Chapter 16

Question 1

The eight specific audit objectives used by the auditor to decide the appropriate audit evidence for accounts receivable

Answer 1

Accounts Receivable Balance Related Audit Objectives

Question 2

A listing of the balances in the accounts receivable master file at the balance sheet date broken down according to the amount of time passed between the date of sale and the balance sheet date

Answer 2

Aged Trial Balance

Question 3

The follow-up of a positive confirmation not returned by the debtor with the use of documentation evidence to determine whether the recorded receivable exists

Answer 3

Alternative Procedures

Question 4

A letter, addressed to the debtor, requesting the recipient to fill in the amount of the accounts receivable balance; it is considered a positive confirmation

Answer 4

Blank Confirmation Form

Question 5

Misstatements that take place as a result of current period transactions being recorded in a subsequent period, or subsequent period transactions being recorded in the current period

Answer 5

Cutoff Misstatement

Question 6

A type of positive confirmation in which an individual invoice is confirmed, rather than the customer’s entire accounts receivable balance

Answer 6

Invoice Confirmation

Question 7

A letter, addressed to the debtor, requesting a response only if the recipient disagrees with the amount of the stated account balance

Answer 7

Negative Confirmation

Question 8

A letter, addressed to the debtor, requesting that the recipient indicate directly on the letter whether the stated account balance is correct or incorrect and, if incorrect, by what amount

Answer 8

Positive Confirmation

Question 9

The amount of the outstanding balances in accounts receivable that will ultimately be collected

Answer 9

Realizable Value of Accounts Receivable

Question 10

A reported difference in a confirmation from a debtor that is determined to be a timing difference between the client’s and debtor’s records and therefore not a misstatement

Answer 10

Timing Difference

Question 11

What are the eight Accounts Receivable Balance Related Audit Objectives

Answer 11

1) Accounts receivable in the aged trial balance agree with related master file and the total agrees with the general ledger (Detail tie-in)
2) Recorded accounts receivable exist (existence)
3) Existing accounts receivable are included (Completeness)
4) Accounts receivable are accurate (accuracy)
5) Accounts receivable are correctly classified (classification)
6) Cutoff for accounts receivable is correct (Cutoff)
7) Accounts receivable is stated at realizable value (Realizable Value)
8) The client has rights to accounts receivable (Rights)

Question 12

The auditor decides the preliminary judgment about materiality for the entire financial statement and then allocates the preliminary judgment amount to each significant balance sheet account

Answer 12

Setting performance materiality

Question 13

Auditors are concerned with three aspects of internal control

Answer 13

1) Controls that prevent of detect embezzlement
2) Controls over cutoff
3) Controls related to the allowance for uncollectible accounts

Question 14

For sales, the occurrence transaction-related audit objective affects what?

Answer 14

the existence balance-related audit objective

Question 15

For cash receipts, the occurrence transaction-related audit objective affects what?

Answer 15

Completeness balance-related audit objective

Question 16

Realizable value and rights accounts receivable balance related audit objectives are not affect by what?

Answer 16

assessed control risk for classes of transactions. These audit objectives must be tested through separate controls

Question 17

The most important test of details of accounts receivable

Answer 17

Confirmation

Question 18

In order to complete a test of details of balances for accounts receivable, an auditor must

Answer 18

1) Have completed an evidence planning worksheet

2) Have decided planned detection risk for tests of details for each balance-related audit objective

Question 19

Most tests of accounts receivable and the allowance for uncollectible accounts are based on the BLANK

Answer 19

Aged Trial Balance

Question 20

Cutoff misstatements can occur for:

Answer 20

Sales, sales returns and allowances, and cash receipts

Question 21

Auditors require a threefold approach to determine the reasonableness of cutoff

Answer 21

1) Decide the appropriate criteria for cutoff
2) Evaluate whether the client has established adequate procedures to ensure a reasonable cutoff
3) Test whether the cutoff was correct

Question 22

Most merchandising and manufacturing clients record a sale based on BLANK

Answer 22

Shipment of goods

Question 23

Accounting standards require that sales returns and allowances be BLANK if the amounts are material

Answer 23

Matched with related sales

Question 24

Sales returns and allowances are recorded in BLANK

Answer 24

The accounting period in which they occur

Question 25

A proper cash receipts cutoff is BLANK than either the sales or the sales returns and allowances cutoff

Answer 25

Less important

Question 26

Confirmations are

Answer 26

highly reliable evidence because they are directly received from a third party. Oral responses are not considered a confirmation.

Question 27

Confirmations may not be appropriate in the following circumstances:

Answer 27

1) The auditor considers confirmations ineffective evidence because response rates will likely be inadequate or unreliable
2) The combined level of inherent risk and control risk is low and other substantive evidence can be accumulated to provide sufficient evidence

Question 28

A positive confirmation is

Answer 28

More reliable evidence because the auditor can perform follow-up procedures if a response is not received from the debtor

Question 29

Negative confirmations may be used when all of the following circumstances are met

Answer 29

1) Risk of material misstatements is low and has obtained sufficient appropriate evidence of relevant controls
2) The population of items subject to negative confirmation procedures is made up of a large number of small, homogeneous account balances, transactions, and other items
3) The auditor expects a low exception rate
4) The auditor reasonable believes that recipients of negative confirmations requests will give the requests adequate consideration

Question 30

Confirmations must be

Answer 30

Mailed from outside the client’s office area