Chapter 16: Completing the Tests in the Sales and Collection Cycle: Accounts Receivable

Question 1

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 1

B) sales and cash receipts.

Question 2

The appropriate and sufficient evidence to be obtained from tests of details must be decided on an

A) efficiency basis.

B) effectiveness basis.

C) objective-by-objective basis.

D) none of the above

Answer 2

C) objective-by-objective basis.

Question 3

Auditors are especially concerned with three aspects of internal control for the sales and collection cycle. Which of the following is notone of their major concerns?

A) controls over cutoff

B) controls that prevent or detect embezzlements

C) controls over sales discounts

D) controls related to the allowance for uncollectible accounts

Answer 3

C) controls over sales discounts

Question 4

For sales, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

A) existence

B) completeness

C) rights

D) detail tie-in

Answer 4

A) existence

Question 5

For cash receipts, the occurrence transaction-related audit objective affects which of the following balance-related audit objectives?

A) existence

B) completeness

C) rights

D) detail tie-in

Answer 5

B) completeness

Question 6

Which of the following is an accurate statement regarding the risk assessment process of phase I of the audit process for the sales and collection cycle?

A) Auditors must perform substantive tests related to assertions deemed to have significant risks.

B) The auditor must relate control risk for transaction-related audit objectives to balance-related audit objectives in deciding planned inherent risk.

C) The realizable value balance-related audit objectives are affected by assessed control risk for classes of transactions.

D) All of the above are accurate statements.

Answer 6

A) Auditors must perform substantive tests related to assertions deemed to have significant risks.

Question 7

For sales, the completeness transaction-related audit objective affects the existence balance-related audit objective.

TRUE OR FALSE

Answer 7

FALSE

For sales, the occurrence transaction-related audit objective affects the existence balance-related audit objective. For sales, the occurrence transaction-related audit objective affects the exis- tence balance-related audit objective. For cash receipts, however, the occurrence transaction-related audit objective affects the completeness balance-related audit objective. A similar relationship exists for the completeness transaction-related audit objective. The reason for this somewhat surprising conclusion is that an increase in sales increases accounts receivable, but an increase in cash receipts decreases accounts receivable. For example, recording a sale that did not occur violates the occurrence transaction-related audit objective and existence balance- related audit objective (both overstatements). Recording a cash receipt that did not occur violates the occurrence transaction-related audit objective for cash receipts, but it also violates the completeness balance-related audit objective for accounts receivable because a receivable that is still outstanding is no longer in-
cluded in the records.

Question 8

Recording a sale that did notoccur violates the occurrence transaction-related audit objective and the existence balance-related audit objective.

TRUE OR FALSE

Answer 8

TRUE

Question 9

The accounts receivable balance-related audit objective net realizable value is notaffected by assessed control risk for sales or cash receipts.

TRUE OR FALSE

Answer 9

TRUE

Question 10

The results of the tests of controls determine whether assessed control risk for sales and cash receipts needs to be revised.

TRUE OR FALSE

Answer 10

TRUE

Question 11

Auditors use the results of the substantive tests of transactions of sales and the collection cycle to determine the extent to which inherent risk is satisfied for each accounts receivable balance-related audit objective.

TRUE OR FALSE

Answer 11

FALSE

Auditors use the results of the substan- tive tests of transactions to determine the extent to which planned detection risk is satisfied for each accounts receivable balance-related audit objective.

Question 12

For most audits, revenue recognition is considered to be a significant risk.

TRUE OR FALSE

Answer 12

TRUE

Question 13

Which of the following types of receivables would notdeserve 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 related parties

D) each of the above would receive special attention.

Answer 13

D) each of the above would receive special attention.

Question 14

Analytical procedures are substantive tests and, if the results of the analytical procedures are favorable, the auditor would normally

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 14

A) reduce the extent of tests of details of balances.

Question 15

Analytical procedures

A) are only done during the planning of the audit and when performing detailed tests.

B) performed during the detailed testing phase are done before tests of details of balances.

C) performed during the detailed testing phase are done before the balance sheet date.

D) are performed only on accounts receivable, not on the entire sales and collection cycle.

Answer 15

B) performed during the detailed testing phase are done before tests of details of balances.

Most substantive analytical procedures performed during the detailed testing phase are done after the balance sheet date but before tests of details of balances.

Question 16

Which of the following is a correct statement regarding analytical procedures?

A) If an auditor identifies a possible misstatement in sales using analytical procedures, accounts payable will be the likely offsetting misstatement.

B) Auditors should also compare the results of their analytical procedures to budgets and industry trends.

C) If sales are overstated, the income statement will be incorrect, but the balance sheet will be correct.

D) If an analytical procedure uncovers an unusual fluctuation, the auditor must assume fraud is involved.

Answer 16

B) Auditors should also compare the results of their analytical procedures to budgets and industry trends.

Question 17

An auditor is comparing the write-off of uncollectible accounts as a percentage of total accounts receivable with previous years. A possible misstatement this procedure could uncover is

A) overstatement or understatement of sales.

B) overstatement or understatement of accounts receivable.

C) overstatement or understatement of bad debt expense.

D) overstatement or understatement of sales returns and allowances.

Answer 17

C) overstatement or understatement of bad debt expense.

Question 18

Favorable results from analytical procedures may reduce the extent to which the auditor needs to test details of balances.

TRUE OR FALSE

Answer 18

TRUE

Question 19

When analytical procedures in the sales and collection cycle uncover unusual fluctuations, the auditor should make additional inquiries of management.

TRUE OR FALSE

Answer 19

TRUE

Question 20

A high inherent risk increases planned detection risk and decreases planned substantive tests.

TRUE OR FALSE

Answer 20

FALSE

Question 21

The understatement of sales and accounts receivable is best uncovered by

A) testing internal controls.

B) testing the aged accounts receivable trial balance.

C) substantive tests of transactions for shipments made but not recorded.

D) substantive tests of transactions for bad debts.

Answer 21

C) substantive tests of transactions for shipments made but not recorded.

Question 22

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 22

D) detail tie-in

Question 23

A listing of the balances in the accounts receivable master file at the balance sheet date, including individual customer balances outstanding and a breakdown of each balance by the time passed between the date of the sale and the balance sheet date, is the

A) customer list.

B) aged trial balance.

C) accounts receivable ledger.

D) schedule of accounts receivable.

Answer 23

B) aged trial balance.

Question 24

Audit procedures designed to uncover credit sales made after the client’s fiscal year-end that relate to the current year being audited provide evidence for which of the following audit objectives?

A) realizable value

B) accuracy

C) cutoff

D) existence

Answer 24

C) cutoff

Question 25

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 25

A) either by error or fraud.

Question 26

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) The client has a right to the accounts receivable. D) Existing accounts receivable are included.

Answer 26

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 27

An auditor is performing a credit analysis of customers with balances over 60 days due. She is most likely obtaining evidence for which audit related objective? A) realizable value B) existence C) completeness D) occurrence

Answer 27

A) realizable value

Question 28

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 28

D) the confirmation of customers' balances.

Question 29

Because of its central role in auditing of accounts receivable, which of the following would normally be one of the first items tested? A) accounts receivable master file B) customer file C) aged trial balance D) sales register

Answer 29

C) aged trial balance

Question 30

Confirmation of accounts receivable selected from the trial balance is the most common test of details of balances for the ________ of accounts receivable. A) presentation B) valuation C) accuracy. D) detail tie-in

Answer 30

C) accuracy.

Question 31

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 31

B) aged accounts receivable trial balance

Question 32

If the client's internal control for recording sales returns and allowances is evaluated as ineffective, A) a larger sample may be 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 32

A) a larger sample may be needed to verify cutoff. If the internal controls for recording sales returns and allowances are evaluated as ineffective, a larger sample is needed to verify cutoff.

Question 33

Which of the following audit procedures would notlikely 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 33

C) confirmation of receivables

Question 34

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 34

B) during the accounting period in which the return occurs

Question 35

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 35

B) evaluate the client's control procedures around cutoff.

Question 36

Which of the following audit procedures would normally be included in the audit plan 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

Generally accepted accounting principles require that revenue be reported net of sales returns and allowances A) if practical. B) if required by industry practice. C) if the amounts are material. D) any of the above

Answer 37

C) if the amounts are material.

Question 38

For which of the following accounts is cutoff least important? A) sales B) sales returns and allowances C) cash collections D) inventory

Answer 38

C) cash collections

Question 39

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 39

B) unrecorded sales for the year

Question 40

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 40

A) before the merchandise was shipped.

Question 41

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 subsequent period bank deposits on the bank statement.

Answer 41

D) tracing recorded cash receipts to subsequent period bank deposits on the bank statement.

Question 42

If material, all of the following are required to be separately disclosed in the financial statements exceptfor A) accounts receivable from officers. B) accounts receivable from affiliates. C) sales and assets for different business segments. D) sales for the last ten days of the fiscal year.

Answer 42

D) sales for the last ten days of the fiscal year.

Question 43

For effective internal control, employees maintaining the accounts receivable subsidiary ledger should notalso approve A) employee overtime wages. B) credit granted to customers. C) write-offs of customer accounts. D) cash disbursements.

Answer 43

C) write-offs of customer accounts.

Question 44

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 items on the balance sheet but does not affect net income. D) rarely occurs given the control consciousness of most entities.

Answer 44

C) affects items on the balance sheet but does not affect net income. For most audits, a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff because the improper cutoff of cash affects only the cash and the accounts receivable balances, not earnings.

Question 45

One of the shortcomings in evaluating the allowance for uncollectible accounts by reviewing individual noncurrent balances on the aged trial balance is I. it is difficult to compare the results of the current year with those of the previous year. II. current accounts are ignored in establishing the adequacy of the allowance. A) I only B) II only C) both I and II D) neither I nor II

Answer 45

C) both I and II

Question 46

An auditor selects a sample from the file of shipping documents to determine whether invoices were prepared. This test is to satisfy the audit objective of A) accuracy. B) existence. C) control. D) completeness.

Answer 46

D) completeness.

Question 47

When designing tests of details of balances, an important point to remember is A) auditors emphasize income statement accounts. B) the audit procedures selected depends heavily on whether planned evidence for a given objective is low, medium, or high. C) if accounts receivable are overstated, then sales will be understated. D) sales cutoff is the most important test of details of accounts receivable.

Answer 47

B) the audit procedures selected depends heavily on whether planned evidence for a given objective is low, medium, or high.

Question 48

The net realizable value of accounts receivable is equal to: A) gross accounts receivable less allowance for uncollectible accounts. B) gross accounts receivable less bad debt expense. C) gross accounts receivable less returns and allowances. D) gross accounts receivable less sales discounts.

Answer 48

A) gross accounts receivable less allowance for uncollectible accounts.

Question 49

When an auditor tests to determine if all existing accounts receivable are included in the aged trial balance, A) they cannot rely on the self-balancing nature of the accounts receivable master file. B) if all sales to a customer are omitted from the sales journal, it is easy to uncover the understatement of accounts receivable by tests of details of balances. C) auditors rarely send accounts receivable confirmations to customers with zero balances. D) unrecorded sales to a new customer are easy to identify for confirmation because that customer is included in the accounts receivable master file.

Answer 49

C) auditors rarely send accounts receivable confirmations to customers with zero balances.

Question 50

Tests of detail tie-in are normally conducted last in the audit of the sales and collections cycle. TRUE OR FALSE

Answer 50

FALSE

Question 51

The criterion used by most merchandising and manufacturing clients for determining when revenue recognition takes place is whether title to the goods has passed. TRUE OR FALSE

Answer 51

FALSE

Question 52

After the auditor is satisfied with the allowance for uncollectible accounts, it is easy to verify bad debt expense. TRUE OR FALSE

Answer 52

TRUE

Question 53

Tests of the presentation and disclosure-related objectives are generally done as part of the completion phase of the audit. TRUE OR FALSE

Answer 53

TRUE

Question 54

Confirmation is the most common test of details of balances for the accuracy of accounts receivable. TRUE OR FALSE

Answer 54

TRUE

Question 55

Tests of the realizable value balance-related audit objective are for the purpose of evaluating the allowance for doubtful accounts. TRUE OR FALSE

Answer 55

TRUE

Question 56

For most audits, a proper cash receipts cutoff is less important than either the sales or the sales returns and allowances cutoff since cash only affects the balance sheet, and not earnings. TRUE OR FALSE

Answer 56

TRUE

Question 57

Which of the following is the principle "weakness" of using negative confirmations for the tests of details of balances for accounts receivable? A) They can only be used for large balance accounts. B) They cannot not be used when account balances "bunch" around a mean value. C) Conclusions drawn from receiving no reply may not be correct. D) Response rates are generally too low to draw any conclusions.

Answer 57

C) Conclusions drawn from receiving no reply may not be correct.

Question 58

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 58

D) positive confirmation.

Question 59

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 59

A) requests the recipient to fill in the amount of the balance.

Question 60

The most effective audit evidence gathered for 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 60

C) confirmation of accounts receivable.

Question 61

The audit procedure that provides the auditor with the most appropriate evidence when performing 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 61

A) confirmations.

Question 62

When should auditors notperform 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 62

B) when customers do not return negative confirmation requests

Question 63

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 63

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

Question 64

When positive confirmations are used, auditing standards require alternative procedures for confirmations not returned by the customer. Which of the following would notbe considered 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 sales invoice to verify the actual issuance of a sales invoice and the actual date of the billing.

Answer 64

A) Send a second confirmation request.

Question 65

The positive (as opposed to the negative) form of receivables confirmation may be 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) the auditor believes that the recipients of the confirmations will give the requests adequate consideration.

Answer 65

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

Question 66

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 66

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

Question 67

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 67

C) existence of the balances.

Question 68

If the auditor decides notto confirm accounts receivable that are material, 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 68

C) document the reasons for such a decision in the audit files.

Question 69

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 69

A) as close to the balance sheet date as possible.

Question 70

A type of positive confirmation in which an individual invoice is confirmed, rather than the customer's entire accounts receivable balance is the ________ confirmation. A) invoice B) specific C) balance D) voucher

Answer 70

A) invoice

Question 71

Confirmation of accounts receivable provide evidence related to the ________ objectives. A) existence B) accuracy C) cutoff D) all if the above

Answer 71

A) existence

Question 72

When determining the timing of the accounts receivable confirmations, A) the receivables cannot be confirmed at an interim date. B) if accounts receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule. C) if the receivables are confirmed at an interim date, they must also be confirmed at year-end. D) if internal controls are adequate, the accounts receivable must be confirmed at year-end.

Answer 72

B) if accounts receivable are confirmed before year-end, the auditor typically prepares a roll-forward schedule.

Question 73

When making the sampling decisions for accounts receivable confirmations, A) it is important to sample some items for every material segment of the population. B) if management refuses to allow the auditor to send confirmation requests to certain customers, the auditor must withdraw from the engagement. C) inherent risk does not impact the sample size. D) stratification of the sample is discouraged under current auditing standards.

Answer 73

A) it is important to sample some items for every material segment of the population.

Question 74

A confirmation is a type of audit evidence. TRUE OR FALSE

Answer 74

TRUE

Question 75

The auditor should perform procedures to verify the addresses used for the accounts receivable confirmations. TRUE OR FALSE

Answer 75

TRUE

Question 76

Both U.S. and international auditing standards require the use of confirmations for accounts receivable. TRUE OR FALSE

Answer 76

FALSE

Question 77

Blank confirmations are considered less reliable than standard positive confirmations. TRUE OR FALSE

Answer 77

FALSE

Question 78

Negative confirmations are less expensive, and less reliable, than positive confirmations. TRUE OR FALSE

Answer 78

TRUE

Question 79

It is common to use a combination of positive and negative confirmations by sending the latter to accounts with large balances and the former to those with small balances. TRUE OR FALSE

Answer 79

FALSE

Question 80

If auditors consider confirmations of accounts receivable to be ineffective evidence because response rates will be inadequate or unreliable, they need notconfirm accounts receivable. TRUE OR FALSE

Answer 80

TRUE

Question 81

Negative confirmations normally require a larger sample size than positive confirmations. TRUE OR FALSE

Answer 81

TRUE

Question 82

When sending confirmations during most audits of accounts receivable, the emphasis is often on confirming larger and older accounts. TRUE OR FALSE

Answer 82

TRUE

Question 83

When a customer disagrees with the amount shown on an account receivable confirmation, the auditor should notask the client to reconcile the difference. TRUE OR FALSE

Answer 83

FALSE

Question 84

Auditors must maintain control of confirmations until they are returned from the customer. TRUE OR FALSE

Answer 84

TRUE

Question 85

The confirmations must be mailed by the auditor, but should contain the return address of the client. TRUE OR FALSE

Answer 85

FALSE

Question 86

Stratification of accounts receivable is desirable when using confirmations. TRUE OR FALSE

Answer 86

TRUE

Question 87

Each client misstatement in accounts receivable must be analyzed to determine whether it was consistent with the original assessed level of control risk. TRUE OR FALSE

Answer 87

TRUE

Question 88

Which audit procedure would be used to test for the existence balance-related audit objective? A) Trace ten accounts from the aged trial balance to the accounts receivable master file. B) Confirm accounts receivable. C) Review large sales returns and allowances before and after the balance sheet date. D) Trace ten accounts from the trial balance to the accounts on the master file.

Answer 88

B) Confirm accounts receivable.

Question 89

The auditor is reviewing the receivables listed on the aged trial balance for notes and related party receivables. Which balance-related audit objective is he trying to satisfy? A) detail tie-in B) existence C) classification D) all of the above

Answer 89

D) all of the above

Question 90

Which audit procedure would the auditor use to test for the cutoff balance-related audit objective? A) Review minutes of the board of directors meetings. B) Review the accounts receivable trial balance for large items. C) Use audit software to foot and cross-foot the aged trial balance. D) Select the last 20 sales transaction from the current year's sales journal and the first 20 from the subsequent year's and trace each to the related shipping documents.

Answer 90

D) Select the last 20 sales transaction from the current year's sales journal and the first 20 from the subsequent year's and trace each to the related shipping documents.

Question 91

To determine if the client has rights to the accounts receivable on the trial balance, the auditor should inquire of management if any receivables are pledged or factored. TRUE OR FALSE

Answer 91

TRUE

Question 92

To test for the completeness balance-related audit objective, the auditor should review the accounts receivable trail balance for large or unusual items. TRUE OR FALSE

Answer 92

FALSE