Question 1

If the client's internal control for recording sales returns and allowances is evaluated as effective:
A) a sample of sales returns and allowances subsequent to closing date are examined.
B) all sales returns must be traced to supporting documentation.
C) a larger sample is needed to verify cutoff.
D) all sales returns must be confirmed with the customer.

Accepted Answer

If the client's internal control for recording sales returns and allowances is evaluated as effective, a sample of sales returns and allowances subsequent to the closing date should be examined to ensure that the control is operating effectively. This will provide evidence that sales returns and allowances are being accurately recorded and appropriately reflected in the financial statements. The other options are not necessary or relevant to the evaluation of the internal control for sales returns and allowances.

Question 2

Which of the following would most likely be detected by an auditor's review of a client's sales cutoff?
A) lapping of year-end accounts receivable
B) excessive sales discounts
C) unrecorded sales for the year
D) unauthorised goods returned for credit

Accepted Answer

An auditor's review of a client's sales cutoff would most likely detect unrecorded sales for the year, which occur when sales are made near the end of the year but not recorded until the following year. The cutoff review ensures that the revenue and accounts receivable accounts are properly stated at year-end, so any unrecorded sales would be identified and corrected. The other options are not specifically related to the sales cutoff review.

Question 3

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date.This aging is BEST used by the auditor to:
A) evaluate internal control over credit sales.
B) estimate credit losses.
C) test the accuracy of recorded charge sales.
D) verify the validity of the recorded receivables.

Accepted Answer

The aged trial balance of accounts receivable is most useful for estimating credit losses, as it allows the auditor to analyze the collectability of individual accounts and estimate the amount of potential bad debt expense. While the aging may provide some insights into internal control over credit sales, accuracy of recorded charge sales, and validity of recorded receivables, these are not the primary purposes of the aging schedule.

Question 4

When customers do NOT respond to positive confirmation requests, auditors:
A) cannot complete the engagement and must issue a disclaimer.
B) cannot express an unqualified opinion.
C) must examine supporting documents.
D) must rely on inquiry of client.

Accepted Answer

When customers do not respond to positive confirmation requests, auditors must examine supporting documents to obtain the necessary audit evidence regarding the existence and condition of the accounts receivable. This is part of performing alternative audit procedures to gather sufficient appropriate audit evidence.

Question 5

What is a common reported type of difference regarding confirmations?
A) Goods have been returned.
B) Goods haven't been received.
C) Payment has already been made.
D) all of the above

Accepted Answer

All of the options listed are common reported types of differences that may occur regarding confirmations. Goods may be returned or not received, and payments may have already been made but not shown on the confirmation.

Question 6

Which one of the following would NOT be a part of the approach used in determining the reasonableness of cutoff?
A) Evaluate whether the client has established adequate procedures to ensure a reasonable cutoff.
B) Review the client's December 31 and January 2 entries for cutoff problems.
C) Decide on the appropriate criteria for cutoff.
D) Test whether a reasonable cutoff was obtained.

Accepted Answer

Reviewing specific entries for cutoff problems is more about identifying specific errors rather than assessing the overall reasonableness of the cutoff procedures.

Question 7

The primary purpose of accounts receivable confirmation is to satisfy the:
A) accuracy and cutoff objectives.
B) existence objective.
C) existence and cutoff objectives.
D) existence, accuracy, and cutoff objectives.

Accepted Answer

Accounts receivable confirmation typically aims to satisfy the objectives of existence, accuracy, and cutoff. Existence refers to ensuring that the listed customers actually owe the company money, while accuracy focuses on verifying the balance due. Cutoff, meanwhile, involves confirming that the balances are recorded in the correct period. By obtaining confirmation from customers, the auditor can gain assurance about all three objectives simultaneously.

Question 8

When the client's rights to accounts receivable are limited, detection can be accomplished by:
A) reviewing minutes of directors meetings.
B) inquiries of the financial controller.
C) confirmation with banks.
D) all of the above

Accepted Answer

When a client's rights to accounts receivable are limited, detection can be accomplished through a variety of methods including reviewing minutes of directors' meetings, making inquiries of the financial controller, and confirming details with banks. Each of these approaches can provide insight into any limitations on the client's rights to their accounts receivable.

Question 9

It is easy to test for a cash receipts cutoff error by:
A) performing a four-column proof of cash.
B) reconciling the bank statement.
C) observing the counting of cash at the balance sheet date.
D) tracing recorded cash receipts to bank deposits on the bank statement of a subsequent period.

Accepted Answer

Tracing recorded cash receipts to bank deposits on the bank statement of a subsequent period is the best way to test for cash receipts cutoff errors. This is because the bank deposits would reflect the actual date the cash was deposited, which can be compared to the date the cash receipts were recorded by the company. If there is a significant time gap between the recorded receipts and the deposits, it could indicate a cash receipts cutoff error. The other options (performing a four-column proof of cash, reconciling the bank statement, observing the counting of cash) may not necessarily identify cash receipts cutoff errors.

Question 10

A client's failure to record a credit note could result from:
A) improper recording of sales returns.
B) timing differences.
C) improper recording of sales allowances.
D) all of the above

Accepted Answer

A client's failure to record a credit note could result from any of the options presented in the answer choices, including improper recording of sales returns or allowances, as well as timing differences between the issuance of the credit note and the client's recording of it. Therefore, the best choice is D, which includes all of the above options.

Question 11

What is the most important test of details of balances for accounts receivable?
A) obtaining confirmations from the client's customers
B) recalculating the aged receivables and uncollectible accounts
C) tracing credit memos for returned merchandise to receiving room reports
D) tracing from shipping documents to journals to the accounts receivable ledger

Accepted Answer

Obtaining confirmations from the client's customers is the most important test of details of balances for accounts receivable, as it provides external evidence of the validity and accuracy of the balances. It helps to confirm the existence of the receivables, their completeness, valuation, and collectability. Recalculating the aged receivables and uncollectible accounts, tracing credit memos for returned merchandise to receiving room reports, and tracing from shipping documents to journals to the accounts receivable ledger are also important tests, but obtaining confirmations from customers is the most crucial one.

Question 12

How is the client's estimate of the total amount of uncollectible receivables represented?
A) by the provision for doubtful debts account
B) by the bad debts expense account on the income statement
C) by the accounts with credit balances in the accounts receivable subsidiary ledger
D) in a footnote disclosure in the financial statements

Accepted Answer

The client's estimate of the total amount of uncollectible receivables is represented by the provision for doubtful debts account, which is a contra-asset account that reduces the total accounts receivable to reflect the expected uncollectible amounts.

Question 13

The most important test for the existence/occurrence objective for accounts receivable is:
A) internal control over balances confirmed.
B) ownership of the balances confirmed.
C) existence of the balances confirmed.
D) collectability of the balances confirmed.

Accepted Answer

The most important test for the existence/occurrence objective for accounts receivable is to confirm that the balances actually exist by verifying them with customers. This can be done through direct communication or through third-party confirmations. Internal control over balances (A) is important, but it doesn't test for existence. Ownership (B) and collectability (D) are also important, but they are not as crucial as existence/occurrence because if the balances don't exist, the other two objectives are irrelevant.

Question 14

The criterion used by most clients for determining when a sale takes place is when:
A) cash is exchanged.
B) the order is received.
C) the goods are shipped.
D) the costs are incurred.

Accepted Answer

The criterion most clients use for determining when a sale takes place is when the goods are shipped. This is because shipping typically signifies that the seller has fulfilled their part of the sales agreement by delivering the goods to a carrier for transport to the buyer, transferring the risks and rewards of ownership.

Question 15

You are reviewing sales to discover cutoff problems.If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:
A) before the merchandise was shipped.
B) at a time other than the point at which title passed.
C) at the time the merchandise was shipped.
D) several days subsequent to shipments.

Accepted Answer

If sales are recorded at a time other than when the title passes, it would not align with the client's policy, leading to cutoff errors.

Question 16

The starting point for the evaluation of the allowance for doubtful debts is:
A) last year's audit findings.
B) a review of controls related to the auditee's credit policy.
C) an analysis of write-off authorisations.
D) the aged trial balance.

Accepted Answer

The answer of The starting point for the evaluation of...

Question 17

This year is the first time that, as a normal practice in a client's business, accounts receivable may be pledged, assigned, factored, or sold at discount.The audit procedure which would disclose these practices is:
A) discussions with the client.
B) a review of the minutes of the board of directors meetings.
C) examination of correspondence files.
D) all of the above

Accepted Answer

All of the above options would be necessary to disclose the practices of pledging, assigning, factoring, or selling accounts receivable at discount. Discussions with the client would provide insight into any agreements or arrangements made with third parties. A review of the minutes of the board of directors meetings may indicate any authorization or approval for these actions. Examination of correspondence files could reveal any contracts, invoices, or other documents related to the transactions. Therefore, all of these audit procedures would be necessary to obtain sufficient evidence about the client's accounts receivable practices.

Question 18

Communication addressed to the debtor requesting confirmation on whether the balance as stated on the communication is correct or incorrect is known as a:
A) negative confirmation.
B) positive confirmation.
C) bank confirmation.
D) management letter.

Accepted Answer

A positive confirmation is when the auditor requests the debtor to confirm whether the balance as stated on the communication is correct or not. This is done to provide evidence for the existence and accuracy of the debt balance. A negative confirmation would ask the debtor to respond only if the balance is incorrect, which is less reliable. Bank confirmation and management letters are different types of communication used in auditing, but not related to debtor confirmation specifically.

Question 19

The understatement of sales and accounts receivable is BEST uncovered by:
A) reviewing the aged trial balance.
B) reconciling the accounts receivable general ledger account with the schedule of accounts receivable.
C) test of transactions for shipments made but not recorded.
D) confirming receivables.

Accepted Answer

Test of transactions for shipments made but not recorded directly addresses the issue of understatement by identifying sales and receivables that should have been recorded but were not.

Question 20

The auditor learns that collections of accounts receivable during the first ten days of January were entered as debits to cash and credits to accounts receivable as of December 31.The effect generally will be to:
A) overstate working capital with no effect on the current ratio at December 31.
B) overstate the current ratio with no effect on working capital at December 31.
C) overstate both working capital and the current ratio at December 31.
D) leave both working capital and the current ratio unchanged at December 31.

Accepted Answer

The answer of The auditor learns that collections of accounts...

Quiz 13: Completing tests in the sales and collection cycle: Accounts receivable

If the client's internal control for recording sales returns and allowances is evaluated as effective:

Which of the following would most likely be detected by an auditor's review of a client's sales cutoff?

The audit working papers often include a client-prepared, aged trial balance of accounts receivable as of the balance sheet date.This aging is BEST used by the auditor to:

When customers do NOT respond to positive confirmation requests, auditors:

What is a common reported type of difference regarding confirmations?

Which one of the following would NOT be a part of the approach used in determining the reasonableness of cutoff?

The primary purpose of accounts receivable confirmation is to satisfy the:

When the client's rights to accounts receivable are limited, detection can be accomplished by:

It is easy to test for a cash receipts cutoff error by:

A client's failure to record a credit note could result from:

What is the most important test of details of balances for accounts receivable?

How is the client's estimate of the total amount of uncollectible receivables represented?

The most important test for the existence/occurrence objective for accounts receivable is:

The criterion used by most clients for determining when a sale takes place is when:

You are reviewing sales to discover cutoff problems.If the client's policy is to record sales when title to the merchandise passes to the buyer, then the books and records would contain errors if the December 31 entries were for sales recorded:

The starting point for the evaluation of the allowance for doubtful debts is:

This year is the first time that, as a normal practice in a client's business, accounts receivable may be pledged, assigned, factored, or sold at discount.The audit procedure which would disclose these practices is:

Communication addressed to the debtor requesting confirmation on whether the balance as stated on the communication is correct or incorrect is known as a:

The understatement of sales and accounts receivable is BEST uncovered by:

The auditor learns that collections of accounts receivable during the first ten days of January were entered as debits to cash and credits to accounts receivable as of December 31.The effect generally will be to: