Chapter 9 TB Flashcards
(T/F) The revenue cycle considered by auditors includes the sales process but not collections.
FALSE
(T/F) The revenue cycle involves the procedures in generating a sales order, shipping the products, recording the transaction, and collecting the receivable.
TRUE
(T/F) The shipping department confirms the shipment of goods by completing the packing slip and returning it to the purchasing department.
FALSE
STEP 6 in the Sales Process:
The shipping department records goods shipped and sends verification to the billing department for the generation of a sales invoice.
(T/F) Monthly statements provide a detailed list of the customer’s activity for the previous month and a statement of all open items.
TRUE
Open Item refers to a financial transaction or record that has not yet been fully processed, reconciled, or settled. Open items are usually listed in a company’s accounting records or financial statements, and they need to be resolved or closed out to ensure the accuracy of the financial statements.
(T/F) Invoices are normally prepared when the organization receives confirmation that goods were delivered to customers.
FALSE
An invoice should be issued when the vendor (or supplier) has completed a customer’s order. The order could be for products, services, or both. For a business that’s providing a product, usually an invoice will be generated shortly after delivery.
The shipping department records goods shipped and sends verification to the billing department for the generation of invoice.
(T/F) The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of authorization.
FALSE
The use of prenumbered sales invoices is the primary control procedure to satisfy the objective of completeness.
(T/F) In a control risk assessment questionnaire, each negative (or “No”) answer to a question represents a potential internal control deficiency.
TRUE
(T/F) Formal procedures for approving acceptance of returns are an appropriate control procedure for identifying and recording returned goods.
TRUE
(T/F) One of the benefits of establishing a formal credit policy for granting credit is that management is freed from the burden of monitoring accounts receivable.
FALSE
(T/F) Substantive tests of details for revenue transactions focus primarily on the completeness assertion.
FALSE
Management is more incentivized to overstate revenue, rather than understate it.
(T/F) An appropriate mix of evidence for a low-risk client could include 20% tests of details, 40% analytics, and 40% tests of controls; an appropriate mix of evidence for a high-risk client could include 60% tests of details, 20% analytics, and 20% tests of controls.
TRUE
(T/F) As required by auditing standards, auditors should ordinarily presume there is a risk of material misstatement caused by fraud relating to revenue recognition.
TRUE
(T/F) A company that ships a large quantity of its products from its manufacturing plant to a warehouse that it leases until the customer is ready for the product should record the delivery to the warehouse as revenue.
FALSE
(T/F) The intentional loading of sales at the end of a period to customers that do not need the goods at that time should not be recorded as revenues.
TRUE
Channel stuffing
(T/F) The basic concept for revenue recognition is the realization of cash.
FALSE
(T/F) A tendency for fraud may exist when the granting of stock options is dependent on reaching an earnings goal.
TRUE
(T/F) A consistent pattern of earnings growth would eliminate the auditor’s concern for fraud in revenue recognition.
FALSE
“Too good to be true.”
(T/F) When lapping occurs, all or most customer account balances will be overstated at any one time, making it relatively easy for auditors to detect the scheme.
FALSE
(T/F) The auditor should be alert to the risk of material misstatements when cash flows from operations are negative and net income and revenues have increased.
TRUE
(T/F) Ratio analysis performed by the audit team may include the comparison of gross profit percentage to industry averages.
TRUE
(T/F) The auditor’s determination that the number of days’ sales in accounts receivable increased from 44 days to 100 days would usually be found through the use of ratio analysis.
TRUE
(T/F) Edge and Gregg, LLP would most likely discover a client’s first-time use of channel stuffing through the use of trend analysis.
TRUE
(T/F) Use of reasonableness tests by Bono Mullins, PC, will include relationships between financial but not non-financial data.
FALSE
Reasonableness testing – the analysis of accounts, or changes in accounts between accounting periods, that involves the development of a model to form an expectation based on financial data, non - financial data, or both.
(T/F) The auditor has determined that the control risk for the existence assertion is low; therefore, the auditor may reduce the number of items tested on a substantive basis.
TRUE
(T/F) Confirmations of bank accounts may help the auditor to determine if material amounts of accounts receivable have been sold to the bank on a recourse basis.
FALSE
Confirmations with banks will help identify any loan agreements wherein accounts receivables have been pledged as collateral.
(T/F) When the auditor seeks evidence concerning the allowance for doubtful accounts, he or she would most likely use an aged trial balance to help identify past due balances.
TRUE
(T/F) Current auditing standards do not require the confirmation of receivables if accounts receivable are not material.
TRUE
(T/F) Accounts receivable confirmation letters should be prepared on the auditing firm’s letterhead.
FALSE
Accounts receivable confirmation letters should be prepared on the client’s letterhead.
(T/F) Alternative procedures to the confirmation of receivables include review of subsequent collections and examination of supporting evidence.
TRUE
(T/F) Lapping of accounts receivable is least likely to occur when there is an inadequate segregation of duties.
FALSE
Lapping of accounts receivable is more likely to occur when there is an inadequate segregation of duties.
(T/F) Positive accounts receivable confirmations should be used on all accounts which represent small immaterial balances.
FALSE
Negative confirmations could be used on accounts which represent small immaterial balances.
(T/F) When the client has a large number of relatively small accounts receivable and the assessed level of control risk for receivables and related revenue transactions is high, the auditor is more likely to use negative confirmations.
FALSE
Use positive confirmations when the assessed level of control risk for receivables and related revenue transactions is high.
(T/F) The auditor would examine a sample of sales transactions throughout the entire period to determine if sales were recorded in the proper period when performing a sales cutoff test.
FALSE
Focus on before and after year-end.
(T/F) An example of a control over the sales cycle is the authorization of price lists by the appropriate sales and marketing manager.
TRUE
(T/F) An auditor would test controls over the occurrence of sales transactions by sampling recorded revenues and tracing them back to invoices and shipping documents.
TRUE
(T/F) If control risk is assessed high, the auditor may send significantly fewer confirmations for a sample of accounts receivable than if the control risk is assessed low.
FALSE
If control risk is assessed high, the auditor may send significantly more confirmations for a sample of accounts receivable than if the control risk is assessed low.
(T/F) In planning an audit for the revenue cycle, the auditor must consider the integrated relationship of evidence found between the accounts receivable and the notes payable accounts.
FALSE
(T/F) A method of testing for the completeness of sales is to test the sequence of sales invoices used during the period under audit.
TRUE
(T/F) Material debit balances in accounts payable for amounts due from vendors should be reclassified as accounts receivable.
TRUE
(T/F) The use of data analytics tools makes the audit of the revenue cycle more effective, but not more efficient.
FALSE
(T/F) Testing cutoff involves procedures applied to sales transactions selected from those recorded immediately prior to period end and immediately following period end.
TRUE
(T/F) Valid evidence obtained in an audit for testing the cutoff of sales includes receiving reports for returned merchandise.
TRUE