Accounts Receivable Flashcards
Under which of the following circumstances would the use of the blank form of confirmations of accounts receivable most likely be preferable to positive confirmations?
The recipients are likely to sign the confirmations without devoting proper attention to them.
Subsequent cash receipts are unusually difficult to verify.
procedures indicate that few excep-tions are expected.
The combined assessed level of inherent risk and control risk is low.
The recipients are likely to sign the confirmations without devoting proper attention to them.
This answer is correct! The requirement is to identify the circumstance in which an auditor would use the blank form of confirmations (one which includes no amount and asks the respondent to supply the amount due) rather than positive confirmations. The first answer option is correct because, if a recipient simply signs a blank confirmation and returns it, the confirmation will have no amount written on it, and the auditor will know that additional procedures are necessary. Alternatively, the recipient may be more unwilling to sign and return a blank confirmation with no amount written and will therefor spend the time to look and enter the balance per the recipient’s records. The second answer option is incorrect because the fact that subsequent cash receipts are difficult to verify doesn’t affect whether or not blank confirmations are used. It would simply make it more difficult to perform alternative procedures on nonresponding accounts. The third answer option is incorrect because expecting few exceptions is a condition that affects the use of negative confirmations, not blank confirmations. The fourth answer option is incorrect because a combined assessed level of inherent risk and control risk as low (i.e., the assessed risk of material misstatement) is a condition that affects the use of negative confirmations, not blank confirmations. See AU-C 505 for information on the confirmation process.
Auditors may use positive and/or negative forms of confirmation requests for accounts receivable. An auditor most likely will use
The positive form to confirm all balances regardless of size.
A combination of the two forms, with the positive form used for large balances and the negative form for the small balances.
A combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables.
The positive form when controls related to receivables are satisfactory, and the negative form when controls related to receivables are unsatisfactory.
A combination of the two forms, with the positive form used for large balances and the negative form for the small balances.
This answer is correct because the professional standards suggest the use of the positive form for large balances and the negative form for small balances.
This answer is incorrect because positive confirmations are suggested when internal control is unsatisfactory and the negative form is suggested when internal control is satisfactory.
After making inquiries about credit granting policies, an auditor selects a sample of sales transactions and examines evidence of credit approval. This test of controls most likely supports management’s financial statement assertion(s) of Rights and obligations Valuation or allocation Yes Yes Yes No No Yes No No
No Yes
This answer is correct because a lack of approval may lead to a question as to the value of receivables (valuation); the tie to rights and obligations, if any, is much less direct.
An auditor discovered that a client’s accounts receivable turnover is substantially lower for the current year than for the prior year. This may indicate that
Obsolete inventory has not yet been reduced to fair market value.
There was an improper cutoff of sales at the end of the year.
An unusually large receivable was written off near the end of the year.
The aging of accounts receivable was improperly performed in both years.
There was an improper cutoff of sales at the end of the year.
This answer is correct because an improper cutoff of sales at the end of the year that overstates year-end sales and receivables will decrease the ratio since that ratio is ordinarily far greater than 1. That is, increasing the numerator and denominator of a ratio that is greater than one by the same amount will decrease the ratio (e.g., 3/2 = 1.5 ? 4/3 = 1.3).
Confirmation of individual accounts receivable balances directly with debtors will, of itself, normally provide evidence concerning the
Collectability of the balances confirmed.
Ownership of the balances confirmed.
Existence of the balances confirmed.
Internal control over balances confirmed.
Existence of the balances confirmed.
This answer is correct because confirmation does provide evidence as to the existence of the receivable since the debtor acknowledges it.
Which of the following areas would ordinarily be expected to require the most time when performing an audit of a continuing client?
Accounts receivable.
Common stock.
Retained earnings.
Salaries expense
Accounts receivable.
This answer is correct because accounts receivable represents an account with many transactions and therefore would be expected to require significant audit time.
In confirming accounts receivable, an auditor decided to confirm customers’ account balances rather than individual invoices. Which of the following most likely would be included with the client’s confirmation letter?
An auditor-prepared letter explaining that a nonresponse may cause an inference that the account balance is correct.
A client-prepared letter reminding the customer that a nonresponse will cause a second request to be sent.
An auditor-prepared letter requesting the customer to supply missing and incorrect information directly to the auditor.
A client-prepared statement of account showing the details of the customer’s account balance.
A client-prepared statement of account showing the details of the customer’s account balance.
The requirement is to identify the most likely information that would be included in a client’s confirmation letter that is being used to confirm accounts receivable balances rather than individual invoices. Answer (d) is correct since including details of the account is likely to make it easier for the customer to respond in a meaningful manner. Answer (a) is incorrect because no such auditor-prepared letter will be included and because only in the case of the negative form of confirmation does a nonresponse lead to an inference that the account balance is correct. Answer (b) is incorrect because confirmation requests do not ordinarily include a letter suggesting that a second request will be sent. Answer (c) is incorrect because the auditor does not enclose a letter requesting that the information be supplied. See AU-C 505 for information on the confirmation process.
Which of the following statements would an auditor most likely add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipients?
“This is not a request for payment; remittances should not be sent to our auditors in the enclosed envelope.”
“Report any differences on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records.”
“If you do not report any differences within fifteen days, it will be assumed that this statement is correct.”
“The following invoices have been selected for confirmation and represent amounts that are overdue.”
“If you do not report any differences within fifteen days, it will be assumed that this statement is correct.”
The requirement is to identify a statement that an auditor would be most likely to add to the negative form of confirmation of accounts receivable to encourage a timely consideration by the recipient. Answer (c) is correct because providing such information might increase timely consideration in that the recipient may realize the importance of a reply when the information is incorrect. Answers (a) and (b) are incorrect because while a confirmation request may include these statements, the statements are unlikely to encourage timely consideration of the request. Answer (d) is incorrect because many accounts that are not overdue are sampled, and because even for those overdue such a statement is not ordinarily included with the confirmation request.
Customers having substantial year-end past due balances fail to reply after second request forms have been mailed directly to them. Which of the following is the most appropriate audit procedure?
Examine shipping documents.
Review collections during the year being examined.
Intensify the study of the client’s internal control structure with respect to receivables.
Increase the balance in the accounts receivable allowance (contra) account.
Examine shipping documents.
This answer is correct because the failure of customers to reply to request forms may indicate that these accounts may be in dispute. The auditor would examine shipping documents to determine whether proper items and quantities have been shipped.
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?
Review the cash receipts journal for the month prior to the year-end.
Intensify the study of internal control 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.
Inspect the shipping records documenting the merchandise sold to the debtors.
The requirement is to identify the most likely alternate procedure when replies have not been received to either first or second accounts receivable confirmation requests. Answer (d) is correct because the inspection of shipping records will provide evidence that the merchandise was actually shipped to the debtor. Answer (a) is incorrect because, a review of the cash receipts journal prior to year-end is unlikely to provide evidence on account recorded as unpaid as of year-end. Also, the procedure would only detect one specific type of misstatement, that in which payments were recorded in the cash receipts journal, but not credited to the customers’ accounts. Answer (b) is incorrect because the lack of a reply to the confirmation provides no particular evidence that the scope of procedures related to internal control should be modified. Answer (c) is incorrect because the lack of a reply need not necessarily lead to a presumption that the account is misstated. See AU-C 505 for procedures typically performed for year-end accounts receivable confirmation requests for which no reply is received.
For the fiscal year ending December 31, previous year and the current year, Justin Co. has net sales of $1,000,000 and $2,000,000; average gross receivables of $100,000 and $300,000; and allowance for uncollectible accounts receivable of $30,000 and $50,000 respectively. If the accounts receivable turnover and the ratio of allowance for uncollectible accounts receivable to gross accounts receivable are calculated, which of the following best represents the conclusions drawn?
Accounts receivable turnovers are 10.0 and 6.6 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible overstatement of the allowance.
Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.
Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable is 0.42 and 0.20, respectively. Examine allowance for possible overstatement of the allowance.
Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.42 and 0.20, respectively. Examine allowance for possible understatement of the allowance.
Accounts receivable turnovers are 14.3 and 8.0 and the ratios of uncollectible accounts receivable to gross accounts receivable are 0.30 and 0.16, respectively. Examine allowance for possible understatement of the allowance.
This answer is correct because it includes the proper quantitative amounts and conclusion. Using the following formula: Receivable turnover = Net (credit) sales/Average trade receivable (net), turnover ratios are: $1,000,000/$70,000 = 14.3 and $2,000,000/$250,000 = 8.0; ratios of uncollectible accounts to gross accounts receivable are: $30,000/$100,000 = .30 and $50,000/ $300,000 = .167. Also, this answer correctly suggests a possible understatement of the allowance—it is lower than the preceding year.
To conceal defalcations involving receivables, the auditor would expect an experienced bookkeeper to charge which of the following accounts?
Miscellaneous income.
Petty cash.
Miscellaneous expense.
Sales returns.
Sales returns.
This answer is correct because a debit to sales returns with a credit to accounts receivable is a normal entry for returns and is one which would not appear questionable. Therefore, the auditor would expect an experienced bookkeeper to charge sales returns in a defalcation involving accounts receivable.
In confirming a client’s accounts receivable in prior years, an auditor found that there were many differences between the recorded account balances and the confirmation replies. These differences, which were not misstatements, required substantial time to resolve. In defining the sampling unit for the current year’s audit, the auditor most likely would choose
Individual overdue balances.
Individual invoices.
Small account balances.
Large account balances
Individual invoices.
The requirement is to determine the best sampling unit for confirmation of accounts receivable when many differences between the recorded account balances and the confirmation replies have occurred in the past. Answer (b) is correct because the misstatements may have occurred because respondents are not readily able to confirm account balances. AU-C 505 suggests that in such circumstances certain respondents’ accounting systems may facilitate the confirmation of single transactions (individual invoices) rather than of entire account balances.
Which of the following controls will most likely prevent the concealment of a cash shortage resulting from the improper write-off of a trade account receivable?
Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
Write-offs must be supported by an aging schedule showing that only receivable overdue several months have been written off.
Write-offs must be approved by the cashier who is in a position to know if the receivables have, in fact, been collected.
Write-off must be authorized by company field sales employees who are in a position to determine the financial standing of the customers.
Write-offs must be approved by a responsible officer after review of credit department recommendations and supporting evidence.
This answer is correct because if accounts receivable write-offs must be approved by an officer on the basis of credit department recommendations including supporting evidence, there is very little likelihood of improper write-offs to conceal cash shortages.
The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date. This aging is best used by the auditor to
Evaluate internal control over credit sales.
Test the accuracy of recorded charge sales.
Estimate credit losses.
Verify the validity of the recorded receivables.
Estimate credit losses.
This answer is correct because aging accounts receivable evaluates the adequacy of the allowance for doubtful accounts (i.e., to estimate credit losses).
If the business environment is experiencing a recession, the auditor most likely would focus increased attention on which of the following accounts?
Purchase returns and allowances.
Allowance for doubtful accounts.
Common stock.
Noncontrolling interest of a subsidiary purchased during the year.
Allowance for doubtful accounts.
This answer is correct because during a recession one might expect customers to have difficulty paying receivables—accordingly a higher allowance for doubtful accounts might be needed.
When an auditor decides to confirm accounts receivable balances rather than individual invoices, it most likely would be beneficial to include with the confirmations
Copies of the client’s shipping documents that support the account balances.
Lists of the customers’ recent payments that the client has already recorded.
Client-prepared statements of account that show the details of the account balances.
Copies of the customers’ purchase orders that support the account balances.
Client-prepared statements of account that show the details of the account balances.
This answer is correct because when client-prepared statements of account show details of account balances, it is likely that customers will be able to reply regardless of whether they maintain their payable records by invoice or month-end balance.
Which of the following might be detected by an auditor’s cutoff review and examination of sales journal entries for several days prior to and subsequent to the balance sheet date?
Lapping year-end accounts receivable.
Inflating sales for the year.
Kiting bank balances.
Misappropriating merchandise.
Inflating sales for the year.
This answer is correct because holding the sales journal open (i.e., recording sales of the next period in this period) inflates sales in the current period and this should be detected by the auditor’s cutoff work.
In which of the following circumstances is substantive testing of accounts receivable before the balance sheet date most appropriate?
The client has a new sales incentive program in place.
Internal control during the remaining period is effective.
There is a high turnover of senior management.
It is a first engagement of a new client.
Internal control during the remaining period is effective.
This answer is correct because such testing ordinarily relies upon good internal control existing for the period after the testing. Also, be aware that such “interim” testing is considered inherently more risky.
An auditor is testing sales transactions. One step is to trace a sample of debit entries from the accounts receivable subsidiary ledger back to the supporting sales invoices. What would the auditor intend to establish by this step?
Sales invoices represent bona fide sales.
All sales have been recorded.
All sales invoices have been properly posted to customer accounts.
Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.
Debit entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.
This answer is correct because the auditor would appropriately conclude that entries in the accounts receivable subsidiary ledger are properly supported by sales invoices.
