SU 11 Evidence-Sales/Receivables/Cash Cycle

Question 1

An auditor would encounter the greatest difficulty in detecting the diversion of proceeds from

Answer 1

Scrap sales - provide little documentary evidence to corroborate cash receipts

Question 2

Confirmation of A/R is necessary when

Answer 2

The assessed level of inherent and control risk is HIGH

Question 3

In a business recession, the auditor would increase its focus on what account?

Answer 3

ALLOWANCE for DOUBTFUL ACCOUNTS

Question 4

Accounts receivable TURNOVER is substantially LOWER this year than for the PRIOR year. What can account for this?

Answer 4

There was an improper cutoff of sales at the end of the year

Question 5

When RMM is assessed low, which procedure is an auditor LEAST LIKELY to perform?

Answer 5

Search for unrecorded cash receipts

Question 6

What are the conditions for a NEGATIVE confirmation request?

Answer 6

RMM is LOW
The number of SMALL balances is MANY
Consideration by the recipient is LIKELY

Question 7

An increase in A/R usually indicates:

Answer 7

An INCREASE in sales or LESS stringent credit terms

Question 8

Tracing sales invoices to corresponding shipping documents provides evidence that

Answer 8

Sales billed to customers were actually shipped

Question 9

Which set of information does an auditor confirm on ONE form?

Answer 9

Cash in bank and collateral for loans

Question 10

Auditor reconciles the total of the A/R subsidiary ledger to the general ledger control account. This would enable the auditor to most LIKELY learn that

Answer 10

An opening balance in a subsidiary ledger account was improperly carried forward from the previous accounting period

Question 11

Major flaw in confirmation process

Answer 11

The controller mailing the confirmation

A confirmation is signed (requested) by the CLIENT but mailed by the EXTERNAL AUDITOR

Question 12

On a bank reconciliation, no adjustment is needed for d

Answer 12

Deposits in transit - will be added during the reconciliation

Question 13

On a bank reconciliation, what is the correct adjustment for checks that were written but NOT mailed yet?

Answer 13

The company still has control of the check and the amount should NOT be deducted from the cash balance

Question 14

How are service charges handled in a bank reconciliation?

Answer 14

Service charges should be deducted from the balance per books

Question 15

What procedure would an auditor use to determine unusual sales transactions?

Answer 15

A trend analysis of quarterly sales

Question 16

To determine understatement of sales an auditor would trace transactions from

Answer 16

Shipping documents to sales invoices; would determine if recorded sales couldn’t be found

Question 17

What is a consideration in planning a sample for a test of subsequent cash receipts?

Answer 17

Preliminary judgments about materiality levels

Question 18

The most effective procedure to determine collectibility

of accounts receivable is

Answer 18

Review of the subsequent cash COLLECTIONS

Question 19

A cutoff test of sales COMPLEMENTS the verification of

Answer 19

Accounts Receivable

Question 20

If the objective of a test of details is to determine an overstatement of sales, the auditor should compare transactions in

Answer 20

The accounting records with the SOURCE documents

Overstatements result from entries with NO supporting documentation. Take a sample of entries in the sales account and vouch them to the shipping documents

Question 21

RESTRICTED cash should be recorded as

Answer 21

A NONCURRENT asset

Question 22

Best evidence regarding the year end bank balance is documented in

Answer 22

The bank RECONCILIATION

Question 23

To detect the overstatement of SALES, an auditor would trace transactions from

Answer 23

The Sales journal to the SHIPPING Documents

Question 24

Which procedure would an auditor MOST LIKELY perform when auditing the statement of CASH FLOWS?

Answer 24

Reconcile the amounts included in the statement with the other amounts in the other financial statements

Question 25

Who authorizes a bank confirmation and who sends the confirmation?

Answer 25

The CLIENT authorized the confirmation and the AUDITOR sends (mails) the confirmation.

Question 26

Testing bank transfers for the last part of the audit period and the first part of the subsequent period detects:

Answer 26

Cash balances OVERSTATED because of KITING