recorded balances to be confirmed.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #38
39.
Negative confirmation of accounts receivable is less effective than positive confirmation of accounts
receivable because
A.
B.
C.
D.
A majority of recipients usually lack the willingness to respond objectively.
Some recipients may report incorrect balances that require extensive follow up.
The auditor cannot infer that all non-respondents have verified their account information.
Negative confirmations do not produce evidential matter that is statistically quantifiable.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #39
40.
Which of the following responses to a confirmation of balances at December 31 would be most
troubling to an auditor?
A.
B.
C.
D.
We paid this amount on December 28.
We received these goods on January 2.
We returned this amount on December 28 under our standing agreement with the company.
This amount isn't due until January 15.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #40
Question also found in textbook
Louwers - Chapter 07
41.
Revenues are normally considered to have been earned when
A.
B.
C.
D.
All possibility of return has expired.
The company has substantially accomplished what it must to be entitled to the benefits.
The cash is collected.
Goods have been shipped.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
Louwers - Chapter 07 #41
42.
Sales are normally recorded on the date of the
A.
B.
C.
D.
Customer purchase order.
Bill of lading.
Sales invoice.
Payment check.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
Louwers - Chapter 07 #42
43.
When auditing the revenue and collection cycle, auditors normally select balances to confirm from the
A.
B.
C.
D.
Sales journal.
Accounts receivable listing.
General ledger.
Cash receipts listing.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Easy
Louwers - Chapter 07 #43
44.
Which of the following accounts is not normally part of the revenue and collection cycle?
A.
B.
C.
D.
Sales
Accounts Receivable
Cash
Purchases Returns and Allowances
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
Louwers - Chapter 07 #44
45.
The control activity "credit sales approved by credit department" is directed toward which transaction
assertion?
A.
B.
C.
D.
Occurrence
Completeness
Accuracy
Cutoff
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Easy
Louwers - Chapter 07 #45
46.
Which of the following would be the best protection for a company that wishes to prevent the "lapping"
of trade accounts receivable?
A. Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming
mail.
B. Separate duties so that no employee has access to both checks from customers and currency from
daily cash receipts.
C. Have customers send payments directly to the company's depository bank.
D. Request that customer's payment checks be made payable to the company and addressed to the
treasurer.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #46
47.
Which of the following internal control activities will most likely prevent the concealment of a cash
shortage by improperly writing-off a trade account receivable?
A. Write-offs must be approved by a responsible officer after review of credit department
recommendations and supporting evidence.
B. Write-offs must be supported by an aging schedule showing that only receivables overdue several
months have been written off.
C. Write-offs must be approved by the cashier who is in a position to know if the receivables have, in
fact, been collected.
D Write-offs must be authorized by company field sales employees who are in a position to determine
. the financial standing of the customers.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #47
48.
Auditors sometimes use comparisons of ratios as audit evidence. An unexplained decrease in the ratio of
gross profit to sales may suggest which of the following possibilities?
A.
B.
C.
D.
Unrecorded purchases.
Unrecorded sales.
Merchandise purchases being charged to selling and general expense.
Fictitious sales.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #48
49.
An audit team is auditing sales transactions. One step is to vouch a sample of debit entries from the
accounts receivable subsidiary ledger back to the supporting sales invoices. The purpose of this audit
procedure is to establish that
A.
B.
C.
D.
Sales invoices represent bona fide sales.
All sales have been recorded.
All sales invoices have been properly posted to customer accounts.
Entries in the accounts receivable subsidiary ledger were properly invoiced.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #49
An auditor noted that client sales had increased 10 percent for the year. At the same time COGS as a
percentage of sales had decreased from 45 percent to forty percent and year-end accounts receivable had
increased by 8 percent.
Louwers - Chapter 07
50.
Based on the information above, the auditor is most likely concerned about
Refer To: 07-41
A.
B.
C.
D.
Unrecorded costs
Improper credit approvals
Improper sales cut-off
Fictitious sales
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #50
51.
Based on the information above, the auditor interviewed the Sales manager who stated that the increase
in sales without a corresponding increase in COGS was due to a price increase enacted by the company
during the year. How would the auditor best test the sales manager's representation?
Refer To: 07-41
A.
B.
C.
D.
Perform additional inquiries with sales personnel.
Obtain copies of all price lists in use during the year and vouch the prices to sales invoices.
Send confirmations asking customers about unit prices paid for product.
Vouch vender invoices to payments made after year-end.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #51
52.
To conceal defalcations involving receivables, a dishonest bookkeeper might charge which of the
following accounts?
A.
B.
C.
D.
Miscellaneous income.
Petty cash.
Miscellaneous expense.
Sales returns.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #52
53.
Which of the following responses to an accounts receivable confirmation at December 31 would cause
an audit team the most concern?
A.
B.
C.
D.
"This amount was paid on December 30th."
"We received this shipment on January 2nd."
"These goods were returned for credit on November 15th."
"The balance does not reflect our sales discount for paying by January 5th."
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #53
54.
A client has a separate sales group for its largest "preferred" customers. This is a select group of
customers that normally make purchases in excess of $250,000 and often have accounts receivable
balances in excess of $1 million. Which of the following audit procedures would the auditor most likely
perform?
A.
B.
C.
D.
Prepare a schedule of purchases and payments for these customers.
Send out negative confirmations on a large sample of these customers.
Inquire of the sales manager regarding the accounts receivable terms.
Send out positive confirmations on a large sample of these customers.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #54
55.
Audit documentation often includes a client-prepared, aged trial balance of accounts receivable as of the
balance sheet date. The audit team uses this aging primarily to
A.
B.
C.
D.
Evaluate internal control over credit sales.
Test the accuracy of recorded charge sales.
Estimate credit losses.
Verify the existence of the recorded receivables.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #55
56.
Which of the following might be detected by auditors' cutoff review and examination of sales journal
entries for several days prior to the balance sheet date?
A.
B.
C.
D.
Lapping year-end accounts receivable.
Inflating sales for the year.
Kiting bank balances.
Misappropriating merchandise.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #56
57.
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally
provide the strongest evidence concerning the
A.
B.
C.
D.
Collectability of the balances confirmed.
Ownership of the balances confirmed.
Existence of the balances confirmed.
Internal control over balances confirmed.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #57
58.
Which of the following is the best reason for prenumbering in numerical sequence such documents as
sales orders, shipping documents, and sales invoices?
A. Enables company personnel to determine the accuracy of each document.
B. Enables personnel to determine the proper period recording of sales revenue and receivables.
C. Enables personnel to check the numerical sequence for missing documents and unrecorded
transactions.
D. Enables personnel to determine the validity of recorded transactions.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #58
59.
When a sample of customer accounts receivable is selected for vouching debits, auditors will vouch
them to
A.
B.
C.
D.
Sales invoices with shipping documents.
Records of accounts receivable write-offs.
Cash remittance lists and bank deposit slips.
Credit files and reports.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #59
60.
In the audit of accounts receivable, the most important emphasis should be on the
A.
B.
C.
D.
Completeness assertion.
Existence assertion.
Rights and obligations assertion.
Presentation and disclosure assertion.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
Louwers - Chapter 07 #60
61.
When accounts receivable are confirmed at an interim date, auditors need not be concerned with
A. Obtaining a summary of receivables transactions from the interim date to the year-end date.
B Obtaining a year-end trial balance of receivables, comparing it to the interim trial balance, and
. obtaining evidence and explanations for large variations.
C. Sending negative confirmations to all the customers as of the year-end date.
D. Considering the necessity for some additional confirmations as of the balance sheet date if balances
have increased materially.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #61
62.
The negative request form of accounts receivable confirmation is useful particularly when the
A.
B.
C.
D.
Option A
Option B
Option C
Option D
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #62
63.
When an audit team traces a sample of shipping documents to the related sales invoice copies, they are
trying to find relevant evidence that
A.
B.
C.
D.
Shipments to customers were invoiced.
Shipments to customers were recorded as sales.
Recorded sales were shipped.
Invoiced sales were shipped.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #63
64.
Write-offs of doubtful accounts should be approved by
A.
B.
C.
D.
The salesperson.
The credit manager.
The treasurer.
The cashier.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #64
65.
When an audit team does not receive a response on a positive accounts receivable confirmation, auditors
should do all of the following except:
A.
B.
C.
D.
Send a second request.
Do nothing for immaterial balances.
Examine shipping documents.
Examine client correspondence files.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #65
66.
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.
B.
C.
D.
Understating the sales journal.
Overstating the accounts receivable control account.
Overstating the accounts receivable subsidiary ledger.
Understating the cash receipts journal.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #66
67.
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. Authorization of write-offs of uncollectible accounts by a supervisor independent of credit approval.
C. Separation of duties between receiving cash and posting the accounts receivable ledger.
D. Supervisory comparison of the daily cash summary with the sum of the cash receipts journal entries.
AICPA
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #67
68.
The financial records of the Movitz Company show that Mr. Dennis owes $4,100 on an account
receivable. An independent audit is being carried out and the auditors send a positive confirmation
to Mr. Jones. What is the most likely reason as to why a positive confirmation rather than a negative
confirmation was used here?
A.
B.
C.
D.
Control risk was particularly low for accounts receivable.
Inherent risk was particularly high for accounts receivable.
Mr. Dennis's account was not yet due.
Mr. Dennis's account was not with a related party.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #68
Question also found in Study Guide
Louwers - Chapter 07
69.
In the revenue and collection cycle, the order of the activities in the cycle are best illustrated by
A.
B.
C.
D.
Delivering goods, billing customer, credit granting, collection activities.
Customer ordering, delivering goods, credit granting, billing customers.
Customer ordering, credit granting, delivering goods, billing customers.
Credit granting, billing customers, delivering goods, cash receipts.
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Easy
Louwers - Chapter 07 #69
70.
Prenumbering invoices, shipping documents, and sales orders is a practice to achieve which of the
following assertions?
A.
B.
C.
D.
Completeness
Occurrence
Accuracy
Presentation or disclosure
Original
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #70
71.
An internal control questionnaire for evaluating the occurrence objective of revenues would not include
which of the following questions?
A.
B.
C.
D.
Is customer credit approved before orders are shipped?
Are customers' statements mailed monthly by the accounts receivable department?
Are direct confirmations of receivables obtained periodically by the internal auditor?
Are returned goods checked against necessary reports?
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #71
72.
The positive form of confirmation is best used when
A.
B.
C.
D.
Account balances are relatively large.
Account balances are small in amount, but large in number.
Accounts are not in dispute.
Internal control is considered effective.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Easy
Louwers - Chapter 07 #72
73.
Which of the following is not an alternative procedure when a confirmation is not received?
A.
B.
C.
D.
Examine sales invoices and vouch them to underlying shipping documents.
Examine payments received before the end of the period.
Examine customer purchase orders.
Examine client correspondence with the customer.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #73
74.
A person who has access to both cash and accounts receivable records may be able to take cash receipts
by
A.
B.
C.
D.
A kiting operation.
A lapping operation.
Overstating cash receipts.
Underfooting the bank reconciliation.
Original
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #74
75.
For each of the tests of controls for sales and receivables, indicate the assertion that is supported by
placing the correct letter in the blank.
2
1. Accuracy
Scan sales invoices for missing numbers in sequence.
2.
Completeness
Perform arithmetic recalculation of a sample of recorded1
sales invoices.
3. Occurrence
For a sample of recorded sales, determine whether credit1
was approved.
4. Accuracy
Trace a sample of credit memos to postings in customers'2
accounts.
5.
Completeness
Select a sample of customer accounts and vouch debits to3
sales invoices.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #75
Question also found in Study Guide
Louwers - Chapter 07
76.
A price list master file contains the product unit prices that is used for billing customers.
TRUE
Louwers - Chapter 07 #76
77.
The accountants who record cash receipts and credits to customer accounts should not handle the cash.
TRUE
Louwers - Chapter 07 #77
78.
Credit checks should be performed by the sales department before credit is approved.
FALSE
Louwers - Chapter 07 #78
79.
The aging information for accounts receivable is typically used in connection with assessing the
allowance for doubtful accounts.
TRUE
Louwers - Chapter 07 #79
80.
A comparison of checks listed on a sample of deposit slips to the detail of customer credits posted to
customer accounts receivable can be an audit test for lapping.
TRUE
Louwers - Chapter 07 #80
81.
If control risk is assessed very low, the substantive audit procedures on account balances must be
expanded.
FALSE
Louwers - Chapter 07 #81
82.
A confirmation procedure scheduled on the year-end date with a large sample of customer account
balances is necessary if tests of controls reveal control weaknesses.
TRUE
Louwers - Chapter 07 #82
83.
Auditors should not place total reliance on controls to the exclusion of other substantive testing
procedures.
FALSE
Louwers - Chapter 07 #83
84.
An objective for an audit is to obtain evidence related to management's financial statement assertions.
TRUE
Louwers - Chapter 07 #84
85.
When obtaining evidence about accounts receivable, auditors must put emphasis on the completeness
and the obligations assertions.
FALSE
Louwers - Chapter 07 #85
86.
Inquiries to management usually do not provide very convincing evidence about the existence and rights
assertions.
TRUE
Louwers - Chapter 07 #86
87.
A computer generally cannot be used for scanning large files of accounts receivable for unusual credit
balances.
FALSE
Louwers - Chapter 07 #87
88.
The use of confirmations to test accounts receivable is considered a generally accepted audit procedure.
TRUE
Louwers - Chapter 07 #88
89.
Confirmations yield evidence about existence and the gross valuation of a receivable balance.
TRUE
Louwers - Chapter 07 #89
Question also Found in Study Guide
Louwers - Chapter 07
90.
_________________________________ of accounts receivable records implies the power to alter them
directly or enter transactions to alter them.
Custody
Louwers - Chapter 07 #90
91.
The pending sales orders can be reviewed for evidence of the _________________________________
of recorded _________________________________ and _________________________________.
completeness, sales, accounts receivable
Louwers - Chapter 07 #91
92.
Internal control assessment is important because it governs the ________________________________
_, _________________________________ and _________________________________ of substantive
procedures.
nature, timing, extent
Louwers - Chapter 07 #92
93.
Information about the internal control system can be gathered by completing an
_________________________________ _________________________________
_________________________________.
internal control questionnaire
Louwers - Chapter 07 #93
94.
Another way to obtain information about the internal control system is take a single example of a
transaction and _________________________________the process from its initiation to its recording
in the accounting records.
walkthrough
Louwers - Chapter 07 #94
95.
The actions in tests of controls involve_________________________________,
_________________________________, _________________________________,
_________________________________ and _________________________________.
vouching, tracing, observing, scanning, recalculating
Louwers - Chapter 07 #95
96.
Dual direction testing involves samples of transactions selected to obtain evidence about
control over _________________________________ in one direction and control over
_________________________________ in the other direction.
completeness, occurrence
Louwers - Chapter 07 #96
97.
A procedure to gather evidence on both account balances and controls is called a
_________________________________ _________________________________ procedure.
dual purpose
Louwers - Chapter 07 #97
98.
Assertions related to account balances are _________________________________,
_________________________________, _________________________________
_________________________________, _________________________________ and
_________________________________.
existence, completeness, rights, obligations, valuation, allocation
Louwers - Chapter 07 #98
99.
Confirmations provide evidence of _________________________________ and, to a limited extent, of
_________________________________of accounts and notes receivable.
existence, valuation
Louwers - Chapter 07 #99
100.
____________________________may be used to access computerized receivable files to select and
print confirmations.
CAATs
Louwers - Chapter 07 #100
101.
Two widely used confirmation forms to test accounts receivable are ____________________________
_____ and _________________________________ confirmations.
positive, negative
Louwers - Chapter 07 #101
102.
____________________________ confirmation form is used when individual balances are
____________________________ or accounts are in _______________________________.
Positive, large, dispute
Louwers - Chapter 07 #102
103.
Auditing the details of customer payments listed in bank deposits in comparison to details of customer
payment postings can detect_________________________________.
lapping
Louwers - Chapter 07 #103
104.
What is dual direction testing?
Dual direction testing involves samples selected to obtain evidence about control over completeness in
one direction and control over occurrence in the other direction. The completeness direction determines
whether all transactions that occurred were recorded. The occurrence direction determines whether
recorded transactions actually occurred.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Medium
Louwers - Chapter 07 #104
105.
Is the confirmation of cash and accounts receivable required according to auditing standards? Explain.
In general, the use of confirmations for cash balances and trade accounts receivable is considered
a requirement under auditing standards (SAS 67). However, auditors may decide not to use them if
suitable alternative procedures are available and applicable in certain circumstances. Justifications
for not using confirmations include: (1) receivables are not material, (2) confirmations would not be
effective, (3) analytical procedures and other substantive test of details procedures would provide
sufficient, competent evidence.
AACSB: Analytic
AICPA BB: Legal
AICPA FN: Research
Bloom's: Knowledge
Difficulty: Medium
Louwers - Chapter 07 #105
106.
In tests of controls auditing, auditors need to define "deviations" in advance. Give seven examples of
control compliance deviations related to a client's processing of credit sales transactions and the related
assertion that was violated.
1. Occurrence. Fictitious sales are recorded.
2. Completeness. Shipments to customers are not recorded.
3. Accuracy. Customer credit is not approved.
4. Accuracy. Sales are recorded in the wrong amount (quantity and/or price is wrong).
5. Classification. Sales are recorded in the wrong revenue account.
6. Completeness. Some sales are not posted to the customer accounts.
7. Cutoff. Sales are recorded for the wrong date.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #106
107.
You are the auditor for Wilson Wholesale Products, Inc. As part of the audit of account receivable,
Wilson has provided to you an electronic file representing its accounts receivable as of its fiscal year
end. The file includes the customer name, customer address, customer number, sales invoice number,
sales invoice date, and amount.
Required: Describe three or more substantive audit procedures you might perform using computer
assisted audit tools and techniques (CAATs) with this computer file.
The following substantive tests could be performed with CAATs.
1. Compute the total accounts receivable by adding the sales invoice amounts. Compare to general
ledger control account total (manual).
2. Scan the sales invoice date field for any dates after the year-end.
3. Prepare an aged accounts receivable trial balance using the sales invoice date and amount.
4. Select and print accounts for confirmation of accounts receivable.
5. Scan the sales invoice amount for negative balances.
6. Other ________________________________________________
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #107
108.
What procedures should an auditor perform for a positive confirmation that is not returned by the
client's customer?
Auditors have to perform alternative procedures to ensure existence. These include examining (1)
subsequent cash receipts, (2) sales orders, invoices and shipping documents, and (3) correspondence
files for past-due accounts. Examining subsequent cash receipts is a particularly effective test because
if the customer paid the account, this is strong evidence that the receivable existed. The cash receipt
should be traced to the remittance advice and the deposit into cash.
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #108
Question also found in Study Guide
Louwers - Chapter 07
109.
The following questions appeared on an internal control questionnaire for sales. Next to each of the
questions indicate the related assertion.
1. Completeness
2. Accuracy
3. Accuracy
4. Accuracy
5. Accuracy
6. Occurrence
7. Cutoff
8. Occurrence
9. Completeness
10. Accuracy
AACSB: Analytic
AICPA BB: Critical Thinking
AICPA FN: Risk Analysis
Bloom's: Application
Difficulty: Hard
Louwers - Chapter 07 #109
ch7 Summary
Category
AACSB: Analytic
AACSB: Communication
AACSB: Reflective Thinking
AICPA BB: Critical Thinking
AICPA BB: Legal
AICPA FN: Reporting
AICPA FN: Research
AICPA FN: Risk Analysis
Bloom's: Application
Bloom's: Comprehension
Bloom's: Knowledge
Difficulty: Easy
Difficulty: Hard
Difficulty: Medium
Louwers - Chapter 07
# of
Questions
79
1
1
49
32
1
21
59
59
2
20
13
20
48
115