Accounts Receivable and Revenue

Question 1

If a client’s receivable balance has increased because of a general weakness in local economic conditions. What would the auditor likely do?

Answer 1

expand substantive tests of collectability

Question 2

How is the A/R turnover statistic determined?

Answer 2

net credit sales / average receivables

Question 3

Which management assertion is being when the auditor analyzes the aging schedule of A/R?

Answer 3

the overall valuation of A/R including provision for bad debt allowance

Question 4

In auditing A/R and revenue, what are some potential internal control problems that could exist that would created material misstatements?

Answer 4

Fictitious sales

a specific account is collected, but cash is stolen, later the account is written off as uncollectable

lapped A/R

incorrect year-end cutoff

inaccurately billed customers

undisclosed sales to related parties

shipments of goods on consignment recorded as sales

Question 5

Why would a company report sales transactions that are false?

Answer 5

actual company revenues and net income are below forecasts and market expectations, and reported company financial performance is important for maintaining credibility in investor circles

employee income is based on bonuses, which in turn are based on reported company profitability

the company plans to issue equity or debt securities

Question 6

What departments are involved when a company receives an order from a customer for an item of inventory and then that same company ships the merchandise and records the transactions?

Answer 6

sales department - takes the order and records all needed information

credit department - verifies that the customer should be given credit

warehouse - gathers merchandise and delivers it to shipping department

shipping - in charge of sending goods to customers

billing - reconciles documentation and sends sales invoice to customer

A/R - maintains subsidiary ledger indicating customer balance

collections - follows up on invoice by sending reminders to the customer

Question 7

What documents are generated by the sales department? the credit department? shipping department? billing department?

Answer 7

sales - sales confirmation and possibly the internal order form

credit - marks approval on the internal customer order

shipping - bill of lading

billing - sales invoice

Question 8

An auditor takes a sample of transactions recorded after year end, to verify these transactions are being reported in the proper period,. What assertion is the auditor testing?

Answer 8

Cutoff

Question 9

An auditor takes a sample of transactions recorded just before year end, to verify these transactions are being reported in the proper period,. What assertion is the auditor testing?

Answer 9

occurrence and cutoff

Question 10

What is the first procedure that the sales department does when it receives a customer’s order?

Answer 10

prepares a confirming sales order form with pertinent information

Question 11

What does the sales department do after the sales order document is completed?

Answer 11

1. Have the document reviewed and authorized or approved by an appropriate party
2. Record the essential info on the document, if needed. In an IT environment, this step is probably not necessary, as this work has already taken place via the computer program.
3. File a copy of the document in case follow-up is needed later
4. Forward the remaining copies of the document to the necessary parties or departments

Question 12

When an independent auditor sends out confirmations of accounts receivable balances, what management assertion is being tested?

Answer 12

existence

Question 13

How does the credit department judge whether or not to approve open account credit for a particular sales order?

Answer 13

payment history of the customer

current balance and age of the customer’s open sales orders

credit report

references

financial statements

credit limits

Question 14

Which department receives the approved customer order? What action is taken?

Answer 14

transmitted to the warehouse where merchandise is gathered for delivery to the shipping department

Question 15

At the time of delivery to the shipping department, what three events should occur?

Answer 15

count the goods

check the condition of the goods is appropriate

verify that the goods agree with the description listed in the related documentation

Question 16

When the goods are shipped, what should the shipping department do?

Answer 16

prepare a bill of lading

Question 17

Who receives copies of the shipping documents when the customer’s order is shipped?

Answer 17

bill of lading and shipping document sent with merchandise

bill of lading may also be mailed to customer

shipping document forwarded inventory

customer order retained in shipping

customer order, shipping document and bill of lading sent to billing department

Question 18

which department receives a copy of all customer orders and shipping documents for reconciliation and invoicing purposes?

Answer 18

billing department

Question 19

Once a sales invoice is prepared, what activity takes place next in the billing department?

Answer 19

each invoice becomes an entry in the sales journal

Question 20

Who receives a copy of the sales invoice?

Answer 20

the customer

billing

accounts receivable

Question 21

What are the major functions of the A/R department?

Answer 21

keep a record of the individual amounts owed by each individual customer

keep a record of the age of each customer’s account

send notices to customers if accounts are overdue

secure authorization to turn slow-paying customer accounts over the collections department

Question 22

if the collections department deems a specific customer account to be noncollectable, what activity occurs?

Answer 22

it is reviewed by an independent party before write-off is approved

Question 23

What testing of A/R should be performed during the subsequent period?

Answer 23

cash collections of receivables reported at year-end corresponding to balances that were reported

accounts actually written off as being uncollectible

sales returns and allowances on year-end A/R items

Question 24

What management assertion is being tested when an auditor starts with transactions at their inception?

Answer 24

completeness and accuracy

Question 25

What management assertion is being tested when an auditor starts with a reported account balance and seeks substantiation for it?

Answer 25

existence and rights and obligations

Question 26

During an audit, which document should be used to determine when an A/R item and a sales transaction should be recorded?

Answer 26

the date of the sales invoice, the bill of lading and the shipping document, supported by the customer’s purchase order

Question 27

What are some reasons A/R confirmations might be returned with exceptions, which may require investigation and resolution by the auditor?

Answer 27

payment was made by the customer prior to the end of the reporting period but wasn’t recorded

shipment of the merchandise was not made until after the end of the reporting period

goods have been shipped on consignment so no actual sales transactions has actually occurred

the actual A/R balance is in dispute

Question 28

What are some reasons A/R confirmations might be returned with exceptions, which may not require investigation and resolution by the auditor?

Answer 28

payment was made by the customer, but it was not received by the reporting entity until after the end of the reporting period

the goods were shipped to the customer FOB shipping point and were in transit at the end of the year

the account was temporarily in disputer until certain info was sent to the customer. this info has now been sent, and the account balance is no longer in dispute

a sales transaction was posted to an incorrect customers account due to error but has been resolved

Question 29

what management assertion is being tested when the auditor reviews a client’s credit approval process?

Answer 29

valuation

Question 30

What are the different types of confirmation?

Answer 30

positive

negative

Question 31

How does an auditor decide which confirmation to use?

Answer 31

positive - more effort and cost more. used when more risk, material balances, and/or older balances

negative - risk levels are low, balances are small, homogeneous and relatively low

Question 32

When would an auditor place less reliance on confirmations in the testing of A/R?

Answer 32

when the balance is small

when it is felt that customers will not respond

Question 33

What alternative procedures can the auditor apply that may provide satisfactory audit evidence?

Answer 33

review cash collections after year end

review documentation

Question 34

What are the steps in the A/R confirmation process?

Answer 34

the auditor selects the customer accounts to be confirmed based on certain criteria

either the auditor or the reporting company prepares the confirmation form

a rep of the company must sign the confirmations

the auditor mails the confirms with an envelope for response directly back to the auditor

the auditor review all returned responses and considers exceptions noted

Question 35

A confirmation request is returned by fax instead of the mail, what should happen next?

Answer 35

the auditor contacts the customer and ask the confirmation be returned in the mail

Question 36

What is the auditor concerned about in connection with positive confirmations not returned? What should the auditor do if they are not returned?

Answer 36

the concern is that the customer does not exist and the receivable are fictitious

the auditor can do several things

mail second confirmations

call the customer

review the credit file to make sure that there is adequate documentation of the customer’s existence

review subsequent cash payments and the documentation generated in connection with those recent transactions

Question 37

when is the confirmation of receivables normally performed?

Answer 37

as close the balance sheet date as possible

Question 38

if the A/R turnover declines during the reporting year what problems might this indicate?

Answer 38

uncollectable accounts are not being recognized and written off

cash collections are not being reported or are not being recorded on at timely basis

sales have perhaps remained at the same absolute level or have started to decline, but a higher percentage of customers are now buying on credit and/or they are not not paying on a timely basis for one reason or another

the client may be recording fraudulent sales, and the corresponding A/R are accumulating on the balance sheet