Question 1

The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with Australian accounting standards.

Accepted Answer

The overall objective of the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with accounting standards. This includes verifying the accuracy and completeness of sales transactions, assessing the adequacy of internal controls over the cycle, and ensuring the validity and collectability of accounts receivable.

Question 2

State the six specific transaction- related audit objectives for sales and describe one common substantive test of transactions for each objective.

Accepted Answer

The answer of State the six specific transaction- related audit...

Question 3

Documents related to the billing of customers include a bill of lading, sales invoice, uncollectible account authorisation form and remittance advice.

Accepted Answer

A bill of lading is a document issued by a carrier to acknowledge receipt of cargo for shipment, not related to the billing of customers. The other documents mentioned are related to customer billing and accounts receivable processes.

Question 4

A bill of lading is a special type of sales invoice used when goods are shipped interstate.

Accepted Answer

A bill of lading is a legal document issued by a carrier to a shipper, detailing the type, quantity, and destination of the goods being carried. It serves as a shipment receipt when the carrier delivers the goods at the predetermined destination. It is not a sales invoice but rather a document that accompanies goods in transit, providing evidence of the contract of carriage.

Question 5

Tests of controls should never be performed using the client's computer system; that is, all tests of control should be performed either using the auditor's computer or performed manually by the auditor.

Accepted Answer

Tests of controls may be performed using the client's computer system, but the auditor must take certain precautions to ensure the integrity and confidentiality of the client's data. The auditor must also ensure that the client's system is reliable and that the results of the tests can be properly evaluated.

Question 6

State the six specific transaction- related audit objectives for cash receipts. For each objective, describe one common test of controls.

Accepted Answer

The answer of State the six specific transaction- related audit...

Question 7

A proof of cash receipts is generally performed on all audits.

Accepted Answer

A proof of cash receipts is not typically performed on all audits; it is a specific procedure used in certain circumstances, such as when there are concerns about the completeness and accuracy of recorded cash transactions. Auditors use various methods and procedures tailored to the audit's objectives and the entity's specific risks and controls.

Question 8

Violations of the completeness objective for sales are of greater concern to the auditor than violations of the existence objective.

Accepted Answer

Violations of the existence objective (i.e., whether all recorded sales transactions actually occurred) are generally of greater concern to auditors because they directly relate to the risk of overstatement of revenues, which is a common area of financial statement fraud. Violations of the completeness objective (i.e., whether all actual sales transactions are recorded) relate to the risk of understatement of revenues, which is typically of lesser concern from a fraud perspective.

Question 9

The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

Accepted Answer

When a customer order is received, it initiates the process of selling goods or services to the customer and eventually collecting payment for the same. Thus, it is the starting point for the entire sales and collection cycle.

Question 10

The prelisting of cash receipts should be prepared by the individual who has no access to cash or to accounting records.

Accepted Answer

The prelisting of cash receipts should be prepared by an individual who has no access to cash or accounting records to ensure the accuracy and completeness of the record. This helps in preventing fraud or errors in recording the transactions.

Question 11

Discuss the purposes of, and differences between, design format and performance format audit programs.

Accepted Answer

The answer of Discuss the purposes of, and differences between,...

Question 12

Lapping of accounts receivable is the postponement of entries for the collection of receivables.

Accepted Answer

Lapping of accounts receivable involves delaying the recording of cash receipts to cover up the misappropriation of funds, essentially using subsequent cash receipts to cover previous receipts that have been diverted.

Question 13

Describe each of the six key control activities for sales.

Accepted Answer

The answer of Describe each of the six key control...

Question 14

In converting from a performance format audit program to a design format audit program, procedures are combined.

Accepted Answer

In converting from a performance format to a design format audit program, procedures are typically separated and detailed more explicitly, rather than combined. This is because the design format aims to provide a more structured and detailed approach to the audit process.

Question 15

State the six specific transaction- related audit objectives for sales. For each objective, identify one key internal control. Then, for each internal control, describe one common test of controls.

Accepted Answer

The answer of State the six specific transaction- related audit...

Question 16

Including cash sales, every transaction and amount is ultimately included in one of two balance sheet accounts.

Accepted Answer

Transactions can affect various accounts on the balance sheet beyond just two, including assets, liabilities, and equity accounts, depending on the nature of the transaction.

Question 17

Explain the audit procedure 'proof of cash receipts'.

Accepted Answer

The answer of Explain the audit procedure 'proof of cash...

Question 18

When testing the existence objective for sales, the direction of tests should be from the journals back to supporting documents.

Accepted Answer

The existence objective for sales testing involves verifying that recorded sales transactions actually occurred. Testing should start from the journals, where sales are initially recorded, and then move to supporting documents such as invoices and receipts to confirm that the transactions are legitimate. This approach ensures that all sales are captured and accurately reflected in the financial statements.

Question 19

State the six specific transaction- related audit objectives for cash receipts and describe one common substantive test of transactions for each objective.

Accepted Answer

The answer of State the six specific transaction- related audit...

Question 20

Explain what 'lapping' means and discuss the internal control deficiency that allows it to occur. Also discuss the procedures the auditor can perform to detect lapping.

Accepted Answer

The answer of Explain what 'lapping' means and discuss the...

Quiz 12: Audit of the Sales and Collection Cycle: Tests of Controls and Substantive Tests of Transactions

The overall objective in the audit of the sales and collection cycle is to evaluate whether the account balances affected by the cycle are fairly presented in accordance with Australian accounting standards.

State the six specific transaction- related audit objectives for sales and describe one common substantive test of transactions for each objective.

Documents related to the billing of customers include a bill of lading, sales invoice, uncollectible account authorisation form and remittance advice.

A bill of lading is a special type of sales invoice used when goods are shipped interstate.

Tests of controls should never be performed using the client's computer system; that is, all tests of control should be performed either using the auditor's computer or performed manually by the auditor.

State the six specific transaction- related audit objectives for cash receipts. For each objective, describe one common test of controls.

A proof of cash receipts is generally performed on all audits.

Violations of the completeness objective for sales are of greater concern to the auditor than violations of the existence objective.

The receipt of a customer order from a customer is the starting point for the entire sales and collection cycle.

The prelisting of cash receipts should be prepared by the individual who has no access to cash or to accounting records.

Discuss the purposes of, and differences between, design format and performance format audit programs.

Lapping of accounts receivable is the postponement of entries for the collection of receivables.

Describe each of the six key control activities for sales.

In converting from a performance format audit program to a design format audit program, procedures are combined.

State the six specific transaction- related audit objectives for sales. For each objective, identify one key internal control. Then, for each internal control, describe one common test of controls.

Including cash sales, every transaction and amount is ultimately included in one of two balance sheet accounts.

Explain the audit procedure 'proof of cash receipts'.

When testing the existence objective for sales, the direction of tests should be from the journals back to supporting documents.

State the six specific transaction- related audit objectives for cash receipts and describe one common substantive test of transactions for each objective.

Explain what 'lapping' means and discuss the internal control deficiency that allows it to occur. Also discuss the procedures the auditor can perform to detect lapping.