Question 1

The most difficult type of cash embezzlement for auditors to detect is when it occurs
A) after the merchandise has been shipped.
B) before the merchandise has been shipped.
C) before the cash is recorded in the cash receipts journal or other cash listing.
D) after the cash is recorded in the cash receipts journal or other cash listing.

Accepted Answer

Embezzlement before the cash is recorded in the cash receipts journal or other cash listing is the most difficult for auditors to detect because there is no record of the transaction having occurred, making it harder to trace or identify discrepancies.

Question 2

There should generally be correspondence in the client's file establishing the uncollectibility of their account.

Accepted Answer

It is important to have documentation in the client's file indicating that reasonable efforts were made to collect the debt, but the account could not be collected due to various reasons such as bankruptcy or deceased client. This documentation serves as a proof or evidence to support the decision of writing off the debt as uncollectible.

Question 3

The auditor's primary concern in performing audit procedures of the write-off of uncollectible accounts relates to the risk that the client writes off customer accounts that have already been collected. The primary control for preventing this fraud is
A) examining authorized credit memos.
B) examining the uncollectible account authorization form.
C) examining debit memos.
D) examining the vouchers payable register.

Accepted Answer

The primary control for preventing the fraud of writing off customer accounts that have already been collected is examining the uncollectible account authorization form. This form should contain evidence of management's approval of the write-off and supporting documentation regarding the collection efforts made for the account. Examining authorized credit memos and debit memos would not specifically address the risk of writing off already collected accounts, and examining the vouchers payable register would not be relevant to this risk.

Question 4

You are part of the audit team that is auditing Hillsburg Hardware Co. and you have been assigned to the sales and collection cycle. You are testing whether the cash receipts are deposited and recorded at the amounts received (accuracy objective). List two tests of controls and one test of transactions that you would do to satisfy yourself regarding the accuracy objective.

Accepted Answer

The answer of You are part of the audit team...

Question 5

Realizable value is an essential balance-related audit objective for accounts receivable.

Accepted Answer

Realizable value is the amount expected to be collected from accounts receivable. This is an essential balance-related audit objective to ensure the accuracy and completeness of the accounts receivable balance in the financial statements.

Question 6

A proof of cash receipts is useful in discovering cash receipts that have not been recorded in the cash receipts journal or time lags in the client making deposits to the bank accounts.

Accepted Answer

The answer of A proof of cash receipts is useful...

Question 7

When performing a proof of cash receipts, the auditor will test if the total cash receipts recorded in the cash receipts journal for a given period agree with the actual deposits made to the respective bank account for the same period. A difference found during this test generally signals to the auditor a potential weakness in internal controls.

Accepted Answer

The answer of When performing a proof of cash receipts,...

Question 8

In planning the audit, an auditor takes three basic steps in determining the audit procedures to be performed for any business cycle or class of transactions in order to gather audit evidence concerning possible misstatement due to error or fraud. List those three basic steps below.

Accepted Answer

The answer of In planning the audit, an auditor takes...

Question 9

The most difficult type of cash embezzlement for the auditor to detect is when the cash is stolen before it can be recorded in the cash receipts journal.

Accepted Answer

This type of embezzlement is known as skimming and is challenging for auditors to detect as there is no record of the cash transaction in the books. Skimming occurs when a dishonest employee handles cash and takes it for personal use before it is recorded in the company's cash receipts journal. Since the cash is not recorded yet, the auditor will not be able to compare the cash amount with the book balance to detect any discrepancies. Therefore, this type of embezzlement is the most difficult to detect.

Question 10

It is normal practice for the auditor to trace from prenumbered remittance advices or prelists of cash receipts to the cash receipts journal and the accounts receivable subsidiary records.

Accepted Answer

It is indeed normal practice for auditors to trace from prenumbered remittance advices or prelists of cash receipts to the cash receipts journal and the accounts receivable subsidiary records as a part of their audit procedures for testing the completeness and accuracy of recorded cash receipts and accounts receivable balances.

Question 11

The completeness transaction-related audit objective must be considered when determining key controls for sales. List three of the key controls that must be considered when cash received is recorded in the cash receipts journal.

Accepted Answer

The answer of The completeness transaction-related audit objective must be...

Question 12

At the completion of the tests of controls and substantive tests of transactions, auditors must analyze each exception to determine its cause and the implication of the exception on assessed control risk.

Accepted Answer

This statement is true. After completing the tests of controls and substantive tests of transactions, auditors must analyze each exception to determine the root cause and the impact on assessed control risk. This analysis helps auditors to form an opinion on the financial statements and make appropriate recommendations to the client.

Question 13

For audit clients having a treasurer, the auditor should inquire whether the treasurer has reviewed the financial statement disclosures related to cash receipts for relevance and understandability.

Accepted Answer

The auditor should inquire whether the treasurer has reviewed financial statement disclosures related to cash receipts for relevance and understandability as part of their responsibilities for internal control over financial reporting. This can help ensure that the financial statements are accurate and complete.

Question 14

Realizable value is an essential balance-related audit objective for accounts receivable because collectibility of receivables is often a significant concern. Which of the following is not an internal control the auditor should evaluate to reduce the likelihood of uncollectible accounts?
A) customer credit approval by appropriate personnel
B) preparation of an aged trial balance reviewed and followed up by appropriate management personnel
C) a written policy of writing off uncollectable receivables
D) All of the above are internal controls the auditor should evaluate.

Accepted Answer

All of the listed internal controls are important for reducing the likelihood of uncollectible accounts and should be evaluated by the auditor. Therefore, option D is the best.

Question 15

A proof of cash receipts may be useful when the auditor concludes internal controls in the cash recording function are deficient.

Accepted Answer

A proof of cash receipts can help the auditor detect any deficiencies in the cash recording function. By comparing the cash receipts recorded in the accounting records with the actual cash received, the auditor can identify any discrepancies or irregularities. This information can be used to assess the effectiveness of the internal controls over cash receipts and to determine whether any further audit procedures are necessary to address the identified risks.

Question 16

An essential part of the auditor's responsibility in auditing cash receipts is to identify deficiencies in internal control that increase the likelihood of fraud.

Accepted Answer

As an important part of the audit process, the auditor should evaluate the internal control systems related to cash receipts to identify any deficiencies that might permit fraudulent activities to go undetected.

Question 17

The auditor's primary concern in the audit of the write-off of uncollectible accounts receivable is the possibility of client personnel covering up an embezzlement by writing off accounts receivable that have already been collected.

Accepted Answer

The auditor's primary concern in the audit of write-off of uncollectible accounts receivable is the possibility of client personnel covering up an embezzlement by writing off accounts receivable that have already been collected. This is because, in a fraudulent scheme, the embezzler can steal cash received from customers and then write off the related accounts receivable to cover up the theft. Therefore, the auditor should perform a detailed review of the write-off procedures and documentation to ensure that the write-offs are valid and supported by adequate evidence.

Question 18

The most significant effect of the results of the tests of controls and substantive tests of transactions in the sales and collection cycle is on
A) bad debt expense.
B) the analytical tests to be performed.
C) the confirmation of accounts receivable.
D) the impact of processing cash receipts.

Accepted Answer

The results of tests of controls and substantive tests of transactions impact the confirmation of accounts receivable. This is because these tests assess the validity and accuracy of the transactions in the sales and collection cycle, which directly affect accounts receivable. As a result, the auditor's confirmation of accounts receivable will be based on the reliability of the underlying transactions.

Question 19

The estimation of bad debts expense relates to the write-off of uncollectible accounts.

Accepted Answer

Bad debts expense is an estimation of the amount that a company expects to write off as uncollectible accounts. Therefore, the statement is true.

Question 20

Match between columns
                        Premises: A document or electronic record indicating the description and quantity of goods sold, the price, freight charges, insurance, terms, and other relevant data.
A list prepared when cash is received by someone who has no responsibility for recording sales, accounts receivable, or cash, and has no access to the accounting records. It is used to verify whether cash received was recorded and deposited at the correct amounts and on a timely basis.
A document used internally to indicate authority to write-off an account receivable as uncollectible.
A document for communicating the description, quantity, and related information for goods ordered by a customer. This is frequently used to indicate credit approval and authorization for shipment.
A document mailed to the customer and typically returned to the seller with the cash payment.
A document indicating a reduction in the amount due from a customer because of returned goods or an allowance.
A document prepared to initiate shipment of goods, indicating the description of the merchandise, the quantity shipped, and other relevant data. It is a written contract between the carrier and seller of the receipt and shipment of goods.

Accepted Answer

The Answer of remittance advice and customer order form and is...

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

The most difficult type of cash embezzlement for auditors to detect is when it occurs