Ch 11: auditing the revenue process

Question 1

what are the five steps to auditing revenues

Answer 1

step 1: initial audit planning
step 2: understand internal controls and determine preliminary audit strategy
step 3: test controls based on preliminary audit strategy
step 4: determine and perform substantive procedures
step 5: draw conclusion about fair presentation

Question 2

what are the three classes of transactions in the revenue process

Answer 2

1, credit sales
2. collecting cash receipts (receivables and cash sales)
3. recording sales adjustments

Question 3

what are some examples of sales adjustmnets

Answer 3

sales returns and allowances, provision for bad debts, write-off of bad debts

Question 4

if revenue is recognized prematurely, both sales and AR will be ________

Answer 4

overstated

Question 5

if cash receipts are understated, AR will be __________

Answer 5

overstated

Question 6

transactions providing for bad debts and the write-off of bad debts often occur during _________ or ___________ adjustments

Answer 6

month-end or quarter-end

Question 7

What are two major transaction classes with significant volumes of transactions in the revenue process

Answer 7

credit sales and cash receipts

Question 8

if cash receipts are understated, accounts receivable will be _________

Answer 8

overstated

Question 9

What is steps 4 of the revenue audit process

Answer 9

performing substantive procedures

Question 10

Can analytical procedures be used as substantive procedures to gather evidence in support of assertions related to account balances or transactions?

Answer 10

Yes

Question 11

Are analytical procedures required to be used as substantive procedures?

Answer 11

no

Question 12

if analytical procedures are used as substantive procedures during risk response auditors use data through the client’s ____________

Answer 12

third quarter or YE

Question 13

test of details of transactions may be performed during _______

Answer 13

interim alongside test of controls or seperately

Question 14

Tracing sales transaction the auditor should start with a sample ____________ and trace transactions to _____________

Answer 14

of shipping documents; sales journal

Question 15

tracing cash receipts the auditor would sample items from the ________________ and trace them forward to ___________

Answer 15

prelist of cash; cash receipts journal

Question 16

tracing sales returns the auditor would start with _____________ and trace forward to _____________

Answer 16

sales returns authorization; the receiving report and the entry in accounting records

Question 17

the ______ of sales returns may be a concern if management has incentives to overstate revenues and internal controls over area are weak

Answer 17

sales returns

Question 18

sales cutoff test designed to obtain reasonable assurance that

Answer 18

sales and accounts receivable are recorded in the accounting period in which the transaction occurred and the corresponding entries for inventories and cost of goods sold are made in the same period

Question 19

sales cutoff procedure made as of ______

Answer 19

balance sheet due date

Question 20

the cash receipts cutoff test is designed to obtain reasonable assurance that

Answer 20

cash receipts are recorded in accounting period in which they are received

Question 21

cash receipts test procedure relates to what assetions

Answer 21

existence or occurrence and completeness assertions for cash and AR

Question 22

2 primary sets of procedures for tests of details balances

Answer 22

1. confirmation of receivables and related follow-up procedures and
2. procedures for evaluating the adequacy of the allowance for uncolletible accounts

Question 23

confirmations should be controlled and mailed by who

Answer 23

auditors

Question 24

confirmations are the primary source of evidence for the ________- assertion for AR

Answer 24

existence

Question 25

confirmations of AR provide evidence that the balance is __________ although the evidence is limited

Answer 25

complete

Question 26

anchoring bias

Answer 26

tendency to use initial piece of information as an anchor which subsequent information is inadequately assessed

Question 27

in vouching revenue transaction what are the relevant assertions evidence is being provided for

Answer 27

occurrence, accuracy, classification and cutoff assertions

Question 28

existence is related to IS or BS?

Answer 28

BS

Question 29

occurrence is related to BS or IS?

Answer 29

IS

Question 30

substantive analytical procedures verify what

Answer 30

auditor’s expectations of relationships (like AR to sales and gross margins)

Question 31

what are the four intial procedures for AR account balance

Answer 31

1. obtain AR trial balance
2. agree BB of AR to PY working papers
3. scan for unusual transactions
4. agree sub ledger to general ledger

Question 32

vouching of sales transactions relates to what assertion?

Answer 32

occurence

Question 33

what is the dual purpose test

Answer 33

perform more than 1 procedure on a sample (test of controls and test of details)

Question 34

tracing sales transactions is related to what assertion

Answer 34

completeness

Question 35

what are the times that auditors dont have to confirm AR

Answer 35

AR immaterial to FS; could be ineffective