Question 1

Prenumbered documents will only be useful for control purposes if:
A) a different numerical sequence is used for each company.
B) the sequence is accounted for periodically.
C) employees are allowed to use documents out of numerical sequence.
D) the same numerical sequence is used each accounting period.

Accepted Answer

If the sequence is accounted for periodically, it ensures that all documents are present and accounted for, thus providing a better control system. A different numerical sequence for each company may be useful for identification purposes, but it is not necessary for control purposes. Allowing employees to use documents out of numerical sequence would undermine the effectiveness of prenumbered documents as a control measure. Using the same numerical sequence each period is not ideal either as it increases the risk of potential errors or fraud going undetected.

Question 2

Tracing from source documents to the journal is useful for testing the existence objective.

Accepted Answer

Tracing from source documents to the journal is useful for testing completeness, not existence. Existence is tested by vouching from the journals to the source documents.

Question 3

Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?
A) Sales being included in the journal for which no shipment was made
B) Sales to related parties, such as officers and subsidiaries
C) Sales recorded more than once
D) Shipments being made to nonexistent customers and recorded as sales

Accepted Answer

The answer of Which one of the following is of...

Question 4

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Accepted Answer

Misstatements involving the completeness objective for sales typically lead to understatements of assets and income, as they involve omitting or not recording sales transactions that should have been recorded.

Question 5

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?
A) The cashier prepares the daily deposit.
B) The cashier makes the daily deposit at a local bank.
C) The cashier posts the receipts to the accounts receivable subsidiary ledger cards.
D) The cashier endorses the checks.

Accepted Answer

The cashier posting receipts to the accounts receivable subsidiary ledger cards is considered an incompatible operation because it involves both the custody of assets (handling cash/checks) and the recording of those assets, which should be separated to ensure proper internal control and reduce the risk of fraud or errors.

Question 6

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 at least 2 potential errors (unintentional)and at least 1 intentional (fraud).

Accepted Answer

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

Question 7

To determine that sales are accurately recorded,the unit prices on the duplicate sales invoices are normally compared with:
A) the original invoices.
B) an approved master price list.
C) the amounts recorded in the sales journal for that transaction.
D) the amounts posted to the customer's account in the accounts receivable master file.

Accepted Answer

The best way to determine if sales are accurately recorded is to compare the unit prices on the duplicate sales invoices with an approved master price list. This ensures that the prices being charged to customers are consistent with the prices agreed upon by the company and that there are no errors or discrepancies in recording the sale. Comparing with the original invoices may not always be possible or practical, and comparing with amounts recorded in the sales journal or accounts receivable master file do not provide a reliable check on the accuracy of the prices being charged.

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,provide...

Question 9

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?
A) Granting of credit
B) Shipment of goods
C) Determination of discounts
D) Selling of goods for cash

Accepted Answer

Selling goods for cash does not involve granting credit, determination of discounts or shipment of goods, meaning there is minimal risk of fraud or error related to lack of specific authorization.

Question 10

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because:
A) understatements of assets and income are a greater concern than overstatements.
B) overstatements of assets and income are a greater concern than understatements.
C) it doesn't matter if income is understated because the savings on income tax offsets the reduced revenue and net income is correct.
D) the unrecorded sales cause a reduction of accounts receivable; therefore, the ratios of the two financial statements will not be misleading.

Accepted Answer

Overstatements of assets and income are typically of greater concern in audits because they can artificially inflate a company's financial health, misleading stakeholders. Understatements, while also concerning, are often less prioritized in the context of fraud or financial statement manipulation.

Question 11

Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.

Accepted Answer

The separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function to ensure that the credit decisions are made objectively and free from sales pressure. This segregation of duties reduces the risk of errors, fraud, or abuse in the sales/collection cycle.

Question 12

An auditor needs to determine whether all customers of an electric utility company are being billed.The auditor should test from the:
A) sales register to the accounts receivable ledger.
B) sales register to the meter department records.
C) accounts receivable ledger to the sales register.
D) meter department records to the sales register.

Accepted Answer

The best choice is to test from the meter department records to the sales register. By doing this, the auditor can ensure that all customers who are receiving electricity are being billed for it. This test ensures that there are no customers who are receiving electricity without being billed. Testing from the sales register to the accounts receivable ledger, or the accounts receivable ledger to the sales register, would not be as effective because it would not necessarily ensure that all customers are being billed for their electricity usage.

Question 13

Which of the following is the appropriate point at which the auditor deems authorization to be critical?
A) 
B) 
C) 
D)

Accepted Answer

Authorization is critical at the point where the transaction or event is initiated (11ea69e4_d6fb_3ad8_b0c5_dbb7691fc89c_TB3008_11). This is because authorization ensures that the transaction or event is valid and authorized by appropriate personnel before it occurs, which helps prevent fraud, errors, and other irregularities.

Question 14

When assessing planned control risk for sales,the auditor is concerned about proper authorization at three key points.Discuss each of these three points.

Accepted Answer

The answer of When assessing planned control risk for sales,the...

Question 15

Management's assertions for sales and collection activities remain the same whether sales are generated through traditional or e-commerce activities.

Accepted Answer

Management's assertions for sales and collection activities remain the same regardless of whether they are generated through traditional or e-commerce activities. These assertions include completeness, accuracy, valuation, existence, and cutoff.

Question 16

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

Accepted Answer

The answer of In converting from a design format audit...

Question 17

________ tests are for omitted transactions,while ________ tests are for nonexistent transactions.
A) Tracing, vouching
B) Vouching, tracing
C) Verifying, tracking
D) Tracking, verifying

Accepted Answer

Tracing tests are designed to ensure that transactions that should have been recorded are indeed in the records (omitted transactions), while vouching tests are used to verify that transactions recorded in the books actually occurred (nonexistent transactions).

Question 18

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?
A) B, C, and D should all be of concern to the auditor.
B) Credit must be authorized before the sale.
C) Goods must be shipped after the authorization.
D) Prices must be authorized.

Accepted Answer

The auditor's responsibility regarding appropriate authorizations in the sales/collections cycle is not limited to a single aspect. The auditor should be concerned with all of the options given, including the authorization of credit before the sale, authorization of goods shipment, and authorization of prices. Therefore, option A is the best choice.

Question 19

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:
A) existence objective.
B) completeness objective.
C) ownership objective.
D) valuation objective.

Accepted Answer

Tracing items from source documents to journals is a procedure used to ensure completeness of transactions, as it confirms that all transactions that should be recorded have indeed been recorded. Therefore, the objective that this procedure satisfies is the completeness objective.

Question 20

Prenumbered documents are intended to help:
A) 
B) 
C) 
D)

Accepted Answer

The answer of Prenumbered documents are intended to help:
A) 
B)...

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

Prenumbered documents will only be useful for control purposes if:

Tracing from source documents to the journal is useful for testing the existence objective.

Which one of the following is of the least concern to the auditor when designing substantive tests of transactions for the sales/collection cycle?

Misstatements involving the completeness objective for sales lead to overstatements of assets and income.

Which one of the following would the auditor consider to be an incompatible operation if the cashier receives remittances from the mailroom?

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 at least 2 potential errors (unintentional)and at least 1 intentional (fraud).

To determine that sales are accurately recorded,the unit prices on the duplicate sales invoices are normally compared with:

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

Which of the following would least concern an auditor regarding the lack of a specific authorization to conduct the sales transaction?

In many audits of sales transactions substantive tests of transactions can be reduced in determining the completeness objective because:

Separation of duties in the sales/collection cycle should mandate that the credit-granting function be separate from the sales function.

An auditor needs to determine whether all customers of an electric utility company are being billed.The auditor should test from the:

Which of the following is the appropriate point at which the auditor deems authorization to be critical?

When assessing planned control risk for sales,the auditor is concerned about proper authorization at three key points.Discuss each of these three points.

Management's assertions for sales and collection activities remain the same whether sales are generated through traditional or e-commerce activities.

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

tests are for omitted transactions,while tests are for nonexistent transactions.

Which one of the following best describes the auditors responsibilities regarding appropriate authorizations in the sales/collections cycle?

The auditor traces items from the source documents to the journals in order to accumulate audit evidence that will satisfy the:

Prenumbered documents are intended to help: