Chapter 16 Flashcards
16-20a
As a result of analytical procedures, the auditor determines that the gross profit percentage has declined from 30 percent in the preceding year to 20 percent in the current year. The auditor should
- express a qualified opinion due to inability of the client company to continue as a going concern
- evaluate management’s performance in causing this decline
- require footnote disclosure
- consider the possibility of a misstatement in the financial statements
- consider the possibility of a misstatement in the financial statements
16-20b
An auditor’s preliminary analysis of accounts receivable turnover revealed the following rates over these accounting periods
2019 = 4.3
2018 = 6.2
2017 = 7.3
Which of the following is the most likely cause of the decrease in accounts receivable turnover?
- Increase in the cash discount offered
- Liberalization of credit policy
- Shortening of due date terms
- Increased cash sales
- Liberalization of credit policy
16-20c
After a CPA has determined that accounts receivable have increased as a result of slow collections in a “tight money” environment, the CPA will be likely to
- expand tests of collectibility
- review the going concern ramifications
- review the credit and collection policy
- increase the balance in the allowance for bad debt account
- expand tests of collectibility
16-21a
The return of a positive confirmation of accounts receivable without an exception attests to the
- collectibility of the receivable account
- accuracy of the allowance for uncollectible accounts
- accuracy of the aging of accounts receivable
- accuracy of the receivable balance
- accuracy of the receivable balance
16-21b
Which of the following procedures will an auditor most likely perform for year-end accounts receivable confirmations when the auditor did not receive replies to second requests?
- Review the cash receipts journal for the month prior to year end
- Intensify the study of internal control concerning the revenue cycle
- Inspect the shipping records documenting the merchandise sold to the debtors
- Increase the assessed level of detection risk for the existence assertion
- Inspect the shipping records documenting the merchandise sold to the debtors
16-21c
The negative form of accounts receivable confirmation request is useful EXCEPT when
- internal control surrounding accounts receivable is considered to be effective
- a large number of small balances is involved
- the auditor has reason to believe the persons receiving the requests are likely to give them consideration
- individual account balances are relatively large
- individual account balances are relatively large
16-22a
Which of the following will likely provide the most assurance concerning the accuracy balance-related objective for accounts receivable?
- Vouch amounts in the subsidiary leger to details on shipping documents
- Compare receivable turnover ratios with industry statistics for reasonableness
- Inquire about receivables pledged under loan agreements
- Asses the allowance for uncollectible accounts for reasonableness.
- Vouch amounts in the subsidiary leger to details on shipping documents
16-22b
Which of the following audit procedures will best uncover an understatement of sales and accounts receivable?
- Confirm accounts receivable
- Test a sample of sales transactions, selecting the sample from sales invoices recorded in the sales journal
- Test a sample of sales transactions, selecting the sample from renumbered shipping documents
- Review the aged accounts receivable trial balance
- Test a sample of sales transactions, selecting the sample from renumbered shipping documents
16-22c
The confirmation of customers’ accounts receivable rarely provides reliable evidence about the completeness assertion because
- customers may not be inclined to report understatement errors in their accounts
- recipients usually respond only if they disagree with the information on the request
- many customers merely sign and return the confirmation without verifying the details
- there is likely to be reliable third-party evidence available
- customers may not be inclined to report understatement errors in their accounts
16-23a
The auditor sends out positive accounts receivable confirmations for a client. Assuming a second confirmation is sent out to a major customer who still fails to respond, which action should the auditor take?
- Consider the nonresponse as a minor audit finding and use responding confirmations as a basis for test results
- Issue a qualified opinion due to the lack of sufficient audit evidence
- Send out a third confirmation request and, if no response, perform alternative procedures
- Provide the client a copy of the accounts receivable confirmation and request that they obtain the information from the customer
- Send out a third confirmation request and, if no response, perform alternative procedures
16-23b
Which of the following is least likely to be a reasonable explanation for an increase in accounts receivable turnover?
- Early payment incentives for customers
- Tightening of credit policy
- Implementation of more aggressive collection policies
- Allowance of a new grace period for customer payments
- Allowance of a new grace period for customer payments
16-23c
An auditor who is auditing accounts receivable would least likely perform which of the following tests?
- Select cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendor invoices
- Confirm a sample of accounts receivables with the customers that owe the balcanes
- Vouch cash receipts to the accounts receivables transactions
- Obtain an aged trial balance of accounts receivable and trace the total to the general ledger control account
- Select cash disbursements made shortly after year end and examine the supporting documentation such as receiving reports and vendor invoices
