Question 1

When the PCAOB issued guidance in May 2017 to assist auditors of public companies implementing the new revenue recognition standard, the PCAOB did not mention the importance of auditing any transition adjustment recorded by management as part of the implementation of the new standard.

Accepted Answer

The PCAOB did mention the importance of auditing any transition adjustment recorded by management as part of the implementation of the new revenue recognition standard in the guidance issued in May 2017.

Question 2

The transaction-related audit objectives and the client's methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor's perspective?

Accepted Answer

The answer of The transaction-related audit objectives and the client's...

Question 3

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

Accepted Answer

This is true. Occurrence is one of the important assertions for sales returns and allowances. Auditors need to evaluate whether the recorded sales returns and allowances actually occurred, and that the amounts recorded are accurate and complete. This helps to ensure the overall accuracy of the financial statements.

Question 4

In designing substantive audit procedures for tests of transactions for sales, the auditor needs to test for evidence of misstatements due to errors or fraud. Describe two potential errors (unintentional) and one intentional (fraud).

Accepted Answer

The answer of In designing substantive audit procedures for tests...

Question 5

When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective.

Accepted Answer

When auditing sales returns and allowances, the emphasis is normally on testing the occurrence and accuracy objectives to ensure that recorded returns and allowances actually occurred and are accurately recorded, rather than primarily focusing on completeness.

Question 6

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to
A) prenumber and account for all credit memorandums.
B) require receiving reports that provide evidence of returned inventory items to support all credit memorandums before they are approved.
C) have independent sales and accounts receivable departments.
D) mail monthly statements to customers.

Accepted Answer

Requiring receiving reports to support all credit memorandums before they are approved provides evidence that the goods were actually returned, and prevents the accounts receivable clerk from issuing fictitious credit memos to friends or other customers. Prenumbering and accounting for credit memorandums and having independent sales and accounts receivable departments are also effective control procedures, but they may not specifically address the problem of fictitious credit memos issued by an accounts receivable clerk to his or her friend. Mailing monthly statements to customers does not necessarily prevent or detect fictitious credit memos.

Question 7

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor?
A) understating the sales journal by not recording cash sales
B) overstating the accounts receivable control account by intentionally misstating prices charged for goods sold
C) overstating the accounts receivable subsidiary ledger by not recording payments made by customers
D) understating the cash receipts journal by purposely recording incorrect amounts

Accepted Answer

The answer of Cash receipts from sales on account have...

Question 8

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement.
• sales included in the journals for which there was no shipment
• sale recorded more than once
• shipments made to nonexistent customers and recorded as sales

Accepted Answer

The answer of For each of the following potential misstatements,...

Question 9

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer's account, that employee may be suspected of
A) kiting.
B) lapping.
C) floating.
D) shorting.

Accepted Answer

The act of purposefully entering cash received into the wrong customer's account is an indicator of lapping, which is the fraudulent practice of using payments from one customer to cover up a previously misapplied payment from another customer. Kiting is an entirely separate form of fraud involving intentionally inflating bank balances, floating refers to the time period between writing a check and it being presented for payment, and shorting is not related to this scenario.

Question 10

Sales returns and allowances are often ignored by auditors because they are often immaterial.

Accepted Answer

Sales returns and allowances may be immaterial individually, but in aggregate, they can have a significant impact on the financial statements. As such, auditors are required to test and evaluate the company's process for accounting for sales returns and allowances.

Question 11

Except for two key differences, the transaction-related audit objectives are essentially the same for the processing of credit memos as they are for sales. Which of the following are the two key differences?
A) risk and emphasis on the completeness objective
B) materiality and emphasis on the accuracy objective
C) risk and emphasis on the classification objective
D) materiality and emphasis on the occurrence objective

Accepted Answer

The two key differences are materiality and emphasis on the occurrence objective because credit memos can be used to manipulate sales figures, so auditors focus on whether credit memos actually occurred and their material impact on financial statements.

Question 12

The auditor is concerned about authorization at three key points. What are the key points?

Accepted Answer

The answer of The auditor is concerned about authorization at...

Question 13

When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that
A) the test of controls are designed to test for monetary misstatements.
B) auditors use the same methodology for designing tests of controls and substantive tests of transactions for cash receipts as they use for sales.
C) the tests of controls are not dependent on the controls the auditor identifies.
D) the tests of controls are not dependent on whether the company being audited is publicly traded.

Accepted Answer

Tests of controls and substantive tests of transactions for cash receipts often follow a similar methodology to that used for sales because both areas typically involve transactions that can be subject to similar types of errors or fraud. The methodology for testing these areas focuses on assessing the effectiveness of controls in place and verifying the accuracy and completeness of transaction records.

Question 14

An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting
A) kiting.
B) lapping.
C) unauthorized write-offs of customers as uncollectible accounts.
D) sales without proper credit authorization.

Accepted Answer

Lapping involves the manipulation of cash receipts and accounts receivable, often by delaying the recording of cash receipts to cover up the theft of cash. By comparing remittance advices with cash receipts journal entries and deposit slips, an auditor can detect discrepancies indicative of lapping, such as delays or alterations in recording cash receipts.

Question 15

Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable?
A) Separate duties so that the bookkeeper in charge of the general ledger has no access to incoming mail.
B) Separate duties so that no employee has access to both checks from customers and currency from daily cash receipts.
C) Have a mandatory vacation policy for employees who both handle cash and enter cash receipts into the system.
D) Request that customer's payment checks be made payable to the company and addressed to the treasurer.

Accepted Answer

Option C involves rotating employees who handle cash and cash receipts, preventing any one employee from being in a position to commit fraud for an extended period of time. This offers the best protection against "lapping" by ensuring that different employees are handling cash and entering cash receipts into the system, and also creates an atmosphere of accountability. Options A, B, and D do not directly address the problem of "lapping" and may not necessarily prevent fraud.

Question 16

It is not important that the auditor evaluate and test a client' assertions early in the audit with regards to significant or unusual sales transactions, as long as the auditor evaluates and tests these assertions before the audit is completed.

Accepted Answer

It is important for the auditor to evaluate and test significant or unusual sales transactions early in the audit, because if any issues or discrepancies are identified, it can provide additional information and lead to further testing in other areas. Waiting until the end of the audit to evaluate these assertions could result in significantly more work and potentially missed errors or fraud.

Question 17

When auditing sales returns and allowances, tests performed by the auditor are usually focused on whether the returns and the allowances were appropriately authorized and approved, internally, by proper personnel working.

Accepted Answer

When auditing sales returns and allowances, the auditor focuses on whether the returns and allowances were appropriately authorized and approved by proper personnel within the organization.

Question 18

The audit procedure referred to as proof of cash receipts is particularly useful to test
A) time lags in making deposits.
B) whether all recorded cash receipts have been deposited in the bank.
C) whether there are cash receipts that have not been recorded in the journals.
D) the client's reconciliation between cash receipts and bank deposits.

Accepted Answer

The proof of cash receipts audit procedure is designed to test whether all recorded cash receipts have been deposited in the bank. This helps to ensure that the financial statements are accurate and complete. The auditor will compare the recorded cash receipts to the bank deposits and investigate any discrepancies. This procedure is particularly useful in detecting fraud or other irregularities related to cash receipts.

Question 19

Which of the following tests of controls is useful to test the transaction-related audit objective of posting and summarization?
A) Observe whether monthly statements are sent.
B) Observe unrecorded cash at a point in time.
C) Observe whether the accountant reconciles the bank account.
D) Observe endorsement of incoming checks.

Accepted Answer

The answer of Which of the following tests of controls...

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 14: Audit of the Sales and Collection Cycle: Tests of Controls

When the PCAOB issued guidance in May 2017 to assist auditors of public companies implementing the new revenue recognition standard, the PCAOB did not mention the importance of auditing any transition adjustment recorded by management as part of the implementation of the new standard.

The transaction-related audit objectives and the client's methods of controlling misstatements are essentially the same for credit memos as for sales with the exception of two differences. What are the two differences from the auditor's perspective?

When auditors evaluate sales returns and allowances, a primary emphasis is on the objective of occurrence.

In designing substantive audit procedures for tests of transactions for sales, the auditor needs to test for evidence of misstatements due to errors or fraud. Describe two potential errors (unintentional) and one intentional (fraud).

When auditing sales returns and allowances, the emphasis is normally on testing the completeness objective.

Smith Manufacturing Company's accounts receivable clerk has a friend who is also a customer of Smith Manufacturing. The accounts receivable clerk has issued fictitious credit memos to his friend for goods supposedly returned. The most effective procedure for preventing this activity is to

Cash receipts from sales on account have been misappropriated. Which of the following acts would conceal this fraud and be least likely to be detected by an auditor?

For each of the following potential misstatements, provide one potential audit test that could be used to detect the misstatement. • sales included in the journals for which there was no shipment • sale recorded more than once • shipments made to nonexistent customers and recorded as sales

When an employee who is authorized to make customer entries in the accounts receivable subsidiary ledger purposefully enters cash received into the wrong customer's account, that employee may be suspected of

Sales returns and allowances are often ignored by auditors because they are often immaterial.

Except for two key differences, the transaction-related audit objectives are essentially the same for the processing of credit memos as they are for sales. Which of the following are the two key differences?

The auditor is concerned about authorization at three key points. What are the key points?

When designing tests of controls and substantive tests of transactions for cash receipts, it is important to remember that

An audit procedure that compares the name, amount, and dates shown on remittance advices with cash receipts journal entries and with related duplicate deposit slips would be effective in detecting

Which of the following would offer the best protection for a company that wishes to prevent a reoccurrence of a previously detected "lapping" problem with trade accounts receivable?

It is not important that the auditor evaluate and test a client' assertions early in the audit with regards to significant or unusual sales transactions, as long as the auditor evaluates and tests these assertions before the audit is completed.

When auditing sales returns and allowances, tests performed by the auditor are usually focused on whether the returns and the allowances were appropriately authorized and approved, internally, by proper personnel working.

The audit procedure referred to as proof of cash receipts is particularly useful to test

Which of the following tests of controls is useful to test the transaction-related audit objective of posting and summarization?

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.