Question 1

The criterion used by most merchandising and manufacturing clients for determining when a sale takes place is whether an order for goods has been received from a customer (customer order).

Accepted Answer

The criterion for determining when a sale takes place is typically when the goods are delivered or the service is performed, not just when an order is received.

Question 2

Planned detection risk and planned evidence are directly related; that is, as planned detection risk increases, planned audit evidence for tests of details of balances also increases.

Accepted Answer

As planned detection risk increases, the auditor plans to collect less evidence because they are willing to accept a higher risk that they will not detect material misstatements. Conversely, as planned detection risk decreases, the auditor plans to collect more evidence.

Question 3

It is easy to test for a cash receipts cutoff misstatement by tracing recorded cash receipts to subsequent- period bank deposits on the bank statement.

Accepted Answer

Tracing recorded cash receipts to subsequent-period bank deposits on the bank statement ensures that all cash receipts have been recorded in the correct period and have not been included in the wrong period due to cutoff misstatements.

Question 4

The auditor may consider it unnecessary to confirm accounts receivable response rates from the confirmations that are likely to be unreliable.

Accepted Answer

The answer of The auditor may consider it unnecessary to...

Question 5

The allowance for doubtful debts account is capable of precise calculation.

Accepted Answer

The allowance for doubtful debts account involves estimation and therefore cannot be calculated precisely.

Question 6

In confirming accounts receivable balances, the auditor finds overstatements caused by mistakes in billing customers which will then overstate both accounts receivable and sales.

Accepted Answer

Mistakes in billing customers can result in overstatements of both accounts receivable and sales in the financial statements. As such, the auditor should confirm accounts receivable balances to detect any such errors.

Question 7

The bad debt expense is a residual balance that can be verified by a reperformance test.

Accepted Answer

The answer of The bad debt expense is a residual...

Question 8

Client business risks affecting accounts receivable are considered in the auditor's evaluation of inherent risk.

Accepted Answer

Client business risks, including the risk of non-payment or delayed payment of accounts receivable, are considered in the auditor's evaluation of inherent risk.

Question 9

Comparing the provision for doubtful debts as a percentage of accounts receivable with previous years, can help detect errors in the bad debts expense account.

Accepted Answer

By comparing the provision for doubtful debts as a percentage of accounts receivable with previous years, one can identify any significant changes in the bad debts expense account, and investigate any errors or irregularities.

Question 10

When sending confirmations during most audits of accounts receivable, the emphasis should be on confirming larger and older accounts.

Accepted Answer

Confirming larger and older accounts provides greater assurance that the balances are accurate and reduces the risk of material misstatement.

Question 11

The realisable value of accounts receivable equals gross accounts receivable less the allowance for doubtful debts account.

Accepted Answer

This is the correct definition of the realisable value of accounts receivable. It is calculated as gross accounts receivable (total amount owed by customers) minus the allowance for doubtful debts account (estimated amount of uncollectible debts). The realisable value represents the amount that the company can reasonably expect to collect from its customers.

Question 12

When a customer disagrees with the amount shown on an accounts receivable confirmation, the auditor should not ask the client to reconcile the difference.

Accepted Answer

The auditor should investigate the reason for the disagreement by asking the client to reconcile the difference, as this could indicate an error in the financial records or potential fraud.

Question 13

For most audits, a proper cash receipts cutoff is more important than either the sales or the sales returns and allowances cutoff.

Accepted Answer

A proper sales cutoff is generally considered more important because it directly affects the revenue recognition and matching principle, ensuring that sales and related costs are recorded in the correct accounting period. Cash receipts cutoff is important for cash management but does not typically impact revenue recognition as directly as sales cutoff procedures.

Question 14

The accounts receivable balance- related audit objective net realisable value is not affected by assessed control risk for sales or cash receipts.

Accepted Answer

The net realizable value of accounts receivable is determined based on the amount expected to be collected, and is not affected by the assessed control risk for sales or cash receipts. Control risk relates to the risk of material misstatement due to errors or fraud in the accounting records, which can impact the accuracy of the accounts receivable balance, but it does not impact the net realizable value of the receivables.

Question 15

The type of confirmation is a major factor affecting sample size when confirming accounts receivable, with negative confirmations normally requiring a larger sample than positive confirmations.

Accepted Answer

Negative confirmations are used when the auditor believes that recipients are likely to ignore the confirmation request or when there is a higher risk of fraud. Therefore, negative confirmations require a larger sample size to obtain sufficient evidence to reduce the risk of material misstatement. Positive confirmations, on the other hand, are used when the auditor believes that the recipients are likely to respond promptly and accurately, which reduces the need for a large sample size.

Question 16

The results of analytical procedures performed while auditing the sales and collection cycle are used to determine the level of planned tolerable misstatement for accounts receivable
balance- related audit objectives.

Accepted Answer

Analytical procedures performed during the sales and collection cycle can help the auditor assess the risk of material misstatement in the accounts receivable balance. Based on the results, the auditor can determine the level of planned tolerable misstatement for accounts receivable balance-related audit objectives.

Question 17

For sales, the existence transaction- related objective affects the existence balance- related objective for accounts receivable, but for cash receipts, the existence transaction- related objective affects the completeness balance- related objective for accounts receivable.

Accepted Answer

The existence transaction-related objective for sales ensures that recorded sales transactions actually occurred and thus supports the existence of related accounts receivable balances. For cash receipts, ensuring that all cash receipts transactions are recorded (completeness) affects the completeness of the accounts receivable balance, as it ensures all payments received are recorded and applied against the correct customer balances.

Question 18

Confirmations of accounts receivable are useful for evaluating several accounts receivable balance- related audit objectives, including existence, rights and realisable value.

Accepted Answer

The answer of Confirmations of accounts receivable are useful for...

Question 19

For most audits, inherent risk for accounts receivable is usually moderate or low except for the realisable value objective and the cutoff objective.

Accepted Answer

Inherent risk for accounts receivable is generally considered moderate or low because the amounts are usually confirmed by independent parties (the debtors). However, the realisable value objective (the risk that receivables may not be fully collectible) and the cutoff objective (ensuring transactions are recorded in the correct accounting period) can present higher risks due to factors like customer creditworthiness and timing of revenue recognition.

Question 20

The results of substantive tests of sales and cash receipts transactions are used to determine the level of planned detection risk for each accounts receivable balance- related audit objective.

Accepted Answer

Substantive tests of sales and cash receipts transactions are used to gather evidence and determine the level of detection risk, which guides the extent and nature of further audit procedures for accounts receivable balances.

Quiz 13: Completing Tests in the Sales and Collection Cycle: Accounts Receivable