Evidence -- The Sales-Receivables-Cash Cycle

Question 1

What documentation would provide the best evidence regarding year-end bank balances?

Answer 1

Bank reconciliations

i.e. a bank reconciliation documents direct (primary) evidence of the year-end bank balance

Question 2

What may indicate to the auditor that the sales journal was held open past year end?

Answer 2

Most of the returned positive confirmation requests indicate that the debtor owes a smaller balance than the amount being confirmed

i.e. this overstates sales and receivables

Question 3

What is one audit procedure that would provide appropriate assurance concerning the valuation assertion about accounts receivable?

Answer 3

Assessing the allowance for uncollectible accounts for reasonableness

Question 4

Why must an auditor exercise control over all cash and other negotiable assets when conducting cash counts?

Answer 4

To prevent “substitution”

i.e. this helps avoid the possibility of conversion of negotiable assets to cash to conceal a cash shortage

Question 5

Where would an auditor encounter the greatest difficulty in detecting the diversion of cash received in normal business operations?

Answer 5

From Scrap Sales

i.e. Because scrap sales often provide little documentary evidence to corroborate cash receipts, this makes it difficult to detect abstraction of proceeds from unrecorded sales

Question 6

What is the best method for an auditor to detect kiting?

Answer 6

Inspecting checks returned in the cutoff bank statement

Question 7

What evidence is provided when an auditor traces copies of computer-prepared sales invoices to copies of the corresponding computer-prepared shipping documents?

Answer 7

That Sales billed to customers were actually shipped

i.e. Tracing sales invoices to shipping documents tests for failure to ship

Question 8

What would be an auditor consideration in planning a sample for a test of subsequent cash receipts?

Answer 8

Preliminary judgments about materiality levels

i.e. Judgments about materiality will affect the sample sizes in a variables sampling plan

Question 9

Why would an auditor test bank transfers for the last part of the audit period and first part of the subsequent period?

Answer 9

To detect whether cash balances were overstated because of kiting

Question 10

How would an auditor conduct a test of details to detect a possible understatement of sales?

Answer 10

By tracing transactions from the Shipping documents to the Sales invoices

Question 11

What is an auditing procedure that would help identify unusual sales transactions?

Answer 11

Performing a trend analysis of quarterly sales

i.e. Quarterly sales analysis compared with last year’s amounts or budgets will identify unusual sales transactions and raise questions that the auditor may want to address

Question 12

What is a set of information an auditor would usually confirm on one form?

Answer 12

Cash in bank and collateral for loans

Question 13

What verification does a cutoff test of sales complement?

Answer 13

Accounts Receivable

i.e. A purpose of a sales cutoff test is to obtain assurance that receivables are recorded in the appropriate period

Question 14

What would a CPA do, once they have determined that accounts receivable have increased because of slow collections in a tight money environment?

Answer 14

Expand tests of collectibility

e.g. Reviewing collections subsequent to the balance sheet date and investigation of credit ratings

Question 15

What is a likely procedure an auditor would use when confirming accounts receivable?

Answer 15

Request confirmation of a sample of the inactive accounts

Question 16

What direction would an auditor use to determine whether all customers are being billed for electric utility?

Answer 16

From the Meter department records to the Billing (sales) register

i.e. Comparing services rendered with billings is the best way to detect omitted billings

Question 17

How would an auditor detect kiting when a cash disbursements clerk draws a company check on one bank and deposits the check in the company account of another bank to cover a previous theft of cash?

Answer 17

By examining paid checks returned with the bank statement of the next accounting period after year end

i.e. the auditor essentially searches for checks that should have been listed as outstanding but were not

Question 18

What is the auditor’s purpose for sending standard confirmation request to all banks with which the client has done business during the year under audit?

Answer 18

To seek information about other deposit and loan amounts that come to the attention of the institution in the process of completing the confirmation

Question 19

What would be considered an effective audit procedure for determining the collectibility of an account receivable?

Answer 19

Review of the subsequent cash collections

i.e. subsequent collection of the receivable is the only means of gaining complete assurance that the amount will be paid