AUD 4.1 - Revenue Cycle

Question 1

Auditing by transaction cycle enables the auditor to:

Answer 1

Gather evidence for related accents simultaneously making the audit process more efficient

Question 2

Includes sales revenues, receivables, and cash receipts

Answer 2

Revenue cycle

Question 3

Includes purchases, payables, and cash disbursements

Answer 3

Expenditure cycle

Question 4

Includes cash receipts and cash disbursements

Answer 4

Cash cycle

Question 5

Includes perpetual inventory, physical counts, and manufacturing costs

Answer 5

Inventory cycle

Question 6

Includes investments in debt and equity and the income received from investments

Answer 6

Investment cycle

Question 7

Includes cycles for property, plan and equipment; payroll and personnel; and financing

Answer 7

Other transactions cycles

Question 8

Common revenue recognition fraud includes:

Answer 8

Early rev recognition
Holding the books open past the close
Fictitious sales
Failure to record sales returns
Side agreements
Channel stuffing
Overstatement of receivables

Question 9

Under strong internal controls, segregation of the functions in a sales transaction should exist as follows:

Answer 9

1. Preparation of the sales order
2. Credit approval
3. Shipment
4. Billing
5. Accounting

Question 10

Who begins the sales transaction by obtaining the receipt of a customer purchase order?

Answer 10

The sales department

Question 11

The sales department prepares what after obtaining a customer purchase order and sends it to who?

Answer 11

Prepares a serially numbered sales order and sends to the credit department for approval

Question 12

Who decides if the customer who submitted a purchase order may receive goods on credit?

Answer 12

The credit department

Question 13

If the credit department approves the sales order, what happens next?

Answer 13

A copy of the approved sales order is sent to the shipping department, billing department, and accounting department

Question 14

Who gets a copy of the approved sales order from the credit department?

Answer 14

Th shipping department, the billing department, and the accounting department

Question 15

Once the approved sales order is sent to the shipping department, what does the shipping department do?

Answer 15

They prepare a serially numbered bill of lading and send a copy to the customer

Question 16

When goods are ready to be shipped in the shipping department, what happens from an accounting standpoint?

Answer 16

A receivable is created based on the invoice shipping terms

Question 17

After a copy of the approved sales rider is sent to the billing department, what happens next in the billing department?

Answer 17

They prepare a serially numbered sales invoice and send it to the customer and the accounts receivable department after comparing the shipping documents, sales order, and invoice in a 3 way match

Question 18

Once a copy of the approved sales order is sent to the accounting department and goods are shipped, what happens next in the accounting department?

Answer 18

the sale is entered into the sales journal and a receivable is recorded

Question 19

Under strong internal control segregation of the functions in an accounts receivable transaction should exist as follows:

Answer 19

1. Sales
2. Collection of cash receipts
3. Uncollectible receivables
4. Sales returns
5. Sales discounts

Question 20

To start the accounts receivable transaction process, what happens?

Answer 20

A receivable is recorded in the accounts receivable account by the accounting department

Question 21

After a receivable is recorded, what happens when a cash receipt is collected?

Answer 21

The receivable is removed from the account

Question 22

In carrying out a company’s receivables collection program, the accounting department sends an aging schedule to who?

Answer 22

They send it to the credit department

Question 23

Controls for writing off receivables include proper segregation of:

Answer 23

Authorization by the treasurer and record keeping within the accounting department

Question 24

When a sales return occurs, what happens?

Answer 24

A serially numbered receiving report may be used as a sales return slip. Once the return is approved, the sales return is recorded and the related outstanding receivable is eliminated

Question 25

Who is allowed to open mail in regards to cash receipts?

Answer 25

Incoming mail must be opened by a person who does not have access to the accounts receivable ledger

Question 26

When receiving cash receipts in the mail, receipts should be listed and copies should be sent to:

Answer 26

The cashier
The accounts receivable department
The accounting department

Question 27

What does the cashier do in the cash receipts process?

Answer 27

Receives actual receipts and prepares bank deposits

Question 28

What does the accounts receivable department do in the cash receipts process?

Answer 28

They enter receipts into the accounts receivable subsidiary records

Question 29

What does the accounting department do in the cash receipts process?

Answer 29

Enters receipts into accounts receivable control account

Question 30

What does a treasurer do in the sales process?

Answer 30

Reviews and approves write-offs and sends to the billing and accounting department

Question 31

What’s the most relevant assertion when auditing revenue cycle?

Answer 31

Existence

Question 32

The risk that accounts receivables will be overstated is high, what assertion is this? While the risk that accounts receivable and sales will be understated is low, what assertion is this?

Answer 32

1. Existence
2. Completeness

Question 33

When auditing for completeness in sales transactions, the auditor should do what?

Answer 33

Trace a sample of shipping documents to the corresponding sales invoices, sales journal and accounts receivable subledger

Question 34

When auditing cutoff for sales transactions, what should an auditor do?

Answer 34

Compare a sample of sales invoices from before and after year-end with the shipment dates and with dates the sales were recorded in the sales journal

Question 35

When auditing for valuation, allocation, and accuracy in for a sales transaction, the auditor should:

Answer 35

Compare prices on a sales invoice with authorized price lists

Question 36

When auditing for existence and occurrence for a sales transaction, and auditor should:

Answer 36

Vouch a sample of sales transactions from the sales journal to the sales invoice, then to the customer order and shipping documents

Question 37

When auditing for understandability and classification for a sales transaction, the auditor should:

Answer 37

Examine a sample of sales invoices for proper classification into the appropriate revenue accounts

Question 38

When auditing for completeness for accounts receivable, the auditor should:

Answer 38

Obtain an aged trial balance of accounts receivable and trace the total to the general ledger

Question 39

When auditing for valuation, allocation, and accuracy for accounts receivables, the auditor should:

Answer 39

Examine the results of confirmations for accuracy and test the adequacy of the allowance for doubtful accounts

Question 40

When testing for existence and occurrence for accounts receivables, the auditor should:

Answer 40

Send confirms

Question 41

When testing for rights and obligations for accounts receivables, the auditor should:

Answer 41

Review bank confirmations and debt agreements for liens on receivables AND inquire with management, review minutes, and debt agreements.

Question 42

Type of confirm where customers are requested to return a statement to the auditor regardless of response

Answer 42

Positive confirmations

Question 43

If there are large individual accounts, expected errors, and internal control is weak - what type of confirmation should be sent?

Answer 43

Positive confirmation

Question 44

These type of confirms provide a greater degree of assurance but may also result in lower response rates due to greater effort needed by the client

Answer 44

Blank positive confirms

Question 45

Confirmation provide evidence regarding what assertions? What don’t they provide evidence for?

Answer 45

Existence and rights and obligations

They do NOT cover valuation or completeness

Question 46

Type of confirm where customers are requested to respond only if they disagree with what is stated:

Answer 46

Negative confirmation

Question 47

If RMM is low, there are no big accounts, and there is no reason to expect that recipients will ignore the confirmations, what type of confirmation should be sent?

Answer 47

Negative confirmation

Question 48

Which (positive or negative) confirmation is more effective?

Answer 48

Positive

Question 49

For confirmation exceptions, the auditor should determine if the exception is due to:

Answer 49

Timing or misstatement

Question 50

This occurs when there is a delay in the recording of the transaction by the client or the customer. For example, the client may correctly record a receivable on 12/31 when the goods are shipped, but the customer does not record the payable until the goods are received on 1/5:

Answer 50

Timing difference - NOT a misstatement

Question 51

What’s the process for the auditor if a confirmation does not receive a response:

Answer 51

1. Followed up with a 2nd or 3rd confirmation request
2. Asks the client to help
3. Perform alternative procedures such as inspecting shipping documents or subsequent cash receipts

Question 52

What assertions are audited when testing sales transactions?
What assertions are audited when testing AR?

Answer 52

Sales: completeness; cutoff; valuation, allocation and accuracy; existence and occurrence; and understandability

AR: completes; valuation, allocation and accuracy; existence and occurrence; and rights and obligations