Revenue/Receipts—Sales Flashcards
To determine whether internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices, an auditor most likely would select a sample of transactions from the population represented by the
Sales order file.
Customer order file.
Shipping document file.
Sales invoice file.
Shipping document file.
This answer is correct because the shipping document file represents the items that have been shipped, and accordingly, these shipments should be invoiced.
Shipments to customers were recorded as receivables.
Billed sales were shipped.
Debits to the subsidiary accounts receivable ledger are for sales shipped.
Shipments to customers were billed.
Billed sales were shipped.
This answer is correct because sales invoices will often serve as “bills,” and by tracing them to shipping documents, the auditor discovers whether those “bills” are supported by shipments.
Which of the following fraudulent activities most likely could be perpetrated due to the lack of effective internal control in the revenue cycle?
Merchandise received is not promptly reconciled to the outstanding purchase order file.
Obsolete items included in inventory balances are rarely reduced to the lower of cost or market value.
The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
Fictitious transactions are recorded that cause an understatement of revenue and an overstatement of receivables.
The write-off of receivables by personnel who receive cash permits the misappropriation of cash.
This answer is correct because a goal under strong internal control is to segregate transaction authorization, recordkeeping and custody of assets. Because an individual who receives cash and writes off receivables has both custody of cash and recordkeeping responsibility it makes this answer correct. A possible fraudulent scheme here is for that individual to collect cash on an account, not report that payment, and then write off the receivable as uncollectible.
Which of the following controls most likely would be effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs?
Employees responsible for authorizing sales and bad debt write-offs are denied access to cash.
Shipping documents and sales invoices are matched by an employee who does not have authority to write off bad debts.
Employees involved in the credit-granting function are separated from the sales function.
Subsidiary accounts receivable records are reconciled to the control account by an employee independent of the authorization of credit.
Employees involved in the credit-granting function are separated from the sales function.
The requirement is to identify the control that will be most effective in offsetting the tendency of sales personnel to maximize sales volume at the expense of high bad debt write-offs. Answer (c) is correct because segregation of the authorization of credit from the sales function will allow an independent review of the creditworthiness of customers. Answer (a) is incorrect because while denying access to cash by employees responsible for sales and bad debt write-offs may deter embezzlements, the problem of high bad debt write-offs is likely to remain. Answer (b) is incorrect because while so segregating the matching of shipping documents and sales invoices may help assure that items are shipped properly and subsequently recorded, it will not significantly affect bad debts. Answer (d) is incorrect because while independent reconciliation of control and subsidiary accounts receivable records may defer embezzlements, bad debt write-offs will not be affected.
Which of the following controls most likely would assure that all billed sales are correctly posted to the accounts receivable ledger?
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
Each sales invoice is supported by a prenumbered shipping document.
The accounts receivable ledger is reconciled daily to the control account in the general ledger.
Each shipment on credit is supported by a prenumbered sales invoice.
Daily sales summaries are compared to daily postings to the accounts receivable ledger.
The requirement is to identify the control that most likely would assure that all billed sales are correctly posted to the accounts receivable ledger. Answer (a) is correct because the daily sales summary will include all “billed” sales for a particular day. Comparing this summary to the postings to the accounts receivable ledger will provide evidence on whether billed sales are correctly posted. Answer (b) is incorrect because comparing sales invoices to shipping documents provides evidence on whether invoiced sales have been shipped. Answer (c) is incorrect because reconciling the accounts receivable ledger to the control account will not provide assurance that all billed sales were posted in that both the receivable ledger and the control account may have omitted the sales. Answer (d) is incorrect because comparing shipments with sales invoices provides evidence on whether all shipments have been invoiced, not on whether all billed sales are correctly posted.
At which point in an ordinary sales transaction of a wholesaling business would a lack of specific authorization be of least concern to the auditor in the conduct of an audit?
Granting of credit.
Shipment of goods.
Determination of discounts.
Selling of goods for cash.
Selling of goods for cash.
This answer is correct because at the point of selling the goods for cash, decisions on matters such as appropriate discounts will have already been made. The fact that cash is being received eliminates any credit problem considerations. Therefore, the lack of specific authorization will not be of great concern to the auditor in this situation.
Proper authorization of write-offs of uncollectible accounts should be approved in which of the following departments?
Accounts receivable.
Credit.
Accounts payable.
Treasurer.
Treasurer.
The requirement is to determine the department that should approve bad debt write-offs. The department responsible for bad debt write-offs should be independent of the sales, credit, and the recordkeeping for that function, and should have knowledge relating to the accounts. Answer (d) is correct because, in addition to being independent of the various functions, the treasurer’s department is likely to have knowledge to help make proper decisions of this nature. Answers (a) and (b), accounts receivable and the credit department, are incorrect because neither department is independent of this function. Answer (c) is incorrect because while accounts payable is independent of the function, its personnel are less likely than those of the treasurer’s department to have the necessary information relating to the accounts that should be written off.
If the objective of an auditor’s test of details is to detect a possible understatement of sales, the auditor most likely would trace transactions from the
Sales invoices to the shipping documents.
Cash receipts journal to the sales journal.
Shipping documents to the sales invoices.
Sales journal to the cash receipts journal.
Shipping documents to the sales invoices
This answer is correct because tracing from shipping documents to sales invoices will reveal whether the items shipped (and presumably sold) have been recorded, as evidenced by the existence of sales invoices.
An auditor is determining if internal control relative to the revenue cycle of a wholesaling entity is operating effectively in minimizing the failure to prepare sales invoices. The auditor most likely would select a sample of transactions from the population represented by the
Cash receipts file.
Shipping document file.
Customer order file.
Sales invoice file.
Shipping document file.
This answer is correct because the shipping documents are prepared for the items actually shipped since those are the items sold.
If the objective of a test of details is to detect overstatements of sales, the auditor should trace transactions from the
Cash receipts journal to the sales journal.
Sales journal to the cash receipts journal.
Source documents to the accounting records.
Accounting records to the source documents.
Accounting records to the source documents.
Which of the following procedures most likely would not be a control designed to reduce the risk of misstatements / erorros in the billing process?
Comparing control totals for shipping documents with corresponding totals for sales invoices.
Using computer programmed controls on the pricing and mathematical accuracy of sales invoices.
Matching shipping documents with approved sales orders before invoice preparation.
Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
Reconciling the control totals for sales invoices with the accounts receivable subsidiary ledger.
The requirement is to identify the procedure that most likely would not be a control designed to reduce the risk of errors in the billing process. Answer (d) is correct because the reconciliation of the control totals for sales invoices with the accounts receivable subsidiary ledger will follow billing; thus billing errors will have already occurred. Answer (a) is incorrect because identification of differences in shipping documents and sales invoices will allow for a correction of any errors and proper billing. Answer (b) is incorrect because computer programmed controls will assure the accuracy of the sales invoice. Answer (c) is incorrect because the matching of shipping documents with the approved sales orders will allow the preparation of a correct invoice.
An auditor who uses a transaction cycle approach to assessing control risk most likely would test control activities related to transactions involving the sale of goods to customers with the
Collection of receivables.
Purchase of merchandise inventory.
Payment of accounts payable.
Sale of long-term debt.
Collection of receivables.
This answer is correct because collection of receivables relates to the valuation of accounts receivable, a part of the sales (revenue) cycle.
For effective internal control, the billing function should be performed by the
Accounting department.
Sales department.
Shipping department.
Credit and collection department.
Accounting department.
This answer is correct because the accounting department serves a recording function and billing is an example of a recording function. Therefore, the accounting department’s performance of the billing function would allow effective internal control.
To verify that all sales transactions for which shipment has occurred have been recorded, a test of transactions should be completed on a representative sample drawn from
Entries in the sales journal.
The billing clerk’s file of sales orders.
A file of duplicate copies of sales invoices for which all prenumbered forms in the series have been accounted for.
The shipping clerk’s file of duplicate copies of bills of lading.
The shipping clerk’s file of duplicate copies of bills of lading.
This answer is incorrect because the sales invoices reflect only those sales which have properly reached the invoice stage. There may exist shipments which have not been properly invoiced.
When performing an audit, a CPA notes that bad-debt expense is unusually high relative to similar firms in the industry. The CPA should recommend which of the following controls?
Use approved price lists for customer billing.
Send monthly statements of account to customers with outstanding balances.
Require credit checks on all new customers.
Reconcile accounts receivable in the general ledger with the subsidiary ledger.
Require credit checks on all new customers.
This answer is correct because effective credit checks on new customers are likely to decrease the likelihood of sales to customers whose accounts ultimately become uncollectible.
