3.06 - OPERATING CYCLES: REVENUE CYCLE Flashcards
3.06 - OPERATING CYCLES: REVENUE CYCLE
Which of the following audit procedures would an auditor most likely perform to test controls relating to
management’s assertion concerning the completeness of sales transactions?
A) Compare the invoiced prices on prenumbered sales invoices to the entity’s authorized price list.
B) Verify that extensions and footings on the entity’s sales invoices and monthly customer statements have
been recomputed.
C) Inspect the entity’s reports of prenumbered shipping documents that have not been recorded in the
sales journal.
D) Inquire about the entity’s credit granting policies and the consistent application of credit checks
C) Inspect the entity’s reports of prenumbered shipping documents that have not been recorded in the
sales journal.
By inspecting reports of prenumbered shipping documents, the auditor could verify that all shipments have been completely recorded as sales. Any numbers not accounted for may be indications of unrecorded transactions
Comparing invoice prices to an authorized price list ensures that the correct sales prices were used, addressing the accuracy assertion, but not completeness.
Verifying the mathematical accuracy of the sales invoice does not ensure that the invoice or the shipment was recorded but relates to the accuracy assertion.
Inquiries about the credit granting policies provide the auditor with information about the net realizable value of receivables, not the completeness of recording.
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3.06 - OPERATING CYCLES: REVENUE CYCLE
Which of the following fraudulent activities most likely could be perpetrated due to the lack of eective
internal controls in the revenue cycle?
A) Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.
B) Fictitious transactions are recorded that cause an understatement of revenue and overstatement of
receivables.
C) Merchandise received is not promptly reconciled to the outstanding purchase order file.
D) The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
D) The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
The receipt of cash in collection of accounts receivable is part of the revenue cycle and a weakness in control that
allows the person who writes off receivables to misappropriate cash would be an example of a fraudulent activity in the revenue cycle as a result of ineffective internal controls.
Fraud involving purchase of merchandise relate to the purchasing cycle, not the revenue cycle.
Overstatement of obsolete inventory would be a weakness in the closing cycle, not the revenue cycle.
An understatement of revenue would be associated with an understatement of receivables, not an overstatement.
3.06 - OPERATING CYCLES: REVENUE CYCLE
An auditor observes the mailing of monthly statements to a client’s customers and reviews evidence of follow-up
on errors reported by the customers. This test of controls most likely is performed to support management’s
financial statement assertions of
I. Presentation and disclosure.
II. Existence or occurrence.
A) II only.
B) Both I and II.
C) Neither I nor II.
D) I only.
A) II only.
By confirming accounts receivable directly with customers, the auditor is obtaining evidence supporting the assertion of existence and valuation.
Confirmations do not, however, provide evidence that accounts receivable are properly reported in the financial statements and adequately disclosed, although they may provide information that will be required to be disclosed.
3.06 - OPERATING CYCLES: REVENUE CYCLE
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating eectively
in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions
from the population represented by the
A) Sales invoice file.
B) Customer order file.
C) Shipping document file.
D) Sales order file
C) Shipping document file.
By beginning with shipping documents, the auditor can trace forward to make certain that there is an invoice for each
shipment.
There would be no sales order for goods shipped by the shipping department without a sales order and, as a result, beginning with the sales order file would not include all goods shipped.
Likewise, if goods were shipped that were not ordered there would be no customer order and, as a result, beginning with customer orders would not be useful in determining if such a shipment was invoiced.
Beginning form the invoice file allows the auditor to work forward to determine if all amounts were collected, or backward to determine if all amounts invoiced were shipped, but it would not provide evidence as to whether all shipments were invoiced.
