Audit Ch. 16

Front 1

Ch. 16

Back 1

Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Front 2

1) The net realizable value of accounts receivable is equal to:
A) gross accounts receivable less allowance for uncollectible accounts.
B) gross accounts receivable less bad debt expense.
C) gross accounts receivable less returns and allowances.
D) gross accounts receivable less sales discounts.

Back 2

A) gross accounts receivable less allowance for uncollectible accounts.

Front 3

2) The two primary classes of transactions in the sales and collection cycle are:
A) sales and sales discounts.
B) sales and cash receipts.
C) sales and sales returns.
D) sales and accounts receivable.

Back 3

B) sales and cash receipts.

Front 4

3) The appropriate and sufficient evidence to be obtained from tests of details must be decided on an:
A) efficiency basis.
B) effectiveness basis.
C) audit objectives basis.
D) none of the above.

Back 4

C) audit objectives basis.

Front 5

4) For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives?
A) Timing and realizable value.
B) Completeness and existence.
C) Existence and accuracy.
D) Realizable value and cutoff.

Back 5

D) Realizable value and cutoff.

Front 6

5) For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objective?
A) Existence
B) Completeness
C) Rights
D) Detail tie-in

Back 6

A) Existence

Front 7

6) For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objective?
A) Existence
B) Completeness
C) Rights
D) Detail tie-in

Back 7

B) Completeness

Front 8

7) Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.
A) True
B) False

Back 8

A) True

Front 9

8) For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.
A) True
B) False

Back 9

B) False

Front 10

9) For cash receipts, the occurrence transaction-related audit objective affects the completeness balance-related audit objective.
A) True
B) False

Back 10

A) True

Front 11

10) The accounts receivable balance-related audit objective net realizable value is not affected by assessed control risk for sales or cash receipts.
A) True
B) False

Back 11

A) True

Front 12

LO-2

Back 12

LO-2

Front 13

1) Which of the following types of receivables would not deserve the special attention of the auditor?
A) Accounts receivables with credit balances.
B) Accounts that have been outstanding for a long time.
C) Receivables from related parties.
D) Each of the above would receive special attention.

Back 13

D) Each of the above would receive special attention.

Front 14

2) Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally:
A) reduce the extent of tests of details of balances.
B) reduce the extent of tests of controls.
C) reduce the tests of transactions.
D) reduce all of the other tests.

Back 14

A) reduce the extent of tests of details of balances.

Front 15

3) In performing your audit you noticed that often times goods are shipped that are not matched with the corresponding sales invoice. This control deficiency could cause:
A) understatement of revenues and overstatement of inventory.
B) overstatement of revenues and understatement of inventory.
C) understatement of revenues and inventory.
D) overstatement of revenues and inventory.

Back 15

A) understatement of revenues and overstatement of inventory.

Front 16

4) An auditor selects a sample of shipping documents in order to determine if the related sales invoices were prepared. This test would gather evidence concerning which audit objective?
A) Completeness
B) Detail tie-in
C) Occurrence
D) Realizable value

Back 16

A) Completeness

Front 17

5) The understatement of sales and accounts receivable is best uncovered by:
A) confirming receivables.
B) reviewing the aged trial balance.
C) test of transactions for shipments made but not recorded.
D) reconciling the accounts receivable general ledger account with the schedule of accounts receivable.

Back 17

C) test of transactions for shipments made but not recorded.

Front 18

6) An auditor learns that collections of accounts receivable during the first ten days of January were debited to cash and credited to accounts receivable as of December 31. The effect generally will be to:
A) overstate the current ratio with no effect on working capital at December 31.
B) overstate both working capital and the current ratio at December 31.
C) overstate working capital with no effect on the current ratio at December 31.
D) leave both working capital and the current ratio unchanged at December 31.

Back 18

D) leave both working capital and the current ratio unchanged at December 31.

Front 19

LO-3

Back 19

LO-3

Front 20

1) The audit procedure of tracing sales invoices to shipping documents will provide the auditor evidence that:
A) billed sales were shipped.
B) shipments were recorded as receivables in the subsidiary ledger.
C) the accounts receivable master file and the accounts receivable subsidiary ledger reconcile.
D) goods shipped were billed to customers.

Back 20

A) billed sales were shipped.

Front 21

2) Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?
A) Accuracy
B) Completeness
C) Rights
D) Detail tie-in

Back 21

D) Detail tie-in

Front 22

3) A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding, is the:
A) customer list.
B) aged trial balance.
C) accounts receivable ledger.
D) schedule of accounts receivable.

Back 22

B) aged trial balance.

Front 23

4) Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include:
A)
Test-footing the total column
and the columns depicting the
aging Comparing the total of the aged trial balance with the general ledger accounts receivable account
Yes Yes

B)
Test-footing the total column
and the columns depicting the
aging Comparing the total of the aged trial balance with the general ledger accounts receivable account
No No

C)
Test-footing the total column
and the columns depicting the
aging Comparing the total of the aged trial balance with the general ledger accounts receivable account
Yes No

D)
Test-footing the total column
and the columns depicting the
aging Comparing the total of the aged trial balance with the general ledger accounts receivable account
No Yes

Back 23

A) Yes Yes

Front 24

5) Audit procedures designed to uncover credit sales made after the client's fiscal year end that relate to the current year being audited provide evidence for which of the following audit objective?
A) realizable value
B) accuracy
C) cutoff
D) existence

Back 24

C) cutoff

Front 25

6) Cutoff misstatements occur when:
A)
The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks Subsequent period
transactions are
recorded in the
current period Current period
transactions are
recorded in the
subsequent period
Yes Yes No

B) Yes No Yes

C) No Yes Yes

D) Yes No No

Back 25

C) No Yes Yes

Front 26

7) Cutoff misstatements occur:
A) either by error or fraud.
B) by error only.
C) by fraud only.
D) randomly without causes related to errors or fraud.

Back 26

A) either by error or fraud.

Front 27

8) Which of the following is likely to be determined first when performing tests of details for accounts receivable?
A) Recorded accounts receivable exist.
B) Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.
C) Accounts receivable are owned.
D) Existing accounts receivable are included.

Back 27

B) Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.

Front 28

9) An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective?
A) realizable value
B) existence
C) completeness
D) occurrence

Back 28

A) realizable value

Front 29

10) The most important test of details of balances to determine the existence of recorded accounts receivable is:
A) tracing details of sales invoices to shipping documents.
B) tracing the credits in accounts receivable to bank deposits.
C) tracing sales returns entries to credit memos issued and receiving room reports.
D) the confirmation of customers' balances.

Back 29

D) the confirmation of customers' balances.

Front 30

11) Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested?
A) Accounts receivable master file
B) Customer file
C) Aged trial balance
D) Sales register

Back 30

C) Aged trial balance

Front 31

12) The correct accounting for accounts receivable accounts with credit balances, provided they are significant, would be:
A) written off.
B) moved to the debit side.
C) reclassified as accounts payable.
D) corrected by making adjusting entries.

Back 31

C) reclassified as accounts payable.

Front 32

13) Most tests of accounts receivable are based on what schedule, file, or listing?
A) Sales master file.
B) Aged accounts receivable trial balance.
C) Accounts receivable master file.
D) Accounts receivable general ledger account.

Back 32

B) Aged accounts receivable trial balance.

Front 33

14) If the client's internal control for recording sales returns and allowances is evaluated as ineffective:
A) a larger sample may be needed to verify cutoff.
B) sampling is not appropriate.
C) all sales returns must be traced to supporting documentation.
D) all sales returns must be confirmed with the customer.

Back 33

A) a larger sample may be needed to verify cutoff

Front 34

15) A customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31. This represents:
A)
A cutoff misstatement A timing difference
Yes Yes

B)
A cutoff misstatement A timing difference
No No

C)
A cutoff misstatement A timing difference
Yes No

D)
A cutoff misstatement A timing difference
No Yes

Back 34

D) No Yes

Front 35

16) Which of the following audit procedures would not likely detect a client's decision to pledge or factor accounts receivable?
A) A review of the minutes of the board of directors' meetings.
B) Discussions with the client.
C) Confirmation of receivables.
D) Examination of correspondence files.

Back 35

C) Confirmation of receivables.

Front 36

17) When do most companies record sales returns and allowances?
A) During the month in which the sale occurs.
B) During the accounting period in which the return occurs.
C) Whenever the customer contacts the company regarding the credit.
D) During the month after the sale occurs.

Back 36

B) During the accounting period in which the return occurs.

Front 37

18) Cutoff misstatements can occur for:
A)
Sales Sales returns and allowances
Yes Yes

B)
Sales Sales returns and allowances
No No

C)
Sales Sales returns and allowances
Yes No

D)
Sales Sales returns and allowances
No Yes

Back 37

A) Yes Yes

Front 38

19) The most important aspect of evaluating the client's method of obtaining a reliable cutoff is to:
A) perform extensive detailed testing of cutoff.
B) evaluate the client's control procedures around cutoff.
C) confirm a sample of transactions near period end with customers.
D) confirm transaction with customers.

Back 38

B) evaluate the client's control procedures around cutoff.

Front 39

20) Which of the following audit procedure would normally be included in the audit plan when auditing the allowance for doubtful accounts?
A) Send positive confirmations.
B) Inquire of the client's credit manager.
C) Send negative confirmations.
D) Examine sales invoices.

Back 39

B) Inquire of the client's credit manager.

Front 40

21) Generally accepted accounting principles require that revenue be reported net of sales returns and allowances:
A) if practical.
B) if required by industry practice.
C) if the amounts are material.
D) any of the above.

Back 40

C) if the amounts are material.

Front 41

22) For which of the following accounts is cutoff least important?
A) Sales
B) Sales returns and allowances
C) Cash collections
D) Inventory

Back 41

C) Cash collections

Front 42

23) Which of the following most likely would be detected by a review of a client's sales cutoff?
A) Excessive sales discounts
B) Unrecorded sales for the year
C) Unauthorized goods returned for credit
D) Lapping of year-end accounts receivable

Back 42

B) Unrecorded sales for the year

Front 43

24) How might the auditor determine whether a client has limited rights to accounts receivable?
A)
Review minutes from board of directors meetings Inquiries of the client
Yes Yes

B)
Review minutes from board of directors meetings Inquiries of the client
No No

C)
Review minutes from board of directors meetings Inquiries of the client
Yes No

D)
Review minutes from board of directors meetings Inquiries of the client
No Yes

Back 43

A) Yes Yes

Front 44

25) You are reviewing sales to discover cutoff problems. If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:
A) before the merchandise was shipped.
B) at the time the merchandise was shipped.
C) several days subsequent to shipment.
D) at a time after the point at which title passed.

Back 44

A) before the merchandise was shipped.

Front 45

26) A procedure to test for a cash receipts cutoff error is:
A) reconciling the bank statement.
B) performing a four-column proof-of-cash.
C) observing the counting of cash at the balance sheet date.
D) tracing recorded cash receipts to bank deposits on the bank statement of a different period.

Back 45

D) tracing recorded cash receipts to bank deposits on the bank statement of a different period.

Front 46

27) Auditors often use analytical procedures in gathering audit evidence. For example, an unexplained decrease in the amount of accounts receivable may indicate:
A) Sales were overstated.
B) Inventory purchases were curtailed.
C) Cost of Goods sold was overstated.
D) Accounts Receivables were sold.

Back 46

D) Accounts Receivables were sold.

Front 47

28) For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve:
A) employee overtime wages.
B) credit granted to customers.
C) write-offs of customer accounts.
D) cash disbursements.

Back 47

C) write-offs of customer accounts.

Front 48

29) For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash:
A) is detected and correct when cash is separately audited.
B) is unlikely to have a material impact on the balance sheet or the income statement.
C) affects items on the balance sheet but does not affect net income.
D) rarely occurs given the control consciousness of most entities.

Back 48

C) affects items on the balance sheet but does not affect net income.

Front 49

30) You are auditing Rodgers and Company and have noticed that accounts receivables have increased from the previous year because of financial problems with its customers. Your likely first response would be to:
A) expand tests regarding account balance collectability.
B) increase the allowance for uncollectible accounts for the client.
C) communicate to the client that credit policy must be reviewed.
D) increase the sample size of past due accounts.

Back 49

A) expand tests regarding account balance collectability.

Front 50

31) An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:
A) accuracy.
B) existence.
C) control.
D) completeness.

Back 50

D) completeness.

Front 51

32) When performing tests of controls and tests of transactions for sales, the auditor generally defines the population as:
A) all accounts receivable transactions for the year.
B) all sales invoices for the year.
C) all cash receipts transactions for the year.
D) all sales invoices less sales return credit memos.

Back 51

B) all sales invoices for the year.

Front 52

37) Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle.
A) True
B) False

Back 52

False

Front 53

38) The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed.
A) True
B) False

Back 53

True

Front 54

39) The balance-related audit objectives of realizable value and rights are not affected by assessed control risk.
A) True
B) False

Back 54

True

Front 55

40) Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit.
A) True
B) False

Back 55

True

Front 56

41) Confirmation of accounts receivable provide evidence related to the existence, accuracy and cutoff objectives.
A) True
B) False

Back 56

True

Front 57

42) Confirmation is the most common test of details of balances for the accuracy of accounts receivable.
A) True
B) False

Back 57

True

Front 58

43) Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts.
A) True
B) False

Back 58

True

Front 59

44) For most audits, a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff.
A) True
B) False

Back 59

True

Front 60

LO-4

Back 60

LO-4

Front 61

1) Which of the following is the principle "weakness" of using negative confirmations for your tests of details of balances for accounts receivable?
A) can only be used for large balance accounts
B) cannot not be used when account balances "bunch" around a mean value
C) conclusions drawn from receiving no reply may not be correct
D) response rates are generally too low to draw any conclusions

Back 61

C) conclusions drawn from receiving no reply may not be correct

Front 62

2) Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a:
A) representation letter.
B) negative confirmation.
C) bank confirmation.
D) positive confirmation.

Back 62

D) positive confirmation.

Front 63

3) A type of positive confirmation known as a blank confirmation:
A) requests the recipient to fill in the amount of the balance.
B) is considered less reliable than the regular positive confirmation.
C) generates as high a response rate as the regular positive confirmation form.
D) is used when the auditor is confirming several small balances.

Back 63

A) requests the recipient to fill in the amount of the balance.

Front 64

4) The most effective audit evidence gathered for accounts receivable is the:
A) detail tie-in of the records.
B) analysis of the allowance for doubtful accounts.
C) confirmation of accounts receivable.
D) examination of sales invoices.

Back 64

C) confirmation of accounts receivable.

Front 65

5) The audit procedure that provides the auditor with the most appropriate evidence when performing test of details of balances for accounts receivable is:
A) confirmations.
B) recalculation of the aged receivables and uncollectible accounts.
C) tracing credit memos for returned merchandise to receiving room reports.
D) tracing from shipping documents to journals to the accounts receivable ledger.

Back 65

A) confirmations.

Front 66

6) When should auditors not perform alternative procedures in testing the accounts receivable balance?
A) When customers do not return positive confirmation requests.
B) When customers do not return negative confirmation requests.
C) When confirmations are deemed to be ineffective as an audit procedure.
D) When confirmations are too costly to use.

Back 66

B) When customers do not return negative confirmation requests.

Front 67

7) A positive confirmation is more reliable evidence than a negative confirmation because:
A) fewer confirmations can be sent out.
B) the auditor has a document which can be used in court.
C) the debtor's lack of response indicates agreement with the stated balance.
D) follow-up procedures are performed if a response is not received from the debtor.

Back 67

D) follow-up procedures are performed if a response is not received from the debtor.

Front 68

8) When positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. Which of the following would not be considered an alternative procedure?
A) Send a second confirmation request.
B) Examine subsequent cash receipts to determine if the receivable has been paid.
C) Examine shipping documents to verify that the merchandise was shipped.
D) Examine customer's purchase order and the duplicate sales invoice to determine that the merchandise was ordered.

Back 68

A) Send a second confirmation request.

Front 69

9) The positive (as opposed to the negative) form of receivables confirmation may be preferred when:
A) internal control surrounding accounts receivable is considered to be effective.
B) there is reason to believe that a substantial number of accounts may be in dispute.
C) a large number of small balances are involved.
D) there is reason to believe a significant portion of the requests will be made.

Back 69

B) there is reason to believe that a substantial number of accounts may be in dispute.

Front 70

10) An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:
A) no reply to a positive confirmation request is received.
B) no reply to a negative confirmation request is received.
C) collectability of the receivables is in doubt.
D) pledging of the receivables is probable.

Back 70

A) no reply to a positive confirmation request is received.

Front 71

11) Confirmation of accounts receivable balances normally provides evidence concerning the:
A) valuation of the balances.
B) rights of the balances.
C) existence of the balances.
D) completeness of the balances.

Back 71

C) existence of the balances.

Front 72

12) If the auditor decides not to confirm accounts receivable, the auditor should:
A) always use alternative procedures to audit the accounts receivable.
B) include copies of customer statements in the audit files.
C) document the reasons for such a decision in the audit files.
D) include copies of customer sales invoices in the audit files.

Back 72

C) document the reasons for such a decision in the audit files.

Front 73

13) The most reliable evidence from confirmations is obtained when they are sent:
A) as close to the balance sheet date as possible.
B) at various times throughout the year to different segments of the sample, so that the entire sample is representative of account balances scattered throughout the year.
C) several months before the year-end, so the auditor will have adequate time to perform alternate procedures if they are required.
D) at various times throughout the year to the same group in the sample, so that the sample will not have a time bias.

Back 73

A) as close to the balance sheet date as possible.

Front 74

14) An auditor would be least likely to use confirmations in connection with the examination of:
A) inventories.
B) long-term debt.
C) property, plant, and equipment.
D) stockholders' equity.

Back 74

C) property, plant, and equipment.

Front 75

23) Tests of details of balances must be designed for each balance-related audit objective.
A) True
B) False

Back 75

True

Front 76

24) Tests of details of balances focus on testing the year-end balances of balance sheet accounts.
A) True
B) False

Back 76

True

Front 77

25) Accounts receivable need not be confirmed if they are immaterial to the financial statements.
A) True
B) False

Back 77

True

Front 78

26) Blank confirmations are considered less reliable than standard positive confirmations.
A) True
B) False

Back 78

False

Front 79

27) Negative confirmations are less expensive, and less reliable, than positive confirmations.
A) True
B) False

Back 79

True

Front 80

28) It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances.
A) True
B) False

Back 80

False

Front 81

29) If auditors consider confirmations of accounts receivable to be ineffective evidence because response rates will be very low, they need not confirm accounts receivable.
A) True
B) False

Back 81

True

Front 82

30) The type of receivables confirmation is a major factor affecting sample size, with negative confirmations normally requiring a larger sample than positive confirmations.
A) True
B) False

Back 82

True

Front 83

31) When sending confirmations during most audits of accounts receivable, the emphasis is often on confirming larger and older accounts.
A) True
B) False

Back 83

True

Front 84

32) When a customer disagrees with the amount shown on an account receivable confirmation, the auditor should not ask the client to reconcile the difference.
A) True
B) False

Back 84

False

Front 85

33) Auditors must maintain control of confirmations until they are returned from the customer.
A) True
B) False

Back 85

True

Front 86

34) When a customer does not return an accounts receivable confirmation, it is acceptable, without performing alternative procedures, to assume the amount is 100% overstated when generalizing from the sample to the population.
A) True
B) False

Back 86

True