Audit of Receivables

Question 1

In the audit of which of the following general ledger accounts will tests of controls be particularly appropriate?
a. Equipment
b. Bonds payable
c. Bank charges
d. Sales

Answer 1

d. Sales

Question 2

An auditor most likely would review an entity’s periodic accounting for the numerical sequence of shipping documents and invoices to support management’s financial statement assertion of
a. Existence or occurrence
b. Rights and obligations
c. Valuation
d. Completeness

Answer 2

d. Completeness

Question 3

Which of the following might be detected by an auditor’s review of the client’s sales cut-off?
a. Excessive goods returned for credit
b. Unrecorded sales discounts
c. Lapping of year-end accounts receivable
d. Inflated sales for the year

Answer 3

d. Inflated sales for the year

Question 4

Cut-off tests designed to detect credit sales made before the end of the year that have been recorded in the subsequent year provide assurance about management’s assertion of
a. Presentation
b. Completeness
c. Rights
d. Existence

Answer 4

b. Completeness

Question 5

The auditor finds situation in which one person has the ability to collect receivables, make deposits, issue credit memos and record receipt of payments. The auditor suspects the individual may be stealing from cash receipts. Which of the following audit procedures would be most effective in discovering fraud in this scenario?
a. Send positive confirmations to a random selection of customers.
b. Send negative confirmations to all outstanding accounts receivable customers.
c. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts, excluding cash posted to the cash receipts journal.
d. Take a sample of bank deposits and trace the detail in each bank deposit back to the entry in the cash receipts journal.

Answer 5

c. Perform a detailed review of debits to customer discounts, sales returns, or other debit accounts, excluding cash posted to the cash receipts journal.

Question 6

Which of the following most likely would give the most assurance concerning the valuation assertion of accounts receivable?
a. Vouching amounts in the subsidiary ledger to details on shipping documents.
b. Comparing receivable turnover ratios with industry statistics for reasonableness.
c. Inquiring about receivables pledged under loan agreements.
d. Assessing the allowance for uncollectible accounts for reasonableness.

Answer 6

d. Assessing the allowance for uncollectible accounts for reasonableness.

Question 7

. 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?
a. An auditor prepared letter explaining that a non-response may cause an inference that the account balance is correct.
b. A client prepared letter reminding the customer that a non-response will cause a second request to be sent.
c. An auditor prepared letter requesting the customer to supply missing and incorrect information directly to the auditor.
d. A client prepared statement of account showing the details of the customer’s account balance.

Answer 7

d. A client prepared statement of account showing the details of the customer’s account balance.

Question 8

Which of the following statements would an auditor most likely to add to the negative form of confirmations of accounts receivable to encourage timely consideration by the recipient?
a. “This is not a request for payment; remittances should not be sent to our auditors; in the enclosed envelope”
b. “Report any difference on the enclosed statement directly to our auditors; no reply is necessary if this amount agrees with your records.”
c. “If you do not report any difference within 15 days, it will be assumed that this statement is correct.”
d. “The following invoices have been selected for confirmation and represent amounts that are overdue.”

Answer 8

c. “If you do not report any difference within 15 days, it will be assumed that this statement is correct.”

Question 9

Auditing standards define a confirmation as “the process of obtaining and evaluating a direct communication from a third party in response to a request for information about a particular item affecting financial statement assertions” Two assertions for which confirmation of accounts receivable balances provides primary evidence are
a. Completeness and valuation
b. Valuation and rights and obligations
c. Rights and obligations and existence
d. Existence and completeness

Answer 9

c. Rights and obligations and existence

Question 10

. Auditor may use positive or negative forms of confirmations requests for accounts receivable. An auditor most likely will use
a. The positive form to confirm all balances regardless of the size.
b. A combination of the two forms, with the positive form used for large balances and the negative for the small balances
c. A combination of the two forms, with the positive form used for trade receivables and the negative form for other receivables.
d. The positive form when the combined assessed level of inherent and control risk for assertions related to receivables is acceptably low, and the negative form when it is unacceptably high.

Answer 10

b. A combination of the two forms, with the positive form used for large balances and the negative for the small balances

Question 11

. In the confirmation of accounts receivable, the auditor would most likely
a. Request confirmation of a sample of the inactive accounts
b. Seek to obtain positive confirmations for at least 50% of the total dollar amount of the receivables.
c. Require confirmation of all receivables from agencies of the federal government.
d. Require that confirmation requests be sent within 1 month of the fiscal year-end.

Answer 11

a. Request confirmation of a sample of the inactive accounts

Question 12

Negative confirmations of accounts receivable is less effective than positive confirmation of accounts receivable because
a. A majority of recipients usually lack the willingness to respond objectively.
b. Some recipients may report incorrect balances that require extensive follow-up.
c. The auditor cannot infer that all non-respondents have verified their account information.
d. Negative confirmations do not produce evidence that is statistically quantifiable.

Answer 12

c. The auditor cannot infer that all non-respondents have verified their account information.

Question 13

To reduce the risks associated with accepting fax responses to request for confirmation of accounts receivable, an auditor most likely would
a. Examine the shipping documents that provide evidence for the existence assertion.
b. Verify the sources and contents of the faxes in telephone calls to the senders.
c. Consider faxes to the non-responses and evaluate them as unadjusted differences.
d. Inspect the faxes for forgeries or alterations and consider them to be acceptable if none are noted.

Answer 13

b. Verify the sources and contents of the faxes in telephone calls to the senders.

Question 14

An auditor confirms a representative number of open accounts receivable as of December 31 and investigates respondents’ exceptions and comments. By this procedure, the auditor is most likely to learn of which of the following?
a. One of the cashiers has been covering a personal embezzlement by lapping.
b. One of the sales clerks has not been preparing charge slips for credit sales to family and friends.
c. One of the computer processing control has been removing all sales invoices applicable to this account from the data file.
d. The credit manager has misappropriated remittances from customers whose accounts have been written off.

Answer 14

a. One of the cashiers has been covering a personal embezzlement by lapping.

Question 15

An auditor who has confirmed accounts receivable may discover that the sales journal was held open past year-end if
a. Positive confirmations sent to debtors are not returned
b. Negative confirmations sent to debtors are not returned
c. Most of the returned negative confirmations indicate that the debtor owes a larger balance that the amount being confirmed.
d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the amount being confirmed.

Answer 15

d. Most of the returned positive confirmations indicate that the debtor owes a smaller balance than the amount being confirmed.

Question 16

During the process of confirming accounts receivable as of December 31, 2005 a positive confirmation was returned indicating the “balance owed as of December 31, 2005 was paid on January 9, 2006”. The auditor will most likely
a. Determine whether there were any changes in the account between January 1 and January 9, 2006. b. Determine whether a customary trade discount was taken by the customer.
c. Reconfirm the zero balances as of January 10, 2006.
d. Verify that the amount was received.

Answer 16

d. Verify that the amount was received.

Question 17

Confirmation of accounts receivable is a generally accepted auditing procedure. The presumption that an auditor will confirm accounts receivable is not overcome if
a. Based on prior’s years’ audit experience response rates will be inadequate.
b. Based on experience with similar engagements, responses are expected to be unreliable.
c. The accounts receivable are immaterial.
d. The combined assessed level of inherent and control risk is high.

Answer 17

d. The combined assessed level of inherent and control risk is high.

Question 18

A company has computerized sales and cash receipts journals. The computer programs for these journals have been properly debugged. The auditor discovered that the total of the accounts receivables subsidiary accounts differs materially from the accounts receivable control account. This discrepancy could indicate
a. Credit memoranda being improperly recorded.
b. Lapping of receivables
c. Receivables not being properly aged.
d. Statements being intercepted prior to mailing.

Answer 18

a. Credit memoranda being improperly recorded

Question 19

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?
a. Review the cash receipts journal for the month prior to year-end.
b. Intensify the study of internal control concerning the revenue cycle.
c. Increase the assessed level of detection risk for the existence assertion
d. Inspect the shipping records documenting the merchandise sold to the debtors.

Answer 19

d. Inspect the shipping records documenting the merchandise sold to the debtors.

Question 20

Which of the following is the greatest drawback of using subsequent collections evidenced only by a deposit slip as an alternative procedure when responses to positive accounts receivable confirmations are not received?
a. Checking of subsequent collections can never be used as an alternative auditing procedure.
b. By examining a deposit slip only, the auditor does not know whether the payment is for the receivable at the balance sheet date or a subsequent transaction.
c. A deposit slip is not received directly by the auditor.
d. A customer may not have made a payment on a timely basis.

Answer 20

b. By examining a deposit slip only, the auditor does not know whether the payment is for the receivable at the balance sheet date or a subsequent transaction.

Question 21

. The CPA learns that collections of accounts receivable during the last 10 days of December were not recorded. The effect will be to
a. Leave both working capital and the current ratio unchanged 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. Overstate the current ratio with no effect on working capital at December 31.

Answer 21

a. Leave both working capital and the current ratio unchanged at December 31.

Question 22

All of the following are examples of substantive tests to verify valuation of net accounts receivable except the
a. Re-computation of the allowance for bad debts.
b. Inspection of accounts for current versus non-current status in the statement of financial position.
c. Inspection of the aging schedule and credit records of past due accounts.
d. Comparison of the allowance for bad debts with past records.

Answer 22

b. Inspection of accounts for current versus non-current status in the statement of financial position.

Question 23

Once a CPA has determined that the accounts receivable have increased because of slow collections in a tight money environment, the CPA is likely to
a. Increase the balance in the allowance for bad debts account
b. Review the going concern ramifications.
c. Review the credit and collection policy.
d. Expand tests of collectability.

Answer 23

d. Expand tests of collectability.

Question 24

An auditor reconciles the total of the accounts receivables subsidiary ledger to the general ledger control account as of October 31. By this procedure, the auditor is most likely to learn of which of the following?
a. An October invoice was improperly computed.
b. An October check from a customer was posted in error to the account of another customer with a similar name.
c. An opening balance is a subsidiary ledger account was improperly carried forward from the previous accounting period.
d. An account balance is past due and should be written off.

Answer 24

c. An opening balance is a subsidiary ledger account was improperly carried forward from the previous accounting period.

Question 25

Which of the following auditing procedures most likely would assist an auditor in
identifying related party transactions?
a. Inspecting correspondence with lawyers for evidence of unreported
contingent liabilities.
b. Vouching accounting records for recurring transactions recorded just
after the balance sheet date.
c. Reviewing confirmations of loans receivable and payable for
indications of guarantees.
d. Performing analytical procedures for indications of possible
financial difficulties.

Answer 25

c. Reviewing confirmations of loans receivable and payable for
indications of guarantees.

Question 26

An auditor wishes to test the completeness assertion for sales. Which of the
following audit tests would most likely accomplish this objective?
a. Select a sample of shipments occurring during the year and trace each
one to inclusion in the sales journal.
b. Compare accounts receivable turnover (net credit sales/average gross
receivables) in the current year to that achieved in the prior year.
c. Use common size analysis to compare recorded sales to sales recorded
by other companies in the same industry.
d. Select large individual sales recorded during the year and review
supporting documentation.

Answer 26

a. Select a sample of shipments occurring during the year and trace each
one to inclusion in the sales journal.

Question 27

An auditor is confirming accounts receivable using positive confirmation. The
auditor decides to leave the accounts receivable amount blank rather than stating
the amount owed. The auditor should be aware that the blank form may be less
efficient because:
a. Subsequent cash receipts need to be verified.
b. Statistical sampling may not be used.
c. A higher assessed level of detection risk is required.
d. More nonresponses are likely to occur.

Answer 27

d. More nonresponses are likely to occur.

Question 28

. In line with your audit of a manufacturing client’s financial statements, you were
assigned to audit the trade receivables. In preparing your audit program, which of
the following control objectives would be the least concern?
a. Ensuring that all shipments made have been billed
b. No shipment has been billed more than once
c. Each shipment has been billed for the proper amount
d. All billings corresponds to actual shipments of goods

Answer 28

a. Ensuring that all shipments made have been billed

Question 29

Which of the following alternative audit procedures is necessary in instances where
replies on positive confirmation requests are not received even after sending a
second set of confirmation requests?
a. Examining subsequent receipts of year-end accounts receivable.
b. Reviewing accounts receivable aging schedule prepared at the balance
sheet date and at a subsequent date.
c. Requesting that management increases the allowance for uncollectible
accounts by an amount equal to a certain percentage of the balances
in those accounts that cannot be confirmed
d. Performing an overall analytical review of accounts receivable and
sales on a year-to-year basis.

Answer 29

a. Examining subsequent receipts of year-end accounts receivable.

Question 30

The objective of your sales cut-off procedure in vouching the entries in the December Sales Journal to the source document is the gather evidence about which of the following relevant financial statement assertion over receivables?
a. Completeness
b. Existence
c. Occurrence
d. Valuation

Answer 30

b. Existence

Vouching = Existence

Question 31

If fictitious credit sales were recorded, and the fictitious accounts receivable were later directly written off as bad debt expense,
a. income would be overstated.
b. income would be understated.
c. income would not be misstated.
d. accounts receivable would be understated.

Answer 31

c. income would not be misstated.

Question 32

Which of the following procedures would an auditor most likely rely on to verify management’s assertion of completeness?
a. Confirm a sample of recorded receivables by direct communication with the debtors
b. Observe the client’s distribution of payroll checks
c. Compare a sample of shipping documents to related sales invoices
d. Review standard bank confirmations for indications of kiting

Answer 32

c. Compare a sample of shipping documents to related sales invoices

Question 33

When auditing the allowance for uncollectible accounts the least reliance should be placed on which of the following?

a. Ratios that show the past relationship of the allowance to net credit sales
b. Collection experience of the client’s collection agency
c. The credit manager’s opinion
d. An aging of past due accounts

Answer 33

c. The credit manager’s opinion

Question 34

Which of the following is incorrect regarding the use of confirmation letters an substantive test procedure?
a. A positive confirmation letter is appropriate where the audit risk assessment is high and therefore the auditor expects many misstatement in the account balance.
b. A negative confirmation letter is usually preferred to enhance efficiency of the audit where the account balance comprises several items with relatively low balances.
c. A blank confirmation letter is usually preferred where the auditor suspects an overstatement error in an account balance.
d. A second set of confirmation letter should be sent to the customers, where no reply on a positive confirmation letter has been received given a considerable period.

Answer 34

c. A blank confirmation letter is usually preferred where the auditor suspects an overstatement error in
an account balance.