Chapter 16

Question 1

Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?

a. Timing
b. Realizable value
c. Completeness
d. Accuracy

Answer 1

a. Timing

Question 2

The two primary classes of transactions in the sales and collection cycle are:

a. sales and sales discounts.
b. sales and cash receipts.
c. sales and sales returns.
d. sales and accounts receivable.

Answer 2

b. sales and cash receipts.

Question 3

The appropriate evidence to be obtained from tests of details must be decided on a(n):

a. efficiency basis.
b. effectiveness basis.
c. audit objectives basis. d. none of the above.

Answer 3

c. audit objectives basis.

Question 4

Which of the following is not a balance-related audit objective evaluated in the audit of accounts receivable?

a. Occurrence
b. Completeness
c. Rights
d. Accuracy

Answer 4

a. Occurrence

Question 5

Tests of which balance-related audit objective are normally performed first in an audit of the sales and collection?

a. Accuracy
b. Completeness
c. Rights
d. Detail tie-in

Answer 5

d. Detail tie-in

Question 6

For most audits, inherent risk for accounts receivable is moderate or low except for which balance-related audit objectives?

a. Timing and realizable value.
b. Completeness and existence.
c. Existence and accuracy.
d. Realizable value and cutoff.

Answer 6

d. Realizable value and cutoff.

Question 7

Which of the following types of receivables would not deserve the special attention of the auditor?

a. Accounts receivables with credit balances.
b. Accounts that have been outstanding for a long time.
c. Receivables from affiliated companies.
d. Each of the above would receive special attention.

Answer 7

d. Each of the above would receive special attention.

Question 8

A listing of the balances in the accounts receivable master file at the balance sheet date, by total balance outstanding and by the amount of time the component parts have been outstanding, is the:

a. customer list.
b. aged trial balance.
c. accounts receivable ledger.
d. schedule of accounts receivable.

Answer 8

b. aged trial balance.

Question 9

Testing the information on the aged trial balance for detail tie-in is a necessary audit procedure, which would normally include:
(Test-footing the total column and the columns depicting the aging / Comparing the total of the aged trial balance with the general ledger accounts receivable account)
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Answer 9

a. Yes Yes

Question 10

Auditors are often concerned with three aspects of internal controls related to the sales and collection cycle. Which of the following is not one of those controls?

a. Controls that detect or prevent embezzlements.
b. Controls over cutoff.
c. Controls over acquisitions.
d. Controls related to the allowance for doubtful accounts.

Answer 10

c. Controls over acquisitions.

Question 11

Cutoff misstatements occur when:
(The auditor fails to obtain the end-of-year bank statement directly from the bank, obtaining instead the statement which includes the two succeeding weeks / Subsequent period transactions are recorded in the current period / Current period transactions are recorded in the subsequent period)
a. Yes Yes No
b. Yes No Yes
c. No Yes Yes
d. No Yes Yes

Answer 11

c. No Yes Yes

Question 12

Cutoff misstatements occur:

a. either by error or fraud.
b. by error only.
c. by fraud only.
d. randomly without causes related to errors or fraud.

Answer 12

a. either by error or fraud.

Question 13

Generally accepted accounting principles require that material sales returns and allowances be:

a. recorded in the period when the merchandise is returned.
b. recorded in the period when the credit memo is issued.
c. matched with related sales.
d. recorded as a debit to the sales account.

Answer 13

c. matched with related sales.

Question 14

Communication addressed to the debtor requesting him or her to confirm whether the balance as stated on the communication is correct or incorrect is a:

a. representation letter.
b. negative confirmation. c. bank confirmation.
d. positive confirmation.

Answer 14

d. positive confirmation.

Question 15

A type of positive confirmation known as a blank confirmation:

a. requests the recipient to fill in the amount of the balance.
b. is considered less reliable than the regular positive confirmation.
c. generates as high a response rate as the regular positive confirmation form.
d. is used when the auditor is confirming several small balances.

Answer 15

a. requests the recipient to fill in the amount of the balance.

Question 16

For sales, the occurrence transaction-related audit objective affects the ______ balance-related audit objective.

a. existence
b. completeness
c. rights
d. detail tie-in

Answer 16

a. existence

Question 17

For cash receipts, the occurrence transaction-related audit objective affects the ______ balance-related audit objective.

a. existence
b. completeness
c. rights
d. detail tie-in

Answer 17

b. completeness

Question 18

Which of the following is likely to be determined first when performing tests of details for accounts receivable?

a. Recorded accounts receivable exist.
b. Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.
c. Accounts receivable are owned.
d. Existing accounts receivable are included.

Answer 18

b. Accounts receivable in the aged trial balance agree with related master file amounts, and the total is correctly added and agrees with the general ledger.

Question 19

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor will:

a. reduce the extent of tests of details of balances.
b. reduce the extent of tests of controls. c. reduce the tests of transactions.
d. reduce all of the other tests.

Answer 19

a. reduce the extent of tests of details of balances.

Question 20

The most effective test of details of accounts receivable is the:

a. detail tie-in of the records.
b. analysis of the allowance for doubtful accounts.
c. confirmation of accounts receivable.
d. examination of sales invoices.

Answer 20

c. confirmation of accounts receivable.

Question 21

Tests of details of balances are directed to:

a. balance sheet accounts for all cycles.
b. income statement accounts for all cycles.
c. balance sheet accounts for some cycles and income statement accounts for other cycles.
d. all general ledger accounts for all cycles.

Answer 21

a. balance sheet accounts for all cycles.

Question 22

The most important test of details of balances for accounts receivable is:

a. confirmations
b. recalculation of the aged receivables and uncollectible accounts.
c. tracing credit memos for returned merchandise to receiving room reports.
d. tracing from shipping documents to journals to the accounts receivable ledger.

Answer 22

a. confirmations

Question 23

The most important test of details of balances to determine the existence of recorded accounts receivable is:

a. tracing details of sales invoices to shipping documents.
b. tracing the credits in accounts receivable to bank deposits.
c. tracing sales returns entries to credit memos issued and receiving room reports.
d. the confirmation of customers’ balances.

Answer 23

d. the confirmation of customers’ balances.

Question 24

When should auditors not perform alternative procedures in testing the accounts receivable balance?

a. When customers do not return positive confirmation requests.
b. When customers do not return negative confirmation requests.
c. When confirmations are deemed to be ineffective as an audit procedure.
d. When confirmations are too costly to use.

Answer 24

b. When customers do not return negative confirmation requests.

Question 25

Because of its central role in auditing of accounts receivable, the ______________ is one of the first items tested.

a. accounts receivable master file
b. customer file
c. aged trial balance
d. sales register

Answer 25

c. aged trial balance

Question 26

If accounts receivable accounts with credit balances are significant, they should be:

a. written off.
b. moved to the debit side.
c. reclassified as accounts payable.
d. corrected by making adjusting entries.

Answer 26

c. reclassified as accounts payable.

Question 27

Most tests of accounts receivable are based on what schedule, file, or listing?

a. Sales master file.
b. Aged accounts receivable trial balance.
c. Accounts receivable master file.
d. Accounts receivable general ledger account.

Answer 27

b. Aged accounts receivable trial balance.

Question 28

If the client’s internal control for recording sales returns and allowances is evaluated as ineffective:

a. a larger sample is needed to verify cutoff.
b. sampling is not appropriate.
c. all sales returns must be traced to supporting documentation.
d. all sales returns must be confirmed with the customer.

Answer 28

a. a larger sample is needed to verify cutoff.

Question 29

A customer mails and records a check to a client for payment of an unpaid account on December 30. The client receives and records the amount on January 2. The records of the two organizations will be different on December 31. This represents
(A cutoff misstatement / A timing difference)
a. Yes Yes
b.No No
c. Yes No
d. No Yes

Answer 29

d. No Yes

Question 30

Which of the following audit procedures would not likely detect a client’s decision to pledge or factor accounts receivable?

a. A review of the minutes of the board of directors’ meetings.
b. Discussions with the client.
c. Confirmation of receivables.
d. Examination of correspondence files.

Answer 30

c. Confirmation of receivables.

Question 31

When do most companies record sales returns and allowances?

a. During the month in which the sale occurs.
b. During the accounting period in which the return occurs.
c. Whenever the customer contacts the company regarding the credit. d. During the month after the sale occurs.

Answer 31

b. During the accounting period in which the return occurs.

Question 32

Cutoff misstatements can occur for: (Sales / Sales returns and allowances)

a. Yes Yes
b. No No
c. Yes No
d. No Yes

Answer 32

a. Yes Yes

Question 33

The most important aspect of evaluating the client’s method of obtaining a reliable cutoff is to:

a. perform extensive detailed testing of cutoff.
b. evaluate the client’s control procedures around cutoff.
c. confirm a sample of transactions near period end with customers.
d. confirm transaction with customers.

Answer 33

b. evaluate the client’s control procedures around cutoff.

Question 34

A positive confirmation is more reliable evidence than a negative confirmation because:

a. fewer confirmations can be sent out.
b. the auditor has a document which can be used in court.
c. the debtor’s lack of response indicates agreement with the stated balance.
d. follow-up procedures are performed if a response is not received from the debtor.

Answer 34

d. follow-up procedures are performed if a response is not received from the debtor.

Question 35

The advantage of using the negative form of confirmations is that:

a. larger sample sizes can be used without increasing the costs above what would have been required for positive confirmations.
b. a non-response from the customer proves that the balance is correct.
c. follow-up procedures are scheduled automatically.
d. they provide greater reliance.

Answer 35

a. larger sample sizes can be used without increasing the costs above what would have been required for positive confirmations.

Question 36

Which of the following procedures do most auditors perform when auditing the allowance for doubtful accounts?

a. Send positive confirmations.
b. Inquire of the client’s credit manager.
c. Send negative confirmations.
d. Examine sales invoices.

Answer 36

b. Inquire of the client’s credit manager.

Question 37

When positive confirmations are used, auditing standards require follow-up procedures for confirmations not returned by the customer. In such a situation, which of the following would not be classified as an alternative procedure?
a. Send a second confirmation request.
b. Examine subsequent cash receipts to determine if the receivable has been paid.
c. Examine shipping documents to verify that the merchandise was shipped.
d. Examine customer’s purchase order and the duplicate sales invoice to determine that the
merchandise was ordered.

Answer 37

a. Send a second confirmation request.

Question 38

Generally accepted accounting principles require that sales returns and allowances be matched with related sales:

a. if practical.
b. if required by industry practice.
c. if the amounts are material.
d. any of the above.

Answer 38

c. if the amounts are material.

Question 39

For which of the following accounts is cutoff least important?

a. Sales
b. Sales returns and allowances
c. Cash collections
d. Inventory

Answer 39

c. Cash collections

Question 40

What are the possible disadvantages of evaluating the allowance for doubtful accounts by reviewing individual non-current balances only? (Current accounts receivable may be ignored / It is difficult to compare results of the current and prior years)

a. Yes Yes
b. No No
c. Yes No
d. No Yes

Answer 40

a. Yes Yes

Question 41

Which of the following most likely would be detected by a review of a client’s sales cutoff?

a. Excessive sales discounts.
b. Unrecorded sales for the year.
c. Unauthorized goods returned for credit.
d. Lapping of year-end accounts receivable.

Answer 41

b. Unrecorded sales for the year.

Question 42

The positive (as opposed to the negative) form of receivables confirmation is preferred when:

a. internal control surrounding accounts receivable is considered to be effective.
b. there is reason to believe that a substantial number of accounts may be in dispute.
c. a large number of small balances are involved.
d. there is reason to believe a significant portion of the requests will be made.

Answer 42

b. there is reason to believe that a substantial number of accounts may be in dispute.

Question 43

An auditor should perform alternative procedures to substantiate the existence of accounts receivable when:

a. no reply to a positive confirmation request is received.
b. no reply to a negative confirmation request is received.
c. collectibility of the receivables is in doubt.
d. pledging of the receivables is probable.

Answer 43

a. no reply to a positive confirmation request is received.

Question 44

How might the auditor determine whether a client has limited rights to accounts receivable?
(Review minutes from board of directors meetings / Inquiries of the client)
a. Yes Yes
b. No No
c. Yes No
d. No Yes

Answer 44

a. Yes Yes

Question 45

Confirmation of accounts receivable balances normally provides evidence concerning the:

a. valuation of the balances.
b. rights of the balances.
c. existence of the balances.
d. completeness of the balances.

Answer 45

c. existence of the balances.

Question 46

If the auditor decides not to confirm accounts receivable, the auditor should:

a. always use alternative procedures to audit the accounts receivable.
b. include copies of customer statements in the audit files.
c. document the reasons for such a decision in the audit files.
d. include copies of customer sales invoices in the audit files.

Answer 46

c. document the reasons for such a decision in the audit files.

Question 47

The understatement of sales and accounts receivable is best uncovered by:
a. confirming receivables.
b. reviewing the aged trial balance.
c. test of transactions for shipments made but not recorded.
d. reconciling the accounts receivable general ledger account with the schedule of accounts
receivable.

Answer 47

c. test of transactions for shipments made but not recorded.

Question 48

You are reviewing sales to discover cutoff problems. If the client’s policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:

a. before the merchandise was shipped.
b. at the time the merchandise was shipped.
c. several days subsequent to shipment.
d. at a time after the point at which title passed.

Answer 48

a. before the merchandise was shipped.

Question 49

A procedure to test for a cash receipts cutoff error is:

a. reconciling the bank statement.
b. performing a four-column proof-of-cash.
c. observing the counting of cash at the balance sheet date.
d. tracing recorded cash receipts to bank deposits on the bank statement of a different period.

Answer 49

d. tracing recorded cash receipts to bank deposits on the bank statement of a different period.

Question 50

The most reliable evidence from confirmations is obtained when they are sent:

a. as close to the balance sheet date as possible.
b. at various times throughout the year to different segments of the sample, so that the entire sample is representative of account balances scattered throughout the year.
c. several months before the year-end, so the auditor will have adequate time to perform alternate procedures if they are required.
d. at various times throughout the year to the same group in the sample, so that the sample will not have a time bias.

Answer 50

a. as close to the balance sheet date as possible.

Question 51

Which of the following is the least important consideration in determining the sample size of confirmations?

a. The types of confirmations being sent; that is, positive or negative.
b. The results of related analytical procedures.
c. Total annual credit sales.
d. The auditor’s assessment of detection risk.

Answer 51

a. The types of confirmations being sent; that is, positive or negative.

Question 52

An auditor learns that collections of accounts receivable during the first ten days of January were debited to cash and credited to accounts receivable as of December 31. The effect generally will be to:

a. overstate the current ratio with no effect on working capital 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. leave both working capital and the current ratio unchanged at December 31.

Answer 52

d. leave both working capital and the current ratio unchanged at December 31.

Question 53

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should not also approve:

a. employee overtime wages.
b. credit granted to customers.
c. write-offs of customer accounts.
d. cash disbursements.

Answer 53

c. write-offs of customer accounts.

Question 54

For most audits, a proper cash receipts cutoff is less important than the sales cutoff because the improper cutoff of cash:
a. is detected and correct when cash is separately audited.
b. is unlikely to have a material impact on the balance sheet or the income statement.
c. affects on the cash and accounts receivable balances on the balance sheet and does not
affect net income.
d. rarely occurs given the control consciousness of most entities.

Answer 54

c. affects on the cash and accounts receivable balances on the balance sheet and does not
affect net income.

Question 55

Negative confirmations of receivables are less effective than positive confirmations of receivables because:

a. they do not produce evidence that is statistically quantifiable.
b. the auditor cannot infer that all non-respondents have verified their account information.
c. some recipients may report incorrect balances that require extensive follow-up.
d. a majority of recipients usually lack the willingness to respond objectively.

Answer 55

b. the auditor cannot infer that all non-respondents have verified their account information.

Question 56

An auditor would be least likely to use confirmations in connection with the examination of:

a. inventories.
b. long-term debt.
c. property, plant, and equipment.
d. stockholders’ equity.

Answer 56

c. property, plant, and equipment.

Question 57

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is performed to satisfy the audit objective of:

a. accuracy.
b. existence.
c. control.
d. completeness.

Answer 57

d. completeness.

Question 58

When performing tests of controls and tests of transactions for sales, the auditor generally defines the population as:

a. all accounts receivable transactions for the year.
b. all sales invoices for the year.
c. all cash receipts transactions for the year.
d. all sales invoices less sales return credit memos.

Answer 58

b. all sales invoices for the year.